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

Welcome to HusCompagniet's Interim Report Earnings Conference Call for the first half of 2024. Today's call is being recorded. [Operator Instructions] Speakers, please begin.

Thank you for taking part on the call today. I'm Martin Ravn-Nielsen, CEO of HusCompagniet. Our CFO, Allan Auning-Hansen, is with me on this call. We look forward to presenting the results for the second quarter and the first half of '24, before taking your questions. Let's start with a few comments on recent market developments on Slide 2. We were pleased to see the gradual improvement in the macroeconomic environment continuing in the second quarter. The employment rate is still high and consumer confidence has increased. Still people are cautious and hesitating to make the big investment decisions. The core inflation in Denmark remained below 2% in the second quarter and has declined and stabilized this year. At the same time, the interest rate cut in early June was, of course, good news. All in all, it's positive that both inflation and interest rates has been relatively stable compared to the turbulence in the recent years. This does not mean that our market will recover and rebound straight away, but the trend is currently positive and we are selling more houses today than a year ago. We are on the right track, but it remains difficult to forecast market developments as the global macroeconomic factors continue to play a role and make people uncertain about the future. On this note, Allan, you will cover the highlights for the quarter and the first half. Please turn to Slide 3.

Thank you, Martin. We delivered financial results in line with our expectations and saw activity and revenue pick up in the second quarter of the year. We are reporting DKK 579 million in revenue for the quarter, which is still 7% lower than in the comparison period because of fewer deliveries in semi-detached and Sweden. This was no surprise as we recorded fewer house sales in 2023. We were pleased to note good traction in the Danish core business and continue on a positive trajectory in the quarter. Gross profit was solid in the second quarter and increased to DKK 128 million, resulting in a gross margin of 22.1%. This was an improvement from the comparison period, underlining the impact of maintaining good cost control in a quarter with lower revenue. It should also be noted that the comparison period was affected by a DKK 15 million revaluation of provisions. When adjusting for this, we still note a moderate improvement in the gross margin. Moving on to EBITDA. We posted earnings of DKK 24 million in the second quarter, corresponding to a margin of 4.1%. The solid gross margin and focus on cost control across segments contributed positively to earnings and compensate for some of the decline in revenue. At the EBIT level, we reached DKK 12 million this quarter against DKK 6 million last year. Our free cash flow was DKK 133 million in the quarter, against DKK 61 million last year. This development was driven by higher cash flow from operating activities. We delivered more houses in the detached business, had more on account invoicing in the semi-detached business, and saw an effect of timing of creditor payments between quarters as well. Please turn to Slide 4 for a brief overview of the half year. For the half year, revenue was 17% lower at DKK 1.062 billion. This was as expected and a result of fewer deliveries in the wake of lower sales in 2023. We generated lower revenue across segments and saw the most significant decline in Sweden, where market conditions have also been tough in 2024. Despite the decline in revenue, we maintained a solid gross profit of DKK 249 million, and improved the gross margin by 2.5 percentage points to 23.4% in the first half of 2024. The margin increase was driven by a very strong development in the first quarter and a solid performance in the second quarter as well. We saw lower-than-expected material costs earlier in the year and have maintained very efficient execution by our employees and contractors throughout the first half of 2024. EBITDA came to DKK 45 million and a margin of 4.2% in the half year. EBIT was DKK 21 million and down from DKK 35 million in the same period last year. The free cash flow increased to DKK 130 million in the first 6 months of the year. As mentioned before, this was mainly driven by the increase in cash flow from operating activities. Our net interest-bearing debt was also affected by timing of creditor payments between quarters and came to DKK 236 million at the end of the half year. The gearing level decreased slightly to 2.4% from 2.5% last year and 3.3% at year end. We are staying within the leverage covenants under our financing agreement and continue to monitor our leverage level closely. On this note, Martin will now provide some insights into sales, deliveries and our order backlog. Please flip to Slide 5.

