Daiwa House Industry Co Ltd

TSE:1925

Earnings Call Transcript 2019-Q1

[Takeo Higuchi, executive]

We would like to present our first quarter results using the presentation material titled, Financial Highlights for Fiscal Year 2018 First Quarter.

Please turn to Page 1. Net sales grew 10.4% year-on-year to JPY 902.3 billion. Operating income was up 3.4% to JPY 75.3 billion, and ordinary income up 3.7% to JPY 77 billion. Net income attributable to owners of the parent increased 3.5% to JPY 52.4 billion. All items marked record numbers for the first quarter. Net sales grew for the 8th consecutive year, and operating income and ordering income grew for the 10th consecutive year. Earnings per share was JPY 78.83, up by 3.3% year-on-year. The bottom table is the overview of group companies. The number of group companies was 357 at the end of June 2018, with 44 additions and 4 subtractions since the end of March 2018. The change was mainly due to the inclusion of the following companies that are consolidated subsidiaries. Rawson Group, which consist of 28 companies, operating and Single-Family Housing business in Australia and Royal Gate, which provides cashless payment services in Japan.

Page 2 illustrates our analysis of major factors for changes in net sales and operating income. The top half shows analysis of factors contributing to the increase in net sales, which grew JPY 84.9 billion year-on-year. Sales of development properties increased JPY 22.7 billion. Logistics, Business & Corporate Facilities business increased JPY 34.8 billion. The Commercial Facilities business increased JPY 15.7 billion. The condominiums business increased JPY 5.7 billion. Sales inclusion of Rawson Group as consolidated subsidiary increased JPY 4.3 billion. Sales of the Rental Housing business grew JPY 3.8 billion. Other businesses increased JPY 6 billion, including JPY 2.5 million from selling margins and JPY 1.6 billion from construction support business.

The Single-Family Houses business decreased JPY 8.7 billion. The bottom half shows factors contributing to the increase in operating income, which grew JPY 2.5 billion year-on-year. Top line growth brought JPY 11.9 billion increase. Increased income from sales of development properties contributed JPY 6.5 billion.

Selling, general and administrative expenses increased JPY 5.8 billion. Cost of sales ratio, excluding the sale of development properties, deteriorated 1.3 percentage point, and resulting in decreased income of JPY 10 billion.

Page 3 and 4 show the profit and loss summary. I already reported numbers earlier, and operating income margin had deteriorated by 0.6 percentage point year-on-year from 8.9% to 8.3%.

Major companies contributing to sales increase are: Daiwa House on a nonconsolidated basis by JPY 31.9 billion year-on-year. Fujita grew by JPY 19.4 billion, and Daiwa Living grew by JPY 10.2 billion. Major companies contributing to operating income increase are: Daiwa House on a nonconsolidated basis by JPY 1 billion year-on-year; and Daiwa Living Group by JPY 1.2 billion.

Please turn to Page 4. Selling, general and administrative expenses in the top table increased JPY 5.8 billion year-on-year, of which JPY 3.6 billion was due to high personnel costs, resulting partly from headcount increase of around 2,200 compared to the end of June 2017.

Next, let me present the balance sheet. Please look at the top table on Page 5. Total assets decreased JPY 11.3 billion to the end of March 2018 to JPY 4,023.7 billion; current assets stood at JPY 1,665.6 billion, down by JPY 64.4 billion, mainly due to decreases in cash deposits and accounts receivables; noncurrent assets stood at JPY 2,358.1 billion, up by JPY 53 billion. Intangible assets increased by JPY 23.6 billion since the end of March 2018. This was mainly due to recording related to Rawson Group. Total inventories, shown in the bottom left, stood at JPY 846.9 billion, up by JPY 62.6 billion. Land for sale for others decreased JPY 11 billion, and building for sale for others decreased JPY 14.7 billion, mainly due to the sale of developed real estate to Daiwa House REITs. Land for sale for overseas business increased JPY 27.9 billion, and buildings for sale for the overseas business increased JPY 3.7 billion. This was mainly due to Rawson Group and a new project in Nantong, China. Total property, plant and equipment in the bottom right increased JPY 42.3 billion on the back of steady progress, investment in real estate development and so on.

Page 6 shows liabilities in net assets. Liabilities stood at JPY 2,508.8 billion decreased by JPY 12.6 billion through the end of March 2018. Net assets were JPY 1,514.9 billion, up by JPY 1.3 billion. Interest-bearing liability, shown in the bottom table, increased JPY 53.6 billion to JPY 834.2 billion at the end of June 2018. Debt equity ratio stood at 0.57. Net assets ratio stood at 36.6%.

Page 7 illustrates sales and operating income by segment. The top half shows sales. Sales increased in all segments, except in the Single-Family Houses business. The increases in operating income are as follows: the Commercial Facilities business segment, up by JPY 4.5 billion; and Logistics, Business & Corporate Facilities business segments, up by JPY 1 billion.

Page 8 shows sales gross profit and gross profit ratio of each segment by category: construction, rental management and sale of development properties.

Page 9 states the breakdown of investment real estate. The book value of investment real estate was JPY 971.9 billion at the end of March 2018 and JPY 1,014.9 billion at the end of June 2018, increased by JPY 43 billion in 3 months. The book value of real estate available for sale was JPY 685 billion, of which properties being rented were JPY 236.1 billion, and not being rented JPY 448.8 billion. A breakdown of real estate available-for-sale by type is indicated in the top right. Logistics facilities were worth JPY 504.2 billion, and continue to be our core investment.

The bottom table shows the breakdown of rented real estate available-for-sale. Rented profit earned in real estate in NOI yield. NOI yield of real estate available-for-sale was 6.4%, improved by 0.3 percentage points compared to the end of March 2018. NOI yield of profit earning in real estate was 12.3%, improved by 0.2 percentage points compared to the end of March 2018.

From Page 10, earnings forecast for the fiscal year, ending March 2019, are presented. The forecast remain unchanged from our announcement in May 2018.

Page 11 and 12 show earnings forecast by segment, and they also remain unchanged.

Page 13 and 14 shows Daiwa House's results and forecast of orders received and sales by segment on a nonconsolidated basis for this fiscal year. The forecast remain unchanged from our announcement in May 2018.

Page 15 illustrates the progress of the investment plan. In 3 months, we invested JPY 55.7 billion for real estate development, JPY 22.7 billion for January capital investments and JPY 42.2 billion for merger and acquisitions. We invested JPY 120.7 billion in total, and related investment spend is JPY 557 billion out of JPY 720 billion plan for real estate development during the 3-year fixed medium-term management plan. Our cash flow stands as shown in the consolidated statement of cash flows in the bottom table.

The top table on Page 16 show the number of rental housing units, managed and occupancy rates. The occupancy rate at the end of June 2018 was 95.7%, up by 0.3 percentage points compared to the end of June 2017. The middle part show the stock of completed condominium, which stood at 363 units, including 23 units, with orders recognized at the end of June 2018. The bottom table shows the cumulative overseas investment balance, which was JPY 228.7 billion at the end of June 2018.

Page 17 indicates the sale status of the overseas condominium business. In China, sale of 3 condominium projects have been progressing steadily. In Vietnam, the contract ratio of first stage of mid-term project was 99%. We began the second stage sales from March 2018 and the contract ratio was 99%. The project has also been progressing steadily. This completes the presentation.