Ncc AB

STO:NCC B

Earnings Call Analysis

NCC Reports Strong Earnings and Order Backlog

NCC ended 2023 with strong performance, achieving higher orders and operating profit amidst a variable market. Q4 saw orders of SEK 16.2 billion, leading to yearly orders of SEK 56.8 billion, a 7% increase from 2022. The order backlog was SEK 53.4 billion, despite slightly lower Q4 net sales. With an absence of Property Development gains, Q4's operating profit was SEK 358 million, contributing to the full year's SEK 1.8 billion, up from the previous year. EPS met the target at SEK 16, and a SEK 8 dividend per share is proposed. Denmark's market outperformed within Building Nordics, while Finland lagged. The company stayed well below the net debt target at 0.98x EBITDA. Market challenges persisted in office and residential segments, but Infrastructure showed sustained improvement.

A Solid Year Despite Mixed Market Conditions

NCC's 2023 performance articulated an expression of robust financial fortitude in the face of variable market dynamics. Throughout the year, the company realized a year-over-year orders increase by almost 7%, securing a commendable order backlog of SEK 53.4 billion. With 2023 sales of SEK 56.9 billion, marking an uptick from the preceding year, NCC delivered a substantial operating profit of SEK 1.8 billion without Property Development profit recognition in Q4. The company, navigating through a diversified marketplace with fluctuating demands across the Nordics, successfully achieved its EPS target of SEK 16, pointing to an earning upswing and a stable market.

Strategic Dividends and Financial Targets

In response to these positive outcomes, the Board proposes a dividend of SEK 8 per share. The resilience reflected in NCC's order acquisition and sales, paired with the prudent growth in infrastructure and strategic segment selection, sets the company in good stead. Attaining a consistent EPS echoes the company's robust financial standing, even amid the semi-frozen Property Development market. With an unwavering net debt target to stay below 2.5x EBITDA, NCC prides itself on a comfortable position of 0.98x, underpinning a stable, albeit cautious, dividend policy. Looking ahead, NCC aspires to maintain or exceed the EPS target of SEK 16, which will require rejuvenation in the property transaction market—integral for contributing to this ambitious aim.

Operational Highlights and Market Adaptability

NCC showcases an operational landscape marked by steady performance across its business segments despite the early onset of winter. The Infrastructure sector saw a continuous rally, marking the 21st consecutive quarter of improvement—a trajectory that remains unaided by one-off gains. This steadfast progress, contrasted with the flat margins in Building business areas, ultimately contributed to meeting the EPS target, indicative of disciplined project execution and meticulous resource allocation structure. Amidst environmental uncertainties, NCC has managed to adapt with more predictive insights into inflation and interest rates, shifting focus towards Infrastructure and public buildings, alongside large industrial development to navigate the sluggish office and residential markets.

Regional Performances and Business Segment Evolution

Sweden, commanding 57% of NCC's Nordic markets and Denmark now comprising 22% with a 25% increase in sales, depict a market dynamic with contrasting regions. In terms of net sales, the structure remains steady from the previous year. Earnings, however, highlight the discernible growth in Infrastructure and Industry, buoyed by strategic segment direction. Capital employed swelled to SEK 9.6 billion due to withheld Property Development divestments. Denmark, in particular, stands out with assertive order growth and solid net sales, with regional disparities being addressed through strategic adjustments in operations to normalize levels.

Industry and the Climate's Impacts

As for the industry sector, NCC felt the chill of an early winter across Nordic territories, resulting in a decline in asphalt volume—but maintained decent stone volume sales despite market downturns in the residential and office markets. Adjusting for these contingencies, industry earnings have been propped up largely by Danmark and Norway's asphalt sales, contributing to an improved margin of 3.1% for the year.

Overall Financial and Safety Reminders

While financial goals like the EPS were met with a slight margin, reflecting a sound year, NCC acknowledges areas for improvement in health and safety, with the LTIF4 rate remaining flat. The company's market perspective is cautiously optimistic, calling for improvements in Property Development transactions to sustain and enhance earnings. For interested stakeholders, NCC plans to keep the community informed with an AGM scheduled on April 9, with the annual report due by March 19, 2024.

Earnings Call Transcript 2023-Q4

[Tomas Carlsson, executive]

Welcome to NCC and our presentation of the fourth quarter and the full year of 2023. This will be presented by me, Tomas Carlsson, and our CFO, Susanne Lithander. And as usual, you are welcome to ask questions after our presentation. So let's start by looking at some of our key figures.

