Nexity SA (NXI) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Welcome to the presentation for Nexity's first quarter revenues. And questions and answers will follow the presentation for your information. The conference is being recorded. And I will now give the floor to your speakers, Jean-Claude Bassien, Deputy CEO; and Pierre-Henry Pouchelon, Company Secretary and CFO.

Thank you very much. Good evening, everyone, and thank you for joining us for joining this webcast. Well, what are the highlights for the first quarter. You're all aware, of course, that the first quarter is not representative of the full year because -- we have a large part of the business, which in commercial terms starts from -- after the first half. What are the key points at the beginning of the year? First of all, in the housing market, the environment is challenging. And you can see on the screen, a drop of 31% in retail sales for the quarter. And looking at the tertiary market in investment terms was down 45% on the first quarter of 2023. Now are there some encouraging signs? Well, yes, -- there's a good glimmer of light here. First of all, confirmation of the decline in interest rates since December, down 31 basis points. Now that may seem not very much, and it isn't very much, but it's a trend that we've been seeing for the past 3 months. And you should keep in mind that a decline of 100 basis points is a 10% pickup in the purchasing power of our real estate clients who has lost very significantly in the 12 preceding months, and therefore, it is interesting to note the decline. Similarly, looking at retail clients, you should keep in mind that they have been able to recoup the spending power through a rise in nominal income. So we think there's -- we're about halfway there. Now as far as Nexity is concerned, to get this backdrop in commercial terms for Nexity, we have revenue which is down 40% in the first quarter, which is consistent with our forecast. And in terms of bookings. And for this quarter, what we can see is the big turning point on retail sales, which has to be consolidated over time, but it does show that our results in absorbing our stock is good. Now looking at bulk sales, the first quarter is not representative because there is a high base effect on the previous quarter. And for the time being, the negotiations are underway with the usual market players. And what we expect is completion during the first half. The backlog of Nexity is relatively stable. We have 2 years of business ahead of us in terms of backlog. And I'd like to -- and the backlog stands at EUR 5.1 billion. Now some key points here for the first quarter regarding Nexity. First of all, we are well underway on our deleveraging trajectory, as we'd indicated, after the disposal of our international business that happened previously. At the beginning of April, we have disposed of ADB and we have a cash in of EUR 400 million, which significantly contributes to the deleveraging of the group. Furthermore, the second important point here is that we have continued to stepup our transformation. And the transformation is leading us to position ourselves on urban transformation and transforming our real estate offering to adapt it to the market situation. We have to continue with this transformation. We've continued to cut our operating expenses, which we had already started last year, if you remember with an expected impact in 2024 million of EUR 30 million, and we're continuing this. This is what we've confirmed to the social partners that we're going to continue the consultation process. Regarding our redundancy plan, and this redundancy plan will involve 502 job cuts. Now the redundancy plan effect plus the existing cutting operating expenses from last year and the overall control over operating expenses and the reduction of our debt in the months ahead, all of this combined should contribute in a full year to savings of EUR 95 million with 70% expected for 2025. Now I'll hand over to Pierre-Henry, who will give us the sales figures for the first quarter.

