Anna Falck Fyhrlund: The outcome report for the Q3 for Bonava. Improved profitability, increased sold number of units, and an updated outlook are a few topics in this report. To take you through it, we have our CEO, Peter Wallin, and our CFO, Jon Johnsson, here with me to take you through it. After their presentation, we will open up for Q&A, and you can already now start to type your questions. With that, I leave the word over to you, Peter.
Peter Wallin: Thank you very much, Anna. Good morning, everyone. In front of you have a really interesting project called Norrbodahöjden in Upplands-Bro, north of Stockholm. It is 500 apartments that we are building as rental apartments, B2B as we call them in Bonava. This is a perfect kind of business for Bonava. It gives us a good stream of income, it gives us cash flow, and it also gives us a very secure basis for earnings years to come. If we then dive into the report, I think Anna summarized the content of the report quite good. If we then start to frame the market conditions, as everybody knows now, the market conditions are quite hard to understand sometimes. We still see a very positive development in the Baltic and Swedish markets.
Peter Wallin: I would especially like to point out the activity in the investor segment, hence having Norrbodahöjden on the front page of the presentation. When we turn to Germany, we have spoken in previous quarterly reports that the German market is very dependent upon the long-term interest rates. The long-term interest rates have moved up significantly over the years, especially so in the Q3. We have noted that that has had a subdued impact on the German market. We are seeing that the consumer sales takes longer time to close, and investor deals is also being pushed out a little bit in time. All in all, this has impacted the growth prospects over the coming quarter for us, and I will come back to that shortly.
Peter Wallin: Another impact of the current market situation is that we are also seeing, overall, a stable construction cost market. We are seeing increase from energy, but we are seeing a decrease from other materials. So overall, a quite stable impact, although, at a higher level. We all remember the escalation and costs that we have seen really taking off during the COVID years. But it is rather flat now, and that gives us also a very good prerequisite for starting projects when we know the cost side. Going into the profitability and the headlines of the report. We are increasing the EBIT by 15% at constant FX to SEK 168 million. This gives an EBIT margin of 7.6% in the quarter and 7.8% on the rolling 12-month basis. So that is pretty good, I would say.
Peter Wallin: We are growing the top line by around 3%, and we are still seeing improved project margins. If we would to grow quicker, in other words, if German market hadn't stopped a little bit during Q3, the top line would have been higher and so would the margin be, because then we also cover our costs in a better way. Jon will get into the details here. Because of the German market and the development there, we have revised our outlook for the full year. We are pointing towards an EBIT margin of around 7%, and this is excluding any restructuring costs that we might incur during Q4. Net sales to grow around 10% for the full year. This is compared to the 8% to 9% in margin and 20% to 25% in top-line growth.
Peter Wallin: Again, Jon will come into the details here. Starting off with Norrbodahöjden, we also have some other projects I would like to point to. In Finland, we started a project in Turku, a consumer project, which have attracted a good development in sales. This is, I think, even if we point towards a difficult Finnish market to some extent, the Finnish market has actually been revised upwards. We are seeing an interest for infill projects where there is an established demand. Turning to on the right-hand side, top level, we started our first project in Gothenburg, in Explora, in a joint venture with the Norwegian company OBOS. We see good opportunities to continue to develop this area together with OBOS. Going into the bottom, a very strong market for us is Düsseldorf, where we started yet another consumer project in our project Polsefe.
Peter Wallin: It's a fantastic development of this area. Very strong demand. Last but not least, talking about a very successful and strong market like the Baltics and Latvia. In Riga, we started yet another phase 5 in Valdemara. All in all, this provides a good basis from the high level of starts that we saw in Q3. With that, Jon.
Jon Johnsson: Thank you, Peter, and good morning, everyone. Let's start with this picture, which I usually show. As Peter mentioned, Q3 was very strong in starts and sold. With this latest development, we are actually leading the number of starts and sold in the last 12 months among all residential developers. You see that trend. Of course, Norrbo is part of it, but you can also see that the investor market is still a relatively small share. So it's consumer, B2C sales, and started units, which have improved a lot the last couple of years. We are now on a very high level of ongoing production with a leading sales rate of 64%, excluding reservation, that is. It's very strong numbers. This is, of course, super good for us, but the next proof point will be the cash conversion.
