Bonava AB (publ)

STO:BONAV B

Earnings Call Transcript 2022-Q4

[Susanna Winkiel, executive]

Good morning, and welcome, everyone. This is the presentation of Bonava's Full Year Report for 2022. The presentation will be held by Peter Wallin, our CEO; and Lars Granlöf, our CFO.

My name is Susanna Winkiel, I am acting Head of Investor Relations. After the presentation, there will be a Q&A session, and you can either type your questions in the webcast or dial in to ask them in the teleconference. And now over to you, Peter.

[Peter Wallin, executive]

Thank you very much, Susanna. Good morning, everyone. And since this is the first time I see you digitally, I say also happen New Year. We are presenting now the 12-month report of Bonava, and I would like to start with the market highlights.

2022 started off with very strong markets, and it was a considerable slowdown in the third quarter as we reported about. Now when we close the fourth quarter, we can see that the market has not changed that dramatically compared to the situation in the third quarter. Our sales are continuing overall at a slower pace compared to the beginning of the year but it's notable that our markets in the Baltics and Germany are least impacted and if we look on Sweden, our home turf, because we're broadcasting this from Stockholm, this is the most impacted market.

If we take an overall view on the price level, it remains largely stable year-over-year. Of course, there are certain downturns compared to the peaks and this is also, of course, that we are adapting the supply in the market to the demand in the market. If we look on the cost component, the cost of building our homes, we can see that the increased level is continuing to level off. We are still not seeing a general decrease in costs, but this is to be expected throughout 2023. Another component, of course, is the material prices have come down quite considerably from the peak, but the energy prices is sort of maintaining the production cost. This is something which I think that our business has been very good on handling overall if we look on our portfolio.

So, let's go into the performance in the fourth quarter. The fourth quarter for Bonava means the highest quarter in terms of activity over the year. Over the quarter, we handed over 1,744 units and those are recognized to the revenue. The underlying gross margin was stable at 13.5%, which is still a considerable uptick compared to 2 years ago. This is because of us having ramped up the risk management within the company and especially around how we are analyzing and addressing the starts of projects.

When talking about the results, talking about the risk levels, we also changed the leadership in some of our businesses over the course of 2022. So, when we have discussed and analyzed results, we have decided to take further write-downs of earlier capitalized development costs and also providing for identified risks in the fourth quarter when completing this overhaul of the Swedish operation. So, this is impacting Sweden by SEK 118 million in gross profit in the quarter and Germany by SEK 67 million. And looking into which Lars will comment to much more detail. We still have a solid equity-to-asset ratio of 31.2%. And of course, the comparison compared to last year, the big impact there is the write-down of the operation in St. Petersburg, the net asset value that we recorded, and that is also then impacted the equity-to-asset ratio.

We are very selective on starts on investments, and we are very selective in order to be responsible for maintaining our stability over the course of the business when markets are very volatile. The write-down of the net asset value, as I talked about St. Petersburg is reported and recorded as our business from operations that are to be discontinued. If I take a look on the production starts and sold, we can see that we started 534 units in the fourth quarter, thus not reaching fully the 3,000 that we dictated in the third quarter report. This is very much due to internal decisions that we have not met the 3 starts criteria that we have been very clear about and to a smaller reason for not getting the building permit. We have sold more than we have started so there is still a continued interest in homes.

Let me give you a few examples of projects started in the quarter. On the left-hand side, you see the Parkstadt-Portitz in Leipzig in Germany, where we started 94 units for investors, showing that the investor market is there and working; and that is also something which we are looking into, namely converting business to consumer products to business-to-business projects. On the right-hand side, you find the last phase of the development where we've been over the course of many years in Stockholm. So, this is the very last part of that phase and we have used an illustration here, the beautiful winter time, and it actually looks that if you look outside the windows here from the office. What you could see if it wasn't snow on the roof, it's also the solar panels that is used on these houses, and that has attracted quite some interest from the consumers and customers of this project.

We alluded to in the third quarter results that we were going to review the financial targets. In 2021, when we presented the revised strategy for Bonava, we introduced earnings before tax targets in '24 and '26 in absolute terms. Those were very much underpinned by our growth, a growth in terms of volume and capital and so forth. Given the turbulence in the marketplace and volatility right now, it is not responsible to grow the business. It's responsible to make sure that we maintain and remain stable from a financial point of view and that is why we have adapted the financial targets to be looking at the operating margin instead. I think quite a few of our peers is using the same metric.

