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

Welcome to HusCompagniet's financial results for H1 2023. [Operator Instructions]. This conference call is being recorded. I'll now hand it over to your speakers. Please begin.

Thank you. And first of all, welcome to our conference call for the first 6 months of '23, and based off feedback, we are doing the conference on English and thank you for the feedback. My name is Martin Ravn-Nielsen. I am the CEO, and with me today, I have CFO, Jesper Hoybye. After the disclaimer, now let's go to the summary for the first half of this year. First of all, we maintained our outlook and guidance from May of revenue between DKK 2.25 billion and DKK 2.5 billion and EBITDA between DKK 100 million and DKK 130 million and EBIT at DKK 50 million to DKK 75 million. We have seen the activity on our sales are increased after a difficult second half of last year '22. We have seen the sales on our core business, detached, is actually up with 43% in Q2 '23 compared to Q1 '23. Our EBITDA on DKK 57 million in H1 is on track with our expectations, despite an extraordinary provision of DKK 15 million, and you can see our margins continues to be strong, which shows that we have good control of our selling prices and at the same time, of our cost prices as well. As you know, we completed a supportive capital raise and a refinance on our loan facilities. And on the next page, Page 3, I will give you some extra words around the market update. We have seen a recovery in the demand for a new build in the first 6 months of this year. Our sales in the first half is almost up with 100% compared to H2 '22. We are also seeing some indicators was more positive. For example, despite still a low level, we see the consumer confidence is absolutely better than last year. We also see that the properties for sale again is up, and that's an indicator for the increasing activities going forward also in our industry. And after the sales pickup in the market back in '21, we saw in '22 last year a historic low level for land plots for sale, and therefore, low opportunities to build new houses. And now actually, we see that the plots for sale again are significantly increasing, and that supports the sales increasing going forward as well. And furthermore, we have more leads to work with again, and we also see more people in our show houses. But on the same time, I would say that we absolutely still are in a nervous market, and we have to be more ready, whatever we see. Especially in the B2B segment, it is waiting despite we have a lot of positive meetings. And that kind of sales, we also see that it often will be in chunks that we would gain that sales. We see that supply/demand for subcontractors are more normalized. No bottlenecks as the last year, and the prices are relatively flattish compared to the last year. Also supply chains, we now see, is much more normalized. On Page 4, we have our highlights for H1. We have a revenue of DKK 1.280 billion. We delivered 609 new houses. We have a gross margin of 20.9%, and EBITDA is DKK 57 million. The financial gearing is 2.5x rolling 12 months. On Page 5, you see revenue on -- when we look at the Q2 '23, we have a revenue of DKK 624 million, an EBITDA of DKK 17 million and a gross margin of 18.9%, and it is after the provision of the DKK 15 million. On Page 6, you have an overview on our sales on the quarterly basis since 2020. And as you can see, we have almost doubled our total sales in the last 6 months compared to H2 '22, but compared to previous quarter, we are slightly recovering. And we have the segment split in the figures in the right side so you can see that detached and semi-detached in Sweden as well. On Page 7, we have the split up in the sales in '22, where you can see the development every month over our 3 segments. The detached, our core business in Sweden, VårgårdaHus, show some traction. But on the semi-detached, we're still waiting for some of our negotiations will be signed, and also some of the constructs we already have signed for now will be approved from the municipalities, and therefore can be a part of our order backlog and realized as sales. On Page 8, you have an overview on our deliveries in H1. And as you can see, we delivered 342 detached houses, 145 semi-detached and 122 in Sweden, all in line with our expectations. And now over to you, Jesper, around the number going forward.