Jon Johnsson: Next quarter in Q4, many of the starts we had in 2024 and 2025 will be handed over. There we start to see also the effects on the cash flow, that is the next proof point as mentioned. Strong numbers in starts, strong numbers in sold, and the sales rate continues up. If we look at the P&L, as Peter mentioned, there is a year-on-year growth, which continues up, improved margins, less cost. All the trends also on margins continue the growth pattern, which we have talked about all the time. Improvements across the board. We see a future which changes constantly. Also there, we need to adapt the cost base and the margins, and allocate capital and cost where we see the market growth. That is exactly what we aim to do in the next couple of quarters.
Jon Johnsson: If we look at the performance in the segments, we still see a quite different view. When Sweden and Finland and Baltics are now delivering higher than last year, we see a little bit more flat development in Germany and a little bit down in the margins. Overall, we continue to grow, that is a little bit the strength of Bonava, to be present in many geographies with the different market situations. Remember, in the last couple of years, Germany has been a very strong solid contributor, and will continue to be so. We also see the position as a growth engine to be taken over by Sweden with a faster recovery in number of sold and started projects from another low level, but still with a rapid growth and improvement.
Jon Johnsson: 7.6% in EBIT margin in the quarter and 7.8%, as Peter mentioned, on the rolling 12 months. Gradually improving. If we deep dive into the different markets, we first have Germany out here. Net sales are, from a volume point of view, very similar to last year, just slightly below. We see that margins are dropping because of these structural changes, and that we in some markets struggle with the long-term interest rates and the prices correlated to this one. That is why we are now taking the measures with these cost reductions in Germany to defend the margin and keep it stable. Sweden, on the other hand, have a completely opposite development, right? We see a growth here, which is continuing upwards. Very strong signals, in particular in the Stockholm area, but spreading out across Sweden, with an operating margin which truly reflects that turnaround.
Jon Johnsson: A very strong sales rate. I think it is a market-leading sales rate as well, excluding reservation with 75%. Finland, there is no rapid growth to be seen near term. On the other hand, we have a model here which is suitable for the relatively low volumes we have. As you can see, we still are able to deliver what we promised, cost and cash neutral development for the Finnish markets, waiting for the market to turn. We started a consumer project, which Peter talked about in Turku, a great project, and that is exactly what we need to do in Finland. To start very selectively on projects which still are viable in this type of market. The unsold completed are on extremely low level in Finland, so we do not have an issue or a risk in that sense.
Jon Johnsson: If you go to the Baltics, we see a trend continuing up in this quarter. We were supported additionally with a revaluation and fair value adjustment of our investment properties. But it was a one-time effect. But even excluding that one, we have very strong margins and continue to grow the market, in particular driven by Riga and Vilnius, with strong margins and high reservation and sales rates. If we then look at the building rights portfolio, this is where it becomes truly interesting from an investor perspective, I would say. Because what we are now doing is that we are shifting from traditional on-balance building rights to more options and more conditional agreements. This is necessary in this market, the new normal in the market with interest rates and different market situations every day. So you need to have the flexibility in the starts and the sold units.
Jon Johnsson: That is why we are then shifting gradually more and more to off-balance and conditional agreements. We also need to have the potential start periods very well aligned with our capacity and the markets we operate in. So we are constantly ready to reach our target volume, but we need a little bit market support in the sense that the market should turn and the consumer confidence should be higher. This was particularly important now for Germany, where it is still some uncertainty on energy prices and on the long-term interest rates. Then the split between the four different regions is becoming more and more also flexible in the sense that previously when Sweden was a little bit suppressed markets, we had too many building rights there in relation to Germany, which was very strong.
