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Ncc AB
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Good morning, everyone, and welcome to this presentation of NCC's first quarter. With me here today, I have NCC's CEO, Tomas Carlsson; and CFO, Susanne Lithander. They will guide you through the numbers. And after the presentation, we will open up for questions. Since this is a telephone conference, I would like to urge everyone to use a microphone and state your name in the Q&A session. With that, I would like to hand over the microphone to NCC's CEO, Tomas Carlsson. Welcome, Tomas.
Thank you, Johan. And let's make sure that we have the right slide first. Welcome, everybody. Welcome to this beautiful Monday morning, and I'm happy to see so many of you here.I will summarize the quarter, and I will give you some insights that we have from what we can see, and then Susanne will give you the details on the numbers. Summarizing the quarter, consistent Q1 performance. It's consistent compared to what we've seen historically over actually pretty many years. It's also consistent with what you could expect given the structure and nature of the company as we are today with a large part construction and large part of industry heavily impacted by the winter season.We have high orders received in the quarter on the back of a strong demand for our services. If you compare it to last year, it's nominally a little bit lower, but we had one really large project, Centralen in Gothenburg, last year. We're happy about that, but it's not to be expected to have orders on that magnitude. I will get back to this.We have a stable operational profit in the quarter, negative, but what you could expect from this type of operations. And we have a healthy cash flow significantly improving compared to the first quarter of last year primarily driven by cash flow from operations. And then we have, in the quarter, started 2 new Property Development projects for the group: one is Nordea's new head office in Aarhus at Frederiks Plads; and then Valle View in Oslo.We are continuing the work with the action plan that we launched in October last year. Examples of things that we have -- actions that we have taken during this quarter. We have divested the retail projects of Roskildevej and Kolding, and those were 2 of the projects divested in the quarter for PD with 0 or very little profit earnings effect in the quarter, but we have by now divested 79% of the value of the real estate that we wrote off -- we wrote down in October. The divestment process of Road Service is ongoing and proceeding according to plan. We are expecting to finalize this divestment during this year. And I hope that I will have more news to present in the coming quarters. And then turnaround initiatives on the departments and units that were nonperforming. If you remember what I said in October, I said 2/3 are performing, but 1/3 is not performing, and those are the units where we have specific and very detailed turnaround plans. So it's moving along according to our expectations and according to plan.I will detail orders received and net sales and EBIT a little bit and put it into perspective on what you can expect. If you look at orders received and order backlog for the last 3 years, those are the years that we have audited numbers for the organization as it looks today. So this is the time series that we actually can give to you. You see a clearly increasing trend. We can think about the Centralen order in Q1 2018. That has a very long duration. So what you see is orders received that is significantly larger than the net sales, which means that we are building order backlog, and we end the quarter with more than SEK 61 billion in order backlog.If you do the same slide for net sales and EBIT, it's not immediately as obvious. But as I have said on several occasions, we have different ways of recognizing profits in the business, and the group has different business models. So what happened in 2017 was that we had PD finalizing one large project that was Torsplan. That was, of course, fantastic and good. And we really appreciate it, but it is of a different nature than the more continuous construction and industrial businesses. So if we take -- if we are at the liberty to look at the business, excluding PD, it looks like this. So this is the net sales and EBIT development for the construction business and the industrial business for the last 3 years. The -- increasing net sales and earnings on par with what we've seen the last couple of years. I will give you a number of comments on the business areas in details. I will not give you all the numbers, but I will highlight a few things that maybe can help you understand this.First of all, infrastructures -- Infrastructure. Orders received on a good level. Infrastructure is impacted by the first winter quarter, not as much as Industry, but still impacted. Lots of the -- large part of the infrastructure work is done outdoors. And if you compare orders received with last year's, it's not as high. However, think about Centralen, SEK 5 billion, and then think about that orders received this first quarter is significantly higher than the net sales and also that we are building order backlog, and order backlog is on a significantly higher level than rolling-12 