Sekisui House : Transcript for Earnings Results Briefing for FY2022

Sekisui House, Ltd.

Transcript for Earnings Results Briefing for FY2022

(WEB Conference)

Date	:	Thursday, March 9, 2023, 5:00 p.m. to 6:00 p.m. (JST)
Participants	:	Yosuke Horiuchi	Representative Director of the Board, Vice Chairman, Executive Officer
		Atsushi Yoshida	Executive Officer, Head of Investor Relations Department

Note: The following generally omits the details of the financial results presented in the "Summary of

Consolidated Financial Results".

[Page 2] Results Overview

Record highs were achieved for sales and operating profits in the final year of the Fifth Medium-Term Plan. With this increase in profits, dividend per share increased by ¥20 year on year to ¥110.

Net sales increased by 13.1% year on year to ¥2,928.8 billion. Sales grew for all business models. Contributing factors include sales in the Built-to-Order Business of ¥78.6 billion, ¥44 billion in the Supplied Housing Business, ¥79.6 billion in the Development Business, and ¥132.1 billion in Overseas Business, as well as the strong performance in the domestic and international housing business and progress in property sales.

Gross profit increased by 10.5 % to ¥584.2 billion. Gross margin decreased by 0.5p to 19.9%. This was due to high material costs, but was within expectations. Increased profit in the Development Business and Overseas Business contributed to the increase in gross profit.

SG&A expenses increased by 8.1% to ¥322.8 billion. Personnel expenses increased by ¥13.2 billion due to increase in overseas subsidiaries. The SG&A ratio decreased 0.5p to 11%, partly due to the increase in net sales.

Operating income increased by 13.6% to ¥261.4 billion. Operating margin was 8.9%, staying at the same level as the previous fiscal year.

Non-operating income/expenses decreased by ¥4.1 billion from the previous fiscal year to -¥4.2 billion. Foreign exchange gain/loss decreased by ¥1.8 billion from the previous fiscal year to a foreign exchange losses of ¥0.7 billion.

Equity in earnings/losses of affiliates decreased by ¥0.8 billion from the previous fiscal year to a loss of ¥2 billion. This includes the investment valuation loss of ¥1.7 billion in connection to the liquidation of a partially-owned company in the United Kingdom included in the first quarter. As a result, ordinary income increased by 11.8% year on year to ¥257.2 billion.

Extraordinary income was ¥17.2 billion after calculating the liquidated profit from the liquidation of a condominium project in Suzhou and Wuxi in China.

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Including impairment loss on the Shenyang hotel of ¥2.1 billion, provision of allowance for doubtful accounts in the United Kingdom business of ¥1.9 billion, and loss on sales of fixed assets, etc., extraordinary losses were ¥6.7 billion.

Yearly net profit attributable to the owners of parent increased by 19.9% (¥30.6 billion) to ¥184.5 billion. EPS increased by ¥49.21 to ¥276.58.

[Page 4] Financial Position

Total assets increased by ¥206.3 billion compared to the end of the previous fiscal year, due to the acquisition of Chesmar Homes in July last year, among other factors.

Current assets increased by ¥141.1 billion. Of current assets, cash and deposits fell ¥182.3 billion. Real estate for sale increased by ¥258.7 billion to ¥1,435.4 billion. Domestic real estate increased by ¥51.6 billion and overseas real estate increased by ¥207 billion. In addition to the increase relating to the consolidation of Chesmar as a subsidiary, there was an increase of ¥102.9 billion in effects of foreign exchange rates. Non-current assets increased by ¥65.1 billion. Of noncurrent assets, property, plant and equipment rose ¥13.8 billion. Goodwill from the consolidation of Chesmar and Maruhon as subsidiaries was ¥31.4 billion.

Despite the decrease in corporate bonds, total liabilities increased by ¥59.7 billion due to increase in borrowings, etc. Interest-bearing debt increased by ¥57.3 billion. Of the decline of approximately ¥80.6 billion in Japan and increase of ¥137.9 billion at overseas subsidiaries, the effects of foreign exchange rates were ¥50.7 billion. D/E ratio decreased by 0.1p from previous fiscal year to 37.2%.

Net assets increased by ¥146.5 billion. Retained earnings and cumulative translation adjustments increased by ¥52.4 billion. Equity ratio increased by 1.7p to 54.3%.

[Page 5] Cash Flow, Investment Status

Cash flow generated by operating activities increased by ¥7.4 billion. While the corporate tax payments, etc. increased, increase in inventory during the period declined. Cash flow generated by investing activities decreased by ¥51.7 billion due to the purchase of Chesmar as well as the addition in investment in rental real estate. As a result, free cash flows decreased by ¥44.2 billion. Cash used for financing activities decreased ¥44 billion due to redemption of hybrid bonds of ¥120 billion, dividend payments and the repurchase of company shares. Cash and cash equivalents at the end of the year amounted to ¥332.7 billion.

