Bonava AB (publ)

STO:BONAV B

Earnings Call Transcript 2023-Q2

[Susanna Winkiel, executive]

[indiscernible] The presentation will be given by Peter Wallin our CEO; and Lars Granlof, our CFO. [Operator Instructions] Let's get started.

[Peter Wallin, executive]

Perfect. Thank you very much, Susanna, with all that energy here from Stockholm. So let us take you through the second quarter. During the quarter, we can see that the market is stabilizing, and we are seeing a gradual pickup of sales. This is not done easily. This is a lot of work involved, of course, with doing the sell and sales, and we need to be very close to our customers and the market.

It also means that we need to adapt the offering quite a bit that then entails all kinds of different options. We are -- of course, sometimes we need to adjust sales prices. But we also adjust the offering as such, trying to slim it down in terms of how costly it could be and also being flexible sometimes of moving periods, et cetera.

So there's a lot of things we're working with. But staying close to the market is absolutely a key in that. We saw the stabilizing market condition predominantly across the board, but our strongest markets continue to be the strongest. And here, we also saw the best development in the second quarter. And that relates to our biggest market in Germany. We are biggest region in Germany, Berlin, offered good conditions for growing the business, selling more as well as Dortmund and Cologne and also Riga in the Baltic operations.

Another thing which we are seeing even stronger signs of now is an abating cost inflation. Cost is decreasing both from reduced costs of the input materials but also for the services connected to the construction and contracting industries and the subcontractors.

If we talk about the Q2 numbers very briefly. We are doing a number of measures to improve the cash flow because the cash flow is needed in order to offer more room to grow the business going forward. And it's a very stark comparison, of course, to last year because it was very different conditions in the profit recognized from projects last year.

And also, of course, that we had a much bigger chunk of B2B deals in this quarter compared to the second quarter last year. And the B2B deals that we are talking about is also with very positive payment terms. So that is good from both building up the business volume, but also increasing the cash flow.

We are talking about the savings of the indirect costs and selling and admin costs, and we are well on track on the savings. Of course, we are continuously reviewing the business volume, and we are reducing all kinds of cost all of the time and this is something which we need to continue to do.

Of course, in every given quarter, there could be a certain delay from reducing the costs and that is why the net decrease is not as big as the cost decrease -- gross decrease that we are conducting and executing.

Finally, of course, concluding the divestiture of the Norwegian business increases our financial position and also reduces the future drag on cash flow. And it also means that we can put more focusing on developing the rest of our businesses.

So the measures to improve cash flow then is selling, staying close to the market. And I can't sort of emphasize this enough how important it is because it's a competition out there of selling right now, and we want to make sure that the customers select and choose Bonava. And that also means that it's very good that we have a decentralized business model now where the businesses are very much in the driving seat when it comes to taking the right decisions.

Secondly, continuously adapting the admin and indirect cost to the business volume. We are looking into this. We are also making sure that the businesses are very much on top of the cost levels that they have compared to the volumes that we see ahead.

And thirdly, optimizing the portfolio of land banking projects. We can see stark differences between markets, both within the same city, actually. And it also means that, again, being close to the market is very important. But it also means that we need to question sometimes if we should reallocate capital to the better part of the markets, and that also means that Bonava don't necessarily is the long-term holder of certain building rights.

So this is something which we are working with. We are doing some work with this in the quarter, and we are continuing to develop and looking into selling building rights and converting projects.

So talking about projects, let me take you through 2 projects that we started in the second quarter; 1 project in Dortmund, 64 houses for consumers, and this is a very nice project predominantly for families with kids. It's a lot of room to have the trampolines and the play in the gardens.

We also have a great project with a lot of greenery in Riga, Latvia. And this is also a project for consumers. And you can see all of the starts on our website also.

But with that, I turn over to you, Lars.

[Lars Granlöf, executive]

Thank you, Peter. Good morning, everyone. Let's then start, as we always do, with a bridge of the recognized units compared to the guidance [indiscernible] quarter.

As you have seen, we were completing slightly less than we were guiding for. However, if we look at the consumer units, we have projects in Germany and Baltics that have been sliding over to, to the next quarter. On the other hand, on the investor side, we have managed to finalize a project in Finland before plan.

So out of the 1,256 completed, 106 remain unsold by the end of the quarter. However, we managed then to sell out of the balance that we had by the end of the first quarter, 70 units of that. That means that we have actually then recognized about 1,200 units. And you see here that it's 50-50 between B2B, the investor deals and the consumer deals. And going back to what Peter mentioned earlier on, it's a different mix than we had in the prior year.

If we then move over to the income statement, we see that our net sales is slightly higher than the prior year with a few units more recognized than in the prior year. But also with the weak Swedish krona, we have an impact, a positive impact from currencies on sales and all of the lines in the income statement.