revenue. EBIT is positive, which is sort of what you can expect from an Infrastructure business in the first quarter, and pretty much aligned with my expectations.Building Sweden. Building Sweden has normal orders received. Order backlog for more than a year worth of revenues on a very high level, slightly growing or on par, and net sales and EBIT on the same level as last year, and a net margin of 3 -- or operational margin of 3%.Building Nordics, increasing orders received. They were a little bit on the low side last year, but they are now on a really high side. The increase is primarily Denmark. Number of projects that we have been working on more or less during the entire last year, which we now have been able to sign a contract for. So good orders received in Building Nordics, increased primarily in Denmark, but continued good orders received in Finland as well. Net sales increasing. EBIT increasing, not yet on the level where we want it to be, but moving in the right direction. All divisions within Building Nordics are now in positive earnings. For some, on a very low level, but still positive.Industry, very, very, very pronounced seasonality. And most importantly, for the asphalt business, pretty much on the level where we should expect Industry to be this part of the year. It's very, very difficult to draw any conclusions for the rest of the year for Industry with the start. But there's a delta compared to the earnings last year, so it's a little bit less of a loss compared to last year. And this delta, all divisions contribute to this improvement in the delta, all divisions within Industry contributes to this. And remember that we have expanded the Industry business with investments in, for example, Norway last year.Seasonally low activity. If you look at the stone sales, pretty much on line where we used to be -- where we have been and where we should be. Asphalt, the sales is actually up a little bit in this first quarter, but that is completely insignificant because the sales in the first quarter compared to the sales in the coming 3 quarters, it's very close to 0. So asphalt business is fundamentally closed first quarter.Property Development, no major projects recognized in this quarter. Nominally, it's 3. Nominally, it's 3, but 2 of them was projects that we wrote down in October. So the earnings contribution from them is 0 or very close to 0. And then a third small project where we have not fully recognized all profits yet. So this is fundamentally a quarter with preparing for the future and starting new process -- projects. We had no major projects profit recognized in this quarter. Now for those of you who read the list of when we expect to recognize profits in PD, there were 2 that we were expecting to recognize this quarter. We have now postponed that into quarter 3. It is purely a Danish formality. It's a real estate registry in Denmark that has not had the capacity to file our request for transfer of ownership to the buyer. We have -- we are in collaboration with the buyer, agreed on a new date when we will do the transfer. This is purely Danish formalities. Project is sold and done and built and all of that. So it's nothing that we can really influence.The portfolio is focused on Sweden even though we have started new projects in Denmark and Norway, but more than half of the ongoing projects are in Sweden, and that is according to plan. We have a healthy letting in the quarter, healthy letting in absolute numbers, but also healthy letting if you compare to other first quarters of the recent years. So we have managed to let some 22% of the available space this quarter, and that means that the letting and completion status of the PD portfolio is developing towards a less risky profile.With that, I plan to hand over to Susanne. Welcome, Susanne.
Thank you. Okay. Good morning -- it's morning still, I guess. Income statement. Tomas has taken you through the business areas, and I will just give you the short version on the top level instead. Our net sales has grown 5% compared to the first quarter of last year, and all the business areas have contributed to that growth. But as you saw from Tomas' slides, Building Nordics stands out with a 12% growth.Gross profit, however, is basically on the same level as last year in spite of the higher net sales. And that's also explained by the cautious profit recognition that we continue to have in our construction projects and also the fact that the projects we sold in PD did not have a major impact on our P&L. Selling and G&A is on a normal first quarter level. On a rolling 12 months, it's on a 5% level, where we expect it to be. And the next item on the income statement that we could talk about is the financial items that has increased from the minus SEK 8 million to minus SEK 18 million, and that's driven by the new accounting standard, IFRS 16, which I will come back to with a separate slide for your education. That's pretty much the details on the income statement.Moving on to the segment with other and eliminations that makes the completeness to what Tomas talked about with the business areas. On the slide to the -- on the little box to the right, you see how we split it up and try to explain the negative SEK 94 million in EBIT. First, you have the NCC headquarter, including the smaller