Earnings Call: Q1 2021

Apr 29, 2021

Good morning, and warm welcome to the presentation of Bonnava's Q1 Results 2021. My name is Carolina Storn Bildt, and I'm Head of Investor Relations here at Bonnava. With me today, I have our new CEO, Peter Wallin and our CFO, Lars Gransdern. We will start with a brief presentation of the Q1 highlights and results followed by a Q and 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 that said, I hand over the word to Peter Wallin. Thank you very much, Carolina, and good morning, everyone. It feels great to be presenting my Q1 in Bonnava. And if we start with an overview, it's no surprise for anyone that the housing market is Very strong. It's a high demand, and we can see a favorable price trend in most of our markets. And this is, of course, underpinned by the stable and favorable market conditions. We have growth in the economies. We have stimulus coming from the financial system to underpin the economies now during the pandemic. And the unemployment continues to be on a fairly low level. And our customers, the households and the investors, They have strong fundamentals to be wanting to acquire new housing. When we look on the pandemic impact On the way that we are viewing our living conditions, the size, The fact that we need to work together and work from home and also have schooling from home has been impacting that we are wanting larger space. We also want greening. We want the ability to be outside and to have easy access to nice areas. And this is something which we systematically capturing in the way we are developing our offering to the market. So we are building this on our customer insights, both in the design phase and also on how we are thinking about in the future. If we then take a look on the numbers for the Q1, Q1 is a low quarter throughout the year. We have a stronger second half normally in the way our business is built up. And so we had a net sales, which is decreased by 37% 35% adjusted for translation impact of currency. And this is due to the fact that we have handed over Less units compared to last year. And we did not have any B2B sales compared to last year, where we had B2B sales. Regardless of that, the strong demand made it possible for us to sell from the stock that we had of completed unsold, which Lars will comment more into detail and also the fact that we have been able to adjust prices upwards. So this has meant that we've had a strong contribution into the quarter. The gross margin was strengthened to 12.9% compared to 8.8% compared to last year. And that is a combination of increased prices, the change in project mix product mix And this is also really the key reason why we have the improved performance Even though the net sales have been lower. So if we take a look on the EBIT and adjust for currency, we are more or less Bang in line with Q1 last year. The turnaround in Finland that was underway last year was impacting the margins then. That is not impacting the margins today. And even though we are Long gone with the turnaround with the way that we are focusing on 2 Regions in Finland, this will translate into an improvement of the numbers over the years, because we are a long term business and it takes time before we can see all the full impact of this turnaround. And the foundation for improving the gross margin in our business is the fact that we have improved our business to consumers. The number of units is a key component of our business. And if we start with the sold units, we were more or less in line with last year. And as you can see, the consumer were beating last year, whereas the B2B was under shooting. And started We're quite on the same level as last year. And here, we have the ambition to increase the starts by 5% compared to 2020, where we were ending at 5,710 units. And the recognized units, as I started with saying, we were on a lower level. And despite that, Due to the very favorable market conditions and well executed operations, we have been able to post a Pretty good Q1 result. I would like to show some fantastic new projects That we have done during the Q1. On the left hand side, south of Stockholm, you find Newton, where we started 100 35 units to consumers during the Q1. And in Finland, in the Helsinki area, We've started 72 units to investors. And you can find all of our housing Starts on the websites. One of the most important Areas for me as the CEO of the business is the health and safety. And the health and safety comes first. The extended lockdowns and various way of dealing with COVID has impacted our 9 markets differently. And I'm very happy to see how the Bonnava organization has responded with a very high level of flexibility to make sure that we are putting health and safety first with Customers and our employees and our subcontractors, but also the fact that we have been able to operate our projects without any major disturbances. And one of the foundations for being able to do this is all the efforts we have done within digitalization. So this has meant that we have been able to conduct our business in pretty unmoved territory. And Germany, I would like to point out, is perhaps the market where we are facing some obstacle in terms of a low digitalization within the authorities. And the authorities is a key component To be executing the sales and thereby also triggering the production starts. So we are experiencing delays here, And we are working very proactively in order to minimize these impacts. But