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

Welcome to HusCompagniet Annual Report 2023 Conference Call. [Operator Instructions] This call is being recorded. And I will now hand it over to the speakers. Please begin. Speakers, please begin. Unmute your line and start your presentation.

Yes. Thank you for joining us today. My name is Martin Ravn-Nielsen, and I'm CEO of HusCompagniet. I'm very pleased to have our new CFO, Allan Auning-Hansen, by my side. Allan has been interim CFO since November, and I'm thrilled that he yesterday accepted the position on a permanent basis. We are both looking forward to presenting the highlights of our tough '23 and commencing our outlook for '24 on this call. After the presentation, we will take your questions. Let's turn to Slide 2 for the highlights. '23 was another difficult year as we faced extremely challenging market conditions. Customers remaining pessimistic and demand for new houses were low. Still, we are pleased to report that we have navigated the uncertainty and maintained our focus on delivering on our promises and guidance with the revenue coming in just shy of DKK 2.4 billion and EBITDA of DKK 108 million. While deliveries cut in half, we were still able to generate solid results because of our early adoption and cost cutting back in '22 when we adjusted our business to a tough market conditions. We continue the path in '23 with a strong cost control, reduction of a number of show houses and targeted efforts to reduce debt through a successful capital raise. It is important for us to highlight that we did this while seeing our [ aluminum ] factory picking up the pace, maintaining our high-quality level and improving customer satisfaction from a high level. In '23, we lifted the Trustpilot score from 4.8 out of 5. And today, we reached 4.9 based off more than 6,000 reviews. We are very proud of our employees' ability to deliver solid finances while maintaining focus on a strong and best-in-class customer satisfaction. The adjustments made in '22 and our focus on customer satisfaction form a solid foundation for HusCompagniet when the market rebounds. We have demonstrated the strength of our business model in challenging times. We are ready to accelerate again when the consumer confidence picks up and the increased demands for new quality homes materialize. All in all, we are satisfied with the performance in a tough '23, and we are ready to take on the challenges and the opportunities that we surely will face here in '24. Please turn to Slide 3 for a brief update on the market developments in '23. Uncertainty was the only constant in 2023. Customers had a very little confidence in the future and were increasingly cautious about making significant investment decisions. This had a great deal of impact on the housing market in general and especially the demand for construction of new homes. Challenges was lined up with higher interest rates and a change to the Danish real estate tax model playing the most significant role in combination with general macroeconomic issues. All parts of our business were affected by these developments. The semi-detached segment in Denmark showed somewhat more resilience because it serves professional investors. The detached markets have been affected by the macroeconomic uncertainties and the end customers have been more hesitant. The detached market in Sweden has also been challenged even more than the Danish market. Overall, visibility in the market remains very low and we also expect '24 to be a year marked by low demand. Looking at our subcontractors and the supply chain for our industry in '23, we saw some improvement from a very difficult situation back in '22. The decline in activity has entailed some stabilization on the materials prices, but still inflation has impacted everyone and the price of labor continuing to increase. Let's zoom in on the demand situation and our way of navigating this and turn to Slide 4, please. After the record low consumer confidence and sales in the second half of '23, we did see a moderate pickup in the first part of '23, but the rebound did not gain momentum and we saw a flat and low sales level in the second part of the year. In '22, we acted swiftly on the sagging consumer confidence and the drop in demand. This meant that we had to say goodbye to a lot of good colleagues, but it enabled us to limit the negative impact of a tough market which we saw continuing during '23. We would certainly have preferred a clear and a swift rebound in demand, but the difficult market condition have at least underlined the resilience of our business model and our strategy over the last couple of years, combined with a quick response when the market change. During '23, we have monitored the market developments closely. And we are making sure that we have the organization, the commercial muscles needed to take the opportunities when demand returns. With this, I will leave the floor to Allan and overview the '23 highlights, and please turn to Slide 5.

