Nexity SA (NXI) Earnings Call Transcript & Summary

Good evening, and welcome to this presentation of the half year results for 2024. This presentation is being recorded. [Operator Instructions] I'll now give the floor to Mrs. Véronique Bédague, who is CEO and Chairman of the Board.

Good evening. Welcome, and thank you for joining us on this webcast for our half year results. As usual, I have with me Jean-Claude Bassien; Pierre-Henry Pouchelon; the Chief of Investor Relations. I'll share with you the highlights of this half year presentation. Jean-Claude and Pierre-Henry will give you details about our business activity and financial performance. And of course, we'll be able to put questions after the presentation. First of all, a few key take-home messages on H1 and a few words about the market itself. As you know, this industry has been operating in what has been a downward market on housing. On new property, we have a downward trend to the tune of about 15% according to FPI after Q1, 27% on retail. Adéquation indicates minus 21% on retail. On the first 6 month of the year on commercial property, we see investment down 39% for office property after 50% -- 56% in 2023. But after the publishing of the Q1 results, we have some encouragement, and I'll get back to that. The -- nonetheless, in operation terms, we were very busy. We are rolling out a road map step by step, and I can tell you that our transformation plan is well underway for our refocusing, deleveraging the sizing, recalibrating and redeployment on H1/2 highlights, significant deleveraging to the tune of EUR 264 million. That's down 31%, positive operating profits. Taking onboard the transformation costs, were EUR 128 million. These costs were completely offset by the capital gains generated by the disposal of the PMI business, EUR 183 million. Sales and financial performances are in line with our expectations, and our outlook remains unchanged. I think we should also indicate the sequence of operations in the market. So our leadership position was confirmed, and for the fifth year running by the monitor ranking, the fundamentals tend to confirm this position. Regarding the retail market, we were -- we had encouraging signs from the macro and regulatory viewpoint. Since January 1, 2024, there's been a constant decline in interest rates for property. This is down 54 points over 6 months, which, of course, means the purchasing power of our customers has been up 5% and in line with higher nominal income plus 12% to 13% over 3 years, plus the price efforts that we allowed to the tune of minus 10% -- minus 5%, minus 10%. The loss of purchasing power is 25%, was fully compensated. And thanks to that, reservations for retail remain stable, which is better than market. The second good news in spite of the lack of [ majority and government ], the second degree on zoning extension was published in -- it is in July. That means 700 additional towns that are now eligible to the LLI or 0 interest rate low -- no, intermediate rental investment. And so that's as much as 87% of our supply that is eligible versus 81% after the first extension and 70% before the first extension. Now irrespective of the outside context, this was a very busy period in line with our road map whose implementation is not depending on any outside help, and this is essential for lines of action needed to accomplish this in-depth [ transformation ]. We're perfectly clear. Our teams have been working relentlessly on this road map. We've confirmed this -- well, the disposal of the PMI in Q2, and last night, we published just before these results a press release regarding our exclusive negotiations with Credit Agricole Immobilier to dispose of this property management business. And this puts an end, this search for strategic and financial partners on our management business. The deleveraging is well underway, and we are well underway to cut down on our debt. On the first half year, we have a 30% reduction of debt with, of course, the help of disposal of PMI but also keeping WCR well under control. We are also resizing our cost base, and we have, again, the plan that was published at the beginning of Q1. And indeed, the redundancy plan is going according to plan with reduced headcount and so reduced wage payout, together with the cutdown on SG&A, we are looking at savings to the tune of EUR 100 million for 2026, down 16% compared with end 2022. Regarding recalibrating our offer, we are adapting this to new deal on the market. The national campaigns, there are some highlights, targeted price cuts. And of course, we have to take onboard the higher construction costs. Pierre-Henry will give you details about this because, of course, this will have consequences on our accounts. But these adaptation measures means that we can sell our supply and not end up with unsold property. Finally, the redeployment of the new offer in line with the new market dealers, it will mean that, in practice, we have a -- we are moving towards an agile model as an urban operator, which will be fully operation by year's end. This is, again, [ right underwork ]. We had more than 130 engagement committees that took place in H1. So as many as 9,300 units, including 33% in urban regeneration, are -- were being up for sale. Our partners, including -- our partnerships including Carrefour and Mirabaud enabled us also to step up this urban regeneration without effect on the balance sheet in its initial phase. On this slide, you can see the main indicators. And of course, Jean-Claude and Pierre-Henry will give you details. Business activity and financial performance are in line with our expectations, and the outlook remains unchanged for the year. Regarding business activity, you have to see that retail prices are being -- retail sales are being stabilized, which confirms the idea that we have now -- we are now putting out of the low point and on the financial part, operating income positive to the tune of EUR 55 million, deleveraging EUR 264 million, minus 30%. This is in line with our plan. So once again, we were confirmed as being the #1 developer by Le Moniteur. Our balance sheet is very robust, especially because the deleveraging is well underway. We have a undrawn credit line of EUR 100 million, of which only EUR 50 million were used. Our partnerships remain unchanged. You may remember that Credit Agricole, AG2 La Mondiale, Arkéa and Crédit Mutuel de l'Est, which 3 are on our Board, and there's -- well, the fourth partner, of course, is in close contact with us. This is important, so we are -- we have also partners in the banking business but also the financial partners. This has been important. We have Carrefour, a business partner; Caisse des Dépôts, financial partner; but also Mirabaud for what we call urban regeneration. And number four, we are cutting down on our cost base and adjusting also for 2024 so as to offer an affordable product range. And so we will be in a position to confirm our position as leader in the -- in this development -- property development business in H2.

