Nexity SA (NXI) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, to the Nexity conference regarding its Q1 business activity and revenue performance. [Operator Instructions] I'm now going to hand over to your host, Ms. Nadia Ben Salem-Nicolas, Deputy CEO in charge of Finance. She will start today's conference. Nadia, over to you.

Thank you very much. Hello, everyone. My name is Nadia Ben Salem-Nicolas, I'm the Deputy CEO in charge of Finance with Nexity. I'm with Eric Lalechère, Head of Finance, as well as our Investor Relations team. And thank you all for being with us for this presentation of our Q1 2022 performance. Slide 3, please. There are 2 main messages that I would like to share with you which is inconsistent with what we communicated on April 1. Over the short term, we do not expect the geopolitical context to impact our activity if we get our figures for the past quarter. As you know, this quarter doesn't truly reflect the activities throughout the year, and it has the lowest contribution. In terms of residential real estate, we have good sales momentum, which is very much in line with 2019, '20 and '21, and this shows how resilience -- how resilient our teams are and how well they have weathered the COVID crisis, and this reflects sustainable demand from our entire customer base despite the loss of supply, so minus EUR 130 million. That was expected considering the global context and the baseline was abnormally high in Q1 last year in terms of commercial real estate. Over and beyond this, the rest of Nexity's activities are doing well, particularly Services. Double-digit performance. This shows the continued relevance of our model. Second message, already we are taking action and adjust them to the current context the return of inflation and a rise in construction costs so we can maintain the margin level of our projects. We are confident, thanks to the visibility of our backlog, that we will be able to achieve our financial targets for the year. We are reiterating our guidance. Before we get down to the financials, financial and non-financial performance are increasingly intertwined in the eyes of investors. And also, let's bear in mind that the announcement made a couple of days ago, we are accelerating our climate strategy to strengthen our position as a pioneer in decarbonization and green real estate. As you will know, construction is a major contributor to greenhouse gas emissions. So this is important in terms of our relationship with local and regional authorities. So last year, we received the SBTi, Science-Based Target Initiative certification, and our goal is to limit the global warming trajectory to under 2 degrees. And now we're aligning ourselves on a 1.5-degree global warming increase, which will also receive SBTi certification. So by and large, this means we're doubling our previous targets. And on the graph, you're seeing a much steeper curve. So we're aiming to reduce by 40% by 2030 our CO2 emissions from the entire construction process. This means including Scope 3 emissions that are not within our direct scope of responsibility as opposed to 22% in our previous commitments. We also want to develop a high energy efficiency buildings and the share of refurbishment. We want to use low-carbon construction message -- construction materials more and more. So this is a very ambitious target, 10% more ambitious than the RE 2020 thermal regulatory requirements, which is already pretty demanding as the year goes. And this means Nexity is positioning itself as one of the earliest from -- property developers that embraces that 1.5-degree trajectory. So we're also protecting biodiversity. This new strategy is an important step for Nexity. We have a long-standing tradition of supporting low-carbon construction techniques, and we want to ensure total consistency between what we're saying and what we're doing. Now let us review our quarterly performance for all of our businesses. Slide 5, let's start with residential real estate. Demand is staying strong from all of our customers. There's still a lot of interest from private citizens in terms of residential real estate. This is clearly seen as a safe haven in terms of inflation and the financing terms are still attractive. Interest rates are rising. Yes, have been rising since the beginning of the year, but are still below 2019 and 2020 levels. So there is -- considering this context, the reservations for new homes come to 3,490, which is along the previous years as opposed to our main competitors. Their performance is -- fluctuates more and the reservation levels are still below 2019 level. So our commercial real estate business and its resilience is significant. Our volumes and our sales is significant irrespective of the environment. We are sustainable property development player. We have a strong balance in terms of our customer base. Private citizens are our main customers, accounting for 61% of monthly reservations including 2/3 of individual investors and the remainder are first-time buyers. So 39% of bookings, so that's social landlords. Obviously, this class of assets is attractive, and we have 31% of social landlords, which are important partners in our strategy. They help us meet the growing needs of local and regional authorities, help us win new projects, and they hold the keys to the land bank. So in value terms, reservations account for EUR 764 million for the quarter, down 3% relative to 2021. We've been impacted by the mix because bulk sales performed at a lower price than retail sales. Now it's important to note, as you can see on board in the lower right-hand corner, that the average sales of price per square meter is up 4.2% in supplied-constrained areas which account for 80% of all bookings. And this shows our ability to enhance the value of our products as much as possible so we can retain, develop drivers to absorb the rising construction costs. Now on the supply side, it's still very difficult to obtain the planning permits, and also the investigation times for securing the permit is getting longer and longer. This means that people are not getting together in terms of fighting that short supply problem. So as you can see, there's still a slow recovery in building permits plus 6% between December and January this year relative to last year, even though those levels are still lower than pre-COVID levels. So approximately 5% lower than the red bar, which represents February 2020. Now, we provide a strong national coverage. We have quality operations teams. We have a broad diversity of products, and this means that we get more planning permits than the rest of the market, at 17% for the period. This means we are confident in our ability to fuel our supply for sale over the next few months and meet our target of at least 14% market share for the rest of the year. I'm now going to hand over to Eric, who will review commercial property and services.

