Bonava AB (publ)

STO:BONAV B

Earnings Call Transcript 2022-Q1

[Anna Fyhrlund, executive]

My name is Anna Fyhrlund, and I am the Head of Investor Relations here at Bonava. And with me here today, I have our CEO, Peter Wallin; and our CFO, Lars Granlöf. They will take you through the highlights of this report, and then we will end with a Q&A session at the end, and you will be able to answer -- ask your questions online and also post them. So with that short introduction, I leave the word over to you, Peter.

[Peter Wallin, executive]

Thank you very much, Anna, and good morning, everyone. So very happy to have you here with us here reporting then the first quarter of 2022, the first quarter in our business plan period. So let me start with just describing what we have seen in the first quarter.

From a market perspective, the prices was stable and the market was robust. And we saw good interest and demand from both private consumers as well as investors. Now things changes as we go in and see the conflict in Ukraine, and it's an awful situation, of course, and it clouds the near-term market outlook. We, of course, see signs of cost increases of input material and strained supply of certain materials, and this is something which we have high in focus.

Looking into the first quarter and the numbers. We are increasing both net sales and EBIT. So we have more units recognized with improved margins. We are increasing our gross profit to SEK 373 million and we are improving the gross margin to 13%. You might think that it's a very small improvement to comment upon, but last year included profit from sale of land, which this result does not. So we are noting a improved underlying performance in the business.

We are increasing our building rights in attractive situations in our growth markets by 5%. And as you know, we have announced our decision to wind down the operations in St. Petersburg. I will talk more about that coming forward. And because of this decision to wind down the operation in St. Petersburg, we have slightly revised the financial targets for earnings before tax, both 2024 and 2026, what we rephrase as mid and long term.

So when it comes to St. Petersburg, and the operations there, let me start by saying that this is a humanitarian tragedy. And there is a lot of perspectives to take into consideration here when we are going ahead with winding down the business. We are looking into various strategic options when it comes to winding down the operations.

If we look on the business that we have at hand, we have an attractive land bank, and we are completing the 762 units that we have under production. All of these will be completed towards the back end of this year, 2022. The business is substantial in scope and very profitable, but not material to the group. And when I say not material to the group, I also weigh in the consideration that the return requirements in this business needs to be higher than the average level in the group. So we must have a higher profitability in St. Petersburg in order to be value-creative in the long term. Now decision has been taken to wind down the operations. So that is just a side comment on how you will look at -- need to look at the profitability.

So what we have stated before and which I now want to repeat because it's even more important now is that we need to have the right team in place. We need to verify the cost estimates, and we need to verify the sales and market conditions. It was important before, and it's even more important now. So that is also why we are reducing our outlook when it comes to production starts. So we said 6,000 units before. Now we're not starting out any more projects in St. Petersburg, we are revising the target also with a cautious outlook to 4,200. We need to start projects when the conditions are right to start the projects.

So here, you see some examples of projects started in the quarter. We have a project in Finland, Turun Solina, and then you have a consumer project in Germany, Seepark Patz. And you can find all the projects that we are starting on our website.

Also on the basis of deciding not to continue the operations in St. Petersburg, we have revised the financial targets, as I said. So the 2024 target has been revised from SEK 1.6 billion to SEK 1.3 billion, and the 2026 target earnings before taxes revised from SEK 2.2 billion to SEK 2.0 billion. And this is reflecting that we're not continuing the operation in St. Petersburg.

It's also the fact that when you look into the bigger impact in 2024, it is, of course, harder for us to adjust the allocation of investments in the shorter-term perspective compared to the longer-term perspective. Overall, we believe that our conditions for producing the financial targets is still there very much so. So we are in a good position to perform.

So with that, I would like to hand over the word to you, Lars.

[Lars Granlöf, executive]

Thank you, Peter. Hello, everyone. Good morning. So let's then start with this bridge that normally they are taking you through. When we were guiding in connection with the fourth quarter, we said that we were estimating some 950 units to be completed during this first quarter. Where we now have closed the quarter, we realized that we actually could close 72 units in the investor area earlier, and we were delaying some 121 units in the consumer area into the next quarter, the investor deals in Germany, and the consumer deals in Finland and the Baltics.

So 901, and we had a few of them unsold, 36 units, but to -- added to that, we also then sold or completed unsold from the past of 50 units. So we actually reduced this balance even further. And finally, we also completed handovers of units completed in earlier periods.

