HusCompagniet A/S (HCE.F) Earnings Call Transcript & Summary

At this time, I would like to welcome everyone to this HusCompagniet's Q3 2025 Conference Call. [Operator Instructions] I'll now turn the call over to your speakers. You may now begin.

Thank you. And first of all, welcome to the presentation of HusCompagniet's Q3 results. I'm Martin Ravn-Nielsen, and I'm CEO of HusCompagniet. With me today is Allan Auning-Hansen, our CFO. We will open the call with comments on the earnings adjustments announced 24th of October before presenting the financial results. We will end the presentation with an update on market conditions. And the development in sales, deliveries and our backlog. After that, we will be answering your questions. But let me start with the earnings adjustment announced a few weeks ago on Slide 2. We completed a review of the fully Semi-detached projects portfolio and had to adjust earnings guidance. This was based on 3 key factors that [ unfortunately all ] impact earnings performance. Firstly, we had to make write-downs on 3 ongoing B2B projects. And secondly, we saw a more negative effect than expected from the projects in wholesale Elements that was reported in Q2 report as well. And thirdly, we have seen postponed on other B2B projects because building permits have been received later than expected. The performance in these projects in Semi-detached is, of course, very unsatisfactory. The Semi-detached segment account for 22% of group revenue and 31% of our net order book in Q3. The 3 B2B projects announced for around half of our current net order book in Semi-detached. So this has a significant impact on the business area. The review showed that our other active B2B projects are performing as expected. The net order backlog stood at DKK 697 million at the end of Q3, and we had several active and well-performing projects progressing to plan during the quarter. We were pleased to complete 3 of these projects in Q3 and deliver them to satisfy customers, just like we have done with a number of other projects in the recent years. We will take all necessary steps to improve performance and profitability in the Semi-detached business by learning from challenges and healthy projects alike. After growing our market share from around 3% in '23 to around 10% in '24, we will have a clear focus on improving margins in Semi-detached ahead of winning market shares. We will look at all parts of our process, including calculation, tendering contracts and cooperation internally and with developers. And we will focus on building sustainable and long-term partnerships with developer in carefully selected projects. With this, Allan will cover the challenges in our Semi-detached business in greater details, and please turn to Slide 3.

Thank you, Martin. I will briefly cover the 3 key factors mentioned by Martin before and highlight some of the specific challenges for each of them. The 3 B2B projects have been impacted by various challenges. On some points, the offer calculation process has not been good enough. At the same time, profitability was impacted by changes in building materials and the terms on which this was done. The development means that we are engaged in constructive dialogue as well as contractual disputes. Therefore, we cannot share much more about the specific projects, but we have stated that one is scheduled for completion in the first half of 2026 with the other 2 targeting completion in the first half of 2027. This means that the 3 B2B projects, unfortunately, will have a negative impact on gross profit and earnings in Semi-detached next year and in the first half of 2027. The most significant impact will be seen in 2026. We reported unsatisfactory low margins on a few HC Elements projects in the Q2 report and mentioned that these were seen to have some impact in Q3. This impact was unfortunately more negative than initially expected and caused by challenges in offer calculation combined with excessive project and housing unit complexity. We will not take on these type of projects going forward. The HC Elements projects have been completed and delivered during Q3, and we do not expect any additional impact. Finally, we have seen postponed initiation on other B2B projects as building permits have not been obtained at the pace we had expected. This means that we will not benefit from the revenue and earnings from these B2B projects in 2025 to the extent we initially expected. Let us follow up on 2025 guidance after this walk-through. Please turn to Slide 4. Based on the development in our Semi-detached business, we adjusted our 2025 guidance 2 weeks ago. We still expect revenue to be within the range of DKK 2.9 billion to DKK 3.1 billion, but earnings expectations were reduced to DKK 60 million to DKK 80 million in EBITDA and DKK 15 million to DKK 35 million in EBIT. We expect to deliver around 1,000 housing units this year. With that, let us look at the financial highlights in Q3 on Slide 5. We continue to generate solid revenue growth of 35%, driven by high activity in the Detached and Semi-detached businesses. Both segments have increased sales in recent months and reported more deliveries combined with a higher contribution from work in progress. Gross profit came in at DKK 110 million for a margin of 13.9%, which was 6.3 percentage points lower than the same period last year. This decline was attributable to the unsatisfactory development in the Semi-detached business, which we have already covered. A higher contribution from detached could not fully compensate for this decline. EBITDA amounted to DKK 8 million and a margin of 0.9% compared to DKK 32 million and 5.5% last year. The decline was mainly due to the lower gross margin. And in addition, the margin was impacted by higher staff cost in the quarter following the balanced ramp-up of our organization since Q3 last year. EBIT was minus DKK 4 million, down from DKK 20 million in Q3 last year. Free cash flow came to DKK 0 million compared to minus DKK 4 million in the same quarter last year. A couple of weeks ago, we entered an agreement with Danske Bank and Nordea to increase the leverage covenant for our existing facilities agreement. We were pleased with the constructive dialogue with the banks. The agreement will provide us with ample headroom until end 2026 following the decline in EBITDA in Semi-detached. Let us go to Slide 6 for the highlights in the first 9 months of 2025. Revenue increased by 31% to DKK 2.167 billion in the first 9 months, supported by all 3 segments. The positive development reflects continued sales increase in several consecutive quarters and satisfactory activity levels combined with higher revenue from work in progress. We saw a 25% increase in deliveries across segments, which came to 713 units compared to 569 units. Progress was led by the Detached segment. Gross profit grew by 5% to DKK 370 million for a margin of 17.1% compared to DKK 351 million and a margin of 21.3% in the comparison period. The higher gross profit was driven by the Detached and Wooden houses segments, while the reasons for lower contributions from Semi-detached were the same as mentioned for Q3. EBITDA amounted to DKK 47 million for a margin of 2.2%, down from DKK 81 million and a margin of 4.9% in the first 9 months of 2024. The decline was driven by lower contribution from semi-detached and higher staff costs already mentioned. EBIT declined to DKK 14 million, down from DKK 44 million in the comparison period. Free cash flow was negative by DKK 26 million, down from DKK 126 million last year, driven by changes in working capital and sales outpacing deliveries. Net debt amounted to DKK 309 million at end September, up from DKK 245 million a year before. The development was driven by changes in working capital and the decline in EBITDA. With this, let's go to Slide 7 for a view on the overall market conditions from Martin.