Thank you, Allan. The positive trend in sales continued in our Danish core business, and we are pleased to note the 44% increase overall in the second quarter. We sold 368 units in total against 219 in the comparison period. This strong progress was driven by a pick-up in contracts with professional investors in semi-detached and we reached 140 sales against 9 in the same quarter last year. And please note that these figures do not include our recently won contract of 153 units with Velkomn or a contract with will NREP won last November for 135 units. We continue our dialogue with several professional investors and aim to realize more interesting projects in the coming period. This type of process takes time, but we are already pleased with the progress made in the semi-detached business during the quarter and '24. The detached business contributes to the progress as well with 201 sales against 169 sales last year. As mentioned earlier, people are still cautious, but we see a good number of leads and activity of our offices through our digital customer tools such as HusOnline. In the Swedish business, Wooden houses, we saw a decline in sales to 27 from 41. The market is still tough, and sales are improving gradually and rebounding from the very low levels. But we are keeping sharp focus on the market and our business in Sweden, and we are preparing the factory to be able also to deliver to the semi-detached business in Denmark. The headlines for the first half year are somewhat similar. Strong progress in semi-detached, good traction in detached, and slow sales in Sweden. In July, we sold 50 units in detached, 32 in semi-detached, and 9 in Sweden. Let's look at the deliveries on Slide 6. As expected, the lower sales in '23 continued to impact deliveries in the second quarter of '24. We delivered 250 units against 265 units in the same period last year. The total development was a result of fewer deliveries in semi-detached and Sweden in the second quarter. Our detached business contributed positive with 160 deliveries against 142 in comparison period. In the first half of 2024, we saw a significant decline across segments with a total of 382 units delivered against 609 units last year. In July this year, we delivered 21 units in detached, 9 in semi-detached, and 2 in Sweden. Please turn to Slide 7 for an overview of our backlog at the end of the quarter. Based on the pick-up in sales in the second quarter of '24, our gross order backlog grew 16% to more than DKK 1.9 billion at the end of June. This is an increase of 28% from the end of '23, and we are very pleased to note the progress which is driven by detached and semi-detached segments. The net order backlog grew by 25% compared to the same date last year and 28% for the year of '23. Please note that this overview does not include the July figures mentioned earlier. Now let's turn to Slide 8, and Allan's overview of the segment performance.

Thank you, Martin. The positive trends in the Danish core business and the challenges in Sweden are reflected in the revenue split with Sweden declining to 5% in the first half of 2024 from 14% last year. All 3 segments delivered higher gross margins in the half year, and EBITDA was solid in detached and semi-detached, while the decline in Sweden led to EBITDA balancing around 0. Average selling prices were relatively stable at DKK 2.8 million in the detached business and DKK 1.3 million in Sweden. In semi-detached, the price per unit declined slightly to DKK 1.6 million because of changes in product mix. As mentioned on previous calls, the average sales price in semi-detached can vary quite a lot depending on the projects. Let us move on to Slide 9 and the outlook. Our performance in the first 6 months of 2024 was in line with expectations despite significant uncertainty in our markets. While uncertainty persists, we are narrowing our full year guidance today based on the performance in the half year and sales of 91 units in July. We now expect to be able to generate revenue in the DKK 2.3 billion to DKK 2.4 billion range based on delivery of between 850 and 950 houses in 2024. While the revenue expectations are now in the low end of the wider range provided earlier in the year, we are also narrowing the EBITDA guidance range to DKK 90 million to DKK 120 million from DKK 80 million to DKK 130 million. EBIT is expected to come to DKK 40 million to DKK 70 million, narrowed from DKK 30 million to DKK 80 million. This also means that we expect to stay within the covenants of our financing agreement. We are pleased to remain on track and look forward to continuing the progress in the detached business and leveraging the growing awareness and focus on HusCompagniet as an attractive partner for professional investors in the semi-detailed business as well. Thank you for participating today. Now we look forward to taking your questions. Next slide, please.

[Operator Instructions] The first question is from Kristian Tornøe from SEB.

Yes. I have a couple of questions. I'll just do them one by one. So first of all, a clarification on the changed assumptions to your revenue guidance. Can you just confirm that this is not related to any, you could say, demand weakness, but rather delays to your pipeline?

