YIT Oyj : Webcast transcript Q2 / 21

Transcription

YIT Q2 / 2021 Interim Report

30 July 2021

YIT Q2 / 2021 Interim Report

PRESENTATION

Tommi Järvenpää

Hello and welcome to YIT's second quarter 2021 earnings webcast. My name is Tommi Järvenpää, I'm the Head of YIT's investor Relations. With me here today are also our CEO, Markku Moilanen, and CFO, Ilkka Salonen.

We will first go through the presentation, followed by Q&A. At this point, I would like to hand over to our CEO. Markku, please go ahead.

Markku Moilanen

Thank you, Tommi, and welcome on my behalf as well to this webcast. So, let's start from health and safety, and that's our focus in everything that we are doing. And during the last quarter, our focus has been on preventive actions on safety. We have been fighting against the COVID-19 pandemic, and we are satisfied with the successful actions that we have had. Our sites have been open, and the infections have been low.

However, we have clearly now the fourth wave coming in several countries, in Finland and Russia to mention a few. So we are continuing our vigorous actions in that area.

If we're looking at our safety development, the number of accidents and injury frequency of the LTIF, it's been stagnant for a while and for that reason we had our Safety Week, our annual Safety Week, in May, where we really had a focus on proactive and preventive actions. Actions on safety, observation and management safety walks and talks as well. So we will continue the focus because this is highly important for us.

Looking at our results during the second quarter, as we have reported, it was a satisfactory quarter. I would say that this is another solid quarter, driven by good results in housing. Our adjusted operating profit ended up to be 30 million euros compared to 5 million euros during the same period last year as well.

And the good result is driven by a good result in housing segments in all of the geographies that we're working. However, we had a loss in Infrastructure due to margin reductions in some projects. On the other hand, our business premises segment continued to stabilise, like it did during the last quarter as well.

As a result of strong sales, our operating cash flow was solid during the quarter as well. And after investments, our operating cash flow was 109 million euros compared to 247 million euros during the same period last year. We have to bear in mind that last year during this period, we had cash flow from the sale of our Nordic paving and mineral aggregates businesses. So, operationally clear improvement compared to last year.

As a result, our balance sheet strengthened further, and our gearing improved further. We are using our strong balance sheet to answer our customer needs, especially in the housing market. And we have actually accelerated our housing start-ups significantly during this year compared to last year. So, the annual growth is around 40% compared to last year.

And with this, we are not only answering our customer needs, but ensuring for the company a solid margin for next year.

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YIT Q2 / 2021 Interim Report

Like we reported during or after last quarter, we have three management priorities. The first one is project management where the work started already during autumn 2020 and that's progressing at a fast pace and very well. We are implementing common practises and processes and reports in our project management.

For example new project portfolio forecasting and reporting tools, new criteria for suppliers, new products and reporting practises, to mention a few. So, this is really the backbone of our business, and backbone of being able to deliver predictable results in the quarters to come as well.

Secondly, our work on our operating model is progressing well and we will give you more info during the coming months.

Thirdly, we started our strategy work from our Infra strategy. We were not satisfied with performance of our Infra segment, and therefore we started the strategy work from there. The most notable finding that we already have now before doing the full Group strategy is that we see that Infrastructure business will continue to have a strategic role in the YIT Group also in the future.

We already see that in large urban development projects, having our own infrastructure business enables us to achieve clear synergies and synergy benefits and find ourselves opportunities. In the future, we will be focusing on our core capabilities in infrastructure, such as rock tunnelling, foundation engineering, rail and tram, and urban bridges, and marine, to mention a few.

However, we will also trim our offering to become more competitive and efficient, so we will be more selective in projects. So therefore, as a conclusion, our future Infrastructure business will be somewhat smaller than today, but clearly more predictable and profitable.

We have, during the second quarter, done the analyses of our project portfolio that led to these write-downs and we will have a new director for the segment to start late August. So, this is a good basis for Pasi Tolppanen to continue to grow the Infrastructure business further.

So, let's go to the Q2 results and the numbers through a bit more in detail. So, I have Ilkka Salonen, our CFO, here. Please, Ilkka, the floor is yours.

Ilkka Salonen

Thank you, Markku, and good morning, everyone. If you look at the Q2 from the revenues side, it has grew over there, driven by the housing business and a slight decrease in business premises calling more for the annual volatility, but then also slightly declining in Infrastructure, net sales partly driven by the fact that we are exiting from the Norway as well as from Estonia,

In orderbook, they received a clear drop, about 200 million, but it's good to divide it into a couple of items that requires a little bit explanation. First of all, is the housing side, Housing Finland and CEE roughly about 100 million lower than we had last year after Q2 and it's from the fact that we had roughly about 330 apartments left under construction. That will be fixed as we are speeding up our start-ups later this year.

In Russia, little bit the same story. On the other hand as we are declining or closing down operations in some cities over there. That has an impact for that one as well. In Business premises, a clear increase of about 130 million and there are several projects. The biggest one is a Tammisairaala hospital in the Helsinki area, which we won this year, and then the major project in infrastructure of 200 million, and actually that's coming from different sources.