Thank you, Véronique. Regarding business activity, we are -- Q2 was very much in line with Q1, so we are hitting, of course, a crisis again. Nonetheless, as many as 5,000 reservations were signed up. It's down 7% compared to last year. However in -- on retail, we're doing better than market. We're stable, whereas Adéquation announced, for the market as a whole, a decline of 21% over the first 6 months. And this confirms the diagnosis you -- we set out at the end of 2023. 2023 was going to be a -- the low point, the -- as it were the low point of that cycle. The client mix is not significant because the bulk business, which is the main driver of the market is not linear over the year; and so therefore, we maintain our target, i.e., a client mix with bulk sales accounting for 65% towards the end of the year. So this pie chart will evolve over the year. A few words about this business of intermediate rental housing. We've multiplied by 2.5 the business compared to last year. Now the market is under pressure. Nonetheless, we have to be disciplined in keeping our commercial offer well under control. We -- recalibrating has been efficient. We have -- well, we are selling off our stock of units, and this is doing well. You have to keep in mind that including bulks, we are looking at 85% of all units sold. Another effort we've been making cutting prices down a bit to adapt to the new purchasing power of our customers, and that is to be reflected, of course, in the transformation cost. Pierre-Henry will tell you more about that. All in all, our offer is -- has a rather low risk. The key indicator of a number of unsold completed property is nonsignificant, about 100 units. And of course, the offer remaining to be delivered on H2 is rather low. It's less than 8% of the entire volume. Nonetheless, as Véronique said, we had 87% of our property being offered in the tense context. Let me say a few words about the development of our brand, Nexity Héritage. For this particular business, we're seeing a strong growth relative to 2023. We have brought together our various areas of expertise, which we previously operated via a number of entities under the Héritage brand, and these efforts are bearing fruits. On the screen, you're seeing 2 examples of projects carried out by us. One project in the Paris area is about rehabilitating an office building, turning that into a mixed-use building, including office space and co-living space. And also, we have a project in the historical center of Cherbourg we're turning then into a mixed-use program, including retail and housing space. Now regarding the commercial market, this stands to reason. But after a [ 55 ] fall in Q1, over this half year, the drop in investment is 39%, so the trend seems to be improving. Order intake of those [ totaled ] EUR 46 million is higher than the full year level for 2023 over 6 months. So this is a low-intensity sign. And we're holding on to all of those favorable signs in this sector. So we have 2 off-plan sales contracts that were signed during the period for 10,000 square meters, including 8,000 square meters for a higher education building in the Lyon Confluence development. So 5 iconic projects delivered in H1, the Athletes' Village, 60,000 square meters; Reiwa future head office in Saint-Ouen; the 21,000 square meter co-living project in Puteaux. At the end of June, we had 14 projects underway, representing a backlog of EUR 208 million. Now regarding our Service business, this continues to be driven by serviced properties, student residences, the co-working spaces with sales up 4%, underpinned by growth in our managed portfolio but also by high occupancy rates of both Studéa and Morning. Distribution continues to be impacted by the crises, affecting individual investors. So minus 52% in a market that's collapsing but the -- we need to bear in mind the competitive environment. And when -- with regard to our property management businesses, the group is pursuing its refocusing approach. We're selling our PMI business, Property Management for Individuals, to Bridgepoint. And we have entered into negotiations with Crédit Agricole Immobilier, as already announced for the sale of NPM, Nexity Property Management. Handing over to Pierre-Henry. He will detail our financial performance over the period.

