Bonava AB (publ) (BONAVB) Earnings Call Transcript & Summary

Good morning, everyone, and a very warm welcome to the presentation of Bonava's Q2 report an eventful quarter with improved profitability, and we did a refinancing in the beginning of July. My name is Anna Fyhrlund, and I'm Head of Investor Relations here at Bonava. And with me here today, we have our CEO, Peter Wallin; and our CFO, Jon Johnsson. They will take you through the highlights of this report, and we will end with a Q&A session. And you can start already now to type in your questions, and I will read them out at the end. And with that, I leave the word over to you, Peter.

Thank you very much, Anna, and good morning on this fantastic beautiful summer day. We also have a very beautiful project in front of you, which is Klockaren in Uppsala which we started in the second quarter. So let me start by walking you through the market development. We have the quite boring title perhaps stable market development as a headline here. But underneath that is sort of a treasury hidden in terms of continued strong market in the Baltics and an improved market in Sweden, where we see both increases in activity levels as well as prices. And overall, in all our markets, this is, of course, thanks to the support that we get from high disposable income and a pent-up demand for housing. But then in Germany, we have a little bit of hard to analyze the market right now, and it's partially because it's impacted by higher long-term interest rates. And this is because the inflationary impulses has increased the long-term interest rates in the wake of the Iran conflict. And for the German investors, which are -- consumers which are normally -- they are borrowing less money and they are borrowing much longer durations than what is typically done in the Nordic markets. And that means that the long-term interest rate is very important for the consumers when they buy and invest in new homes. So it's been weeks with strong sales and weeks with softer sales. So all in all, it's a little bit of a mixed picture. And as before, Berlin market and the North Rhine-Westphalia with Dortmund, Düsseldorf and Cologne are the strongest market in our German portfolio. And after the close of the second quarter, the German government also presented a stimulus package for the market. And over time, this will support a segment that we are active in. Then finally, also the Finnish market has continued with quite slow development of the market with softer prices and not so much activity level. One underscoring thing in a very important segment for Bonava is the investor market, the rental projects. And we are seeing an increased activity in all the markets we are active in this segment. And you also saw us publish a bigger deal in the period, but we have not started that project yet, but it's 500 B2B projects in Stockholm. If we take a look at the construction cost, it remains to be stable at a high level, of course, but it doesn't grow as much despite that we have the Iran conflict, but we're keeping a sort of a close check on that. So leaving the market and moving over to Bonava. As Anna said, we have an improved profitability, and this is because the controlled growth part that we are into now. And we more than doubled the EBIT, SEK 166 million. And you can clearly see the turnaround of the business in Sweden, and this will be more profound as we go along in the quarters in this year. We posted an EBIT margin of 7.9% in the quarter and 7.6% for the rolling 12 months. This should be compared to the guidance we have given of 8% to 9%. We grew the net sales by 14%, and we now have 4,455 homes under production, so an increase there as well. And this portfolio is then sold by 59%. And in addition to that, we also have the bookings and reservations. And as Anna also said, we finally closed the refinancing in the beginning of July, and Jon will walk us through all the nitty-gritty details of that, but that's really important for us. We have more and more great projects to show you, and let's show -- walk you through 4 of those projects. So we started up a consumer project in Helsinki in Finland, Isla and a very interesting area. And also, we are saying that the market in Sweden is developing very favorably right now. And of course, the bigger cities has been the engine. But talking about engine, we also have a project called Motorn engine in Swedish in Umeå. So also the regional cities is starting to pick up now. And then when we talked about the Baltic market, which is really strong where the Riga market is really, really strong. And we would have loved -- we could have started up even more projects here. So there is a huge demand and growth in that market. So with that as a background, Jon, please.