Thank you very much, Jean-Claude and good evening, everyone. Let's start off with the sales activity. The volume of reservations for new housing is in excess of 2,000 reservations slightly up for the first time in the retail business since 2020. And this is a nonlinear activity, and it's very much dependent on completions underway. For the same reason, the client mix is not meaningful for the first quarter because 72% of our reservations are done on the retail business in the first quarter, where we expect over 60% of bulk sales to be completed by the end of the year. Looking at our commercial offering for 2024. 7,028 units, down 10% with absorption time lines down at 6 months. Compared to 2023 first quarter, this is down 31%. This reflects the continued increase in selectivity regarding the launch of operations. The prebooking target is set at 60% with the group's capacity to absorb the new offering with appropriate products and pricing and the relevance of our financial support entitled Nexity [indiscernible] for your spending power is equivalent to a discount of 6% on our selling price. Just a few words on the breakdown of the commercial offering, which reflects a controlled offering. This stock of unsold -- the backlog of unsold units is not significant. That's our priority to absorb this and the offering of work underway, stands at 49% versus 60%. And finally, with 85% of the offering in areas where supply-constrained there is eligible for the Pinel, the LLIs and the PTZ. The backlog is relatively stable at EUR 5.1 billion, enabling Nexity to have 2 years of business ahead of it, and we're continuing our growth only on profitable operations. A few examples of good operations, which reflect our penetration in the regions. We have this concerns, campuses, businesses, office space. And we have 15 per planning permission requests underway. Regarding the service activity, the operations continue to draw -- to drive the growth of the group with encouraging indicators both for student accommodation and for co-working premises. We should note a dynamic quarter are selection on the operating business, where we're seeing a recovery to the volumes equivalent to those we had before the crisis, thanks to a lot of work done on the offering, smaller areas, but volumes that can be taken without using loans. Revenues at end of March down to EUR 770 million, down 14%, consistent with our expectations in terms of trend. On development activities be it for commercial premises or residential housing, this reflects the progress on our built-in pipeline on services, operating growth plus 8%, distribution down 45%. So we're continuing to pursue all means that we already implemented to reduce our leverage ratio starting with the disposal of ADB early in April as in line with the calendar that we announced in February. We made about EUR 400 million out of that divestment, which will strengthen our treasury position, which was already strong at the end of 2023. We're continuing to look for strategic and financial partners for our business, especially property management. And as we announced during previous webcast, we are not opposed to deconsolidating IFRS 16 debt for our co-working business. There are 3 other levers that we are pushing on. Debt and WCR. We're using financial contracts and joint ventures to derisk our balance sheet, especially the one that was created for our work with California partnership with Mirabaud and the work we're doing with CDCH. We also have a proactive WCR plan, lining up purchases, work in the field and signing of contracts, a recovery of customer debt and also optimizing fundraising. We are also run [ spooting ] down our international business. We are currently sunsetting our business in Germany, Belgium and Italy. And thirdly, looking at our dividend policy, this is fully in line with the current financial context. We review it every year based on our generated cash flow. Last year for the AGM, we have recommended we suspend the dividend for 2023. The trajectory that started in 2023 will continue through 2024 and '25, and should give us further money to continue to transform. I'd like to give the floor back to Jean-Claude to tell you more about that transformation.

So transformation is moving towards an urban real estate operator that aims to put Nexity in a position through which it can leverage its expertise based on the regions with multiproduct regions through our ability to consider everything in a given region through a single authority. And this is what should enable us to ramp up our urban operator strategy. The first demonstrator of that strategy is the Carrefour deal that you're aware of, of course, and that is going to serve as a model as we roll out the rest of our strategy in the near future. Our regional expertise will be further fleshed out nationally with some real estate offering post for office space, for houses, for urban regeneration. And in these types of projects, we're going to be able to have innovative high-quality offerings with good performance control of our business. Finally, we have decentralization of our business. This will go hand in hand with an increase of the expertise levels of our central functions, so strong regions supported by a strong center. After this transformation, Nexity should be more operational, more effective, should be more about profitability and should be more at the service of the urban regenerative projects that it undertakes, more in line with the new needs of our customers and our regions in a market that will have significantly changed. In saying that, it is important that we underline that as part of this transformation, we are supported by a number of partners. Of course, I mentioned the Carrefour deal earlier, which should help us continue to deploy the offer and by the way, this year, we are expecting to have about 15 extra building permits. We also have our partnership with Mirabaud which should enable us to further develop our ability to turn office space into housing. Finally, and this is significant, I would like to underline the support that we receive from our bond and banking partners. Indeed, the group received from all of its bond and banking partners, Euro PP debt relief until the end of financial year 2024. Let's quickly touch on our cost-cutting measures. As you heard from Pierre-Henry earlier, we have undertaken a number of measures -- we've been extremely proactive when it comes to cost cutting, looking for a full year effect of EUR 95 million. I'd also like to remind you that we have the effects for 2023, which already accounts for EUR 30 million. We've also got the redundancy plan, which affects 20% of headcount for the development and construction business, and that should enable us to save a further EUR 45 million full year. We're continuing to work on general costs and real estate. That will be another 20 or so million on top of that. So 16% savings are what we're targeting on our current operational cost base for Nexity, 3/4 of which will be active from 2025 onwards. In light of what I just shared, our outlook remains similar with operating profit, which will be positive. We believe that the trend is bottomed out in 2024, and that the outlook is good going forward with a bounce back a net financial debt, which will be significantly lower than what we had in 2023. And we're expecting an improvement in our leverage ratio by 2024, with a maximum ceiling set at EUR 500 million. That is what we announced, and that is what we're sticking to. This brings me to the end of my formal presentation, and we would like to answer any questions you may have.