Thank you, Nadia. Now, commercial real estate. This business was weak, only EUR 34 million in order intake. In 2022, we anticipate a lower order intake. This is a low point, but things are expected to pick up in 2024. The quarter was mostly marked by a major project at the heart of Paris, and this reflects our expertise. We are converting a garage base into an office building, and this shows our ability to transform the city, respond to new users and we're setting the example in terms of CSR. Now services. We are well positioned in line with the 2021 trend. In this slide, you can see the importance of our co-working business, the stronger momentum. More sites, so 5 new sites. More -- higher square meterage operated and also the occupancy rate is also up 90% in Q1, the same occupancy rate we had prior to the COVID crisis. Now in terms of shared offices, they are core to new users. We provide flexibility in terms of floor space and also duration of leases for users. Our activities are well positioned in terms of property management. It's a high level of transactions for seasonal rentals and good performance in terms of transaction activities. There's a good level of notarized deals in particular. So slide -- next slide, please. In Q1, our sales come to EUR 895 million, so proper level of business in residential and commercial. Sales were down by 13% relative to 2021, so EUR 1.28 million in like-for-like scope basis, bearing in mind the divestments performed in 2021. Due to the strong base effect, there was a major project that we signed in France. Sales services is up 10%, this is expected to continue in 2022. In terms of businesses, we expect sales to amount to EUR 400 million. The eco-campus project in Garenne-Colombes is proceeding according to plan. Now sales are contracting in Q1. This is expected to continue in Q2, and then it will kick back up thanks to new projects in the second half of the year. We expect to reach sales levels that are at least as good thanks to the visibility provided by our backlog, and that's what Nadia is now going to discuss.

