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

Hi, everyone, and welcome to HusCompagniet's Interim Report Q3 Earnings Results Conference Call. [Operator instructions]. This call is being recorded. I'll now hand it over to the speakers. Please begin.

Thank you, and thank you for participating in our call today. My name is Martin Ravn-Nielsen. I'm the CEO of HusCompagniet. I'm joined by CFO, Allan Auning-Hansen on this call. We will present the results for Q3 and the first 9 months of this year before taking your questions. Please turn to Slide 2 for some remarks on current market developments. Overall, we saw continued stabilization of our market condition in Q3. While customer confidence has declined in the recent months, the sentiment has still improved compared to the very tough times in '22 and '23 as well. At the same time, the employment rate remains high. This stabilization over time drives consumer interest in housebuilding. There is still a fair share of caution that we are booking more sales meetings and seeing more building permits being issued. The Danish housebuilding market is also supported by stable core inflation below the 2% mark and a slightly declining interest rate. We welcome these steady improvements and are pleased to note 1 more quarter with less turbulence. We see the positive macro trends translating into increasing sales in the B2C and B2B segments as well. And after a long period of fluctuations, we still expect the rebound to materialize gradually. We are in good shape and prepared to size the opportunities when they arise. Let's turn to Slide 3, and Allan, you can give the highlights.

Thank you, Martin. We continue to make progress in Q3 with steady performance in line with expectations. The pickup in revenue continued on the back of more deliveries in the detached segment in Denmark. On this background, we are really pleased to report revenue growth of 3% to DKK 588 million for the quarter. While the growth rate was relatively moderate, it underlines our traction as we return to growth after a 2-year break. We certainly aim to hold on to this momentum in the coming quarters. The growth in Q3 translated into a slight increase in gross profit to DKK 126 million and a margin of 21.4%. We maintained a good efficiency level across the business and continued to exert cost control. The improved performance was driven by higher gross profit in detached in Denmark and land plot sales in the Swedish part of our business. This was countered to some extent by a lower average sales price in the B2B segment in Denmark compared to a very strong level in Q3 last year due to changes in the price mix. EBITDA was stable at DKK 32 million in the quarter, and the margin came to 5.5% against 5.9% in the comparison period. This reflected the continued focus on cost containment to ensure reasonable earnings and profitability, while we are gaining momentum and returning to growth from a lower revenue level. EBIT for the quarter was DKK 20 million against DKK 22 million last year. We are reporting a free cash outflow of DKK 4 million in Q3 against an inflow of DKK 56 million last year. Changes in net working capital drove this development, and we are seeing an impact from the steadily increasing activity level. Due to this continued pickup, we had more work in progress for customers across the business in Q3. Let us continue with a brief overview of the first 9 months on Slide 4. With the growth in Q3, we are reducing the revenue gap between 2023 and 2024. For the first 9 months of the year, we generated revenue of DKK 1.650 billion, corresponding to a decline of 11% from the same period in 2023. The development follows fewer deliveries during 2024 because of the low sales last year. The Detached segment is picking up pace and reported a moderate 1% growth in revenue for the 9-month period. This was not enough to compensate for a decline in Sweden and lower revenue in the B2B segment. Gross profit came to DKK 375 million against DKK 388 million last year. We had a 1.7 percentage point increase in the gross margin, which came to 22.7%. We remain focused on securing efficient execution across projects and have benefited from material costs that were lower in the first part of the year than what we initially expected. In addition, the comparison period was impacted by provisions totaling DKK 24 million. We delivered EBITDA of DKK 77 million and a margin of 4.7% for the first 9 months. This was decline from DKK 91 million and 4.9% due to the lower revenue this year, but we are pleased to see profitability picking up in the second half. EBIT was DKK 41 million against DKK 57 million in the same period last year. The free cash flow came to DKK 126 million in the first 9 months of the year, and the gearing level declined to 2.6 as planned after a reduction in interest-bearing debt from DKK 435 million to DKK 245 million. We remain well within the leverage covenants under our financing agreement and continue to monitor our leverage level closely. Martin will now cover our sales, deliveries and the order backlog. Please turn to Slide 5.

