HusCompagniet A/S (HUSCO) Earnings Call Transcript & Summary

Good morning, and welcome to the HusCompagniet First Half 2022 Results Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I would like to hand the call over to Martin Ravn-Nielsen, CEO, to begin the call. Thank you, Martin, over to you.

Thank you so much. And first of all, thank you to all of you dialing into this conference call about HusCompagniet's first half of '22 results. My name is Martin Ravn-Nielsen, CEO of HusCompagniet. With me today, I have Mads Winther, our CFO. And after the disclaimer, you see our summary and the highlights. In the first 6 month, you will see we have a revenue growth of 11% to DKK 2,266 million. You have seen our sales decrease with 47% year-over-year, but also from an extraordinary high level in H1 '21. Our EBITDA is on DKK 175 million. It was a margin with 7.7% despite an extraordinary supply chain pressure. And the target of delivery is still 98% on time. It was what we have maintained is very important also around the customers. You saw in the Q1 '22 that we have a share buyback on almost DKK 37 million. Our acquisition in the factory in Esbjerg, in Denmark. It was closed here in the first July '22. If we are going to the market then we absolutely see market demand was lower in H1 '22 also after an external high activity in the H1 '21. But we also see cost inflation a lot of higher prices from the suppliers due to accelerate energy prices. We see the supply and demand balance for the subcontractors is more normalized in Jutland and Funen, but we absolutely still see some bottlenecks in Zealand. Around our outlook, '22, Mads will come back to that later, but just some numbers also for me, we see now that we will have a revenue in between DKK 4.1 billion to DKK 4.4 billion. And then EBITDA before special items between DKK 340 million and DKK 360 million. EBITDA is between DKK 265 million and DKK 290 million. And that is also with an adjustment includes the special items will have an effect of around DKK 20 million to DKK 25 million from the reorganization that we now are looking into. The expected leverage ratio is around 2.0x net debt-to-EBITDA. And with you going to the next page around the market update, then we -- I can see that we have seen a significant decrease in the demand in the H1 '22. And also, we have seen it here in July, and we also see it here in August. It is a lot of factors. Actually, we have seen the rising interest rates and inflation who has been significant. We see now that the building industry is slow down. The customer is more aware now. And therefore, our visibility is extraordinarily low. When we are looking into the B2B market, also the professional market is also impacted by a slowdown. And therefore, we will see also that the sales level for '22 is expected to be lower than '21. We still are comfortable around our strategic and midterm targets going forward also because we still see us as a very strong player in this industry going forward as well. But for now, we are in a visibility and a situation who is extraordinary. When we talk around the subcontractors, we see now that Jutland and Funen starting to be more normalized in the demand balance, but we also see that the bottlenecks still exist in Zealand. We have made some adjustments. We will now take some adjustments in our organization just to the demands that we are looking into. We have earlier this year made decreased our organization with 41 FTE. And now this month, we will also adjust with 46 FTE in this month. So therefore, we -- all the time is -- make the right organization, we make the adjustments to what we are looking into and the demand. If we're looking into the supply chains, yes, the visibility has reduced further. We still deliver 98% of our houses, but the energy prices is -- increases significant. And it is also what we are seeing from the suppliers, and therefore, we have a pressure that way. The extra cost we see now due to accelerated energy prices it is also what we have seen in the first half year. But we look into some better margins in H2 because we have made some sales price adjustments who will have an impact in all our deliveries in most of our deliveries in '22. So that way is what we're looking into. But currently, we see some risk also in the supply chains because the gas situation is a challenge going forward. And also, as you know, the geopolitical situation is extraordinary for now. If we are looking into the market about the test on the next page, it is actually why we have made an adjustment in our -- our adjusted our organization because the private customers are more hesitant for now. And therefore, to align our organization to the demand, we already earlier this year, have adjusted the organization with 41 FTE. And now we will do it again this month. The reorganization in here in '22 will make some savings on an annual basis in SG&A, approximately around DKK 55 million to DKK 65 million. As I've mentioned before, the visibility is absolutely reduced. And therefore, we are monitoring the market very closely, and we are on track to have the right organization going forward to the demand that we are seeing. If we are going to the next page around the highlights for H1. Then you see the revenue is DKK 2,266 million, it is 11% up from the same period last year. The EBITDA is actually the same as last year. It is DKK 175 million. The EBIT is DKK 151 million, almost the same also that last year. We have available cash on the DKK 262 million. Our deliveries is 732 houses, and our EBITDA margin is 7.7% compared to last year, 8.6%, and it is primarily the extra cost pressure that we have seen in the H1. As we also earlier have mentioned will be a pressure. We still see that H2, we will maintain to have better margins than we have seen here in the first half. And the EBIT margin is also there 6.7%, a bit lower than last year. The financial gearing is 2.2x -- so -- and it was 1.8 in last year's same period. If we are going more into the highlights in Q2, it is the next page, where we see that our revenue is DKK 1,094 million. It is up almost 1%, and our EBITDA is DKK 76 million compared to last year, it was around DKK 100 million. And the EBIT is now DKK 64 million. The deliveries is up with 526 houses. It is 24% up. Our EBITDA margin is now 6.9% and the EBIT margin, 5.8%. If we're going more into the deliveries in H1 and the next page. Here, you can see that we are up in the first half on 23% year-over-year. In the figure in the left side, you see also if we are looking into the quarter-by-quarter in Q2 for '21 compared to Q2 '22. Here, we can see we are up with 24%. The segment split, you can see in the figure in the right side. So it is all our segments here that we are up in the deliveries. If you're going to the next page is the sales for H1. We are hit down 46% year-over-year in the first half. And the figure on the left, you can see this 50%, we are down from Q2 '21 to Q2 '22. And it is also the segment split you can see on the right side. It is especially the Detached and the Sweden that with the main, you can see reasons to the significant lower level or the semi-detached is 12 units that we have more -- less in the sales. And maybe Mads, over to you around the segments and some numbers.

