Ncc AB

STO:NCC B

Earnings Call Analysis

NCC Group Reports Strong Q3, Reveals Strategies

NCC Group's Q3 earnings story unfolds with strong underlying earnings, marginally improved order intake in Building Nordics, and an overall steady performance in a challenging market. Notably, the quarter was marked by a SEK 614 million profit, resulting in a 3.2% operational margin, absent any Property Development project recognitions. Despite softer margins in ongoing projects within Building Sweden and Building Nordics, the latter shows signs of recovery. Industry returns to normalcy with heightened sales and improved margins, particularly in asphalt and stone material sectors. The company's future outlook hinges on the Property Development market, with the current net debt being comfortably low at SEK 2.8 billion, well below the targeted 2.5x net debt-to-EBITDA ratio, sitting at 1.06. Dividend policy remains unchanged with an upcoming SEK 6 per share payment, and the EPS rests at SEK 16.21. Addressing Property Development, NCC Group pledges a prudent approach, abstaining from distress sales despite a compressed market, demonstrating confidence in their strong balance sheet and value preservation.

Steady Growth and Strategic Resilience

NCC Group's third quarter reflected a narrative of resilience and measured progress, with CEO Tomas Carlsson highlighting a 'good quarter' marked by strong underlying earnings. This gain was partly driven by a one-off capital gain from a subsidiary sale, which underscored the Group's ability to leverage asset sales for profit. Infrastructure celebrated its 20th consecutive quarter of improvement, while the Industry sector bounced back to normal levels of profitability. Despite some ongoing projects in Sweden and Nordics being impacted by lower margins, positive strides were observed in Sweden's market.

Order Intake Reflects Seasonal Norms with Subdued Growth

The quarter's orders received followed the typical seasonal pattern, with variations attributed to the timing of large-scale orders which may skew the quarter-to-quarter comparison. Overall, the orders were marginally lower compared to the previous year, with Infrastructure scaling back from a previously high quarter to a more standardized level, and Building sectors in Sweden and Nordics showing marginal improvement. This indicates a continued robust backlog supporting steady operations and reflecting a business model that isn't overly reliant on short-term fluctuations.

Financial Health Supported by Strong Sales and Margins

Net sales have slightly increased year-to-date, with the quarter matching the previous year's performance. The operational margin stood at 3.2%, with reported earnings of SEK 789 million, a testament to the company's efficient cost management and lucrative project execution. Notably, Infrastructure continues its trajectory of incremental improvement, whereas Industry sectors have shown significant improvement leading to robust margins and profitability. Earnings reflect a balanced contribution across various business units, depicted by a mix of improvements and challenges due to strategic portfolio choices and broader market trends.

Divided Market Outlook Poses Challenges and Opportunities

The Group's market outlook reveals a divided landscape, with commercial and residential sectors experiencing a slowdown, contrasting with a robust public sector demand, particularly in infrastructure projects. The green transition is gaining momentum, presenting new opportunities. However, anticipated financial tightening among Swedish municipalities may introduce an element of conservatism in the market moving ahead. Resolution to this will depend upon how the next quarters unfold and the Group's ability to adapt and harness its strengths.

Property Development Hinges on Market Stabilization

The Property Development unit showed no profit recognition for the quarter, due to the lack of project sales—a reflection of a strategic choice rather than an operational setback. Continued focus will be on leasing and capital management, as evidenced by the operating capital employed at SEK 9.2 billion with a return of 5.7%. Management seems cautiously optimistic about selling four completed projects, although they remain hesitant to engage in 'fire sales,' signaling a focus on value retention and favorable market conditions for transactions.

Focused Efforts on Sustainability and Organizational Efficiency

Progress continues on the health and safety front with a Lost Time Injury Frequency (LTIF) of 3.9, and strides are being made towards energy and climate targets, with a current achievement of a 58% reduction toward the 60% goal by 2030. Financially, dividend policy remains consistent, and net debt is well managed, hinting at a robust fiscal discipline within the firm. Additionally, efforts to streamline operations, particularly in Finland where cost reductions have been implemented without one-off impacts for the quarter, mark a strategic approach to improve profitability across the board.

Earnings Call Transcript 2023-Q3

[Tomas Carlsson, executive]

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

[Susanne Lithander, executive]

Good morning.