Thank you, Eric. The backlog on Slide 10. We're ending the quarter with a backlog at a -- remains at a high level, EUR 6.5 billion at the end of March. That's 2 years of revenue. Maybe just a technical point, but the backlog represents future revenue of the group that is already secured, that is to say reservations that have not been endorsed and the portion of the revenue that needs to be generated on notary deeds already signed with margins that are pretty much secured. So on these transactions under construction, we're seeing a moderate uptick of challenging the firm and non-revisable area of our markets. Many applications are exaggerated, and we're examining them for the 500 job sites with special attention for small companies and long-term partners. Renegotiations, of course, are covered normal contingencies that are included on our budget of operations, so this backlog and stringent management make us very confident in reaching our target of current operating income for the year. Over and above that, the projects will be launching and which will generate the revenue beyond next are included in potential activity, which is the red bar still at a high level, EUR 13.5 billion. That reflects the assurance we have of renewing our production in the out years whatever the market environment. Turning to Slide 11. As we said, we're confident in our ability to materialize our backlog in revenue tomorrow with the expected margin rate. We expect to renew the offering in the success of new projects after tomorrow and the issues here are essentially linked to the constraint of construction costs. They represent only 50% of the project cost, 50% for construction materials, so 25% of our project cost and 50% labor cost. These costs are higher than our initial anticipations and included in our budget. They lead to an extension of negotiations for construction projects, slowing the renewal of offering. We haven't seen an increase in the number of discarded projects because we're fully in motion to adapt ourselves as indicated in the title, to adapt to this new global context and be able to continue to launch transactions that will absorb these cost increases whilst respecting our profitability requirements. We're in action by fully leveraging the group size and its negotiating capability with a central construction division, which is a real competitive edge as compared to our peers. It's fully mobilized to monitor market condition to increase our purchasing policy, strengthening suppliers relationship. And on the 19th of May, we'll have a special trade event to buy new framework contracts by anticipation. When it makes sense secure those transactions and ensure that the best price is secured. We're more than ever agile in the way we devise our projects by reviewing our construction process, the type of material and their geographic provenance when it's relevant to move towards more economical solution. To give you a very practical example, faced with the difficulties posed currently by the tiles in terracotta that are affected by the rising price of gas. They're replaced by concrete tiles that are more economical and more virtuous in terms of RAC because they emit less carbon. As well as working on our cost base, we're working on our offering products, geographic origin to meet changing demand so that we can direct as best as possible the available cash and selling our products at the best price by leveraging a diversified customer base. And then, of course, increased energy prices that's generating strong pressure and heightened sensitivity by all our customers. It's an opportunity for us to make the difference and to enhance in our offering, our lead in by low-carbon, building -- constructing buildings that consume less energy, and of course, renovating existing build stocks. It's this effort, relying on our traditional expertise, makes us confident in our ability to maintain our margin levels as we've always done in the past. Through the property cycles that it has experienced, let me remind you that Nexity is the development player with the highest margin and the one that is the most stable and resilient over time. So on this basis, thanks to the strengths. Slide 12, we're reiterating, as I said at the outset, the annual targets disclosed last February. Market share and residential property above 14%. Current operating income of at least EUR 380 million will continue to follow closely, of course. Developments of the health, economic and social situations. To conclude, Slide 13, I remind you our next meeting with shareholders is the Annual General Meeting to be held on the 18th of May in person. After 2 years of virtual meetings, this AGM will be an opportunity to review the results of the year lapsed we discussed in February. Nexity recorded high level performance, demonstrated strong resilience and strengthened its financial structure. The dividend is up 25% to EUR 2.50 per share, back to its pre-COVID levels of 2019, representing a high yield for our shareholders. That's what we wish to say to you today. And between now and the next AGM, we're ready to take your questions with Eric.

[Operator Instructions] First question from Emmanuel Parot, Gilbert Dupont.

Yes. I hope you can hear me clearly. I had 3 questions. The first on reservations bookings. I was actually a bit surprised on the developments by customer especially the professional tenants, landlords, and the fact that you could have perhaps -- given, perhaps favored the most profitable clients in that context where there's no shortage of offering. If you could perhaps give us some explanation on that? And then second question, construction costs. In your release, maybe it's in it, but did you give a figure regarding the change in construction costs since the start of the year? We're talking about a second wave of increase. Could you maybe give us that for Nexity? That would be of use. And are you facing shortages that are impacting the progress of construction sites and booking the revenue? Third question, both in terms of demand in April. I know it can't be disclosed without giving a figure. Is demand as sustained? I mean, when you see the pass-through rate is good. I mean, this context seems to be tightening a bit with the interest rates. If you could say a word about that.

