Ncc AB

STO:NCC B

Earnings Call Transcript 2022-Q3

[Tomas Carlsson, executive]

Good morning, and welcome to this presentation of the third quarter earnings for the NCC Group. My name is Tomas Carlsson, I'm the CEO. And with me here today, I have Susanne Lithander, our CFO.

The way I think about this quarter goes something like this. It's a mixed picture in more challenging conditions. On one hand, we have strong orders received, then we have a strong order backlog. We have strong cash flow. We have stable earnings in Infrastructure and Building Nordics, even though cost increases are challenging. And then we have property development, selling one piece of property exactly according to plan.

On the other hand, we have write-downs in a few projects in Building Sweden, and we have a heavy impact on cost increases in Industry, and those are, of course, disappointments. So it's a mixed picture, and that is somewhat the theme of everything that we see today.

So to give you a little bit more flavor on that. Strong orders received, both in the quarter and rolling 12. Quarter 3 is always a bit seasonally a little bit lower on the orders received. But compared to other third quarters, this is a good quarter, and rolling 12, we are on a really good level.

To be a little bit more specific, if you look at the different segments of buildings, you can see that residential for the last 2 quarters has been going down. Now I always say that 2 quarters is maybe not long enough to actually know if it's a trend, but it's clearly in line with what you should expect. But there's still a demand for residential buildings.

Offices, surprisingly flat. We have a few peaks with larger orders received in the quarter. That's normally depending on one or 2 larger buildings, but overall, surprisingly flat so far in the quarter.

And then we can see clearly over a couple of quarters that public buildings increasing. That is everything from prisons to schools via hospitals. We can see investments into water treatment and sewage treatment and also other type of public buildings.

So on the back of that, we have a strong order backlog, a book-to-bill rolling above 1 and an order backlog on a really high level. And on the back of that, we have now a really stable net sales. You should focus on the blue line that's excluding PD, because that's where you can see the trend. You can see that it's slightly, slightly going up.

However, we have lower earnings and margin in the quarter, and that is driven by the Asphalt business and Building Sweden, and then we have, according to plan, less profit recognition in Property Development. So Building Sweden and Asphalt business driving lower margin.

And if you want to have some more details on that, this is the quarter-to-quarter comparison. You can see that Infrastructure and Building Nordics, fundamentally on the same level; PD lower, but because of sales of fewer buildings, one building compared to 3 same quarter last year.

But you have Building Sweden with the write-downs in a couple of projects in residential and then somewhat more headwind and -- primarily in residential, and then Industry compared to last year due to increased costs. It's increased oil, it's increased gas that influences our production costs in our plants, but it also influences transportation cost overall. So SEK 510 million in the quarter.

For the year-to-date figures, the picture is pretty much the same, the same drivers. So we end up at SEK 814 million for year-to-date first 3 quarters.

And then finally, the market, a mixed picture. Significant uncertainty with potentially impact on the business areas. We all read about it. We all talk about it all the time. We talk about inflation. We talk about the interest rates going up. We talk about the financing market, and that should theoretically have a negative impact for businesses. We can't really see it overall in the group yet.

But also at the same time, we have strong areas of demand, for example, infrastructure, public buildings, as I demonstrated, the industry is investing into the green transition. So we have a number of factors that should have a potential positive impact on the market.

So what are we doing? Diligent project selection, we've done that for a long time. We continue with that. It's what we've seen in the last quarter is no reason for not continuing what we've done before. Continued operational discipline, maybe even more and maybe even more emphasized on some places, and we're also adapting resources throughout the group.

And with that, I hand over to you, Susanne.

[Susanne Lithander, executive]

Thank you. Okay. As Tomas said, we have a strong order backlog in our contracting units. The dark blue bar here, it's in the vicinity of SEK 19 billion for all 3 units, and that is significantly higher than the 12 months net sales number. Continuing with the contracting units, the margins are, as you can see here, on rolling 12. Infrastructure shows stability. Building Nordics are pressured on the margin due to the material cost increases, and we see Sweden drop significantly due to the write-downs.

Business unit Infrastructure had good orders received, SEK 4.5 billion in the quarter, which is higher than the previous 2 years. The biggest project was Kappalaverket water treatment facility. Water treatment is a strong area for us, where we have a strong market position and are strengthening it further. The book-to-bill was 1.1 in the quarter, and the net sales grew 9% to SEK 4.1 billion. The Danish and the Norwegian markets are growing, but still Sweden remains the biggest market with 73%. Earnings and margins were stable in the quarter. Earnings grew to SEK 139 million, and the margin was 3.4%, and we need to remember that the margin is still pressured by some old Swedish projects.