[Operator Instructions] Our first question is from [ Marlin Fo from Bernstein ].

Of course, I have a couple of questions on the cost cuts. My first question is on the EUR 30 million that you initiated in 2023. You -- can you give us an idea of what you've already been able to cut and what you've already booked for 2023? For the redundancy plan, you're saying that you'll get EUR 36 million in savings from that from 2025 onwards. Can you give us more information? Are you saying that the rest of those savings will be felt in 2026? And for general costs, I would like to better understand the phasing for the cost cutting measures and how we're going to see the effects of that? That's what I wanted to ask about the cost-cutting measures. I have a follow-up question on Morning. What do you mean by deconsolidation of IFRS 16 debt? Can you tell me more about what that is? Are you looking to bring in new partners to shift to a minority stake? Now I understand you can't share details with us because these will be ongoing negotiations. But could you give us a little bit more of an idea of what you're aiming for there? My third question is on bookings. I understand that you've seen an increase in booking rates. What kind of echoes you're getting back from the market on that? Are you seeing the market start to stabilize? Are interest rates starting to stabilize? Are you seeing more interest or more requests to visit your properties?

All right. I'll start with the final question there, and then I'll let Pierre-Henry come back to your first question. So on bookings, now let's not get ahead of ourselves. The first quarter of the year is starting to show some light at the end of the tunnel may be. There may be some impact from the interest rates for consumer bank loans. But what we're mainly seeing right now is people being more open and more aware to price stimulus effects. What I mean by that is when we are able to target some of our operations, particularly, there is sensitivity in the market to that. And I think that we're probably not the only ones who observed that effect. So that's for the booking rates. And I would like to wrap up my part of the answers by saying that we do need to be circumspect up until the end of the financial half, to see whether those effects do indeed prove themselves to be true. Now regarding Morning, we had already stated that we were looking for financial and strategic partners for a number of our service businesses, mainly management after the divestment of ADB and our property management business and also distribution. For Morning, our approach is different. We're looking at how we can support the growth of co-working, which is something that we're seeing in our books, and we're still seeing strong demand in that sector. We want to continue to support that side of the business, but we also want to make sure that there is less of an impact on IFRS 16 debt given the market environment that has changed so much. We believe we need to be conservative. So we're looking for partners who would be able to come in with us, who will be able to bear part or all of that IFRS 16 debt so that Morning can continue its growth trajectory and continue to feed into our office space offering as well through our operations. In a nutshell, if the opportunity arises, we would be willing to have a minority stake in Morning so long as things are moving in the direction that we hope. For the savings plan, the EUR 30 million in savings from 2023, we'd already released. How we achieved that? This was a plan that was mainly related to freezing new hires. We would not replace people who left us and also we were able to save some general costs. That plan was rolled out throughout 2023, and we stated that we had achieved our goals there, the full year effect will be for 2024. As for the redundancy plan, the mechanisms behind a redundancy plan or kind of slow-moving COGS, we need to talk to union representatives, employee representatives. And depending on how the negotiations go and depending on how quickly people leave, that's going to spread well into 2025. The reason for this is that the most savings, so the whole EUR 45 million should come in, in 2026. But for 2025, we're expecting EUR 36 million in savings from the redundancy plan. And for general costs, we're currently running down every line of every contact -- contract every maturity date, and that is something that we're going to see as we renegotiate some of those contracts depending on the end dates of those contracts based on the phasing plan that we have right now.

So in other words, you're saying that we shouldn't expect significant savings in 2024?

Indeed, and there will be costs related to the transformation and reorganization projects. So we confirm that 2024 will be the bottom out year given the incurred costs from our reorganization and other measures.

Final little question from me. Following renegotiation and changes in your debt structure, how high do you think financial debt cost is going to be in 2024?

So we expected 2024 to be the bottom out year financially. So we've got no covenant issues at the end of 2023. We've been able to talk to our lenders to explain the reorganization, explain what we're doing. It was necessary, and they're on board with it. So we've been able to get relief on our financial ratios until the end of 2024. There will be increases in financial costs, but seeing as we have extra liquidity, thanks to the divestment of ADB, it is going to depend on how much we draw from our credit line and we're trying to leave that credit line alone right now. And that excess cash is being invested with rates being quite high. We can actually use that. So our high cash position means that we can actually make money off it, and we'll be able to offset some of the costs related to the waivers that we received on our financial ratios.