Thank you, Jean-Claude. Hello, everyone. Let's now discuss our financial and nonfinancial performance. As you can see on this slide, Slide 18, this reflects the transformation plan, which is now underway with its full impact on the first half of 2024. The slide shows all our main indicators, which I will now detail one by one. Let's start with sales. At the end of June, total sales amounted to EUR 1.7 billion, down 14% excluding divested activities or EUR 267 million. Obviously, this is due to property development, both for financial and commercial, and this reflects the progress of operations underway as well as a drop in bookings. With regard to services, serviced properties are up 4%, offset by a downturn in distribution due to headwinds in the new build market for individual customers and also a decline in bookings in 2023. As we said in the introduction, the group's transformation involves a resizing with key announcements made on the occasion of the Q1 results. Expected savings by 2026 amount to EUR 95 million, and that's an expected reduction in the cost base of at least 16% in full year 2026. So EUR 75 million of this plan will be saved by reducing payroll, and the implementation of the redundancy plan is on schedule. EUR 20 million will be saved on overhead and real estate where operational action plans are in place to achieve this. Now operating profit was positive at EUR 55 million, in line with our annual guidance. It was heavily impacted by transformation cost of EUR 128 million, which were fully offset by the EUR 183 million capital gain from the sale of our PMI business. Now current profit factors in our cost of adapting, recalibrating the offer design in the previous cycle, which amounts to EUR 57 million. Let's bear in mind the price effect and cost price as well as construction costs mostly in connection with corporate failures. So noncurrent items include EUR 30 million of abandonment costs and impairment of land put up for sale. These are all projects, which we, together with our operational staff, have decided not to develop. So EUR 41 million of reorganization cost provisions, including redundancy plan costs and lastly, EUR 183 million capital gain on the sale of our PMI, Property Management for Individuals business. Now Slide 22, we show the breakdown of recurring operating profit by activity. Of course, it's heavily impacted in property development by the adjustment costs described previously. For Services, recurring operating profit is impacted by distribution activities and weighed down by the drop in bookings in 2023. WCR, excluding tax, fell by EUR 23 million to EUR 1.315 billion (sic) [ EUR 1.316 billion ] with EUR 102 million decrease in the residential development business. As we told you from the outset, that reduction relies on 2 pillars: refocusing our efforts via divestments but also working capital discipline and reduction. The actions undertaken since 2023 are bearing fruit in the first half of the year. And this explains the significant drop, continued selectivity in our operations. Land purchases are down by EUR 60 million compared with the first half of 2023. The land bank is down 14% to EUR 143 million at June 30, 2024. I should point out that no acquisitions on the land bank have been authorized since the beginning of 2023. Also, we're optimizing the period between acquisition and cost of funds. And this is what's working on the timing of land purchases, the signing of these and also the start of constructions. And this has less of an impact on our WCR. Speaking of collection of customer receivables, we have also factored in the favorable effect on WCR of abandonment costs to the tune of EUR 30 million. Working capital is penalized by a deferred cash inflow of EUR 85 million from our key project in La Garenne-Colombes. Adjusted for this impact, WCR