Thank you, Martin. After having talked with a few of you on the phone already this morning, I think it will make sense to start with the provision. I started as CFO 4 months back. And as a natural part, I've been through all the provisions we had to deliveries up until today. We went through what we have set aside and looked at how we estimated it and came to the conclusion that we wanted to be even more cautious compared to what we have been before. It did give us an additional provision of DKK 15 million. It should be seen as an accounting technicality, and normally, in years where we generated DKK 300 million to DKK 400 million in EBITDA, we would not have highlighted this as we have done this time. But due to the fact that is actually half of the result for the quarter, we want to highlight it. So you can also adjust the numbers based on the business as you see going forward compared to the bigger impact from this provision. But looking at the slide where we see our net order backlog, there's a few things that's interesting on this page. First of all, we can see detached is actually going up. It's going up with DKK 74 million compared to the end of first quarter. It does mean that we are now selling more than what we're delivering to our customers. We sold 169 in second quarter, and we delivered 142 houses. We gave a guidance, as Martin said, of DKK 2.25 billion to DKK 2.5 billion on revenue for the year. We have, for the first half, in the books, DKK 1.28 billion. In addition to that, of the DKK 1.1 billion net order backlog, a bit more than DKK 700 million of debt relates to deliveries of work done in 2023. It means that already now, we know that we have, end of H1, DKK 2 billion in the book. In addition to that, we also gave a number on July, and we have visibility for August, and taking that into account, we could add somewhere between DKK 100 million and DKK 150 million. This is without taking into account what we will sell and what we will start to build from September. And this is the reason why we reiterate our guidance for our revenue and the outlook for the year. If we move on to the next slide, the cash flow slide. I would actually take 1 step back. We had a loan balance at the end of 2022 up DKK 768 million. We gave guidance that with working capital improvements, both lower activity, but also from initiatives that we would start throughout the year, it would decrease with some DKK 200 million. We have now, in addition to that, raised capital, which gave us net another DKK 200 million. So rather than having a starting point in DKK 768 million, it's closer to the DKK 568 million, and then you could add what we guided before to add another DKK 200 million. We ended Q2, as you can see, at a loan balance, including lease obligations of DKK 489 million. So it is going down as expected. This is due to different reasons. One is that our natural net working capital level has decreased due to the fact that activity has also decreased. We should not expect to see more on this account, and this is back to what I explained before that we're actually expecting to see more activity from Q2, in particular, our detached markets. It will go slightly down on semi-detached and also in Sweden, so all known, it should be [indiscernible]. But we still need some million more than DKK 100 million to actually go down to our guidance. And the 3 key levers to reach that number is, one, that's our upfront payment of DKK 75,000 that we increased to DKK 150,000. That will have half year effect for the rest of the year, so it will benefit our loan balance. The second part is our show houses. We have also given guidance that we will reduce that number down to 40 by the end of the year. We have on our balance sheet today 52 houses. Of the 52 houses, 12 are sold but not delivered to our customers and hence, cash has not been received. So that will be received in the second half. The last one, but also the biggest one is our large B2B project, which we have closed [indiscernible] where we are seeing somewhere between 25 to 30 houses being sold and delivered to our customers in the second half. So those 3 levers, the bigger ones to give a comfort that we're actually going down to a loan balance level that give us comfort that we are not in challenge with our leverage ratio, but we also have some room to invest in our strategy. That could be additional bigger B2B contracts, it could be land acquisitions or investing in digitalization towards our customers. Even though it seems like ages ago that we did the capital and refinancing on the next slide, I just want to put a few words on it. What we did do back in May was refinance our loan agreements with our 2 banks. We had loans before, a loan of DKK 675 million and DKK 400 million in the revolving facility. That's been refinanced to be DKK 500 million and DKK 250 million in revolving facility, and this should be more than enough for us to actually have access to cash compared to the EBITDA levels and the leverage ratio we have appetite to have in the future. It's a maturity of 3 years, but with the opportunity to extend it for another 2 years. There are a few clauses in this sum, which is a repeat of what we had before. Leverage ratio and also restriction on land acquisition. We had that before, and we continue to have that in the new one. But in addition to that, there's a change of the control clause, and that's also restricting M&A, share buybacks and dividends up until the end of Q2 next year. But I do want to say that with this facility in place and the raised capital, we are quite comfortable with our loan situation, our capital situation, going forward. The next slide, our segment results for H1. Martin said most when he went through the overall results, but I just want to put a few words on what I see interesting. Detached houses came out with DKK 12 million for the first half. But if we correct it with the DKK 15 million that we do in provisions, it actually would have been DKK 27 million, and our gross margin would have increased from 16.8% up to 18.6%. So that's definitely satisfactory. Also, our H1 '23 gross margin across the group would, with the correction of the DKK 15 million, have been 22.1% compared to the 20.9%, which we are seeing here. All in all, I would say that our first half, and particularly, our second quarter came out stronger than what we had expected. It's in line with reported EBITDA, the DKK 17 million to DKK 18 million, and that's what we expected, but we have also had the opportunity to include the DKK 15 million in that number. So in the end, just want to reconfirm what Martin said that we are still expecting to reach our revenue targets, EBITDA in the range of DKK 100 million to DKK 130 million; and our EBIT, DKK 50 million to DKK 75 million. One thing that you should definitely bear in mind here, and otherwise, I'm sure some questions could pop up. We will stop reporting on special items from 2024. We will continue to report throughout '23 because we are comparing with '24 where we had some bigger chunks of special items, but we will not book more for the rest of the year. We had DKK 2 million booked in Q1. We had a reversal of some special items that we took some provisions we took for rent back in '22, which has a positive impact in Q2, and that's the only thing that could impact our special item line is if we actually took some provisions back in '22 that could be reversed in '23. With that, I want to hand over to Q&A.

