Ncc AB

STO:NCC B

Earnings Call Transcript 2020-Q2

[Tomas Carlsson, President & CEO]

Good morning, everybody, and welcome to this report of the quarterly earnings and first half year for 2020 for the NCC Group. My name is Tomas Carlsson, and I also have -- I'm the CEO of NCC, and I also have our CFO, Susanne Lithander with me here. I'm going to give you the overview of the quarter and the half year, while Susanne will give you the finer details directly after me. But if you want to think about the first -- second quarter and the first half year, this is the way to think about it. So we have earnings improved, 18% up for the operational earnings for the group. This is true for all business areas except Industry, and I'll get back to Industry later on. So earnings improved for the group and all business areas except the Industry. Net sales, on par with last year, completely within normal variations. And orders received on normal levels. In Sweden, actually strong. What's important to remember here is that we -- when we compare to the second quarter last year, we had SEK 3.4 billion of orders received in Denmark. That's not something that we should expect every quarter or every second quarter, it's actually not even desirable to have, but Denmark is also back on more normal levels. I'll get back to that. Orders received in the first half year is significantly higher than net sales. So we're building order backlog, and the order backlog remains strong. And then finally, from the highlights, we have a good cash flow from operations, really strong compared to last year, even though this is seasonally a quarter where we have negative cash flow, but significantly better this year compared to last year. And if we move on to the market update. The big thing that most people are thinking about is the coronavirus. And our message here is that we have, for our ongoing projects, no material impact by the corona crisis to date. What we do know, though, is that Construction, Industry trails the general economy long term, and the long-term effects from the coronavirus is still hard to assess. But as I said, no material negative effects today. Property market. In the outlook, there are some uncertainty. Letting resumed in June, but the long-term effect needs to be monitored. So that was the highlights and the market. This week's news, and that's not really part of the quarter, but we think it's important anyway, is the divestment of Road Services. Road Services, the business that deals with snow clearance, cleaning, adjusting signs, et cetera, for the group. It's a business that has -- is vital to society, but we decided in turn -- in connection with the Capital Markets Day in the fall 2018, that this was up to -- for divestment. It's noncore business for the NCC group, and it's a different type of business than we normally do. And I'm happy to report that we have managed to divest Road Service Denmark and sold it to Arkil, a Danish company. We think it has -- will have better opportunities to perform within that group. And then a couple of days later, we reported that we have been able to sell Road Services Sweden and Finland to the fund, Mutares, from Germany. And with that, for all practical purposes, the Road Service businesses have been divested. We expect to close this in the third quarter this year. And then combined, there are no earnings effects from this deal and a marginally positive cash flow effect to be expected in connection with closing. Now for those of you who remember the details of road services, we still have some business in Norway. That will remain. That is fundamentally fixed contracts. They will not be reported separately anymore. They will be a part of the business area Infrastructure Norway, and we will continue to run them within infrastructure while we consider different types of divestment opportunities for the individual contracts, one-by-one or as a group. So that was divestment of Road Service. Let's get into orders received. And if we look at the slide of orders received quarter-by-quarter we see that nominally this might look like it's somewhat low. I would say it's rather normal. We have to remember that we had SEK 3.4 billion in orders received in -- for residential project. It was fundamentally 3 large residential projects in Denmark. That cannot be expected to happen every quarter. It shouldn't be expected to happen every quarter. It's actually not something that we want to happen every quarter because that would stretch our capacity beyond the limits we have. Orders received in Denmark, as well as in other business areas, are now back to normal levels or within normal variations. So I'm pretty happy with the orders received actually in this quarter as well, and I'm really happy about the orders received for the first half year. A question that we normally get is residential orders. So let's talk about that immediately, and let's talk about the overall group and leave it to Susanne to talk about the residential orders in Sweden. We can see on this slide that we are pretty close to the average, and the average is lifted by these 3 large orders in Denmark last year. So this is on -- within normal variation on the high side for a quarter of residential orders within NCC. And as you will see, when Susanne presents, this is pretty much a Swedish thing. That leaves us with order backlog. It remains strong in all business areas, it's -- we have been and we are still on a really good level with the orders -- with the order backlog. And on the back of that, net sales, moving on to the slide with net sales. We have net sales compared with previous years and pretty much where we've been for some time now. So steady moving forward, good earnings, normal orders received, net sales on par with last year, continuing the development where -- that we're at, which we see at this slide with operating profit increasing from SEK 411 million to SEK 483 million. This has been -- this is driven by all business areas except Industry. So all the Construction and Infrastructure business areas are improving their earnings as well as Property Development. Industry has slightly lower revenues as well as slightly lower earnings. This is, to a large extent, the effect of bitumen price in different ways. It has an effect that we, earlier this year, when the uncertainty around Nynas was really high, filled our inventories with high-priced bitumen in January, not as a price hedge, but as a hedge to be able to continue to deliver would Nynas not be able to supply bitumen. What has happened during the spring though is that Nynas is continuing to deliver, which we are super happy about, but at significantly lower price, trailing the general price development for oil and our contracts are regulated according to current bitumen price. That has some impact on earnings, and it also has a pretty significant impact on revenue. So that is all bitumen-connected. And finally, as my last slide, I will talk about health and safety. We remain at the low level where we've been for some years now and focus on work accident is the top priority for NCC, since this is the business where you have to have that as a top priority. And with that, I hand over to Susanne Lithander to give you the details of the second quarter and the first half year.