Jon Johnsson: Now we see a little bit change dynamics in there, and we have also worked a lot with moving projects closer in time in Sweden. So I would say that we are gradually moving to a much better building rights portfolio than we had before, and this was further confirmed with the annual external market valuation of our landbank, which remains solid on the same levels as previous year. We know needs for impairments or changes in value on that one. So stronger and stronger building rights portfolio in the right locations with higher flexibility. That is what we are striving for here, to be able to turn this into cash for you as investors. If we look at the net financial items also here, of course, EBIT has grown. Net financial items were in the quarter a little bit higher.
Jon Johnsson: In total, we have for the refinancing SEK 67 million in one-time items. But 29 of those were taken in Q3, and that increases net financial items. But we long term see central debt decreasing for the interest rate to 5.83% compared to 6.86%. Of course, this is also related to the net debt, and I will come back to net debt and how we see that development. But improved net profit in the quarter compared to last year, and we see this continue as, of course, a natural consequence of the better result and margin in the other financial metrics. Net debt is increasing. I talked about that one, and this is also what I have said in the last quarter, that we are building up projects. You will see that even more clearly when I talk about the balance sheet in a second.
Jon Johnsson: But the net debt specifically is now on 4.8% on a peak level because we have grown the number of projects. Remember the first slide with ongoing projects were growing so fast, and that is, of course, to a large extent financed through external debt. We see that the project financing is in percentage-wise what is growing the fastest, but we also use central funds to fund certain projects in Germany. We still have a large number of handovers in Q4, which will reduce net debt as planned and as communicated before in Q4. Q4 is always the quarter where we have a lot of handovers, and we release the cash. That is the next proof point, as I mentioned.
Jon Johnsson: If we look at the cash flow, this further emphasizes what I just said, that it is a change in working capital which has impacted the cash flow, and that is a buildup of the ongoing project portfolio we talked so much about. While the profitability is, of course, increasing, and that cash conversion will materialize now when we have reached a higher, stable production volume. Here you see the balance sheet, and the orange bar in the left graph here is really what truly matters. It is the project assets which have increased a lot, and that is what I am talking about. That is projects with strong margin, high sales rate, and very low risk. That will be converted down into cash while our properties held for future development gradually decreases because we move to this optional and off-balance building rights.
Jon Johnsson: So we create more flexibility, and the last part is to convert it to cash. With that, I hand over to you again, Peter.
Peter Wallin: Thank you. Well, thanks very much, Jon. I think I would like to end with a couple of points just to wrap things up here. We are seeing continuously improved operating performance according to the controlled growth phase. I am very pleased to see the development we see. Even if we could have wished for growing quicker, we are doing very well in the current market conditions. I am really happy for the turnaround achieved in Sweden. As we report the quarters going forward, you will see more and more of this manifested in the stronger P&L, a stronger cash flow and return, both for Bonava and for the Swedish business itself. We have a solid financial position.
Peter Wallin: I think the refi we did mid-year here now is setting us up well to weather the impact and also taking care of the growth that we are seeing in the marketplace. The focus, exactly what Jon alluded to, is to move idle capital away, to move it into working capital, the ongoing project. That is where we make the profits and the cash flows to come, and that is what we will use to do dividends and buybacks of shares. Even if we updated outlook with the way the market is developing, during my career, I have always sort of set myself of acting fast. That is especially true in the market context we are living right now.
Peter Wallin: I am very pleased with the very resolute actions that the German operations is taking now to both address flexibility and scalability of the P&L and setting us up well into the future for the German business, but also making sure that we work effectively. It is always tough to take these kind of actions and decisions, but they are the right ones to take. Even if we see that the growth in Germany will be subdued over the next 12 months, Germany will be a solid contributor in profits and cash flow for Bonava. That is why we remain very focused on hitting our financial targets. We will do that with a very controlled growth. I think when we look back at what we have achieved so far, we are still looking at a 10% growth in 2026 with an improved margin.
Peter Wallin: All in all, I am pleased with the development for Bonava. With that, Anna, should we move over to the next topic?
Anna Falck Fyhrlund: Yes. Thank you both. We have some questions here, and I will start with Mathias Carlson from DNB Carnegie. What needs to happen for the delayed German projects to get started? How much of that pipeline could start in 2027 without compromising on returns?