[Operator Instructions]. The first question will be from the line of Sebastian Grave from Nordea.

Congratulations on the better-than-expected results. So starting on the guidance here, as you both alluded to, now including underlying provisions, i.e., you can say, underlying, it's an upgrade of the EBITDA guidance at least, and you say due to better-than-expected quarterly development. But could you be more clear? So what exactly developed better than you expected? Was it the profitability, or was it the sales levels or a combination of both? Maybe some color here could be helpful.

Yes. Thank you for your questions, Sebastian. It actually split into we have seen more building activity and more deliverables than expected in Q2, particularly Sweden has had more activity than what we expected before. When we forecasted our margins, we didn't take into account that cost prices wouldn't -- we took into account that it would increase more than what we're actually seeing in the market. So the margins on our detached and semi-detached has been better than expected. So that's the 2 main levers why we actually see a better EBITDA result in Q2 than expected.

Okay. That is very clear. And then I guess moving on to what you can call the million-dollar question. So as you also show on the slide, your detached sales rates increased over -- has increased monthly over the year, peaking in June and then going down from 60 in June to 40 in July. Let's say normal seasonality, with Q2 being the baseline, is 40 detached sales. Is that an okay number, you think? Or is it slightly below what you will say, enormous seasonality at this point in the slower summer months? Or what should we think about this number?

I think if you compare to the previous year, then 40 is what we have expected. So it is in line with what we expected compared to also the months before in May and June. So July, when it is around 40. It is 40 compared to the other months, it's on the level that we have seen in the previous year.

Yes. Just to add, what you would normally see is that from June, which is a more normal one, you would see a decrease going into July. You would see some recovery going back in August, but that's still impacted by summer vacation. And then September is again a level which should be closer to sales level, which we've seen in, let's say, June. And that's for September, October, November, and then slightly down again in December due to Christmas.

And then the follow-up is have you then seen the expected pick up here in August so far? Because I mean the reason why I'm asking, looking out the window and listening to key peers not only in Denmark but also in the U.K. and et cetera, et cetera, they see slower-than-expected summer sales or slower-than-expected pickup from summer sales. So maybe just that's the same for you guys? Or does your business seem to be more resilient at this point?

What we're looking into now, it is that we are rather resilient because we see that August will be better than July.

Okay. And what will be sort of -- what do you think was the explanation here? What -- because I mean, again, looking at the window, I don't see anything really turning better at this point in terms of macro uncertainty, high interest rates. So why are customers becoming more willing to -- and have more appetite to new build at this point, you think?

I think it is very difficult to answer, and we are spending quite a lot of time trying to understand the dynamics in the market. But what we have seen, Sebastian, is that normal housing and apartment market rates has increased, and we normally see a delay in that. It seems like retail, in general, that [ VårgårdaHus ] families are looking to move, looking to buy new apartments, looking to buy new houses, looking to buy some new builds. So it's again gone up at a higher level than the terrible H2 '22, which we saw. But let's not forget that it's still way below historical average. And I think that the Danish economy is doing quite well. We are seeing inflation coming more under control. We are seeing unemployment at quite low levels, so I'm confident consumer confidence is also improving. Still at a negative level, but still improving. And I think that the Danish economy is doing quite well, whereas if you're looking towards Sweden, I see some completely different challenges that could impact the Swedish house sale much more than what we will see in Denmark.

And also to add on to Jesper's explanations, as I also mentioned, we also now see that there is a significant increase in plots for sales all over Denmark in general. And that is absolutely an underlying factor also for us, but one thing that you also have to remember is a lot of the customers that will sign finally a contract with us here in August, it is families that we have worked with since the start of the year, and therefore I think we have a bit longer work to do actually before we -- we have the sign on the contracts if you are seeing on the housing market, existing housing market.