[Susanne Lithander, Chief Financial Officer]

Thank you, Tomas. I will start with our largest business area, Infrastructure, that ended the quarter with a continued, really strong backlog of SEK 19.2 billion, even though they are working off some really large orders from previous years. They had an order intake in the quarter of SEK 3 billion, which is a bit below last year, primarily in Sweden and Norway, but it's a normal variation, quarterly variation, we think. Some examples of new orders are for Lund–Arlov Railway extension worth SEK 400 million, and the Tvarbanan Light Rail Line in Stockholm-Sundbyberg worth SEK 265 million. And in connection to that, I can mention that the share of orders received and net sales in railroads has also increased 11 percentage point in the first 6 months compared to last year. Net sales increased 8% to SEK 4.5 billion and the increase for the first 6 months come from all divisions, and is primarily due to the high workup rates in the really large projects. Operating profits and margins continue to improve, and it's the business area's sixth consecutive quarter with improved earnings compared to previous year. EBIT was SEK 92 million in the quarter; margin, 2%. Q2 last year included a positive effect of SEK 45 million for closed claims in Norway. And the significant improvement comes from volume, of course, but also improved margins in the project portfolio. We still have a cautious approach to profit recognition, and we continue to recognize some of the large complex projects, that are in early stages, to 0 margin. And below, you can also see Road Services. And as Tomas said and as we have announced, Road Services have been sold or we have signed agreements to sell. We expect it to close in the third quarter. Quarterly numbers, here, it is evident that the business has shrunk due to the prudent tendering we have had for -- during last year. Overall, they perform in line with our plans. And as said, closing expected during third quarter and the remaining part in Norway will be incorporated in the business area Infrastructure after that until further notice. Moving on to Building Sweden, who had a very strong order intake in the quarter. They improved to SEK 3.7 billion in the quarter. And for the first 6 months, the order intake have increased to SEK 3.2 billion, and the backlog has grown to SEK 17.9 billion. And here, we have some orders worth mentioning. For the quarter, an office building for Fabege in Solna, with an order value of SEK 750 million, and we also had a number of residentials. And here, public buildings account for almost 40% of the orders booked in the first half of the year, and that increase is primarily driven by the 2 hospital projects in mid-Sweden region, Sormland, from the first quarter. Net sales decreased in the quarter due to the lower order intake in the end of last year. Earnings are positively impacted by improved margins in the project portfolio, but of course, the negative volumes have a negative impact. Margin in the quarter was 2.6%. And we should remember also that last year's earning included a negative impact from an old claim from Project Ragarden. Next slide, regarding the residential market in Sweden that Tomas alluded to, and we usually get a lot of questions about the residential market in Sweden. And this slide shows that our order intake in residential varies a lot between the quarters. In the second quarter this year was, in comparison, a very good quarter with SEK 1.1 billion. And more of that -- more than 70% of that was for rentals in the quarter. I will now repeat what you have heard a couple of times already. In Building Nordics, last year, we received 3 large housing orders, residential or housing projects with a value of SEK 3.4 billion in the quarter. That explains the downtrend in -- or the decrease in orders received for Building Nordics. Orders worth mentioning in the quarter, 2 projects in Finland, residential building worth SEK 440 million, and a preschool and school worth SEK 280 million, both in the Helsinki area. In Norway, Oslo, we booked an order for Manglerud swimming facility worth SEK 370 million. The order backlog decreased in Q2, but is still on a high level for Building Nordics, SEK 15.2 billion. Housing and refurbishment accounts for almost half of the orders received. Net sales in the quarter increased to SEK 3.1 billion, driven by the Finnish and the Danish units. A large part of net sales come from housing and refurbishment in primarily Finland and Denmark. And as shown on the slide, Finland is the largest market with 52% of the sales, followed by Denmark. Earnings in the quarter increased to SEK 62 million. That improvement is due to increased volumes. But also project margins continue to be subject to cautious profit recognition and the margin in the quarter improved to 2%. And now we move over to Industry, and this time we start with the volume picture. And we can conclude that the volumes are on par with last year's second quarter, slightly up for asphalt and slightly down for stone material. The business area Industry had a decrease in the order intake. That was SEK 3.7 billion in the quarter. The decrease is primarily due to the asphalt business in Denmark that received a really large state order last year. Net sales, SEK 3.6 billion, is a decrease in the quarter compared to last year, primarily driven by, as you've already heard from Tomas, the asphalt business, due to the decline in bitumen market pricing, and as you heard our customer pricing is linked to the pricing for bitumen. That explains the down -- the decrease in net sales. And the earnings was