subsidiaries and associated companies, basically on the same level as last year. The very small improvement there comes from our insurance company.Internal gains is the area where we do see some movements during the year. This is where we eliminate the profits on a group level, primarily PD. And when we start projects in PD, this increases and continues to grow until we take the profits there and where we recognize and deliver the projects from Property Development. Group adjustments contained some smaller adjustments, primarily within pensions this time.And now we come to the new accounting standard and the effects that have on our books. First of all, we have the income statement. And as you see, the effect on the income statement is negative SEK 5 million, so immaterial on the total level. However, we do see some movements between the lines. We do reverse the leasing cost in EBITDA, so we have a positive impact on EBITDA with SEK 143 million. That comes back instead as depreciation of our right-of-use assets. So our depreciation increases with SEK 137 million. And also, our financial costs increases with SEK 11 million. But all in all, immaterial impact.The balance sheet, the impact is SEK 1.4 billion, and that is shown as the right-of-use assets within fixed assets primarily. And on the liabilities side, you find them under long-term and short-term interest-bearing. The cash flow for the period, you don't see any impact, but there's also movement between the line. There's an improvement on cash flow from operating activities with SEK 162 million. And there is a decrease with the same amount with cash flow from financing activities. Crystal clear.Our net debt has grown significantly since the first quarter of last year from SEK 1 billion to SEK 4.8 billion. First, we have the other corporate net debt that has gone from a net cash position to a negative or net debt of SEK 700 million, almost. We have the lease debt or the lease liabilities that are now SEK 1.9 billion. And our pension liabilities grew during last year to current level of SEK 2.3 billion. As you know, we have our financial targets in this area. We have a target to have a net debt to EBITDA below 2.5x. And after the first quarter, we are on the level of 2.4, so within, but rather close.And finally, our cash flow for the quarter was strong. Very good cash flow in the quarter. This slide also shows '17. And as Tomas has already said, we had a major impact from Torsplan and [ Hilton ] that skews the numbers or the comparison for '17. And on here, you can see that the cash flow from operating activities has improved. And as I've just said, that comes from IFRS 16.The cash flow from property projects, slightly down, but that's more of a timing issue. Investing activities, also a bit down, and that comes from our investments -- a little bit lower investments in our asphalt business. The big improvement here really comes from the working capital, and that's primarily driven by prepayments in our Infrastructure business.And with that, I hand back to you, Tomas.
Thank you very much. And only for me to wrap up before we move on to questions. And the way to remember the first quarter is consistent Q1 performance, consistent with what we've seen the first quarter over many years with the NCC group and consistent with the structure of the company that we are, high orders received, continued good demand from the market on our services.The only exception to that rule is residential where we still see a little bit more muted market in Sweden and Denmark. But when it comes to offices, public buildings, infrastructure, industry, we see a good demand. Stable operating profit in the quarter, healthy cash flow in the business, 2 new Property Development projects started and the long-term improvement plan is on track.And with that, we open up for questions.
Let's start here in Stockholm.
Niclas Hoglund, Nordea. A couple of questions. If we start out with the building operations. What are your sort of main takeaways from the Building? We see solid improvement.
Building Sweden or Nordics? Or both?
Both. Firstly, the deviation versus last year is in the Nordics while Sweden is stable. What were the most surprising for you in the first quarter? What stands out?
No surprises is the big thing. And I think we remain with a good demand in the building sector. We have been able to compensate for the more muted demand in residential. However, if you look really, really, really carefully, we actually have an increase in residential in Sweden. But I think you shouldn't read too much into that. But we have been able to meet the demand from other sectors. Nordics, what we see is that we have a continued good demand. And in Denmark, we have been able to conclude a number of negotiations during the quarter, for example, the new Hilton Hotel in Copenhagen that we have been working with for quite some time.
On the Building side, you're talking about a slightly more than muted or continued soft market than the rest of the market in Sweden.
In residential, yes.
Yes. What would you say that the mix in the backlog is right now for Sweden on a profitability level? Would you say that the projects here are taking on? Or are you expecting sort of them to reach your target? Or will there be slightly more pressure owing to the mix?
