Bonava AB (publ)

STO:BONAV B

Earnings Call Transcript 2022-Q3

[Anna Fyhrlund, executive]

Good morning, everyone, and welcome to Bonava's presentation for the third quarter 2022. My name is Anna Falck Fyhrlund, and I am the Head of Investor here at Bonava. And with me here today, I have our CEO, Peter Wallin; and our CFO, Lars Granlöf. But before they will start the presentation, I would like to take the opportunity to remind you of our Capital Markets Day in Berlin on the 10th of November. So if you haven't registered yet, please do.

And with that short, I would leave the word over to Peter to start the presentation.

[Peter Wallin, executive]

Thank you very much, Anna, and good morning to you all. So let's start with what's happening around us on the market. We are seeing a gradual slowdown of the sales in our markets. And I would say that the most serious effect is on the Swedish market where sales have dropped significantly. Whereas, on the other markets, and the German markets being our key market, sales is still ongoing.

Overall, prices are unchanged. Of course, we are trying to make our offering in the marketplace being as good as possible, given the uncertainty. So we are trying to make it as attractive as possible for the buyers and potential buyers. On the cost level, we are seeing the signs that the peak has been hit. So we are seeing some of the input material dropping in price, whereas the increase in cost of energy, of course, is going the other way. And I also see that it's much easier now to find good construction works ongoing. And we also believe that, that will be visible in further easing on the construction part going ahead.

So if we take a look on our numbers and look into our profitability. If we start with the volume in the third quarter, as expected and as guided for, we are at a quite few handovers in the third quarter compared to last year. The prices are higher. So in SEK million, the reduction is not as visible. More importantly, our profitability is growing tremendously, up to 15.9% in gross margin on handed-over units. And this is despite the fact that we have had challenges as increasing cost levels and shortages of material. So I'm very pleased with how the organization has responded to those challenges.

So that improvement is partially then offset by the fact that we are taking a SEK 155 million charge in the Swedish business in the third quarter. And this charge is related to us writing down projects not being able to be started given the current market context. And in addition to that, with the lower volumes near term, we are also making an impairment of tangible assets in one of the production units. So this will mean that we will stand stronger in the Swedish business going ahead.

If you take a look at our financial position, which Lars will talk about in detail, we are posting a solid balance sheet with an equity-to-asset ratio of 31.4%. And when it comes to financial position, we are very selective on the starts and investments. And we are selective and really driving home the prerequisites of starting projects, and I will come back to that later on. After the close of the third quarter, we entered into an agreement of selling the St. Petersburg operations. And the tough decision was made, of course, already in March of exiting St. Petersburg. And I now think it's a good opportunity for us to focus on the rest of the business going ahead.

So coming into then the starts and the sold units. We have started 860 units in the third quarter. And we are also lowering our guidance from 4,200 starts to 3,000 starts for the year, which implicitly indicate 750-ish starts in the fourth quarter. So of course, it's due to the fact that the market has slowed down, but also the fact that we are still waiting for building permits in the German market. So we are still talking about that because that's a fact, and the building permitting processes are not moving up in speed. So that is why we are -- it's a bit hazy for us to know when we will be able to start projects in the German context.

Now let me talk about some of the projects that we have been able to start. Starting on the left-hand side with Årsta Park, a build-to-manage project in the university city of Uppsala in Sweden, with 231 units. And then on the right-hand side, the second larger projects starting in Lithuania, in Vilnius, Lake Town, and I'm really looking forward to follow these projects going ahead.

With that said, I'm going to hand over the word over to you, Lars.

[Lars Granlöf, executive]

Thank you, Peter. Good morning, everyone. Let's start then with the bridge over the number of units that we estimate to complete when we released the second quarter report compared to what we actually have completed now. And you see that we have 158 units less than we were guiding for. The investor deal of 97 units is in Germany, and it was actually due to that the notary got COVID and could not then complete the process of these units. So that is slipping now into the fourth quarter.

