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Edited Transcript of BONAVb.ST earnings conference call or presentation 24-Jan-19 9:00am GMT

Full Year 2018 Bonava AB (publ) Earnings Call

SOLNA Feb 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Bonava AB (publ) earnings conference call or presentation Thursday, January 24, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ann-Sofi Danielsson

Bonava AB (publ) - CFO & Head of IR

* Joachim Hallengren

Bonava AB (publ) - CEO & President

* Sofia Rudbeck

Bonava AB (publ) - SVP of Marketing & Sales

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Conference Call Participants

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* Fredric Cyon

Carnegie Investment Bank AB, Research Division - Research Analyst

* Niclas Hoglund

Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator

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Presentation

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Sofia Rudbeck, Bonava AB (publ) - SVP of Marketing & Sales [1]

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Good morning and very welcome to Bonava's Fourth Quarter and Year-End Report Presentation for 2018. Very welcome to our office here at Lindhagensgatan in Stockholm, and of course, equally welcome to everyone who is following us through the webcast. My name is Sofia Rudbeck, and I will guide you and be the moderator for the next coming hour.

The agenda is as following, we will have a presentation from Joachim Hallengren, CEO at Bonava as well as Ann-Sofi Danielsson, CFO at Bonava. They will go through the report and present the details for you. And after that we will open up for questions where you will have the possibility to ask questions to Ann-Sofi and to Joachim.

So let's get started, I would like to welcome up on stage Joachim Hallengren, CEO of Bonava.

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Joachim Hallengren, Bonava AB (publ) - CEO & President [2]

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Thank you much, Sofia, and good morning, all. Time for a new quarterly presentation, the last quarter of 2018. But before we start and dive into the numbers, I would like to allow myself to reflect a bit.

Sometimes it seems that we have been around forever and ever, but that is actually not true. We have been listed for 2.5 years. 3 years ago, we hosted an information meeting where we first disclosed our ideas and thoughts around the purpose of the company, which was then a part of NCC, but also the first draft of a strategy.

We used words like affordable or (spoken in Swedish) in Swedish, a word that was, at that time not very common. If you follow the Swedish debate regarding the housing situation or the residential situation, it is a word that is used in every second sentence now. We talked about homes, but we also talked about neighborhoods, which was also pretty rare at that time. That has also been included in the Swedish vocabulary when you discuss residential development.

Quite early, we came to the conclusion that the Swedish market was very interesting, especially Stockholm, but it was 1 of the heat -- hottest market in all of Europe. We said that we, to use an old proverb, no trees grow to the skies, and we said that probably we are better off placing our bets in Berlin than Stockholm. I remember that we raised 1 or at least a few eyebrows at that stage. We also were really clear about the advantages of working both with consumer and investors to create a steady portfolio also with a footprint spreading over many countries and many markets.

And now closing the fourth quarter 2018 and also with that, closing the full year of 2018, I'm really proud to stand in front of you to share the result created by the fantastic Bonava team. It's a really strong report but on top of that, reflecting back it is obvious that the analysis that we made, at which -- at that point was not totally clear to all and also the strategy that we set the company upon was the right choice.

Looking at the quarter then. Really strong quarter. We had an increase of sold units. We increased the number of starter units with 30% compared to last year. Net sales is up, the profit is up but also the profit margin is up. On top of that, we increased the number of units in production. So it was a really strong quarter and please keep in mind that 2017 was the peak year so far of Bonava. Of course, a lot is supported by the very strong Swedish residential market at that time.

The fourth quarter, we also made our first investor deal or rental project in the Baltics. It was in Estonia, Uus-Mustamäe project. Why is that important? Well it's actually pretty important because that is, as I said, a vital part of the strategy that we work both with investors, rental apartments and with consumers. As we said before, approximately 1/3 should go to investors. It is a good way to balance business. I will be back to that when we talk about Sweden.

But this is not a common model on our markets. Of course, there has been transactions in the Baltic market before but that's more managed rental properties that have been shifting hands between different kinds of investors. This is potentially the first deal that's ever been made, where a development project is sold to investors before project start. So this is promising. With this deal, we have succeeded to make investor deals on all our markets where we operate. And again, as a foundation for our strategy, that's vital.

If we look on the full year then of 2018, we also sold more units, and I would like again to remind ourselves that the Swedish housing market is under pressure and sales pace is down substantially. So I think this is really strong and good performance, showing that Bonava is not about 1 market, it's about all the markets and it's not about any individual, it's about the team and the team effort.

