Atal SA

WSE:1AT

Earnings Call Analysis

Atal Group Reports Strong Revenue Growth Amid Market Challenges

In Q3 2024, Atal Group achieved PLN 1.215 billion in sales, a 41% increase year-over-year, with 806 flats handed over. Despite growth, gross margins decreased to 27.4%, reflecting market pressures. The company successfully started 22 construction projects, showing resilience in a challenging environment. With nearly 90% of their current flats contracted for sale, Atal expects sales to improve with planned 2,100 deliveries in Q4 2024. Looking ahead to 2025, they anticipate sales exceeding 2,500 units, driven by ongoing projects. Their commitment to maintaining a healthy dividend policy remains strong, with a PLN 259 million payout in Q3.

Robust Revenue Growth Amid Market Challenges

In the third quarter of 2024, Atal Group reported revenues from sales amounting to PLN 1.215 billion, marking a substantial increase of 41% compared to the same period last year. This growth was supported by the higher number of flat handovers, emphasizing the company's operational strength despite prevailing market difficulties.

Margins and Profitability Insights

The company's gross margin on sales stood at 27.4%, while the net margin was recorded at 21%. Notably, gross margins saw a decrease of 3.6 percentage points year-over-year. For Q3 alone, margins showed improvement with a gross margin of 25.8% and a net margin of 19.5%, reflecting steady operational efficiency.

Sales Trend and Future Expectations

Despite a challenging sales environment, Atal remains cautiously optimistic. The total number of flats sold in the first three quarters was 1,630, down 14% from the previous year. Looking ahead to Q4 2024, management anticipates selling around 2,100 to 2,500 flats, highlighting a slight recovery. However, they expect no immediate breakthrough in sales compared to Q3, with a potential rebound anticipated in 2025.

Strong Handovers and Completion Plans

In Q3 2024, Atal handed over 806 flats, with total handovers amounting to 2,021 flats over the first three quarters, an increase of 26% year-over-year. The company aims to finalize the handover of approximately 3,062 flats in 2025, nearing a sales contracting level of 50%. This robust pipeline sets promising ground for future revenue generation.

Strategic Land Acquisitions Supporting Future Growth

Atal has invested PLN 324 million in land acquisitions across its operational markets, which will facilitate the development of 185,000 square meters of saleable area. The current land bank will enable the construction of 649,000 square meters of flats, positioning the company well for future projects. Nevertheless, management anticipates less aggressive land purchases in early 2025, planning to reassess market conditions.

Dividend Commitment and Financial Stability

Reflecting a commitment to shareholder value, Atal declared and paid a dividend of PLN 259 million, constituting 76% of its profit from the previous year. This approach underscores the company's robust financial health and resilience, even amidst fluctuating demand in the housing market.

Addressing Market Conditions and Future Outlook

The current market is characterized by high interest rates, which are dampening buyer interest, particularly among lower-income families. Management noted that while there is hope for a shift in interest rates and potential supportive government programs in 2025, the prevailing economic conditions necessitate strategic adjustments. Notably, Atal is positioning itself for recovery, maintaining an optimistic outlook for increased sales beginning in 2025.

Ongoing Adjustments to Sales Strategy

In response to current market dynamics, Atal is actively adjusting its sales policy. Although competition remains fierce, the company is implementing strategies to retain market relevance while focusing on premium segments. The adjustments include monitoring pricing strategies and enhancing marketing efforts tailored to diverse buyer profiles.

Earnings Call Transcript 2024-Q3

[Andrzej Biedronka-Tetla, executive]

Good morning, ladies and gentlemen. Welcome to the quarterly conference presenting Atal Group's operating and financial results for Q3 2024. Today's conference will be participated by the CEO of Atal, Zbigniew Juroszek.

Good morning, and my name is Andrzej Biedronka-Tetla. I'm member of the Board for Finance. In the first part of the conference, I would like to give you a presentation on our financial and operational results. And after that part, the CEO will comment on the current operating situation, situation on the market of development -- of housing development. And in the third part, we will, as usually give the floor to you to ask questions through the Q&A panel.

