Bonava AB (publ)

Good morning and warm welcome to Bonava's presentation of the second quarter 2021. Speaking is Carolina Strömlid, Head of Investor Relations. And with me today, I have our CEO Peter Wallin and CFO Lars Granlöf. We will follow the usual procedure and start with a presentation of the highlights and financial results, followed by a Q&A session where you're able to ask questions if you participate in the telephone conference. I would also like to mention that the presentation is recorded and an on-demand version will be available on our website. With this, I hand over the word to Peter Wallin.

Good morning, everyone, and very welcome to our conference here. And I would like to start with giving you a view of the market conditions. The very good fundamentals and strong market is continuing. So we are seeing a very high demand and possibility to increase prices across all of our markets. We are seeing a tendency in some markets that the growth rate of prices has abated somewhat, but are still at a very good level. Another thing we are seeing is also during the pandemic, the trend to prioritize the housing situation, moving to larger housing and also with the possibilities to go out in green areas has continued to strengthen. And this is something which benefits the happy neighborhoods that we are providing. The fundamentals in terms of macro and with low interest rates, low unemployment and a good growth in the economy and also a very strong positive sentiment for companies and households is continuing. So this underpins the new production and starts. And we see this both on the short term and on the long term for the housing market. Turning into the profitability, the net sales decreased by 4% due to the lower recognized volume of investor units compared to last year. If we look on the number of units, you can see that they dropped by the whole 21%. So that means that we have a higher price per unit. Also the fact that we are selling more consumer units with good margins. We significantly strengthened the EBITDA margin. And this is also due to the fact that we have more consumer units recognized and also were able to increase prices and also contain cost. So that meant that the gross margin strengthened in all segments. In the second quarter, as announced in May when we announced the decision to wind down the business in Denmark and Copenhagen, we took 117 million SEK as an items effect and comparability relating to the wind down. So, of course, the comparison with Q2 last year, which was fully impacted by the pandemic, is a little bit skewed. But I think that this report clearly indicates a step in the right direction. Looking into the sales development, we have increased the number of starts. We have also increased the number of sold units, and those two are linked together, as you can see. And if you look to the rolling 12-month level, they are both overshooting last full year. Also, comparing to last year, we had a very skewed fourth quarter with a lot of starts into the fourth quarter. So it was a quite low start in 2020. Another point I would like to make is if you look on the recognized unit, you can see that the number was quite below last year, but the consumer part was much stronger. And this again is coming back to the stronger impact on the P&L. And Lars will comment much more details of this. The outlook that we have and the guidance we're giving is still at the 5% mark if we adjust for the close down of Denmark that we announced after the Q1. So this should be based on the base of close to 5,400 units 2020, excluding the Danish units. I would also like to present two of the projects we started in the second quarter. If we start on the left-hand side, we started a project in the Imanta district, which is very close to the airport and also close to the city centre. And it's also very close to green areas, as we talked about. And it's actually A-rated in energy efficiency. Turning to the right-hand side, we started up a project in Umeå in the University City in the northern part of Sweden, where it's also very high on the agenda in terms of sustainability. And in this area, we are developing and are looking into developing more units as time goes by. Then turning into the external factors that we have playing around. If we start with the pandemic, the health and with staff, customers and projects is the key priority for us. And of course, we are keeping a very strong eye on the development of the spreading of this Delta virus as we are seeing. So far, we have very limited disturbances on our operations from the pandemic and also the implication that this has given on the supply chain. Looking a little bit closer to the supply chain, we are seeing a lot of cost increases, of course, and this is offset by the very strong growth in sales prices, which means we can start projects with sufficient margins. And of course, if we experience shortages of material and resource, this may impact margins and handovers and starts timing wise. But this is something so far which have been able to manage. We are focused on optimizing the purchase and flows to our projects. And as a company which overstretches a large number of markets, we have the ability to drive larger volumes and also tackle shortages in the group. So this is something which we are doing as efficiently as we can. I would also like to point out that the situation with production of cement in Sweden, which has has rised on the alert side, is something that would have an impact on our Swedish operations. So this is of course a very big impact for Swedish construction industry and Swedish economy as a whole if this situation is not resolved. From a Bonava Group point of view, it's a very limited impact because it's only the Swedish operation that would be impacted if this crisis should come into fruition. Then I would also like to comment the floods that we have seen and experienced in Germany. The footage we have seen in the media is very disturbing and alarming. And our heart and thoughts go out to the people that have been impacted by the flooding. I can happily report that we have not heard any of our employees being involved or hurt in any of the floods. And the closest projects we have to the flooded areas are in Cologne, in the western part of Germany, 15 kilometers from the flooding. And some project has been impacted by heavy rain, but not any flooding. has not gone through any major disturbances. As a company, of course, we are caring for the local communities and we are looking into how we can support the local communities when the flooding has subsided. Then I would also like to point out and come to the project starts. This is the engine of our business and we are committed and fully focused on increasing the number of homes to the market in a demand situation which far outstretches that of supply. And we need to make sure that we have the production and everything in control before we start a project. This comes to both the project, the pricing and also the costs. And we are not starting any project just to report a high number of starts. We are only doing it when we can secure the basics. We have increased the number of starts in a period, and I'm very pleased to see the work that the operation has done on that part. Secondly, I would like to comment that we are committed and fully focused on increasing profitability. The strategic review that we announced in the first quarter is ongoing. We announced the first step, exit the Danish operations, And this is going according to plan. I'm also very happy to report that we have started a structured process of selling the land bank. This is done with a large interest in our assets. And we were hoping to conclude this during the second half. The outcome of the strategic review will be communicated during the fourth quarter. Thirdly, the sustainable business part is very important to us. And under the second quarter, we expanded the green financing, which enables us to finance long term the sustainable housing that we are providing to society. Also, and perhaps most importantly in our type of business, it is securing an attractive portfolio of building rights. And this is something which we are looking towards increasing with the sustainability and profitability as key focus in most of our markets. With that, I would like to hand over the word to Lars Granlöf, our CFO.