We have, as I said, many units in production. We have 10,700 units in production. I think that's worth remembering and putting in to sort of into consideration. Sometimes people or stakeholders likes to compare us at Bonava with the other companies within our industry. Sometimes those players are so small that they would represent 1 project in this large portfolio. So we are a really big player that's playing on many, many markets. The sales ratio in our portfolio is 68%. It's the same sales ratio as we had 1 year ago, but with 1,000 units more in production. I also think it's fair to point out that due to seasonal effect, we hand over a lot of completed projects in Q4. And by that, it's a natural pressure downwards on the sales ratio. So we will see the sales ratio normally overseas increasing over time and then handing over a lot in the last quarter and slight pressure downwards as we manifest the real strength of that portfolio.

EBIT level is down approximately SEK 300 million compared to the record year 2017. I think it's interesting to look at that gap and 1 large explanation to the gap is actually within the words below, the -- or deeper -- longer down in the sentence, it is the land sales. As you see, the effect of land sales, which was on an all-time high in 2017, that accounts for approximately SEK 250 million out of the SEK 300 million. To be a bit technical, the rest is covered by a business decision that we made internally.

We decided that we thought it was better to work with depreciation period for internal investments like IT systems and other investments over a 3 year period than a 5 year period and that increased the writedowns in 2018, with somewhere between SEK 40 million and SEK 50 million. So taking that into consideration, the underlying profitability performance of the company is on the same high level as the record year of 2017, without the support of a super strong Swedish residential market.

EBIT margin, slightly down. Of course, the land sales were extremely profitable and that is basically the rationale behind that. And then the Board has decided to propose to the shareholders at the shareholders' meeting a dividend of SEK 5.20, which is the same amount as last year, and that is an equivalent of 44% of the earnings. The dividend policy says at least 40%. I agree, and share the opinion of the Board that it's beneficial for the shareholders of Bonava to stay in the low end of that dividend policy because we believe that we have very attractive opportunities to reinvest in the company to create better value for our shareholders than to hand money out as dividend.

Looking at the sales then. In the quarter, as I said, really strong sales and again to be able to succeed with this we need to shift the sales between different business units, consumer sales in Sweden under pressure. We have shifted over to more residentials or rental projects, investor deals in Sweden and by doing that we have been able to keep more or less the same sales level, but the mix in the sales -- in it of the sales are different. Housing starts in fourth quarter again really, really strong, looking at sales as I said full year, we are up compared to last year. Housing starts are slightly down, but as you can see, we start approximately 500 units more than we sell, and I think that's a fair balance. And again, the units in production on a really high level with a solid sales ratio.

Looking at the different markets then. Germany, the financial or economical engine of Europe is still really stable. There is a huge underlying demand of residential properties and homes, especially in the affordable segment where we are so strong. Finland, Norway and Norway for us as you know is Bergen, and St. Petersburg are good markets. Solid demand in Denmark. However, I think it's fair to point out that we're keeping a closer eye on Greater Copenhagen, some political interventions regarding taxation and also the rules around financing has changed or changed a few quarters ago. Potentially that has slowed down sales speed somewhat, but we still deem the Danish market as stable.

And then Sweden is a cautious market. I foresee that it will stay that way, most likely over -- during all of 2019. We are now seeing that a lot of oversupply is hitting the market, it's projects that've been started early 2017 in the beginning of all this period. And they have a rather low sales freight, they are now entering the market as they are being completed. On top of that, and this is maybe not as data driven as I would like, but that's my personal reflection over that, it's a layer of apartments that were actually not bought with the purpose to move in, it's actually been bought off people who would like to bet on the residential market, trying to earn some money in between. We can call them speculators. They never have any intent to move in. So now they need to get rid of the asset because they can't actually finance that.

So continuous pressure on the Swedish market, especially around Greater Stockholm, Uppsala, (inaudible), but again, Bonava with our footprint and our portfolio, well prepared to have countermeasures for that. Investors, well, as I said before, it's really a hot market if we only can get our hands on land with the right pricing for retail -- or rental projects, we can basically sell anything at really good prices.

This is a graph that we normally show. It's divided into 2 dimensions on our ongoing portfolio. So you have both the sales value, and you have the number of units, and why is that? It is because that in different regions a unit can have very different value. If we look at the Baltics and St. Petersburg for instance, the value of those apartments, even if we can keep the same margin, are of course lower than apartments in Sweden and in different parts of the German operations.

Again, making it really clear that the strategy that we set out -- that we set then 3 years ago is working, and we're following it -- we decided then to grow in Germany, we're doing that. The German operations is now depending on which KPI you use, somewhere between 45% to 43% of our portfolio. If you look on the rolling 12 net sales 2018, it's equivalent to 41%, but this is the future, and you can see that the Swedish part now is, if you count sales value, is below 1/3, it's 29%.

So Germany surpassed Sweden this year in all dimensions. I was not sure that they will surpass Sweden when it comes to earnings, but in the end they actually did. So whatever dimension you choose, Germany is now our biggest unit. We will, from the next report change the order in which we present things, moving Germany to the first place, which they have so well worked for and deserved. You might argue that they were supported by the weaker Swedish residential market situation. That is true, but I wouldn't take their hard work and all the efforts that we put in moving Germany into this position. They did a really good job.