Let's start with the presentation and operating results in Q3 2024. Now just to summarize the map that we keep presenting to you. It shows our presence in the biggest cities and agglomerations throughout Poland. We have had 8 branches since recently, where we carry out development activities. The newest, the latest one is Szczecin, where we have one investment, and we're planning one more on land that is already purchased. So currently, we're having 42 projects in progress for more than 9,000 flats. And what we're planning on our land that we have ownership of or perpetual user [indiscernible], we're planning to implement 41 investments or projects for more than 11,700 flats.

And after this summary of the presence in the country, let's move on to sales, which as usually brings a lot of emotions in the comments. These sales in the first 3 quarters of 2024, we signed preliminary agreements like 1,630 such contracts, which is a drop by 14% to an analogous period of the previous year. And the bottom chart shows you that in Q3 2024, it was 355 flats. The level is similar to Q3 2024.

I'm not going to ponder on that longer because probably it will be commented on by the CEO later on. And probably we'll have some questions regarding that. Here's some information about our rank as compared to other developers. 1,630 flats give us the fourth rank among Polish developer companies.

And flats in offer, probably we need some more comment here because the offer has increased by over 7,000 flats in Q3, which is the result of, first of all, introducing a large number of new investments into the sales offer and launching and starting some construction projects that we will see in the revenues for consecutive years. Here, we are planning on the future after 2025. And in consecutive slides, we're going to show you in the balance sheet items, how it translates these new investments started -- how they translate into our results.

Now handovers. In Q3 alone, we handed over 806 flats, mainly in the Tri-City, 301; and in Aglomeracja, 190; and in Poznan, 142 that was Q3 alone. As for all the 3 quarters of this year, these were like Tri-City, that's 438, but also in Lódz and Poznan, quite a lot in [indiscernible]. So altogether in those 3 quarters, we handed over 2,021 flats. As for handed over flats in the first 3 quarters, it's an increase by 26% in terms of the number of handed over flats as compared to the first 3 quarters of 2023 from 1,606 to 2,021 from January to September 2024.

As for handovers in the first 3 quarters, but in terms of the salable area and square meters, it's an increase by 37%. So as you can see, it's a bigger increase as compared to the number of flats, which means that we hand over bigger flats simply. New land. In the first 3 quarters, we spent PLN 324 million, which will allow us to build PLN 185,000 total salable area of slats.

In Q3 alone, we spent PLN 150 million on land. And in the 3 quarters, we've purchased in all the cities where we are present, we purchased land and the average price per square meter was -- of total salable area was PLN 1,753. The land bank that we have as of the end of September this year will allow us to build 649,000 square meters of total saleable area. As for the dividend, to summarize, this piece of information was shared in the previous quarter.

In Q3, we actually did pay out PLN 259 million of dividend, which constitutes 76% of profit of Atal for 2023. And here, I think we can say that this year, looking at our results, financial results that we're presenting for now, the Management Board will try and hold to this dividend policy and keep paying out the dividend.

As for potential handovers in 2024, all the investments that we've actually completed, they are in gray. The only project is Skwer Harmonia in Kraków, which is completed, but we're working for the permit for use to be issued. And here, we are expecting to get this permit soon. So it's going to be handed over in Q4 2024, those flats under this investment. If you have a look at this quite important piece of information, which is sales contracting, it's already at the level of almost 90%. At the end of September, it was 88%.

Majority of those investments, as you can see, these flats are fully sold. This will allow us to achieve revenues from sales after handed over those flats. What's also important is the number of not handed over flats by the end of September on the terminated projects was about 600. So 400 of them will be handed over in Q4. As for handovers in 2025, these are the projects that we're planning to finalize and handover in 2025.

So here, we'll be finishing investments of covering 3,062 flats. At the end of September, it was 3% of contracting. Now we're approaching the level of 50% of sales contracting. Those floods that will be hanging over like in ATAL City Square at the beginning of the year, large level of contracting. So majority of them is already sold, but there are also some flats that will be handed over later on. So we have still some time to sell it to new buyers.

As for the total potential of handovers of projects after 2025. So flats that will be handed over from 2026 onwards, here in this potential, we have 67 projects were covering 17,570 flats. And these are actually undertakings that will be handed over where the flats or premises will be handed over in 2026 and onwards and consecutive years, and that's where we'll see the results from them.