we can see that there is delays in the market. As the new CEO, I would like to share my first When it comes to the Bonnava business, starting with the project starts. The way we are reporting our revenue, the starts is the indication On how our profitability will be looking in the future when the project is being completed and handed over. So this is the platform for growth. We are clearly focusing on efficient production And also a strong level of project control. The project control means that we are not starting any projects before we have a full control over the project estimates, the team that is going to do the project and also the sales process. So all of this needs to be in control before we start the project. This is something that we will not compromise on how eager the market is still wanting our housing projects. Secondly, I have launched a strategic review of the performance And also the different markets in Bonnava. And this is because I can see a great foundation To improve profitability, because we need to improve profitability overall. We have very good and solid Performance in Germany and in St. Petersburg and the Baltics, but we need to improve and up our game in the Nordics and in Sweden. So this strategic review will entail where we are, how we are doing business And also looking into if we're going to tweak the business model in various degrees going forward. And we will be communicating the outcome of this strategic review during the Q4. Lastly, and extremely important, is sustainable business. This is something which It's an integral part of the Bonnava business, and we drive sustainability step by step In all the various parts and pieces we can impact. And we have signed up for the science based approach, which means that we will entail and look into the whole value chain when we look at the footprint of our projects. And I think this is this whole view is very important to have because it's only together that we can make A noticeable impact in improvement of the way we are building and acting within our business and as a society. And with that, I with warm hand hand over the control and the word to Lars. Thank you, Peter. Good morning, everyone. I would like to start with units recognized. Peter showed you units recognized compared to the prior year. And if we start with this slide, the ones that are following us saw in the Q4 We estimated some 400 units, all consumer units completed during this quarter. We have actually made it possible to complete a couple of projects, 1 in Finland and 1 in St. Petersburg, earlier than expected. So that is adding to the quarter this quarter's completions. So out of the 568 completed, we have Then 38 of them unsold and 71 of them are sold, but the processes were not that we could recognize these units as part of net sales and profitability. So that will come in the coming quarter. And the major thing outside completions is, of course, with a very high demand in all our markets, we have managed to decrease The completed unsold balance with more than 200 units during the quarter. And if you look into the figures by the end of Q4, we had almost 500 units completed unsold. That has now been reduced by some 200 units. So that's the bridge to the 665 units recognized. That is then, Of course, the basis for the SEK 1,800,000,000 in net sales. So very low quarter volume wise, as Peter said, with compared to the SEK 2,900,000 in the prior year, which also was a low quarter, you can say. Gross profit Significantly improved, as Peter showed you in the previous slide. In addition to his comments, I would The market mix, we have more of completions in St. Petersburg, Baltics with higher gross margins, as you will see in the BU slides Coming. And with good control of selling and administrative expenses below the prior year, We managed then to deliver an EBIT in line with the prior year, in particular when we are factoring out the currency effects, as you see in the footnote down below. Net financial items increased over the prior year, and that is mainly because we took measures to prolong our funding portfolio, in particular the green bond that we issued in September, October in the prior year. But we also have some cost for backup facilities we actually then took during the spring last year in connection With the start of the pandemic, just to make sure that we were not running out of financing. So if we go from the total group over to Germany. Germany, our biggest business area, had, Of course, in a low quarter affecting the whole group, fewer units recognized, meaning that We have a gross profit in absolute terms that is lower. And just the small volume turned out that we had a mix With a lower slightly lower gross margin than in the prior year. But with good control of selling and administrative expenses, some of that It was then compensated. But again, low volume means that we did not manage to reached a breakeven, so a slight minus EBIT in this quarter. And if we look at the Sol and the started units, We see that the starts are in line with the prior year. But of course, this we have a high ambition. And as Peter said, Production starts are the key priority in Germany as well as in the other business areas for the future. We have a strong demand in Germany, but We have few units completed, so there isn't that much to sell. We could probably have sold more if we had more units To sell, so to say. We have price increases in Germany, but at a slightly slower pace