Sekisui House : Transcript for Earnings Results Briefing for the Second Quarter FY2023

Sekisui House, Ltd.

Transcript for Earnings Results Briefing for the Second Quarter

FY2023 (WEB Conference)

Date	：	Thursday, September 7, 2023, 5:00 p.m. to 6:00 p.m. (JST)
Participants		Representative Director of the Board,
：	Yosuke Horiuchi
		Vice Chairman, Executive Officer

Executive Officer, Head of Investor

Relations Department

Atsushi Yoshida

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

Consolidated Financial Results".

[Page 3] Results Overview

The net sales recorded in the second quarter of the current fiscal year were a record high for a second quarter due to factors such as the stable growth of the rental housing and commercial buildings segment and supplied housing business in addition to the sales of properties in Japan. Operating income declined due to condominium deliveries in Japan and sales of properties owned by multifamily business in the United States during the second quarter of the previous year as well as the impact of sales being recorded before the price change in the Built-to-Order Business. The progress is mostly according to our plan, and we have achieved the second-highest level ever. Considering the state of rental housing orders received and the favorable trend of the Detached Houses Businesses, there is steady progress toward achieving the plan to reach new record-high profits during this fiscal year.

Net sales increased by 2.7% year on year to ¥1,462.4 billion. A new record-high was achieved through sales of real estate and developed properties in Japan.

Gross profit fell 2.7% to ¥293.3 billion. Gross margin decreased by 1.1p to 20.1%. The cost of sales increased due to the impact of soaring material prices as well as the goodwill which arose from the acquisition of Chesmar in the first quarter of the current fiscal year.

SG&A expenses increased by 8.5% to ¥168.4 billion. Personnel expenses increased by ¥5.3 billion, due partly to the increase in overseas subsidiaries. The SG&A ratio increased by 0.6p to 11.5%.

Operating income fell by 14.7% to ¥124.9 billion and the operating margin decreased by 1.8p to 8.5%. Overall, operating income for the first quarter accounted for 47.0% of the full-year plan, remaining on track.

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Non-operating income/expenses decreased by ¥0.9 billion year on year to ¥0.3 billion. Foreign exchange gain/loss decreased slightly year on year to foreign exchange gains of ¥2.3 billion.

Equity in earnings/losses of affiliates increased by ¥3.8 billion to ¥1.9 billion with the sale of shares of the hotel in the Fukuoka Daimyo Garden City. As a result, ordinary income fell by 15.2% year on year to ¥125.2 billion.

Extraordinary income was boosted following a gain of ¥8.2 billion from the sale of a commercial facility in Singapore.

Quarterly net profit attributable to owners of parent fell by 11.1% to ¥92.4 billion. EPS decreased by ¥14.75 to ¥140.31.

Overall orders increased by 9.9% to ¥1,593.9 billion.

[Page 5] Financial Position

Total assets increased by ¥269 billion from the end of the previous fiscal year.

Current assets increased by ¥278.4 billion. Of current assets, cash and deposits fell by ¥28.1 billion. Real estate for sale increased by ¥326.7 billion. Domestic real estate rose by ¥102.6 billion following active purchasing made by Sekisui House real estate companies, while the ongoing construction of multifamily business in the United States boosted overseas real estate for sale by ¥224.1 billion, including ¥92.8 billion in foreign exchange gains. Non-current assets decreased by ¥9.4 billion. Goodwill decreased by ¥11.5 billion due to the allocation of the acquisition cost of Chesmar being determined.

Total liabilities increased by ¥176.1 billion due to an increase in interest-bearing debt. Interest-bearing debt increased by ¥171.9 billion. D/E ratio increased by 0.08p from the end of the previous year to 45%.

Net assets increased by ¥92.9 billion due to factors such as the recording of quarterly net profit attributable to owners of parent and increase of cumulative translation adjustments.

Equity ratio decreased by 1.7p to 52.6%.