And also I would like to, yes, present some of the projects that we started. This is just a pick of what we did, but I picked a few ones that I think is especially interesting. These are 2 fantastic development projects from Berlin, the Berlin area. The first is HUGOS. We sold 124 units to investors, that's just the first part of the HUGOS development and as you can see, the total investment is 450 units. This is a plot that we bought a couple of years ago, and this is what we can do with our size and our financial strength. We can buy land areas with large development schemes that very few other players can afford or handle, because it's just very complex. And then Parkstadt Karlshorst is even bigger. We sold a huge package, 470 units, to investors in December, but as you can see, the total development scheme is 1,000 units. And we brag about this project sometimes because it's a very good example of what the German society or what we can do within German legislation when it comes to residential development.

We changed the zoning incorporation with the municipalities, with the local municipality, and within 1.5 years' time, we were able to put the shovel in the ground. I can't see any large Swedish or for that sake, Scandinavian developer who can compete with such a high speed going through a zoning process that we can do in Germany. So that is 1 reason why we really enjoyed being on that market. Maybe at least 5 years' process in Sweden, maybe 6, maybe 7. We have 1 smaller project in Umeå. I think we are now in to our 3rd year of appeal process. So again, the German market, with the legislation and everything around it is really interesting for Sweden, for us to work in.

Moving to the west coast. Tuve 1 residential project that we -- in Gothenburg, that we also sold in Q4 and started. First investor project on the west coast. Really impressed by that: large size, really what we're going to do, right up our alley and then moving back to Greater Stockholm, Haninge kommun. This is 1 example of what we develop to target the so-called affordable segment. This is a row house. We have 5 different sizes or products when it comes to row house. This is our affordable. It's pretty small. It's 93 square meters, very well designed, good quality. The price tag is around SEK 3 million and it's moving really quickly on the market, just underpinning the demand of that target group. So Sten i Stockholmen is one of my favorite projects. And then Bergen, Skjoldhagen I and II. Just 1 of a few great and successful projects that we have started in Bergen, also very well received by the market.

With that, I understand you're longing for some crisp, dry numbers, and here is Ann-Sofi to give them to you.

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Ann-Sofi Danielsson, Bonava AB (publ) - CFO & Head of IR [3]

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Yes, some real facts. And I will dig a little bit deeper into the whole 2018, and also of course, the quarter, and I'll start with this. Just to see where we are when it comes to how we did regarding our financial objectives and the dividend policy. And we have 2 financial objectives, as many of you are well aware of. First, return on capital employed. The -- how much return do we get on the capital that we use in the business. The objective is to be between 10% to 15%. And we did 12.8% for 2018. So in between here are really good, I will come back to that to show you how we have grown the business. We use more capital in our operations now, but we still have a really good return on the capital that we use in Bonava.

And then, the second financial objective, it's equity to asset ratio to be above 30%. That is our objective, and at the end of 2018 we were almost at 35%. A really strong financial situation. That is something that we all can agree upon, I think. And then thirdly, what Joachim already has commented upon, the dividend policy. At least 40% of earnings per share, to be paid out to our shareholders, and our Board proposes to pay out 44%, or the same as last year, SEK 5.20. And we will come back regarding conditions, when this will be paid out and so on later on.

Just to comment a bit more about the whole year 2018. It's relevant to look upon this, I think. Last year was an extreme year in many ways. We had strong contribution from sales of land as Joachim has stated out. And if you compare just the numbers, you see that we are down on net sales, we have a lower EBIT margin as well, but if you take the longer perspective, the development of the Bonava business is really strong. If you exclude the sales of land last year, and also bear in mind that we have recognized somewhat fewer units to consumers this year, especially then in Sweden, the development is really positive when you take it into, in some -- more years into consideration. And we used to say, I come back to that, that having an EBIT margin of 12% in our business is really world class, and we are very close to that in 2018. So a really good year, we think, that we can conclude.

So a little bit more details regarding the quarter and the first theme here, we have actually higher net sales than 2017, the last quarter, if you compare the 2 quarters, and why is that? Well, actually we had fewer units recognized to consumers, especially then in Sweden, as you see here, but we -- quite good levels in all other units, but that was well compensated by more units recognized to investors. And I think that again, it's a really good sign of why our strategy is really working. Well, sales to consumers are down, we can profit from more units to investors. We see that also in our net sales numbers.

The other thing -- or the second thing I want to comment upon is our admin expenses. We are growing our business. We are more than 2,000 people now and if you compare just when we started 3 years ago, I think we are more than 300 people more than we were then, but we have focused a lot on keeping our admin expenses on a decent level. And I think we can conclude that in the last quarter, we really did well here, even less than 2017 for the fourth quarter and that means that we have our costs in control.