than we saw prior to the pandemic. And again, we have the effects of the lockdowns. It affects starts building permits. And to some extent, it's also affecting recognition of finalized projects because of the process of notarization, etcetera. Going forward, we have also an acquisition of a small land plot in Hamburg that we will be coming back to in the coming quarters. If we go to Sweden. Sweden, as you see, also had a low quarter with fewer recognized units And then a significant lower sales amount than in the prior year. But the mix of projects, completions It's kept the gross margin in line with the prior year, selling and administrative expenses in line with the prior year. But of course, that is then impacting with a lower net sales than the prior year, we have a lower EBIT on the SEK 27,000,000 or 5 point 5% in margin. If you look at how it looks going forward, you see that we have started more units, is, of course, very positive compared to the prior year. But we haven't been selling as much as we did in the prior year. And that is particular in the investor area where we haven't had any deals in the Q1. Prices are increasing in Sweden as in the other business areas and especially then for the larger apartments and houses, I. E, the demand that the market has for Bigger apartments and houses now. Here, we see a significant reduction of completed unsold from Prior periods. And if you're looking forward here, we have 2 smaller land acquisitions in Stockholm and Gothenburg where we are targeting some 250 new units going forward. And we also have 1 conditional investor deal, conditional on building permit and transfer of ownership in the northern part of Sweden in Umea, 83 units that we'll come back to. The Nordic segment also lower in recognized units. And here, you also We see that we haven't got any investor deals during the Q1. Even though we had lower net Sales, we have a positive and significantly improved gross profit and gross margin. And in the prior year, of course, we had some finished projects that were recognizing losses that impacted significantly in a negative way in the Nordic segment. Selling and administrative expenses in line with the prior year, but still we have a small negative EBIT with a low volume in The Nordic segment. Looking at sales and starts. Here, we see a strong development. See, started units, we have both in the investor segment and the consumer segment. And it's Almost it's more than double than what it was in the Q1 last year. Sold units, Consumer in line with the prior year, but then we have this investor deal that came through in the quarter. So there's strong demand for both Consumers and investors in all the segments. We have also in this business unit business area reduced are completed unsold from the start of the quarter. The 2 investor deals, 36 plus 36 units, It's sold and started in Helsinki during the quarter. And we also here have some acquisition of land plots, Turkey and Tampere And an interesting joint development beginning with DNB, Livforskokring in Norway, where we are planning some 300 units for the time being. The segment business area where we have increase in net sales is St. Petersburg And the Baltics, more units recognized, as you see, more than 300 compared to the prior year's 167. And that with a good gross profit, gross margin significantly improved, impacting of course then significantly the group Gross margin, good control of selling and administrative expenses. We have also then realized a Strong EBIT margin in excess of 18% for the quarter. Looking at the sales and starts. Sales is, of course, looking strong. Sold units, almost 400 units in the quarter, But no starts, which is according to what we were planning for this quarter. And we also So need to view that in light of that. We actually started some units already in the 4th quarter last year that Initially, we're planning to start in this Q1. If we go from the Segments, the business areas over to the balance sheet. Looking at the equity assets ratio, it has come down from what it was in Q4, but it's Significantly above where it was for 1 year ago. But there is a significant impact of us having our AGM On the 31st March, where we separated the dividend out, if that would have taken place in April, we would have had a Solidity or equity asset ratio of 34.5% instead, so almost in line with our Q4 numbers. If you look at return on capital employed, it's going in the right direction. A positive development, we are above 8%, but we Still have some way to go in order to be between the 10% to 15% objective that we have. And this is, of course, One of the things that we are targeting in improving the profitability of the group. Going to cash flow. When we released the Q4, I was mentioning the strong position. We had a strong development in cash flow, we had low net debt, coming back to that in the next slide. In the Q1, we have started to invest more for the future, So more investments in ongoing housing projects, I. E, more starts in the Q1. That then resulted, of course, in negative cash in the quarter about SEK 800,000,000. And that means that if we go to net debt, net debt has increased up to SEK 4,200,000,000 from the record low level of SEK 3,300,000,000 by the end of last year. And we then are sitting on some SEK 4,500,000,000 of unused credit facilities. So we have a significant strength to build on in terms of building new housing projects and new starts. So The couple the last couple of slides