Ncc AB

STO:NCC B

Earnings Call Transcript 2024-Q3

[Tomas Carlsson, executive]

Good morning, everybody, and welcome to this presentation of the third quarter 2024 for the NCC Group. I'm Tomas Carlsson, CEO. And with me here today, I have Susanne Lithander, our CFO. But let's start by looking at our key numbers.

[Unknown Attendee]

In the third quarter, NCC had orders received of SEK 13.3 billion. The order backlog was SEK 53.5 billion. Net sales in the quarter was SEK 14.3 billion and in line with the preceding year. Operating profit was SEK 665 million, an improvement by about 8% compared to the same quarter last year, adjusted for capital gains from the divestment of buying asset.

[Tomas Carlsson, executive]

Good morning again. And let's look at how you can think about this quarter for the NCC Group. We had a stable third quarter and for us, stable is good. Earnings increased compared to last year. Adjusted for that, we had a capital gains from the sales of a subsidiary last year, we are up 8%. Increased orders received. We have rather good orders received in the quarter. But more importantly, we have book-to-bill on a rolling 12-month basis on 1. We see a continued positive outlook for the market, however, divided, but we see a good demand for Infrastructure, Public Buildings, Defense and other types of large segments. In the quarter, we see continued improvements for Industry, and I will quantify that in a little while.

Earnings up for Building Nordics and stability in Infrastructure and Building Sweden. And finally, property market is still slow, but we see positive signs in the market from the lowering interest rates. That's sort of the gift of it from the quarter. And let's give some details, and then Susanne will give you more details on that.

Good orders received. The third quarter is seasonally always a little bit lower for the simple reason that we have a vacation period during July and August. But we have booked -- we have good orders received in this quarter. We've had that for some time, and we now have a book-to-bill of 1. While maintaining a disciplined approach to tenders, and that's important going forward. That gives us a stable order backlog on par with where we were last year.

And just to give you some examples of the orders that we have won this quarter. We have another phase of the hospital project in Vasteras, Sweden. That's the largest one, SEK 2.5 billion, but we also have a production facility in Örnsköldsvik, and we have continued refurbishment projects in Denmark, which is a segment that we really like.

Net sales on the same level in the quarter and year-to-date. There was a pronounced seasonality effect in the beginning of the year due to the Easter. This quarter continues, so we have net sales on the same level as last year. EBIT up 8% in the quarter, including the capital gains from the divestment. And you can see that we had capital gains of SEK 175 million on this slide. So SEK 665 million is the number for Q3.

If we break that down to the business areas, we can see that Infrastructure and Building Nordics and Building Sweden together -- altogether, pretty stable. An improvement in Building Nordics, and that continues the trend from earlier on this year. But the big improvement is from Industry continuing from the -- already good year last year, continuing to improve this year.

PD, a good quarter, not from divestments, but from the fact that we are now starting to see rental income from the Finnish projects that we have in the portfolio, bringing us to SEK 665 million in EBIT.

If you look at our financial targets, we have for the short and medium term, we have the earnings per share at SEK 16. We're now at SEK 12.7. Net debt should be below 2.5x EBITDA. We are significantly lower than that on 1.79x. And then as you know, we have a dividend policy of 60%, SEK 8 per share this year. Half of it has already been paid and the second half is coming up in a couple of weeks.

Environmental and climate targets. CO2 target will have to be revised next year because for Scope 1 and 2 that we have a target of minus 60% until 2030, we have already now reached minus 65%, mainly due to more biofuels in our asphalt production. Scope 3, well, the target is minus 50%. We're working with important categories and with our suppliers and the most progress we made with rebar steel.

And the health and safety target. We have a target for 2026 of having a lost time injury frequency 4 of below 2. We are now at 3.8 at the rolling 12-month basis. The last 2 quarters, we've had really encouraging development and NCC expect that to be more visible later next year.

So to finalize, we have a continued positive market outlook divided, but there's an underlying demand still strong in Infrastructure, Industry and Public Market segments. Property market is still slow, but we're starting to see some positive signs driven by the lower interest rates.