[Tomas Carlsson, executive]

And you will hear more from her in a little while. So let's talk about the third quarter. And the way to think about it, it was a good quarter. We have strong underlying earnings boosted by a one-off capital gain from the sales of a subsidiary. And I'm particularly happy about the 20th consecutive quarter for Infrastructure improving the business and that Industry has a good quarter back on normal levels. Building Sweden and Building Nordics, still impacted by lower margins in ongoing projects but definitely improving in Sweden. In this quarter, we are not recognizing any profit from divestments of property.

The one thing I'd like to talk about is orders received. And this is a quarter with normal orders received that we've seen over the last couple of years. This seasonal variation, the seasonality in the orders received, mainly driven by the fact that our customers are on vacation 1/3 of the quarter. Comparing the orders received for the quarter with last year, it's lower. And I will actually do a bit of a deep dive into that.

If we look at the orders received for the third quarter for 2021, 2022 and 2023, we can see two things. One is that Infrastructure had a really good quarter last year and are now back to more normal levels. It depends on a couple of larger projects that they had the opportunity to book last year. While the Building business areas, Building Sweden and Building Nordics, are on the same level as we've seen over the recent years, actually marginally a little bit higher.

And I've said this before, you should not pay too much attention to an individual quarter when it comes to orders received because of the nature of our business, with large orders that can have a significant impact in the individual quarter or even a series of quarters. So don't read too much into the development of the orders received.

We have a solid order backlog, on the same level as we've seen the last couple of years. The difference here is the larger orders that we saw in Infrastructure. And I'll have to remind you that year-to-date, the first 9 months of the year, we had approximately the same orders received as we had last year. We can see a continuation of the trend that we've seen in Building. So over some time now, we had a much slower residential market, a slower office or commercial building market, while Public Buildings have a strong demand from the market.

Looking at net sales. We are year-to-date slightly up and, in the quarter, on the same level as we saw last year.

And now focusing on earnings. If we look at the earnings in the quarter, operational margin -- or earnings in the quarter, without the capital gain from the divestment of Bergnäset and keeping in mind that we have not recognized any Property Development projects this quarter, we still have an earning of SEK 614 million, bringing us to a margin of 3.2%. And if you look at the nominal numbers, what we report, it's SEK 789 million and 3.5% earnings.

The development is driven by these factors: Infrastructure continuing with small improvements for the 20th consecutive quarter, Building Sweden coming back from the very weak quarter last year, Building Nordics on approximately the same level, Industry back to normal levels with a clear improvement, PD lower because we didn't sell anything that we did that last year, and then we have the divestment profit. That's the way to understand the development of the quarter. And if we look at the first 9 months, the trend is fundamentally the same. The big difference here is Other and the eliminations that, on the first 9 months, is positive. Otherwise, it's fundamentally the same development.

And then before I hand over to Susanne, let's talk a little bit about the market outlook. We see that there's a divided market, clearly a slower demand in commercial buildings and residential. But there's a strong demand from public sector buildings, infrastructure in the widest sense of the meaning of -- the word's meaning. And we also see that the green transition is starting to gain some momentum. We are -- we have a strong position in many attractive segments of this development.

We see larger local variations than we saw a couple of years ago or 1 year ago. And we see looking forward that the municipalities and the regions, particularly in Sweden, are clearly facing financial challenges and signals a somewhat more muted demand going forward. But that cannot be seen in the numbers for this quarter, and we really don't know what that will mean for the quarter going forward.

And for us, as always, we will focus on building on our strength, to continue to select the right projects and make sure that we are active within the segments that we have chosen and we adapt our organization locally where needed. Here in Stockholm, for example, we are right now hiring while we are decreasing the organization in other parts of the organization.

So with that, Susanne?

[Susanne Lithander, executive]

Thank you. Okay. Let's start with looking at 3 contracting units, and starting with the order backlog. We clearly see here that both Building Sweden and Building Nordics have a backlog that is above the 12 months of sales rolling. And Infrastructure is a bit below, but in Infrastructure we have a lot of Phase 1 in the pipeline and a very strong pipeline.

We also compare the margins in the contracting units. And clearly, you see here the 20th consecutive quarter of Infrastructure improvement. We can also see that Building Sweden is bouncing back a bit after the write-downs from last year that has been pressing the margin for the full year. And Building Nordics is on a different trend. They have had problems in Norway with write-downs and a tough market in Finland with increased costs.

But if we look into the different business areas, and starting with Infrastructure. As Tomas already showed, we had not any big large orders in the quarter, which explains the difference from last year. We see sales on the same level. And their strategy of focusing on their segments has clearly paid off. And Energy and Water Treatment is the largest segments, and they stand for 40% of orders received in the 9-month period.

