Ncc AB

STO:NCC B

Earnings Call Transcript 2022-Q2

[Tomas Carlsson, executive]

Good morning, and welcome to this presentation of the second quarter earnings for NCC during 2022. My name is Tomas Carlsson. I'm the CEO. And with me here, I also have Susanne Lithander, our CFO. And just before we start, the slide that you're looking at right now has a drone picture of 1 of our projects. It's Kronløbsøen in the former Free Harbor of Copenhagen. And what's special about this is that we will produce a man-made island in the former bay in the Free Harbor, with 4 story underwater parking garage and a large residential block in a very typical Danish modern design. This is a really good project that we have and also a clear demonstration of what complexity in the construction process means for us.

With that we move on to the summary of the quarter. And the way to think about the quarter is like this. We have some growth in the contracting and the Industry business areas. We have a strong order backlog. We have orders received on rather normal level. Earnings in contracting on par with last year. However, we have nothing sold in -- or profit recognized in PD, and Industry volumes somewhat impacted on cost in the quarter. So earnings on pretty much the same level as we saw last year.

What we see this quarter is that we have more impact from inflation, impact from interest rates on the general economy, and overall more economic uncertainty in the quarter. So stable quarter in more economic uncertainty.

Orders received on a fairly normal level, followed by several quarters with really good orders received. As I've pointed out many times, orders received can have a normal variation depending on what kind of projects we win, and you cannot really draw any conclusions from an individual quarter or even for 2 consecutive quarters, but a stable level of orders received for this year.

And that means that we have -- and if you look more on a couple of interesting segments. You can see that this normal variation -- you can see -- from this slide, you can see 2 things, basically. You have normal variation regardless of the general economic environment at any given point. You can have high orders received in a rather slow economy, and you can have low orders received in a good economy. That's evident for all the segments. You can also see that net sales have a more smooth development than orders received, and that's kind of natural since orders received is a 1-day event. And delivery, normally that takes several years.

And then what I think is important with this slide is the scales are the same, that residential and public buildings for us normally is a larger proportion of our orders received and the net sales.

Net sales up from last year on the back of strong orders received over an extended period of time, SEK 14 billion. Stable earnings, roughly on the same level as last year. Margins stable. And you have to remember, no profits recognized in PD this quarter.

If we take a look at the earnings a little bit more in detail and look at the bridge connecting last year's second quarter and this year's, nominally, this is the way it looks. We have contracting net of the 3 business areas on the same level. Property development actually up compared to last year. We didn't sell anything this year, we didn't sell anything last year, but we ramped in some of our previous projects. So we got some revenue from that. Industry nominally down, minus SEK 4 million, and then the large negative deviation is other and eliminations.

There are several components of other and eliminations this year, but 2 that are the most important drivers. First of all, last year we still had Road Services Denmark in our books. We had Road Services Denmark and Road Services Norway. Road Services Denmark was actually profitable. We sold that after the second quarter. And this year, we have only Road Services Norway left. So the delta is negative.

And then what we have left in Norway is 5 projects that we are running out. And then we have higher investments in IT this year. We've been working with our IT infrastructure for quite some time now, and we can expect that we will have higher IT investments going forward. Right now, in the short and medium term, on the level that we see now. But we will get back to that later on this year and give you some more details on that. And that leaves us with SEK 474 million EBIT.

Now however, we sold Asphalt Finland, which was a perennially loss-making business. So you could expect a positive effect from that, and we really don't have that. So excluding Asphalt Finland, we have SEK 39 million lower earnings in Industry. Now that is not primarily cost for goods sold. It's primarily other things having to do with restructuring of the Asphalt business and the continuous improvement programs that we have underlying. The Asphalt business is developing in a really good way.

If we look at the different types of businesses, contracting margins on a pretty stable level. We see some margin pressure for the 2 building business areas, but still on a high level.

And if we look at order backlog compared to sales, we still have really healthy -- we have a healthy backlog, more than 1 year's worth, for all the business areas, and for some instances really much more than that.

If we give you another perspective of order backlog, we can see that rolling 12, we have a book-to-bill over 1 in the quarter, it's 0.9, but you have to look at it on the longer time perspective to really understand what's going on. So book-to-bill larger to 1 on the rolling 12 perspective on a normal level this year, leaving us with an order backlog of almost SEK 61 billion larger than we've seen in over a long period of time in quarter 2.