We do not have any other questions in the queue here. [Operator Instructions] Next question is from Nicolas Tabor from Monita.

Can you hear me?

Yes.

Thank you -- thank you for the presentation. I would simply ask regarding the price decreases have had a positive impact. What is the scale of the price declines? And should we expect a drop-through of 100% on to the EBIT margin. But to understand the sensitivity here what is the share of the programs that would be concerned? You have the pie chart that shows what is underway. What is still in the process of completion?

Well, yes, of course, this is program-per-program. It's project-by-project. First of all, a brief word on the macro aspect here. The price management is based on macro parameters. What are those parameters Jean-Claude has described this. For the first time, we have a decline in mortgage rates after an uninterrupted rise. We've had 31 basis point decline. We also have the information through these studies done by banks, whereby our customers over the past 2 or 3 years, have seen 12% to 13% overall rise in pay. They lost about 31% in terms of purchasing power on real estate. So it shows the gap that we have to close in order to match supply and demand. And this is what we said when we presented the annual results, and we're still on that trend and a price gap of minus 5%, minus 10%. Our national campaign at present is based on a 6% decline in prices, is beginning to produce results because our launch in this in the first quarter, showing a more dynamic trend than what we were seeing last year. So of course, price declines will emphasize the offering for works underway and with delivery time lines, 2024 and 2025 and our priority for 2024 is to cut back on our unsold backlog to emphasize deleveraging and our WCR. And of course, macro parameters change every month. We adjust the prices to reflect that, and this has an impact on margins, but this is part of the adjustment costs that we have factored into our business plan for 2024 and which is part of our plan for a recovery in 2025 with a renewed offering, fully adjusted, fully adapted to the current market and expected market conditions. So this minus 6% on discount on average.

This is on applied to all programs? Or is it only on certain programs?

Well, these -- it's program-per-program to start off with. And then depending on the programs is the work the project underway, always the delivery time line close or not. And depending on that, we adjust the price and the national campaign was based on minus 6% on all of our backlog in terms of commercial offering and then we can have that applied to units with a closer delivery time line in order to ensure that we have the appropriate absorption of that backlog.

Now to these operating results -- these operating results before or after the EUR 50 million runoff of cost, has it been adjusted or not? This is just to understand the different blocks but going to be set up between now and the end of the year?

Well, the operating income tax reflects the capital gain that we will book on property management with the adjustment costs that we've described, and we gave this in detail, and then we have price. On prices, we've given us room for -- margin for maneuvering prices. And then we also dropped some operations. So we have an increasingly well-balanced operational balance in that we can give up on some projects and restructuring costs will be less than the operating income because it comes under the EBITDA. So the capital gain will -- on ADB will not be on nonrecurring capital gains. Now we have the -- that will include capital gain plus restructuring costs.

So the positive part?

Well, the current operating income and nonrecurring items, which will be positive for 2024.

Okay. That is very clear. And regarding the second quarter, you -- and regarding bulk sales, you're seeing a shift is what you said on retail sales. And on services, do you see this happening through in the distribution. Is distribution reflecting this environment for the retail sector? How is minus 45% and plus 5%. There's such a contrast. Can you explain that?

Let's be clear here. What is complex is that you have the commercial side and the bookings are the commercial aspect and revenue is the signing of completed projects. So we see poorer performance in terms of completion because we can -- we're seeing conversions of reservations last year and the signing, actual completion in the first quarter. So we see minus 45% in distribution in revenue, but good performance, good figures on bookings. And that augurs well for what's different.

And on the covenant holiday on your debt and on Euro PPs, will you be able to postpone this again next year to have some room for maneuver? Or was that not possible?

Well, that's something -- that's part of the discussions that we're having with our banking partners and bondholders, and we'll see, depending on the progress in our transformation plan and 2025 budget, which to date has not been finalized.

There are no further questions, so I'll give the floor back to the speakers to conclude the presentation.

Well, in concluding, we're meeting our commitments to step up our deleveraging and to implement the transformation of our production process to look ahead to new growth opportunities that we can see. In particular, on urban renovation, we're fully aligned with our road map for the first quarter. Thank you all very much. Have a pleasant evening.

Thank you. Ladies and gentlemen, the conference call is over. Thank you all very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]