Thank you, Peter. Good morning, everyone. I think we start, as we have done the last few quarters, with the build-up of net sales. As reported in our Q1 report, we were estimating completions of about 830 units, 140 of them in the investor area and 690 in the consumer area for the second quarter. We have hit the 140 in the investor area, and here you see that out of the 830 or 690 B2C, the customer area, 21 units were, for different reasons, postponed in terms of completions later on. Out of the 809 that we completed then, 38 remained unsold by the end of the quarter. But on the other hand, we continue to decrease completed unsold from previous periods, and this time with 121. So a significant further reduction of these units in the balance sheet. And in addition to that, as we were reporting and mentioning in the first quarter, we had a number of units that were sold completed, but for various reasons not recognized because we have not finalized all the registrations, etc. So 151 of those were completed and added to net sales for the second quarter. So looking at the quarter and the figures here to date, again, Peter mentioned that last year, the second quarter was the first quarter where the pandemic really hit the business, not only in Bonava, but the whole society. So it was not a very strong quarter, as we know. But if we look at net sales, we had more units recognized in the prior year, but this year with much more profitability. We had a mix of projects where we were handing over and recognizing a number of not very profitable projects. In addition to that, of course, we had a mix of very much of investor projects, typically at lower margins than the consumer projects at that point in time. So that means that our gross margin for the second quarter is almost doubled than the gross margin in a prior year, almost 14% compared to just above 7% in second quarter last year. And if we add then the selling and administrative expenses, slightly higher than last year. Last year, of course, then everything was locked down, closed down. And this year we have some more spending, but not significantly higher, which you can also see on the year-to-date figures where we are practically spot on on the level as we had in the prior year. So with that, we are delivering an EBIT of 257 million before these items affecting compatibility. I come back to that. With that margin, we have increased our EBIT margin with 6 percentage units up to 7.6% in this quarter. But as Peter mentioned, and as we have reported by the end of May, we have decided to close down, wind down our business in Denmark. And we have taken a charge down here in the second quarter of 117 million. So after that, EBIT is 140 million, still significantly above what we were recording and reporting in the prior year. If we look at net financial items, they have increased, and we have been presenting that before. We have prolonged, we have longer financing now to reduce the financing risk, and that is, of course, increasing the interest rate. But it is also outlined in the report that we have an ownership by NCC in Germany that where we have an option to buy that ownership. And we are paying about 3 million Swedish per quarter for that. And that has been added to the net financials. And then you see that our tax percent is low compared to what it used to be. And part of that is, of course, coming from the tax credit that the items affecting comparability is creating. so let's move into the segments and as you saw in the heading in in the prior slide we have improved margins in all the segments and we see that in in the coming slides and if we start then with with germany we have a mix that has improved project and region mix compared to the prior year And as you see here in the diagram in the graph on the right-hand side, we had a significant portion, 60% of what was recognized last year was coming from the investor segment at the lower margin. So a big improvement compared to the prior year. We also see that our selling and administrative expenses is slightly higher in the quarter, but better than the prior year to date figures. So we are delivering close to 13% EBIT margin compared to less than 4% EBIT margin in the prior year in Germany. And then looking at sold and started units, we see in Germany, as Peter also explained, that all our markets, we have a strong demand and a very good sales development. And it goes, of course, for Germany as well. We have still prices on high levels. They are increasing, but the pace of increase is slightly lower than we have seen in the past. We have been selling, of course, on the consumer side, so far less on the investor side in Germany. And we have started twice as many units in the consumer area in Germany than we did in the prior year. Going to Sweden, here we see more handovers to customers, as you can see from the diagram here, at less investor deals than in the prior year. And we see improved margin from the mix and from the projects that we have handed over in the period in the quarter. Selling and administrative expenses in line with the prior year means that we then have increased our EBIT margin to above 9% in the quarter compared to 6.6% in the prior year. And looking at the market, I would say that it's a carbon copy of the German situation. Strong demand, very good sales development. Also here we see high price levels and the pace of the increase is coming down slightly now compared to what we have seen in the past. And you see that sales is good in the consumer area, but we have not sold anything in the investor area. But we'll come back to that in the bullet further down here. So we have not added that in the quarter. But in terms of starts, we have increased the number of starts, and that is coming from the consumer area. there is a high interest in the investor areas as well. We have then concluded two deals in the second quarter in Umeå, the project that Peter showed you, and also in Solentuna suburbs to Stockholm. And