And finally, I started out with a more mixed picture. It's a more mixed market environment we see, and I think that's evident for everybody. We see more risks and uncertainty, inflation, interest rates impacting both investments and consumers, mainly having an impact on residential and commercial buildings. But while at the same time, we see a maintained demand for public buildings. And in public buildings, you have, of course, things like administration buildings, schools, but also buildings like hospitals and prisons, where we have several projects of both.

And then we see a high demand from industrial investments connected to the green transition for the industry, and we see continued really high demand for infrastructure of all times in all the Nordic countries ranging, of course, from roads and railways, but also to water treatment, water distribution, electricity distribution, and all sorts of infrastructure.

And then finally, we have this looming risk with supply of cement in Sweden. This is a long-term uncertainty. There's a process ongoing, and we hope that we will get intermediate solution towards the end of the year. But I think it's worthwhile reminding ourselves that this is still a risk for the industry as a whole.

And with that, I hand over to Susanne Lithander.

[Susanne Lithander, executive]

Thank you, Tomas. Let's start with the business area Infrastructure. They had an order intake in the quarter of SEK 3.1 billion. That is a drop compared to last year, but we need to remember that last year was a very high quarter and a very high first half of the year with some really large projects being booked.

Net sales grew 6% to SEK 4.4 billion on the back of last year's strong order booking. And as you can see to the right, the Danish market is growing, but Sweden continues to be by far the largest market with 74% share of net sales.

Operating profits and margins are stable. Earnings increased to SEK 124 million in the quarter with a margin of 2.8%. The margin for the first 6 months improved slightly to 2.1% due to the divestment of Hercules Rebar, and also good higher margins in the project portfolio. We remind you that the margin is still impacted by a handful of old large projects in Sweden with really low margin.

Building Sweden had a good order intake in the second quarter, SEK 3.7 billion, a bit lower than last year, but over the 6 months period they have increased their order booking substantially. The growing segments are Public Buildings and segment Other. The Public Buildings include a couple of really large penitentiaries and Other includes industry and logistics buildings that are growing.

Residential orders, as you can see to the right, vary a lot between the quarters. And in the second quarter, it's low, basically on par with last year's level. Half of that is rentals. Book-to-bill is 1.2 for the first 6 months for Building Sweden.

Net sales increased in the quarter to SEK 3.8 billion, and 50% of the revenue comes from residential and refurbishment. Earnings are fairly stable, SEK 117 million in the quarter, negatively impacted by pressured project margins, both in the quarter and for the first half of the year, even though the margin is stable on 12-month rolling.

Building Nordics. Orders received in the second quarter was SEK 2.7 billion, SEK 200 million lower than last year. But for the first 6 months, the business areas had a very strong order booking driven by the Danish market, and the Danish operations took several large orders in the first quarter and the book-to-bill for the first half of the year is 1.2.

Net sales grew 25% quarter-on-quarter, and all countries grow, but the Danish operations contribute the most. And Denmark is the largest with 47% of net sales. Earnings in the quarter grew to 92% -- to SEK 92 million due to the increased volume. Margins were pressured from increased costs, and they decreased to 2.8%, for the 6-month period to 2.4%. However, the margin on 12-month rolling increased to 3.5%.

This slide shows the volumes in business area Industry, and we can conclude that the volumes were on par with the second quarter last year for the stone material. For asphalt, the volumes are slightly lower, and that's in line with the planned change in our product mix. And in all these numbers that we show, we have excluded the Asphalt Finland part that was divested last year, for relevant comparison, of course.

Order intake for the business area increased in both divisions stone and asphalt. The net sales increased in both divisions and the increase for the first half of the year is driven by volume and price increases for stone material and for the increase in asphalt is driven by price increases. And Sweden accounts for 55% of the business area's net sales.

The earnings in the quarter was SEK 240 million, which is SEK 40 million below last year's second quarter. The decrease is due to increased cost that hasn't been fully covered in increased customer pricing, primarily in Denmark and Norway. They have also, as Tomas said, increased some overhead cost due to improvement costs.

Capital employed, SEK 5.4 billion, and return on capital employed, 8%. We have started 2 projects in Property Development in the quarter, 1 office, Habitat 7 and 1 logistic project, Arendal Albatross. We have 12 ongoing projects in our portfolio after the second quarter, corresponding to 238,000 square meters and 78% of that is in Sweden. And these are the earnings per quarter for Property Development and it shows the volatility in the earnings.