I think we have approximately the same type of profitability in the new orders received. We are, also for Building Sweden, more cautious and more prudent in what kind of projects we take on and where we bid. For Building Nordics, we definitely see better profitability. We have been more cautious. We are working more with general risk contingencies. We are being more selective in bidding.
And then we will go to Infrastructure. You're announcing that you will continue to divest Road Services. Could you share some thoughts on the timing? And maybe also regarding to the losses of SEK 5 million, is it -- should we expect more or less a breakeven contribution from Road Services? Or are there any write-downs included in that number?
Well, we did major write-downs in October. So now it's ongoing business, and the old contracts that are continuing not to contribute that much. The process is ongoing. We have now sent out the information memoranda to actually a large number of potential buyers. We expect that we will start negotiation with a number of potential buyers within the next couple of months.
Okay. And looking at the rest of the operations, you've been having problems with some of the projects in Norway, for example. What's the sort of status on those? You are mentioning that all divisions are showing positive numbers, but are there still losses in those projects in the quarter?
Well, they are not well-performing. The projects that I talked about in October, at that point, we estimated that they would be completed during the second quarter this year, and that assessment still holds. So we're continuing gradually improving the business in both for Infrastructure and also in the Building Nordics.
And a follow-up. We've seen that the share of large orders, well, started in 2018, has increased. Could you share some thoughts of the sort of dilution from, I would say, cautious recognizing these projects in an early stage? Would you say that have had a negative impact on the sort of profitability that you're showing us today?
Well, it for sure decreases the profitability level. We are doing 2 things. We have a more prudent profit recognition, particularly in the large projects, but also in other more complex projects. Then we have -- we are doing 0 profit recognition on projects where we think that their size or complexity motivates that. And we are accumulating the 0 recognition in this quarter as a prudent measure for recognizing profits.
Will that continue to expand through the year or have we peaked?
That would be my expectation that we will continue at least this year and probably into next year and be more prudent in the profit recognition. Think about it like this: the average duration of our projects is 2 years, and until we are actually through one of those cycles, we will continue to be more cautious.
Yes. It took a major step in Q3 last year, but...
Absolutely. But if you remember, if you look at the write-downs we did, and that was balance sheet items with the exception of Road Service, other was claims and disputes, it was balance sheet items for Property Development, and that was the main explanation of the write-downs. It wasn't projects.
And then on Property Development, you're mentioning these 2 projects in Denmark that is sort of pushed into the second quarter. Could you allude a little bit? Are those 2 projects also among these sort of write-down projects?
No, no, no.
These are sort of normal...
These are real projects, real projects.
Real earnings projects?
Yes.
Yes. And could you also share some thoughts on the ongoing sort of interest in the rental market for the K12 and K11, I mean the properties in your main headquarters? We haven't seen any major leases in the K11.
No. I mean demand for rental for office space is high in the Stockholm area. And we are negotiating with a number of potential tenants, but we haven't concluded anything yet.
And the projects, at least the K12, will be finalized during the year?
Yes.
What's the sort of -- do you see potential for divesting the property already this year?
That could be one option.
And what would be the...
We have several options that we are working -- thinking about.
And any thoughts of any interest from any buyers?
We haven't started that process yet.
Okay, not started. And my final question, if I may. Just...
We have plenty of time.
It's just the -- well, we're seeing that the tax costs or, in this case, tax earnings in the first quarter, it's only 15% of the group. Normally, the sort of percentage point in the first quarter is an indication for the sort of full year expectations. Are you pointing us towards 15%? Or is it more likely to be in the...
Tax items, I, with confidence, hand over to Susanne.
No, we're not pointing at any direction with that.
So it's more the normal Swedish taxes?
Yes, yes.
Okay. Let's hear from the telephone conference if there is any questions.
Did we not cover all spectrums in that segment?
[Operator Instructions] And there are currently no questions registered on the telephone line, speakers.
Okay. Thank you. We'll take it back here in Stockholm.