Now let's move on to consolidated financial results. Let's start with profit and loss account. In 2024, after Q3, we had PLN 1.215 billion of revenues from sales with which regarding the higher number of handover compared to the previous period this year -- similar period this year is an increase of revenues by 41%. The gross result on sales is PLN 333 million and net result for the 3 quarters is more than PLN 254 million. As for gross margin on sales in Q3, it was at the level of more or less 27.4% and net margin at the level of 21%.

And let us also have a look at some more charts. This increase in revenues period-to-period is 41%. Gross margin on sales dropped by 3.6 percentage points. Net result is higher by 30% and net margin as compared to the analogous period of the previous year is 1.8 percentage point lower. And let's have a look at gross margin on a quarterly basis. Q3 alone of this year.

So gross margin on sales is 25.8%. So it's higher than in Q2. And net margin by quarter is 19.5% in Q3. So it's higher than in Q2. As for the balance sheet, some shifts of assets, assets increased by 2%. I will give you more details on the reasons for it. As for liabilities, this -- the equity is at the same level, almost the same amount and liabilities in total increased due to some development projects ongoing. And these liabilities are related to flows, obviously, which is the result of increased performance implementation of development activities on a broader scale.

Let's move on to the key items in the balance sheet. Inventory at the level of PLN 3.141 billion. So it's an increase as compared to previous periods, and I will comment on that in a moment. As for cash, it's a drop by PLN 157 million. But note that in Q3, we paid PLN 260 million of dividend, and we purchased land worth PLN 150 million, and we increased the number of development undertakings in progress. So if you have a look now on the other side of the balance sheet, you see the liabilities that increased to PLN 1.913 billion and equity at the same level as last year.

When you have a look at inventory, PLN 3.141 billion is an increase by PLN 473 million as compared to 2023. And note that this is mainly work in progress, so commenced construction. And finished products increased by PLN 51 million. But if you remember, 650 flats at the end of September, these are the flats that we have not handed over just yet, but they're finished.

As for maturity of debt structure, here again, you can see there's no shift between short-term and long-term liabilities. Actually for now, as for financial liabilities, what we have left is PLN 340 million of bonds that will be -- to be mature in 2025, also loans granted by the shareholder, PLN 300 million and a loan -- bank loan of PLN 100 million. So for 2026, we have no liabilities as for now or for redemption that will be mature or to be redeemed.

As for financing sources, usually -- as usual, it's equity, PLN 1 billion -- PLN 1.7 billion almost. Prepayments from customers, PLN 663 million and then corporate bonds, loans granted by the shareholder and bank loans. And to summarize our operating results and our operating activities, I wanted to note that in this period of 3 quarters of 2024, we started the construction of 22 projects. 19 of these investments were introduced to sales offer, and we completed -- finalized 9 investments. So you can see the scale of our activities and operations that will be increasing in consecutive years. After 2025, we will see it in our results.

So I think this is all as for the presentation. Now I would like to give the floor to the CEO to comment on the current situation on the market and in Atal, and then we'll ask you to post your questions.

[Zbigniew Juroszek, executive]

Ladies and gentlemen, as you can see from the presentation, despite a worse situation on the market, these offensive activities carried out by us are done so that we have a lot of products while the situation -- economic situation is improved. We have not just stopped any future project, but we also started new ones. And in 2026, we will see the results. In 2025 at the end of the year, there will be some outcomes of that.

Current sales and handovers are on schedule. So despite the difficult situation that we have on the market, I think we function according to our assumptions, and we're not expecting any major differences in terms of the final result after Q4. So I think we can say it's a success. You will probably ask about it in your Q&A session. You're worried about smaller sales. We're double that worried, but that's the situation. It is as it is.

In November, we already see some improvement, though. But yet, there will be no breakthrough in Q4 as compared to Q3. That's not something we could anticipate. So we're hoping for a change of trend in 2025. Obviously, there are some things that we do have impact on, and we do everything we can, even in excess. We are very offensive on the market. But there are also some aspects that we don't have impact on like financing, for instance.