In the second quarter, we had no projects recognized in profits, but we did sell 2 projects in the quarter, Arendal Albatross, and Kontorværket 1. Letting in the quarter was low. Only 7 contracts were signed corresponding to 3,400 square meters. During the quarter, we sold Arendal Albatross with no letting risk, and that's the dark blue part in the middle of the slide, sold, no letting. The green and the yellow lines show the relation between letting and completion ratio. And there is a healthy balance between the letting ratio of 65% compared to completion ratio of 63%.

And again, there were no projects recognized in profits in the quarter this year. Last year, we only had a very small project with no positive impact on earnings. And the increase in both sales and earnings in the quarter are due to additional revenue and earnings from previously sold projects.

Capital employed SEK 7.5 billion, and the return is 7.3%. On the lower part of the slide, we have the expected timing of profit recognition for the projects that are already sold. And as you can see, we expect profits in Q3 for Fredriksberg and Q4 from Kineum.

Cash flow. In the second quarter, we always have a negative cash flow due to the startup of the Industry business, where we start up their operations and they build up their working capital. Cash flow before financing was negative SEK 1.5 billion in the quarter and SEK 1.9 billion for the first 6 months.

Earnings from operations look lower, even though operating profit was on the same level as last year. That's explained by lower reversals of noncash items. And in this case, it was provisions. In cash from property projects, you can see that we continue to invest in property projects, even if it's on a lower level than last year.

Working capital had a very negative impact due to the working capital from Industry, as I already mentioned. But in addition to that, we have the contracting units that have increased their working capital from accounts receivable and lower prepayments and that comes primarily from infrastructure and building Nordics. For the 6 months' period, the gap or the deviation is even larger, and that's due to the fact that we had large prepayments within property development in 2021.

Investing activities, the CapEx is lower due to the divestiture of Hercules Rebar in the quarter that had a positive effect of SEK 96 million on investments. And for the 6-month period, we also have a positive impact from the received payment for land in Denmark that we sold last year.

Our corporate net debt was almost SEK 2 billion after the second quarter. Increase is mainly due to the negative cash flow before financing, but we also did pay out dividend of over SEK 300 million, and we have bought shares of around SEK 300 million.

Our net debt-to-EBITDA target is to be below 2.5x, and we're well below that at 0.8x at the end of the quarter. And finally, we added up for the income statement. On the first, we had -- the business areas contributed SEK 575 million in earnings. And then we come to other and eliminations that have a negative impact on earnings. On the first item there, we have costs for headquarter and smaller subsidiaries that don't belong in BA, and that had a negative impact of SEK 71 million in the quarter. And this is above the same period last year due to, as Tomas mentioned, the fact that we had positive earnings in Road Services from Denmark, and we have also seen -- or we have, in line with our strategy, increased investments in the IT development area, that is impacting this number.

On internal gains, where we eliminate the profits in PD projects during the construction phase and reverse it when we recognize the profits in PD. The difference between the years is due to higher buildup pace last year and a smaller portfolio this year. And in group adjustments, we have various accounting adjustments. That brings us to an earnings of SEK 474 million that Tomas has already talked about. Our financial net is low and on the same level as last year. Tax rate is calculated to 18.4% then based on the projected portion of profits from property development. And net profit for the quarter was SEK 383 million, and that corresponds to an earnings per share of 13.78 on 12 months rolling.

And that's all from me, and back to you, Tomas.

[Tomas Carlsson, executive]

Thank you very much. And I have a couple of things before I wrap up. First of all, we started a repurchase program of shares that will go on until the next AGM. That has a limitation of maximum SEK 1.5 billion or maximum 10% of the shares that we can hold at any given time.

Per June 30, we had repurchased, under this program, 2.6 million shares, which means that we are totally owning 3.3 million shares, roughly 1/3 of what we can own. We are buying everything that we can buy at the time given the rules and regulations for that.

And then second point, health and safety targets, that is something that we are working a lot with. We are focusing on both the lost time injury frequency 1 and 4, and we have a target of 3.0 for lost time injury frequency 4. We have a slight decline in the development, but we have more to do in the business areas going forward.

And then sustainability, we report that during the first and third quarter. So we have nothing new at this point, but I'd like to point out that we had a decrease of minus 41% for Scope 1 and 2. And then we're building the road maps for the most important sources of CO2 emissions for Scope 3.

On the picture on the top right, you see me together with a whole bunch of other people receiving the first dumper made out of Swedish carbon-free steel, which is 1 milestone towards the Scope 3 emissions.