after the end of the quarter, we also concluded one in Västerås. The Nordic segment, they have a quarter with very low volumes, as you can see in terms of recognized units. Only 122 units recognized in the quarter. No investor deals just on the consumer side. And that, of course, then brings a low net sales figure. But with less of investor deals handed over in the quarter, we can see an improved gross margin even though still on a low level. We are building some selling and administrative expenses here. And this is mainly due to that now when we are winding down Denmark, we are... than dressing Norway as a standalone market not being assisted and serviced by Denmark. So we are building that organization as an investment for the future. EBIT still on the negative side, even though it has reduced the negative amount. And then we're coming to the 117 million in items affecting comparability, as we were talking about earlier on, is the winding down of Denmark. And it's relating to warranties, it's relating to staff, and it's relating to the remaining organization that we see here. Thank you. Nevertheless, also here we see strong demand and sales development with increased prices in all of our markets. You see that we are strong in terms of sales on the consumer side, a bit weaker on the investor side compared to the prior year. But we have closed and sold and started one in Finland in the period. And we are starting more consumer units, 100 units more in total. But if you're just looking at the consumer units, 150 more than we had in the prior year. And here, as in the other business units, we are adding land acquisitions in Finland, in particular in Tampere and in the capital area. And then to our fourth segment, St. Petersburg Baltics. It's good, yet another very good quarter in terms of recognized units increasing again over the prior year, adding net sales with good profitability, almost 90% gross margin in the quarter, up more than 1% each point compared to the prior year. Selling and administrative expenses in line with the prior year. And that is, of course, then bringing the EBIT margin 13.6%, which is almost three percentage points above the prior year. High demand and price increases we can see in all of our markets, St. Petersburg and the three Baltic countries. We see strong sales development, as you see here, more than 500 consumer units sold compared to 135 in the prior year. And in particular, we see a contribution from Latvia in this period. We also see increased starts. In the prior year, we didn't start anything at all in this business unit. Now we started 266 units in the second quarter. We have also made a land acquisition of about 1,000 building rights in Vilnius, Lithuania, which is our newly added market in the Baltics that we started up just a year ago. If we move from our business unit, our segments, and move over to the balance sheet, we continue to see a strong, very strong financial position. If you're looking at our equity to assets ratio, we are above the 31% level. And you know that our target is above 30%. So building on that, And talking about the building rights, which is of course a very significant part of our balance sheet. Here you can see the development from end of last year, where we had almost 32,000 units, has now increased to almost 34,000 units over this first half of the year. Despite the fact that Germany right now is decreasing the figures due to that they are starting a lot of projects and units and then are utilizing. But we're looking for opportunities to add more building rights in Germany, of course, going forward. Sweden, a slight increase. We have a slight drop in the Nordic area, but we continue to look for more there. And a very strong increase in the Baltics and St. Petersburg. Looking at the return on capital employed, our capital employed is still at a rather low level, about 12.5 billion. So with a good profitability and a low capital employed, we have actually now reached the 10% level, which is the lower level, of course, of our range that we are targeting in terms of financial objectives. And moving over to cash flow, yet another quarter of strong cash flow, despite the fact that we are continuously investing for the future in investing in new housing projects. And that will, of course, continue going forward because that is what is building our future business. But we still managed to deliver a strong cash flow. And we have the capacity, in addition to a strong cash flow generation, we have the financing capacity from our facilities. By the end of this quarter, we have 3.6 billion Swedish kronor in unutilized credit facilities. And we are still on a low level in terms of net debt, despite the fact that we have been growing our housing project balance quite significantly. And also I would like to mention that Peter pointed out that we have actually increased our green bond alone by tap issue in the quarter. And we have also refinanced other green facilities within the green financing framework. Moving over to the graphs that we have in our report, updated now for yet another period, and here we have also included Q2 and the delta that I showed you in the early picture. We see a gradual movement of slight delays i would say moving to the to the next quarter and this is of course a situation where we are a bit uncertain about the building rights building permits etc in particular in germany but we are of course working hard in order to to hand over and complete our projects as soon as possible And in the consumer area, we have added, as you see here, 1,100 units in the quarter, adding to completions going forward. And if we're looking at the investor area, we can see that we actually have moved one project earlier that we now think that we will be completing already in Q3 instead of later on. And here we have added some 240 units compared to where we were in the previous report. So that's the end of my presentation. So I hand the word over back to you, Peter.