We want to be at least 10% in operating margin from the full year 2026 and forward. Why 2026? Well, since we are using the completed contracting method of recognizing revenue, those projects that we will record in 2026 needs to be started in '24 and early '25. So that is why there is the natural 1.5-year lag because that is how long time on average it takes to build and sell our homes. We have also introduced a new target when it comes to the net gearing, and that is to look at the recorded net debt and compare that to reported equity. That should not exceed one time. And that is also to show a certain volume part of EBIT percentage. That is also showing how we need to maneuver and address the volumes of the business over the course of the business cycles. So, with this, I also think that we demonstrate that we do aim to increase our value add considerably going forward. So, with that, Lars, I hand over to you.

[Lars Granlöf, executive]

Thank you, Peter. Good morning, everyone. I'll then take you through more of the detailed figures and as always, starting with this one, the bridge of units recognized as we estimated in our Q3 report, we said 1,840 units should be completed during the fourth quarter, and we almost reached that 14 units less that were not completed. Of the completed units, 85 units were remaining unsold at the end of the quarter but we have sold some from previously unsold, and we have also a change in balance of the sold completed but not recognize. That meant that we came out shy of the estimate with about 96 units then.

So going into the income statement, with those 1,744 units, we reached net sales of about SEK 6.2 billion, not that far from the SEK 6.4 billion in the prior year, even though we recognized 400 units less. This is driven out of a better average price on total, also driven slightly about of currency translation differences, of course, with the Swedish weak currency. If we look at the gross margin, the reported gross margin is lower, significantly lower than the prior year. But as Peter mentioned, we have taken further provisions and write-downs in Sweden. We've also taken provisions in Germany. If we are factoring them out, we are on par with the gross margin that we're reporting in the prior year. Selling and admin expense is basically in line with the prior year. And also, if you look at operating margin factoring out these further write-downs and provisions we are on par with the prior year.

Our financial net goes without saying that it has increased with the increase in net debt as well as increase in interest rates. Slightly lower tax rate also in this fourth quarter with some adjustments of positive tax effects coming in the quarter, meaning that we posted a net income from continuing operations of SEK 211 million compared to close to SEK 500 million in the prior year. And then from the operations to be discontinued, i.e., the St. Petersburg business, we have close to SEK 900 million negative and of course, the write-down that we took of the net asset value that Peter mentioned is the main portion of that.

As you see in the graph here, we are trending down on rolling 12 months in terms of gross margin. But of course, both in the Q3 and also now in Q4, we have taken charges affecting the gross margin. If we are factoring that out, we would have seen a trend that is flat to slightly improving. So, let's move into the business units, starting with the biggest one. Germany, recognizing slightly less units than in the prior year, but both with higher average price and also currency effect here, we have higher net sales than in the prior year. A reduction in the gross margin in Germany is partly due to the provisions for warranties and also the mix effect, of course, of the recognized projects in the period as such. And as Peter mentioned, we are looking for the investor market. And here, we have actually then managed to close both sell and start to investor deals of 154 units in the period.

Moving to Sweden. Here, we have fewer recognized units in the prior year. So hence, the lower net sales. We have a gross margin that is negative with the charges that we have taken. But factoring them out also on the Swedish segment, we would have recorded a gross margin on par with the prior year and same goes for the operating margin. The slightly higher selling and administrative expenses is mainly due to that based on the lower volume that we're planning for, we have not been able to capitalize expenses to the extent that we were planning for and to the extent that we were having in the prior year. You see that this is a very low quarter, both in terms of starts as well as sold units.

Moving to Finland, increase in the number of units, increasing net sales, improving the gross margin. So, we start to see now the stabilizing effects that the activities that we have put in to stabilize the Finnish business. We have a slowdown in sales to consumers, but we have then made 2 investor deals, both started and sold in the quarter of 220 units, which is the main contributor then to the starts and sold units as you see here.

Norway, less units recognized than in the prior year, partly due to partly composed of completed unsold from previous period. We have an improved gross margin in the Norwegian business. We have selling and admin expenses higher than the prior year, same reasons that I just mentioned for the Swedish business, as you see also a very low volume quarter for Norway, no starts, and only 15 units sold.

And then moving to Baltics. Even though they have few units recognized, they have improved the margin significantly over above the prior year. If you look at the full year, it's actually a record operating profit in absolute terms in the Baltics in this year 2022. They are selling. They are starting units, and it's a bit worrying in the 3 markets that we are in, but it's an ongoing business. So, it's not that slowdown that we've seen in, for instance, Sweden.