SEK 258 million, which is SEK 64 million lower than last year due to the lower net sales, caused by the bitumen pricing. But also in addition to that, that Tomas has already explained as well, we stocked up extra on bitumen at higher prices at the end of winter, early spring to ensure that the delivery capacity was there. And we did that due to the uncertainties around Nynas' supply capacity. So we had high cost for the bitumen that we used in the beginning here. The margin decreased to 7.2% in the quarter and on rolling 12, their margin is 3.7%. Return on capital employed is in line with our target of 10%. Property Development. Their net sales reached SEK 679 million in the quarter, and we recognized profits from 2 projects, offices in Helsinki, Fredriksberg B and C. Earnings was SEK 68 million in the quarter. And in addition to the 2 Finnish projects, we also had some land sales and earnings from previous sales that contributed to profits. And after the second quarter, the rolling 12 margin is on 14.9%. And return on capital employed, 12.9%, which is above the targets on both indicators. During the quarter, we have started 1 new project, Project Bettorp, which is a care home in Orebro, Sweden. And with 2 projects sold, we end the quarter with 14 ongoing projects. Of these 14 projects, 5 are sold, and we expect to take 2 more to profits this year: Bjorko skola and Arendal 4. Letting amounted to 25,600 square meters in the second quarter, which is a quite normal level for second quarter, actually. There was pretty much a stop in letting in April and May, but it came back in June and resumed on good levels, and that brought us back to an okay level for the full quarter. And this slide shows that we continue to have a healthy relation in our portfolio between our letting and completion ratios, with a higher letting ratio of 55%, then completion ratio of 46%. Adding -- now we come to the lower part of the income statement, adding it all up for the group. We have reviewed the business areas and their earnings that, in total, had a positive contribution of SEK 574 million in the quarter. And after that, we have some negative impacts in our other and elimination area. First, we have the cost for headquarter and the smaller subsidiaries and companies that don't belong in a BA. That had an impact of negative SEK 47 million, which is less than last year, and that is explained by the fact that the subsidiaries have a better result this year, but also last year's Q2 included cost for turnaround activities and restructuring costs. The next line item is internal gains, where we eliminate the profits in PD projects during the construction phase and we reverse them when we recognize the profit in our PD projects. The net effect here is negative SEK 18 million in the quarter. And in other group adjustments, we have various accounting adjustments. And the main impact in the quarter is adjustments for pensions according to IAS 19. And if you look at the accumulated numbers here for the first 6 months, you have a major impact from IFRS 16 adjustment that we had to make for the sales-leaseback of our new head office in Solna. This adjustment will reverse over the lease period of 10 years that we rent the office. That brings us to an EBIT of SEK 483 million to compare with the SEK 411 million last year in the quarter. Looking at 6 months number, we're at SEK 414 million compared to SEK 59 million last year, and that improvement on the half year number is driven by the profit recognition in Q1 from our head office in Solna K12. Worth notice here is also that we have a lower financial net due to our lower corporate net debt. And also, our tax cost is very low, in both the quarter and accumulated, by the fact that a large portion of our profits come from the first -- from Property Development projects. Net profit for the period, SEK 435 million. And as Tomas mentioned, we had a strong cash flow in the -- continued strong cash flow in the second quarter. And also for the first 6 months, it's been very strong. And cash flow from improved profits, from Property Development and our Construction units had a positive impact, as you can see on the line from operating activities. Cash flow from property project is positive, of course, due to the sales of K12, our head office in Solna, in Q1 and also Fredriksberg here in the second quarter. We have a negative impact in the quarter due to the start-up -- from working capital due to the start-up of the industry operations in the second quarter. That is a seasonal variation that we see every year. And if we look at the 6 months number, we have a positive impact from improved capital -- working capital, and that is explained by, to some extent, by settlement of claims in Norway. On investment activities and the effect there, we have pushed industry investments in asphalt in time, so they've been postponed and delayed. That have a positive impact compared to last year. And last but not least, our net debt was SEK 5.2 billion compared to last year's Q2 when it was SEK 6.4 billion. The corporate net debt is a positive net cash of SEK 73 million. Our pension liabilities, as you can see, have increased to SEK 3 billion due to actuarial changes. And the remaining net debt, SEK 2.2 billion, with leasing liabilities according to IFRS 16. And the increase is driven by the sales-leaseback of our head office. Net debt -- or we have a target, as you know, of net debt-to-EBITDA to be below 2.5x. And after the second quarter, we're pretty much on 0, negative 0.03 to be exact, due to the positive corporate net debt, of course. And with that, I hand back to you, Tomas.