that I will show you are the graphs that you see in the report that is hopefully helping you to understand how we view the completions in the coming quarters. In this slide, we have also then included a Q1 this year. And there, you had SEK 400,000,000 in the Q4 report. The actual is SEK 568,000,000. The SEK168,000,000 corresponds to SEK 140,000,000 that we estimated early on to be completed in the second quarter. That is now that now was completed in the Q1. So that has been reducing this quarter's There's possibilities. And there are also some movements earlier units completed in Q3 that we earlier estimated to be completed in Q4. You see that Q1 starts 4 42 units, And it's interesting to see that we actually started 42 units in this quarter that we estimate to complete before year end this year. Looking at expected completions then in the investor area, none in the Q1. We Estimate some 90 more in the second quarter than we did in Q4. And that is, of course, early completions taken from Q3 this year. And we are also redistributing some delays into Q1 next year. And here you see the 76 added units for the B2B. So by that, I hand over back to Peter. Excellent, Lars. Crispy and clear. So summarizing the report that we have put forward today. Very strong market conditions for the housing sector generally and especially in the regions we are active in. I especially want to point towards Germany, our biggest markets, where the sentiment is very strong. And the key priorities for us is the project starts and profitability. And of course, extended lockdowns have delayed projects in the past and With the continued waves of COVID and before we get the vaccination fully distributed could, of course, impact this further. But we are ambitious, And we are targeting a 5% increase of starts in 2021, given that we can get the permitting done. And the strategic review that we have initiated now of the performance targeting to increase profitability is ongoing, and we will be back with the outcome in Q4. So wrapping up with the last point. We have a high level of ambition for long term value creation, and this will be underpinned by what the headline is stating, I. E, We will strengthen our market position in selected markets, and we will grow the business from a balance point of view, meaning that we will only grow with the capacity we have, but we are aiming for a growth. So with that, I hand over the word again to you, Carolina. Thank you, Peter and Lars, for a good presentation. We will now open up for Q and A. So operator, please go ahead with the first question. Our first question comes from the line of Fredrik Zion of Carnegie. Please go ahead. Good morning, Peter and Lars. I tried to be attentive here, but the sound quality is like from our work correspondent in the mountains of Afghanistan. So sorry if I ask questions that I've already addressed. But starting off with the Not for full year 2021 of 6,000 units approximately. Really appreciate that you gave that guidance, but how much clarity do you have on that at this point? Thank you, Fredrik from Afghanistan. Well, the what we do know, the things that we can control, Meaning the team in place, production estimates in place, sales process in place, we have full control of. And we are making sure That we can get the permitting online. And sometimes, it's also that we have the permitting in place, but we are waiting for to get the other parts, which we are controlling internally. So we are not it's not that we are only waiting for the From the letter in the mailbox saying that we can start. So it's a combination here. But regardless of that, The most important factor for to hit the ambition level of starts will be the German market. But as you can see across our business units, we have actually quite high volumes across the different markets, but Germany being the biggest and most important one. And in terms of Germany, It tends to be back end loaded starch where you have a high degree of starch in the 3rd and Q4. Should we anticipate a similar Quarterly development in Germany for 2021. I think you can do so. And you can do so not Because we are aiming for that, but because we are still having lockdowns in Germany, and we are within the Q2. So we can hope that we will be out of the woods In the Q3. So I think it's a fair estimate to have that expectation. And then moving over to gross margins in Germany. They have been at a distant level, but still Far from the levels you had in 2019 and then prior to that, is there anything you want to highlight In terms of gross margins moving forward, is there an underlying pressure downwards here? No, there is no pressure downwards. And I would say that give me a few quarters more as the CEO, and I can be able to comment more and put some more flavor on But I think the operating model we have in Germany with a very good proven track Sort of knowing the various markets, we have a great concept of platform, both for single family housing and multifamily housing. And we are also much more involved in larger areas where we are controlling the whole development over many years. So we can harvest in on the increased value that we created in the area over time. So I'm very optimistic about Germany's ability to create good margins going forward. Perfect. And my last question relates to the strategic review of the performance and markets ongoing. You leave some time there. It's far from 100 day plan. It's more like a 300 day plan. What is the reason