YIT Oyj

OMXH:YIT

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, dear all. Welcome to YIT's Q1 2019 results info, webcast and conference call.The agenda is traditional. We have presentation by our CEO and President, Kari Kauniskangas; and CFO, Ilkka Salonen. And the questions are after that first from the audience here in Käpylä and then from the conference call line.All the material can be found online on our webpages, and we still have some pro forma figures here. So comparison period is pro forma since YIT and Lemminkäinen merged last year, 1st of February.But without further ado, Kari, the stage is yours.

[Kari Kauniskangas]

Good afternoon, also, on my behalf. I can continue reporting broadly improving results compared to previous year.YIT's adjusted operating profit in Q1 was better than estimated, mainly due to 3 reasons: In Paving, great result improvement was due to lower-than-expected winter planning costs. Secondly in Russia, we were able to handover 2 projects ahead of schedule and the result realized already in Q1 instead of Q2. Also synergies are realizing faster than we have estimated and fixed cost level has been lower than we estimated. Overall, as I said, we have had broadly improving performance in several segments.Good cash flow considering the seasonality. As you remember, I'm taking into account the Lemminkäinen's first month last year, the comparison period cash flow was negative of EUR 200 million.In Housing Finland and CEE, we sold 600 apartments, completed or close to completion to the established fund, which strengthened the cash flow and also supported Partnership Properties strategy to create profitable real estate portfolios enabled by the market situation. In addition to cash flow that deal had EUR 40 million impact to the revenue and 0 impact to gross margin level.During the quarter, we were quite successful and competitive in several segments, and we were able to strengthen our backlog of orders from the end of last year by 2%. In addition, there were several positive decisions, including [Foreign Language] and that kind of life cycle projects, which we won and will be -- those projects will be recorded later to our backlog of orders. New projects, new startups are giving already positive visibility to the year 2020.Adjusted operating profit was still loss making due to normal seasonality in Paving and Infrastructure projects and also due to low number of handovers in Residential segments. Adjusted items compared to last year were also clearly smaller. They are mainly related -- merger related, fair value cost effects and cost related to synergy targets.Revenue increased by 16% and it grew in all segments, especially in business premises and renovation services divisions. Order backlog has been stable, even as I said, we have had good success in several segments, especially in Infrastructure projects. In Paving, the starting point for the season is better than year ago in all Nordic countries.Then if you look at development segment by segment, in Housing Finland and CEE, the revenue at start was around on the same level than year ago, but EUR 40 million of that revenue came from selling the apartments to the established fund. The sale had only revenue impact but no result impact.Another reason was that main part of the completed projects during the quarter in Finland located outside Helsinki region where the average profitability of project is lower than in Helsinki region.In CEE, the sales starts was one of the best ever, but we had no handovers during the quarter in those countries.In Housing Russia, the main improvement came from contracting where we didn't have any significant projects write-off as we had year ago.In Residential side, 2 projects was completed and that was a small improvement compared to what we estimated 3 months ago.In Business Premises, revenue and operating profit improved mainly good volumes, profits and renovation services division. Also, the start of Tripla offices and revenue and profit recognition after the sale in December had a positive impact.In Infrastructure project, the profitability was still low due to seasonality and due to that significant amount of gross margin still from first quarter came from all projects with low margin level. Those projects are coming closer to completion and will be complete during this year. Strengthening in backlog of orders in that segment start to be seen in both revenue and operating profit in second quarter.In Paving, as said, the result improvement came from the winter-planning costs, which were clearly lower level, especially Norway and Sweden, as it has been in the past.Synergies seems -- are coming through faster than we have expected. So far, we have already taken actions, signed agreements, which will lead to savings of EUR 45 million during the agreed period. Of those, already is realized in profit and loss statement cumulatively EUR 25 million of which EUR 6 million more are recorded during the first quarter of this year. This year, the expected new synergies are still coming from IT and finance platform simplification.Market outlook is widely unchanged. We have changed only one bullet here, it's outlook of Paving in Finland and it's due to cuts in government spending. Government is planning to pave only 1,500 kilometers during this year overall, which is around as much as one road from Hanko to Otsuki. So that figure is very small and leading to declining market during this year. Despite of that, our situation has been quite good. We have been able to secure good backlog of orders, actually even a bit better than year ago for Finland in Paving.Other red flag is in Housing Finland, there activity among consumers improved in the latter part of the quarter and it has stayed on the same level than it was last autumn, as we expected 3 months ago.Also, this Federation of Construction Industry announced their