So, let's move over to St. Petersburg. An update on the sales process. You've seen that we have now when we issued the press release about the write-down of assets in St. Petersburg. We have now seen that the GE Group that we had to deal with, they didn't get the approvals from local authorities to go through that deal. So, it has been canceled but the sales process has been restarted. Since we are uncertain on the amount that we are going to be able to sell the business for as well as one in time, where we took the decision to make a write-down of the net asset value for the St. Petersburg business to 0 in the group and this is, of course, a noncash flow item.

As I mentioned earlier on, it's reported as part of the operations to be discontinued. But underlying the ongoing operations in St. Petersburg is running according to plan. We have handed over 91 units in the fourth quarter. There are slight delays not on our part, but for technical reasons for bureaucratic reasons. The completion certificates have not been achieved in before the end of the quarter. And we hope that, that will now happen in the beginning of the year 2023. And just to reiterate, we will not start any new projects in St. Petersburg.

Moving to the balance sheet. You say that the balance sheet has been growing almost SEK 2 billion compared to how it was by the end of '21. SEK 1.5 billion of that is actually currency effect, the translation effect and here, you see also that we have a write-down of the assets in St. Petersburg. If you look at the comparison to the end of Q3, the reduction is, of course, mainly that we have handed over a number of units reducing that balance. Looking at cash flow, slightly negative. Normally, the fourth quarter is a positive quarter from a cash flow perspective. But due to that, we have less starts, we have not achieved the advances that we normally achieve and we also have less investor deals normally and forward funded where the cash is coming in by the end of the quarter, and hence, a slight reduction in -- or a slight negative cash flow in the quarter.

Looking at the equity asset ratio, which is the main covenant in our funding. We have a covenant of 25%. And here you see that we are still over and above our own target of 30%, 31.2% in equity asset ratio, even though we took the write-down of St. Petersburg. If we wouldn't have done that, we would have been on a 33.5% level. Speaking about funding credit facilities, we were then successful in amend and extend our revolving credit facility of SEK 3 billion just before year-end. So that is now extended into 2025. So, we have on centrally credit facilities of SEK 7.2 billion, 2.1 billion of those are unutilized. In addition, we also have project financing facilities of 1.9% with 0.4% of those unutilized by the end of the year.

If we move into the land bank, the land bank has increased compared to Q3 and definitely compared to how it was 1 year ago. In the quarter, the main increase was coming from the land acquisitions in the Stockholm area that we have announced, which is adding 550 units to our land bank. And then the book value of the land bank is now about SEK 10 billion. If you look at the total number of building rights, 32,700; 20,000 of those are on balance and 12,700 of balance. There has been an increase of on balance of converting conditional agreements and options to on balance building rights. And you see that 32,700 out of that, approximately 60% has been acquired in '20 up to 22. And we are estimating that about 40% of those will be utilized for starts in '23 to '25. That means 13,200 units will be started based on that in '23, '25; 87% in multifamily and 30% in single-family. And as it stands right now, 82% in business to consumer and 18% in the investor deals, but we are looking into potential conversions from the consumer, the B2C over to B2B.

Rounding off then with how we view handovers completions going forward. This is the B2C curve. You see 730 units we are estimating in Q1 to be completed, less than we were estimating early on. They have been pushed a bit further into Q2, Q3. If we then look at similar slide for the investors. We have 210 million in Q1, same as we saw in the Q3 report. And you can see that the sales rate for the investor deals are 100% except for in those quarters where we're estimating to complete our build to manage projects in the Baltics and in Sweden. So, with that, Peter?

[Peter Wallin, executive]

Thank you, Lars. So, I will try to wrap this up. It's been an eventful quarter. I understand there is a lot of things to take in when looking at the report and looking at everything that we have been talking about. So just to try to recap this, we have a quarter with a very high activity quarter for us, 1,744 units recognized and handed over to happy customers. We are continuing to work, and we are showing an improvement of the underlying gross margin year-over-year and then we have taken measures to reduce risk and cost for legacy and warranty issues. And I do understand the surprise for us doing this, but changing leadership in one of the larger business units, it has taken some time to complete both a complete review of the business as such and also the need to adapt the organization after the way we're going to work in the future. And I'm very much convinced that the new leadership in Sweden have identified the right way for Bonava in Sweden.

We have also launched the revised financial targets. And as you've also picked up, as you know, from the strategy, we have divided our business units in 3 different pockets. And we have the right to operate and the right to grow needs to be handed over to the units who can grow. And 2 of the units that need to show stability has been Finland and Norway. As you saw from the numbers, both units are improving their performance, especially Finland is improving the performance and against the backdrop of the investment need in the land bank and also the low volumes concurrently in the Norwegian business, we are undertaking a strategic review of the business, where we're looking at different options going forward.