So if we're moving over then to our income statement, you see that we have fewer units recognized than we had in the prior year. And as Peter mentioned, we have taken charges then in Sweden of SEK 155 million that is significantly impacting our income statement for the quarter. And you can also see that, if you're starting from the bottom, we have actually then separated out St. Petersburg business as we said in the release that we made on the 7th of October. So that's the operations to be discontinued, the net result from that.

Looking from the start here, the continuing operations, lower sales based on less number of units recognized, as I said. Our profitability measured as gross margin is lower than the prior year. But if we are factoring out the charges in Sweden, we have a significant improvement of the gross margin, close to 16% actually. With low volumes in the quarter, we cannot then handle the selling and admin expenses in the way that we are improving operating margins. So operating margin is down to 4.7% compared to 8.3%. But again, factoring out the Swedish charge, we would have seen an improvement.

Net financials, higher than the prior year. Not surprising given the market situation with increasing interest rates, of course, and, which you will see in coming slides, higher net debt in the quarter than we were starting the quarter with. We have a higher tax charge. We had some one-off tax adjustments in Norway affecting the tax rate for the quarter.

So moving from the full group over to the business units, starting with Germany. Also here, we have less units recognized than in the prior year, but at a better profitability, higher gross margin. But as I said, we have lower volume and, thereby, we cannot absorb the selling and admin expenses to that extent. So the operating margin is slightly less than we had in the prior year. And if you look at the right-hand side, we see that we are starting and we are selling units in Germany. The starts in line basically with the prior year, but the sales is slower than we saw in the prior year.

Sweden, also here, less units recognized, but a significant increase in profitability. If you're factoring out the SEK 155 million, you will end up in a gross margin in the region of 21%, which is a significant improvement, of course, compared to the prior year. Also here then, with a low volume, we cannot leverage the selling and admin expenses that is impacting our EBIT margin. The Årsta Park project is the one that we have started, the 231 units. So it's almost up to the level that we had in the prior year. But here you see that we are not selling in line -- not close to in line with the prior year, only 18 units then sold in the Swedish segment.

Finland, also here, less units recognized, but an improved gross margin in the one that we are recognizing. But again, with a slow -- with a low volume, we are not absorbing the selling and admin expenses affecting then the operating results and operating margin. But we've made a large investor deal in the quarter, some 300 units we made a deal of. And we are seeing that the Finnish business is stabilizing as we are targeting, as we have been talking about in the past. And here, both in terms of starts and the number of sold units, we are basically in line with the level that we were 1 year ago.

Norway, more units recognized, and it's hard to have less units with one unit recognized in the prior year. We have a decent gross margin, improved gross margin in the Norwegian business then, but affecting, of course, the operating margin with still relatively low volumes. And here you see, we haven't started anything and the sale of units is very low, both this year as well as in the prior year.

The final segment then, Baltics, delivering less units than in the prior year, but at higher average prices. So that is then impacting net sales positively. Good gross margins keeping up, also the operating profit, but still we have, with low volumes, a significant negative impact on the operating margin. We are keeping up the starts in line with the prior year. Sales a bit lower, but it's also due to that we had less objects to sell in the Baltics segment.

Then moving over to the discontinued business. You've all seen that we signed the agreement on the 7th of October, where we have then agreed to sell our business at a price of EUR 98 million, close to or around SEK 1.1 billion. We are expecting a net financial impact of this of about SEK 0.1 billion to SEK 0.3 billion negatively, and that will be realized then when we are closing the deal, which we are estimating in the first half of next year then. The whole transaction is pending the approval from the Russian authorities, of course. And you saw that we have a small net profit then reported from the St. Petersburg operations in the third quarter.

Going to the balance sheet, significant increase in assets. There is one big foreign currency impact, of course, with a very weak Swedish krona that is impacting us significantly compared to the prior year. But if we look into the different parts of the balance sheet, the main increase is coming from land. We have increased our investment, as you know, in the first half and slightly also in the third quarter of this year. And the assets in St. Petersburg have increased with about SEK 1 billion as we are producing more and more for the handovers to come now in the fourth quarter.

