YIT Oyj

OMXH:YIT

Earnings Call Transcript 2021-Q1

[Tommi Jarvenpaa, Vice President of Investor Relations]

Good morning, and welcome to YIT's First Quarter 2021 Earnings Webcast. My name is Tommi Jarvenpaa, I'm the Head of YIT's Investor Relations.Our first quarter profitability improved from last year. This was driven by solid performance in the Housing segments and stabilizing result in the Business Premises. In the beginning of the second quarter, Markku Moilanen started as the new CEO of YIT. Next, we will hear Markku's first thoughts about YIT, and then Markku and our CFO, Ilkka Salonen, will go through the Q1 results in details. 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.

[Markku Moilanen, President, CEO & Member of Management Board]

Thank you, Tommi. Good morning on my behalf as well. Before starting by sharing my first impressions as the CEO of YIT, I would like to give a big thanks to Antti Inkila. He did an excellent job as an Interim CEO. And of course, to the whole management team, due to their great work, we have achieved these good results that Tommi was alluding to.I'm very happy to announce as well, as we told earlier this morning that we are strengthening the YIT's management team. So we have a new member, Ilkka Tomperi will join us. He's currently working at Varma Mutual Pension Insurance Company as the Investment Director Head of Real Estate. He has a long experience, international experience in real estate development and investment. So welcome, Ilkka.So let's go further. And I would like to share you a bit of my first weeks as a CEO. And I have to say that I'm really impressed on our people. Their competence, their professionalism and passion. And we certainly have outstanding team spirit here at YIT. I already knew before joining YIT that YIT's brand is highly recognized. But now after discussing with our clients and customers and our stakeholders, my view has only been strengthened. We have a highly appreciated and recognized brand. Thirdly, our quality of work in construction is the best in the industry. We know how to build houses, schools, tunnels, bridges and so on. And that's, of course, important because that's the core of what we are doing. And finally, we have been very successful with our customers and clients. Our customer satisfaction score in our housing business in private customers reached this spring the highest core in the industry in the EPSI rating. So we reached a score of 81, which is a very high score. And our group NPS is at a good level at 51 as well. Overall, looking at the company, we have been doing work on harmonizing the processes, driving cultural integration and strengthening our financial position. However, it's clear that our project performance and earnings volatility have been not on a good level. There has been too many deviations. So therefore, we need to be -- we need to become more resilient in our performance, in our operational performance. Based on the findings, we have now initiated immediate actions in 3 areas: in product management, in our operating model and then in our strategy starting from infrastructure. In project management, where we have had the issues or the volatility in some of the projects, we already at the end of last year initiated a detailed program to improve our project management. What we are doing there is, of course, the very practical things, looking at the processes, the practices and our reporting as well. In addition, we are taking a more rigor look of our culture to ensure that we have transparency and discipline and consequent management so that we follow the rules and the principles that we have commonly agreed. We can already see promising results in the Business Premises segment. Since Tom Ekman took over the leadership of Business Premises, May 2020, we can see a continuous improvement, and the first quarter certainly is a good result of that.Secondly, we have started to look at our operating model. To look at where do we have resources, to clarify our responsibilities, removing overlaps in order to have an efficient operating model moving forward. And thirdly, we have started to look at our strategy. And the natural first step that we have