Thanks a lot, Martin, and thank you very much for the nice introduction before as well. I'm really excited to build on a great collaboration with you and the HusCompagniet team going forward. I really had a chance to meet some of the participants on this call as well, and I look forward to meeting more of you in the coming period. Moving on with the financials for 2023. Revenue came in just below DKK 2.4 billion and well within the guidance range of DKK 2.25 billion to DKK 2.5 billion. We entered the year with a lower order book and sales were significantly impacted by the decline in demand described by Martin before. This led to a sharp drop in revenue. This development had a negative impact on gross profit. But we are reporting an increase in gross margin, which reached 21.7% for the full year. This increase was driven mainly by our ability to navigate in an environment with changes in material and subcontractor costs, combined with the decision to increase sales prices and maintain focus on quality in tough times. Also, the addition of our own prefab had a positive effect. We generated EBITDA of DKK 108 million before special items in 2023, in line with the guidance of DKK 100 million to DKK 130 million. This was a result of an improvement in gross margin and our sharp focus on staff costs and external expenses. SG&A is DKK 80 million lower in 2023 even including the impact of higher SG&A costs in the semi-detached business after the addition of the factory in Q2 2022. EBIT came to DKK 62 million, which was also within the expected DKK 50 million to DKK 75 million range. Following the refinancing in 2023, we had DKK 473 million cash available at the end of the year. We are keeping a close eye on the gearing level, which came to 3.3, because of the lower activity level and earnings. This was expected and in line with the leverage covenants under the agreement. Let us flip to Slide 6 and a few comments on the Q4 highlights. The flattish sales and deliveries in the first 3 quarters of 2023 continued in Q4. While we did sell more houses than in the comparison quarter in 2022, please keep in mind that this was a record low level. The low number of deliveries was a consequence of low sales in 2022 and 2023. The low activity level impacted revenue, which declined significantly to DKK 531 million. Contracted work in progress was lower on the back of lower sales, partly compensated by positive effects from price increases and higher contribution from sales of own land. The sales of own land, together with adjustments in detached sales prices early in the year and the utilization of our own factory also contributed positively to the gross margin, which increased to 24.3%. The gross profit came to DKK 129 million. EBITDA before special items decreased as well and came to DKK 17 million. EBITDA in Q4 is impacted by the decrease in revenue and employee-related provisions. The EBITDA margin before special items came to 3.2% in Q4. Let us turn to Slide 7. Our gross order backlog declined throughout the year ending at DKK 1.5 billion on 31st December. This followed from the challenging market condition and was a significant decrease of 26% from the end of 2022. We did, however, see a somewhat slower decline during 2023 than in the comparison year. Looking at the net order backlog, it's also worth noting that the level has been stabilizing to some extent. At the end of the year, the net order backlog amounted to 47%, at the midpoint of our revenue guidance for 2024, which I will get back to shortly. The segment overview shows a moderate growth of DKK 18 million in the detached net order book from a low comparison level. This was not sufficient to outweigh the decline in the semi-detached segment and our Swedish business. Please turn to Slide 8 and comments from Martin on how we intend to improve our order book.