market forecast few days ago and also they shared the same opinion that we have given already several months ago that the number of startups in Housing will be back on a normal level around 30,000 to 35,000 units during this year, and we feel also that this is more healthy and sustainable level in long run. From YIT's point of view, this decline is positive point. We expect that our volumes overall will stay around on the same level than earlier, but of course, we will have more projects for institutional investors than year ago.Sustainable development is one of the key drivers in development of the whole construction industry in coming years. To gain benefit on that trend, we decided to establish a group-wide development program Green Growth last autumn, to support our steps in that area according to our strategy.In order to determine key themes of sustainable development from the perspectives of group business and stakeholders, we conducted a materiality assessment process last year and created ourself a materiality metrics showing where are the key topics, where we have to put more effort to improve the sustainable impact of YIT.So as you can see, city development, urban development is one of the key topics. In addition, there are several topics connected to personnel and their respect of personnel in several ways.Then few comments concerning segments. In Housing Finland and CEE, the profitability of the quarter was exceptionally low due to significant sale of apartments to new fund, but this is not a new normal level. In second quarter, we expect to recover also with profitability.Number of unsold completed apartments declined to a healthy level being around 200 in Finland and below 100 in CEE countries. Number of new startups for consumers in Finland was 510, and we are now gradually starting to increase amount of startups from last autumn's level.We have shifted the focus towards institutional investors according to our normal business model. And as a proof of that, we announced at the beginning of April quite a big deal with ICECAPITAL to whom we sold almost 800 units worth EUR 160 million. Those projects will be started during coming months.I said earlier, in CEE countries, we had extremely strong consumer sales during the quarter 260 units, which was 50% more than in comprising period year ago. But we didn't have any handed over projects in last quarter.In Russia, the result was low but the performance overall was better, especially in contracting. We didn't have any write-offs, as we had year ago. Also this year, it's good to notice that the majority of completions will be in Q4. So in this segment, the expectations for profits are in last quarter of this year. Cash flow from Russia continued to be positive and the target to reduce capital there is proceeding.In Business Premises, we signed several remarkable lease agreements for instance in Tripla. Leasing rate of Mall of Tripla exceeded 90% in April. And also in Tripla offices, the leasing rate is over 80%.In the comparison period, Tripla offices were constructed in their own balance states, so now that had a positive impact to both revenue and profit. And as said, renovation services is strongly developing and proceeding in all big cities in Southern Finland.In Infrastructure project, the main topic during the quarter or actually during the winter has been that we have been successful in getting new projects with healthy margins. So we are quite confident that the development of this segment continues now to right direction and there will be seen clear turnaround compared to very weak results during last year. Profitability of the segment in Q1 was still the reason that the main part of the revenue and profit came still from those old projects with low margins.In Paving, sizable reorganization measures taken during the winter and spring 2018, start now to be visible in segment's result. As you noticed last autumn, the profit improved already EUR 8 million compared to 2017. Now we saw the impact in winter planning costs and the proceeding is positive.We have also been successful in public tenders for 2019 season in Nordic countries and our market share has increased, especially in Norway and Sweden and also the average price of asphalt tons has increased in those countries. So overall, the starting point for this season is clearly better than year ago.In road maintenance area this year, government in Finland has organized 17 competitions on those long-term maintenance contracts and YIT won 7 -- sorry, 6 of those, which means that our markets here has stayed on the same level than it has been during the last few years being around 35%.In Partnership Properties, this new residential fund was established and the objective of the portfolio is to keep YIT steady cash flow and to create potential for value increase by optimizing the sales timing. So we didn't lose anything by making this. This year, actually we created opportunity to make money later through this portfolio. Those apartments are rented by YIT and partners renting organization, and we will divest those apartments later after some years’ time.The transaction strengthened the investments of segment in rental housing generating this cash flow. It enables also YIT to speed up capital turnover, while keeping this value upside on the portfolio.We have, during last year and then this year, gradually built a portfolio of projects in Partnership Properties and this is the first time line to show how we expect those projects to be realized and constructed. In addition to these projects, we have several projects in initial stage, which we have not yet published. In addition to projects, we have also 3 established funds, and we are preparing new ones focusing to Housing and the CEE countries.Then Ilkka continues with the financial figures, which I think are more and more important in coming quarters and years.