So EBIT, SEK 899 million compared to SEK 820 million, and again then, a really strong contribution from Germany, as we have said now many times, SEK 490 million coming from really good -- is the profit from the units that we have recognized in Germany in the last quarter. Sweden, good levels, even though lower than last year, and again here you see that actually, very clear that Germany is now by far #1 for the fourth quarter, but also when you look at it for the whole year, Germany's contribution is higher than the Swedish one.

The 3rd unit I think is relevant to comment upon is Finland. We struggled a lot last year in Finland. We closed down a lot of the projects that we didn't have so good margins in, and we promised then that Finland will be back on positive numbers, and now we can show you that that was true, we promised and we delivered. If you look at the margin, I will come back to that, it's not that good, we still have some things to do in Finland, but we are on positive, on the positive side of the EBIT level. So that's really a good development. So SEK 899 million for the fourth quarter.

And then I also think it's another good thing that we have worked a lot with is our financing, our financing costs. And here we also have had good development. They are substantially lower than last year, and I repeat once again that the main reason for that is that we have less financing in rubles, where the interest rates are higher than in financing in other currencies, and we continue to reduce our debt in rubles and that has really affected our net financial items in a positive way.

And then last but not least, we have a positive tax effect in Germany, of a total of SEK 72 million that was taken now in quarter 4 in total, and the reason for that is that there was a new legislation in Germany. Actually, we had -- we have the information late December. So it was really the last days of last year that we learned that there is a new legislation saying that you can use tax losses from the past. We thought that we had lost all those tax losses, they were more than SEK 400 million. But the new legislation made it possible for us to use those tax losses, and that's why we have this positive effect in the last quarter. So that was really good news for us. Positive effect of SEK 17 million, giving us a tax percentage of only 12% in the fourth quarter. So that is a standalone, once in a time effect that would be rather hard to achieve in the future. Normally, we say that the tax percentage for our business is around 25%. So being at 12% is really, really low for us.

So net profit, SEK 762 million for the last quarter last year, really, really good profit. I will comment again on our different business units, started with #2 then, Sweden. Net sales of around SEK 4 billion, and here you see that the business in Sweden has really diminished in a number of ways, and you see it also here, we have lower net sales due to -- the main reason compared to last year is that we have fewer units recognized to consumers, but also again, sales of land impacted both net sales and EBIT margin last year. So if you take that into consideration, having a margin of more than 19% is really strong, also in Sweden that's -- that is 1 thing to remember.

And here, Germany. Strong development, #1 now when it comes both to net sales, units in production and also EBIT. And the EBIT margin, almost 40%, really strong. I think it's strong to grow your business like this, also growing your EBIT margin that's a good sign that the strategy that we had in Germany really works. And here you have Finland, as I talked about. Last year was a sad story for Finland. We are back on black numbers, however, the margin is not that -- is not so much to talk about, only 3%. But still, the development is going in the right direction and we normally get the question how much -- when can we expect margins to be on a decent level in Finland, and of course, it will take some time, but there is no reason why Finland shouldn't be as good as, for instance, Germany or Denmark, Norway when it comes to margin. That will take some time, though.

Denmark, Norway, not so much to say about for 2018. Somewhat lower net sales due to the fact that we have somewhat fewer units recognized for profit, but the margin is on a good, stable level and that goes also for St. Petersburg. Fewer units recognized for profit, impacting net sales but the margin is on a good, decent level. And here you have the units that we have in production. Joachim talked about this, that if you compare with quarter 4 2017, you really see that we have grown our business, we have more units in production now, 10,712 with a very decent sales rate, 78%. And here I'll take the opportunity to note is that we have a very strong seasonal variation in our business, and that is something that we can see in a number of ways.

This is 1 way to see it. We have -- we normally have higher sales rate in our portfolio, it was -- especially in quarter 2 and quarter 3, since we hand over so many units in quarter 4. That's a trend that we've had for many, many years that normally we hand over most of the units in quarter 4, which means that the sales rate in our portfolio goes down then. So you see this seasonal variation in a number of ways. Another way of looking at our portfolio is to see when do we forecast these units to be finalized and completed and that here are the forecast as we see it today, as we've had it today. These 10,700 units, when will they be completed and able to hand over to our final customers.

And we always show these bars, and I take the opportunity here to point out a couple of important things. The first 1 is that when you look at the bars and the division between the different countries, it's relevant -- it's important to see that the mix can be different compared to 1 year ago. So more units in Germany, fewer in Sweden and so on. That is some -- that is 1 thing that I want you to notice. The other thing is that we now can see that, our portfolio, we have more units to investors going on and normally the margin in that kind of -- in that part of our business is lower as Joachim pointed out. Still on good levels, but we take on less risk in that business, and that means that the capital is turned over faster, but the margin is a bit lower. So that is 2 important things to bear in mind when you look at this for 2019.