The main focus for us is to maintain financial stability. Thus, we need to be selective on starts and investments, and we need to safeguard that we have the right prerequisite to be there when the market is normalizing. Because the long-term need for sustainable house in our core market is really strong and that we are there for the long run. Thank you for this. Susanna.

[Susanna Winkiel, executive]

Thank you, Peter, and thank you, Lars. And now it is time for our question-and-answer session. And the first question is from Simen Mortensen at DNB and he wonders the cut of dividends. How should we look at this versus the new financial target net debt that will not exceed 1x of visible shareholders' equity.

[Peter Wallin, executive]

So you start...

[Lars Granlöf, executive]

I think that in these times, challenging times, it's very important that we are safeguarding our balance sheet. We have a strong balance sheet, but it's also important to see too that we have capacity if there are opportunities arising. So, I think that has been very much about the reasoning from the Board and the recommendation.

[Peter Wallin, executive]

And it's also very important. It's a good question, Simen. I think with relations to the financial targets and the net gearing, specifically, we have quite a headroom compared to that. But it is also the current volatility in the market that we need to sort of take it for and as Lars says, the opportunity. So, it's a balance of the 2 and then, of course, one should also be reminded that we took SEK 900 million out of the equity through the write-down of St. Petersburg. So again, this is to build a stronger making us able to actually deploy the very attractive land bank that we have of close to 33,000 units.

[Susanna Winkiel, executive]

Yes. Thank you. We have one more question from Ron [indiscernible], who wants to know, will you suspend the dividend or alter the dividend policy to reduce the time to the financial stability targets?

[Peter Wallin, executive]

The dividend policy speaks about 40% of net profit to be dividended over a business cycle. And actually, we are -- if you're monitoring in the 0 that we -- the Board is proposing to the AGM is we are actually somewhat below 40% over a few years. So we do not need to amend the dividend policy against the proposal from the Board.

[Susanna Winkiel, executive]

Very good. Let us see if there are any questions from the teleconference…

[Operator]

The next question comes from Erik Granström from Carnegie.

[Erik Granström, analyst]

I had some questions as well. Starting off perhaps with what you were talking about in terms of development costs. It seems like you mentioned that you see a slowdown in the increase of construction costs. But at the same time, you're talking about material costs coming down, whereas energy costs are basically flat. Could you elaborate a little bit on what you mean about a slowing increase but still an increase, but then a decrease in terms of material costs?

[Peter Wallin, executive]

Yes, there's derivatives in all directions, negative and positive. So, I understand that the conclusion, Erik. So, for example, if you look at concrete slabs, we have the steel in the slabs have gone down in terms of price. The energy consumption that needs to be driven in order to reduce the concrete has gone up -- so there, you have the balance on that is really creating a leveling-off impact at a high level.

[Erik Granström, analyst]

Okay. No, that's clear enough. And then you're talking about converting into investor properties from consumer properties. Is this something that you can do in all -- are you looking into this in all markets? Or is this a strategy that's more specific to a specific region?

[Peter Wallin, executive]

I think that there are a number of business units where this is more of a modus operandi where you're working. And that is specifically the Finnish and German businesses. And here, you can have a working market in both the rental part and in the consumer part so you can sort of flip back and forth. You don't have those big differences in terms of the layouts and the finishes and so forth between the 2 products. You can easily convert and go between. And when I say easily, it takes a bit of negotiations. I don't want to undermine the work that is behind it, but it's feasible in a much simpler way. It is also applicable to some Swedish examples, but of reasons known because you have certain limitations of how the rents are set and so forth, you might have a bigger challenge there.

[Erik Granström, analyst]

Okay. Perfect. And then regarding in the report you state about -- you talked about basically the SEK 370 million in savings as of 1st of January '24. I was just wondering; do you expect that to entail any additional cost as well? Or have those been taken in order to achieve these kinds of savings?

[Peter Wallin, executive]

Those costs have been taken in the SEK 56 million that was provided in the fourth quarter and also the cost of what's taken in the second quarter.

[Erik Granström, analyst]

Okay. Good. And then a question regarding Norway. You're talking about the review in Norway, but perhaps you could help us understand the sort of the strategic logic behind this because it's a strategic review, which means I don't think it has anything to do with sort of a market outlook because that's usually something that's more short term. Could you explain a little bit why you're looking into Norway now specifically versus, for example, 1.5 years ago?