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YIT Q2 / 2021 Interim Report

One is that, yes, we are exiting from Estonia as well as from Norway. That is having impact for the order book. We have in Finland big projects in the end of their life cycle it, that way meaning that the amount in the order book is lower than last year, and when it comes to the new big projects just like tram alliance in the Helsinki area, that is in the design mode so there is not too much in the orderbook.

And the third one is that yes, you have to be more selective for the new orders, new deals, and that has had an impact to the orderbook as well.

In the profit side, our adjusted operating profit was 30 million compared to last year's 5 million, so a clear improvement over there. And of course, the absolute levels what we see on the right-hand side in housing, Housing Finland and CEE as well as Housing Russia, good results for the Q2. Business premises stabilised. Infrastructure, -12, and there we are stabilising that one at the moment. The Partnership properties pretty much like last year.

And then the deviations, segment by segment, compared to the last year. As there you can see, there is a very good performance in the housing side. 22 million in Finland and CEE, and 4 million in Housing Russia.

And then Business premises. Even the absolute result is not satisfactory level yet, but it is clear and so the stabilisation over there has performed quite nicely during the last one year. And Infrastructure is in stabilising mode at the moment, and the negative deviation compared to last year, it is driven by the margin reductions in some projects.

Cash flow 109 million. That is once again a good performance from the businesses. Last year, we had 247 million. It's good to remind that 283 million was driven by the divestment of the Nordic paving and mineral aggregate business. So, the improvement and performance in the businesses themselves has been clearly from the negative side up to 109 million.

And then yes, we have continued to invest for the plots, and we are eager to buy plots in the future as well, especially when we try increasing our start-ups, this also requires new plots.

Net interest bearing debt - 350 million. If we take comparing the Q2 last year, that's about 350 million, and in that 750 million, the paving deal is already in. So, in the beginning of the second quarter of 2020, the net debt was 950 million. So, the cash generation has been quite nice. And of course, there is also impacting the 100 million euro hybrid which we took in Q1.

We have made a major refinancing programme during the first half year this year. Actually, all of these items have been refinanced. Two bonds, one hybrid and also the revolving credit facility has been renewed. So, the financial portfolio, it will get the maturity, and then the diversity is very good and will be solid for a number of quarters forward.

That was the - and then, yes, of course, equity ratio and gearing ratio. We are at the moment in 35 over there, but already at these stages, good to highlight that we are increasing our start-ups, which will guide capital more than we have had in housing Finland and CEE.

And then, of course, when the cash flow is working and the profit is improving, all the other metrics are also getting to the better level.

That was shortly and now I pass back to Markku.

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YIT Q2 / 2021 Interim Report

Markku Moilanen

Thank you, Ilkka. And let's have a look at the market outlook. The market is quite stable in the housing, real estate, and infrastructure. However, there are minor changes in real estate and infrastructure. Housing remains to be good as we stay during Q3 in all of our geographies.

The minor changes are that in the real estate market; the Baltic real estate market has turned, as we see, or will turn from yellow to green as the investor demand is seemingly strong. On the other hand, in the Baltics, the infra market has turned

• we have turned to red. It is weakening, as the government's budget have already been running over so we see less opportunities over there.

Let's have a look at a couple of other items that impact the outlook for the next quarter. The first one is the material cost inflation. So, all the building material as well as subcontracting and costs are clearly inflating in all of the geographies and in all of the markets that we are active.

However, we have taken, and will take, mitigating action at YIT, and I want to open you a couple of these. The first one is procurement practises. It is like indexing materials on our purchasing. Then, as we have a majority of our businesses in housing, so we can buy the materials in advance, so we know when we are going to do the start-ups. So, there is a bit more tools to mitigate against the cost inflation in housing, whereas in traditional contracting in Business premises and Infrastructure, we don't have these mitigation tools available.

Then we have pricing and contractual practises, like dynamic pricing in Russia and the CEE housing, so that enables us to mitigate against the material cost inflation. We continue to follow the development closely and we don't see a major impact for YIT Group during this year, but if the inflation continues for long, it will have more impact to us and for the entire construction industry.

Another item that will have an impact for our Q3 is our housing completions. As you can see from this chart, we are - our completions are reaching a bottom during Q3, so we will have around 300 units completing compared to 874 units during the third quarter in 2020.

On the other hand, we expect the fourth quarter to be back on a high level again, so there's the volatility in the completions between the quarters. And this will of course have an impact on our Q3 results also, so these less completions than last year is expected to have an approximately 15 million euro impact to the segment's adjusted operating profit year-on-year.

We expect otherwise the housing business, Housing Russia, continues in a solid way. We expect Business premises performance continues to stabilise as well. However, we expect that our Infrastructure business will have a low level of profitability due to certain low performing projects.

Then I want to remind of the Lestijärvi windmill park sale, which will have a swing effect. We're still expecting to get the sale around 40 million during this year, but there's some probability, low probability, that that will fall to next year as well.

In Partnership properties, our portfolio development is expected to continue. The good news is that so far in Mall of Tripla, which has a major weight on partnership properties, the number of visitors has been increasing and that will of course have a positive impact on partnership properties. But we need to remember the impact of the fourth wave of the pandemic as well, so there could be volatility in that area as well.

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