[Page 6] Cash Flow, Investment Status

Cash flow generated by operating activities decreased by ¥111.5 billion mainly due to the active purchasing of real estate for sale. Cash flow generated by investing activities increased by ¥61.3 billion year on year, mainly due to proceeds from the sale of investment securities connected with the sales of a project in Singapore, despite the progress in the acquisition of tangible fixed assets. Consequently, free cash flows declined by ¥50.1 billion. Cash used for financing activities increased by ¥72.1 billion year on year due to increases of short-term corporate bonds and short-term borrowings. Cash and cash equivalents at the end of the second quarter amounted to ¥304.4 billion.

Total investments include capital expenditures of ¥41.4 billion. Of this, investment in rental real estate comprised ¥28.7 billion.

The full-year plan figure of ¥85 billion remains unchanged.

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[Pages 7, 8] Segment Information (Built-to-Order Business)

The classification of reportable segments has been changed and comparisons and analysis are based on the revised classification.

Net sales in the Built-to-Order Business overall slightly declined to ¥618.8 billion. Operating income fell by ¥1.9 billion to ¥65.1 billion.

Net sales in the Detached Houses Businesses declined by 3.9% to ¥231.4 billion due to an ongoing decrease in the initial order backlog following the decline in orders during the second half of the previous fiscal year. Gross margin decreased by 0.5p to 23.0%. Of this, the impact of soaring material costs was around ¥1.2 billion. Profit margin is gradually improving from the effects of the cost pass-through effect. Operating margin decreased by 1.4p to 8.1%. From the second half of the year onwards, we expect further improvement of profit margins due to the diminishing impact of material prices compared to the previous fiscal year and our cost-cutting efforts. Orders received fell by 5.0% to ¥229 billion. The decline can be attributed to a high benchmark set in the previous fiscal year, as such, the situation is robust. Advance indicators such as the sales performance of land for sale and number of showroom visit reservations are promising, indicating potential for future improvement. The order backlog is almost unchanged. The unit price per building increased by ¥2.66 million year on year to ¥48.85 million.

Net sales in the Rental Housing and Commercial Buildings Business increased by 6.8% to ¥263.7 billion, maintaining steady progress. Gross margin decreased by 0.9p to 24.1%. Of this, the impact of soaring material prices was around ¥1.5 billion. Operating margin decreased by 0.2p to 15.0%. Orders remained strong, increasing by 9.7% to ¥272.5 billion. The adoption rate of ZEH for Sha Maison rental housing continues to grow, reaching 77%. Non-housing such as Zero-Energy Building (ZEB) offices has also increased significantly. The unit price per housing increased by ¥15.13 million to ¥156.74 million compared to FY2022.

Net sales in the Architectural/Civil Engineering Business fell by ¥7.5 billion to ¥123.6 billion, while operating income increased by ¥0.1 billion to ¥6.7 billion. The decline in sales is attributable to delays in construction progress due to orderer's terms caused by soaring material costs and other factors. The profit margin improved due to improved profitability. Orders received increased by ¥14.3 billion to ¥144.1 billion. Despite ongoing weak demand for civil engineering work, demand for architectural construction remains strong. Order activity itself remain relatively steady.

[Page 9, 10] Results by Segment-Supplied Housing Business

Net sales in the Supplied Housing Business as a whole increased by 4.8% to ¥409.4 billion. Operating income increased by ¥2.1 billion to ¥38.3 billion.

Net sales in the Rental Housing Management Business increased by 4.5% to ¥321.1 billion. Operating margin improved by 0.1p to 8.2%, showing continued stable growth.

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The number of units under management exceeds 700,000 with an occupancy rate of 97.7%.

Net sales in the Remodeling Business increased by 5.9% to ¥88.2 billion. Operating margin also rose by 0.2p to 13.7%. A strong customer base anchored continued stable growth in both detached houses and rental housing remodeling, thanks to large-scale remodeling such as the Family Suite Remodeling for detached houses as well as remodeling proposals crucial for managing rental properties stably in the long term. Overall orders increased by 2.2% to ¥88.9 billion. Orders remained strong from the previous fiscal year.

[Page 11, 12] Results by Segment-Development Business

Net sales in the Development Business overall increased by 32.4% to ¥248.5 billion. Operating income increased by ¥13.7 billion to ¥33.8 billion.