Thank you, Allan. We are pleased that we have maintained the positive traction in sales during '25 despite a continued decline in consumer confidence throughout the year after the positive trend in the second half of '24. We want to maintain the good traction, and we have strengthened our local presence in Jutland with a new showroom in Horsens and a dedicated FORIUM offices in Aarhus during Q4 to support a positive development in the Detach business. While consumer confidence is trending down, the Danish economy as such remains solid, supported by a high employment rate and largely unchanged core inflation as well as long interest rates. Let's take a look at sales in Q3 on Slide 8. In Q3, the total sales across segments grew by 56% to 376 units. Detached sales increased by 7% and the pickup continued, but a slower pace than in the recent quarters. This is partly because of the stronger comparison picture, but we're also seeing [ damned ] sales growth after a steady declining consumer confidence in '25. Semi-detached was up 431% and driven by the subcontracting agreement for 156 units in the Project Søgården, which we mentioned in August. And in Sweden, the sales level were down by 16 units. Please note that the contracts for 106 units with Thylander announced back in October last year is still not included in Semi-detached sales. In early October this year, we announced that building permits and acceptance from [indiscernible] welcome were obtained for 2 remaining stages, which compromise 107 houses units of the 3 states B2B project in [indiscernible]. Please turn to Slide 9 and an update on delivered houses. The total number of houses delivered increased by 71% to 319 units in Q3. The development was driven by all segments and more HC Elements projects were completed, as also mentioned in the beginning of this call. The pickup in deliveries reflects the continued increased sales in recent quarters. And I will end this presentation with a quick look at our order backlog on Slide 10. We continued to build our net order backlog, which grew by DKK 57 million to DKK 2.2 billion at end September compared to the same period last year and has been growing constantly throughout the year. The positive development was driven mainly by Detached and Semi-detached. And Detached accounted for 64% of the total order backlog at the end of the quarter with Semi-detached accounting for 31% and the Wooden houses in Sweden for 5%. Thank you for listening. And now please turn to the next slide for the Q&A session.

[Operator Instructions] Our first question comes from the line of Sebastian Grave from Nordea.

I have a few starting on the current trading. So 62 units sold in October, Detached units, that is, it looks like a deceleration from August and September. So how does this number square with your own expectations for the month?

I would say the 62 units is lower than expected. Also when we actually was going in October, we have thought that we will end on a higher number, but we have seen some of the customers is, you can say, a little bit slow about signing on the contracts and more cautious also about signing the contracts. So it was actually what we have seen the last couple of weeks.

Okay. And is there any explanation behind this? Do you think -- and it can also be an explanation that you took down your marketing efforts at Detached here during the summer? Does that have an effect here? Or I'm just trying to get an understanding of the situation.

Yes. Thank you, Sebastian. So following the month after taking down our marketing investments, we saw a decline in the beginning, as we have previously mentioned. But actually, the number of leads gained momentum pretty well, not shortly after. So we have seen a fairly number of leads throughout Q3. So it was actually, as Martin said, when we entered the month of October, we were expecting more from a sales perspective and also the number of leads were pretty decent. So it's towards the second half of October that we have seen a number of leads slowing down and customers being more cautious in terms of signing contracts. And I mean, the past couple of months, we have read a lot in the newspapers about people being resigned from their jobs from some of the largest companies in Denmark and generally a drop in consumer confidence. So there might be something into this. So of course, it's something that we are very much paying attention to and we'll do so in the next couple of months as well.

Sure, sure. And sorry for staying on this topic, but is there any silver lining here start November? Or is it too early to say at this point?

I would say it's definitely too early to say. So sales are being closed throughout the month and usually with a fairly number of closings towards the end of the month. So I would say it's too early to conclude on anything right now.

And where does this...

I will also mention here, I have been in this game for decades. And there is some quarters, some months in the past that you can see a drop in sales and maybe other months there is a significant pickup in sales. And why are those months being down or up compared to what expected? I have seen it a lot of time before without actually one answer.

That's fair. Just wondering where does this put you in terms of costs going forward? So does this deceleration here in October, does it in any way alter your investment plans also considering that your reorganization at this point is back to a fairly large level compared to last year?

I think now -- I think it's a total fair question, Sebastian. I think right now, we are paying attention to sales on a daily basis, and then we will take the measures required if needed any. So right now, I think it's also -- there's a signal to us right now, and we need to monitor that signal carefully. I think that's the best we can conclude at this moment.

Sure. And then just one more question, I'll go back to the queue. And maybe it's a bit too early to talk about capital allocation with the leverage beyond 4x EBITDA. But can you just remind us of your priorities at this point? So what is your capital allocation priorities going forward in '26 and beyond?

I would say that in recent years, being able to build on own land is something that boosts margins. And we are considering approaches into which this is possible considering capital allocation and the overall environment as such, I would say, difficult to jump to any conclusion at this moment.