In the fourth quarter, NCC had strong orders received of SEK 16.2 billion which brought the full year orders received to SEK 56.8 billion, almost 7% higher than 2022. The order backlog at the end of the year was SEK 53.4 billion. Net sales in the quarter was SEK 15.6 billion, slightly lower than last year and SEK 56.9 billion for the full year, up compared to 2022. Operating profit was SEK 358 million in the fourth quarter without any profit recognition from Property Development. For the full year, earnings are up with an operating profit of SEK 1.8 billion.

So this was a good year for NCC in a very mixed market. We are growing earnings, and we reached our target EPS of SEK 16. The Board proposes a dividend of SEK 8 per share, and this is driven by a couple of developments. We have consistent orders received and net sales affirming the stability in the market. We have a steady and positive earnings growth in infrastructure, growing in selected segments that we have been working with for some time now. Building Nordics, large variations between markets with Denmark as the strongest market, while Finland has the clearly slowest market.

Building Sweden, solid order backlog, but lower margins on the back of price pressure in the market and a very successful turnaround of business area industry during the year. PD, Property Development, has been navigating totally frozen market focusing on letting and identify -- trying to identify viable opportunities going forward. And we had good letting in the fourth quarter. That's the summary. Meaning that we have a solid order backlog going into 2024.

Book-to-bill for the year was again above 1, and that is with an increase in net sales. We had -- in the quarter, we had stronger earnings in 3 BAs. The most important thing here to recognize is that Property Development had no property sales in the quarter and didn't recognize any profit from that.

We had the final part of the smaller land sale, but compared to last year when we recognized a large piece of property that we sold. And then the improvement in industry also continuing into the quarter even though the winter came early this year. IT and pensions impacting other and eliminations.

And for the full year, the same pattern holds with infrastructure continuing to improve. Industry improving earnings for the full year with almost SEK 400 million. Property Development, lower earnings since we only had 1 property to recognize for the entire year. And then we had divestment profit from the sales of subsidiar, Bergnäset leading us to a full year earnings of SEK 1.802 billion. For the contracting margins, Infrastructure continued to improve, and this is the 21st consecutive quarter with an improvement, and this is improvement without the one-off gain from sales of Bergnäset.

So this is the underlying business, while the margins in the Building business areas are more on a flat level. We met earnings per share target SEK 16, which is we're really happy about, and I'll get back to that in a little while because these are our financial targets. SEK 16 was the target for 2023. We met it at SEK 16.11. Now let's remind everybody of that SEK 16 is also the target going forward. This year, we were helped by a one-off sale of a subsidiary, but we also experienced sort of semi-frozen Property Development market, where we only recognized one project and in the beginning of the year. Going forward, we expect that the contribution to SEK 16 from contracting business and industry will increase, but to meet that target in the short and medium term, we need the property transaction market to come back again. So Property Development can contribute to that target.

Net debt target is to be stay below 2.5x EBITDA. We are now with a wide margin below that on 0.98x. And then the dividend policy. We changed that 1.5 year ago to approximately 60%. The Board had a discussion on what was a prudent dividend this year, considering good earnings in the year, however, helped by one-off effect, continuous uncertainty in the property market going forward and our balance sheet and came to the recommendation to the AGM of SEK 8 per share for a dividend. That is in the lower end of the range, around 60%. But it also represents a quite significant increase of the dividend and the dividend to be paid in 2 tranches during the year.

We didn't meet the health and safety target. The LTIF4 remained flat. Number of accidents decreased a little bit, but it's clear that we have more to do in this area. Talking about the market. We see still uncertainty in the market, remains for large parts of the market, the same as we've seen last year. However, we have signs of more predictability regarding inflation, interest rates and priorities, and we have more positive signals at the same time. Office and residential market remains slow. Property market and property transaction market continues to be difficult with a very low activity but we see a strong market for Infrastructure and public buildings and large industrial development. So it's a mixed market, but with more positive signs than we've seen in a while.

For NCC, and you may recognize this because this has been our focus for some time. We had more diligent project selection using our segment strength that has proven extremely valuable to us during last year, continued execution discipline in what we do and adapting resources where we need, and that has been continuously ongoing for the last couple of years. And with that, I hand over to Susanne Lithander.

[Susanne Lithander, executive]

Thank you, Tomas. So this is what we look like now, SEK 57 billion in sales, 12,200 employees. Sweden dominates our Nordic markets with 57%, but Denmark is increasing to 22% after an increased sales with 25%. The split between our business hasn't changed that much from previous year. When it comes to net sales, at least, it is actually quite the same as last as '22. Earnings, however, reflects the changes in -- between the business areas. And of course, Infrastructure and Industry has increased their share of earnings. Our capital employed has increased as we haven't divested or we haven't profit recognized any Property Development projects lately to SEK 9.6 billion for the year.