Yes, so if we look at the next page with segments, then reflected on the left side of the page, we can see that we continuously see that the Detached business, the Sweden and the Semi-detached business growing faster than our Detached business, so good news on that. If we then move into the right side the table, what is really worth highlighting is, of course, that we have a fairly low share of land. As many of you already know when we sell own land, we have higher margins. So the year is affected by this is not a big surprise. We have guided that it will be below 10%, around 10%. So this, we are seeing also we see a decrease in similar cash while they are growing. When we then look at the average sale prices, we can see that we are starting to see an effect of the price increases we have done. But as Martin also mentioned, we will see margins bottoming out here in Q2, and we will start seeing the price increases that we have put in place starting to kick off a bit more in the next quarters. And as we can see in Sweden, it's pretty much linear. Of course, you cannot see the decimals, but they have a sort of a pretty steady business. Then looking at our EBITDA margins on segment-wise, we can see that Detached is hit on this. We are also seeing an effect in Semi-detached, we are, of course, building up an organization, as you all know, which is affecting this. But as well, a lot of the projects we're doing in Semi-detached is around Zealand where we are seeing this congestion also ground subcontractors that has extended a little bit more. So we are seeing some effect of that. In Sweden, we are seeing a margin decrease, which is -- has to do with 2 elements, a mix of what houses we sell. And the second part is just of the prices that have increased our materials as well. So moving on to the next page around order backlog. I should first highlight that the order backlog net, which is 58%, it's 60%. So we will correct that, of course, in the material. But if we look at order back of gross, we can see that it's declining due to of course, when we say that the sales has not been performing at lower levels. We are slowly starting to see that in our order backlog. We still have a very strong and healthy order backlog. Here grows a little bit down from the full year. And then when we look at the net order book, then we can see that, that's down now to 60% of our midpoint 2022 guidance. And remember that the net order book is what we are going to recognize from a P&L perspective moving forward. It's mainly the Detached market that we are seeing dropping in Order backlog but also the Semi-detached. So -- I'm sorry, not the Semi-detached, of course, adding, sorry, 56. So that's taking a cushion on the order backlog. And then moving to the next page on outlook. Margin also went through this in the beginning, but we are growing our outlook and basically impacting revenue, which is taking slightly down due to that we're seeing less sales. And then we are taking EBITDA down from DKK 370 million to DKK 410 million to DKK340 million to DKK 360 million. EBIT as well as Martin mentioned there, we're, of course, seeing also the full effect of the special items following redundancy around and we are now commencing here in today. Then we're very happy to -- on all these less good news than at least highlighting that the leverage ratio will be lower despite us buying the factory, as you all know, in April, then we will be looking at lower leverage ratios, given our flexibility in our business. Then on the assumptions for the outlook, Martin also mentioned this. Of course, disappointing sales, we are taking those down. We're also seeing a small effect on our deliveries, but they are close to the same, given the congestion we have in Sweden. We are also taking a little bit more on Semi-detached revenues, we are taking at least guidance opening up for being between DKK 450 million to DKK 500 million. And then I think the main items were around the special items of this DKK 25 million to DKK 30 million that we expect and they are due to, of course, the reorganization. But remember, we're also closing offices, et cetera. So those costs will be included in this and move forward to '22. So with that, I will leave it to the moderator for Q&A.