Clear and sharp. Thank you very much, Lars. So rounding off this presentation, strong market, very strong underlying drivers for our business. We have improved the profitability considerably in the second quarter. And the whole organization is with a high activity to secure the handovers and project starts also going forward. The windover Denmark is the first step in ongoing strategic review, and this is to be finalized in the fourth quarter. And overall, it's a good foundation for continued improved performance. And with that, I hand over to you, Karolina.

Thank you, Peter and Lars, for a good presentation. We will now open up for questions. So, operator, please go ahead.

Thank you. If you do wish to ask a question, please press 01 on the telephone keypad. If you do wish to withdraw your question, you can do so by pressing 02 to cancel. Our first question comes from the line of Stephen Edison from SEB. Please go ahead. Your line is open.

Thank you and good morning. A couple of questions from me. First, just to double-check two things. When it comes to the guidance on starts, the 5%, in the report you mentioned 5,300 something. The number you have there, I guess that is last year, excluding Denmark. So we don't have to do any adjustments to that number, just to double-check.

That's the double check. Hello, Stefan. That's correct. Including Denmark, the number is 5,710. 5,346 excluding Denmark. That is the base. Yes. Perfect.

And then when it comes to the divestment of the land bank, as you talked about for the second half, I guess you were talking about Denmark there. Could you give an indication on how much land you own there so we can understand if it's going to be a big number or a small number in profits from that.

It's a rather small number. We have more or less four different plots with building rights in Copenhagen. Very attractive plots. And so it will give an impact on the P&L, but it's not a material impact.

Okay, that's good. So can I understand roughly how big it could be? When it comes to the... You mentioned it, and I fully understand it's difficult to have an overview, but see if you can help out slightly at least. With the price increase on the tier that you see now, you said that the price hikes we've seen in the market fully cover that, but could you maybe, are we talking that price hikes, the cost inflation being 50% of the price hikes, or You know, 25 or is it 75? I mean, what kind of impact do you have on your cost, really, on an apartment? You can use whatever reference you want, but just to understand roughly how big the impact is on your cost line.