And again, here you also see the seasonal variation in our business. It seems we have less assets than we had 3 months ago at the end of 2018, and the reason for that, the main reason for that is of course that we have handed over so many units to our customers, that's why our assets are going down in the last quarter of the year. This is a very strong trend that we've had for many years. And again, another way of looking at this is that we have a strong cash flow in the fourth quarter; that also goes for 2018. Almost SEK 1 billion, the last 3 months of 2018.

And there are 2 -- there are a couple of things I want to make you aware of here. The first is that we had a really good cash flow coming from the operations before the changes in working capital. And the reason for that is the good result, of course, but also this tax return that we got. So that's what's really a good development for 2018. And of course, we had a good cash flow coming from all these housing projects that we handed over, we continued to invest into new projects, and we also, 1 other thing that was a bit different worthwhile -- worth pointing out for the last quarter was that we had a little less prepayments from customers, that's why we have here other changes in working capital, more negative than in 2018, the last quarter then, the last quarter of 2017, and the main reason for that was that we had less prepayments from customers. So all in all, almost SEK 1 billion as cash flow in the fourth quarter.

And again, our seasonal variation you see that also when you look at our net debt. We -- thanks to the good cash flow in the fourth quarter, we reduced our net debt in the fourth quarter and that was also for 2018. And here again, I used to do that, and I think it's worthwhile, point this out, since in Sweden there is a discussion and also a lot of media regarding the way housing developers account for their shares in tenant owner associations and housing companies and for those of you who know me, and who have followed Bonava, and also actually NCC for a long time, you know that as long -- Bonava has the accounting principle saying that as long as we haven't handed over the housing units to our customers we include that asset in our balance sheet and also the debt connected to that, and that is when you look at these bars here, the light green part of our net debt that is the financing that actually is -- if we haven't included these tenant on our associations on the housing companies, that debt would have been excluded from the Bonava debt as we recognize it. So that's important to remember, and of course Bonava will continue to use this method. We think it's the most relevant way of showing our business and showing the risks of Bonava.

Here, capital employed. We have grown our business quite a lot if you look back some years. Here you have it already going back as long as 2014. If you look at the capital that we use in our business, we now have more than SEK 13 billion as capital employed that we use in our business. The main reason why you see this development here is the investments that we've done in Germany. And all in all, we think that these investments have paid out well. You have here return on capital employed. If you compare the development going back, I think it's really strong, to grow a business like this in this way and to stay with a good return on the capital that we have used in our business. And again, it is, especially the growth in Germany who has given us this good development.

I just want to say some words about accounting principles, and there are 2 that are important at the moment, 1 is what I've already touched, to -- with revenue recognition, IFRS 15 for those who are -- well, interested in these matters, and just to stress that there is NASDAQ in Stockholm, did an investigation last year have -- how did housing developers -- how we understand IFRS 15 and how we apply for it. And Bonava, we are 1 of the few who -- we have a very cautious method, saying that we recognize sales on profit on the day when we hand over the finalized units to the customers, and we will continue to do it this way. And it also means that we will continue as I just commented upon, to include the debt in tenant-owner associations, housing units companies in Finland. We will continue to include that in our net debt. We understand IFRS 15 when it comes to revenue recognition. This way is a very cautious method, but we think it's the best way to both do it internally and also externally when we present our statements.

And the second one is IFRS 16, that concerns leasing and leasing agreements. This is a new accounting principle that all companies all over the globe who are public have to follow as from 2019, and we have done a thorough investigation how this will affect Bonava, and our conclusion is that the impact on Bonava statements is rather small, not so significant. We will increase our assets if we would if we had done this at the end of 2018, we would have increased our assets by SEK 500 million and debts around the same number. So no big impact, and no big impact on the profit and loss either. You have all the details in our yearly report. So accounting principles 15 and 16, laws that I love to work with, but -- yes Joachim, you will summarize the last quarter.

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Joachim Hallengren, Bonava AB (publ) - CEO & President [4]

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Thank you very much. So again, to wrap this up. Really solid and good performance, not only in Q4 but also during 2018, taking into consideration the challenges that is in the Swedish residential market. So the strong sales where we use both dimensions, consumers and investors, as part of our strategy, the increased numbers of sales in the fourth quarter but still if you look on the total years, a really good number. The very high numbers of unit in production with really high sales rate, 68%. And then of course, the result. Strong EBIT, strong margin and the cash flow, we didn't talk that much about the cash flow, but we actually had a positive cash flow of SEK 1 billion approximately in the fourth quarter. Together with the assets to -- equity to assets ratio, and we have a really strong position that gives us a lot of room to maneuver and to act on opportunities wherever they might materialize in the future.