Thank you, Allan. In '24, we will continue to protect our brand and earnings while maintaining sharp focus on increasing the order book. This is a clear priority for us in the coming period as we want to leverage our competitive edge and win market share. In Denmark, we look to expand our footprints in the detached market where we have a market share around 17%. We will do this by clearly setting HusCompagniet apart from competitors. Our setup from 9 offices and 10 show parks in Denmark provides countrywide coverage and local presence, which is our key to the customers. Progress will be driven by our own commitment to improve our leading customer experience with great digital tools, customer support and personalized guidance through the billing process. Our market share in the semi-detached market space in Denmark is around 3%, and we want to grow and strengthen our presence to become a key player here as well. With our competitive advances, including our size, the focused one-stop shop offering and our own aluminum factory in Esbjerg. We will also maintain our focus on delivering high-quality work and seek to establish a long-term partnership with the professional investors. This is a key step to scale benefit and reduce risk through an early project enrollment and ongoing collaboration. In Sweden, our business is based on a standardized prefab concept with a range of house models, matching local preference. We are focused on providing value for money and responsive customer service, and the business is based on a long local sales agent structure. The modern Swedish prefab factory has the capacity to absorb the potential increase in demand in the Swedish market and the Danish semi-detached market as well when the tough market condition ease off. We have defined 3 key focus areas in support of our efforts to grow the order book. Firstly, we are still building our digital platform to improve the customer experience and ensure scalability. This make us stand out from competitors and we'll use our size and scale to use data and become digital frontrunners, offering personalized products and new services. In 2023, we took several steps on digitalization journey, including the launch of a new version of our online home building platform, HusOnline. And secondly, we are sharing our value propositions in the detached market in Denmark with the introduction of clearly defined concepts tailored to our customers' demands to redefine setup will enable us to tail our offering and provide bespoke services ensuring seamless, efficient and personalized experience. Again, this will be supported by digital tools to ensure confidence and be more efficient. And lastly, we will continue to take the lead in terms of integrating sustainability throughout the value chain. This is a competitive advantage for us because we have the strength and the know-how to make the right choices when selecting building materials and make sustainable options available to the customers. This is of core importance during the construction process, but it is crucial to think ahead and consider the sustainability aspect after handing over new house to the customers. And also our factories in Denmark and Sweden with prefab would support our sustainable agenda. Let us move to Slide 9 and the outlook. Please go ahead, Allan.

Thanks, Martin. We expect 2024 to be another challenging year in the housebuilding market in Denmark and Sweden. Visibility remains very limited because of geopolitical tension and the volatility we are seeing in consumer confidence and macroeconomic indicators such as interest rates and inflation. Based on the lower order book at the start of 2024 and sales of 171 units in the first 2 months, we are providing relatively broad guidance again this year. We expect revenue to be within the range of DKK 2.3 billion to DKK 2.6 billion, assuming that we deliver between 800 to 1,000 houses in 2024. The midpoint of this revenue guidance would entail a moderate 3% growth rate for the year. For 2024, we are now guiding on EBITDA after special items. We expect EBITDA to reach DKK 80 million to DKK 130 million and EBIT in the range of DKK 30 million to DKK 80 million. Some of you may note that this earnings outlook is slightly higher than the initial outlook for 2023 presented a year ago. While higher revenue is seen to contribute positively to earnings and profitability, we are mindful of the need for additional investments in SG&A this year to ensure that we are ready to step up when the market rebounds. As mentioned by Martin earlier, we are keeping a close eye on our leverage, and there will be no dividend distribution in 2024. We expect that dividends will be reintroduced when we see the market normalize and our leverage returning to around 2x net debt. Thanks for listening in today. We will now open the line and take your questions. Next slide, please.

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

So just first question, in the last year's annual report, meaning in the 2022 annual report, you had a statement saying that your outlook at that time implied a scenario where you would not be able to meet your covenants. Now I don't see a similar statement in this year around. So can you just confirm that even in the low end of your full year 2024 guidance with DKK 80 million full year EBITDA, you do expect to still comply with the financial covenants governing your credit agreement? That will be the first.

Sebastian, thanks for your question. I can confirm that if we deliver within the expected range, we will not be in a covenant breach.

That is perfectly clear. And then next, on to the '24 guidance here. A few things. First, what is sort of the underlying assumptions for development in the detached segment? So for instance, you reported 112 detached unit sales in the first 2 months of 2024. Do you bake in a pickup from this current run rate throughout the spring selling season? Or should we -- or is it based on sort of a flat volume development over the coming months? That would be the first.

Thank you for the question, Sebastian. What we saw in '23, the first months, we actually saw a pickup in the sales. And after 2, 3 months, we saw that it was flat and then more back to what we saw in the second half of '22. So therefore, yes, we have seen a pickup in the sales here in the first 2 months, and it is also a level that we expect in the coming months. But it is, of course, very difficult for us to say what we will see in the coming months. But we see a higher level also in our leads.