So all in all, 991 units handed over during the first quarter, which is a significant increase over the 665 units that we handed over in the first quarter last year. So that is, of course, the explanation when we're looking at the income statement. The increase in our sales is -- that volume is going through the whole income statement all the way down. And we are improving our gross margin. But as Peter also mentioned, last year, we had a sale of land that was profitable. So comparing -- taking that out in the prior year, that means that we actually have improved more than a 0.1 percentage unit that we see here.

Selling and admin, a bit higher than in the prior year, but then we have to remind ourselves that last year first quarter was a very quiet quarter in terms of lockdown due to COVID, et cetera. We have then an operating profit of SEK 141 million, a significant improvement over the prior year. Financial net in line with the prior year, and a slightly higher tax rate, which is mainly based on that we have a higher proportion of the German business in our results this year, and that business is the one with the highest tax rate.

And if you look at the graph on the right-hand side of this slide, you see the EBT margin, earnings before tax margin, both as reported, jumping up and down with our completed contract method. And if we look at the rolling 12 months, we see that, that is improving to close to 7% margin now if we measured rolling 12 months.

So let's move over to our business units, starting with the biggest one, 48% of the total group net sales on a rolling 12-month basis. And you see that we have a good quarter behind us in Germany with higher volumes, significantly higher number of recognized units, an improvement in gross margins. And we also added more building rights to our portfolio. And you probably also saw that we issued a press release this morning about even further building rights in Germany. And we see that we have a slight increase in number of started units and sold units compared to the prior year.

Let's move over to Sweden, second large, 21% of our net sales. Here, we have an impact of mix. In the prior year, we didn't have any investor deals. This year, we have investor deals, which is then reducing the average margin. And again, as I mentioned on the group figures, we also had the sale of land included in Sweden last year. So the reduction in gross margin is not that big as it seems in this slide. In accordance with plan, we didn't start any new projects in the quarter, but we have added more building rights to the portfolio.

Finland, 11% of our net sales. And now you realize that we have now broken up as we reported in mid-March that we are actually breaking up the Nordic segment in its part. So Finland, 11%. Here, we also see the same pattern as we had in Sweden, i.e., we have investor deals affecting this year, no investor deals in the prior year, which have a negative mix effect on the margin. But it's a good market for further investor deals. And here, we are working on stabilizing the business, as we had said earlier on.

Norway, 6%, also part of the previous Nordic segment. It's a low volume quarter. Even though we have more recognized units, it's very low quarter. And unfortunately, we have one loss-making project that is adding -- or reducing our margin significantly in the quarter. And we also have high sales and marketing expenses, primarily due to the handover from -- and separation from Denmark. But we also have added more sales and marketing costs and some rental costs in the quarter that we didn't have before because we are here stepping up in terms of sales and marketing.

Moving over to the Baltics, 5%, and a business that is more profitable than in the past, even though it's a low volume also this quarter compared to the prior year. Margin, as I said, improved, and we have also added significant number of building rights, 1,600 building rights in this segment. And we are very much looking forward to the second quarter now where we are going to deliver and hand over the first project in Lithuania, the new market since a couple of years in the Baltics.

And then finally, St. Petersburg, 4% of our net sales on a rolling 12 months basis. As Peter also mentioned, it's included in our group figures with the consolidated figures. We have not made any impairment charges, et cetera. It's a continued good execution of our projects, and you see a significant improvement again in gross margin due to a very favorable mix of what we have been delivering in the quarter. 762 units is ongoing.

Most of them will be delivered in the fourth quarter. I'll come back to that in the next slide. So we will have slow second and third quarter, everything else equal, and the fourth quarter with a significant proportion of completions and handovers. And as we said, there will be no new starts or investments in this area due to the decision to wind down the business.

We're trying to summarize how we view the exposure. Having said that, we haven't made any impairment charges, but of course, there are exposures in the business given the underlying circumstances right now. The equity, as we have reported in the Q1 report, is RUB 5.9 billion or SEK 671 million based on the exchange rate by the end of the quarter. And this will, of course, increase given that we will hand over the units by the end of the year, we will increase our profit and increase our equity.

At the same time, Bonava AB is, of course, then guaranteeing the project financing that we have with external banks in Russia. And that guarantee will also increase with increased project financing up to when we are closing the project and delivering the units to our customers. And then it will be repaid from the advances that are with the bank in blocked accounts.

In addition to that, we have some guarantees for commitments for ongoing land acquisitions, SEK 186 million, guaranteed by Bonava AB. And if we are then summarizing this as we stand right now, we have a total exposure of about SEK 1.1 billion.