The segmentation strategy and the selected segments for our -- the strategy that our contracting units have had has been quite successful. We can see that here. For infrastructure, energy and water treatment has grown to 40% of orders received. For Building Sweden, public buildings has increased to 46% of orders, while offices and residential are backing. Building Nordics are having a high level of orders received in public buildings as well, slightly increasing, but other is the area that has increased the most here, and that's because we have a large hotel and a large industry building booked here. So Infrastructure continues their improvement trajectory and Sweden and that's further boosted by the sale of Bergnäset.

Sweden, still the dominant market with 74% of sales, while also here, Denmark is increasing and is now at the same size as Norway with 13%. They had a solid orders received, and they had an increased sales. Earnings improved and margin improved to 3.1% for the year. Building Sweden had orders received quite a bit lower this year compared to 2022 on the back of the fact that they had a very large orders booked in '22, but also depending on the demand on residential and offices market, of course. The sales increased to SEK 14.5 billion. Earnings are on par with last year. They are depressed by impact from high cost in certain segments, but also from the write-downs we did last year.

Building Nordics. As a share of net sales, Denmark has increased here as well and they are now almost 50% of the business area. They have very strong orders growth for the year. And they have also solid growth in net sales. It's a bit of a mixed picture between the countries, however. Denmark is growing strongly. Norway is also growing while Finland has decreased in a tougher market. Earnings are on par with '22. There are also here variations between the countries. Denmark is delivering very strong and good numbers. We have had write-downs, as we've talked about earlier this year in Norway that are impacting Norway and Finland is adjusting their operations to come back to more normal levels.

Industries volume and when it comes to asphalt volume, we had a big impact by the early winter this year in the Nordic countries, we have had winter for a long time. And the stone volumes are also slightly down, but still holds up quite well given the market. We think the decline is in line with what the residential market and the office market is down. So in Industry, the share of net sales has not changed. 55% is still in Sweden. They had good sales in a market with high price pressure. The split between the divisions here, I should also mention is that stone has 27% of sales and asphalt is 73% of sales.

And the sales has increased in both areas, both in stone and asphalt, driven by the customer pricing. When it comes to earnings, stone delivers very strong earnings and asphalt is returning to more normal levels and driving the improvement is primarily Denmark and Norway when it comes to asphalt. The capital employed in the business is SEK 4.1 billion and the return is up to 8.9% now.

Property Development. This shows the earnings by quarter. We had a sale or we had a profit recognition of a property in the first quarter. And this quarter 4, we only had sales of land here in Solna and also revenue from completed projects, rental income that is. We had good letting in the quarter, 9 contracts corresponding to 12,600 square meters. This is another way of looking at the letting. And you can see that the letting during the quarter is jumping up.

The completion ratio, the green line is on 75% for the total portfolio and the letting ratio is 65% also for the total portfolio. We have 7 ongoing projects, 4 completed projects. We have 3 that are presold, and you can see the timing here. We have Albatros in the first quarter of this year and MIMO in the fourth quarter. And then Park Central in Q2 '27 and as I said before, operating capital employed is up to SEK 9.6 billion now, and the return is low 2.8%. So that remains segment other and elimination, and I know this is difficult for everybody to predict externally. Parts of it is somewhat difficult for us as well as it's dependent on interest rates and inflation assumptions that we do not know about in advance. First line is our headquarter costs and subsidiaries, not belonging in BA.

Here, we see an increase -- a big increase. It's in the quarter, it is normally high. And for the year, it's also quite high. The driver of this increase is primarily IT investments. But we also have other costs that we are focusing our areas when it comes to ESG reporting, green industry transformation, as mentioning some of them. The level in the quarter is, as I said, are normally high and it cannot be used as a normal month moving forward or a normal quarter moving forward. Internal gains is where we eliminate the profits in PD, Property Development when we build. And when we sell properties that reverse that provision and we have a positive impact here. As we've only sold 1 project during the year and none in the last quarter, it's quite negative this year.

And when it comes to other group adjustments, that's where we have accounting adjustments for IFRS mostly. And this is impacted by the changes primarily in discount rates and expected return on pension fund with reduced incomes rate -- discount rates again now. But overall, the level is on par with previous year. Financial items are fairly low or they are low, and that is due to the capitalization of ongoing projects of interest. The tax rate is also low in the year. It's 13% and that's because of the tax-free sales of one big project in PD and also the sales of Bergnäset was tax-free. That gives us the earnings per share of SEK 6.11 that Tomas talked about.