Thank you, Peter, and good morning, everyone. We start, as usual, with a slide showing ongoing production and sales rate. And what we can conclude is that the ongoing production is continuing to increase. Now it's plus 35% versus the same quarter last year. Notable is also that the B2B deals, which Peter talked about, the investor deals are still on a relatively low level. But due to the activity, we see that portion increase in the next coming quarters. We have a lot of interesting projects waiting to be signed on that. If we talk a little bit about the sales rate, it's 59%, and that's excluding reservations, including reservations, that would be around 63%. And worth to point out is also that Germany and Sweden remains well above 60% on this metric, while Baltics, as I've mentioned before, are tracking around 40%, 45%, which is more due to the consumer pattern than anything else. A strong sales rate and growing ongoing production. We can also mention that the completed unsold is now down to 189. So it's a further reduction of that one. We have gradually decreased that over many quarters now, and we expect that to continue. If we look at the P&L, the income statement, the most important trend line, which we highlight all the time is the rolling 12 EBIT, which is now, as Peter mentioned, up on 7.6%, and that should then be where you are following us in our guidance, 8% to 9% for the full year. We have improved gross margin, 15.5% in the quarter. And as Peter mentioned, we had 14% organic growth in the quarter. Costs are kept under control and margins are developing favorably. So -- good result, good quarter. If we jump into the different segments, we can conclude that Germany, Sweden and the Baltics are all above 10% EBIT in the quarter. We still have Finland on a lower level, and I will come back to our expectations for Finland as well, but it's cost and cash neutral in a tougher market situation. But the other 3 segments are then on strong levels and contributing well to the group profitability and EBIT on that side. Deep dive to Germany. Germany is flat compared to the full year 2025 in almost all in both absolute and relative metrics, as you can see on this picture. We have some hesitation on the market, some weeks with very strong reservation and some weeks with lower depending on what happens in the external environment. I think that our outlook is still growth for Germany, definitely, given the -- not the least the investor deals, which we aim to close in the second half of this year. Worth to point out is also that this quarter in specific was impacted by a price reduction in the Baltic Sea vacation homes. It's homes with a low turnover, and we took the chance to allocate capital elsewhere where we needed and had the price reduction. They are still sold with profit in the quarter, but the impact on the gross profit specifically was SEK 42 million. We have also somewhat lower sold and started in the first, which has to do with the reservations I talked about. But a more positive outlook for the second half still from Bonava side. If we move over to Sweden, I think that's a super good development, and we see a lot of interest on the market for new homes. We have improved our margins and of course, a very high sales rate, as I talked about, well above 60%. The 10% EBIT was supported by a sale of land of SEK 36 million. But even without that, we see a very strong development, not only in the quarter, but also in the coming quarters. A lot of positive energy in the market right now, and that's what we can expect. I think that also this sale of land has a strategic value for us moving different pieces of the land bank to earlier production time. And so it's a lot of ongoing business, which is happening. Finland, I talked about, and we keep it on a low level and profit neutral. We have small negative EBIT, but we do still expect to close the year on breakeven in EBIT, and we have it very capital efficient. And we started one consumer project, as Peter mentioned, in Helsinki called Isla. We hardly have any completed unsold left. It's around 10 units in total. So very low numbers and cost and capital efficient. Baltics continue to grow fantastic, and it's driven by Riga and Vilnius whereas Tallinn is a little bit more flat in the market development. We still have a good occupancy rate in the B2M projects, and we have increased sold and started units in the quarter and continued good development. If we look at the land bank, we talk a lot about resilience in Bonava in the controlled growth phase. And with resilience, we mean how we can act in both in a good business cycle in a good environment and in a tougher market climate. And one important piece of this is our land bank and the building rights portfolio to have both on balance and off-balance and optionality in our land bank in terms of timing when they should be produced and when we can wait with a specific project until the market is there. So we have, in the quarter, added a lot of off-balance units, and that's a deliberate strategy for us to have a more balanced portfolio in building rights with good optionality in development times. I think that between the markets, it's quite consistent. We had one bigger in Sweden. But again, in Sweden, we work more with the potential start period where we need more units earlier in the start period and less so later on to balance the growth we have also in Sweden. But super important from a resilience point of view. The next very important part was the refinancing of Bonava also for the resilience to have a much more flexible financing closer to the active project assets and working with banks which really want to support us in this growth journey we are on. And we managed to successfully close that refinancing 2nd of July. We initiated it in Q2, and that's why we talk about it now. It will give us much more agility in the local markets and with different project types we are aiming to achieve. not the least the growth in Germany expected in the next couple of years. And the financing consists of a new green bond of SEK 1.5 billion, and that has a tenure of 3.5 years. And then that is then linked together with a syndicated loan facility of EUR 200 million with a tenure of 2 years, but with optionality to increase that given the discussions with the banks. We should also mention that this new financing has reduced cost, increased flexibility and also the restrictions on dividends has been removed, meaning that we are much more normalized as a business, and we have the optionality also there. Of course, it's pending a Board decision. But still, if the financials are showing what we plan, then we have a big chance to give out dividends in years to come. Net financial items is in the quarter temporarily increased with non-recurring items related to the refinancing of SEK 38.5 million. But without that, we are lower than last year despite that we have a higher net debt. And the reason for that is that the interest rates have -- are lower than last year. We expect that with the refinancing to reduce even further with around 1%, you could say, for the coming 12 months. And we have an improved net profit in the quarter and also on the rolling 12. So we continue again the journey we are on and expect to have a strong development on this metric, not only from improved EBIT, but also from lower net financial items after the non-recurring items are out. Net debt, that has increased in the quarter, and that is very logical because we have grown our ongoing production, as you saw on the first slide, significantly. So we have a lot of active project assets, which needs funding. Part of that is in Germany, where advanced payments, but the growth -- the massive growth in Sweden, we have in ongoing production requires project financing and project financing is a light green part, which is we expect to grow further and will peak now in Q2, Q3 until the units are handed over in the late part of this year from the start 1.5, 2 years ago. So -- we expect a little bit peak now, but then it will be reduced further until year-end when we have the recognized units. So available liquidity close to SEK 1 billion, very strong financial position we are in, and that is very good for the coming quarters. Cash flow is, of course, related to the same topic. We have a lot of ongoing production, which requires a lot of working capital in the buildup phase until we have reached the level 3,500, 4,000 are designated area, and that will require continuous investments in working capital, but it's super important that, that is done in conjunction with the project and not as an as a separate part. So that is closely following the projects. And on that note, if we look at the balance sheet, we have that metric in the lower bottom right corner, net project asset value and net debt, and we are well above the financial framework of 1.4 on the quarter and expect this to continue to be stable and even growing that metric somewhat further. Equity ratio is temporarily down on 38% because we had a cutover of the refinancing and the bond where we had an amount in an escrow account over the month end, and that resulted in a slightly lower equity ratio in Q2 specifically, but it's already up on 40% again as per July. So that is the levels you can expect. Another comment on the balance sheet is that we continue to have equity well above the properties held for future development of land bank, and that is also part of our strategy to match these ones and then to make sure that we have a solid, healthy financing for our projects from advanced payments and from external debt then as previously mentioned. So all in all, a very strong quarter, and we expect more.