[Tomas Carlsson, President & CEO]

Thank you, Susanne. And I'm just going to wrap it up and just conclude saying this is a good quarter, continuing on the improvement path that we have in the group. Earnings for the group, up 18%. All business areas, except Industry, contributing to this. And then when we think about the Industry, it's largely related to bitumen, both for sales and earnings. Net sales on par with last year, orders received on normal levels. And in for Building Sweden, actually on a rather high level. But to understand that, you need to remember the SEK 3.4 billion orders in Denmark last year in the comparison. Orders received for the first half year is significantly higher than net sales. So our order backlog remains strong. Cash flow, as Susanne just explained, strong from operations compared to last year in this normal, seasonally weak cash flow quarter. And with that, operator, we open up for questions.

[Operator]

[Operator Instructions] Now I've got a question from Tobias Kaj, ABG.

[Tobias Kaj, Research Analyst]

Yes. I would like to start with a couple of questions regarding the Industry operation. And you mentioned that you had some negative effect due to buffering of bitumen in the beginning of the year. Will this continue to have a negative impact on Industry for Q3 as well or is it solely an impact for Q2?

[Tomas Carlsson, President & CEO]

No. We consider this to be a one-off effect. We are now back to normal procedures, so where we are filling our inventory on a more regular basis than we're filling them with bitumen at the current low price.

[Tobias Kaj, Research Analyst]

Okay. And you show that volumes for stones and asphalts are stable year-over-year, but we also had a very mild winter. Is that indicating that the demand is actually declining? Should we expect stable volumes for the second half as well or is it a risk of a decline?

[Tomas Carlsson, President & CEO]

Yes. I think you can expect pretty stable volumes. Where we've seen some impact on something that is not weather-related is Norway, where you have a change in the procurement system. But it's pretty stable.

[Tobias Kaj, Research Analyst]

And regarding the...

[Tomas Carlsson, President & CEO]

And we have good volumes in the end of quarter 1, so that was the warm weather impact.

[Tobias Kaj, Research Analyst]

Okay. And regarding the divestments of the Road Service operations. Did you have any additional central expenses because of that in Q2 or will you have that in Q3?

[Tomas Carlsson, President & CEO]

Susanne, can you answer that question?

[Susanne Lithander, Chief Financial Officer]

We really don't expect to have any extra cost. I think we have -- when we say that the effect on our profits will be basically null. We have included all the costs that we also have.

[Tobias Kaj, Research Analyst]

Okay. Excellent. And regarding your order intake, I mean, you talked a bit about it. But one way to look at it is that you actually had a little bit more announced orders in Q2 this year compared to last year, but still a significant decline. So excluding the announced order, order intake fell by more than 30%. Is this an indication of the underlying demand trend in the market or is it more like temporary volatility between the quarters?

[Tomas Carlsson, President & CEO]

No. It's not -- the way we see it is that it's not an indication of the market. Demand is still good in all our markets and in all our countries. It's more of the normal volatility. And I've talked about that and tried to exemplify it with residential order intake, where you -- even in a really high, good market, you can have individual quarters or several quarters with lower intake and then you have higher order intake. So there's a built-in volatility in this, and we're in that normal territory.

[Tobias Kaj, Research Analyst]

And regarding the trends in the market, do you see any signs of lower cost inflation due to COVID?

[Tomas Carlsson, President & CEO]

No.

