YIT's (YITYY) CEO Kari Kauniskangas on Q1 2016 Results - Earnings Call Transcript

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YIT CORP UNSP ADR (OTCPK:YITYY) Q1 2016 Earnings Conference Call April 28, 2016 3:00 AM ET


Iida Lahdemaki - IR

Timo Lehtinen - CFO

Tero Kiviniemi - Deputy to CEO and Head, Business Premises and Infrastructure segment

Kari Kauniskangas - President and CEO


Iida Lahdemaki

Good morning everyone and welcome to YIT’s Q1 2016 Results Presentation. I am Iida Lahdemaki from IR, and as usual we have here today Mr. Kari Kauniskangas, President and CEO who will shortly tell you more about the Q1 results. In addition, we have here Mr. Timo Lehtinen, Group CFO, who will go through the financial spending.

Timo Lehtinen

Good morning.

Iida Lahdemaki

And for questions we also have here Mr. Tero Kiviniemi, Deputy to the CEO and Head of Business Premises and Infrastructure segment.

Tero Kiviniemi

Good morning.

Iida Lahdemaki

After the presentation, we will have time for questions, both from the audience and from the telephone lines. But now let’s get started. So Kari, please.

Kari Kauniskangas

Thank you. Good morning also on my behalf. The agenda today is quite traditional and we start from the highlights of Q1. Our Q1 result was modest as we indicated already at the beginning of February, when we published our annual statement and guidance for 2016. However, the result of Housing Finland and CEE as well as in business premises and infrastructure segments were promising from several angles. The result of Housing Russia was a bit weaker than we expected two months ago. The clear bright spot of the first quarter was strong improvement in business premise and infrastructure, in terms of revenue growth and operating profit which doubled compared to comparison quarter.

In Housing Finland, we saw improving consumer demand in Finnish market, and we increased clearly our start up -- the number of startups for consumers in Finnish markets. Also, those newly started projects have been selling very well during the recent months. In CEE, we continued our startups on a high level and we finalized the product, which is first product which is in Poland and we are planning to start the project there already during this quarter.

In Russia, our main priority during this year is to reduce invested capital, provide positive cash flow and still having a target to provide positive operating profit. This will be done by stronger sales than a year ago. During Q1 we succeeded to increase our sales in Russia on a targeted level, and clearly from the previous quarters. But actions to improve the sales caused also pressured in our profitability. I will come back to this question later in my presentation.

I'm also proud that after the quarter YIT was strong again as the most ideal employer in the construction industry, in the Universal Student Survey for the third consecutive year. This year we will also provide again -- offer summer trips for at least 700 students only in Finland. Asset, the result was modest and it was mainly burdened by the weak result in housing Russia segment. The other segments were proceeding as planned. Revenue decreased 1% year-on-year at comparable exchange rate. Order backlog increased a little bit and it was little bit supported also by change in Russian ruble exchange rate.

Debit bridge compared to last year is here, and compared to several quarters during last year, we have now several columns which are clean, showing that in business premise and infra the direction already is right and it's improving strongly. In Housing Finland and CEE, we are on the pace of turning the sales mix back towards the consumer sales, which is having -- impacting in volume. In Housing Russia, I will go through more accurate in later.

In Finland we saw improving consumer confidence during the first few months of this year. Also prices -- apartment prices seems to be stabilized or even turned back to growth. Today those smaller apartments are selling very well, especially in growth centers. The amount of markets has been growing already 14 months in a row, and it's strongly supporting currently the housing market. In CEE, the macro outlook in all countries is quite positive. The consumer confidence has been strengthening already several years. The prices of apartments remained relatively stable. The traffic's here are the situation at the end of last year because the latest information is not yet available on the whole markets. And also in those markets, the interest of mortgages are on a low level supporting that good demand.

The revenue in the Housing Finland and CEE dropped a little bit. The main reason was that main part of sales was down on those newly started provisions, the percentage of completion was quite low. So then revenue and profit from those projects will be reported later when the percentage accomplished and its proceeding. Also important issue was that year ago we had almost 200 apartments sold in bundle sized deals. In this year we had only 39. So the amount of those apartments sold in bundle sales deals clearly decreased as we have estimated already earlier.