As Peter was also alluding to, we have a gross margin that has been impacted then by the mix with more of investor project at lower margins, but we also had a significant portion of very high-margin projects handed over -- completed and handed over in the prior year.

Costs have been coming down. Sales and admin costs down to below 180 compared to the -- about 200 in the prior year, with an operating margin just north of 5% compared to the 10% in the prior year.

We have a significant impact in our -- negative impact in our financial net, coming from higher net debt, higher borrowings, but also, of course, higher interest rates in the market compared to the prior year. And if we come all the way down, we see the net profit from the continuing operations and below that, we have the results from the discontinued operations, i.e., St. Petes, that we have classified as discontinued for quite some time now, not contributing very much to that line.

The most significant part of it is, of course, the loss from the divestiture of Norway, SEK 824 million out of the SEK 854 million that we are reporting.

If we then look at our BUs, starting with Germany, now being almost 60% of the business in the group. We see a slightly lower sales figure despite a significantly lower number of units recognized compared to the prior year. And of course, the currency impact is coming here in a positive way.

Gross margin, as I said earlier on, impacted negatively by the product/mix, but we have also then taken measures to improve cash flow, among them the impairment here of SEK 34 million. We saw sales picking up, even though from a low level, 212 compared to 115 units in the first quarter.

Sweden being the second largest with just about 20% of our business, with net sales close to the prior year, with gross margins then impacted again by measures to improve our cash flow. And we have taken some risk provisions also in the Swedish business unit. We saw an increase in number of sold units, even though from a very low level, only 14 units in the first quarter coming up to 43 units in the second quarter.

Finland, 13%. Finland being the strongest, I would say, in the Q2 report with a significant amount of handovers compared to the prior year, with margin improvements coming from cost control as well as our high volume of units recognized. We see that we're coming from low levels of sales, but we now manage to sell 39 units in this quarter.

On the other hand, on the investor side, no one sold compared to the prior quarter with 75. And Finland is a very tough market. We have a number of competitors with significant amount of completed unsold. So it's a tough market also going forward here.

The Baltics with net sales slightly lower than the prior year with fewer units recognized, lower gross margin due to product/mix, and we continue to see Riga as the driver of the development in the Baltics, but also with some improving conditions in Tallinn in Estonia. And coming up now in the third quarter, we will see the first build-to-manage project to be completed in reporting.

So going from the BUs, coming to Norway. It was, of course, very positive that we managed to close the deal by the end of the quarter as we have now sold the business to Union Residential Development Fund. We sold it for SEK 1.5 billion with a net impact, a net loss of about SEK 0.8 billion, including the foreign currency reserve that is part of equity ongoing.

And of course, we have freed up capital, about SEK 800 million of the price have been paid cash and the rest will be coming through payment of vendor loans that will be maturing over the coming 2, 3 years.

St. Petersburg, still an ongoing process. You saw that we have signed with a new party during the quarter. The process of achieving approvals from the [ Fortis ] are ongoing. If we look at ongoing operations, we managed to actually complete one of the projects and handover [ 80 ] units of those in the quarter. There are some 260 units still in production that will be completed during the year.

But in relation to the completion and handovers in the quarter, we actually managed to amortize project financing and get a release of parent company guarantees for that, reducing the financial risks for our investment in St. Petersburg.

So going from that over to our balance sheet. We see a decline. I think it goes without saying since we have now deconsolidated Norway in our balance sheet. But that has a positive impact. On the other hand, we have an increase then of our total assets with about SEK 1.1 billion compared to the end of the year last year due to currencies.

On the cash flow side, we have a positive cash flow in the quarter. Of course, the divestiture of Norway is one of the contributor. But you also see here that we have less investments in ongoing housing projects and also less investments, of course, in land, in plots in the quarter compared to the prior year. And that means that with a positive cash flow, we have seen the net debt coming down to SEK 6.6 billion. Out of that, SEK 1.5 billion is coming from net debt from tenant owner associations and housing companies.

And you see that the loan covenants that we have equity to assets ratio and interest coverage ratio, we are well within the boundaries stipulated by our loan agreements.

And if we then look at the maturities of our funding portfolio, you'll see that we have an upcoming bond maturity in 2024. And we also, of course, have the revolving credit facility coming up in '25. So these remain to be the highest priorities, of course, for us to refinance that. So that is a work ongoing, and it will be ongoing now during the autumn of this year.

And if we then come to the building right portfolio, you see that the number of building rights is basically at the same level as we had in the first quarter with some movements in between the business units. And if we look at the 29,400 building rights that we have, about 50% of those were actually acquired before the beginning of '21.