It's hard to give you a number because we have so many markets and so many composition of projects. So it's hard to give you a number. But so that is why we have given the reference relating to the sales prices. The price increases on the sales prices has been actually a bit more than the cost increases. So that's the indication that we're given. Also, of course, since the revenues is higher than the costs, you will get a cushion there from the price increases. So this is something which we have full focus on. And also, as I talked about, the fact that we have frame agreements and multi-year agreements also means that the implications is gradually over time. So it doesn't come from one day to another. So we are, of course, on top of this situation and we are trying to mitigate the implications. The big strain could be on the smaller subcontractors that we are hiring. They could have a hard time managing the situation. So we are supporting our supply chain, trying to make the disturbances as small as possible for the projects.

Thank you. Then looking at the building rights... How do you see the prices developing there? Sometimes when the end market is moving quite a lot and there's a big demand, then those prices start moving as well. But that's not always the case. So how do you see that in the future?

You're absolutely right that increasing of prices is also creating a communicating source to the cost increases of building rights. And we are still seeing opportunities to buy because there are some stickiness. And also we have building systems and platform systems, which means that we we are in full control over the production cost, which also means that we can turn even an increased cost of the building rights into sufficient margins for us to start the projects.

Okay, very good. I think that the last question would possibly be if you see, I mean, evidently it's a big demand, but it's also quite, your competitors are a little bit forward-leaning as well. Are you seeing any smaller, how do you say that, local areas where there's a little bit too much coming out at the moment or is it the big demand all over?

Generally, the demand far outstrips the supply. So I would say that is not the case in any markets or segments we're in right now. That is something which, of course, could happen from time to time. But for now, that is not the case.

That's all for me. One thing, I was looking at Sweden there with the start. Are you happy with the pipeline that you see now going into the second half when it comes to starts? I guess you want them up a little bit, particularly Sweden. Just wondering if you're pleased with the planning process and so on going on in that room.

I'm balancedly pleased when it comes to Sweden because, as you know, in Sweden we have a very long planning horizon and that sometimes can sort of kick a couple of quarters back when it comes to production starts. So it's always an adventure at times. But I would say I'm pleased with the situation and the pipeline that we have in Sweden. And I would hope that we are able to increase the starts going forward. But then again, we are not starting just to produce a high number. We are starting when we have full control over production and we can start a project.

Thank you. That was all for me.

Thank you. Our next question comes from Yara Grimstone from Carnegie. Please go ahead. Your line is open.

Thank you very much. Good morning. I had a few follow-up questions. Starting off with your ability to start for the second half. Obviously, you need to ramp up number of starts significantly in the second half versus the first half in order to reach Could you say something about where and what regions do you see the best potential in terms of planning for new starts the coming six months?

Hello, Erik. We are seeing that pretty much across the board, but given the importance of Germany, especially Germany,

Okay, fair enough. And then also, perhaps a bit of a detailed question. The option plan that you have in Germany in relation to NCC's holdings there, you mentioned that you will be paying about 13 million SEC per year. Is that something that we should expect to be ongoing, or should we expect you to use that option, which would then change the situation? Or how should we view that financial item?

Hi, Erik Lars here. Yes, we are in discussion with NCC about that. But for the time being, I would argue that you should add that to the financial net and we come back to it when we have sorted out the situation with NCC.

Okay, but the idea is basically that if you use the option and acquire their part, then you would obviously remove any payments to NCC. That's the way it's structured.

Absolutely. It's an option for us to buy their share in our business that has remained there since the foundation of Bonava in 2016.

Yeah, okay. And then my final question relates to number of units sold in Sweden in Q2. Starts was obviously up quite significantly. Units sold slightly lower than previous quarter, if I'm not mistaken. How do you see sort of the situation for you to sell units in Sweden? Is this a... a situation where you simply don't have enough to sell and you need to get the number of starts up? Or is there a discrepancy between sort of the demand and your ability to start.

Oh, you are completely right. Starts and sales are completely hand in hand in this matter. So when we start the project, we will also be able to report and turn the sales in. So it's not a situation where the demand is imbalanced. So starts will lead to higher sales.

Okay, thank you very much. Those were my questions.

Thank you. Our next question comes from the light of Victor Krager from ABG. Please go ahead. The light is open.

Hello. Just a quick follow-up question regarding the Nordics. You said that Norway will become an independent market within... Well, you didn't really specify the time for that, but my question is... What will happen to Finland? Will that also be an independent market and separate from Norway and Sweden?