So let's move over to the balance sheet. We see that we have increased the total assets with about SEK 1 billion, and that is primarily coming from the properties held for future development, i.e., the land bank.

And you can see that in our cash flow. Our cash flow is about SEK 1 billion weaker than the prior year, and that is mainly coming from us then increasing our land bank. And if we look then at the financing of the business, we are in -- continue to be in a very strong financial position with a 34% equity to assets ratio, down 1 percentage point from year-end, but still on a very high level. We have increased our borrowings, our loans to fund the acquisitions of -- mainly of the land bank acquisitions, but also increase in the ongoing housing projects.

And speaking about the land bank. Here, you see the 1,600 increase from year-end or 4,000 more building rights from -- compared to how it was 1 year ago. And if we look at how that is broken up, 36,900 units, 22,000 of them on balance. And if we look at how it is distributed between the years when we have made the agreements, we see that about 60% of them have been in agreement from 2020 up until now. We are going to utilize 46%, we're estimating, of this land bank for starts in 2022 up to '24. And that means that 17,200 estimated will be utilized primarily for multifamily and primarily for the consumer segment.

Finally, these graphs are part of the quarter report, as you have seen over the quarters. And here, you can also see that we have the slippage of the 121 into the next quarter, the second quarter. One comment on this compared to how this graph has been looking in the previous quarters is that the start that you see in the bottom line here, they are, of course, included in the delta line above. Earlier on, we have had them separately. So there might be a problem to compare it to previous graphs. But please contact us if you have any questions. So that's the consumer market, and this is the investor market then. So with that.

[Peter Wallin, executive]

Thank you for a very clear presentation, Lars. As always, a pleasure to hear. So summing up what we're talking about now. We have a stable market in the first quarter. The outlook is cloudy, and we are prepared to act. One of the things we need to prepare is, of course, to question any types of costs that we incur into the business. So we are undertaking a review of our selling and admin costs, and this will be completed during the second quarter.

We are progressing in improving our profitability. And one very important part of that journey is to secure more attractive building rights and an attractive land bank, something which we have done in the quarter and of course, which is further underlined by the press release we sent out this morning. These acquisitions have been going on for quite some time. So it takes some time before we actually can report the deal and investment made.

Finally, we are revising the financial targets slightly. So we are changing both the midterm in 2024 and 2026. But with that, I hope that you have gotten a better rounded picture of where we are as a group. And me and my management team are very positive towards our ability to continue to improve Bonava. Thank you.

Anna?

[Anna Fyhrlund, executive]

Thank you both for a good presentation. And now we will open up for the Q&A session. And today, you will be able to ask your questions through the phone and also post them online. I haven't received anything online yet, so I will start with the phone. So operator, please?

[Operator]

So we have the first question from participant from ABG.

[Unknown Analyst]

I was not hearing the operator correctly, but please say if you can hear me?

[Lars Granlöf, executive]

We can hear you loud and clear now, but we didn't hear the operator, yes.

[Unknown Analyst]

Okay. Okay. Perfect. So I would like to start off with the revised targets. You talked a bit about that in the beginning, but if we look at the 2022 starts, for instance, the guidance decreased from 6,000 to 4,200. How much of that is due to the removal of St. Petersburg and how much is due to other markets? And maybe if you could talk a bit more about the other markets, sort of what is driving the change? Is there supply chain issues, higher development costs, harder to sell apartments or a mix?

[Peter Wallin, executive]

Very good questions and central questions, of course, to ask. So if we start with the 6,000 guidance we gave in conjunction with the fourth quarter report, that contained 1,100 units related to St. Petersburg. So of course, when we have a unit which we have labeled as a growth area that is not being part of any further investment, that is a chunk coming out from the 6,000. And the remaining 700, I would say, is a more cautious view generally. We are early into the second quarter, and it's far too early to say any type of reactions with the consumer market. And we can speculate as well as you can do what we're reading and what we're hearing.

But we do not have any clear signs that it's diminishing right now. But we are expecting that it will be tougher to start new projects if we want to start them with the right prerequisites. And as you heard me talk about today, it's even more important that we keep to those prerequisites. So it's a more cautious view with the mixture of everything that is happening right now in the marketplace.

[Unknown Analyst]

Okay. Perfect. And just staying on starts, because you mentioned in the Q4 report that 700 starts or 700 potential starts have been pushed from Q2 into the beginning of this year. And if I do not remember incorrectly, I think most of that was in Germany. So how should we think about the 4,200 starts in this year? Will it be evenly spread out during the rest of the quarters or very backloaded?