Sweden -- Building Sweden had order received on the same level as previous 2 years, an okay level, SEK 2.4 billion. But clearly, we can see now that Tomas pointed out as well that, public buildings are growing as a share of orders received. It's on the same level in the quarter in -- over the 9-month period as residential is now 27%. Of residentials, we have 56% rentals.

Earnings, net sales were SEK 3 billion in the quarter and 30% of that was residential. Earnings down significantly, as Tomas has talked about, minus SEK 56 million in the quarter due to the significant write-downs in a few residential projects in the Stockholm area, but the project margins are also pressured by cost increases primarily within the residential projects.

Building Nordics had an okay order received number, SEK 2.3 billion. It's higher than the same quarters last years, but seasonally low. The quarter increase is driven by the Finnish unit. But if you look at the 9-month number, it's Denmark that is driving the increase on orders received.

Also here, we can see that public buildings are growing as a share of orders received and the book-to-bill is 1 for the 9-month period in Building Nordics.

Net sales grew 12%, if we exclude impact from currency to -- and that's on the back of the really strong order intake we had last year. All countries contributed to the growth. Earnings in the quarter is slightly below last year due to pressure on margin for cost increases, but it's 3.2% margin, and it's still on an okay-ish level.

Moving over to Industry and the volumes, we can see that the stone material volumes drop, minor, is really minor while the asphalt drop is significant. That is due to planned customer mix changes, but mostly due to increased customer pricing.

And this slide excludes the numbers for Asphalt Finland from last year for comparison reasons, of course. Net sales in both stone and asphalt grew to SEK 3.6 billion, and that is driven by the increased customer pricing, of course.

To the right, we can see that Sweden accounts for 56% of net sales. And the split between stone and asphalt is 72% asphalt and 28% stone material.

Earnings in the quarter dropped to SEK 50 million, and as already said, driven by cost increases that we have not been able to compensate for in customer pricing. The business area has also had increased overhead coming from improvement activities, but also from the payments to the pension foundation. Capital employed is SEK 5.1 billion and return is 2.9%.

This slide shows the volatility in earnings in Property Development. And this quarter, we only had one project recognized to profits, Fredriksberg D in Finland. We started one project, an office project called Hyllie -- called Flow Hyllie in Malmo. We have 12 projects in our portfolio. Over 80% of the 240,000 square meters in our portfolio is in Sweden.

We did have some letting in the quarter, even if the letting was slow. We signed 8 contracts corresponding to 9,000 square meters. And the green and the yellow line on the top there shows the relation between completion ratio and letting ratio. And this quarter, the letting ratio of 62% is below the completion ratio of 63%.

Net sales, SEK 836 million. Only one project in revenue compared to 3 projects last year. Earnings, SEK 183 million comes from Fredriksberg D, but also from -- earnings from previously recognized projects. Capital employed, SEK 7.6 billion and return 5.6%. And on the bottom there, you can see the timing expected for profit recognitions for the 4 sold projects.

That brings us to an earning of SEK 420 million from the business areas. And now we come to other and eliminations. Usually has a negative contribution to earnings, but not this quarter, and I will try to explain why.

The first item there, we have NCC headquarters and subsidiaries, that is not part of the BA. That has a positive contribution of SEK 27 million, and this is explained by repayments from sickness and pension insurances, plus reversals of provisions in the parent company.

Next item is internal gains, where we eliminate the PD project profits while under the construction phase, and we reverse it when we take profit recognitions on property development. The difference between the years is explained by the fact that we only reversed profits for one project this year versus 3 last year.

In other group adjustments, we have various accounting adjustments, and the large impact this quarter comes from the IFRS 19 booking of a reversal of the pension cost that industry had to take to put money into the pension foundation that we reversed on this level. So SEK 90 million positive effect from other elimination in the quarter.

Financial net is increasing due to increased corporate debt and interest rates. Tax rate is 15% in the quarter based on the portion of property development projects expected in profits. That brings us to SEK 425 million net profit, and earnings per share, SEK 11.3 on rolling 12.

Cash flow before financing was almost SEK 700 million. And from operating activities is, of course, lower due to the lower results. And from property projects, we continue to invest in projects. Last year we had revenue coming in here from 3 projects. This year -- that explains the change to this year.

Other working capital have a positive impact of SEK 145 million, and that's driven by improvements and reduced accounts receivable. And if we look at the 9-month period for other capital employed, the impact there comes from big prepayments that we had in PD in '21.

Investing activities is low, and that's due to the divestment of NoDig in the quarter, that contributes SEK 100 million to this positively. In the 9-month period, we also have SEK 140 million additionally that comes from the land sale in Denmark in Q1 and Hercules Rebar in Q2. So SEK 700 million cash flow before financing.