Cash flow-wise, it has been a negative quarter, mainly driven out of some delays than in handovers not being able to cash in, but also that we made investments, as I said, that is impacting the cash flow. And if we compare to the prior year, we were in the strategy review process, so we were actually deferring, I guess, investments in land and also starting projects to some extent, giving a positive cash flow in that period.

And if we then move over to net debt. With a negative cash flow, of course, our net debt has increased with about SEK 1.1 billion. We are -- as we have said before, we are then consolidating the debt for the tenant owners and housing companies, and that is approximately SEK 1.6 billion, SEK 1.7 billion of it. So underlying, we have increased our net debt with about 0.9%, a significant portion is investments. But we still are maintaining a good equity/assets ratio in line with the prior year. The third quarter is normally the weakest quarter then in terms of equity/assets ratio.

And talking about our facilities, even though we have increased our net debt in the quarter, we are still sitting on unutilized facilities in the region of SEK 2.8 billion in total, including the project financing, as you can see here. The main facility, our revolving credit facility, is maturing by the end of next year. So we are right now in the renegotiation and renewal of that credit facility. And we hope that -- estimating that, that will be renewed within the coming weeks.

Moving over to building rights. We have increased building rights with about 1,300 compared to how it was 1 year ago, but the slight reduction in the quarter due to that we have a number of starts that have been reducing the balance. The book value is now up to SEK 9 billion. We started the year on a SEK 6 billion level. So almost SEK 3 billion have -- the book value have increased with almost SEK 3 billion.

And if we look at the 32,300 building rights that we have in the portfolio, about 56% of those have been acquired now in the last 3 years, 2020 up to '22. We're estimating that 28% of those will be used for starts for the remainder of this year and '23 and '24. And as you see, as we have had in the past, the 14,400 that we are estimating then to start '22 to '24, almost 90% in multifamily houses and 75% of that in the customer segment.

Just looking at the graphs for how we are expecting completions for the coming quarters. You see that we are expecting then 1,270 units in the consumer area to be completed now during the fourth quarter. And in the -- this area, we are estimating 570 units to be completed. And of course, the 97, as you see here, the German project that I was mentioning is included in the Q4. So the Q4 has increased with those 97, everything else equal.

So with that, I hand the word over to you again, Peter.

[Peter Wallin, executive]

Thank you very much, Lars. Great presentation, as always. So wrapping this all up, we are improving our profitability and some -- the measures that we have taken into the business is gradually starting to pay into effect. And I think this is very important as we have a considerable volume of units to hand over and -- which also means that the profitability in that volume feels more stable and solid now.

And as you saw from Lars' latest graphs, talking about the fourth quarter, we are entering into the most active quarter, the biggest quarter for Bonava, and that's the fourth quarter. So there will be a lot of activity where we are prepared to hand over homes to happy customers.

In the quarter, the third quarter, we also took the write-downs in the Swedish business. And I think that this was a prudent measure given how the market is performing. And also, this will mean that we stand on the stronger footing going ahead.

We are increasing the land bank, as Lars has alluded to. And if you look on the land bank on our books, there has been a move from the options that we have been working with for quite some time into the balance sheet. And that also means that price levels that they are entering in on the balance sheet is on a very good level compared with the market or trading.

We have a strong financial position. The growth in indebtedness that Lars alluded to is a planned growth. And also, consequently, as the quarter 4 will be a strong quarter of handovers, so will be the improvement of equity and the balance sheet.

Having entered into the sales contract in St. Petersburg, may -- is a good first step, even though we are facing a very complex process with getting the permitting okay from the Russian authorities. But that -- this also means that we can focus on the rest of the business, as I talked about, because management attention is needed given the market context.

And last but not least, we today have targets talking about earnings before tax, including interest. And of course, looking ahead, it's very hard to see where the interest rate is going. So we will take a review of the current financial targets and we will come back with the conclusion of our analysis when we post the fourth quarter results.

So with that, Anna, I hand over to you again.

[Anna Fyhrlund, executive]

Thank you both for a very good presentation. I think Lars can come here as well, and we will start the Q&A session. And today, you will be able to post online and you will also be able to call in your questions.