We are currently estimating to utilize 7,700 of those [ 4 ] starts in '23 to '25. But given the current market circumstances, of course, things can change. But out of the 7,700, almost 90% we are estimating going into the multifamily housing and we are also estimating more than 70% in the consumer side, but we are looking into conversions of consumer to investors in order to improve the cash flow with a better pattern from a cash flow perspective in the investor deals.

So with that, I hand back to you, Peter.

[Peter Wallin, executive]

Thank you very much, Lars. Impressive speed, as always. So let me try to wrap this one up. No one has missed, I hope, that we are prioritizing selling homes and improving cash flow going forward. That are our 2 key priorities. We are seeing the stabilizing market condition in the second quarter, and sales is gradually picking up.

And if you then also look into the completion graphs that we are distributing each report, I also would like to draw your attention to the fact that we have a low volume in the third quarter this coming year. And then we also have, as usually, a very strong fourth quarter around the corner.

So with that, I think we are completed here now, Susanna, in terms of presenting the second quarter.

[Susanna Winkiel, executive]

Thank you, Peter, and thank you, Lars. And now we will be taking questions. [Operator Instructions] So do we have any questions?

[Operator]

[Operator Instructions]

[Susanna Winkiel, executive]

No telephone questions, but I've got a question from Stefan Andersson here regarding financial costs. So financial costs per quarter have shifted markedly upwards lately. Could you comment on what interest rates Bonava currently pays on its financing and what could be expected in the coming quarters?

[Lars Granlöf, executive]

Yes. Good question. And of course, with the increased indebtedness if we compare it to the prior year and the increased market interest rates, of course, goes without saying that we are increasing our financial cost. I would say that the average cost for the quarter, we are on the, say, 6.5% level. And it depends, of course, on the market what will be happening going forward. We are utilizing our revolving credit facility and if the market interest rates are increasing, of course, that can have a further negative impact on us.

[Susanna Winkiel, executive]

Yes. We have the next question from [indiscernible] at SEB, who asks, could you give a rundown on your process for further deleveraging in the upcoming 12 months and the cash flow generation?

[Lars Granlöf, executive]

Yes, we are not giving any forecast, of course, but we are, as both me and Peter have been speaking about, looking into converting consumer deals over to investor deals to have a better cash flow, cash-generating profile. We are also, of course, looking into what are the projects that we are starting. So we will see that they are cash generating and at least not cash consuming.

We are looking into our land bank to see whether there are parts of the land bank that we will divest, we should divest because it's not strategic for us or it will take a very long time for us really to develop that, and it's then putting, of course, a drag on the balance sheet and the cash flow. So there are a number of things that we are doing. But as I said, we are not going to give any forecast in order to -- for the future.

[Peter Wallin, executive]

And if I can build up on Lars' very good answer there. It's also the fact that we are within the financial covenants and we are also within our internal indebtedness of gearing, net gearing ratio. And this kind of business with the balance sheet also lends it into that we need to focus on starting new products. So indebtedness follow the sort of the cycle of the project and the growth in the project. So we will see a natural deleveraging by handing over projects and completing projects, but then we need to start new projects because this is our bread-and-butter business.

[Susanna Winkiel, executive]

Right. Which leads me to the next question from [ Keevan ], which is what are prospects for long-term margins and the targets that we have set?

[Peter Wallin, executive]

The EBIT margin target that we have set is 10%. And that means that we need to find a gross margin in the tune of 15% to 16%, we have a selling and admin around 5% to 6% to give that 10%. And the market has been very tough because it's been a shift in the prices and a shift in cost at the same time.

Now when we are seeing the start of stabilizing, that is also give you some indication that we are starting to find the levels of selling prices and cost of building the homes. So the long-term margin target is the 10%.

[Susanna Winkiel, executive]

Very good. This leads me to the next question. [ Matias ] is wondering, did I understand Peter correctly that we see a decent in material prices and service prices?

[Lars Granlöf, executive]

Yes.

[Susanna Winkiel, executive]

Yes. Very clear. Simen at DNB is wondering about comments on the gross margin in Sweden. The large drop, is this driven by lower price or higher costs or a mix of those? How big discounts are now given on units sold?

[Lars Granlöf, executive]

It's a mix of, of course, cost component and sales component. And we are not giving any general discounts. I mean it's a process that where we are looking at the object by object, unit by unit and look into what do we need to do in order for us to drive sales because sales is, of course, very, very important for us to drive the business and to drive cash flow, to generate cash flow for further starts.

[Susanna Winkiel, executive]

Very good. Are there any other questions on the telephone? No. Then as there are no further questions, I would like to bring to your attention that our results for the third quarter will be presented on November 15. So this has been pushed forward slightly.

And with that, I would like to thank you for listening and wish you all a very good summer.