Okay, okay. Would you be able to split up the 112 sales in January and February? Or...

It is around the same for the 2 months.

Okay, okay. Very clear. Then another question on top line here, '24. So the midpoint of your net sales guidance is slightly higher than what you achieved in 2023. And I mean, in comparison, you delivered roughly 1,050 units in 2023. And I mean, this '24 guidance is based on the midpoint, as it seems, on 900 deliveries. So I guess the implied ASP on deliveries is up quite significantly year-over-year. Could you put some color to this? What is the dynamics here?

So all in, Sebastian, you can say that the revenue generated and the mix that we have had in -- throughout 2023 has been more distributed towards Zealand, and we expect a broader geographical mix, so to say, in 2024. And I think when we look at the numbers for the coming year, we are very, so to say, looking at very little visibility as we also did in entering into 2023, which is also the reason for why we have this relatively broad guidance.

Okay, okay. And then I will just take the last question here and I will go back on the queue. So I mean, I know you don't give a lot of details here on the underlying assumptions in terms of split between detached, semi-detached, et cetera, for 2024. But you achieved DKK 1.7 billion sales in 2023 in the detached segment, which was inflated by roughly DKK 120 million sales in show and project houses. Now obviously, you can't sell those two times, unfortunately. So -- and I mean, at the end of 2023, the net backlog value is roughly the same as it was in 2022 for the detached segment. So I guess what I'm trying to say here, it seems like detached sales will be flattish year-over-year in 2024 and Sweden may be flattish at best. So is it fair to assume that the delta in the 2024 guidance versus 2023, the positive net sales delta that is, is driven by the semi-detached segment, as it seems today?

I would say the way that we look at it, still a lot of uncertainties in looking into the future. But when we look at the detached segment, we have a lot of uncertainty. But to the extent that when looking at the sentiment overall in the market, there is less of a negative sentiment in the market, and that's what we are taking into consideration. But again, keep in mind the uncertainty.

The next question is from Anders Preetzmann from Danske Bank.

A couple of questions on the guidance from my side, too. Can you maybe talk about what kind of gross margin you're considering in the guidance here? I know that it depends on the product mix, et cetera. But can you maybe give us a fair range there?

I think, again, Anders, when we looked at the gross margin in 2023, it was very much based on our ability partly also to adjust prices in due time based on the development in the costs, but it's also back to the geographical split that we see in the market. We do expect a different geographical split in 2024, which was very Zealand-heavy in 2023. So therefore, we do not expect the same high level of gross margin in the next year.

All right. And back to the question that was asked before on the covenant breaches. Allan, you confirmed that you would not be in a breach situation in 2024 or so forth the EBITDA reaches DKK 80 million. So obviously, that means that the net debt is going to come down in 2024. But can you please give us some flavor on the dynamics on this? Should we expect any additional positive cash flow from the working capital in 2024? Or how do you see this?

I mean, as you know, the covenants are slightly more stressed here in the first half of the year, which is also what was discussed back when we raised additional capital. And I would say when we look ahead and into 2024, what was taken into consideration was the net order backlog and the potential sales that we are looking into. And the guidance that we are providing here and with the covenants that we have in place, we don't anticipate a covenant breach within this guidance range.

All right. So you cannot maybe give us a fair range on what you expect on the net debt for 2024, maybe?

I think with the general uncertainty that we are looking into, I don't think we should -- I prefer not to comment on the range of the net debt now.

All right. That seems fair. Another question on the special items. So you're going away from guiding on EBITDA before special items. Does that mean that we should not expect any special items for 2024?

I mean, as the situation and based on the knowledge that we have right now, we do not expect any significant special items for the upcoming year.

All right. That is very helpful. Maybe just one final question from me then. Maybe you've answered it a little bit already, but you've been very kind to give us the house sales for the first 2 months of 2024. And can you maybe just repeat or add some more flavor on how you see the activity level going forward? Is there any optimism? Has the leads generated increased? Or what is the situation there?