For the need to wait until early 2022 until we get more details on how you want Turn the chip around. Very good question, and I will try to give a good answer. We, as you know, are a long term business. It's long lead times. And I think given that we are 5 years now as a stand alone company, It's a good time to take a really close look on how we should be organized and also how we should be operating. And given that it's about culture and how we can increase the commercial awareness out there in the organization. In order to succeed, it's important that the organization is aligned with the change that will happen. And it's not until the culture and the organization It's in line with the change that we will actually see the long term positive impact on it. And that is the reason why I would Extended this to the Q4. Sorry, just one final follow-up on that. Will the strategic review in any way impact stocks or 2021? Our ambition is that it's not, but we are we will try to mitigate that in the forecast and the ambition level that we have communicated in the report today. Thank you very much. And the sound quality is better now. Thank you, Fredrik. Our next question comes from the line of Stefan Anderson of SEB. Please go ahead. Thank you. A couple of questions. And I'll start with a follow-up on Soren's question there regarding the Starts outlook. Just a bit it's a very strong market. You have very much books sold, very little in the stock of Departments. I fully I have full respect for It's quickly ramp up and ramp up, absolutely. But just a little bit curious, what is the bottlenecks for not Starting even more given the very, very strong demand, is it primarily permits or is it also the organization? It's a combination, Stefan. And the combination reads and that is why we are emphasizing the project control. So we are doing a very good job on the market and sales in Bonnava. I'm very impressed by the work that is being done there. So that's a great foundation to start up the projects from a market and sales point of view. But then you need To adapt design. And when you have adapted the design, you need the production estimates to be fixed and assured. And so I think it's and then, of course, you need the permitting. But sometimes, as I alluded to in the previous Question to Fredrik. We do have the permitting in place, but we need to reassure ourselves that we have everything under control before we stop production start. And I also think that we are we will be very, very strict on when we report product starts out in the market. We will actually start. It will It will not only be a number. So I think all of that is and showing you the complexity of ramping up this from one end to another. And I I only wish that we could ramp it up quicker, but I will not Thank you. And then a question on completions. When we look fantastic slides, by the way, were showing exactly the so we understand the deviation here in handover. So I'm very pleased with those slides. Just a question on 2022. The reason behind the delay, it feels like there is Actually, of 100 to 140 apartments per quarter, Q1 to Q3, just on the consumer side, a little bit more on the B2B side, what is the reasons for those delays? Because the project has Started, I guess, in order to be completed in Q1 and Q2. Yes, Stefan. Well spotted. Yes, I would say that a large proportion of this is relating to Germany and the way that they're viewing Future right now because it's not only building permits that are delayed for starts in Germany. It's also more complicated handover process with No verification that can be delayed, the funding, the financing that can be delayed, etcetera. So there have been movements where they expect some later completions. However, once we have lockdowns over, when the pandemic start to fade down, they might Then, of course, revisit this. But this is the current more conservative view, I would say. Okay. Great. Thank you. And then you mentioned because Peter mentioned that You benefited from price increases, and I guess that's on the stock of apartments, not the ones already sold, of course. But if you look at those price increases that we've seen in the last 6 to 9 months, How active have you been in your projects to adjust price? When did you see Yourself doing upward revisions on the projects you started. And then I guess I could calculate the 2 year lag on When I see that in the numbers. Yes. This is the secret trick of this business, to be Putting up enough stock out in the markets that you know how you can optimize the pricing. And We have different pricing regimes across our different markets. As you know, in Sweden, when we do the co ops, we can't Change the prices when we have launched and sort of fixed the financial plan for the co op, which means that we need to divide Divide the phases out in a smart way. And but then, of course, if we have unsold completed in the co ops in Sweden, We are able to manage the prices according to the market development. And then for the all the other markets, I would say, we are adapting and Changing the pricing as the market goes. Yes. And what you're saying is you were early already during the summer taking up your prices in the project. This is every day. This is the most asked Question, when you are talking about the project, when you're looking at the monthly reports, when you're discussing opportunity, what is the pricing? What Just the cost, what can we do about it? And we are bringing a value to