[Peter Wallin, executive]

Lars, would you care to comment?

[Lars Granlöf, executive]

Yes. In terms of the 700 that was sliding, I think that we are seeing further slides, things that we were estimating coming into Q1 instead of Q4. Some of them are coming instead in Q2 and so on. So that's part of it as well. I would say that we have it in basically all our segments with the building permit process that we have been commenting on -- earlier on in Germany. We have delays in the process, zoning processes, et cetera, in Sweden as well that is impacting. As Peter was mentioning all the prerequisites for starting, they are, of course, even more important in a situation that we start to face now with an increasing inflation, with increased interest rates and increased pricing of the supply.

[Operator]

Next, we have Mr. Erik Granström from Carnegie.

[Erik Granström, analyst]

I believe that was the queue for me. I had 2 more questions, please. The first one regarding your admin costs. You're stating that you're looking through the situation right now, and hopefully, you will be completed by Q2. Does that mean you expect to come back to the market and sort of give us a guidance of the impact already in Q2? Or do you expect that to happen in Q3?

[Peter Wallin, executive]

It's a very good question. So I believe -- and could you please repeat who I'm talking to now, because we couldn't hear the operator.

[Erik Granström, analyst]

I'm sorry. Yes, this is Erik Granström with Carnegie.

[Peter Wallin, executive]

Of course, it is Erik, the man with the cinnamon buns. Yes, the -- I would say that we will be able to talk in -- before the Q2 report is being released, hopefully, but no later than the Q2 report, which is to be announced on July 21, if I'm not incorrect.

[Lars Granlöf, executive]

Maybe adding to that also, you said, Erik, that selling and admin cost, and we also reviewed the indirect cost, of course.

[Erik Granström, analyst]

Yes, absolutely. Sure. And then -- and also, I have a question on the wind down in Russia. You were -- Lars, you were talking about sort of the impairments -- potential impairments that could come through. Given the fact that you are winding down and that you do expect to complete projects 2023 as well, does that mean you can't make any potential impairment this year that you would have to wait until everything is completed and turned over of the ongoing production?

[Lars Granlöf, executive]

Very good question, Erik. I think that we have to follow the situation all throughout the year. It's way too early right now. The things can change. Of course, the underlying circumstances, the environment, the rules and sanctions, et cetera, will, of course, impact if those are changing. We are determined to finalize the production, as we have said. And most of it will be finalized and also most of it will be handed over this year, but some of that will be coming into the early 2023 as well.

And given that situation, most of the current production is sold and also prepaid by the customers. So that is secured, so to say. We have to look into a situation. We haven't got much of fixed assets. These are current assets, of course. And what we need to look into going forward is, of course, the land bank that we have and what's the value of that. But it's also too early to say anything about.

[Peter Wallin, executive]

And if I can continue to build on that, I also think it's a very good question, Erik. We have a performing business right now, and it feels very strange to talk about our business, which is on the wind down, to be performing. But it is. And that throws sort of the challenge at us that as we are looking into strategic alternatives, this could sort of -- will potentially then make this decision and conclusion quicker than 2023. But nothing is clear and decided yet. So we have to come back.

[Erik Granström, analyst]

Okay. And then I also have a question on sort of the startup pace in Sweden. You didn't start any projects at all in Q1, which is quite uncommon, but you also stated that this was according to plan. Does that mean that it was according to plan from early on already at the beginning of the year. So nothing in terms of cost inflation or disruption in production has been the reason why you didn't start any projects? And also, do you expect projects starts already in Q2? Or is it going to be very much a second half of the year for Sweden in particular?

[Peter Wallin, executive]

It was part of the original plan. And I hate to say that it's part of a plan not to start any projects, but that was the way that the project was -- the portfolio was pegged up. We hope to start projects in the second quarter. And in the first quarter, things move so quickly right now. So in the first quarter, we do not have any implications to any degree when it comes to cost escalation or any other market sign. So that is embedded in the comment that we're making that it's a cloudy outlook. And as you know, Erik, the implication is for the starts, whereas our reporting method makes the profit and loss more easy to forecast.

[Operator]

No more questions.

[Anna Fyhrlund, executive]

I have no questions online either. So if no further questions, then we will end this session. And if you do have additional questions, don't hesitate to contact me, and we will answer them after this. Thank you all for listening, and goodbye. Have a nice day.

[Peter Wallin, executive]

Thank you.