As for the investment situation, capital expenditures were ¥95.3 billion. Of this, investment in rental real estate comprised ¥78.3 billion.

Capital expenditures for FY2023 is ¥85 billion. Of this, ¥65 billion is planned for rental real estate.

[Pages 6, 7] Segment Information (Built-to-Order Business)

Net sales in the Built-to-Order Business overall increased by 7.9% to ¥1,077.3 billion. Operating income was ¥109.9 billion. Custom Detached Houses Business and Architectural/Civil Engineering Business decreased in income, while Rental Housing Business increased in income.

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Net sales in the Custom Detached Houses Businesses remained flat at ¥352.4 billion. Gross margin decreased by 1.4p to 25.1%. Operating margin decreased by 1.1p to 10.9%. Orders received was ¥344 billion. The order backlog decreased by ¥8.4 billion. The ZEH ratio was 90%. ASP per building increased by ¥3.54 million year on year to ¥46.19 million.

The impact of increase in material costs affected the detached housing, rental housing, and houses for sale businesses, totaling ¥27 billion during the Fifth Medium-Term Plan period. The affected segments covered the factors constraining the earnings and achieved a cumulative increase of ¥20 billion (total of detached housing and rental housing) over the three years.

Net sales in the Rental Housing Business increased by 11% to ¥426.1 billion. Sales increased significantly in line with robust receipt of orders and strong progress in construction. Gross margin decreased by 1.1p to 24.6%. Operating margin decreased by 0.9p to 13.7%. Orders received increased by 9.3% to ¥426.4 billion. Sha Maison rental housing continued to show favorable results. The adoption rate for Sha Maison ZEH increased to 65%. ASP per building also increased by 11% year on year to ¥141.61 million. The ratio of three-to-four-story houses also remained high at 87.1%.

Net sales in the Architectural/Civil Engineering Business increased by ¥36.8 billion to ¥298.7 billion. Operating income decreased by ¥1.9 billion. Although the profit margin decreased due to competition for orders in the industry and rise in material costs, recent improvement in profit margin was better than the revised plan. Orders received decreased by ¥31.9 billion to ¥301.6 billion. The architectural business remained flat but the public works orders in the civil engineering business decreased.

[Page 8, 9] Results by Segment-Supplied Housing Business

Net sales in the Supplied Housing Business as a whole increased by 5.9% to ¥785.1 billion. Operating income increased by ¥2.1 billion to ¥78.2 billion.

Net sales in the Remodeling Business increased by 6.2% to ¥165.9 billion. Operating margin also improved by 0.2p to 16.6%. Remodeling remained strong in custom detached houses and rental housing. This strong growth was due to large-scale remodeling such as Family Suite Remodeling for detached housing performing well with the increased use of subsidies. Remodeling proposals that are vital to long-term stable management of rental housing showed continued stable growth atop a strong customer foundation. Sales of remodeling for rental housing increased by 10% year on year to ¥51.7 billion, accounting for one-third of the net sales and we recognize this as a business with high potential demand. Orders received increased by 5% to ¥169 billion.

Net sales in the Real Estate Management Fees Business increased by 5.9% to ¥619.2 billion. Operating margin decreased by 0.4p to 8.2%. Despite the impact of temporary increase in costs associated with the establishment of Sekisui House Real Estate Holdings, high occupancy was maintained and rent level increased.

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The number of units under management is about 691,000 with an occupancy rate of 97.8%.

[Page 10, 11] Results by Segment-Development Business

Net sales for the Development Business overall increased by 20.7% to ¥464.4 billion. Operating income increased by ¥10.9 billion to ¥49.2 billion. Sales and profit increased in all segments.

Net sales in the Houses for Sale Business increased by 24.4% to ¥238.2 billion. Gross margin improved by 0.1p to 18.1%. Orders received increased by 23.7% year on year to ¥249.6 billion. Effort was put into ongoing purchases of land in prime areas. Land inventory increased by about ¥53.6 billion from the end of the previous fiscal year.

Net sales in the Condominiums Business remained flat from previous fiscal year at ¥90.8 billion. Operating margin also improved by 0.9p to 14.7%. Delivery of the residential tower completed at the end of the previous fiscal year in the Umeda area of Osaka significantly contributed to the profit. Orders received were at the same level as the previous year, at ¥84.2 billion. Completed housing stock increased by 80 units from the end of the previous fiscal year to 245 units. Multiple properties were completed in January this year, resulting in a temporary increase in inventory, but sales progressed smoothly.