Yes. Thank you, Kristian. So when we prepare -- or into the year, we have certain expectations in terms of when projects are going to start in the B2B business and when projects are going to -- and how they are going to progress. And just to confirm that the narrowing of revenue guidance is purely a timing perspective in the B2B business.

Excellent. And then you could say, given that you are lowering the midpoint of your revenue guidance, but not your earnings guidance, you could argue that you -- I mean, I would assume that the lag of B2B revenue would have come with some margin. So implicitly, there is another part of the business you must be upgrading underlying. So just any reflection on where margins maybe have proven better than expected?

So as you can see in the beginning of the year and also here in the second quarter, we have realized fairly good margins in both B2C and B2B or detached and semi-detached business, which is why we have not felt necessary to adjust the revenue guidance -- sorry, the EBITDA guidance.

Okay. That makes sense. And then I think -- I mean, obviously, we have seen a step-up in order flow for the semi-detached business. So maybe if you can just elaborate a bit on the interest you see out there, because I know you've been fairly positive for a while, and now we are finally starting to see some actual orders coming in. But then on the other hand, you are sort of indicating that permitting is probably a bit slower than what you've hoped for. So looking ahead, what kind of market and business are you looking at for B2B?

When we are looking in the B2B market, we still are rather positive around our position, because the market is also in a low level in the B2B. But what we can see now is that we are gaining market share there. We are absolutely -- we are the most, you can say, one of the most priority partners now by the B2B segment also, because we have our own factory now, and that is rather positive for us. We've got much more wood in there, and the construction is prioritizing at our customers. And we also have a lot of new dialogues also for the future. So we are rather positive, yes.

Sounds good. And then just two more housekeeping questions for me here at the end. So in semi-detached, your SG&A costs have been DKK 20 million, both in Q1 and Q2, which is stable compared to the run rate last year. Is the level of DKK 20 million roughly what we should expect in coming quarters as well?

I think it's more or less what we expect in the coming quarters. So I would say it's also a matter of being in compliance with transfer pricing and allocating costs across the segments based on activity. So that also impacts.

Understood. And then to Sweden, obviously, sales has been quite weak, but gross margin has been fairly high, at least in a historical context, above 40%. So what has driven gross margin to this level? And should we expect that to be sustainable?

As you mentioned yourself, Kristian, activity has been pretty limited in the Swedish business. And therefore, it doesn't take a lot for the gross margin either to be more positive or more negative than what we have seen on an average basis. So I would say what we are seeing right now is on the higher end of our gross margin expectations in Sweden.

Next up we have Anders Preetzmann from Danske Bank.

Color ones from me as well. Maybe going back to the semi-detached segment. So of course, you've announced quite a lot of orders here in Q2. And it comes to my understanding that some of those contracts you won was due to the original contractor going bankrupt and you then taking over the contract. Can you maybe talk a little bit about whether there are any additional opportunities for a similar uptick in contracts, one from bankrupt contractors? Or have all those contracts been distributed now?

Yes, I can confirm that we have taken up some contracts, some projects from some of those. But that's not what we're looking into for the future in the high level. What we're looking into in the future is maybe some of the customers to the [ contractors ] who are bankrupt, they are maybe going our way now. We have a lot of dialogues because the counter party risk is maybe more now than very focused, and therefore, we absolutely have an advantage there in this industry. So, yes.

All right. Maybe also, you've previously announced that the SG&A cost base that you have set was said to be sustained by a quarterly detached sales level of around 180 units, but I see quite a lot of job posts and activity from you guys on LinkedIn, et cetera. So should we expect SG&A to go up going forward? And if yes, what sales level on units should we be looking into to sustain the new SG&A?

Yes. As you can see, the headcount, you can see in our company now, it has increased very little. It's around 7 employees. So that's not the high number. But of course, when we see the figures in the market and our sales, of course, we have to add more employment. So we still can have the very high customer confidence, of course. But we take it along the road, as we say, because we will see what the pickup will be in the sales. And therefore, we will have the organization that matches the order bank.