Thanks, Allan. We maintained the positive momentum in Q3 and lifted up unit sales by 24% to a total of 241 houses. The detached segment in Denmark and our Swedish business drove the progress in the quarter, while the B2B segment was lower in Q3, mainly due to timing of building permits for larger projects. For the first 9 months, we generated 38% growth with 881 units sold. This was driven by strong sales performance in the detach business and growth of 78% in semi-detached segment after significant progress in first half of the year. the development in Sweden was rather flat in the period. Our B2B sales are picking up, and we were pleased to announce that we have obtained building permits for the project with welcome for 153 units here in October. And this means that these units are not included in the Q3 sales figure, but will be in the Q4. And the contract with NREP won last November for 164 units and the new contract with Thylander Gruppen for 106 units announced here in October will be included in the order book when we are getting the building permits. All in all, we still have good traction with the larger B2B investors, and we are continuing the dialogue to sign more interest projects going forward. Our sales efforts are being strengthened these months to maintain the momentum and win market share in B2C and B2B as well. During Q3, we introduced our new high-end concept, Funen, as a part of our business to customer in Denmark. The concept has been well received, and we expect Funen to contribute to growth in the B2C going forward. Only last week, we also introduced our new B2B concept called Morrow, which has a climate impact of roughly 1/3 of the average Danish house building today. Morrow is based on wood elements and produced at our factory in Esbjerg. The climate impact is also significant below the new limits that will be introduced in the middle of '25. Investors' appetite for quality set test houses being on wooden frames and cassettes is increasing, and this holds great perspective for our B2B segments and capacity utilization of our factory. In Sweden, we grew house sales to 33 units from 17 last year. This positive development is driven by improving macros, and we expect to see continued progress going forward. We are maintaining flexibility and preparing our factory in Sweden to be able to deliver to the semi-detached business in Denmark as well. In October, we sold 72 units in detached, 153 in semi-detached and 9 in Sweden. Please go to Slide 6 for an update on deliveries. In Q3, we saw a continued impact of the low sales in 2023 and delivered 187 units against 213 units in the same period last year. The detached business made progress again in the quarter and delivered 138 houses against 126 units in the comparison period. We reported a fewer deliveries in both Semi-detached and Sweden in the quarter. We delivered 569 houses in the first 9 months. This was a 37% decline caused by the low sales in '23. In October this year, we delivered 44 units in detached, 3 in semi-detached and 10 in Sweden. Let's turn to Slide 7 and our order backlog of the end of September. Our gross order backlog increased 29% to DKK 2 billion and after a continuing growth in the sales during '24. Since the turn of the year, the backlog has increased 22%. The progress is driven by all 3 segments with the detached business taking the lead. At the end of September, the net order backlog has grown by 29% as well to just above DKK 1.4 billion. Since the end of '23, the increase was 23% in the picture for October and the large B2B projects mentioned earlier are not included in these figures. Please go to Alan's review of segment performance on Slide 8.

Thank you, Martin. Revenue increased slightly in the Danish detached business in the first 9 months, while semi-detached was down 22% and the Swedish business declined by 63%. We were very pleased to increase the gross margin and maintain positive EBITDA across all 3 segments to deliver on profitability despite the lower revenue so far this year. The average selling prices were stable at DKK 2.8 million in the detached business and DKK 1.3 million in Sweden. The semi-detached average selling price declined to DKK 1.6 million from DKK 2 million. This was because of changes in geographic and product mix and the development underlines our semi-detached ASP can vary a lot depending on the projects. Please move on to Slide 9 and the outlook. Based on the performance delivered in the first 9 months and the outlook for the remainder of 2024, we are narrowing our earnings guidance again today. We maintain our revenue guidance in the DKK 2.3 billion to DKK 2.4 billion range as we expect to deliver between 850 and 900 houses in total this year. Based on the good efficiency level and performance until now, we are narrowing the EBITDA guidance range to DKK 95 million to DKK 115 million from the DKK 90 million to DKK 120 million levels, which was introduced when we presented the Q2 figures. EBIT is now seen to come to DKK 45 million to DKK 65 million against DKK 40 million to DKK 70 million as depreciations are a bit lower than initially expected. This level of performance means that we are staying well within the covenants of our financing agreement. To sum up the Q3 results, we remain on track and continue to make progress in a market which is gradually improving. We look forward to continuing the work and delivering on the 2024 guidance. Thank you for listening in. We now look forward to answering your questions. Please turn to the next slide.