[Anna Fyhrlund, executive]

So I think I will start, because we have some here online, and they are from David Flemmich at Nordea. And his first question is, can you mention anything about the geographic split of the 750 units expected to start in the Q4?

[Peter Wallin, executive]

We can't give you the exact split. But given how the market weighting is looking, the predominant part is in the German market and we are also perceiving projects to be started in the Baltics, and also in Norway. But then Germany will be the biggest proportion of the 750.

[Anna Fyhrlund, executive]

Yes. And he has a question on selling and admin. Selling and admin was SEK 206 million in Q3, up almost 10% year-on-year. You write in the CEO letter that reduced expenses expected to impact approximately SEK 220 million on a full year basis for 2023. Can you say anything about how much of this expected to impact on the SG&A and production costs, respectively?

[Lars Granlöf, executive]

We have chosen not to split it because we are working on the different parts of it. What we are seeing is, of course, a gradual impact now in 2022. And as Peter has written in his CEO message, the full impact will be 2023. But we see that there is a significant portion, also indirect expenses, which is not, of course, separated out in our reporting. So it's not just S&A.

[Peter Wallin, executive]

But that is part of the gross result and the gross profit. And the gross profit, as we remember, grew to 15.9%. And in the numbers that David is referring to, of course, you have a currency impact of comparing the numbers, because a lot of the cost is denominated in euros and the euro has strengthened against the SEK, or if the SEK has weakened, you'd be the judge of that. And then in addition to that, we have also incurred expenses of reducing the costs in that selling and admin level. So I'm very positive towards the measures that we are taking to reduce the cost levels.

[Anna Fyhrlund, executive]

Thanks. And his last question is, what yield on cost target do you have for Årsta Park?

[Peter Wallin, executive]

That is something that we will keep to ourselves. But we have started the project in a very attractive area, and we have done so with robust estimate for building and producing the area. And a lot of things is happening around the area. So this will be an important part of creating a new part of Uppsala, where a growing dynamic city.

[Anna Fyhrlund, executive]

Okay. Any calls, or should I continue with the online questions?

[Operator]

[Operator Instructions] The next question comes from Erik Granström from Carnegie.

[Erik Granström, analyst]

I have a few questions as well. Starting off with the review that you have made in Sweden that -- resulting in these charges. Does this mean that you feel confident in further starts of the project portfolio in Sweden? Or will you go through the potential starts going forward in terms of this kind of a review again?

[Peter Wallin, executive]

If -- you had a few questions. So I think you stopped there, so let's now try to answer your first very good question then. As you know, we have a new leadership in the Swedish business. And of course, they have taken a strong look on the -- on what is happening in the market context. So what we're talking about here is capitalized expenses earlier on projects to be started. It has not to do with the actual production cost in those units. So -- and with a stronger and more sober view on how the market looks like, the measures have been taken to write those off. And then in addition to that, we have the impairment on the tangible assets in the production unit.

So turning back to your question then, again, these are a very few number of projects. Then the start of the projects, we are preparing. We have a number of projects prepared. But still, we need to be very selective in the starts and we need to be very strict on having the right team, having control over the production cost and verifying the sales status. So the answer on those 3 is also the answer whether we are prepared to start or not.

[Erik Granström, analyst]

Okay. That's clear enough. But sort of moving into other areas, obviously, the market condition changing is part of the reason why you're doing this in Sweden. We've also seen changes to market conditions in other countries as well. Have you run through those units to the same extent that you have done in Sweden now? Or is that something you're already comfortable with? .

[Peter Wallin, executive]

The short answer is that we are comfortable with the situation, albeit we don't know what will happen in the marketplace, and hence, I can't say that we will not take any measures forward. That depends on how the market develops. But if you, for example, think about Finland, there, we changed the complete management last year. And they have been working through the numbers and the organization big time during the last year, and now we are starting to see the Finnish business performing better and better. So that is one business that you have reviewed.