Okay. No. I think you did a good job trying to [ piece out ] the dynamics here. My last question is really on the top line. So just trying to picture how the top line will move from here throughout the remainder of the year. So as I understood, you have to correct me if I'm wrong here, but that Q2 is going to be the smallest quarter on top line and then you're going to see incremental more top line in Q3 and Q4. Is that correctly? Or...

I think given the fact that we've actually seen higher activity in Q2 than what we expected. Right now, indications are that it will be flattish throughout where Q4 could have a pickup compared to what we see of sales in the next few months.

Okay. I guess, in that light, your revenue guidance looks a bit cautious.

That's an opinion.

The next question will be from the line of Anders Preetzmann from Danske Bank.

I have a question as well on the gross margin, in particular, the detached gross margin. If you adjust for the provision, you say you are at 18.7% gross margin for Q2. But can you give some flavor on what we can expect in the coming quarters? And do you see any improvement going forward in the gross margin on the detached segment?

Yes, I can take that, Anders, and thanks for your question. As said, Q2, there's a few, as always, technicalities to those numbers. And I know that we are guiding closer to the 20%. Q2, besides the provision, also had some expenses related to previous periods that actually hit negatively in Q2. So adjusting for all those things, you would have seen something in the range closer to between 19% to 20%. We are expecting a Q3 where we're also benefiting from the sales level compared to not as increasing cost levels due to the fact that we sold it earlier when we thought costs would increase more than what's actually done, and then going back to a normalized level in Q4, where we are still aiming to have something close to the 20%, everything included.

All right. That sounds good. And maybe we can do the same exercise on the gross margin in Sweden. In Q1, that was 37%, and in Q2 now it is 30.6%. Maybe some explanation there?

Sweden has been challenged by producing and delivering houses which were committed 1 to 2 years back, so we are struggling more than expected, as I said before, on the gross margins, but we are expecting that to normalize, maybe not in Q3. It depends on which orders have been taken in, but normalizing when we go to Q4, Q1 2024.

Okay. So just to get that clear, is that a matter of sales price on the house compared to the cost of building it?

Yes. The dynamics in Sweden is that you enter into a contract with the customer, and you don't have the same commitments as you have in Denmark. So as long as they have something in place, then they are waiting to maybe find a plot, maybe find or get all the permits in place, and the lead time from signing something until they actually call it for production on the factory is much longer than what we see in Denmark. So when we talked about Q1 that we were -- or H2 last year, we were penalized by increasing costs compared to the sales prices, this is what has been hitting Sweden in Q1 and even more in Q2.

Okay. That sounds good. My last question is just a clarification. The update on the show houses, can you just repeat how many were sold and not yet in the books? Because it sounded like that you had 52 left and you'd already sold 12. So again, now you're actually down on that 40 that you need to be down on?

That's correct, Anders.

The next question will be from the line of Kristian Tornøe Johansen from SEB.

Yes. Also a couple of questions from me. So previously, we've heard you sort of indicate that the customers who typically sign a contract with your customers with a stronger capital base are less dependent on securing full financing. Is that still the case? Is there any change to the whole discussion around the final signature of contracts?

No, nothing changed, Kristian. We are still seeing that the majority of our customers are the more capital resistant customers who has some value from selling a previous house or bought at the right time, where some of the first time buyers or people who doesn't have the capital available are still struggling to get into this market.

Okay, quite clear. [indiscernible] sure.

In addition to that. We also see our ASP actually still is on a rather high level. And this is also because if we're looking into the customers for now, we have very few who is the first time customers. So they have some capital, some equity, as our customers that we are seeing now, and therefore, it is the financially strong customers, and therefore, we also still see that our ASP is on a high level. Many could maybe say that we will have a lower ASP now because everybody has to do some lower level and so on, but it is actually not what we see now.

And success is definitely that we see ASP dropping down towards something closer to 2.5%, 2.7% because it's opening up the market for buyers who cannot afford buying a new build to date.

Maybe just following up on that because you also said that cost has increased less than you expected. So are you considering to lower prices to [indiscernible]?

No, we're not looking into that. It is very important for us to -- we are the market leader, and yes, I have been in this industry for more than 25 years and back in time, we have gross margins in the level that we have now. We have seen some couple of years in the competition that we have had lower margins than we want, and therefore, now we are on track again to defend that absolutely.