already now initiated is infrastructure. We have had, as you know, unsatisfactory performance and project deviations in the infrastructure segment. And on management side, now when Antti Inkila took the role as the Interim Director, we have a strong leader in that business, and we are looking at the behavior on that business. But we are certainly looking at the strategy as well. And we are doing that in a very traditional way, looking at the market situation, the market opportunities, the competitive situation, then we are looking at our own internal capabilities, our differentiators. And based on that, looking at where do we want to do business in the long run. This infrastructure strategy is the first step of looking at the overall YIT strategy. I'm quite sure that the core of our strategy that we want to be a sustainable urban developer remains at the core. However, we need to sharpen our strategy to define more clearly where do want to play where we are really successful. And we want to make our objectives more tangible. Secondly, we'll have a renewed vigor in sustainability. For example, the Green Finance Framework that we are telling later a bit more today is first big step in that area. And finally, in order to ensure our long term competitiveness, we'll take more rigor look at health and safety. It is and it will be #1 for us in everything we do. During the last year, we have, of course, been fighting against the COVID-19 pandemic, and the results are good. So we have taken successful proactive actions. For example, the mandatory masks on the sites, and we are using them at the offices as well, using the docs to identify the infections and so on. We have been able to keep the sites open and the infection levels low. And as in the whole society, in those geographies where we are, the overall infection rates are going down. But we have to remember that pandemic is not yet open. So we have to be following the rules over there to ensure that we can safeguard our people, our subcontractors' people and, of course, our business as well. Looking on the other hand, health and safety performance. It's been stagnant for some time. And we need improvement in that. We have a key KPI, the combined lost time injury frequency, and our short-term target is to bring it to below 9. Currently level is 9.9. And we have already an action plan on place, really from the leading indicators, increasing management attention, increasing management safety works. And we see that, that is leading to higher number of safety observation and finally, to lower level of accidents. We certainly want to have a respecting life attitude in everything we do.So let's have a look at our first quarter results in a nutshell. Overall, our adjusted operating profit added up to be EUR 21 million, and our gearing was at target level. We had a solid quarter. And we had excellent performance in the Housing segments actually in all the geographies that we are in Finland, in the CEE countries and in Russia as well. As I was alluding to earlier, our Business Premises business was stabilized, and we can see that in the results during Q1 as well. Secondly, we had a strong cash flow, which was supported by strong apartment sales and decreased capital employed in Housing Finland and CEE. Actually, we had record high Q1 cash flow, EUR 70 million this year. Thirdly, key item during Q1 was our launch of our Green Finance Network, which is supporting our overall climate and sustainable targets. We issued 3 green bonds, totaling EUR 300 million. And Ilkka will share you a bit more details on that area. And finally, our balance sheet was strengthened due to the improved cash flow and the hybrid bond issuance. And our gearing reached our target level, which is below 50%. Our gearing during the first quarter was 44%.Why do we need a strong balance sheet? That's important for us because construction is cyclical business. And we want to have strong balance sheet and low gearing level because that allows us to do business development and investment in any market situation and pay dividend to our shareholders as well. So Ilkka Salonen, our CFO, will now walk you through the Q1 results in detail. Go ahead, Ilkka.