So 4 questions in one, Emmanuel. Eric, I'll start, and feel free to complete. The first question on the client mix and declining sales to individual investors. Let me tell you, Emmanuel, that the customer mix that we have in Q1, 60% in retail, 40% bulk is broadly similar to the customer mix we had in '21, 55% retail, 45% bulk sales. I mean, you must just read in some differences, some calendar -- quarterly calendar differences. And if there were to be a bit more, it would be the inadequacy of our offer rather than specific requirements of customers because there's a lot of activity on our Internet side, a lot of expressions of interest and -- shown on their part. Okay, interest rates have increased, but they remain attractive. And the callout rates, I mean, what they've been historically, and I would say that property is a safe haven. It's really being fully leveraged during this period. Really, it's just quarterly calendar effects, and by the end of '22, we should have a client mix broadly similar to that recorded in '21. As I said, 55% individuals, 45% bulk sales even if we retain the flexibility to steer the selling down the most responsive sales channel. Eric?

Yes. Since the start of it, there wasn't a major tipping point or shift compared to what's happened since the start of the year, or the war in Ukraine hasn't changed consumer behavior regarding real estate. And then your second question on construction costs. So there were actually -- you had 2 questions. The first on supply and the second on the cost. On supply, obviously, on the construction sites underway. I mean, there are no delays that are specifically linked to supply. There's no main -- big shortage of materials that we've seen. In 2021, construction costs underwent a sharp increase the construction index. Cost went up 5% because of rising energy prices and tensions on raw materials, and we were able to pass that, factored into our sales price because, Emmanuel, retail price sales rose between 2% and 3%. Well, since the start of the year, the war has sent the cost of certain material spiring upward. Steel, aluminum, bricks and tiles, and then you've got outside carpentry, locksmithing and the major works. But I mean, there's no delays linked to supply issues on these products. And then on the cost, we were actually expecting an increase of the order of 4% to 5% full year, and what we're seeing to date is rather an increase of the order of 4% since the start of the year on construction costs.

So it's slightly higher than expected in other words?

Yes. In an annual approach it might continue to rise slightly, but the bulk of the rise by having in other budgets. We're a bit more cautious than imagine early in the year to incorporate the risk factor that really extends the unwinding of these projects for certain. I mean, it might lead to rethinking certain projects regarding materials, construction and in the components of the project. That can sometimes take time. But broadly, we're confident in our ability to cement the budgetary equation at a cost price with dynamic cost management.

Just a final question on your business model. I hope you can hear me.

Yes. Yes, so your question is on the business model. Please go ahead.

In terms of inflation, we felt that the projects were well structured, your backlog in particular. But I get a feeling that in this context with this high inflation, even the backlog can be subject to price pressures from your suppliers. Am I right?

Well, to a limited extent, what we explained earlier about the backlog for projects currently under construction, things are secured. We may receive claims from suppliers who have higher construction costs and they may challenge the setup. But of course, we need to look at things on a case-by-case basis. But by and large, we are pretty secure. The contracts are signed with our suppliers are firm and not subject to revision. And in terms of provisional margins, there is nothing to worry about when it comes to our backlog. It is secure, and obviously, you never know how projects unfold. Anything can happen in the course of operations, but we are confident. We are confident in terms of our guidance of our operating margin for the year. It depends on the revenue generated from those projects, but we are confident in our projects. We have discussions with our suppliers. There's more an impact on the project itself than on the level of margin generated by that project.

Next question, Marie Fort, Societe Generale.

I'd like to get back to your indication for your revenue on an annual basis. So basically, you expect sales to remain stable throughout this year. But in terms of services, plus 11%, is that what you're hoping to reiterate? Did I understand properly? And what is the basis for that confirmation? If you could please remind me. And secondly, regarding the tender and the impact this has not on your backlog, but on your pipeline. So you rework on projects but you don't cancel projects. Did I understand properly?

I'll take the first question. I think Eric said that we're hoping to maintain net sales from last year, at least -- do at least as well as last year. Obviously, there are moving parts and different trends that are at work from one business to another, so we expect a drop in commercial real estate. And again, this is a mechanical effect relative to EUR 492 million recorded last year. We're expecting this to drop to EUR 400 million for 2022.

And regarding the 2 other businesses, what does it mean for residential property and services?