Peter Wallin: If I divide it into, we actually have a quarter left of 2026 as well. So we actually have a few in the pipeline for the last quarter to be started. We have quite a considerable amount of B2Bs, including some German B2Bs. That will take part of some of the questions. When it comes further ahead into 2027, we have a number of deals lined up, but we have also seen some of the deals moving out. I cannot say whether they will happen in 2027 or not. That depends on what happens with the long-term interests and what also happen on the political scene.
Anna Falck Fyhrlund: Yeah
Peter Wallin: especially in Berlin.
Anna Falck Fyhrlund: Yes. How much should net debt fall after the Q4 handovers, and how much cash will be available at group level once project loans are repaid? How exposed are you if some handovers slip into next year? Maybe a question for you, Jon.
Jon Johnsson: Yeah. I am not going to say an exact number, but there is a substantial release. For those of you who watched our quarterly report in Q4 2024, that is where we had the big number of starts. That means that a lot of those which have not yet been handovered in Q3 and Q2 is now coming in Q4. So we are talking about up to around 1,000 units in handovers, and that will then translate into positive cash, of course. But I am not going to say an exact number on those ones. But it will be very positive cash flow. The important thing is now when we have come up on this higher level of activity, that we hold on to the cash generation. Of course, if you would continue to grow faster, that would also have an impact on the cash flow.
Jon Johnsson: But this actually allows for us to release more capital.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: And if I might add to Jon's answer, the 1,000 units is a lot. But the 1,000 units is unfortunately the historical trend
Anna Falck Fyhrlund: Probably, yeah.
Peter Wallin: of what we need to handover in Q4. So we are quite used to working between Christmas and New Year's in order to hit the handover. So we have done all the resourcings made possible in order to hit the 1,000 mark.
Anna Falck Fyhrlund: Yeah. How much of your new guidance is already covered by existing projects and signed contracts? What still needs to come through before year-end?
Jon Johnsson: I think a large portion is covered, of course, with our high sales rate and execution of projects. I think the biggest uncertainty still is the B2B, the investor deals, which Peter Wallin talks about. From a percentage of completion method, of course, the sales rate directly impacts while the construction is more gradual. But the volume is so large that it actually has an impact anyway on Q4. That is the uncertainty, we should say, and to some extent, also the continuous sales in ongoing projects. This is particular in Germany. I would say the certainty in other markets and predictability is very high. But given where we are right now with Germany, that is also why we take the measures. That is where the uncertainty is.
Anna Falck Fyhrlund: When we talk about Germany, is there any deviation between the regions, or do we see the same in all of them?
Jon Johnsson: No, but it is definitely deviations between regions. But Berlin, which has been a stronghold, has this kind of difficult political situation which Peter Wallin referred to. So I would say that what is normally very stable and a super strong market for us, where we are still the leader, is a little bit more flat development also on that market. While North Rhine-Westphalia continues to be strong with Cologne and Düsseldorf. There is less impact on that market.
Anna Falck Fyhrlund: Yeah.
Jon Johnsson: We have developing markets in the other where it is slower in Saxony and northern around Mecklenburg.
Anna Falck Fyhrlund: Were there new price adjustments in Germany this quarter, or are we seeing the effects of earlier reductions? Can you quantify the impact on Q3 earnings and say whether further adjustments may be needed?
Jon Johnsson: I think that after the summer, we saw a big shift. That is where the long-term interest really started to impact our reservations and sales rate. As you could see on the earnings in Q3, we had 1 percentage less in gross margin, and that is the price reductions we were talking about. That is also what we expect going forward, that in order to keep up the sales rate, there were certain price reductions needed. That is also the level which we adapt to with the new cost base.
Anna Falck Fyhrlund: Yep.
Peter Wallin: That is specifically relating to Germany. If we take a look at Bonava as such, we also made substantial price increases.
Anna Falck Fyhrlund: Yep. Then the final one from Mathias Karlsson, how much of the SEK 100 million in annual savings should we see in 2027 earnings, allowing for lower volumes? Will you still have the capacity to increase production when demand returns?