Cash flow in the quarter was quite good, SEK 850 million and for the year, SEK 360 million. That is driven by improved operations, results, operating profit has improved, so has the cash flow from that. And other working capital has improved and also we are helped, of course, by the Bergnäset cash. Our corporate net debt target is to be below 2.5x. And as Tomas said, we are on 0.98x after this year. And as you can see, the net debt has increased with SEK 2.4 billion, mostly due to the fact that we continue to invest in PD and while not selling any PD properties basically. That's it from me, and I hand over to you, Tomas again.

[Tomas Carlsson, executive]

Thank you very much. Thank you. And I will quickly wrap this up. First, I want to remind everybody that we have an AGM coming up on April 9. It will be in the same way like last year. We will be at the SPACE Conference Center in Stockholm, close to Sergels torg. More information will be published later more -- no later than 4 weeks ahead of the AGM and the annual report will be published at the latest on March 19, actually 2024, not 2023. So we're in 2024.

So in summary, increased earnings for the year for the NCC Group. We reached the EPS target of SEK 16 and I'm really happy about that. We have a dividend proposal on the prudent side of SEK 8 per share. We have really strong orders received, both for the quarter and for the full year. We still have a mixed picture with strong parts and more challenging parts in the market. Property market development is decisive on what will happen for the full year 2024 and then we have continued significant uncertainty about the impact from current economic climate, residential and commercial properties most exposed to this going forward. So with this, operator, we open up for questions.

[Operator]

[Operator Instructions]. The first question comes from the line of Fredric Cyon with Carnigie.

[Fredric Cyon, analyst]

A few questions from my side. Let's start off with Property Development. Are there any ongoing sales processes?

[Tomas Carlsson, executive]

We have several ongoing discussions.

[Fredric Cyon, analyst]

Okay. And do you expect some news regarding that during the next couple of quarters? Or what's the time line?

[Tomas Carlsson, executive]

We'll get back to that when we get back to that.

[Fredric Cyon, analyst]

Not a very surprising answer. Moving over to capital employed in Property Development. Is that a constraint at the high level on new starts? Or how do you think about starting new projects?

[Susanne Lithander, executive]

Starting new projects.

[Tomas Carlsson, executive]

Yes.

[Susanne Lithander, executive]

Well, yes, we have strict rules or guidelines for when we start new projects, and we have said that we now are really asking for clear exits to start new projects and also some other areas that we look at.

[Tomas Carlsson, executive]

But it might be worthwhile noting that it's not primarily the balance sheet that prevents us from starting new projects. It's the uncertainty of whether it will be a good deal or not. So what we are asking for now is that we are asking for a higher degree of pre-let, and we want to see a clear path to exit before we would start anything new. Exactly like we did with Park Central last year when we started that in Gothenburg. And then we would like to see somewhat smaller projects that would be easier to start than really large ones.

[Fredric Cyon, analyst]

Regarding Property Development, you mentioned capital gain on land sales. and the EBIT in the quarter was positive despite no major sales. Should we expect that PD, even without divestments would be in the black, considering the net operating income that the property management portfolio generates. Assuming you don't say...

[Tomas Carlsson, executive]

On a low black level, yes.

[Fredric Cyon, analyst]

And then on orders. Orders received full year 2023 grew despite a fairly challenging construction market based on the tendering activity that you see ahead, should we expect that order intake should be similar or close to current levels or did you gain market share in tendering during 2023?

[Tomas Carlsson, executive]

There are several dimensions to that question. The first one is that we experienced roughly the same type of demand now compared to what we've experienced during 2023. So we don't see any changes in that. The second dimension is that due to the nature of our type of projects, you cannot predict what will happen in any given quarter. And as I always said, you shouldn't read too much into any given quarter. So it depends a little bit on when our customers decides to actually start a project or not, but we see the same type of demand. And then we see a continuous -- we are into a large number of projects in early phases that we haven't ordered -- registered yet, but they tend to -- and they have always tended to take some time before they actually mature, but we have a very good transformation rate.

[Fredric Cyon, analyst]

Perfect. And then my final question regarding central elimination cost you mentioned. You gave us some color on the impact in the fourth quarter. But moving forward, excluding the effects from pensions, is that SEK 180 million for the full year representative of where it should be and not excluding pension that is.

[Susanne Lithander, executive]

No. No. No. What I said is that the quarter -- this past quarter, Q4, is high, and you cannot use that as you cannot just prolong that into the coming quarters. And you -- I don't think you can use the SEK 180 million for the total either as the right level of going forward because it's so dependent upon the adjustments in IFRS.

[Fredric Cyon, analyst]

With you. But regarding the IT investments that were part of the reason for the high cost in the quarter, are those IT investments continuing into 2024?