[Ilkka Seppo Salonen]

Good morning, everyone. If we look at the Q1 revenue as well as about the order book or in generally, it was a solid quarter. And in the revenue, even it seems that we have EUR 100 million lower revenue than last year, it's good to remind that last year, we made a change in our revenue recognition in Russia, where it was a one-off item, roughly about EUR 60 million. And then we had the Keilaniemi, a tower sales last year, which was a one-off item. So more or less, at the same level, the operational side. Then in the order book, if we look at from the end of last year, all the segments actually increased their order book, which is good. If we look at compared to the last year, there we see ups and downs and in the Housing side in both segments. Actually, the reason is that we had a stopping our start-ups in the spring due to the coronavirus. And then in infrastructure side, we are finalizing big projects at the moment, and the new ones are in the design phase when there is not too much in the order books. Adjusted operating profit, EUR 21 million compared to EUR 8 million last year. That is a good improvement. And then if we look at from the segment side, it's easy to see that Housing has done a good job. I'll come that a little bit later. And Business Premises turn to be profitable. Infrastructure, slightly lower than the previous year. And then the partnership properties EUR 5 million compared to EUR 14 million last year. And then if we look at the little bit that where those items are actually coming from -- where the delta is coming from compared to the last year. Housing Finland, clearly, strong sales. Housing Russia, minus 1, but once again, it's good to remind that last year, we changed the revenue recognition over there, which had a EUR 5 million impact. So in the real life, the underlying performance in the Russian operations was roughly about EUR 4 million better. And in Business Premises side, very much driven by the fact that the deviations last year were huge. And this year, the negative deviations are not over there. As you remember, Myllypuro as well as Tripla had an impact for last year. Then Infrastructure, slightly weaker than last year. And then the Partnership Properties, that's almost fully described by the fact that last year, we sold a tower in Keilaniemi this year, Keilalampi and the deviation is pretty much close to EUR 10 million. So that's shortly, Housing did a very good job in operations. Business Premises stabilized. Infra, pretty much the same than last year. And in the Partnership Properties, timing of the asset sales.And as Markku said, the cash flow was on a good level. Actually, record high for the Q1, EUR 70 million. Last year, minus EUR 48 million. And if we look at the time when YIT and Lemminkainen was merged, actually, the Q1 over there was almost close to EUR 200 million negative. And that has been one of the major driver just what comes to the operations, the cash flow. So where we have spent the cash flow, the plot investments were lower than, let's say, normally. But it's more or less about the timing of the plot investments, and we are, for sure, willing to investment for the plots as we have done in the previous years as well. So there is no changes in that attitude. And yes, we had the green bonds in the first quarter, and we have established the Green Finance Framework internally. And there are those 5 categories where we are actually impacting to the environment and sustainability. And the biggest one is for -- in our case, is the green and energy-efficient buildings. That is the biggest part in our operations. But of course, renewable energy, just like wind power, clean transportation and technologies, but trams, what we are doing, pollution prevention just like water treatment in the Helsinki capital area as well as in Stockholm. And the climate change adoption, for example, how we can help the cities to handle the raining waters, which is probably increasing in the future due to the climate change. How we can help the cities handle those ones. So there are those 5 categories with we reach the life. And that's pretty much -- or that's fully -- the reason is that the biggest one is the first one where we have the light adoption. The others are medium or dark. But we are very happy that we were able to establish them. And also, we were able to raise the EUR 300 million green bonds there in 3 tranches, 2 senior bonds and 1 hybrid. And the maturities are 3 to 5 years. And also our financial costs are lower than previously. Then to the net interest-bearing debt. Actually, that's minus 53% compared to the last year. And yes, hybrid was one topic over there, that 100, but that's only 100 over there. The biggest impact is from the sales of paving last year. That's about EUR 300 million. But even you take those 2 ones, we have also able to generate cash flow from our operations, clearly better than in the previous years. And after the transaction, the maturity structure of interest-bearing debt is very favorable. We are -- we have been able to longer our maturity. And then as Markku mentioned about the gearing target. Now we are in the target level, thanks to the cash flow from operations, thanks for the hybrid bonds, and thanks for the paving sales. Now we are under 50%. And it's good to mention over here that if we haven't had that hybrid, which was a strategic decision, our gearing would have been around 60%. And the equity ratio of 37% and also the net debt to adjusted EBITDA ratio as well as interest coverage ratio, both are improving. And then I'd pass back to Markku, please, tell us what comes to the outlook.

[Markku Moilanen, President, CEO & Member of Management Board]