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

I have a few, and I'll just run them through one by one. First, on the October sales in the detached segment. So 72 units sold, which is, I guess, sort of a strong exit rate here. So do you have any indications on sort of the demand picture ahead that you can share with us? And also, could you add some comments in terms of Q4 and seasonality around the Christmas holiday?

Thank you for your question. As you can see, we actually have seen a steady growth in the detached during the year is around 30%. And it is the market for now that we are looking into. So it is a slightly growth that we are seeing for now.

Okay. And what do you normally -- Martin, what do you normally see around Christmas? Is it sort of the same dynamics as in -- during the summer that people are -- the activity level is a bit lower? Or how should we think of it?

If we are going -- you can say back in the history, then the normal we are seeing the Q4 sales is around the same level as we are seeing in Q2.

Makes sense. And then you talked about FORMIUM, your new high-end offering, which is to support sales going forward. Can you share -- do you share some numbers on FORMIUM performance here for September or October? Or you don't disclose that at this point?

Not for now. And also, it's important for me to say that there also is a time when for when we are meeting the FORMIUM customers the first time and until they are signing a contract. So therefore -- but we are seeing a very, very interest in, you can say, number actually of meetings and so on with the sales reps. So we are rather confident that you can see the strategy going that way to have an extraordinary brand. It is the right way.

Okay. Nice. Happy to hear that. Then on the cost base here, so trying to understand your SG&A a bit better here. So it seems like very lumpy quarter-on-quarter. I don't know, Allan, if you will expand a bit on the dynamics here?

So if you go back in time, you'll also see some lumpiness across the quarters, the usual one. So I would say SG&A is as we expected. There is some timing to it. And as we have been talking about throughout the year, we have been adjusting our SG&A based on the progression in our activity level overall. And if you look at SG&A in Q3, it's roughly DKK 5 million higher than it was in the same quarter last year.

Okay. So that should be an indication for Q4 as well or...

That's our perspective.

Then last question, and then I will hand the word to my colleagues here. So you narrow your EBITDA and EBIT guidance toward midpoints while you sort of -- your deliveries guidance points to the low end. I guess -- at least the way I read this is that you are still seeing some sluggishness in terms of permitting. Can you expand on sort of your deliveries here and why you lowered the guidance?

Yes. So we are -- just to be clear, so guidance on revenue is maintained, but the assumptions on deliveries is narrowed in. And we do that because we do see some delay in our B2C segment for a number of reasons. But I think also we had a couple of B2B contracts, which have been delayed as we have talked about before as well. And I think overall, that's the conclusion for why we're narrowing in our deliveries estimate.

And these delays you're seeing in B2C, is this something that concerns you going forward? I mean, are the market ready to sort of absorb a pickup in activity?

It's -- I would say there are a lot of stakeholders involved in the process around securing that we can get the building permit, and it's not something we see as a structural problem. We see that as a temporary problem right now.

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

So my first question would be on the detached segment. So Martin, you referred to the growth in households being around 30% for the first 9 months and the October number is also up 30%. If this run rate continue, would it all else equal, be fair to also expect 30% growth in revenue for 2025?

There's a lot of, you can say, things going into that because it's also a matter of mix. So if the sales in Jutland is a bit higher percent than Zealand, then you just can't go that way because also the ASP will have some different outlooks.

And then just adding to that is also the progression in building permits and construction time, et cetera, et cetera. So you can't translate it one-to-one, but it's effective.

Sure. And obviously, the permitting is difficult for you to comment on specifically. But on the mix side, I mean, when you look at the houses sold for the first 9 months, is there a sort of notable change to the ASP based on geography or other aspects?

We can see that the ASP is a bit lower now, and it is because we see potential more sales in Jutland again. So -- but not at the high level of numbers, but there is a little fluctuation quarter-to-quarter.

Okay. That makes sense. Then turning to semi-detached and these 2 orders from NREP and Thylander, so I know the process for municipalities are not always easy to predict, but what is sort of your best guess on when building permits should be there for these 2 projects?

Thylander is a contract that we signed in last month. So therefore, now we are prepare a lot of material to the municipalities. And therefore, it is in line with our expectations that we can start up in '25. NREP [indiscernible] of the municipalities, it has taken, I would say, some longer time than we have expected from the beginning, but we are comfortable around that we will have the permits, you can say, in Q4.