And then finally, the summary of this quarter. We have a good order backlog strong, good orders received. We have growth in the business. Earnings flat due to some headwind when it comes to -- from inflation and cost increases. In Property Development, we have started 2 projects, and we have sold 2 projects; Albatross falls in both categories, both sold and started. Price increase is tangible, but managed so far. Mixed market conditions, on the one hand, resistance from price increases, interest rates; on the other hand, maintain good demand from public sector and then strong demand from industry and infrastructure.

And what we've been working with over the last couple of years, the action plan is still valid in this type of economic environment, focusing on building about the business and have more control over risk and being maybe even more prudent when it comes to what kind of projects we take on.

And with that, operator, I open up for questions.

[Operator]

[Operator Instructions] The first question comes from Erik Granström from Carnegie.

[Erik Granström, analyst]

I have a few questions. And I would like to start off with both, I guess, building and infrastructure. You mentioned a bit that volumes are sort of positively affected by, in general, inflation, as you can push prices increases on to customers, but it also is affecting your margins. What do you expect going forward? You mentioned that you've had some cost increases in specific projects in Q2, mainly residential. Are these projects completed? Or do you believe that this trend of margin dilution and higher volumes will continue through the second half of the year and into next year?

[Tomas Carlsson, executive]

Well, that depends on what the development we see going forward. Because what we've seen over the last couple of months or end of last quarter and this quarter is very high level of cost increases and that we have managed to handle the cost increases over the last year in a very good way. We see some impact during this quarter. What will happen going forward depends on what happens with cost increases. And there are mixed signals on the market now, lots of uncertainty. So we will get back to that after the next quarter.

[Erik Granström, analyst]

Okay. And then going into a discussion about the fact that the order backlog. I assume that, that currently does not include any changes or indexation to customers going forward. What I'm asking is basically, will the order backlog increase due to indexation in contracts as you push cost increases to customers, meaning that we are sort of underestimating the order backlog?

[Tomas Carlsson, executive]

You're both right and wrong with that assumption. Right in the sense that it will continue to have an impact on increases in the order backlog. Wrong in the sense that it doesn't include anything, because we do that continuously. So we have adjusted order backlog over the last couple of quarters as well. However, I don't think you should overestimate the effect on the order backlog on that. But it's an effect.

[Erik Granström, analyst]

Yes, sure. Absolutely. I understand. And then if we can come back to the working cash flow in Q2. I believe, Susanne, you mentioned that it was aside from industry which has its seasonal changes. It was mainly related to infrastructure and building Nordics, where you talked a little bit about less prepayments and so on. Could you perhaps go into a little bit more detail as to what the difference is in this quarter versus what we saw, for example, last year, because the difference is quite large?

[Susanne Lithander, executive]

Yes. And the difference between the quarter is not explained by industry, because they are on the same level as they were last year with a negative impact. The big difference comes from infrastructure and Building Nordics, as I said. And it is accounts receivables and prepayment. Accounts receivable due to increased volumes, of course, but also due to a bit late invoicing actually, which is something we need to work with.

And the lower level of prepayment comes from the fact that we have worked up some of the larger prepayments we had last year from some of the larger, really large infrastructure projects. So we've kind of worked up that. And the same goes for Building Nordics. They have also been late in their invoicing and not good.

[Erik Granström, analyst]

Okay. And do you believe that sort of the invoicing situation will sort itself out in coming quarters? Or...

[Susanne Lithander, executive]

Yes. We have no indications of overdues or anything like that. It's more of not having invoiced in time.

[Erik Granström, analyst]

Okay. And then also, while you're on the line, so to speak, eliminations, you mentioned you had increased cost for increasing IT investments. Could you perhaps give us a little bit of a guidance as to how large these are? And what you sort of would expect going forward. So we have some sense of where eliminations are heading?

[Susanne Lithander, executive]

I think we will see increases on the same level as of now. But if needed, we will come back with some clearer guidance later on in the fall.

[Erik Granström, analyst]

Okay. And also, going forward, you are divesting the Nordic area. And I was just wondering, could you tell us something about what sort of -- how large has that area been in terms of volumes and EBIT for infrastructure. Is it meaningful? Or will we simply not see it once it's excluded from the figures?

[Tomas Carlsson, executive]

Stop thinking about it.

[Erik Granström, analyst]

Okay. Roger that.

[Tomas Carlsson, executive]

It has not been meaningful historically, and it will not be meaningful as a divestment.