Sweden continued to be the largest market as a share of sales but Denmark is increasing as well. And earnings improved. As you can see here, we have excluded Bergnäset in the numbers. And they continue to improve on margin. And as Tomas said, the margin in the quarter is 3.8%, and on rolling 12, it's 2.9% now.

Moving on to Building Sweden. They have stable orders received and also stable net sales. And we can see here that Public Buildings and refurbishment is the largest segments, and Public Buildings make up for 45% of orders received in the first 9 months. And here also, we clearly see that the earnings are bouncing back after the write-downs that has been pressing them for -- since last -- the same quarter of last year, even if they are still not on a really high level but they are at least bouncing back as expected.

Building Nordics. They continue to grow in both orders and sales. It's driven by Denmark and Norway when it comes to orders, but also some currency help here. And when it comes to sales, all the units contribute and also some fuel by the currency. Public Buildings dominates also in this business area, and they now stand for 43% of the orders received over 9 months. Denmark is the largest market with almost 50% now. And here you can see the margin is decreasing, and it is depending on write-downs in Norway and a very weak market in Finland.

Industry. This slide shows the volumes. And stone material, the volumes are down, slightly down, and we believe that's due to the fact of the residential market. And the asphalt volumes are on par with previous years, so stable volumes in asphalt. And as Tomas said, we are seeing that Industry are returning to more normal earning levels, increased sales due to increased customer pricing. And earnings and margins is also improving significantly, explained by the increased customer pricing but also some lower cost when it comes to energy and maintenance. We should point out that the strongest improvement comes from asphalt, but stone material is also improving significantly and doing a good job. They have a capital employed that is on a normal level, SEK 4.8 billion, and the return is almost 7%.

Property Development. And we had no profit recognitions of projects in the quarter, hence, the negative earnings. And this is the normal earnings level that we have in Property Development -- or that we've had over the past 4 years, to point out that we now have SEK 201 million in earnings after 9 months. And as we can see on this picture, in the middle there, we have the profit recognition timing of the presold projects.

And for the remainder of the year, we only have the land sale in Solna part 2, which is a significantly lower value than a normal project would have. We have 7 ongoing projects and we have 4 completed projects that are not sold. And operating capital employed is now up to SEK 9.2 billion and the return is 5.7%.

This is the current portfolio. We'll split it up between the completed projects and the ongoing projects. And as you can see here, the 7 ongoing projects of -- the 3, we have presold. We only have 34% letting. The 4 completed projects, they have a strong letting or a high letting level, they are almost 90% let. And of the 200,000 square meters that we have in the portfolio in total, we have a higher completion ratio than letting ratio. And the letting ratio is -- or the letting is low in the quarter. We've had very few lets and very few square meters let. So that is what we are focusing on.

After the business areas, we come to the segment Other and elimination. And we have the headquarters cost and the subsidiaries that is not part of any BA. There, we have a big discrepancy between last year, and that's due to the fact that we had huge positive items in the accounting last year since we received payback from insurances -- sickness insurances.

Internal gain is positive. Even if we have not sold any projects, we've had adjustments in ongoing and discontinued -- or ended projects that impacts the internal gain level here. And in other group adjustments, we have a large positive number because of discount rate changes. We have increased our discount rate from 185% to 385%.

Financial items are low, I would say, in this market due to the fact that we capitalize on the interest rates for PD in ongoing projects. And our tax rate is 18.5%.

Cash flow is good in the quarter, still negative over the 9-month period. The improvements in the quarter comes from working capital and also from the fact that we have been paid from Bergnäset, the divestment in infrastructure. And the negative cash flow for 9 months is, of course, due to the fact that we haven't sold any more properties.

Our corporate net debt has increased to SEK 2.8 billion. We are still well below our target of having a net debt-to-EBITDA of less than 2.5x. It is on 1.06.

So that's what I had. And with that, I hand over to you, Tomas.

[Tomas Carlsson, executive]

Thank you, Susanne. And I have some additional information, I have a reminder and I have a summary left before we open up for questions.

Health and safety. We are now back on the level where we've been for some time now at LTIF4 of 3.9. We still have some work to do before we reach our targets, but this is a priority area for us and we are on a lower level for the industry.

Climate and energy targets. This is the update from the first 2 quarters of this year. Scope 1 and 2, we have a target of minus 60% until 2030, and we are now at minus 58%. So we are rapidly working towards that target. Scope 3 is somewhat more complicated, but we are working with the 4 prioritized segments and making progress in 3 of them while we're still working with transportation to be able to catch the correct data on that.