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

[Susanne Lithander, executive]

Thank you, Tomas. Let's start with looking at our contracting units. And as Tomas already said, we have strong orders received in the quarter and especially Infrastructure and Building Sweden is driving that increase. As you saw also on the slide before, we have some really large projects coming in from Building Sweden when it comes to the hospital in Vasteras and the production facilities, both in Oxelosund and Ornskoldsvik. We have continued really solid backlog. It's well above or in line with 12 months rolling net sales. And our earnings and net sales in the quarters are stable for the total area of contracting. Infrastructure is basically on the same level as they were last year.

Building Nordics, however, they have reduced sales coming from the challenges in Finland basically. However, on the margin side and earnings, they have improved substantially also. Thanks to the restructure in Finland and also improvements in Norway. Denmark continued to deliver really strong results.

Building Sweden, slightly down on a challenging market. And we also have our fourth contracting area, green industry transformation, nothing really new to report there. We have ongoing discussions with potential opportunities, of course, and we continue to work with planning -- with the collaboration agreement with LKAB.

Moving over to Industry. They delivered another strong quarter with stable orders received. Net sales and earnings are up and both asphalt and stone are improving. And the focus on diligent pricing and cost continues.

Here are the volumes. And as you can see, the asphalt volumes are up in the quarter compared to previous year. Stone material is on the same level as last year.

And here, we have the improved earnings. They are now up to SEK 338 million in the quarter. And as I said, improvements come both from asphalt and also from stone and is driven by -- in asphalt, of course, from the volumes, but also we have lower cost level and lower expenses in the business area.

The capital employed has come down to SEK 4.6 billion basically, and that is due to the fact that we have lower fixed assets in the business area. And they are closing in on their 12% target of return on capital employed. They are now at 11.3%.

And moving on to Property Development. We have not sold or started any projects in the quarter. We have 10 projects in the portfolio, and they are all offices. We had low letting in the quarter. Only 3 quite small contracts. So the letting ratio that was low with only the 3 contracts, we are now at 72% for the total portfolio. For the completed projects, we're at 80%. The completion ratio for the total portfolio is at 83%. They had a good or a positive result in the quarter, SEK 37 million due to the rental income that we come from the completed projects or the completed properties. The operating capital employed is up to above SEK 10 billion now, and the return as we can see, really low.

We have 10 projects in the portfolio. And on the time line here, you can see the expected time or the expected profit recognition for the sold projects, MIMO and Park Central. I want to add that for MIMO, we have had additional rental agreements or additional letting after the quarter ended. So we have had additional letting in October. So we keep expecting MIMO to be divested or profit recognized this year. We have 2 ongoing projects that are not sold, and we have 6 ongoing projects that are not sold.

Now we come to Other and elimination, which has a lower EBIT than last year. It's gone down with SEK 50 million -- little more than SEK 50 million. And that is driven by increased cost on the group level. It's the common group cost that is primarily driven by development in IT and costs related to that. And we try to guide on this level here on this row. We try to guide that about 1/3 of the cost for the common group cost is for -- cost for IT, and we expect that to increase for the coming years.

We have eliminations of internal gains and when that's where we eliminate the profit when we build our property development projects and we reverse it when we have profit recognition, and that is negative when we don't have any profit recognitions as it is here.

Then we have a positive line for pension adjustments, IFRS adjustments for pension. For the future, we should not expect a positive income there when now -- when the inflation and interest rates are coming down and stabilizing on a lower level, we should see less fluctuations on this row.

So with our earnings of SEK 665 million on EBIT, we have increased our financial net substantially. It was SEK 53 million in the quarter, of course, due to a higher net debt and the fact that we cannot capitalize the interest on -- when we have completed our PD projects. And we also have higher interest rates.

Our tax rate in the quarter is 22%, which is higher than we normally have, but that is also because we don't sell any properties. That brings us to SEK 475 million (sic) [ SEK 472 million ] on profit -- or the operating profit or the total profit with an EPS of SEK 4.83 and on rolling 12-month, it is SEK 12.72 for EPS.

Lower cash flow in the quarter. It is negative and much lower. One reason for that is the cash that we got last year from buying asset that you can see under investing activities. It was positive last year. But the big difference here comes from changes in working capital, and that is completely due to lower accounts payable that in turn comes from a weekend effect. This year, the last day of the month was on a Monday, while last year, it was in a weekend, which means that since we pay our suppliers really diligently on time, we had this huge effect this quarter.