[Operator Instructions] Your first question comes from the line of Frederikke Due Olsen from Carnegie Investment Bank.

I have a couple. I'm just going to take them one by one. First, I was curious if you could elaborate a bit on what dynamics are in place to cause lower demand or lower sales of houses. So is it primarily that the overall demand for newbuild has decreased? Or is it also a longer conversion time being a driver here? And maybe relating to the latter, do you expect that to potentially delayed or the extended conversion time has pushed part of the sales you were perhaps expecting for Q2 into Q3 or 4?

Yes, we -- Martin here. Thank you for -- we see a very -- we see a lower demand, absolutely. And we also is in, I would say, historical situation compared almost to the financial crisis in 2008 and '09 and so on. So therefore, it is extraordinary for now. The demand for the customers is for a period here is stocked up and therefore, the visibility for now, it is extraordinarily low. So it is actually what we're seeing into now. And it is also what we see about the real estate, the sales around that, and there's a lot of things that we're going that way. So therefore, a lot of private customers actually do stop up for a period. And when it come back to a more normalized situation, it is very difficult to say. Actually, nobody can say it. So therefore, we, all the time, have to make the adjustments in our organization. So it is reflected to what we are seeing into the future. And we have proved that you can see in 2x before earlier in this -- in this year, and we also do it again. So therefore, we are on top of also adjust our business to the demand and our business model also with outsourced construction is now sure our advantage here.

Right. That makes sense. You also mentioned that the guidance downgrade is partly due to delayed effect of sales price adjustments and that we should expect positive -- we should expect the sales price increases to positively impact margins in the second half. Could you maybe elaborate on what level of margin expansion we should look for in the second half?

It is a bit difficult for us to say because as the visibility also around a lot of cost also, the energy cost that we're looking into. It is a bit difficult for us to give exact margin. But what we are looking into for now is that the price increases that we have done to the backlog that we will deliver on here in H2, it will be better than we have seen in H2. But there can come some extra costs as we have seen. And therefore, we also around our outlook here is in a phase actually now that our visibility is very difficult. But also just to elaborate on if we are going -- coming on around mid guidance for the outlook here, it is the second best result in the history here we have in this company.

Right. Okay. Yes, that's clear. Then I know that there is some intersegment allocation playing into the margins on the Detached and Semi-detached. Could you give us an idea of what the underlying margin is on Semi-detached projects currently?