Thank you, Ilkka. So let's have a look at the market outlook and then after that, our guidance based on the outlook and the current situation as well. So Q2 market outlook in the different markets is shown here on the slide. So if we are looking at the housing market, it has been good, and it is expected to remain good also in the future in all the geographies that we are having business in. We can clearly see that the COVID-19 pandemic has not decreased residential demand. On the contrary, we've seen an increasing interest and demand as well. And even if we, last year, stopped our start-ups due to the uncertainty of the -- for a while due to the pandemic, this year, we have ramped up our start-up in Finland during Q1. And we had nearly 570 consumer start-ups during Q1 compared to below 500 per quarter in 2020.In Russia, the demand outlook look good as well as the state interest subsidy will continue until June. If we are then looking at the real estate market, there, we clearly see that the pandemic has had more impact on real estate. There are new needs for office spaces as remote work will increase as we see it also after the pandemic. And there's a need for adaptability as well. But overall, there is kind of less need in that market for new construction, but adjusting the existing ones is becoming more and more important. And for example, we have launched our Workery+ concept, which is a proactive and flexible model for our clients and tenants for their office space needs. Then the infrastructure market, there, the situation varies between the different geographies. In Finland, the situation, the current prevailing situation is expected to continue. Yes, the government had launched new rail investments, but not yet in 2021.In the Baltic countries, the situation is challenging. There's less project opportunities, and there's intense competition as well. And then finally, in Sweden, the demand is good. The overall market is much bigger than in Finland, when the civil engineering market is EUR 7 billion in Finland, it's over EUR 11 billion in Sweden. And there are a lot of large projects coming up in Sweden as well. So based on the situation and the market outlook, our guidance for this year remains the same that we have communicated in the beginning of the year. So that our group adjusted operating profit to be higher than in 2020 when it was EUR 85 million as well. And then I would like to highlight on kind of items impacting to the profit as well. In Housing, yes, as I was mentioning earlier, the pandemic is not over yet. So it could still cause temporary shutdowns and a slower progress and consequently delayed completions, which then could lead to postponement on revenue and profit. So that's one item over there. On Russia -- in Russia, however, we expect a solid underlying performance to be continued. In Business Premises, we were burdened -- our profits were burdened by certain projects. We have no similar issues expected this year and stabilization and overall stabilization that I've explained to you earlier that today is expected to continue. In Infrastructure, we are looking at our strategy, but we are looking at our projects and having a rigorous review on those as well. It is notable that we have this last year, windmill park sale that we have communicated earlier, that will be or is the largest swing factor, not only for Infrastructure but for the whole group. So the impact is EUR 40 million, and that will be finalized either this year or next year, and we are still hopeful and expecting it to come this year as well.And then finally, in Partnership Properties, the Mall of Tripla fair valuation may have an impact on our profits this year. Also, whether we see that as the pandemic is slowing down and the number of visitors is increasing, that will have a positive impact on the fair valuation as well.So to summarize, in our management agenda, I strongly see that we have a strong foundation in YIT to build upon. My first weeks as a CEO has only strengthened my view and belief on our people, our competent and passionate people and our outstanding team spirit. Our quality of work, which is among the best in the industry, on our customer satisfaction, which is at a good level and our strong and highly appreciated brand. However, to become more resilient and to stabilize our performance, we are taking -- we have initiated actions on 3 areas: on project management, on operating model and our strategy and starting from the Infrastructure segment. Simultaneously, we will start looking at our overall strategy to ensure our long-term competitiveness. I see that the core of our strategy, sustainable urban development remains to be the same. But we'll sharpen our strategy and make our objectives more tangible. We will continue focus on health and safety as our license to operate, and we see sustainability as a great opportunity for the future. With sustainable solutions, we are not only building the future for YIT, but also for the future generations. Thank you very much.

[Tommi Jarvenpaa, Vice President of Investor Relations]

Thank you very much, Markku. Operator, we are now ready for the questions.

[Operator]

[Operator Instructions] The first question comes from the line of Anssi Kiviniemi from SEB.

[Anssi Kiviniemi, Analyst]

It's Anssi from SEB. So I have four of them. I will take them one by one, if that's okay. First of all, starting with the Housing business and housing starts. I mean you highlighted that in Finland, you ramped up housing starts for consumers. But what are your ambitions for this year? It seems to be a very hot market. So should we expect a continuous increases in the housing starts and thus, for the Housing business overall?

[Markku Moilanen, President, CEO & Member of Management Board]

Okay. If I may start from the first one. Yes, as I mentioned, we have increased our housing starts during Q1. And of course, we need the plots that we have for the increases as well, and we are looking at the opportunities. And certainly, due to the good market situation, the good plots are something we are looking at, allowing us to make start-up as much as possible. So we are carefully looking at that and increasing if possible during this year as well.