We have 2 situations, very expensive interest rates that are persistent that have been quite high for a long time, which eliminates a large part of the society from the market, unfortunately. And also, this element of waiting for some decreases. There are all kinds of announcements. I don't want to play this game. We'll see. It will be as it will be, right?

And in 2024, there has been this support program that was announced, but it's suspended. Perhaps it's going to be launched or not. I don't know. We don't know that in next year, perhaps but we don't know. We don't have impact on that. I've already commented on it that it's very small, very limited, but very needed. But unfortunately, what prevails is the media messages that are detrimental for the buyers that there's no scheme like that.

But before we move on to quarrel with those who don't write, I suggest that you look at the numbers in the entire Europe, the fixed rate cost of loan in Western Europe is 3%. And well, when we talk about fixed rate, it's 7.58% in Poland, even more. So it's difficult to handle if we're saying that some part of the society is -- well, all theses -- it all depends on the number of children, flats, age. So it all kind of affects the group of people who have the availability. If we support them with money that is not on the market, where is the problem? It's quite hard to understand that.

So the situation on the market is that the customer has a huge problem with it. We actually sell things to rich or moderately rich people. That's what we have to rely on and we eliminate from the market, those customers that cannot afford it. There are some pseudo announcements of flats for rent. If anybody did this in the right way, the results would be visible in 10 years or so.

So it's difficult to understand that, but the situation is as it is. And we're hoping for the first scenario that the interest rate will start dropping and with dropping interest rates, we'll have a lot of diversified products on various land, broadly affordable and available, and we hope to be successful in this area. What do we have in exchange in this situation? What we have is good availability of contractors, no limitations, no problems here. Prices of materials are not increasing. They're sometimes even decreasing.

So in this respect, it's okay. So that's the good part of the market, the good side, but it's not very good for the economy because it's not based on nothing, these lower corporate tax or VAT earnings. So if we have like lower production programs and in return, we have social programs, the effect cannot be different. But we're hoping for a change of trend. Wherever we can, we improve our internal organization, and we try and use the time for even better and well-tailored products for the market.

So yes, let's move on to the Q&A session perhaps. Use the Q&A option, and we'll be back in a minute to answer your questions.

[Andrzej Biedronka-Tetla, executive]

Right. We'll try and answer all the questions that you have asked. Some questions will be combined because they repeat themselves, they concern the same issues.

First question, how many flats has the company added to the offer in 9 months -- in the 9 months of 2024?

In Q3, like 300 -- 738 in Q3, in 3 quarters, and in Q3 alone, 742 flats in Q3 alone.

The next question, what do you think about sales in the last quarter of the year? How many flats are you planning to sell in 2024?

[Zbigniew Juroszek, executive]

We've already mentioned the situation. In Q4, these sales are a little bit better than in Q3, but it's not that much better to change -- to implement the anticipated sales of 2,300 to 2,500. It's going to be probably about 2,100 or a little bit more. We keep seeing this question. The situation is a little bit better, but not better enough to change the situation with regards to our anticipation and forecast.

During the previous conference, you mentioned that Atal purchased land in [indiscernible] but it's not actually decided on whether it's going to be resold or whether it's going to remain within the group. We have no decision. We have some design work ongoing. Obviously, in the new branch, it's not our priority. Our priority is to finalize the investments that are in progress in the current branches and launching some other investments in the current branches. So this has the least priority, this issue. But we do have it and we carry out the project, but without having started it yet.

[Andrzej Biedronka-Tetla, executive]

Two more questions concerning sales in the first weeks of Q4. What sales are we expecting in 2025? And how many new flats -- well, actually, this is a new question maybe. How many new flats are you planning to add to the offer in 2025?

[Zbigniew Juroszek, executive]

As for question -- as for Q4, we have 8 new projects with 945 flats. As for 2025, we're not -- we would not like to give you a lot of details on that. It's an entire year ahead. So let's leave it unanswered.

[Andrzej Biedronka-Tetla, executive]

Do we see some movement in sales in October and November?

[Zbigniew Juroszek, executive]

We do see some better results as compared to Q3, but these sales are much lower than in the previous year.

