Review by the President and CEO
Kari Kauniskangas in connection with Half-year report 1-6/2019
Q2: Solid performance and strategic decisions
The adjusted operating profit for the second quarter improved year-on-year and revenue remained at the level of the comparison period. From the end of March, the order backlog strengthened in almost all segments. Our outlook is positive: we estimate the adjusted operating profit of the company’s continuing operations to improve also during the second half of the year.
During the last months we have made significant decisions to execute the company’s strategy. Right after the reporting period we decided to sell the Nordic paving and mineral aggregates operations to Peab for EUR 280 million. We will record a positive cash flow effect of approximately EUR 240 million and a capital gain of approximately EUR 40 million from the sale upon the estimated completion of the transaction in January 2020. With the transaction, YIT’s business portfolio will be streamlined, the balance sheet will be further strengthened, and the seasonal earnings volatility of the company will decline. With the help of the cash flow received from the transaction, we will be able to lower our gearing ratio ahead of time to a level in line with our strategic goals as well as to invest in large urban development projects and growth of service businesses.
At the end of June we announced considerable steps in Russia to reduce capital and enhance profitability in line with our strategy: we decided to discontinue residential construction in Moscow, the Moscow region and Rostov-on-Don, as well as contracting and paving in Russia. We will focus our operations to the cities in which business has remained profitable throughout the Russian recession. These cities are characterised by good plot availability and size, sensible average sales price levels and sufficient consumer purchasing power with respect to YIT’s housing product. The changes to be implemented release capital and improve the result in Russia markedly going forward, even though we in this quarter record a one-off negative item in the operating profit.
These strategic moves enable YIT to accelerate growth and improve profitability in the priority areas defined in the group strategy: urban development and non-cyclical businesses. These decisions will focus our operations, enhance our performance and financial position as well as affect our reporting from this quarter on.
Regarding the continuing businesses, I am especially proud of the performance of Housing Finland and CEE segment as the profitability improved to a good level, over 10 per cent, supported in particular by Finnish residential construction. During the quarter, we increased residential start-ups in Finland and continued to invest in plots in Finland and CEE. The number of start-ups enables us to keep the volumes on a good level also next year. The increase in the adjusted operating profit came first of all from the result improvement in segments that underperformed last year. Also at the end of the period, the order backlog was approximately EUR 4.7 billion. The order backlog strengthened especially in Infrastructure projects and Business premises. Among others, the Raide-Jokeri light rail project in Helsinki and Espoo, wastewater tunnel in Stockholm and the expansion of Vaasa Central Hospital in Finland were added into the order backlog. In Infrastructure projects the margin quality of the order backlog improved supported by new contracts. We also agreed to build over 1,000 apartments for institutional investors in Finland.
In the first half of the year, construction volume has been at a good level in Finland. Demand for business premises has been brisk, in particular in the Helsinki capital region, Southern Finland and renovation business. The infrastructure construction outlook is supported by traffic investments planned by the new government for the next few years in Finland. In Sweden and Norway the infrastructure construction outlook has continued to be strong. In Finland, institutional residential demand has been good and consumer residential sales has been proceeding as anticipated. In the CEE countries, residential demand has been brisk. In Russia, the changes in the regulation concerning the housing market has increased general insecurity in the market.