Yes. So I think the margin, as we've said in the past, are still very much equivalent to our detached business -- so our Semi-detached margins, of course, seeing some of the same effects, but the underlying margin in our Semi-detached is still very healthy. So you should assume that it's on the same level as Detached claims for the intercompany elements. And this quarter, it will probably be a little bit higher, but nevertheless, that's the lever we're seeing.

Okay. Right. Then just for my final question. I'm looking at your order backlog in trying to get an idea of what we can expect as cash conversion from your gross order backlog. Could you maybe fill in the blanks here? And if I take your gross order backlog and assuming EBITDA margin as of, let's say, 9.5%. Can I use that as a proxy for the cash flow we can expect from your order backlog or should I multiply that by maybe a 50% cash conversion rate.

I think the methodology there is absolutely correct, right? And I think you -- it is, of course, you should apply still our cash conversion rate is because we are guiding some of these test for now, above 50% cash conversion. And therefore, I think it would be prudent to use that assumption as well on the margins. But that you can -- that's a good proxy for sort of the cash flow generated in the business.

Your next question comes from the line of Claus Almer from Nordea.

Also a few questions from my side. The first goes to your new guidance. What is -- I can see all the assumptions you are mentioning, but maybe more color to this. What is Q2 is repeated the rest of the year? What would that do to your 2022 performance?

So if we are seeing -- for example, if we're seeing gas stop, so I think what we saw in Q2. I guess it was the beginning of Q2 and in March, right? So if that is what you're reflecting if we start seeing these immediate surcharges, things like that coming that would hit our business. So no doubt about that. I think what we are seeing today is that there is a lack of gas supply, right? And this is sort of when we start seeing that Russia is cutting gas to 20%. It hits the gas prices. And if you look at the newspapers, at least here locally, which most of you are from, then it's clear that the electricity prices yesterday was the highest we've seen on [Vargardahus]. And -- and of course, we're also getting some of these. So that is actually something we have countered in. What we haven't encountered is the geopolitical gas. If China suddenly invades. So it's probably not the way China will put it, but if they go into Taiwan, then, of course, these kind of things with no semiconductors, et cetera, those are not included as per natural, right? But we have -- we have seen this what we know today. That is what we are taking in. And this is that the gas prices are increasing, and we've got more the gas material increases, et cetera, also lately. But I think the main reason for our -- and I just want to make that clear, sorry. The main reason for our decrease in outlook is the sales. So just to be very clear around that. So our sales...

What sorry? Sales -- yes.

The sales or the sales right, because it's hurting our bid. So you're not seeing a big effect in our deliveries, but remember that the main effect we're seeing is the sales we are doing and have done in the last few months. Those will mainly hit our bid to work in progress in '23. And those are also hitting our results this year. So those has been on a different level than we expected. And those are then impacting our business. Of course, the rest of the year sales are less into the dip and therefore, there's less risk of that effect coming in moving forward.

Okay. Let me try in another way. So I understand the least. What I hear, when you do the presentation today, I hear you -- margin has troughed in Q2, things will be better in the second half. So -- just trying to understand the thinking behind the change of guidance. Is the revenue for second half already secured in the backlog? So there's no really exposure to the sale of houses in the next 6 months? And secondly, on the margins on your deliveries, is this based on the current sourcing level of sourcing? And of course, I can understand geopolitical, there might be some changes due to that. But from what we see today on -- yes. So first, is this all in the backlog. Second, is it based on your sourcing prices today? Is that what is midterm mid-range of your new guidance? That would be probably the question?

Correct, on both.

Okay. Okay. Good. Then I can understand the least. The second is about the price increases you're talking about. How sure are you actually that -- obviously, you can always raise prices, but how sure are you that higher prices will not have a negative impact on the number of houses sold? I mean in a situation where you don't sell a lot of houses and then you go out raising prices, normally, it's not a good mix.