[Andrzej Biedronka-Tetla, executive]

Does this imply a clear increase? We've actually answered that.

Why did the situation -- why is the situation in 2025 to be better?

[Zbigniew Juroszek, executive]

There's more and more empty promises. There are no tenants. It doesn't pay off to buy on the primary market.

[Andrzej Biedronka-Tetla, executive]

Who is to drive this development market?

[Zbigniew Juroszek, executive]

There's a record number of flats on the secondary market. As you saw the potential for 2025, the potential of handovers, what we note is the contracting level, which at present is almost 50% of flats. So the flats that will be handed over in 2025 are already sold. And we're hoping that there will be some information on some flat age scheme, if there will be any program like that.

Or maybe if there's not, some of the customers that are waiting for this program to make decisions, maybe they will simply make a decision anyway. So this will unlock the sales of flats in 2025, we hope.

[Andrzej Biedronka-Tetla, executive]

What's the sales result in the first weeks of Q4, we've answered that.

What's the segment that sells best and sells worse?

[Zbigniew Juroszek, executive]

Actually, this premium segment, this higher standard segment, actually, these economical investments, they don't function actually, we don't have that much of it. But this standard, this premium standard, we have oversupply on market. That's why we struggle on the market.

We -- you've asked about promotion. We have the promotion policy that is being adjusted on a current basis. It's present on our website on the each investment. As for prices, they're fixed for the entire investment period. That's our policy.

[Andrzej Biedronka-Tetla, executive]

Another question. Were there any one-off factors that implemented -- that affected low sales in July?

[Zbigniew Juroszek, executive]

Yes, there were some factors. Well, that's summer vacation, that's always worse sales. But perhaps you remember, it was a transition period -- end of the transition period for the implementation of the New Development Act, and the 30th of July was when the old accounts were being closed and new ones were being opened, escrow accounts. So we had to speed up some contracts, and we signed them in June and some of the contracts were moved to August and signed in August. But we simply blame it on the summer holidays.

[Andrzej Biedronka-Tetla, executive]

What's the gross margin on sales that the company forecast for 2024 and in 2025, in Q4 2024? And are there any investments that might have a positive or negative impact on that?

[Zbigniew Juroszek, executive]

We were thinking about 25% of margin for Q4 and on Q1 2025, we have like 27%, 28% according to our analysis. We'll keep you informed.

[Andrzej Biedronka-Tetla, executive]

As for a breakthrough in sales, quarter-to-quarter, is it going to be better? Q4, we've answered that. As for Q1 2025, I think it's going to be similar to Q4. Q1, well, we're actually thinking the breakthrough will appear in Q2.

Another question regarding sales, which is closer to [indiscernible] 5,000 of sales we've discussed that. Now what were the cities that the company purchased land in, in Q3? Are there like fast release land where you can start development work quickly or rather a longer perspective purchase?

[Zbigniew Juroszek, executive]

We've already mentioned it and all purchases planned for Q4. Now in Q3, it was [indiscernible] Warszawa [indiscernible] and again, Warszawa. So where we have some demand for land, that's where we purchased the land. We look at those cities where we are present and where we have scarce land where we don't have enough land, that's where we try to add land to our land bank.

[Andrzej Biedronka-Tetla, executive]

How many projects would the company like to introduce for sales in Q4 2024 and how many in 2025? I think we've had a similar question.

[Zbigniew Juroszek, executive]

We mentioned 8 projects, 945 flats.

[Andrzej Biedronka-Tetla, executive]

Now taking into account the high number of projects in progress and this relatively small demand, would the company like to introduce some pro demand activities? This is if so, how?

It's a currently adjusted sales policy strategy. We keep you informed on our website. There's no like single sign. We do it on a current basis.

Now another question regarding sales. What's the target in 2025? As for sales?

As for 2025, we're assuming the sales will be higher because we hope there will be a rebound in Q2 next year. So we hope it's going to be higher. It's difficult to estimate now, but I think this level of 2,500 and higher, that's what we would like to achieve. We'll be able to be more precise in this during the next meeting next quarter.

Now decision on installments. What's the interest in this program?