Financial targets. Dividend policy, known since before, SEK 6. The second tranche of that will be paid in a little while. Net debt, as Susanne pointed out, well below our target of 2.5. And then on a rolling 12 basis, SEK 16.21 EPS. So the question is we can still reach this, but it depends on -- it's dependent on the Property Development market, and we'll get back to that in the fourth quarter.

Now a reminder. Capital Markets Day, already next week, November 9. Welcome to Scandic Continental or online. And we will have an update of the business from the management team, including all the business area managers.

So in summary. Again the quarter, strong earnings, strong underlying earnings boosted by a one-off capital gain. Industry back on normal level and then orders received seasonally normal. This is the normal level. The big difference here is within Infrastructure, where we see a really strong demand. And we cannot read anything in regarding the construction market from these numbers. It's clearly a more divided market, variations regionally and between segments where we see that, for example, Denmark is really strong but also Northern Sweden.

So with that, operator, we open up for questions. And Susanne, welcome back.

[Operator]

[Operator Instructions] The first question comes from the line of Simen Mortensen, DNB.

[Simen Mortensen, analyst]

Congratulations with a strong result. But I have a few questions from my side. In terms of the other segments, there was a big dip there versus what a lot of people perhaps was expecting. And you say change in discount rates is part of the other reason for the dip. Can you please explain what is behind -- and would you clarify what you mean by change in discount rates and how that's been raising the EBIT in the quarter, please?

[Susanne Lithander, executive]

It's the discount rate for our pension liabilities.

[Simen Mortensen, analyst]

Okay. So -- but it's now operational cash flow from that, I assume?

[Susanne Lithander, executive]

No, no, no. That is IFRS accounting, IAS 19.

[Simen Mortensen, analyst]

Okay. And the other one is the margin in Sweden. Just a question here because it's been on a bit of a declining profile. How would you describe what we're now seeing versus historical levels refers to? What is the market effect? What is the cost effect on the market? And perhaps on execution, there seems to be some legacy projects still from residential where there were write-downs. Or what is the main element of issues you see for the current margin being as they are versus the historical levels we have seen for Building Sweden?

[Tomas Carlsson, executive]

I think the answer is very much contained in your question. And there's two main drivers. One is legacy from projects that we wrote down last year. And since they have not been delivered yet, we continue to deliver on a lower margin level. And then it's the general market in Sweden.

[Simen Mortensen, analyst]

Can you say how much the effect of these legacy projects eventually are in terms of the size and the revenue or such?

[Tomas Carlsson, executive]

Not really, because it has an impact on fundamentally everything or a large part. So it becomes very complicated to have a definition of that.

[Simen Mortensen, analyst]

A question comes to Property Development. We all know the situation and the liquidity in the commercial property development. But you still have 4 very large projects now completed on the balance sheet with some 87% letting ratio, several of them -- one in 100, several over 90.

But the capital committed here in the balance sheet seems to be SEK 4.9 billion. How are you thinking about this in terms of selling them in the current market? Or are you wanting to wait and expect lower interest rates? Or how do you address the situation? And how much are you willing to commit this capital as completed projects in today's market going forward?

[Tomas Carlsson, executive]

Yes. I will reiterate what I said this summer. We are not participating in any fire sales of property development. We have a strong balance sheet and we can hold them for some time. However, that's not our business model. So we'd like to sell them. But we want to see a more normalized market. And for all practical purposes, we are continuously reevaluating what we should do with them.

[Simen Mortensen, analyst]

Are you actively trying to sell these assets in the market today? Or are they more waiting and hoping for interest rates to fall?

[Tomas Carlsson, executive]

We are making efforts to sell them but we will not accept any type of price.

[Simen Mortensen, analyst]

Understandable. You also just noted in the report, my final question, that in Finland there were some implementing some organization changes to align the business with -- to strengthen the profitability and such in the report. Can you just describe what you have been doing there?

[Susanne Lithander, executive]

Well, what we have done is we have changed the organization. We have restructured the organization. And we have a lot of redundancies, so we have decreased our cost levels.

[Simen Mortensen, analyst]

Has there been any one-off impact in Q3?

[Susanne Lithander, executive]

No, not really.

[Operator]

[Operator Instructions]

[Tomas Carlsson, executive]

If there are no further questions, we thank you for listening into this presentation. And we remind you, this was a good quarter. Don't read anything into the orders received. This is on a seasonally normal level, and the decrease compared to last year is within the Infrastructure.

Thank you all, and see you next time. Thank you.

[Susanne Lithander, executive]

Thank you.