Strong growth in number of start-ups can be seen also in strengthening backlog of orders. The profitability improved, compared to previous quarters and they are on the same level than a year ago. Lower amount of those bundle sized deals impacted total profitability level, also growing amount of consumer sales and during this quarter we didn’t have growth sales to those growth funds. Provy [ph] overall is on quite a stable level, but the trend as you can see is in the right direction. The capital invested to this business is now clearly lower than it was year ago. So that’s how I've said already several times, consumer sales increased compared to previous or compared to comparison quarter. And if you remember the sales in January was not yet very good, its meaning but the sales in February and March was already clearly better. The April sales is expected to be around 130, which is quite a strong figure. Year ago we had several start-ups where we had very strong sales in April.

In CEE, the consumer sales grew 5% and to be continued having more than 300 apartments in our start-ups, when year ago the level was clearly lower. The project which was acquired in Poland is expected to start already during this quarter. So we have a valid building permit for the project on that plot.

And as you can see the production volumes is now growing quite significantly. In Finland the number of unsold completed apartments reduced below 300, which is the first time on that level since 2013. And the target still is to reduce the amount of those apartments and the capital tied to those apartments. This soar of construction in CEE is continually growing.

Then to Housing, so a big picture, the expense rate level is on a higher level than a year ago. The apartment prices in cities have stayed stable or declined slightly. The overall transactions volumes in primary market Housing increased during Q1. The market subsidy program, provided by government extended at the beginning of March to continue on to the end of 2016, and its strongly supporting the sales in primary markets.

The revenue was low, and it was impacted by several things. Foreign exchange rate had around 20% -- the revenue decreased by 20% at comparable exchange rates. So you can calculate that the impact of exchange rate change was around 10%. We have little bit lower sales volume in Q1 than year ago, but clearly stronger than in previous quarters. Also because we have reduced amount of start-ups during last two years the production volumes and production proceeding therefore is little bit lower than earlier.

And also in certain projects, the percentage of completion times percentage of sales is on a quite low level, which are not providing support in revenue in short term. Probably, one of the most interesting question for many of you is the profitability development in Housing Russia during the last and in coming quarters. In my mind the situation is actually not so dramatic than the graphics shows. As you reminder, our main during this year is to reduce invested capital in Russia and it’s planned to do through strong sales in all units. We’ve reached the targeted sales level, having around 900 sold apartments during Q1 which was 20% more than in previous -- several previous quarters.

To reach that sales speed, we’re forced to decrease sales price list in certain projects in St. Petersburg and Moscow region. These sales had a negative hit to our profitability in Q1. When we changed the income expectation, it changed also according to IFRS principals, the profitability of the projects and in these case, we have to reverse already recognized too high profit from certain projects. So that is the main reason for the negative result in Q1. At the same time this also explains why we’re still having quite realistic opportunities to keep the target to have a positive operating profit for the full year.

If the sales speed and the demand continues with the current level, it no need to change list sales prices during the coming quarters. The target is quite realistic. So as you can see, the sales improved clearly compared to previous quarters, perceivably less than a then year ago but as you remember at the end of 2014, we had extreme strong sales of which part was then transferred from the December to January last year. We started pre-projects in Russia to have critical volumes in all units. Quite important is that one of those start-ups done in Noginsk in Moscow Oblast area, was the first project with new modern pre-fabricated serial house, where the average size of apartments are clearly smaller than the previous real houses, and the layout of apartments are quite modern, meaning that the up sold sales prices of those apartments will be lower than in the past and also meeting the current demand of apartments in that area.

The housing sales in April has continued on a quite good level being clearly over 250 apartments also in April. Production volumes are around 8000 at the movement and the number of unsold completed apartments was lower than quarter ago. At the end of the March, we had 23,000 apartments in our maintenance and that business is growing at the movement. Maybe you remember that we changed the organization structure inside of this business so that all service units in Russia are now managed by one-unit director.