Okay. So just getting back on your comments for the Thylander project. So you say start-up in 2025, when exactly would you expect the building permits? Is that sort of midyear then? Or how many quarters would it normally take?

I would say that that the 2 contracts with welcome and NREP have learned me not to give you or myself actually a month that we now can expect exactly because there's a lot of things that can go the wrong way. But I think that around 6 months, then we should have the permits.

All right. Understood. And then just staying on semi-detached, the SG&A costs in the first 9 months has been fairly flat. Obviously, with the increase you are seeing to backlog and orders, I would assume this will lead to increase sequentially at some point? When should we expect that to sort of step up?

The SG&A increase you referred to, inflation?

Yes. So I'm just looking at SG&A for semi-detached, which was DKK 20 million in Q1, DKK 20 million in Q2 and DKK 19 million in Q3. So there is obviously an increase year-on-year, but sort of over the year, it's not been trending up.

I would also say what you have to remember in this perspective is that the SG&A is also based on an allocation of costs from the parent company. So you can't do that translation over all. I mean we look at the overall SG&A cost as well. And as I mentioned before, overall SG&A cost in Q3 is DKK 5 million above last year.

Okay. So with that, it should mean that once activity picks up, Semi has would be allocated more costs?

Yes, on a relative perspective, yes.

Sure. Okay. That makes good sense. Great. Then just my last question on pricing. Have you done any pricing actions in your detached segments since we last spoke?

No. Yes, we increased since the last quarter, since the last call we have, you can also that we increased prices by 2%.

[Operator Instructions] The next question will be from the line of Anders Preetzmann from Danske Bank.

I also have a few. So going back to the detached segment and the sales activity obviously being better than last year, and you also talked about you booking more sales meetings than you did 1 year ago. Can you give us some more color on this? What sort of increase are we talking about here? Is it 20% more meetings than last year? Or can you give us an idea of that?

I think, Anders, in general, we see an increase in meetings. We see an increase in sales, but we cannot comment any more detail on the number of meetings.

Okay. Yes, that's fair enough. But maybe then going back to the detached unit sales as well. And Martin, you've been in the business for a long time, and you remember the 2010 very clearly, I suppose. And can you maybe give us an idea on the activity level right now and the optimism/pessimism you see from potential homebuilding customers. What does it compare to? Are we still just after the financial crisis? Or are we starting to see maybe something reminiscent of 2014 or something like that?

It's a difficult question actually because there's a lot of macros and so on who has an impact on the sales going forward. So what the last 2 years especially have learned there is that we are taking the situation and the market day by day, and we are gaining the market share and the possibilities maximum what is possible for us. And how the market will look, you can say, the next year and so on. Yes, we can have our expectations and it is absolutely you can say, what we have seen now, it is a 30% increase in the sales, you can see it is not maybe the best number that we can expect going forward in this level.

Yes. Okay. Another question, Allan, you mentioned that you saw lower depreciation costs than expected, and they came in at DKK 12 million. Why were they lower than expected?

I would say it's just a recalculation of depreciation costs, nothing specific.

Okay. And what should we think about depreciation going forward? Is DKK 12 million a fair assumption or?

I think that's more or less the level that we have seen in the quarter. So I think that's a fair assumption.

Okay. And then my final question here and it has already been answered, I think, but just going back to the SG&A. So a 5% increase for Q4 '24 compared to '23 seems likely. But should we not see some sort of operational leverage going forward? I mean you can't keep on increasing like this? Or where do you think the SG&A in 2 years if the momentum keeps this way?

I think what we have to consider is that we need to ramp SG&A to support sales. So I guess, when the market suddenly dropped, we could scale down in SG&A with a pretty fair and quick impact. But deliveries go on for additional maybe 6 to 9 months. So I would say you need to consider an SG&A ramp to support sales, and we are, of course, trying to balance that to the best possible way based on our expectations in the market, et cetera.

Okay. Yes, that's perfectly fair. But then maybe just a follow-up. So the current SG&A base, you have also answered this question before, but can you maybe say how many unit sales per month does your current SG&A base cover ballpark figure?

That's not a detail that we provide, but it's a fair question.

As we have no further questions in the queue, I'll hand it back to the speakers for any closing remarks.

Thank you, and thank you all for dialing into this call today. I wish you all a good day for today, and have a nice weekend when you're coming into that. Thank you.