[Anssi Kiviniemi, Analyst]

Okay. Is the availability of plots an issue when thinking about scaling up the Housing business currently? Or do you have a pretty big plot inventory? So how should we look at that situation?

[Markku Moilanen, President, CEO & Member of Management Board]

I would say that it's not a major issue, but we need to understand that we need a continuous flow of plots. And of course, we are utilizing the ones that we have available at the moment. And we want to have the plots in the right places as well. But in the long run, we need to increase the number of lots as well.

[Anssi Kiviniemi, Analyst]

Okay. Then on Housing business margins, in Q1, they were quite strong as a matter of fact. How do you look at the situation going forward? I mean everywhere we are looking, we are seeing inflation, also in the building materials. So are you able to kind of manage the inflation development? And what actions have you been taking to basically safeguard the margins that are currently pretty high level?

[Markku Moilanen, President, CEO & Member of Management Board]

Yes. Thank you. Yes, you're right with the materials and all of that on the cost side. We are, of course, first, looking at our overall efficiency to be as efficient and improve our efficiency of our products. Secondly, the high quality of our housing and the right placing our plots allow us to have the pricing on a good level. And with that combination, we actually expect that the housing profits will remain on a good level moving forward.

[Anssi Kiviniemi, Analyst]

Okay. That's very clear. Then a question on Infrastructure. You are currently starting to look at the strategy of the division. How should we read this announcement? Does it mean that you will mainly play around with focus areas, thus kind of centralizing your efforts in the areas you are really strong? Or should we think this also that you might get rid of some business, some geographies or even the whole business itself for kind of -- what's the read on here?

[Markku Moilanen, President, CEO & Member of Management Board]

Thank you. We clearly see already in the work that we have initiated that Infrastructure, we have a lot of synergies between the different segments. And again, going back to our strategy, the sustainable urban development, where we have this hybrid project, where you have infrastructure, you have houses and you have business premises. And our great experiences in major projects in infrastructure as well. We see that the infrastructure is an important part of our strategy. Then in the work, yes, we are doing, like you say. We are looking at the focus areas, looking at the areas where we are, where we have the capabilities where we can win and we can deliver with good profits as well. So that's what we are doing in that work. Of course, there might be corners here and there where we need to make conclusions on. But the big picture is looking more on a focus while having a focus on improving project management as well. Because I see that, that will be a key part of improving the performance there, like we have done in the business premises.

[Operator]

Next question comes from the line of Pauli Lohi from Nordea.

[Pauli Lohi, Analyst]

I have two of them. I would like to ask first about the institutional housing demand. And I see that your start-ups for institutions in Finland, they are relatively low level in Q1. But then in the market outlook, you are saying that you will see stable demand from institutions. Should this mean that your start-ups are going to improve, then in the following quarters and the full year, start-up health will stay at last year's level? Or how should be read this?

[Markku Moilanen, President, CEO & Member of Management Board]

Yes, the combination comes from institutional housing as well as our own development as well. And as we said, the good level is expected to stay during this year.

[Ilkka Seppo Salonen]

Yes. And some, let's say, changes between Q1 and Q2. There is no major differences compared to the previous. So it is stable, that market. And on the other hand, very good market.

[Pauli Lohi, Analyst]

Okay. And then about the Infrastructure segment, how much cost overruns you saw in Q1? And do you expect the magnitude to increase or decrease going to Q2?

[Markku Moilanen, President, CEO & Member of Management Board]

Yes, we can see the Q1 results where you can see that we were about in the same level as Q1 last year. Moving forward, and of course, when we are doing the project review in detail, we are not expecting to have project deviations in the same magnitude that we had in business premises last year, where we talked double-digits deviation. So we are more talking about single-digits deviations in that segment.

[Operator]

[Operator Instructions] We have no further questions, so I will pass back for any closing comments.

[Tommi Jarvenpaa, Vice President of Investor Relations]

Thank you very much. Thank you for the questions. Our second quarter results will be published at the end of July. Until then, have a great May Day, and goodbye.