Turning to business premises and infrastructure, overall the construction volumes in this business both in the infra side and business premises but is on a good level. Investor demand has stayed stable. There are several large projects ongoing and also in tendering phase. And the situation is around the same in CEE countries, the strongest situation being in Slovakia at the movement.

Last year we ensured strong backlog of orders, and now we can see the impact of that from the construction is proceeding in those project. The revenue increased by 22% compared to Q1 last year. The backlog of orders increased slightly. In addition, the Tripla is proceeding strongly at the moment and it’s not yet in our backlog of orders. Also, the decisions done by Finnish government few weeks ago to fulfil their part of the finance of Tampere light rail project is giving support to our outlook, because YIT already year ago, won the tender of that project in an alliance model. And in that project, the development phase is at the movement ongoing and the construction is planned to start during autumn this year. So this decision done by government is important part. So the final start of decision of that project.

So profitability improved. Being on a level of 4% it's still having some special increase, but overall the profit doubled compared to last year. ROI is continuing to improve, being a level of 12 and you remember that our target level is 15. So this is going to right direction. One issue that we mentioned is that from the beginning of this year we added our equipment business balance sheet to these figures because around 25% of the revenue and the balance sheet is used by housing -- infra services unit and business premises unit. Also comparison figures are corrected with the same figure.

So Tripla, we purchased the plot at the beginning of March. The letting is proceeding very well. We announced that already one-third of premises has been rented with final agreements, and the demand has been extremely good from our point of view. Inside, the production is proceeding good and the percentage of completion is increasing as planned. The target is to sign and grow the final -- to deal with the investor consortium of owning this mall of Tripla shopping mall during Q1, and we are expecting at the moment that projects will be added to our backlog of orders during this quarter.

In business premises we won several big cases or signed contracts during the quarter and 40 million of those mentioned in the Slide are not yet included in our backlog of orders because the building permit was missing. We have since during April got those permits. And the major projects have been progressing quite well, like the ‘18 project.

Then Timo Lehtinen will open the financial position and key ratios.

Timo Lehtinen

Thank you. Good morning all. Then the financial position and those key ratios. A bit different quarter, negative cash flow in Q1 after a long period of positive developments, slight weakening of those key ratios and this time positive translation difference due to stronger ruble in quarter end. Negative cash flow of €25 million included plot investment with a value of more than €50 million. The acquisition of existing Pasila railway station for Tripla project was also a good part of that.

Invested capital was stable on a level of €1.1 billion, a slight decline of return on investment to a level of 4.7, clearly unsatisfactory and clearly below of our target of 15%. As Kari mentioned we have made good progress in -- especially in business premises and infrastructure and also we are seeing a positive trend in Housing Finland and CEE.

In Q1, gross and also net debt increased slightly. We have get the strong liquidity buffer of close to €500 million. A successful bond issue was executed in March to refinance this year’s maturities, especially bond due in June. Our debt portfolio has a balanced financing sortie with the average interest rate of 4.2%. Currently we have relatively low volume in commercial papers we feel be increased in coming quarters. Concerning Tripla, as Kari mentioned we have continued the financing negotiations with a target to close in Q2 ’16.

Then those key ratios. So gearing was 109, the equity ratio change was a combination of negative net debt development, dividend, strong rule and finally also excess cash, having again an impact of 1.5 percentage points to equity ratio. As we have mentioned in Q1, ruble appreciated meaning a positive translation difference of €16 million. YIT's Russian exposure to respectively being now on a level of €340 million in total. Concerning then the capital in this program, over 80% done of the program initial value of €380 million. That's a modest progress in Q1 and as you well remember, target is to complete this program this year. So this has sorted the financial position on those key raises.

And Kari then will continue with the outlook and guidance. Please.

