Good morning, and welcome to YIT's Q2 2022 Silent Call. I'm Tommi Järvenpää, the head of Investor Relations, and Tuomas Mäkipeska, our Chief Financial Officer, is here with me. We are going to go through the key messages for the second quarter ahead of the silent period, which will start at the end of next week. Please note that the call is being recorded, and the recording will be published on our website later this afternoon. At this point, I will hand over to Tuomas. Go ahead.
Yes. Thank you, Tommi, and good morning on my behalf as well. All in all, we've had an eventful Q2 so far. Of course, the sale of Russian business has been one of the top priorities, but also we have put a lot of effort on execution of our strategy. Of course, we've focused on monitoring and also managing the extraordinary market conditions and its impacts on our businesses. We will cover a couple of topics, basically five topics, in the call, and then we will have time for some questions at the end. First of all, we will cover the sale of Russian businesses. Then we will cover the consumer confidence and the demand outlook for housing. Construction material inflation and availability as a third topic, and also covering then the operating environment in the other segments than housing.
Of course, a couple of comments on the strategy execution in the end. That's basically the topics we will cover here. First of all, the sale of Russian businesses is now completed, and we've announced that we completed the sale to Etalon Group PLC, which is a Russian construction company listed in London Stock Exchange, and it's a well-known construction company in Russia, so it was good for our former employees as well. With this, we've withdrawn all the operations in Russia, and of course, this then allows us to focus fully on our core businesses and the strategy execution. All in all, the sale was completed in line with the agreed sales price and the other terms agreed in signing phase of the process.
The exact financial impact will then be published in Q2 report since all the numbers are not completed since there is the exchange rate effect that will be then calculated on average basis. It will be then published, all the impacts, in Q2. That's basically it. We are of course happy that we could complete the sale of the Russian business and now going forward, focus on the strategy execution and the core businesses. A couple of comments on the consumer confidence and the demand outlook for housing. As we all know, the general consumer confidence is weakening. Consumers are getting more cautious, and this is basically due to the growing uncertainty in the macroeconomic environment. Of course, the cautiousness is now, as we can see it's increased universally.
But, as we see it, the cautiousness is more on the consumer side than on the investor side from our business perspective. We expect this cautiousness to continue at least for the next couple of quarters. But, as we all know, it's very challenging to forecast how it will play out. While now the near-term outlook is somewhat subdued, the mid and the long-term prospects remain positive for our businesses, and urbanization is continuing, and of course, the need for sustainable living is increasing, especially in the selected growth cities where we operate at the moment already. And we own a lot of attractive urban plots in these growing areas. This still gives us a good kind of a foundation to go forward. A couple of comments on the construction materials availability and inflation situation.
Of course, the challenges on the availability of some certain construction materials have persisted. But so far we have been able to mitigate the impacts, and we have found alternative materials and sources and alternative supply chains as well. We've been, as earlier mentioned also, we've been able to mitigate the situation pretty well so far. Of course, this is pretty much due to the very good longstanding relationship with our suppliers. This has, of course, benefited us in the changing and challenging situation. But still, we think and anticipate the situation continue at least couple of next quarters, and we are kind of continuing the tough work with, of course, our suppliers, but also with our clients. So far, the impact of the inflation and the availability of the construction materials, the impact hasn't been material.
Actually, if we look at the situation now, in some construction materials, the prices are already showing indications of decline. For example, in rebars the price increase has already stopped, at least for now, and that's one good example, but of course, the situation differs by material class, of course. But of course, we will mitigate the situation by having tough, let's say, conversations and negotiation with our customers and clients, our suppliers, and kind of using our purchasing power in procurement as well. The fourth topic to cover here is more the operating environment for business premises, infrastructure, and property development. All in all, we can argue that the operating environment has been pretty stable, actually, and the demand has remained on a good level. Also in these businesses, especially in business premises and infrastructure.