[Peter Wallin, executive]

Thank you very much, and thank you for giving the opportunity to clarify because I understand that I was not as clear as I intended to be. So no, we have not changed our view, our overall positive view on the Norwegian market. The Norwegian market, if we look into the developments over the course of 2022, the Norwegian market is one of the more stable markets in terms of price development and demand. So, the market conditions are there.

Then if I step back to the strategic review that we did and also on how we displayed the various business units and the license to operate, where we put Finland in Norway and get the basics right. And I think Norway has taken quite a few steps and get the basics right. And we are now in a sort of a fork in the road in where we need to grow in order to come up to a sustainable level for the business. And given where we see the best track record of performing and that investment need, namely Germany, Baltics, and also now Sweden, I would say. -- well, then we need to prioritize. So, it's under that part that we are looking at Norway.

Also, it's not only to look at the divestment part. We are also looking into how we can work together over the business units because as you know, the chunk of the operational cost of managing a business is quite high as a start cost, and that impacts sort of how you can operate and how you can operate efficiently.

[Erik Granström, analyst]

Okay. And then my final question was it's a bit of a sort of a technical one for Q4 specifically. Could you break down the financial costs a little bit in terms -- on a group level versus what we saw in Q3, just so that we understand a little bit the change Q-on-Q because I assume that the business that basically Russia is stripped out of that.

[Lars Granlöf, executive]

Absolutely, Erik. That's absolutely right, that's reported as part of the discontinued operations, of course. We see a gradual increase. We haven't got a dramatic increase in net debt over the fourth quarter compared to the third quarter, but we start to see the increase in underlying interest rates, of course, and that's the major reason for the increase. And including in the financial net, we have fees for facilities, et cetera, but that's a smaller portion. So, the increase is coming from the rise in interest rates.

[Susanna Winkiel, executive]

All right. I have a question from Fredrik Stensved at ABG Sundal Collier. He says that there is usually a seasonality effect in the equity ratio where Q4 is higher than, e.g., Q2, Q3. However, you have a lot of completions upcoming in the next 18 months. Can you give any comment on how you think that the equity ratio will be going forward into 2023?

[Lars Granlöf, executive]

Yes. We are not giving any forecast, of course. But if we start with Q4, it's like I'm saying that with the write-down in St. Pete, that is having a 2.3% impact. So everything else equal would be on 33.5%, which is a bit shy of what we have normally seen in Q4. But what has also impacted or, of course, the currency effect with the increase of assets as having the equity not increasing at the same rate. Going forward, we are, of course, estimating to hand over based on what you're seeing in the report and to realize profitability on that we will see an increasing equity as we go -- our assets, as we will be more careful with starts going forward.

I don't think that we will see the increase of the ongoing production to the same extent that we saw, for instance, in '22, not i.e., everything else equal, not growing the asset base in the same way. We are not going to acquire land to the same extent as we did in '22. The unknown is, of course, how currencies will move our balance sheet going forward.

[Peter Wallin, executive]

But as an add-on for me, that effect is sort of the equity and the assets are moving in the right -- same direction on the FX component. If I can build upon what you're stating then one thing you need to bear in mind is the fact that when we are acquiring land, we are acquiring land in different models. Sometimes, we do negotiate a smaller part being paid upfront and a bigger part paid when receiving the zoning plan and so forth in order to balance the risks we are taking in the zoning process, both in terms of how much building rights we can get and also in terms of time.

So during 2023, we expect to pay some of those lands and keep them on balance. They are very attractive pieces of land and building, right? So it's the absolute right way to do. But that -- you need to build that -- we will not be very active on buying new, but we have commitments to buy land, which will be then seen through the cash flow and balance sheet also, just to add to that.

[Susanna Winkiel, executive]

Very good. I have one more question from Simen Mortensen. "I wanted to know, how have Bonava been adjusting selling prices the last months given the drop in used home prices in several of your markets?"

[Peter Wallin, executive]

We have not dropped the sales price significantly. I would say we have moved them very little, as I was alluded to in the start commenting the market. What happens is you do withdraw a number of projects from the sell list so the supply produces. The other thing you do, you're looking at other kinds of measures in order to improve the offering. So, if we continue to look back into the single-family housing project, I was talking about in Stockholm with the solar panels added in the product as a selling point. That is increased interest. So, there are various ways other than just adjusting the sales price.

[Susanna Winkiel, executive]

Very good. I believe that was our last question. So once again, I would like to thank you, Peter. Thank you, Lars, and thank you for listening.