Kari Kauniskangas

Okay, so I think first time since the part of the merge where we see overall positive progress in Finland, and you know that the arrow there is light green and little bit upwards in that direction. So, consumer demand has been improving slightly and we expect that the development to continue. The demand focusing to small and affordable apartments and growth centers. I said earlier investor demand is on a good level, available to more this is good level. They are not interest for business premises on a positive level, focus being a specially in capital region and contracting market continuing to be active.

Three weeks ago Finnish government made some decision to give political support for new infra projects, and we saw that very positive to long term outlook of our business in Finland. Okay, in Russia, the development still is -- or we have the visibility. The GDP growth has been declining and GDP has been last year around minus 4 and now the figures are improving being smaller, but the low cost are expecting that in Q4, that the GDP could be already on a positive side. But so far the proceeding still is declining. In CEE the positive market environment is expected to continue as it has been.

So as the overall Q1 result was pretty much according to our expectations, and the market outlook in Russia and CEE is expected to continue to similar like three months ago. In Finland we see now slight positive progress. Overall the guidance for the whole year is unchanged being that we are expecting revenue growth being in the range of 0% to 10% at comparable exchange rates and also that the adjusted operating profit to grow from the level of 2015 which was €76 million.

So I think that’s the presentation today. If you have any questions, please doesn’t hesitate to ask and if you start from this room in Capula [ph]. No questions here so then online.

Question-And-Answer Session


[Operator Instruction] We have a question from [indiscernible]. Please go ahead your line is open.

Unidentified Analyst

[indiscernible] I’ve got a couple of questions. First of all, just to be precise, can you describe the pricing situation in Russia in bit with more detail. When you say that there have been changes in the pricing, certain projects, did I understand that kind of share price of completed projects has been taken down at the time when these have been sold out or what is the sort of the negative effect that it is coming down to the bottom line?

Kari Kauniskangas

So as you know this, during the last few quarters our sales have been around 750 per quarter. And the target for this year was stronger sales and to increase the sales figures, we made the decisions to change least prices in certain projects in St. Petersburg and Moscow region. And when we made the change in the income expectations, the profitability of those projects is also changing and when the profitability forecast for the project is the smaller than it has been earlier, already recognized revenue that there operating profit is reversed being on the level of new forecast.

And the reason for that is in certain projects, they have sale better than what we have sold in previous quarters, and I think now we found the market level in those projects and the sales in all projects are now on an acceptable level. And as I said, if the current demand stays and we are not forced to make other changes, the current – meaning that the current price at least is enough for us to sell according our targets, then there are no more negative hits from those prices changes. And to be honest, if the prices are growing, there will be similar kind of hits to a positive direction, but the impact is not as weak to that direction usual.

Unidentified analyst

So I guess I understood you correct enough. Basically prices have been taken down of it and then maybe couple of words how those prices compared to the market prices today? Are they now kind of in line with the market price or below or above?

Kari Kauniskangas

I think we are still little bit above the market prices, but that has been the practice already the year. So we have some pricing power but we can't be too far from the lowest prices in the market.

Unidentified analyst

Second question, regarding the Finnish Housing market, maybe couple of words, how do you think the beating competition today looks like? Have there been changes from the past years that the beating and competition would be more active today than a couple years ago?

Kari Kauniskangas

That’s true that in [indiscernible] there are no more construction than it has been in the past and at the same time it's good to remember that probably during last two years there have been too low numbers of constructed apartments. And the reason for that has the mainly city plan, limitations and now city is giving some space in that area, meaning that it's possible to construct apartments according to current market demand. And for sure there are more and more construction. Still the location has a big impact and I think we have already have plots in quite good locations.

Unidentified analyst

And my last question would be on the comments regarding Q1, if I remember right in the Q4 report the comments were that Q1 would be the weakest quarter in the year. And at least I didn’t notice, that comment between being repeated in today's report. So is that comment still intact?

Kari Kauniskangas

Yes, that’s the fact.


[Operator instructions]. There are no further questions I will now hand back to the speaker for closing comments.

Kari Kauniskangas

Okay thank you. If there are no more questions here, then I thank you all and wish you warm spring. Thank you.

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