[Erik Granström, analyst]

All right. Fair enough. And then my final question is regarding your repurchase program of shares. You mentioned it's about SEK 300 million so far. Do you have any indications that, that will change some of the pace going forward? It seems like you're guiding of about the same pace for the rest of this year and up until the next AGM?

[Susanne Lithander, executive]

Yes. No, we continue with our buybacks in the same fashion that we are doing.

[Operator]

Your next question comes from Markus Henriksson from ABG.

[Markus Henriksson, analyst]

I have a few questions as well. First off on infrastructure. You have earlier said that the margin would be diluted by around 50 basis points due to old projects. And in this quarter, you highlighted that costs are expected to increase in 1 of the large Gothenburg projects. On the back of this new information, how should we view the infrastructure margin trailing 12 months now 2.5%?

[Tomas Carlsson, executive]

Well, there's a limited number of projects that we are not recognizing any profits on, but they have significant revenue, Korsvägen being 1 of them. We highlighted Korsvägen because the letter I wrote to the Director General of Trafikverket got public and was published. And as you can understand, those projects are continuing for a very long time and will have an impact on the margin for infrastructure in the corresponding time frame.

[Markus Henriksson, analyst]

Okay. Then how much did the Hercules Armering affect figures in infrastructure in Q2?

[Susanne Lithander, executive]

It's slightly above SEK 10 million.

[Markus Henriksson, analyst]

Perfect. Then also, as Erik discussed before, you mentioned increased cost in Building Sweden Housing Project. What do you hear from the market, expectations of volumes to decline materially? I'm thinking about the residentials being a positive driver for order intake in the last 2 years? How are you thinking about that subsegment within building?

[Tomas Carlsson, executive]

Well, I mean, it's an important subsegment. So we work a lot with it. But I think I have to refer back to what I said initially, there's more uncertainty, and it depends on what happens going forward from now. I mean, both from the perspective of ongoing projects, we need to be more careful and make sure that we understand what's happening with price increases, as well with what will happen with coming projects over short and midterm. Will there be investments on a meaningful scale in housing. And we'll come back to that later during fall in coming quarterly reports. I can speculate as well as you can. I think you concur with me on that.

[Markus Henriksson, analyst]

Then also on Industry, you mentioned Norway and Denmark were affected in the quarter. You couldn't compensate high cost fully with the price increases. Do you expect that to continue into Q3 as well?

[Tomas Carlsson, executive]

I mean, we're working on improvements. I really don't want to give an expectation on that because we're working on improvements and let's see how successful we will be.

[Markus Henriksson, analyst]

Okay. Last question. As you mentioned, quite a slow leasing quarter for NCC, but could you share some information on ongoing discussion? Sometimes it ends up in 1 quarter or not? What do you hear from your project and leasing staff?

[Tomas Carlsson, executive]

I mean leasing has been a big item over the entire corona period, and we've had a couple of quarters with really good leasing. This 1 was a slow one. but we definitely see that there is an interest from the market of leasing offices continuously. And the concerns from the corona of the exodus from the office is sort of over now. People really think that they need offices and they need modern offices, flexible offices as a place to meet. So we see a demand for that.

[Operator]

[Operator Instructions] Ladies and gentlemen so far there are no more questions from the phone.

[Susanne Lithander, executive]

We have questions from the web from Simen Mortensen of DNB. The first 1 probably partly answered, but what are the potential impacts of the Korsvägen project in Gothenburg, since we're stating that this will lead to higher cost and take longer than previously announced?

[Tomas Carlsson, executive]

Now you cannot speculate the impact from Korsvägen. We are having ongoing discussions with Trafikverket. What my intention with that letter was to really make sure that all of the Trafikverket organization understood that this is something that needs to be worked with together. Together we have to work with this. So there's no use in speculating on that.

[Susanne Lithander, executive]

And then the other question is, how do you assess the SEK 16 EPS target given the comments about higher risks going forward in the market that's more difficult to assess?

[Tomas Carlsson, executive]

It's still valid.

[Susanne Lithander, executive]

That was all the questions from the web.

[Tomas Carlsson, executive]

Thank you very much. And if there's no more questions from online?

[Operator]

Not so far, sir.

[Tomas Carlsson, executive]

Thank you very much. Of course, good orders received, strong order backlog, earnings in line with last year, but more uncertainty on the market going forward. Thank you all, and I wish you all a nice summer. Bye-bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.