We have continued to execute our transformation and actually turnaround strategy, and we've been able to deliver on the plans that we have internally. It's good to see the progress even in the a bit of uncertain market situation. The investor activity has remained on a good level during the first half of the year. In general, we might say that the investor sentiment has turned slightly cautious, but more kind of being more selective. The investors are being more selective, or let's put it this way, that the selectiveness has increased during Q2. But the best locations and the sustainable buildings are still of interest as before. In that sense, the kind of investor sentiment has stayed maybe on a better level than the consumer confidence has been.
Of course, if we look at the interest rates, and if the interest rates keep rising, they will naturally have an impact on the yields, and consequently, they might have an impact on the selling prices as well. One good kind of a success in business premises was the sale of Pradiareň 1900 that we published in April. It was a building in Bratislava that we renovated. It is an old factory building that we renovated and turned to office, basically mainly office building. We were able to complete the sale of the project in April, which will then have a good impact and positive impact on the business premises profits for Q2. In property development, basically no major transactions during the Q2, and there has been also a bit of a conversation in public of our exit of the Trigoni project.
We are targeting to agree on the exit with the counterparties still during the Q2, and this might then have a negative impact on the property development profits in Q2. That is basically around the business premises and property development businesses. Regarding the strategy execution, first of all, the strategy itself. When the crisis in Ukraine began, we, of course, evaluated our strategy again and concluded that our strategy, what we launched last year's November, it is still the right one. We think that the actions that are planned are especially good in this kind of a rapidly changing market condition. The strategy is still intact. The balance sheet is strong as we have been communicating also before. This also gives us a bit of a buffer and room for maneuver in these extraordinary conditions.
Of course, everybody else does not have the luxury that we have with our strong balance sheet now in going forward. In our view, the mid- and long-term prospects remain positive. We will continue investing in growth, in housing, in Finland, in the growing cities, and especially in CEE countries. We would like to still remind you that the lead time in housing is approximately 18 months. Of course, we expect the demand in our key markets to gradually recover. But also, of course, the decisions made today will have then impacts on 1.5 years later. The key message here is that we continue to invest in growth. But of course, for sure, we are continuing to monitor the situation and the different markets that we operate in very closely. Of course, if the situation changes dramatically, we will adjust our plans accordingly.
All in all, we have been able to mitigate the situation pretty well during the Q2 and continue with the same strategy. That is basically the key messages that we would like to give you.
All right. Thanks, Tuomas. Now we are ready for the questions. If you have a question, just raise hand and we will then ask you to ask the question. I think Svante was the first one, so go ahead.
Yes. Thank you. Thank you for the presentation. Regarding the situation now with the consumer confidence, investors being more cautious now. Perhaps first on the consumer side, how do you really look at startups with input prices still at elevated level and consumer confidence taking a big hit? Do you want to comment anything about the startups?
Yeah, sure. Basically, as mentioned, we've been monitoring the situation very carefully. As I just mentioned, the lead times from the startup to completion is 1.5 years. As we know also that when we slowed down the startups when the COVID started, now we see the impact on the completion side, taking this kind of a lead time into account. So we have been still starting projects as planned before. But of course, we have increased our selectiveness also and the timing of the startup. But so far, no major changes regarding the plan that we have had already. We have been continuing the startups as planned so far.
Okay. Thank you. How does the situation in the CEE countries look when it comes to the consumer side and perhaps investor side also? Is there any changes that differ from Finland? Obviously, the vicinity to the crisis area is one thing, but any other issues?
Well, yes. I will actually, on a general level, it's good that I just visited some of the CEE countries and the Baltic countries just this week and a couple of weeks ago. So I've been having discussions with the locals and with the clients there. So actually, the market situation is better than in Finland. The consumer confidence has been, on a general level, higher than in Finland, even though the inflation rates are higher than in Finland. So it's an interesting situation, because the markets are reacting so differently to the situation. For example, in Lithuania, Poland, the consumer demand has stayed on a very good level. Actually no major changes compared to the last year. Also the same goes for the investor market so far. So in general, I'd argue that in CEE countries, the market situation is better than in Finland.
Okay, thank you. That is very helpful. Then on business premises and infra, have you seen any shift in demand between public and private customers?