Jon Johnsson: This is not something which happens overnight, the restructuring program, I think everyone knows that. But we will have the run rate effect fully up and running after mid-year 2027. That is when you will see the full effect. But of course, it will come gradually even before that. In terms of capacity, I am not worried with this readjustment. Because what we need to do is to focus on the markets where we see the growth. So we allocate resources and capital there. And we have substantial opportunities in those markets to reach the desired levels also on a lower FTE basis or employee basis.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: If I only can add, we already had started to look into efficiencies even in the beginning of the year, based on the fact that we did a big restructuring a number of years ago, and we have new ways of working. And that would have allowed us to take steps making efficiencies. In addition to that, the regions which are not performing well, we are redistributing the resources to the regions that are growing well and are expected to grow well. If you simplify the savings, you are going to see roughly half of it in 2027. And it will be a little bit of a distribution there because half of it will come within production cost, indirect and direct production cost, and the other half will be of OpEx, you can say.
Anna Falck Fyhrlund: Our guidance on 3,500 to 4,000 starts is not impacted by us doing this.
Jon Johnsson: No, I would say that we have plenty of opportunities with existing, but it is about focusing again. I think that we have been a little bit too scattered and waiting for the full market recovery, which would then mean above 4,000 units. Now it is more within that focus area, and we have allocated.
Anna Falck Fyhrlund: Yeah. Then we have some questions from Fredrik Reuterheld from SEB.
Jon Johnsson: Yeah.
Anna Falck Fyhrlund: Guidance about 10% sales growth and about 7% EBIT margin implies Q4 net sales of roughly SEK 3 billion and about 6% year-over-year, and EBIT about SEK 215 million before restructuring cost. How much of that Q4 revenue is already secured in ongoing production, and how many of the roughly 10,000 starts of handovers are in Germany, Sweden, and the Baltics? A long question, and you might have answered some of it before, but
Jon Johnsson: Yeah, I will try to answer because obviously it is three months left. I think that in terms of the handover, if I start with there, a lot of that is already secured because that is sold units and we just need to finalize the paperwork, documentations, and processes with external authorities, which can sometimes take time in bureaucratic countries. But there, the certainty is high. In terms of sales for Q4, as I mentioned, I think the uncertainty, again, coming back is the investor deals and how much that is. But year to date, we have 9% organic growth and close to 7%, slightly short of 7% in EBIT. So what we see is quarter-on-quarter, a similar trend as prior this year, actually. So around 10% and around 7%.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: Just to build on that, when we talk about percentage of completion, we have two components. One is how we actually build and complete the projects. That's the construction progress. That's a no-brainer. Then the unknown is how much do we sell additional compared to where we leave Q3.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: All in all, that produces the uncertainty. Of course, a major part in Q4 is secured. When we give guidance, we also have a certain leeway when we give guidance.
Anna Falck Fyhrlund: Yeah. You have already alluded to his next question, but does the guidance assume any new investor deals or land sales in Q4?
Jon Johnsson: Yes, but more limited than the original prognosis.
Anna Falck Fyhrlund: The German market has been weak for some time, but could you talk about the negative acceleration in the German market since Q2? Is there a reason behind it, or is the result of geopolitical uncertainty, high interest rates, and deteriorating consumer confidence?
Peter Wallin: It is a mixed bag of all the things mentioned.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: We all look at the news. We all read the same web pages and papers, et cetera. All in all, Germany has been quite impacted by the energy crisis from the Iran-US war. That, in combination with the growth of the funding needed to support both the increasing deficits on state levels as well as financing defense increases and infrastructure deficits and the funding need to support the AI capital expenditure boost. All in all, it is a toxic cocktail for the long-term interest rates, and we are seeing what has happened with the French government state bonds interest rates, and that is, of course, being carried over for German bonds and other bonds as well.
Peter Wallin: All in all, the German investors are very much looking at the long-term interest rates, both the consumers, because what they do compared to many other markets is that they borrow less, and the loan that they take, they loan over a longer period of time.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: Hence the long-term interest rate is more important. For investors, the long-term interest rate impacts the return requirements from the rental. Even if you have a continued strong growth from rents
Anna Falck Fyhrlund: Yeah
Peter Wallin: into a higher net operating income for the rental, the yield requirement is increasing.