[Susanne Lithander, executive]

Yes. They are continuing in '24 and for several years ahead.

[Operator]

The next question comes from the line of Markus Henriksson with ABG.

[Markus Henriksson, analyst]

Three questions from me. First off, you highlight the price pressure within the Building divisions. Could you highlight in what type of orders and in what geographies you mentioned Finland is a weak market, but where do you see the most price pressure, in what type of orders?

[Tomas Carlsson, executive]

Finland, absolutely. And what we see is that we see more mixed market now than what we had a couple of years ago. And we see a lower demand for residential buildings. So what has happened is that small and medium-sized companies has developed capabilities for residential building. And now when the demand is low for that, they are trying to expand into other types of residential type of houses.

And in that market, we see -- in some projects, we see very low price levels. We emphasize that we continue to be very selective, and we continue to be very disciplined in how we operate in that market. And this is what you typically see when the residential market goes down. And as you've seen several of our peers has also announced write-downs in projects of this time recently.

[Markus Henriksson, analyst]

And it's quite clear that the order backlog have declined in Building Sweden, for example, is it fair to assume that Building will continue to see a decline in order intake year-over-year if the current situation persists?

[Tomas Carlsson, executive]

Well, that's one possible scenario that you can have, but we also see good demand in other types of buildings like public buildings and industry. So it's not entirely sure that, that will happen. But if the choice is between maintaining discipline and accepting lower order intake or just going with the flow right now, we will always choose the disciplined approach.

[Markus Henriksson, analyst]

Then you continue to highlight the legacy projects, I guess, the write-downs you did last year in Building Sweden. When do you expect those legacy projects to be completed? When do we stop seeing diluted margins from them?

[Tomas Carlsson, executive]

Well, most of them are actually already finalized. What we see now is more of a general price pressure, that's a more important driver right now.

[Markus Henriksson, analyst]

Okay. So limited or a clear effect in the quarter, but all else equal, what we've seen in the last 2 quarters should not be translated into next year? But possibly price pressure.

[Tomas Carlsson, executive]

Exactly.

[Markus Henriksson, analyst]

So could we get any help there? Are you continuing to see a decline in margins? Or have these legacy projects, as you say, they are completed, most of them. So now we should see slight improvement all else equal?

[Tomas Carlsson, executive]

Yes. All else equal, I think that you should expect a slight improvement and slight being the operative word here. And it will take some time, and it depends on the general market.

[Markus Henriksson, analyst]

Last question. If you were to be able to divest some or all of the completed properties during 2024 or if we take into 2025 as well, what would be the key focus as for capital allocation in NCC for the next 2 to, say, 4 years?

[Tomas Carlsson, executive]

I think that's a hypothetical that goes way too far and has too many potential answers.

[Markus Henriksson, analyst]

Could we get some?

[Tomas Carlsson, executive]

Well, we have the same opportunity as everybody else when you -- if you would get more excess cash.

[Operator]

[Operator Instructions] Next question is from the line of Stefan Andersson with Danske Bank.

[Stefan Erik Andersson, analyst]

Just 1 or 2 follow-ups here. Sorry for listening poorly maybe. But I think you said on talking about EPS of SEK 16 going forward, you -- I understood you really be cautious because of Property Development. But just if you could repeat there, you said that you expect an increased contribution from Infrastructure and Industry, if I heard correctly, was it also Building or how did you split that, sorry?

[Tomas Carlsson, executive]

You heard pretty much correctly. I said contracting, which is Building and the Infrastructure together. So we expect that we will gradually have a larger contribution from contracting, that is Infrastructure, Building Sweden and Building Nordics and Industry. But we need the contribution from Property Development to reach the full SEK 16.

[Stefan Erik Andersson, analyst]

And then sorry for repeating here maybe, but if you're are talking about price in Building, would you say that the orders that you're receiving at the moment are diluting the margin on the order backlog a little bit. Is that how we should read that as it's offsetting some of the easing from the legacy projects?

[Tomas Carlsson, executive]

Not right now, but they have been for some time during 2023.

[Operator]

No more question at this time.

[Tomas Carlsson, executive]

And we have no questions online. So if we don't have any further questions, let me remind you of the upcoming AGM. More information will follow and also, let me remind you of that we think this was a good year for NCC. We increased our earnings. We met our EPS target. We had strong orders received and the Board has proposed SEK 8 per share as the dividend, which is a quite significant increase, while still prudent. What we see going forward is a continued mixed picture with lots of uncertainty, but with more positive data points going forward. Thank you all, and look forward to meeting you. Thank you.

[Susanne Lithander, executive]

Thank you.