is down by EUR 108 million. I would like to add that this reduction occurred in the first half of the year, which structurally represents a peak in working capital for developers. I'm talking about residential property management. Net debt fell by EUR 264 million, so minus 31%, mainly due to the sale of our PMI business for EUR 400 million and the negative impact of free cash flow from operating operations for EUR 95 million, which is impacted by the deferred cash inflow from the La Garenne-Colombes project to the tune EUR 85 million and also interest expenses for EUR 47 million. Adjusted for the deferred cash inflow, the reduction in debt would have been nearly EUR 350 million or more than 40%. I'd like to remind you our history between net debt. At June 30, we had over EUR 1 billion net debt, EUR 843 million at the end 2023. Now we stand at slightly under EUR 500 million at the end of the first half. The debt profile of Nexity has significantly been decreased. Now the financial structure remains balanced. At the end of June, 60% of gross debt is at fixed rates. With the hedging instruments, our gross debt is 96% hedged. The group's liquidity remains very solid at EUR 1 billion including EUR 750 million in undrawn confirmed credit line. The total amount of the line maturing in 2028 is EUR 800 million as there are no restrictions on its use. There was no change in this half year in the long-term debt maturity schedule. As a reminder, our banking partners and Euro PP bondholders have shown unanimous support for transformation and have waived all financial ratio obligations for June 30 and for fiscal 2024. The next test date for financial ratios is June 30, 2025. I'd like to show you a slide on nonfinancial performance, which is at the heart of our business challenges. The group's low carbon trajectories and ambitions, as a reminder, we're aiming for a 42% reduction in our carbon footprint by 2030, a level that's 10% better than current RE2020 energy efficiency regulations. And this is equivalent to being 2 years ahead of the regulatory thresholds. In the first half of the year, we did even better, outperforming by 30% on average the RE2020 energy efficiency requirements for projects at the building permit stage. And this is been made possible by the continued deployment of heat pumps and low-carbon construction methods as well as by growing share of refurbishments in our production portfolio, all the while keeping our cost prices under control. So one example of Nexity's lead in low carbon development is the Olympic Athletes' Village. I'd like to remind you, this is a project of around 60,000 square meters, including 40,000 square meters of residential space developed in just 5 years and designed to emit as little CO2 as possible with less than 700 kilograms of carbon per square meter. And this was made possible by a number of technical service innovations that Nexity has now catalyzed on in future projects. And finally, a word about our outlook. Based on the successful execution of the road map, in particular, the implementation of measures to address and transform the organization and assuming the macroeconomic environment does not deteriorate further, we maintain our outlook unchanged. This includes positive operating profit in 2024, marking a financial low point. This lower profit factors in capital gains on disposals, the cost of adjusting the offering to the new market environment and the costs associated with the group's reorganization. Net financial debt at the end of 2024 will be significantly lower than what it was at the end of 2023, improved profitability for 2025 and consequently, continued debt reduction with a maximum net debt of EUR 500 million by the end of 2025. Thank you very much for your attention. Of course, the 3 of us are happy to answer any questions you may have.