Thank you very much, Jon. Excellent. So let me summarize the second quarter for Bonava. We have a very strong project pipeline ahead, and we are looking into a very active second half of 2026 as well. This will be supported, of course, by all the work we have done and the attractive building rights that we have in the portfolio. So we are growing net sales on the back of the controlled growth strategy that we have right now, which also means making sure that we have the sales intact. So maintaining a prudent view on the risk level and then also combined with what Jon has talked about as a prudent indebtedness for the company. We are continuously improving the operating performance, and this is something which will be even more clear when we are growing the business volume, the net sales because that means also that we will cover cost in a better way, which will improve profitability. The turnaround in Sweden is visible in the second quarter, and the turnaround will be building even more momentum as we go along in the year. I'm really happy to see that. There's a lot of hard work going in, and I'm really pleased with the development here and a shout out to the Swedish operations. The new financing is in place. This will support us. John has spoken very clearly about it, and we feel that we mean that we can focus 100% of the business. And all in all, with an increased volume and ongoing production and a very strong pipeline, we repeat our outlook for 2026 in terms of growth and in terms of margin. So with that, Anna.

Thank you. Thank you both. Very good presentation and interesting to dig in. And we have a few questions. And we will start with Fredrik Reuterhäll from SEB has a couple of questions. In Q2 2025, you said Bonava would reach 3,500 to 4,000 production starts, but aim to get there in 2026. On a rolling 12 basis, you are now at 2,734 starts with the second half coming in and the 500 units Swedish investor deal signed post the quarter and the growing B2B pipeline. Do you expect to enter that range on a run rate basis before year-end?