[Zbigniew Juroszek, executive]

Our experience shows us that this program was actually mainly used by people who are convinced that even if there's no such program of aid from the government, they will use a commercial loan to buy a flat anyway. So this is mainly addressed to this group of people. And I think it does have some results.

[Andrzej Biedronka-Tetla, executive]

Is Atal planning in consecutive quarters to maintain the level of purchase for land observed in 2024?

[Zbigniew Juroszek, executive]

I think at the beginning of 2025 that we will buy less land. Perhaps we will supplement our land bank in the second half of 2025 because we purchased quite a lot, I must admit, using the situation as it is that we do have some offers.

Well, the situation with land was not easy. But in the second part of 2024, a lot of land appeared that allowed us to supplement our offer in our locations because each handover of another investment creates some new space for new possibilities and opportunities. That's where we added a lot of land to our bank, but we're not planning any major big purchases at the beginning of 2025.

[Andrzej Biedronka-Tetla, executive]

What are the plans concerning bond issue for Atal?

[Zbigniew Juroszek, executive]

As you know, in 2024, we have not issued any series of bonds. In 2025, we'll be taking a decision on that. But since we've had some loans from the shareholder and the loan from the bank, we will -- probably in 2025, we will make -- consider a decision on bond issue strongly.

[Andrzej Biedronka-Tetla, executive]

In which cities are flats sold the fastest and where the slowest?

[Zbigniew Juroszek, executive]

Well, traditionally, Warszawa and [indiscernible], these are the stronger markets, but it all depends on the situation and on the project. But it's not like that. For instance, in [ Wojs ], we have quite good sales. We have good large exposure to projects in good locations. So in the presentation, you could see the levels of sales of flats in particular locations.

[Andrzej Biedronka-Tetla, executive]

Do you reduce the prices of flats? Do you use like discounts higher than 2%, 3%? Now among competition, do you see the tendency to reduce prices in the last few months?

[Zbigniew Juroszek, executive]

Well, the general situation is that among the major developers, this policy of sales is quite similar. But I think there's a stall in smaller players. Those that are not listed on the Warsaw Stock Exchange, we see more stagnation there. But I think the situation with discounts, promotion, it's similar to that of our main competitors.

[Andrzej Biedronka-Tetla, executive]

What are you planning to see an increase in the cost of construction?

[Zbigniew Juroszek, executive]

Well, this nice situation cannot continue forever. I think in next year -- in the second half next year, it will -- there, the cost will increase. It's a similar question now.

[Andrzej Biedronka-Tetla, executive]

Where do you look for some rebounds of sales?

[Zbigniew Juroszek, executive]

Well, the interest rates have to drop for the rebounds to be visible? I think it's the main factors. Yes, I think it's one of the main factors.

[Andrzej Biedronka-Tetla, executive]

And could you say a few more words about the target customer?

[Zbigniew Juroszek, executive]

Well, we -- our target is a Polish family, Polish entrepreneur that buys flats. We're not running any contracting activities with any funds. So our priority has always been a Polish customer, and that's what we -- where we dedicate our activities to.

[Andrzej Biedronka-Tetla, executive]

Well, I should like to add that we try to prefer and offer for a more rich customers, but also for those more popular customers as we call it. But the standard of our flats, I think it's higher than that, the popular one. So yes, that determines kind of our group of customers, target customers.

Do you have any information from the government as for the new support of sales program?

[Zbigniew Juroszek, executive]

No, we don't have.

[Andrzej Biedronka-Tetla, executive]

And what's the stage of the Dresden project?

[Zbigniew Juroszek, executive]

It's in Stage 2. The schedule is being kept, maintained. There's no good or bad information about that. Mid next year, we would like to prepare an offer for the funds. As you know, for the first stage, we sold the entire thing -- everything to the fund.

Here, the intention is the same, but the offer will be prepared next year. So like mid next year due to some precise decisions on handing over of flats, it's going to be more like easier to estimate the handover. So mid next year, we'll be presenting the offer to the founds.

[Andrzej Biedronka-Tetla, executive]

And this was the last question. Thank you for participating in our conference. Since next conference will -- it's going to take a long time until the next conference. So please contact our...

[Statements in English on this transcript were spoken by an interpreter present on the live call.]