[Operator Instructions] Christophe Chaput from ODDO.

I hope you can hear me okay. About the questions, I have 4 of them if that's okay. In reference to Slide 21, you discussed the transformation rate, EUR 128 million over the half year. Could you please tell us more about the costs you'll have to post for the entire year? Could you break it down between current costs and noncurrent costs, recurring and nonrecurring costs? That would be very helpful. Second question regarding bookings. You said this trend is not linear from the first half to the second half, so minus 30% for the first half if I understand correctly and for the full year. Do you expect better stability of bookings? Third question, property management. You have entered negotiations for selling NPM. So we're talking revenue of EUR 80 million and about EUR 3 million in operating profit. Could you give us some color when it comes to the [ Service ]? Because the range is pretty broad between EUR 50 million and EUR 100 million. That sounds consistent. And lastly, at the end of 2025, I understand that you expect your debt to be lower than what it was a year before. What about the landing at the end of 2024?

I'll take questions 1, 2 and 4, and I'll let Jean-Claude answer the question regarding Nexity Property Management. Regarding cost of adapting the offering, now nonrecurring item, we have provision for reorganization of EUR 40 million, including a provision for the redundancy plan that's been done. In the first half, we have also posted abandonment costs and as well as the sale -- the divestment of land that we don't intend to build because we have agreed with our operations teams to not develop certain projects because we are unable to reach satisfactory profit margin levels. When it comes to the cost of adapting offering, as I've been saying all along, with -- we work in program by program, apartment by apartment, delivery day by delivery day. It's daily management. We're doing -- that's what we've been doing in H1. We want to make sure we always work in line with our priority. We're selling our inventory, and we don't want any unsold completed homes on reporting date. As Jean-Claude rightly said, we have very few homes to deliver that have yet to be marketed in H2, but we will make adjustments later on. But our priority remains debt reduction and optimizing WCR and also, of course, maintaining profit, operating profit. Regarding net financial debt, yes, our guidance remains unchanged. We want a debt trajectory that is significantly lower than 2023. In the first half, as you saw, we can simply say that our debt is significantly lower than it was in 2023. But you know that there's a strong seasonal effect in all line of business, and this gives you some idea of our debt profile at the end of the year. Now in terms of Nexity Property Management, we made an announcement regarding our NPM subsidiary. I'd like to remind you that when it comes to our property management business, we have 2 subsidiaries. NPM caters to the commercial sector in Accessite is different. And Accessite is not involved. But NPM, the revenue is lower than what you said, Christopher (sic) [ Christophe ], about EUR 55 million jobs. And it comes to bulk sales. Yes, the trend is not linear over the year, and that happens every year. It all depends on what contracts we sign. Now we signed an agreement with Caisse des Dépôts for a little over 10 units, and 50% of those are LLI eligible, but we're sticking to our targets. When it comes to bulk sales amounts, we want that amount to be pretty much the same as what it was last year.

I'm thinking what about the transformation costs and capital gain at the end for the year as a whole, the balance between transformation and capital gain. I mean you will come out with a surplus even though there are additional costs with -- for adaptation.

Well, yes, it will -- we're doing this very carefully line by line, and we have priorities in terms of selling our inventory and try to keep down the number of units completed and yet -- and so all this will be calibrated depending on our needs to sell off property and to see how many properties remain unsold. But this is very much in line with our plan.

The next question comes from Marie Fort from Bernstein.

Can you hear me loud and clear?

Yes, we can. Yes, we can.

I have a couple of questions. Number one, on this -- your efforts to cut prices down to anywhere between minus 6% and minus 10% at the beginning of the year, for Q1, you said that you were close to the lower end of that bracket. Is it still the case? The other question then, I'm sorry to insist, but the adaptation costs for the offer on H1, do you expect the same for H2? I mean you have less in terms of commercial property and because you have less of that lift, there should be less of a cost in adaptation. What about Morning and coworking, where do you stand in your strategic terms you decided to sell off NPM? What about that coworking? And if you look at the debt net on Slide 25, you see that the cash position was about, what is it, EUR 130 million. How much of that can be used to reimburse the debt due in 2025?

I'll start with the last question about the cash position. Of course, we include the cash available for Nexity. About 2/3 is held in co-development, so it will be only available after a certain timetable. And that depends on the co-developer to get the funds ready. But you have EUR 150 million immediately available, and you add that to the EUR 750 million of undrawn credit lines. So all in all, you arrive at EUR 1 billion. So it was EUR 250 million plus EUR 750 million, sorry. But of course, as to the use of that credit line, there's no limitation as to the adaptation costs. Just to give you a few words of context. This is done in line looking at 3 items. Customers lost 25% in purchasing power, but they regained about 5% because interest rates came down 54 basis points since the beginning of the year. And then we'll be monitoring this very carefully to see how this continues or not, the interest rates. And of course, they got 10% to 12% in purchasing power because of wage increases. So all in all, as we point out in our announcements, we have prices that can come down anywhere between minus 4% and minus 6%, and that depends on how advanced the construction is and the delivery date. So all these parameters are considered day by day. And that's why in our guidance, we -- well, we don't have a fixed amount, but we say positive operating income. But of course, we try to resize this as carefully as possible. We want to make sure that we sell our property, and there's no completed housing units unsold. Regarding the second question, property management is a -- sorry, Morning is a growth business, but that growth comes at a cost. And so we told the market that we were considering a deconsolidation of Morning from our scope. And so therefore, we need a strategic or financial partner to take that up. We're still looking. As to the proportion of -- go ahead.