With that, thank you very much and let's open up for a Q&A. Sofia.

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Questions and Answers

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Sofia Rudbeck, Bonava AB (publ) - SVP of Marketing & Sales [1]

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Thank you very much, Joachim and Ann-Sofi. (Operator Instructions) And with that said, I will now open up for questions to Joachim and to Ann-Sofi.

So it seems like we don't have any questions at the moment, at least, so then I will start off. So you, Joachim. What do you think is the most significant in this report that you think we should take with us?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [2]

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Again, I think it is Bonava's strategy and the composition of Bonava, who is very different from most players listed here in the Nordic countries. And it's so easy to take 1, as I said to take 1 developer and compare them with us, but we're actually very much different, we have our footprint, the 8 countries, the 23 regions, we do work with investors, we do work with consumers, and we have a really solid and strong economy, and also a history. I mean, we've been developing homes and neighborhoods since the '30s. The brand might be new, we might be listed only 2.5 years ago, but there is a vast experience and knowledge within this company, and we are a big player. We will be here in good times, and we will also be here in more challenging times.

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Sofia Rudbeck, Bonava AB (publ) - SVP of Marketing & Sales [3]

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Thank you, and we will now open up for the phone conference, where we have a question. So please operator, help us to navigate.

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Operator [4]

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(Operator Instructions). The first question comes from the line of Niclas Hoglund from Nordea. Please go ahead, your line is now open.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [5]

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Good morning, Niclas Hoglund, Nordea. First, well, I have 4 questions, if I may. First on the net debt related to the tenant-owner association. You seem to have changed your definition when you now specify the numbers for Q3 it says SEK 5.2 billion, while it says SEK 4.3 billion in the third quarter, and it's SEK 5.0 billion now. Could you please elaborate what it's about?

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Ann-Sofi Danielsson, Bonava AB (publ) - CFO & Head of IR [6]

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Yes, that's a very good question. And yes, and the thing is, that we have financing from not -- that is not connected to the tenant-owner association as projects. We are actually financing it from Bonava itself. But we wouldn't have had that debt if we should exclude the tenant-owner association. That is why we have changed this way of presenting it. We thought that this was more relevant, that gave better view of what actually is the Bonava debt at each time. So that's why, but so you -- good that you noticed it, but we think it's more appropriate and the best way to present it as we have presented it now.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [7]

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But a follow up, is that debt unrelated to the building rights? Or just for a theoretical thought, here, would all that (multiple speakers)

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Ann-Sofi Danielsson, Bonava AB (publ) - CFO & Head of IR [8]

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No, it's connected to the building rights. It's connected -- we shouldn't have had that debt if we haven't had the project ongoing.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [9]

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Okay, fair enough. And then moving to Germany. Firstly, you have had a very strong catch up in starts. We sort of complained last year, I remember, and could you comment on capacity constraints and sort of -- will you be able to sort of keep this high pace when you look at the building rights before you? But also on Germany, I think you need to sort of comment on your very, very strong margin. Is there something we need to, sort of, adjust for? Is there any positive one offs helping you in the quarter, and on the full year? Or is this is sort of the new normal for Germany?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [10]

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So that was many questions in 1. I will try to sort them out and then Ann-Sofi will help me a bit with the margin. Yes, I'm glad you point that out, Niclas, it has been a fantastic recovery when it comes to starts. Will there be restraints? Yes, there will be restraints. We have said that we, over the period, are looking or having a target to be able to grow between 5% to 10% over sort of the business cycle, over the period. Now we've been over-performing. Constraints, or to get our hands on subcontractors for our projects, also to be able to employ people, both for design and production, steering. It's also bottlenecks in the municipalities when it comes to handling of zoning and building permits. And I would argue that it's not really constraints when it comes to land. I understand that you noticed that the land bank is decreasing in Germany.

We have many deals that are make -- they're sort of waiting to be triggered by, for instance, zoning decisions. So I expect a lot of these rather substantial land sales to fall in place in the first half of the year, but of course, Germany is a hot market and the competition is increasing. So I can't stand here and promise this very high growth rate over every year. There will be years where it will slow down, and mostly it will be due to factors without our -- outside our control. Then the margin question, Ann-Sofi. I don't think that we can argue there is any positive one-offs.

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Ann-Sofi Danielsson, Bonava AB (publ) - CFO & Head of IR [11]

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No, it's not. You have to also remember that in the fourth, we have fixed costs in the organization. That goes for all units actually, that we have fixed costs in each quarter, but when we deliver and hand over many units in 1 quarter, the margin will improve since we spread out all the fixed costs for the whole year. So that's the main reason why we have. So there is no one-off or anything like that in quarter 4.