[Operator]

Our next question is from Erik Granstrom, Carnegie.

[Erik Granström, Financial Analyst]

I have a few questions as well. Starting off with building Sweden, could you remind us what would the underlying profitability have been last year in Q2? I'm sorry. You had extraordinary negative effects in your EBIT last year in Q2 in Building Sweden because of the provisions you took, which gave you a margin of 2%. Now the margin is 2.6%. So I was just wondering what -- if we do the same exercise as we did within Infrastructure, what would this show for Building Sweden, the 2.6% versus then last year?

[Tomas Carlsson, President & CEO]

Building Sweden would have been higher, but it's still increasing.

[Erik Granström, Financial Analyst]

Okay. So above 2.0% but below 2.6%?

[Tomas Carlsson, President & CEO]

It's -- yes.

[Erik Granström, Financial Analyst]

Okay. That's fine. Then my second question is regarding the divestment of Road Services. Obviously, Norway will be a very -- extremely small part of infrastructure going forward in terms of volumes. But should we expect profitability to be impacted for that entire business unit because of the implementation of Road Services Norway.

[Tomas Carlsson, President & CEO]

It's a really small part, but it's not the high profitability. So marginally, marginally, you could see dilution of margins for Infrastructure Norway.

[Erik Granström, Financial Analyst]

Okay. But for the business area Infrastructure, which is -- which have turnover of somewhere around SEK 8 billion, SEK 9 billion, we shouldn't expect to see much?

[Tomas Carlsson, President & CEO]

No. We have to be clear on that. We're talking about fixed contracts.

[Erik Granström, Financial Analyst]

Yes. Yes, and do you expect to sort of -- that's a one-off and then you're looking to divest it or will you continue to look for orders as long as you're keeping that unit?

[Tomas Carlsson, President & CEO]

No, this is not our core business. We've been very clear on that. And we're looking for opportunities to divest either project-by-project or if someone wants to buy the entire portfolio.

[Erik Granström, Financial Analyst]

Okay. My final question was regarding property development. You had a turnover of SEK 679 million, and I believe that the sales price for the projects in Finland were SEK 680 million. Is this basically the turnover that we see in Q2, is basically, simply the divestment? Or has there been some sort of FX effect?

[Tomas Carlsson, President & CEO]

Susanne?

[Susanne Lithander, Chief Financial Officer]

Sure. The PD -- the 3 -- the 2 projects that we sold accounted for -- where do I have it? For 600 -- yes, basically, it was 500...

[Tomas Carlsson, President & CEO]

SEK 587 million.

[Susanne Lithander, Chief Financial Officer]

I think it was SEK 587 million, the Fredriksberg B and C accounted for.

[Erik Granström, Financial Analyst]

Okay. So the change, the effect versus the press release is because you've reported it earlier or it might have been some other difference?

[Susanne Lithander, Chief Financial Officer]

We have some really, really small land sales and earnings from previous -- where we have guarantees that we have booked to sales, but it's very minor. So it's basically the 2 Finnish projects that goes into sales.

[Erik Granström, Financial Analyst]

Okay. Fine. One final question on -- then on Industry. It seems like a little bit of a blast from the past to talk about bitumen prices again. But if I understand it correctly, that the volumes that you bought early on in the season is now completely used up. So now you are running basically on spot prices going forward?

[Tomas Carlsson, President & CEO]

Yes. And just to finalize that question. There are 2 effects here that we see. We see the effect that you just described on earnings. We bought expensive bitumen, and then when we get compensated for the work we do, that's according to the current bitumen price. And that -- and the reason for that was the uncertainty around the whole Nynas situation. So that has an impact on earnings. If you look at the volumes, the actual tonnage of asphalt, that's pretty much the same as last year, while revenues are down, and that's because the prices are impacted by the bitumen price. So unit price for asphalt is lower due to bitumen, not impacting earnings as much.

[Operator]

[Operator Instructions] And we have no more further questions at that time. I hand over back to you.

[Tomas Carlsson, President & CEO]

If we have no further questions, at this time, I can't ask for further questions in the room. I will just finally say that this was a good quarter, increasing earnings for the entire group. Building Sweden, Building Nordics, Infrastructure, PD contributing to the increase, while we had some challenges with Industry deriving from bitumen. Good, normalized orders received; good, healthy order backlog; and good cash flow in the quarter. And with that, I wish you all a nice summer going forward. Thank you all.

[Operator]

This now concludes our conference call today. Thank you for attending. You may disconnect your lines.