We did, however, make some corrections back in January at the beginning of the year, but are not considering to do any other adjustments to that.

All right. That's quite clear. Then to your earlier comment on the surprises to Q2, you say that there was more activity than you expected. Can you elaborate what drove this activity?

It was simply that we were successful in progressing more on the houses that we are going to deliver and building for our customers than what we expected when we made the budget.

And does this reflect an easening on your subcontractors availability and stuff like that? Or how should we think about that?

We do make our estimates and part of it is, of course, related to a lot of uncertainty and also deliveries being put into our systems. As we move along, we are getting new data, new information of what can be done and really can be done. And that gave a positive surprise. But yes, definitely one of the levers that it's easier to get access to our [ UEs ] than it was last year.

Based on our target, what we have now, the employees that we have, we have made some redundancy in '22 and some of -- part of that, it was that we also look into -- then we have, back on employees, it is absolutely the best performance. And also when we are looking about our subcontractors as well, it is also the best performance that we have now. And all that combined, we can see that we actually have stronger margins than we actually have expected because it is a best-in-class team all over now.

You have previously indicated the fixed cost SG&A cost or whatever you want to call it to be in the range of DKK 375 million to DKK 400 million for the full year. Is this still the range you're looking at?

It is still the range. And I'm sure you're going to refer to Q2 not going down as much as we would expect if we're going to fall within this range. We have seen that the redundancies made last year had an impact in Q1, but it continued to go down from Q1 to Q2 with additional 20 people. So that's something we'll see a lower run rate from in the second half of '23. There's a few technicalities, and I'm sure we are not the only company who struggles with that, but that's vacation money when you -- how you put it into your books and when you release it again. And you will naturally have more [indiscernible] throughout H1 because people are not taking summer vacation in that period, and then it will start to go down through the month of July and August. So that will have another positive impact. So we are still confirming our outlook for the rest of the year. I would be very happy to say that we're actually breaking it and spending more, but if you're going to do that, that is because we're going to hire more building advisers and also someone to actually work on -- with building more houses than what we expect the activities to be right now.

Makes sense. Quite clear. The last question for me, you have mentioned this increased availability of plots a couple of times. Can you elaborate on where these plots are coming from? So what has happened underlying to facilitate that development?

It is the municipalities. It is private offices [indiscernible] -- it is also -- it is just the data from [indiscernible] when we are looking on trucks, we can see that the numbers is increasing from around 3,500 to around [ 4,300 ] now, so therefore, it is a significant increase.

[Operator Instructions] The next question will be a follow-up from the line of Sebastian Grave.

Just a quick follow-up here. So just to touch upon the activity level in Q2 in Sweden, as you said, yes, but it's still a grim macro outlook in Sweden. But despite this, I mean, 41 units sold seems quite extraordinary in the light of the current macro outlook. So is this activity level? Is it sticky? Or is it extraordinary in Q2?

No. We see that level is also what we're expecting going forward, actually. But yes, compared to what we also saw in '22, we -- where it was a very, very low number, there, you -- we also explained earlier that our agents that we have in Sweden, they have spent a lot of time in '22 that they had done a lot of their sales. You can see it ready for the factory and has spent a lot of time for that. And now they have more time, actually, real time also for using their real time to the sales. And it is also what we're looking into now that the sales is a bit better than '22.

It's definitely better than '22, but I think we also need to be cautious about the sales levels. And even though 41 is a significant improvement to what we've seen before, it is still in the very low range of what we would need to keep the factory at that earnings level as we've seen before. And I'm sure that when we talk macroeconomics, and you look at inflation, look at interest rates, look in consumer confidence, unemployment in Sweden, it looks quite grim compared to what we see in Denmark. So the pickup will probably come with some delay.

Okay. Okay. And then just -- so 19 houses sold in June and then 3 in July. So it seems like seasonal fluctuations are just more extreme in Sweden. Is that how it works? Or is this just a coincidence?

I think it is some coincident. We did have 1 bigger order in June that came in, and I think it gave 12 or 14 of the 19 sales. And June and July in Sweden is just very quiet and more quiet than what we seen in Denmark. So that's perfectly natural. It's not a big number, but it's actually higher than what we expected in July.

As there are no more questions, I will hand it back to the speakers for any closing remarks.

Yes, we will say thank you so much for dialing into this conference call, and have a good day, everybody. Thank you for now.

Thank you.