Net sales in the Urban Redevelopment Business increased by ¥32.5 billion to ¥135.3 billion. Sales from the sale of properties were ¥94.8 billion. Operating income increased by ¥3.7 billion to ¥15 billion. Sales of Prime Maison to Reit, sales of development properties such as Akasaka Garden City stakes and sales of properties owned by Sekisui House Real Estate progressed, securing profits exceeding the plan. In addition, in the Hotel Business, occupancy is recovering thanks to mitigation of entry restrictions.

[Page 12] Results by Segment-Overseas Business

Net sales increased by 34% to ¥521.1 billion. Operating income increased by ¥23.7 billion to ¥73.8 billion. Operating margin also improved by 1.3p to 14.2%. Orders received decreased by ¥14.2 billion to ¥418.5 billion.

[Page 13] Overseas Business-Details by Country

In the United States, net sales increased by ¥137.1 billion to ¥434.5 billion. To break this down, the multifamily business completed sales of four properties this year as planned, making net sales of ¥80.5 billion, an increase of ¥18.1 billion from the previous fiscal year. The master-planned community business decreased sales by ¥1.3 billion from the previous fiscal year to ¥74.1 billion. The homebuilding businesses increased net sales by ¥121.1 billion to ¥279.9 billion through consolidating the Holt Homes from the first quarter and Chesmar from the third quarter. Operating income increased by ¥16 billion to ¥63.4 billion. The multifamily business conducted a review of property evaluations due to the delayed recovery of the office environment in San Francisco, resulting in profit of ¥6.8 billion. The master-planned community business recorded a significant increase in profits with ¥23.1 billion due to strong sales. In the homebuilding businesses, Woodside Homes showed significant increase in profit. With Holt and Chesmar, profit totaled ¥34.2 billion.

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Orders received increased by ¥1.7 billion to ¥339.4 billion. In the Multifamily Business, orders received was ¥65.5 billion, including one property planned to be delivered during this period. The homebuilding businesses increased by ¥32.9 billion to ¥200.6 billion with the addition of two consolidated subsidiaries. Of this Wodside Homes show decrease of approximately 20% due to slowdown of sales from June last year. The decrease was 44.3% in terms of units and 35.6% in terms of dollars. The order backlog is ¥66.4 billion. Sales status declined in the latter half of the previous year due to raise in mortgage interest rates but the rise in interest rates has stabilized recently. There are some months that result in a positive to the same months of the previous year. FY2023 is expected to be an adjustment phase but significant recovery is expected from the end of this period. Based on thorough PMI of the three companies in charge of housing sales, we are working to improve earnings as well as adoption of Sekisui House technologies. The investment balance increased by ¥264 billion against the end of the previous year to ¥845.3 billion due to M&A and other factors.

In Australia, net sales increased by ¥28.2 billion to ¥62.5 billion. Operating income increased by ¥9.1 billion to ¥5.1 billion. The increase was contributed to by the delivery of condominium and property sales in Sydney and the homebuilding businesses. Orders received increased by ¥8.6 billion to ¥74.5 billion. Custom detached houses and condominiums is expected to continue to be in adjustment phase while mortgage rates remain high. The investment balance rose ¥7.1 billion yen to ¥171.6 billion.

In China, net sales decreased by ¥33 billion to ¥23.9 billion. Operating income decreased by ¥0.9 billion to ¥6.9 billion. With the completion of all condominium project deliveries, the order backlog was zero. The investment balance decreased by ¥16.6 billion against the end of the previous year to ¥4.9 billion. Progress is steady toward the completion of projects in the Sixth Mid-term Management Plan, including the liquidation of project companies in Suzhou and Wuxi.

In Singapore, the equity in earnings of affiliates increased by ¥0.4 billion to ¥1 billion. The investment balance stood at ¥41.8 billion.

[Page 15] Full-year Plan

In FY2023, net sales increased by 5.2% year on year to ¥3,080 billion. Operating income is expected to increase by 1.3% to ¥265 billion. Ordinary profit is expected to be ¥259 billion. Extraordinary income and extraordinary losses are expected to be a net ¥16 billion. Yearly net profit attributable to the owners of parent is expected to be ¥193 billion. EPS is expected to be ¥295.05. ROE is expected to be 11.6%. The annual dividend per share is planned to be increased by ¥8 from the previous fiscal year to ¥118, marking a 12th consecutive period of dividend growth.

In the Sixth Medium-term Management Plan, in addition to maintaining an average dividend payout ratio of 40% or more, we aim to further improve the stability of shareholder returns by setting a minimum dividend of ¥110, the same as the performance in FY2022. Additionally, repurchase of company shares will be carried out flexibly, with the Board of Directors resolving to increase the upper limit by ¥10 billion from the previous year to ¥40 billion for FY2023.

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