Erik Granström, Carnegie. I just had a question then perhaps on the balance sheet. You were talking about the fact that you're moving in towards that net debt-to-EBIT target that you have. You're at 2.4 now, and the target is 2.5. I assume that you expect the sort of EBIT situation to improve going forward. That's obviously part of the action plan. But when in terms of your overall sort of net debt situation, how do you feel about that? Or do you feel that there's something that you need to do? Or is there anything that will automatically happen throughout the year that we should take into account?
No. I think we're pretty comfortable with the situation we have. We will carry the Q3 number in the calculation, and that's really what pushes it down to the level where we are. But from a financing perspective, we feel comfortable.
Any situation in terms of divestments that could change that picture? I'm thinking about if there are any effects from divesting Road Services or PD in particular for '19?
No, I don't see that. I don't see that.
Okay. And then perhaps moving on to Building a little bit and talk a little more about the residential market. You mentioned the fact that you've sort of been able to step up the activities outside of residential in order to sort of fill up the backlog. In terms of profitability, do you feel that there is any differences between the segments, particularly for Building Sweden then obviously?
No, not really. We have -- variance of profitability is within different customer segments more than between segments. So we see pretty much the same type of business. We are being more selective when it comes to bidding in all segments right now. But I'm really happy that we've been able to meet the slowdown in the residential with other sectors, but also really happy with the work that primarily the Building Sweden organization has done, focusing more on rental residential than most outlets that's in Sweden. And that's a job that they have been working with for several years now, so it's not part of the turnaround plan. They made a strategic decision 2 or 3 years ago.
Stefan? Go ahead.
First, to add on to that. Going back before you came back, there was lots of talks about this renovation wave coming and the good opportunities in that area, just staying on the residential. Is there anything you could say on the development on that side?
Well, we do renovation. I think it's not as clear -- particularly in Sweden, it's not as clear-cut as you've seen in Finland and Denmark, but it's part of what we do. But it's not as huge wave driven by a need to renovate that people has been talking about for a long time. It's sort of happening all the time and on approximately the same level as before.
Then going back to Q3, I think you mentioned the SEK 200 million remaining in costs for activities. And I think -- I could be wrong now, but I think SEK 150 million, SEK 152 million or something was taken into Q4. So there's another SEK 50 million we're waiting for, I guess, unless you -- it's -- yes, you could be -- yes.
That was the estimate, and the estimate was also that, that would happen during the remaining part of '18 and during '19. We were able to do -- take a lot of action end of 2018 and therefore had lots of restructuring costs. I think we will have restructuring costs during this year as well, but you should think about the smaller portions happening throughout the year.
So it won't be highlighted as a cost?
Well, we probably will be highlighting it if it is significant and material.
And to that, is -- should we expect it to be connected to the divestment when that happens? Is that part of it? Or is it...
It's not an estimate on the divestment -- on the earnings on the divestment of Road Services. We can really not forecast what will happen with that. It's more in connection with whether we close offices, if we have to rightsize organization somewhere or if we have to make changes to the organization.
Albin, please?
Albin Sandberg, Kepler Cheuvreux. Two follow-up questions. First, on the Road Services sale, you seem quite confident that, that will actually happen. But if you don't get the price that you're looking for...
Nothing is certain but death and taxes, but we have a really good process.
And there is no way to holding it in order for you to improve the performance? I'm thinking that you can fetch a better...
That's always an option, but that's not what we're aiming for.
And then also just on your comments about being prudent in the profit recognition. I guess if one has followed NCC a long time, I think prudent has always would have been a key word. So I wonder if we ever will hear that now we have an aggressive revenue recognition. But I just wonder if -- are you overly prudent now because of what has happened in the past when you were new? Or do you think it fairly reflects the projects that you're working with right now?
Well, I don't know what previous management has communicated, so I really don't know that. And it's hard for me to assess whether we are being over-prudent or not. I think we are -- there's a range of how you can think about profit recognition. We try to be at -- within that range but at the more prudent side. That doesn't mean that all projects are risk-free or nothing can't happen, but we try to be really careful.
Thank you. I think that concludes all the questions. So we would like to thank everyone for coming. Thank you.
Yes. Have a continued good Monday, and then see you around. Thank you.
Thank you.