Yes, yes. I mean that, of course, makes sense. But just maybe then some indications on the activity level in leads, et cetera. So you were very kind to release the July numbers as well. And I mean, 50 detached houses for July may be a bit low, but in a normal seasonal year, it would be normal that Q3 is not the highest activity, of course. But how do you see the activity or rather the seasonality of the business in 2024? Should we still expect that Q3 and Q4 is better than H1, or...

What we see is a fairly reasonable level of activity, and we have been seeing that increasing gradually, but at a moderate pace throughout the year. And we have seen that in July as well. And the sales numbers that we have seen in July is on par with our expectations.

Okay. That was very clear. And then my final question also maybe a bit of housekeeping here. So on the gearing and the net debt, of course, fairly low for Q2, but I suspect that with an increased activity level going forward, we should also be seeing the net debt going up. Can you maybe just comment a little on that?

Yes. So of course, we are monitoring our net debt levels closely and [Technical Difficulty]

It seems like we've lost audio from the speakers. Please standby and we will investigate. It looks like we have the speakers back. Please go ahead.

Thank you. And our apologies, we had a technical issue here. So getting back to your question, Anders. So the gearing level that we saw by the end of the quarter was a combination of a large number of deliveries in the detached business focus or a mix of payment in the B2B business, where payment terms can vary quite a lot, and then the calendar date ending in the quarter of Q2. So of course, the gearing level towards the end of the year will also be impacted by the payment terms that we have on various B2B projects and our deliveries. We do still expect to be within our covenants, and that's what we are focusing on.

And the next question is from Sebastian Grave from Nordea.

So I have a few left here. If you could, for start here, comment on the detached sales for the quarter. So you're above the 200 mark here for the first time since Q2 2022. And then maybe you could share some thoughts. Is this simply, I mean, a reflection of end market tailwinds? Or is it also that you gaining market shares in the quarter?

Yes, it is a difficult question because we don't have the strategy that we can say very clear is it one or is it the other. But we are strongly focused on that we want to gain more sales. And we will see later about is it the market where we have the peak of, or is it we gaining market share, or is it a combination? That we'll see.

Okay. No, that's fair. And I realize that there's a lot of good data points here to rest on. Then on the detached margins, flattish Q-on-Q. Is this the level around 20% we should look for going forward? Or is there anything to highlight here on that line?

So I would say, the margins that we're realizing here in the period is what we had expected and what we are expecting going forward.

That is very clear. And then just a last question on the cash flow. So as you said, or as you alluded to, Allan, it is boosted by payment terms on B2B projects. I mean, is this completely random? Or is it also reflecting, I mean, a more benign competitive environment in general that, I mean, you're able to push through these, I mean, pricing terms in your favor? Or what is to read into this?

I would say, I wouldn't call it random. I would more call it based on the contracts that we have negotiated in the past. And it's more of a result of contracts going way back and how the payment terms have been defined in those contracts.

Okay. But not relating to some of the newer contracts, as announced this quarter, for instance?

No. No.

Next in queue, we have Kristian Tornøe from SEB.

Yes. Just a clarification on 2 of the larger B2B orders you have announced, but which I understand is not yet part of the backlog. So I'm thinking about the 153 cemented houses from Velkomn, and then the 164 houses from NREP in Viby. So can you just update us, have these 2 projects received permits? And if not, when do you expect them to do so and hence become [indiscernible]?

I can confirm that they are not in our order backlog. I can confirm that we don't have the permits yet. But we are, on a daily basis, working with the customers and municipalities to reach the permits, but it's not clear now when we will have the permits. But we have a good dialogue, so we absolutely -- they will come, but it is just a question when.

Is there risk that it could go into next year? Or do you expect them to come here in the second half of the year?

It is very difficult. There could be a risk, but our expectation is that we will see them in '24.

At this moment, there are no further questions in queue on the conference call. So I will hand it back to the speakers.

Thank you so much. And from Allan and my side, we will say thank you for your attention to today's call. And please feel free to reach out to Allan or me if you have any follow-up questions. Have a nice day.

Thank you.