Well, we're expecting revenue to increase. Services expected to enjoy continued double-digit growth. But there are lots of issues pertaining to our portfolio: Student residences, co-working, et cetera will have a portfolio effect, and this is what drives our business for 2022. Regarding projects, we may have to rework on projects if we realize that the financial equation is in peril, the basic financial equation. But then, of course, that doesn't happen systematically. It doesn't happen across the board. When we budget, we are very careful. When we sign options or sales of contracts in terms of estimated revenue of construction costs. And by the time we actually get to work and start negotiating construction cost, it is then that we determine whether or not our forecasts were sound. Very often, we get good news regarding revenue. In recent times, we've had less good tidings when it comes to construction costs, and this is causing us to renegotiate, rework the project. But up until now, we've been pretty good in terms of maintaining our projects. It's just teething problems that are taking longer. That's it. But in terms of contracts, we have continued problems in terms of obtaining planning permits, building permits and also the budget equation has to be found. So these are the 2 main constraints. That's another way of answering your question. In terms of solvency of customers. The increase in interest rates is a constraint for our customers, and also regulatory bodies are imposing more constraints in terms of access to loans, and this has some impact on demand, and by definition, solvent demand is impacted as well. But we have a well-balanced customer portfolio with a lot of social housing operators and the guidance is at least 14% market share when it comes to housing reservations or bookings.

[Operator Instructions] The next question is from ODDO, Christophe Chaput.

Please clarify. When you said to Emmanuel the construction costs went up by 4% since the beginning of the year, did you compare that with Q4 2021 or December 2021?

Yes.

So when you compared construction cost with Q1 2021, it's plus 8%. But in your reservations, you said that those prices increased by 4% for retail sales. But on that basis, the profitability rate is pretty similar for reservations that were just signed in Q1. Is that how I should interpret this?

Yes, absolutely. You're absolutely right. Construction costs doubled and they account for just 50% of unit costs since the beginning of the year, with same sales prices per square meter increase to even 3% with some certain types of products. This means we are able to protect our profitability despite the rise in construction cost.

And what about the provision for work-related contingencies? Are you able to increase that provision to some extent to have an additional safety net?

We can do anything we want. It's a matter of internal management. Unfortunately, when the pressure doesn't go well, it doesn't happen often, but it does happen. Sometimes you have to weigh that provision. But for the projects we're currently looking at for in 2 months' time, in 3 months' time, we clearly asked our operations teams to increase their -- the expected construction costs. So we don't necessarily classify that as a contingency because it's more likely to go well than do not go well, but we're looking at the estimated cost of the contracts we're going to sign. It's not just a repetition of previous prices. We apply inflation, so we're working on that particular item. And because we are cautious people, and we know that a lot that things can happen in the construction project, generally, we have a general contingency provision. And so it's there, we keep it there, and if necessary, step into it should there be a contingency. And at the end of the day, the profitability rate is in line with our expectations and in line with our history. Yes, we can increase the provision. It's not an accounting role. It's a management role, but obviously, that's a separate recipe. But these days, yes, the provisions tend to go up as opposed to down because of the rising uncertainty levels on our market.

One last thing. I'm sorry if you already answered the question. But if we look at your land bank, are there parts of land that you have been up on the basis that they won't be enough to generate the kind of profits you want?

Well, our land bank is rather limited, which is a good thing because at our sites, we have major opportunities. So at the moment, we're not having any problems, no specific problems when it comes to land bank. But of course, we're extremely cautious in terms of our ability to tap into new land banks or we try to maximize upside and minimize disappointment.

Well, when margin levels are insufficient, the teams rework the project so that the budgetary equation is sound enough to ensure the profitability level we expect.

No more questions in the line. [Operator Instructions]

No more questions? Well, thank you very much, everyone, for showing interest in Nexity. Thank you for taking part in our conference. If there's a question that comes to mind later, feel free to write us, our Investor Relations team are on hand to answer you. Thanks again for attending, and have a good evening.