No major shifts, at least so far. The infra market as it is, it is not that cyclical than the other businesses, the market, and it does not react on the same way. During the downturn, the public spending for the buildings and social buildings usually stays on a good level. This is something that we have seen so far at this time as well. So the infra market situation is actually pretty good at the moment. Also no major shifts from the private to public client so far.
Okay, thank you. Then perhaps last one on the investor sentiment in Finland when it comes to perhaps residentials, mainly. I guess there has been some larger portfolios in the market for some time now, and it seems like the bid-ask spread has increased quite significantly because no deals have closed. So how do you put this into perspective for you? Do you believe that the quality and the fact that you sell new apartments has a big advantage in that?
Well, yes. This is something that we have been monitoring carefully as well. In general level, we can argue, as actually I mentioned, so the location and the quality of the product is the key. As I mentioned, so the selectiveness also in residential. So it is a key, and basically we have You put it right. So basically one might argue that we have a bit of an advantage since we are active on the growing cities, and selling new apartments. So at least for now, the situation has been pretty stable compared to the last year.
Okay. Thank you. That is all from me.
Thanks, Svante. Next question from Anssi.
Thank you, guys. It is Anssi Raussi from Skandinaviska Enskilda Banken. I have a couple of questions left after Svante. The first one would be that, have you changed anything in your pricing mechanism? Or maybe better to ask, how have you changed your mechanism? For example, if I was planning to buy an apartment, when is the first possible moment in the process for me to lock the price? If we compare this to your costs, how much of your costs are locked at this moment?
Thank you, Anssi. It is an extremely good question, and I will try to answer on a general level since we are not disclosing the pricing process of our business. Anyway, this is something that we have been using now in this kind of a market situation. We have basically three different points where we can still change the price, and we have been using these phases in the process, and so far pretty successfully. The thing is that if we turn it around, the price increase is of course Or let us put it this way, that the price sensitivity of demand is of course the key. How much, and in this kind of interest rate situation, how much you can raise the price, it is of course tied to the demand of the apartments. But we have been using our ability to increase the prices as we go.
Okay. The next one may be about your financing costs in the coming quarters. As we all know that the cost of debt is increasing. So what kind of refinancing needs you have? Simple one here.
Yeah. Basically, we don't have any refinancing needs. But of course, the interest rate situation, it is interesting, and we are monitoring that as well. We use interest rate hedging as well, and this is something that I think every company considers now what to do in this kind of a market environment. But basically, we don't have, in near future, any refinancing needs. So in that sense also, we have a stable situation.
Okay. Maybe finally, I continue a bit on Svante's question about the Finnish housing market, as we have heard that the prices are somewhat stalled at the moment. But you should be increasing your selling prices due to cost inflation. So a bit more, how do you see the situation and what kind of message you receive from your customers? So how do they see this situation, and what are they expecting in the future regarding this spread between new buildings and other ones? Thanks.
That's a good question, and also here we kind of need to note that the apartments that are now completed and we are selling or we have been selling during the construction phase. The costs have been locked already a lot earlier. And the inflation of the cost materials actually started pretty heavily already in 2020, November or something like this, and the inflation has been increasing during the last year. In that sense, the apartments that we are now selling, which are completed, they are kind of locked on a lower construction cost level. But then, if we look at the situation from consumer perspective, so of course, the rising prices and the rising interest rates, so it's not a good situation for the consumer in the longer term. And this has been also reflected on our reservation rates in the project that are under construction right now.
And we have active discussions with the consumers about the price levels, but also kind of a layout of the flats, and the changing needs there. But that is basically what we can tell in this point. But we all know that it is not a good situation from consumer perspective.
Okay. Thank you.
Thanks, Anssi. Then we have Markku.
Yes. Thank you. This is Markku Moilanen from OP Corporate Bank. Still couple of questions left. First of all, how would you describe your sales mix now in Q2? If I recall correctly, you said in Q1 that you had exceptionally good sales mix there. So has there been any change in that, and will that affect your margins?