And finally, our corporate net debt is SEK 1.9 billion, and the development there is explained by the negative cash flow over the 9-month period, of course. And our net debt-to-EBITDA target is to be below 2.5x. And after Q3, we are at 0.9x.

And with that, back to you.

[Tomas Carlsson, executive]

Thank you, Susanne. And before I wrap up, a couple of other things. We continue our repurchasing program for the NCC share. We can have maximum 10.8 million shares. And last Friday, we had repurchased 9.6 million odd shares. So I expect that we will finalize this in the next couple of weeks. It has been significantly less costly than we anticipated.

Financial targets. Our target for 2023 is SEK 16. We are now rolling 12 at SEK 14 and -- for 2021 and for the rolling 12, we are at SEK 11.

Net debt significantly lower than the target. Dividend was decided at the AGM SEK 6 with 2 tranches of payment and the second payment will be on the 8th of November next week.

Nonfinancial targets, starting with health and safety. We are on the same level as we were before. We have a mixed picture even for health and safety. We have clear improvements in certain areas, but we have a couple of departments that will have to work even harder on health and safety, 3.7 compared to the target of 3.0.

Climate and energy, we have, for a long time, been measuring Scope 1 and 2 of CO2. The target for 2030 is minus 60%. We are now at minus 48%. And a person with a good memory might remember that we've been on minus 43% previously. We have restated this, this quarter and also back to the starting year 2015 as in effect of the sales of Asphalt Finland. But since they had higher CO2 emissions than the rest of the group, this has a positive impact on the CO2 savings.

Scope 3, clearly more and more complicated to measure and it's, to a large extent, dependent on our suppliers and who we work with. So we have a progress on the areas that we can measure, most significantly, so for rebar steel where we use more recycled steel for our rebar steel.

So in summary, mixed picture, strong orders received and order backlog. Stable earnings in most of the business, that's true for all business areas. Though quarter -- we have challenges for residential buildings in Sweden, not related to -- primarily related to cost increases, but contract management. And the cost related challenges in the Industry Asphalt, mainly energy cost.

Stable financial position and then it's substantial uncertainty about the impact from the current economic climate. Residential and commercial properties would be most exposed, but we also have some positive signs or some positive developments in society.

And with that, I open up for questions and I think we will start with questions from the room.

[Albin Sandberg, analyst]

Albin Sandberg, Kepler Cheuvreux. I have 2 questions. The first on the asphalt business and some of your colleagues in the industry have pointed to the fact that those are contracts with limited ability to pass on cost to the client. For how long are you sort of stuck in these contracts? Are they...

[Tomas Carlsson, executive]

That's true, but they are also normally quite short. There are contracts with a duration for several years, but most of the volume has good duration of this year, and then we retender now and again. So the tendering period starts now or in the beginning of December and it ends fundamentally in the end of March, and then you have the seasonal volumes.

[Albin Sandberg, analyst]

And do you foresee yourself trying to obviously charge higher prices or getting some kind of indexation clauses in these contracts? Or would you be ready to walk away from this business basically?

[Tomas Carlsson, executive]

Well, I see that as actually the same thing. We need to have higher prices. Otherwise, we have to walk away from them.

[Albin Sandberg, analyst]

And on the competition side in that business?

[Tomas Carlsson, executive]

It's also a mixed picture because it's different from country to country. In Sweden, you have a number of larger competitors. In Norway, you have a couple of large competitors, but also a number of smaller ones. And in Denmark, you have several competitors.

[Albin Sandberg, analyst]

And then for sure, as you've pointed out several times, I know you're not providing a guidance and so on. So I'm just trying to…

[Tomas Carlsson, executive]

But let's try again.

[Albin Sandberg, analyst]

Rephrase the question. So you still reiterate your target for 2023 of SEK 16 per share. What will it take to get your there? Is that a broad based improvement across all your divisions? Is there some specific thing you're looking for '23 versus '22? And also maybe tie it back to your overall outlook for this year?

[Tomas Carlsson, executive]

Well, the target remains, but to be completely transparent, it's tougher than when we set it. We will have to have a more consistent performance across the group from the starting point that we set this year. So we will not -- we will have a different mix between the different areas. But admittedly, it is harder, but the target remains.

[Albin Sandberg, analyst]

I have one more question, if I may. That's on the buybacks. And you said it was not as costly as you imagine from the first part. Your gearing is coming up a little bit, but still quite below. What's your overall take away from this share buyback program? Is this something that you would consider again?