Peter Wallin: That creates a bad mix
Anna Falck Fyhrlund: Yeah
Peter Wallin: into one.
Anna Falck Fyhrlund: Yes. His final question is the rolling 12 number of starts was 2,973. What is the new expected run rate in 2027?
Jon Johnsson: It is all these ifs and buts. Of course, we then will continue to grow where we can grow. We expect it to grow from that level. Whether or not we will be closer to 3,500 is too early to say, but we will come back on that.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: We have a quarter left to go this year.
Anna Falck Fyhrlund: Yes.
Peter Wallin: When we are done with that quarter, we will talk even more about 2027.
Anna Falck Fyhrlund: We have a Capital Markets Day coming up after Q4 also. Then we have a question from someone called Olli Laronata. "Could you please provide more color on the very strong margins in Finland in Q3?
Jon Johnsson: I think it is the finalization of a couple of historical projects which are now completed, and with that you have certain risk reserves and certain sales reserves. So I think it is temporarily boosted, but having said that, the margins in Finland continue to be super strong actually compared to other markets as well. We do not start many projects, but the ones we start have strong margins.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: Super good team. That is the color code.
Anna Falck Fyhrlund: Yeah. Sounds good. Then we have, "What would be your medium-term three to five-year target for proportion of on and off balance sheets?" Talking about Finland.
Jon Johnsson: We really
Anna Falck Fyhrlund: You are looking at each other.
Jon Johnsson: No, but I think that we want and we need to gradually shift over, as I mentioned in the presentation.
Anna Falck Fyhrlund: Yeah.
Jon Johnsson: I think it is to create that flexibility. If I would say any number, it should be at least around 50% on balance. That means a further development towards that number.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: We are going to work with quality in the P&L.
Jon Johnsson: Yeah.
Peter Wallin: Which means that rather to go for more growth, we work with improving capital efficiency and improving margins. That also means that the need for landbank itself is going to peg to a more constant volume rather than an increase in the whole times, because then you are chasing your own tail.
Jon Johnsson: Cash conversion and capital turnover will be our main focus on that one.
Anna Falck Fyhrlund: Yeah. Mathias Karlsson came up with the final question here. "Could you free up more capital?
Peter Wallin: Are you sure?
Anna Falck Fyhrlund: Let's see. "Could you free up more capital from the land you already own through sales or partnerships and use more options for future land purchases? How much cash could that realistically release, and what would you give up in future project profits?
Jon Johnsson: The short answer is yes. Again, I do not want to mention numbers, but of course we are in a property development, residential development business, which means that there are substantial capital locked into landbank. We are looking into such opportunities.
Anna Falck Fyhrlund: Yeah
Jon Johnsson: I am not going to say a number now.
Peter Wallin: You can say that we will have much less capital than we have on the balance sheet now, and we have already reduced it from SEK 9 billion down to SEK 6.6 billion, and we will continue that.
Anna Falck Fyhrlund: Yeah.
Peter Wallin: Taking more projects, growing the ongoing projects into active working capital will reduce the landbank, and then we will also.
Peter Wallin: of course, look at other potential ways of releasing capital.
Anna Falck Fyhrlund: Yeah
Peter Wallin: in landbank.
Anna Falck Fyhrlund: I think that was all the questions online. Would you like to summarize this quarter?
Jon Johnsson: Well, I think it's continuous improvements in all areas, actually. Next proof point, cash conversion in Q4, and we are taking the measures to adapt for lower volumes in Germany than we had previously anticipated, but it's going to continue to be a strong growth engine. We are still growing 10% and having better margins, which for many companies would be.
Anna Falck Fyhrlund: Super
Jon Johnsson: super.
Anna Falck Fyhrlund: With that, I would just like to highlight again that we have a Capital Markets Day coming up on 17 February, right after our Q4 release. So stay tuned for that, thank you all for listening today.
Jon Johnsson: Thank you.