Well, all in all, the sales mix has been, let's say, on a very ordinary level on Q2. No major changes to the normal situation. A bit of a more, let's say, unfavorable mix compared to the Q1. In Q1, as we mentioned, the kind of the sales mix then was a bit extraordinary good. We don't have the tailwind in Q2. That's the main message here.
Okay. That's clear. Then regarding your housing financing, when you are talking with banks, have they still become more cautious in the housing company loans, and have you been able to obtain all the housing company loans you have applied for?
Well, so far we have been able to obtain all of them. Let's put it this way, that we have a pretty high market share in housing company loans in Finland, and we have been able to keep kind of the market share so far. Also with the banks and with the housing company loans, we have the active discussion in this kind of a new situation going on. But so far, no major changes there either.
Good. Thank you. Finally, at the end of Q1, approximately 40% of housing under construction was for investors. How are the margins in those units developing in this inflationary environment?
This is something that we cannot directly comment here. All being said so far, we understand that also from investors' perspective, if the interest rates are increasing, that will have an impact on the yields, and consequently on the selling prices as well. That's a general comment of the situation.
Okay. Thanks. That's all from me.
Thanks, Markku. Then the next question from Samu.
Yes. Thank you for the good presentation. I only had one question in conjunction with the other questions already asked here. You stated that, of course, we know that the increase in interest rates may have a detrimental effect on the demand for apartments, but you still stated that you are still starting projects as planned, so you're not worried on that. Just connecting the dots here, you have stated that half of your interest rate portfolio is from floating rates, and 16% of the interest-bearing debt is housing company loans related to unsold apartments. If we would see a decrease in demand for apartments and you're still starting projects, in terms of financial risk management, do you see any counter risk associated with that? Thank you.
Good question. First of all, the situation, as mentioned, differs a lot by market area. Basically, if you look at this, it is not maybe a relevant question regarding the CEE countries. Still, I would like to mention that we are growing in the CEE countries, and we are starting projects in CEE countries where we see a still stable demand for apartments. That is the first part of the comment. Secondly, in Finland, as we can see, there is a weakening of consumer confidence here in Finland. We have been a bit more selective on the startups during these last months. Of course, we cannot have a clear forecast going forward, but we will be a bit selective going forward, maybe in Finland. All in all, this does not have a major impact compared to our original plan of startups this year.
In terms of financial risk management, you are saying that you are still pretty confident relating to the macro environment here?
Well, basically, yes. You are right. Of course, we do not have a crystal ball on the macroeconomic situation. Still, as I mentioned, if it would now slow down dramatically, the output and the completions would then be lower in 1.5 years. We need to take into account the lead time of the construction, and that is the major argument that we have not been slowing down the startups significantly.
All right. Thanks for clarifying that. No further questions from me. Thank you.
Thanks, Samu. Next question from Mikko.
Yeah, hi. Good morning also. [inaudible] . Concerning the housing business and the pre-reservation rates in new projects, have you seen any cancellations in the pre-reservations?
Yes. As mentioned, the reservation rates have been a bit lower. I'll put it this way, that they are increasing a bit slower than in a normal situation. But we haven't seen a lot of cancellations during the last couple of months or during Q1 and Q2. It is pretty rare that our customers would cancel the deal. There might be just a couple of them, but not in big picture, impacting the business heavily.
Okay. The last one from me. In business premises and infra, you have had these problem projects. Any info to share on those ones, how they are progressing?
Yes. We still have some of the legacy projects that we are continuing to execute. We have now, during Q1 and Q2, been able to continue as planned. No major negative surprises there after the year-end last year. Basically, we are managing the situation with the old legacy project pretty well also. When we go forward, the share of these legacy projects is, of course, all the time decreasing. We are moving in the right direction, and it shows also in the results of business premises and infra.
Okay, good. Thanks. That's all from me.
Thank you, Mikko. It seems that there's no further questions, so thank you for the participation. This also was my last Silent Call at YIT, as I will be taking up a position outside YIT in September. This is not a goodbye yet, as I will be still around until the end of August and obviously responsible for the Q2 report as well. But at this point, thank you, and see you at the end of July.