Bonava AB (publ)

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 Winkel. 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.

Thank you very much, Susanna. Good morning, everyone. And since this is the first time I see you digitally, I say also Happy New Year. We are presenting now the 12-month report of Bonova, 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 is 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. And another component, of course, is that material prices have come down quite considerably from the peak, but the energy prices is sort of maintaining the production costs. And this is something which I think that our business have 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. So over the quarter, we handed over 1,744 units and those are recognized to the revenue. The underlying gross margin was stable in 13.5, which is still a considerable uptake compared to two years ago. And this is, of course, 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 breakdowns 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 118 million in gross profit in the quarter and Germany by 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 has 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. And the write-down of the net asset value, as I talked about to St. Pete, is reported and recorded as business from operations that are to be discontinued. If we 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 three 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 Parkstad Portis 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 products. 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 at 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 is 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 result 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 2024 and 2026 in absolute terms. Those were very much underpinned by a 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. And 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 one and a half 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.

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 breach 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 remain 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 recognized. 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 6.2 billion. Not that far from the 6.4 in the prior year, even though we recognize 400 units less. This is driven out of a better average price on a total, also driven slightly of currency translation differences, of course, with the Swedish weak currency. If you 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 on right 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 were reporting in the prior year. Selling admin expenses 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 increased 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 pose a net income from continuing operations of 2011 compared to close to 500 in a year. And then from the operations to be discontinued, i.e. the St. Petersburg business, we have close to 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. And 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 mixed 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 administrative expenses is mainly due to that based on a lower volume that we were 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. And 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, the activities that we have put into to stabilize the Finnish business. We have a slowdown in sales to consumers, but we have then made two 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 composed of completed unsold from previous period. We haven't improved the 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 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. And if you look at the full year, it's actually 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 free 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 G group that we had a deal with, they didn't get the approvals from local authorities. to go through with that deal so it has been cancelled 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 when in time we took the decision to make a write down of the net asset value for the St. Petersburg business to zero in the group and this is of course a non cash 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 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 see that the balance sheet has been growing almost 2 billion compared to how it was by the end of 21. One and a half 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 than forward funded, where the cash is coming in by the end of the quarter. And hence, a slight reduction 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 right down of St. Petersburg. If we wouldn't have done that, we would have been on a 33.5% level. And speaking about funding credit facilities, we were then successful in amend and extend our revolving credit facility of 3 billion just before year end. So that is now extended into 2025. So we have centrally credit facilities of 7.2 billion. 2.1 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 one year ago. In the quarter, the main increase was coming from land acquisitions in the Stockholm area that we have announced, which is adding 550 units to our land bank. And the book value of the land bank is now about 10 billion. And if you look at the total number of building rights, 32,700, 20,000 of those are on balance and 12,700 off balance. There has been an increase of on balance 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 years. And we are estimating that about 40% of those will be utilized for starts in 2023-2025. That means 13,200 units will be started based on that in 2023-2025. 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. And rounding off then with how we view handovers completions going forward. This is the B2C curve. You see 730 units we're estimating in Q1 to be completed. 30 less than we were estimating early on. They have been pushed a bit further into Q2, Q3. And if we then look at a similar slide for the investors, we have 210 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 or build to manage projects in the Baltics and in Sweden. So, with that, Peter.

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 improvements 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 three 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 two of the units that need to show stability has been Finland and Norway. And as you saw from the numbers, both units are improving their performance, especially Finland is improving their 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 housing in our core market is really strong, and we are there for the long run. Thank you for this. Susanna.

Thank you, Peter, and thank you, Lars. And now it is time for our questions and answers session. And the first question is from Simon 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 one times a visible shareholder's equity?

Shall you start? 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 that we have the capacity if there are opportunities arising. So I think that has been very much about the reasoning from the board and the recommendation.

And it's also very important, it's a good question, Simon, 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 take height for and, as Lars says, the opportunity. So it's a balance of the two. And then, of course, one should also be reminded that we took 900 million out of the equity through the write-down of St. Pete. So again, this is to build us stronger, making us able to actually deploy the very attractive land bank that we have of close to 33,000 units.

Yes, thank you. We have one more question from Ronny Blankenberg, who wants to know, will you suspend the dividend or alter the dividend policy to reduce the time to the financial stability targets?

The dividend policy speaks about 40% of net profit to be dividended over a business cycle. And actually, if you're monitoring in the zero that the board is proposing to the AGM, 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.

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

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Eric Granstrom from Carnegie. Please go ahead.

Thank you very much. Good morning. 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 of what you mean about a slowing increase, but still an increase, but then a decrease in terms of material costs?

Yeah, there's derivatives in all directions, negative and positive. So I understand the confusion, 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 produce the concrete has gone up. So there you have the balance on that is really creating a leveling off impact at a high level.

Okay, thank you. I know 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?

I think that there are a number of business units where this is more of a modus operandi, a way of working, and that is specifically the Finnish and German businesses. And here you 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 that big differences in terms of the layouts and the finishes and so forth between the two products. So you can easily convert and go between. And when I say easily, it takes a bit of negotiation. So 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.

Okay, perfect, thanks. And then regarding in the report you state about, you're talking about the basically the 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 kind of savings?

Those costs have been taken in the 56 that was provided in the fourth quarter, and also the cost that was taken in the second quarter.

Okay, good. And then a question regarding Norway. You're talking about the review in Norway, but perhaps you could help us understand 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, a year and a half ago?

Very good. 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 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 and Norway in get the basics right. And I think Norway has taken quite a few steps on 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.

Okay, thank you. And then my final question was, it's a bit of a sort of technical one for Q4 specifically. Could you break down the financial cost 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 Q1Q. Because I assume that the business that's basically Russia is stripped out of that.

Absolutely, Eric. 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, 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.

Okay. Thank you very much. That was very clear. That was my question.

All right. I have a question from Fredrik Stensved at ABG Sundal Collier. says that there is usually a seasonality effect in the equity ratio where Q4 is higher than 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?

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's, that is having a 2.3% impact. So everything else equal would be on 33.5%, which is a bit shy of what we are normally seeing in Q4. But what has also impacted are, of course, the currency effects with Bitcoin. 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. So 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 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.

but as an add-on for me, that effect is sort of the equity and the assets are moving in the 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 rights, so it's the absolute right way to do it. But you need to build up. 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.

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

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 reduces. 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 project as a selling point, that's increased interest. So there are various ways other than just adjusting the sales price.

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.