our customers. And we, of course, want it to be at market price. Okay. Last question for me is, I mean, the softness of apartments that you had unsold, completed now, It's small, 200 something. But just to understand, what Kind of apartments is there? Is this a specific region? Or is it problems to sell certain sizes of apartments? If you can just give a little bit about If we look at the situation by the end of Q1, I read that we have 2.70 3 units that are completed unsold. And part of that is in Sweden, where we have been discussing like Tollare, for instance, Tollare Teras, Tollare Marina. But There we are we have started to sell units there Testfully, we have also been able to increase pricing in that. So it's coming down significantly. Germany has not got very many units completed unsold. Most of them are actually show units. So the remaining part is in the Nordic segment. We have some in Finland in relation to some older projects, but it's Started to move there as well. Some of these old projects we have sold out of completed unsold. And we have a portion in St. Petersburg, Baltacom as well. But nothing that makes us particularly worried going forward. Okay. Thank you. That's all from me. Our next question comes from the line of Jan Efels Of Kepler Cheuvreux. Please go ahead. Okay. Thanks for that. I have a couple of questions. And I just wanted to start with the bars that is showing expected deliveries during 2021 2022. And my question really regards to 2021. Is these numbers fixed now so that there won't be any more starts that could be Hand it over this year. Jan, I mean, we are this is Representing the best estimate that we have right now when we close the books. There will always be changes. And of course, the closer we come to completion, those changes will not be there. But you can we can probably see changes for Q2, Q3, Q4 also in the coming quarters. So it's not sort of rock solid, but we will not expect Major changes to completions in 2021. The risk is, of course, when we come up to year end, that The process is, in particular with authorities, makes certain part of units then slipping over into the next year. But this is the view that we have right now. Okay. Thanks. And then the 3rd question on your guidance here. Have I got it right that you these 5% are The volumes that you could control yourself and if things go Your direction in planning process and so on, this could be a higher number than 5% plus? No, you're not right. Sorry to say, Jan, but it's a combination, as I say. Some of it, it's up to us, And some of it, we are dependent upon permitting. And especially for Germany, as we've been trying to highlight in the presentation and in the report, We are very much dependent upon getting the permitting and also The notarization of the sales agreements with our customers. Okay. And then a question on construction prices. 2 of your peers have been Commenting upon raised construction prices, do you also see it? And how does Affect your profitability? Needless to say, the market is hot, so is The construction market and we can also see how pricing on steel and wood and other types of Building materials is increasing. So yes, we are seeing an upward price pressure. And that is the reason why I'm also emphasizing The project controls because it's not until we have very good estimates of our projects that we are launching and starting the projects. So that is one of the prerequisites for starting a project and especially important when we are seeing the very hot market that we're seeing right now. Okay. And then a question on residential rentals. We have seen here, at least in Sweden, that the demand from There's on residential rentals are very high, and you could more or less get the same price As the tenant on apartments, does this change your view on the portion that you put on the Residential rentals in any way? Or could you just comment upon that? I think it's a Fair observation. And this is something which we are always looking project by project and market by market because this is not a sort of a generic you can look at it. And this is something which we have as a good way of Both taking care of risk reward in a project and also the fact on how we are taking on how the market is developing. So Yes. From time to time, it can happen that we turn into B2B, but also turning B2B into B2C. And this is, 1st and foremost, This is the reason why we need to be strong from a local point of view and local level because this is a Local market condition that creates this kind of opportunities. And how easy is it For you to switch between Tenet and Apartments and Residential Rentals? In some of the core products That we have and some of the products where we it is quite easy. Okay. And just my last question also regards to residential rentals, and it's regarding Berlin. We have seen a rent Freeze there. How does it impact your business, your strategic view on that market And then maybe your profitability? The rent freeze was exhumed by the Berlin Court of administrative processes 2 weeks ago. So this is going to benefit Our business and what we are seeing in terms of interest from investors into our B2B is sort of a very strong interest. So this is not hampering the market. Okay. Thanks for taking my questions. And there are no further questions at this time. Please go ahead, speakers. And then it's time to conclude today's presentation. Thank you all for listening in and welcome back on the 20th July when the Q2