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Joachim Hallengren, Bonava AB (publ) - CEO & President [12]

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But I think we can agree that the profit margin is on a very high level. I mean, it's better than what we prepared to say as well, Clas. And I've said that before, don't expect any revolution, it will be evolution and it might vary because we also have a different kind of mix when it comes to products and regions. But yes, it's a good margin, it's -- it would be too optimistic to say it's the new normal, but we should be there -- around there somewhat, some -- sometimes a bit lower and sometimes also hopefully, a bit higher, but we're not -- we're talking about points, not full percentages.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [13]

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Okay. So just to follow up, you're talking about changes in mix, and when you look at the portfolio now, we talked before about increased -- well, increasing market tenant buildings in Germany, which could well have some negative impact on the average selling price of the product. Do you foresee that to sort of shave off? Is there any main differences also in profitability that we need to sort of take with us into the coming years, in -- on the backlog?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [14]

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No, I wouldn't say that. I think that we should expect that the distribution should continue in favor of multi-family, because otherwise, it would be really challenging to drive the volume. But when I talk about mix, of course, a row house or a flat in Leipzig or Dresden is very differently priced than one in Frankfurt, for instance. So -- but you wouldn't see any margin changes due to our expansion, in the sense that you are sort of asking about.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [15]

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Okay. And then a question, more of a general note, you have a profit recognized in the quarter of 2,471 and when you, sort of -- when you published your third quarter report, the numbers were substantially higher than that. It was more than 2,900 units. We do see deviation in St. Petersburg, for example, or it seems to be in delay, although your guidance for the first quarter is not that different, compared with the third quarter. Could you elaborate a little bit why we saw less units than in the third quarter now for handing over? And when will we see those units come?

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Ann-Sofi Danielsson, Bonava AB (publ) - CFO & Head of IR [16]

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Well first of all, we have units that we haven't been able to recognize for profit, both in the Baltics, actually that will be recognized in the first quarter of 2019, and also in St. Petersburg. And then we'll also actually have some few in Sweden as well. I think we have around 20 units that we haven't been able to hand over in the fourth quarter. So we will always have some units that will be late in some way or another. But I think all-in-all I think we are in line with what we said in quarter 3, there are not so many divestitures. If you take this into consideration, that we had some units that we hadn't been able to hand over in quarter 3, and now they are handed over in quarter 4, but there are new units that will be handed over. There will always be a movement here and some that we will not be able to hand over on time, to have it as units recognized for profit.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [17]

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Okay. But just to follow up. When I look at the numbers for St. Petersburg, I'm, sort of, looking 230 -- 223 units. So it's quite substantial. Am I wrong there, or...

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Ann-Sofi Danielsson, Bonava AB (publ) - CFO & Head of IR [18]

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I can't say if that -- I don't remember exactly that figure, but I don't, I think they are correct. We have more units. We handed over some units that we should have handed over in quarter 3, and now we have more units that we will hand over in quarter 1. I don't remember the exact number, actually. Sorry.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [19]

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And then my last question, if I may. On Sweden, could you give us some more granularity to your sort of cautious outlook? And now you're starting more units than you're selling, or you continue to start more than you're selling, and you have a substantial increase quarter-on-quarter. So are you seeing a positive light in the tunnel? And the second part of this really long question is on margins. If we exclude the sort of gains from the plats of land, well, you're running on pretty low margins. Part of that is of course explained by mix, but it's still on pretty low level. And what's your thought on the sort of underlying margin, excluding gains?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [20]

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So should you should start with the margin, and then I will take the...

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Ann-Sofi Danielsson, Bonava AB (publ) - CFO & Head of IR [21]

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Yes, but I don't think that we fully agree. Actually, we think the margin is still on a quite good level, even if you exclude -- if you exclude the margins from the sales of land in Sweden, that's one thing that we want to comment. The other thing is that, as you saw very clearly, we have fewer units recognized for consumers in Sweden. And that is also 1 reason why the margin is going down somewhat. But we don't think that the underlying margin in those units that we have recognized -- now is on a -- that the margin on those are so low with -- that is not what we think.

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Joachim Hallengren, Bonava AB (publ) - CEO & President [22]

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Commenting then on your market question there. I mean, we strongly believe in Sweden as a long-term market. We strongly believe in Stockholm. There is an under supply, there is urbanization and all of that. But we are not sure. We -- we're, sort of -- we're seeing a light in the macros. Whenever we will be out of the tunnel is very uncertain. However, there are some obstacles on the market for consumers that we clearly see. A, is financing, where there is a question around the financial situations of the customers, but also about the valuation of the current asset. The other thing is, question marks from the potential buyers, whether a project will start or not. And we just saw a press release earlier this week, or late last week about 1 project that was withdrawn here in Stockholm, and suddenly a few people that signed up didn't have a project anymore. And then, of course, we have question marks whether the developer will exist when the project is finalized.