[Tomas Carlsson, executive]

Considering everything you can do, this is one thing we can do. Now this is probably the cheapest M&A we could have done during this period.

[Erik Granström, analyst]

Erik Granstrom, Carnegie. I have a few questions as well and perhaps starting with building and the margin development. Even if we put back sort of the SEK 120 million in charges that you took in Sweden, it seems like the underlying operations aren't performing perhaps as well as you would like. What should we expect going forward? Do you think that this will be the trend going into next year as well, in line with sort of the fall that we've seen in Building Nordics? Or what's the underlying order backlog look like?

[Tomas Carlsson, executive]

That's true. And that's what I try to allude to with somewhat heavier headwind from primarily residentials. And residentials is normally around 1/3 of the order backlog for Building Sweden and we still have some projects to deliver on the orders won a year ago or so. So think of it as a tougher headwind for residentials going forward.

[Erik Granström, analyst]

And also, how have you handled those kind of contracts in this environment when you bid for new ones? I would assume that residential contracts to some extent, are fixed, and that's part of the reason why you're seeing sort of the cost squeeze. What are you doing in your order backlog now that we've seen you've won orders for?

[Tomas Carlsson, executive]

In the current order backlog, we try to use the tools we have, index regulations when we have that opportunity, more of operational discipline when we -- more support to the units. Going forward, we are even more careful with what kind of projects we pick, and what are the contractual requirements from the residential contracts. And you can see that in the order backlog with probably order received will probably decrease more than the market has for orders received in residential.

[Erik Granström, analyst]

And I have 2 more questions. One is then on Industry. What's your outlook for sort of next year? Albin was into that specific area a little bit in terms of -- what do you expect in terms of operations? Do you think that you need to make larger adjustments to this business area? Or will you continue as is?

[Tomas Carlsson, executive]

Well, at the moment, we keep all options open. But my expectation is that we will be on an improvement trajectory, but we will not reach full potential next year and not even maybe the year after that.

[Erik Granström, analyst]

And my final question is your letting activity. What have you seen after the summer now that we've towards moved into Q4? You did lease some space, but it's still fairly low volumes. And sort of a follow-up on that question as well is, would you consider divesting projects that are ongoing, which are not fully let if you felt that you could handle the leasing risk at that point?

[Tomas Carlsson, executive]

Lease or letting is definitely slower this quarter, and you can clearly see that, but it's not disappearing. We have let during the quarter, and it's on the low level, but it's still within the range that we normally are at. We develop our properties to have a good profit from them. So we have a pretty fixed set on rules on letting before we take risk on that. And as we stated, we will rather wait than sell below our expected price.

Operator, will you open up for questions?

[Operator]

[Operator Instructions] The first telephone question comes from the line of Markus Henriksson from AGB Sundal Collier.

[Markus Henriksson, analyst]

First off, a question on the EPS target of SEK 16. Do you think you need to have a historically strong results in property development in order to reach that target?

[Tomas Carlsson, executive]

I think we need to have a result according to expectations.

[Markus Henriksson, analyst]

Fair enough. Then I have a question surrounding the positive effect of the NoDig divestment in infrastructure. How large was that in the result?

[Susanne Lithander, executive]

It's very minor. It's really minor.

[Tomas Carlsson, executive]

It's more of a cash flow effect.

[Susanne Lithander, executive]

Yes. But the cash flow effect is SEK 100 million, but on profits, it has very little impact.

[Markus Henriksson, analyst]

Then it's been several questions surrounding Industry, and you mentioned that you do not expect to reach normalized results, maybe not even in 2 years' time. Could you highlight a bit, you have earlier said you focus a lot on internal efficiency and that you're done with divestments. Do you feel that results would have been better in Q2, Q3 if your plan would have put in place? Or do you feel that the increased costs have really been almost impossible to handle?

[Tomas Carlsson, executive]

Well, that's a bit contrafactual, since what we've seen over the last couple of quarters is cost increases and primarily for Industry on a level that we haven't seen in a very long time. But what we've learned is that maybe we have to be a little more flexible and a little bit quicker in adjusting to -- when we see this type of price increases that we haven't seen for more than a decade.

[Markus Henriksson, analyst]

And then one more follow-up on Industry. You mentioned that the tendering starts now in December. Have you already gotten some feedback from clients and how they are expected to behave into next year given the vast cost increases?

[Tomas Carlsson, executive]

Not that it has reached me.

[Operator]

There are no further telephone questions on the line right now.

[Tomas Carlsson, executive]

Very good. Any further questions in the room? If not, thank you for attending this presentation. And if you have further questions during the day or later, please reach out to us. And have a good day. Thank you.

[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.