It's a long question. The short answer, yes. And if I -- you're going to paint a little bit more meat to the bone there. It's, of course, a combination of the fact that we -- one part of improving the operating performance is the fact that we have really worked with derisking the way we start projects. So getting the sales right, getting the cost right and having the right team in place, and that's super important for us as well. So a much better have quality in the starts than just hitting the 3,500 mark. But again, I think the way that our pipeline looks like and given that we can have the sale -- achieve the sales we're looking for, it's clearly within the realistic expectation.

And to nuance it even further, it really depends on the exact timing of the investor deals.

Yes. And that was a follow-up. If we have no recorded investor deals in Q2, how dependent are you on those transactions to hit?

I mean for the total volume of about 3,500, yes, we are depending on them. And that also adds to the whole turnover of Bonava. It's somewhat lower gross margins, but contributing to EBIT margin and EBIT and covering our overhead costs, and that is what we are aiming.

Absolutely, which means we -- it's an important part of the business. So of course, we depend on them.

And the consumer sales fell by 33% and production start dropped by 63% year-on-year in Germany. How much of that is macro sentiment versus project timing? And when do you expect starts to recover towards historical levels?

I think it's a really good question, and it's a question we are struggling actually to answer because that is why we are saying that sometimes it's really strong sales and sometimes it is a little bit weaker. We did not anticipate to start a lot of new projects in the second quarter. And I would say we have also seen that the market is -- we don't start until we see really clear on the sales side. So it's a combination of both, actually, the started and the sold. I believe that Germany always of traditional reason, have had a very much stronger second half of the year. So again, I think you will see us sort of improving again on that level. When we stood here and talked about the first quarter, we all talked about the cold winter, which feels strange now when the weather outside, but that impacted the production. The second quarter has seen us pick up the volume in terms of that production slack that was left predominantly, some part of it will leak into the third quarter. But on the sales side, the sales was in the beginning of the second quarter much weaker, which then produced a lower sales situation for the quarter as such. Now when we look at Germany, it's very clear that the reservation balance is at a decent level. And we know that with a very limited cancellation rate and then with the normal process of signing those and legalize those contracts, it's a very clear view on the sales situation. And it seems like it's picking up now in the third quarter.

Yes and Sweden's 10.1% EBIT margin was partly supported by the SEK 36 million in land sales. stripping that out, underlying EBIT was roughly SEK 9 million. How should we think about the normalized Swedish margin in the second half? And is the turnaround self-sustaining on consumer projects alone without investor transactions?

I think that -- I mean, without investor transactions and without the sale of land, we have a fundamental improvement also in the B2C deals for Sweden. It won't go as fast as it will with the critical volume to reach the levels of full absorption in Sweden. So investor deals, again, is a super important complement to the consumer business. And together, they will bring Sweden faster back on above 10% also excluding sale of land and those items.

And again, this is -- the B2B deals makes sense from a business point in all senses. And that's also why we have sort of turned into the strategy of growing more in that segment as well. So it's an important part of our business. So again, having the combination of a strong market-based B2B market combined with a good commercial one makes perfect sense.

Yes, according to plan. And that was all from Fredrik, but we have a few questions from Mathias Carlson at DNB Carnegie. Your rolling 12 months EBIT margin is now at 7.6%. What are the most important operational drivers required to reach the 8% to 9% full year margin guidance?

Volume. No, but really, it is the kicker we will get from net sales. And as you can conclude yourself, we have a guidance of 20% to 25% net sales in the year, and we have 14% year-to-date. So of course, we do expect the net sales to pick up even further in the second half, and that will be the kicker on EBIT.

Yes and what proportion of the expected second half earnings improvement is already secured in the ongoing production? And how much depends on the new starts and investor transactions?

That's a really good question. But I would say that the growth in the ongoing portfolio that we have still stands for the biggest part. But if you then come back to Jon's answer on the previous question, to spice it up with the higher volume and growth in net sales of the new projects that we intend to start in the second half of the year, then it depends on when we start within that second half of the year and the type of revenue that we get. So we talk about the margin, which means that the marginal impact of the new volume is very important to reach that still. But the major part, if you look on the absolute part of the profit that we will report in the second, most of it is already projects that we have ongoing.