Yes. We had the last couple of months seen a pickup in our leads and also the visits in our show houses, also the meeting with potential customers as well. So therefore, yes, for a short moment actually, yes, we see some positive indicators. But we have also learned from the past is to be cautious because we have seen 1 or 2 months before that have been better than we have seen in the period. So therefore, we are very cautious. But yes, if you ask me for the moment now in January, February, yes, it has seen a pickup in lease and potential customers.

[Operator Instructions] Up next, we have Kristian Johansen from SEB.

Yes. I also have a couple of questions. So first, just a follow-up on the dynamics of your revenue guidance. So on the midpoint, lower expected deliveries year-on-year. And you also say lower expected ASPs year-on-year due to the mix effect on geography. Yet revenue guidance on the midpoint point calls for a slight increase. So am I even right in assuming that this will reflect a pickup in sales and hence, higher revenue generated from orders taken during the year than what we saw last year? Is that the way we should think about it?

Yes. Thanks for the question, Kristian. So still with a very limited visibility and uncertainty, as I said before, there is less of a negative sentiment in the market. We very much look at the macroeconomic factors in the way we do our modeling. And I guess we all read the newspapers, which are fluctuating messages from time to time. But towards the second half year, we do anticipate and hopefully see a slightly more positive upside in the sales in the detached segment.

Okay. That's quite clear. Then to the gross margin. So the gross margin for the detached segment in Q4 was quite strong at 22.7%, if I recall. Can you just elaborate a bit on what drove that level and how sustainable 22.7% is?

Yes. So the gross margin in Q4 was based on our ability already earlier in, I would say, late '22, early '23, to adjust our prices. We are monitoring costs -- material cost, contractor costs constantly and adjusted our prices accordingly. So that's one of the factors driving the gross margin. The other factor driving gross margin is sales of houses on owned land. And thirdly -- sorry, these are the 2 factors, yes.

Okay. And so it seems you have been able to raise prices without having the expected cost inflation against you. Does that mean you can sort of expect that we stick to this sort of plus 20% gross margin level under current market condition?

Yes, we increased our prices in '22 more actually than we saw the cost inflation. So therefore, we have seen an increase in the margins, especially here in Q4. We have adjusted some of the prices against the customers. We have also adjusted a bit around what is the standard materials in our houses as well just to be -- to secure that we are competitive also when we have to protect our market share as well. So therefore, we have some little changes in the pricing in '23 that you will see in '24 in the margin. So therefore, we can expect the high level.

Okay. So in your guidance, you have assumed gross margins coming down from the levels we saw in Q3 and Q4 in detached.

Yes.

All right. That's quite clear. Then the next question, we have seen a couple of bankruptcies in the industry among some of your peers. Just curious on your analysis of any potential impact. And I'm particularly thinking about subcontracts that you might share with some of these players who've gone bankrupt. And any challenges that they might incur as a consequence?

Yes. As you can see, our subcontractors, we have a lot of subcontractors. It is important for us that we don't have subcontractors who is too, let's say, big. So therefore, if some of them will be hit, then we have all the other we can choose. But for now, we haven't heard that some of our subcontractors is hit by the bankruptcies that you are mentioning.

Okay. That's good to hear. And then maybe just my last question. So an update on your pipeline within semi-detached. Also considering you did flag a potential order while you're awaiting the permit, is that progressing as planned? And how is the pipeline and general development for the semi-detached?

It is progressing as the guidance. Some multi privileges is a bit longer around the permits that we have expected. But we still have the pipeline as we have mentioned before, absolutely. So we are in line with our expectations, but there is some delays.

As there are no further questions at this moment, I will hand it back to the speakers for any closing remarks.

We want to say thank you, Allan and I, for joining our conference call today. Please feel free to reach out to Allan or me if you have any follow-up questions, and have a nice day.