[Ilkka Seppo Salonen]

Yes. Good afternoon, everyone. In this section, there are actually 2 key topics in this presentation, one is that the cash flow was very good. If we look at that we were leaving Q1, which is usually heavily negative. The other one is the implementation of IFRS 16 standard.If we start with the IFRS changes in what comes to the lease agreement, on the left-hand side, you can see that what is the estimated impact for the full year, this year, it means that roughly about EUR 45 million EBITDA positive impact operating profit that was EUR 10 million and then finally profit for the period about EUR 6 million, lower than without the changes in the standard.The major impacts are in the balance sheet side. So the total impact is roughly about EUR 300 million. So EUR 306 million in assets and liabilities. I know there -- in the asset side, there are 2 parts, one is related for the property plants and equipments; and the other one is leased inventories, which is actually the rented plots from the plot funds.And then in the liability side, it is divided for the short- and long-term liabilities. But the major thing is that roughly about EUR 300 million came to my -- came to our assets and liabilities.If we look at the operating cash flow, last year the reported one was EUR 153 million negative. And then if we add Lemminkäinen in January, negative cash flow roughly about EUR 50 million, we ended up EUR 200 million. And right now during this quarter, we ended up to about breakeven. And then 2 items where we are investing, one is for the plots and then the investments for the associated companies both were on the lower level than last year.In our presentation, we used adjusted net debt figures, which means that the IFRS 16 impact has been deducted from there and that shows quite nicely that how the interest-bearing net debt is coming steadily down, especially from the beginning of the last year.Maturity, we haven't done any major transactions since last May. We have 2 items expiring this year, one, Lemminkäinen and bond in this summer. At the moment, if you look at our cash position and the liquidity, there is no plans for refinancing that one from the market, but of course, we look at that for this to maturity and there are one slot over there which is the 2022. And in the coming quarters, probably we are working with that one.Also the key figures, they are presented without the IFRS 16. The impact and the reason is that all our covenants are based on these figures. But there is a clear trend seeing from the beginning of the last year towards the targeted level of 30% to 50% gearing and that is with IFRS, if you add the IFRS impact, it's roughly about 30% tilt to the figure. So we still have some journey to go towards the range of 30% to 50%.Equity ratio in a good level and adjusted net debt to adjusted EBITDA, we are now around 3 over there. So quite a lot done during for the last one year. And I would say that the base for the operations is clearly more solid that the company has seen in the past years.How the capital employed have been divided by the segments and this describes the deviation between the beginning of the year until the end of March. And there it's quite easy to see that Housing Finland and CEE over there the amount has declined, roughly about EUR 80 million.Then on the right-hand side, you can see the table where is the difference between the -- or the time before IFRS 16 and the time after IFRS 16, and the deviation is in the gray boxes in the middle in Housing Finland and CEE, that's clearly the biggest impact over there EUR 170 million that is driven by the rented plots.Housing Russia is quite small. The other big figure is EUR 71.5 million in the Others and that's mainly related for the premises where we are operating above their rent agreements. And Paving is just about the leasings related to the machines and equipments.That was shortly the financial part and now I let Kari to continue.

[Kari Kauniskangas]

So in IFRS world, the number of handovers per quarter in different segment, this is quite important figure, and you can see here our current estimates. As you remember in Finland, there will be around 1,000 completions less than year ago. Also, it's good to know this that during the first quarter, the number of apartments sold and under construction for institutional investors has increased by 1,000 unit up to 2,400. And these apartments and the revenue and profit is recognized according to percentages of completions. So we had better-than-estimated start for the year and there is no reason to change the guidance.Group revenue for this year is estimated to be in the range of plus 5% to minus 5% compared to revenue last year. And that the adjusting operating -- adjusted operating profit is estimated to be from EUR 170 million to EUR 230 million. Also, we estimates that the adjusted operating profit for the second quarter of 2019 will improve slightly from the comparison period.So that was our presentation, good start and positive outlook. Thank you, and now if you have any questions, please don't hesitate to ask.

[Svante Krokfors, Analyst]

Svante Krokfors, Nordea. I have a couple of questions. Regarding the larger projects that you have Trigoni and Helsinki Garden, how long have you come in negotiation with possible co-investors there? Can you comment anything on that? And do you have any plans for how much you will own?

[Kari Kauniskangas]

Yes. Both projects has good demand among the potential co-investors. Yes. We have started, I would say, still discussions. In Garden, we have some -- even paper signed but the final stage of those negotiations will start a bit later when the design stage is a bit longer than it is now.

[Svante Krokfors, Analyst]

Have you seen a change in investor demand after the success of the whole Tripla project?

[Kari Kauniskangas]

At least it is not declining. So it has been quite good. And one topic that I has to say that this kind of deal flow is also clearly improving the confidence towards the company. And that's of course, good thing from our point of view when considering those new projects.

[Svante Krokfors, Analyst]

Then one other question, perhaps, Ilkka also can answer on that. But now when you will have more joint ventures also this residential fund but also the large projects, how much of balance sheet liabilities do you have? And how high can you take them? Will you report them in anyway or...

[Kari Kauniskangas]

Ilkka?

[Ilkka Seppo Salonen]

Yes. There is mention what are the commitments we have, what comes to the financing of those joint ventures, we are not committed to give any -- or we are not committed giving commitments for external money. I mean the commitment what you can see over there is the commitment that where we are committed.

[Kari Kauniskangas]

If no more questions from Käpylä then if there are any questions from online, so please?

[Operator]

[Operator Instructions] There are no question signals from the phone.

[Kari Kauniskangas]

Several similar events at the same time from construction companies.If there are no more questions, then I thank you, and I wish you a warm spring and hot summer. Thank you.