And finally, our corporate net debt is higher than last year, SEK 1.1 billion higher, and that is due to the lower cash flow, of course, and also the fact that we have kept investing in ongoing properties. And as Tomas already said, we are well below our target for net debt-to-EBITDA below 2.5x. We are at 1.79x.

And back to you.

[Tomas Carlsson, executive]

Thank you, Susanne. And my job here is just to sum up and then open up for questions. So in summary, stable quarter for NCC. Earnings up 8%, adjusted for capital gains investment, increased orders received in the quarter, but also a healthy book-to-bill on 1 for rolling 12-month. Industry main drivers of improvements, other business areas are stable. Property transactions market remains slow, but we see some positive signs from -- driven by the lower interest rates in the market. And we continue to have a positive market outlook while recognizing that it's a divided market and the market is mainly driven by Infrastructure, Industry and Public sector.

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

[Operator]

[Operator Instructions] The first question is from Simen Mortensen with DNB.

[Simen Mortensen, analyst]

A few questions from my side. One, in the financing costs in the quarter, you also stated in the report higher corporate net debt and higher interest rates, but also lower capitalized interest rates. Can you just please elaborate a bit on the movement because the financing cost has increased significantly over the quarters. How much is the capitalized effect, et cetera?

[Susanne Lithander, executive]

I can't give you the exact number for the capitalized effect on what we cannot capitalize. I can come back to you on that. But it is -- a large part of it is that, of course, as we now have basically 7 properties that are completed. We didn't have that last year.

[Tomas Carlsson, executive]

I think for the Gen AI -- while we're developing projects, we can't[indiscernible]. And while they're completed, we don't anymore.

[Susanne Lithander, executive]

Exactly. So we have to take it directly to the financial net when they are completed. So now we only have 2 or 3 ongoing projects.

[Simen Mortensen, analyst]

And yes, so please come back to me on that. But it also moves me into my next question. You have a lot of unsold completed developments. One, can you say us a bit about the rental levels in that portfolio? How representative is the rental income in the quarter? And how are the divestment processes going currently?

[Tomas Carlsson, executive]

Well, we have had for some time now quite a lot of completed projects in portfolio and we've been clear on that. We intend to sell them as soon as we get the price that we consider to be fair and correct to the market price. And net rental levels are good. We are not having any discounts just to get them let. Good letting ratios. And in the finalized projects, I think we have around 90% letting ratio -- 80% for the finalized, yes. But for the sales -- for the transaction market, we cannot give some kind of forecast, but we see positive signs.

[Simen Mortensen, analyst]

But you are active in the market on these assets, marketing them?

[Tomas Carlsson, executive]

Yes, we are. Yes, we are.

[Simen Mortensen, analyst]

And my last question is the pension cost or pension income in the quarter just because it has been a volatile line on the other income line. And it's where -- compared to me and consensus, you may have the biggest beat. Can you please give us some clarity on the other and eliminations, just kind of what is expected run rate without any pension gains?

[Susanne Lithander, executive]

The expected run rate is -- we give you an approximate amount of that -- 1/3 of -- it is increasing on common group cost and 1/3 of it is IT development costs that will continue to increase with about SEK 40 million to SEK 60 million per year. It's really impossible to give any guidance on the pension line other than we expect it to not be -- continue to be positive due to the interest rates and inflation coming down and stabilizing there.

[Operator]

[Operator Instructions] There are no more questions at this time.

[Tomas Carlsson, executive]

If there are no -- do we have any questions from the web?

[Unknown Executive]

Yes. We have some questions here from the web. Starting with the first question from Nordea. Are there any nonrecurring items, one-offs in property development and eliminations in Q3?

[Tomas Carlsson, executive]

No.

[Unknown Executive]

And we have a second question here for Commercial Property. In addition to MIMO, do you see any near-term divestments? What's the plan for 2025, plus investments in this division?

[Tomas Carlsson, executive]

We don't give a forecast on that, but we see positive signs in the market, and we have positive dialogues.

If there are no further questions, thank you all for listening into this presentation. And if you have any more questions, please reach out to us and we will get back to you. Thank you very much. Bye.