When we talk about independent, we are talking about business units being the operative segment. Sweden is a business unit. Finland is a business unit. Denmark-Norway was a combined business unit. Lars was referring to the fact that when we are not exiting Denmark, Norway will be a standalone business unit. We have lumped actually two business units together, which are now consisting of a startup of Norway and then a continuation of business unit Finland. Once we are dealing with the full year of 2021, we will take a closer look on how to report the numbers going forward for Finland and Norway, respectively. And this, of course, will also be on the back of the conclusions we made of the strategic review.

Understood. Thank you.

Thank you. If you do wish to ask a question, please press 01 on the telephone keypad now. Our next question comes from the line of Jan Iffel from Kepler Chavros. Please go ahead, your eyes open.

Okay, Kepler Chavros, Jan Iffel. Okay, good morning, everyone. I actually have three questions. The first one is regarding your acquisition of land. You have been quite pronounced about that you're going to increase the building rights in Sweden. My question really is... Are you looking at building rights where you could start pretty soon, or are you looking at more, so to say, normal building rights? I just wanted to see, because probably the ones that are going to be used soon is a bit higher priced.

Lars here. Hi, Jan. Yes, you're absolutely right. I mean, we are, if we find things that have not been sown and that we can develop at starting from lower prices, of course, that is something that we need. But sometimes we also need to look into those that have been more of a plan, more of ready projects for us to get started and then being able to finalize it earlier on. So it's a mix, it's a combination, and we have to take balanced decision over time. And I also think that going back to Peter's comment about Having the right people in place, the organization in place, is truly important no matter what in these cases.

Okay. And the next question really regards your land bank. Could you say how much, what portion is the single houses in your total land bank?

which we don't have. It's a limited portion. And you can say that in Germany, the big land plots we are buying there, we can build both the single family houses and the multifamily houses on. And where we see a very large need to build up the land bank for single family houses is especially in Sweden, which is the other market where we have single family houses. So Here is a market where we think there is a very good demand on our very popular building system for single-family houses. So we need to build up this land bank going forward to provide more single-family houses.

Okay. My third question, just a clarification. You had a comment there on that the prices for the houses have come up more than your cost, so to say. Was that cost relating to material purchases or is it total cost that you're referring to?

It's total cost I'm referring to. So it's a mix of if you have increased land bank. But the project we are starting, it's predominantly where we have the land bank for quite some time and where we have achieved zoning and building permit on. So there is not so much implications of the... increased building right prices that we're seeing right now. So it's mostly that of material subcontractors.

Okay. So material prices may be more increases than the housing prices are?

No, if we start, housing prices, if that is 100, the cost is approximately 75 to 80% of that 100. So if 100 increases more than the 75 or 80%, you are getting an increased buffer, of course. And then as you are taking newer land into consideration when you are developing, the average cost of those building rights are higher than the ones you have used in older previous projects. So overall, if you just take the underlying, the increase of material and subcontractor prices is the material part of the impact of cost increases that we see in production that we are ready to start now. We also said this, again, this will also be something which will be over time since we have multi-year agreements and frame agreements.

Okay, I just was asking because I think the material purchases is like one-third of total cost. So I just wonder if that was driving your increased cost or was it other items that were also driving your somewhat higher costs?

You need to look into your number when it comes to the material prices impact. The one-third sounds very small. Okay. Okay. Okay, thanks very much.

Thank you. Our next question comes from the line of staff and below from Nadia. Please go ahead. The line is open.

Thank you. Just one question for me regarding Germany. Have you noticed any changes in Germany when it comes to issuing building permits?

Yeah, that is something which we're looking into every day. I can promise you that. And that's why I'm laughing a little bit because that's the most frequently asked question internally here. Germany started up, you can say, four weeks ago, three weeks ago, big time. And... We have seen that it is picked up a little bit, but it's a big backlog to work from with a lot of permits that needs to be handled now. So hopefully, and here is where the Delta virus and the pandemic could put a little bit of stumbling blocks on the way of starts. But so far, so good. And how it pans out for the rest of the year, we can only hope that they increase the efficiency now in the permitting.

Okay, thank you.

Thank you. We have no more questions from the audio line. I will hand it back to our speakers.

Thank you for listening to our presentation and welcome back on the 28th of October when we present the results for the third quarter. We would also like to wish you all a really nice summer.