And we also see that it might be unpleasant or hard for somebody to commit to buy a new apartment 2 years from now. So we have started a few units based on a lower sales ratio, but a good, sort of, market contact, trying to shorten the period between buying your apartment and the finalization, and also showing the customers that we are here long term. And we have received good response on those. [It marked us] by showing (inaudible) in a nice one, for instance, and the Sten i Stockholmen that I showed. These are obstacles, mental obstacles for our customers. Last in economy, the really important reason why we do this is because we can. We are so financially strong that we can meet and make -- take business decisions based on a risk and reward in the Swedish market. So we will continue doing that. I'm not saying we will put the throttle to the floor, but that we have that tool, and we certainly will use it.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [23]

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Just a follow up on -- okay.

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Sofia Rudbeck, Bonava AB (publ) - SVP of Marketing & Sales [24]

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One more.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [25]

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Now we have just to follow up. So you're not worried on -- you're selling 74 units in the fourth quarter, which is actually less than you sold in the third quarter, although you can argue that it's had more of a seasonal impact because of the summer. So why are you selling less in the fourth quarter than in the third in Sweden?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [26]

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I think it has to do with the mix also. I mean, sales pace are a bit slower in projects that were started earlier, maybe in the beginning of '17. We also had to adapt our prices, because I mean, reality is king or queen here. But when we start and many of the starts that we actually have during Q4, we haven't registered the sales yet. And of course in these projects, we have a new price setting that -- being helped by lower cost from contractors, lower material prices, we are still looking at keeping our margins at a good level. So it's a bit seasonality, it's a bit about the mix, but we are pretty confident, and long term, Sweden and Stockholm will bounce back. It's just a question when.

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Sofia Rudbeck, Bonava AB (publ) - SVP of Marketing & Sales [27]

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Thank you very much. We also have a question here through the webcast and it's Anton from Nordic Property News, and he's asking, what is your main strategy to bounce back in Finland?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [28]

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Okay, it's pretty simple. We should walk the talk. We should do what we're doing. We are through the worst now. It's just to stay on course.

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Sofia Rudbeck, Bonava AB (publ) - SVP of Marketing & Sales [29]

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Thank you, and then I will just see if there are any questions still here in the room, or through the phone conference for any final questions. Yes, there's one, so then we will open up for one question in the phone conference.

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Operator [30]

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The next question comes from the line of Fredric Cyon from Carnegie.

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Fredric Cyon, Carnegie Investment Bank AB, Research Division - Research Analyst [31]

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Two questions from my side. Starting off with Germany. Obviously your CAGR in sales has been about 80% in the last couple of years, so that's materially above the -- what you anticipated long term, and if I look at the ongoing production to consumers, it's up about 40% year-over-year. What's the biggest challenge and risks with that kind of growth trajectory for Bonava in Germany?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [32]

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I think it's being too self-confident. This is not an easy industry. It's very capital-intense. If you don't have the right people, if you don't make the right decision with the right timing, it is very, very costly. So I think it's a good balance between being opportunistic, positive, but also being healthy cautious, and that's why I have Ann-Sofi at my side here. We have been overperforming, I agree, but I also say, don't expect us to over-deliver always. I think it's -- the shareholders and the management here would rather make wise decisions than bold decisions at all times.

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Fredric Cyon, Carnegie Investment Bank AB, Research Division - Research Analyst [33]

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That's clear, and then moving over to Sweden, then. I've noticed that you've done some price adjustments in a couple of projects in Stockholm, and we obviously see that your selling rate is low compared to history. And also that margins underlying are declining. Are you still confident that you can maintain margins of plus 10%? Isn't that -- is it adjusted for lower prices in Stockholm, going forward?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [34]

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No, I think that we have to go through a pretty tough period where we have some project that were started in another market situation. Of course, we can't deliver on those margins according to expectations. But we still have to get them out of the system. Regarding the new system -- the new starts, we have not lowered our expectations on earnings, but there we're more supported by new prices when it comes to construction and materials. So yes, it will have an impact, but long term earnings hopefully will be back to normal.

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Sofia Rudbeck, Bonava AB (publ) - SVP of Marketing & Sales [35]

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Okay, thank you very much, and we will soon close this Q&A and by that, I would just ask you Joachim, if you have any closing remarks?

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Joachim Hallengren, Bonava AB (publ) - CEO & President [36]

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Again, I will say thank you to the Bonava team, I think this is a really strong report. Again, the strategy is right, the analysis was right. Now it's just hard work, continue to do what we do.

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Sofia Rudbeck, Bonava AB (publ) - SVP of Marketing & Sales [37]

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So thank you very much, and I hope to see you all back here again for the quarter 1 report. Thank you very much.

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Joachim Hallengren, Bonava AB (publ) - CEO & President [38]

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Thank you.