The same is true for the Norwegian business. Germany is a much more stable business and a more stable management and have not had the same challenges that you have seen in the Nordics. And then last but not least, the same is true for the Baltics, which are performing greatly. And as we commented upon in the second quarter, now we are firing up all 3 markets with starts and sales.

[Erik Granström, analyst]

Okay. And my final question was regarding starts. You highlighted that out of the 750 starts, it's predominantly going to be Germany. If I look in Q3, you started about 231 units in Sweden, but those were rental units and I don't believe you started any units to consumers. Do you expect to start units to consumers in Sweden in Q4 and perhaps already in Q1 next year? Or is this something that is on hold until you start to see sales of units pick up substantially?

[Peter Wallin, executive]

I -- again, I come back to the answer I gave you on the first question, that depends on the market situation. And the most important for us, Erik, as you know, is being prepared to launch projects. That is something that we do the whole time and making sure that we are right in terms of the market. And the visibility in the market today, especially in the Swedish context, is quite low, because the buyers and sellers are not agreeing on what kind of price level they should be reaching at currently.

So that is why I'm a bit hesitant to pushing starts if we are not seeing a robust interest in the project. So I wouldn't make any promises, but we will, for sure, be active seeing if there are opportunities to start projects, but we will be selectively doing though. If we don't hit the sales, we will not start it.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Anna Fyhrlund, executive]

We have a few more questions here online, so I will continue with those. Simen at DNB has a few questions. What are the risks for the settlement in the Russian operations sale? How do you expect to get the money transferred out of Russia? Will there be a Q4 transaction impact?

[Peter Wallin, executive]

That's a difficult question, so I hand it over to Lars.

[Lars Granlöf, executive]

If you look at the -- actually, I didn't write it down, so you have to remind me. But the actual flow coming -- the money coming to Sweden, it's like we were talking about in connection with the release on the 7th of October. At that point in time, we believe that the rules actually made it possible if the payment would have happened that day, maybe in smaller amounts. But we don't know what is going to happen, of course, up until the time of the closing. So -- but we are of course, constantly looking into this and seeing that we can do that, paying attention to sanctions and rules, of course.

[Peter Wallin, executive]

And then the Q4 impact.

[Lars Granlöf, executive]

Q4 impact. I would say that since we have a transaction on the table, we will not realize any amounts, any results from the Russian operations in our Q4 results. It will be close to 0, even though we will have handovers in the fourth quarter because that's the mechanics of the underlying transaction really.

[Peter Wallin, executive]

Yes. And the transaction as such, if it would to happen in the fourth quarter, we would be the most surprised person, because I think that we have a full respect the complexity in closing the process. And on the flow structure, just building on what Lars said is, we have, of course, structured payment process that is okay by today's standards and are hitting all musts. But then again, what is unraveling now in the political universe is something that could quickly change conditions, of course.

[Anna Fyhrlund, executive]

Yes. And then Simen is asking, how much of the drop in guided starts related to regulation issues versus market weakness?

[Peter Wallin, executive]

I will -- I can't give you an exact number, but the permitting part is actually a substantial part of the drop we are doing, where we expected a chunk of permitting to be received during the third quarter, and it was not. Now we only have less than a 1/4 remaining of this year, and that makes us being a bit on the cautious side. So...

[Anna Fyhrlund, executive]

Yes. And then we have a question from [ Mathias Mendel ]. Isn't an adjustment in employees, for example, in Germany necessary because you have increased the employees from 911 in 2021 to 935 up to now?

[Peter Wallin, executive]

This could move up and down, because we also have blue collars in the German operations. So depending on how much we are doing self-perform of the production work and not, that could be due that the numbers go up and down. It is always needed to look in on the total cost level, and that means selling and admin and indirect cost. And especially if we are looking towards lower volumes going forward, we will always need to keep a track of how we are faring on the cost level. And we will do our utmost to be as efficient as possible.

[Anna Fyhrlund, executive]

Yes. And that was the last question I had here online, and I don't think we have anything over the phone. So with that, we would like to thank you all for listening today. And I will once again stress our Capital Markets Day in Berlin, so hope to see you there. And with that, thank you.