Net sales in the Real Estate and Brokerage Business increased by 18.7% to ¥130.2 billion. Gross margin improved by 0.6p to 20.4%. Orders increased by 29.6% year on year to ¥155.2 billion. Reinforcement of procurement of prime land and high real estate sales performance of the Sekisui House real estate companies were the contributing factors. Land inventory increased by about ¥64 billion from the end of the previous fiscal year.

Net sales in the Condominiums Businesses fell by 8.9% to ¥49.9 billion, and the operating margin decreased by 2.7p to 16.7%. This decline in sales and profit was due to the delivery of large tower condominiums in the second quarter of the previous fiscal year. However, sales activities for supplied properties were favorable, with orders amounting to ¥51.7 billion. Completed housing stock decreased by 47 units from the end of the previous fiscal year to 198 units.

Net sales in the Urban Redevelopment Business increased by ¥45.1 billion to ¥68.3 billion. Operating income increased by ¥12.5 billion to ¥13 billion. This was underpinned by the gain from the sale of shares of the Otemon Tower/ENEOS Building and Hommachi Garden City Terrace. Occupancy rates are recovering, particularly for luxury hotels, and have turned profitable in terms of net operating income.

[Page 13] Results by Segment-Overseas Business

Net sales declined by 16.5% year on year to ¥201.7 billion. Operating income fell by ¥33.7 billion to ¥12.4 billion, and the operating margin decreased by 12.9p to 6.2%. This decline in sales and profit was due to the large amount of properties sales and condominiums deliveries in the second quarter of the previous fiscal year. Orders received increased by ¥15.3 billion to ¥266.1 billion.

[Page 14] Overseas Business-Details by Country

In the United States, net sales increased by ¥7.8 billion to ¥184.4 billion. To break this down, the homebuilding business, bolstered by Chesmar's earnings, increased by ¥31.5 billion to ¥132.2 billion. Master-planned community business decreased sales by ¥8.7 billion to ¥30.1 billion. Multifamily business decreased by ¥14.9

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billion to ¥21.4 billion, as there was only one property sale this quarter compared to the sale of two properties in the second quarter of the previous fiscal year. Operating income fell by ¥20.7 billion to ¥14 billion. A closer look at the figures shows a gain of ¥1.4 billion in the homebuilding business, ¥8.4 billion in the master-planned community business and ¥4 billion in the multifamily business.

The decline of profit in detached houses was mainly due to determining Chesmar's goodwill. Profit declined by ¥4.7 billion compared to the initial plan. Excluding this effect, profit is higher than planned.

Orders increased by ¥45.6 billion year on year to ¥242.4 billion. With the addition of Chesmar, orders in homebuilding business increased by ¥59.5 billion year on year to ¥194.9 billion. Orders continue to be favorable despite the rise in mortgage rates. Order backlog increased by ¥73.1 billion from the end of the previous year to ¥207.9 billion, with homebuilding business accounting for ¥144.3 billion and master-planned community business accounting for ¥62.9 billion. The investment balance increased by ¥175.3 billion from the end of the previous fiscal year to ¥1,020.6 billion.

In Australia, net sales decreased by ¥27 billion to ¥16.6 billion. Operating income declined by ¥6 billion to a loss of ¥0.3 billion. Sales and profit declined due to the impact of the sale of land for development near Sydney and the delivery of condominiums in the same period of the previous fiscal year. Orders received fell by ¥27.2 billion to ¥23.2 billion. Sales of condominiums are expected to progress according to plan from the third quarter onwards. We plan to achieve the full-year plan by strengthening the sale of non-residential properties and detached houses. The investment balance increased by ¥42.6 billion to ¥214.2 billion.

In China, net sales fell by ¥20.6 billion to ¥0.5 billion, while operating income fell by ¥7 billion to a loss of ¥0.4 billion.

In Singapore, extraordinary income of ¥8.2 billion was recorded from the sale of a commercial facility. The investment balance is ¥38.8 billion.

[Page 16] Full-year Plan

Full-year plans remain unchanged based on steady orders in Japan and overseas.

Note: Matters previously described in the financial statements and documents subject to timely disclosure are

omitted.

Question

• What are the outlooks on the future sales trend and profitability against the plan in the homebuilding business as well as property sales in the multifamily business in the United States?
• What is the prospect for recovery in orders for Detached Houses Businesses in Japan?

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