Ncc AB

STO:NCC B

Earnings Call Transcript 2022-Q1

[Tomas Carlsson, executive]

Good morning, and welcome to this presentation of the first quarter earnings for the NCC Group. My name is Tomas Carlsson, and I'm the CEO. And with me here today, I have our CFO, Susanne Lithander. We are broadcasting with the live audience from Space in downtown Stockholm, and that's one of the many interesting projects where NCC has been involved in a major way.

So as you can see on this slide, I've been here before. But let's get back to the first quarter. And first of all, I'm really pleased with the way that the year has started and with the first quarter earnings. It may not be super obvious when you see the earnings numbers, but let me point out why I think that. First of all, this is a quarter where we always have seasonally low activity obvious for the winter, and our large asphalt businesses impacted, but also all of the contracting units are impacted by that.

We have a really strong orders received, almost SEK 2 billion up compared to last year in the first quarter. We have a really good letting in property development of office space. We have earnings in all of the contracting units improving in the quarter, and we have industry preparing for the season as planned in a really good way. And then last afternoon, last evening, the Board decided 2 things that we sent out the press statement on. First one was that we will do a repurchase of shares for a maximum of SEK 1.5 billion according to the mandate that we have from the AGM and then an adjustment of the dividend policy from more than 40% to approximately 60% of the after-tax profits.

Those are the highlights of the quarter. The question that I've been asked for almost a year now and even more pronounced. So over the last quarter, is this what's happening with inflation and challenges to the supply chain? And the summary of that is that we have a clear global uncertainty, and we clearly have inflation, but we've been able to manage that so far. We have no material impact on the quarter -- on the first quarter. NCC has no presence or direct suppliers from either Russia, Belarus or Ukraine. But of course, we have an impact from the global economy at large.

Inflation is significant, but manageable. And just to highlight this, and maybe you saw in the newspapers yesterday, cement supply in Sweden, even though no one is really talking about it, it's still an concern for the coming years. So that's sort of the message for inflation and supply chain. In the quarter, SEK 16.6 billion in orders received, continuously increasing for a couple of quarters now. We have seen the effect of that in terms of that we have net sales coming back to where it were in the first quarter last year. We went down a little bit on the second quarter, coming back on the back of good orders received for a longer time now.

EBIT, seasonally low, and I will get into some details on how you can think about this EBIT, but we always have a large loss. The only thing that can -- in a really significant way to change that is if we have a sale of some property development project in the quarter. So let's look at the first slide I have on EBIT. Seasonal pattern in earnings. This is the way it always looks. You have a profit in the contracting parts, but with a lower margin than you have in other quarters. That's the way we would normally expect it to be.

We have a relatively low profit in property development because we've only -- sold a profit recognized one project in Orebro in Sweden. That also has an impact on Other & Eliminations since we are investing more into the business and building more than we are selling. We have an impact on Other & Eliminations from internal gains that we are capitalizing in Other & Eliminations. And then we always have a large loss on industry, and I will get back to that in more specifics in a little while.

One small project recognized in the first quarter this year, that was Bettorp. First quarter last year, we recognized Valle View, that was a project that had larger revenues, but because of provisions we had to make for rental guarantees and VAT and other things related to Norway. It had a smaller profit and we've seen some of that profit come back during the successive quarters, Bettorp relatively small. So if we compare earnings Q1 this year to earnings last year, this is the way it looks nominally. Contracting increasing SEK 21 million, property development because of the reason I just stated, down SEK 18 million, Industry, SEK 7 million lower, doesn't look that dramatic. And then SEK 15 million of the SEK 22 million in Other & Eliminations is because of internal gains. So that's the difference between SEK 144 million and SEK 170 million.

But then you might remember that we sold asphalt business in Finland, and that has an impact. So let's take a look at the same comparison year-over-year. Excluding Asphalt Finland operations. This is only the operations during the first quarter. Now the difference is larger. Contracting still increasing, property development, the same number, but the gap on industry is larger than we saw on the other slide, nominally. First of all, this is not because of oil prices. Note the not. There are 3 main drivers because of this difference, and I don't find anything to be concerned about in land. It's -- one is that we had a couple of positive effects last year that we don't have this year. We sold some land in the first quarter. We had some provisions that we saw the positive effect from. So that was one part.

The second part is a completely normal seasonal variations. That is maintenance of plant and equipment that we've done a little bit more this year compared to last year. And then we have some costs from active measurements to improve processes and control of the Asphalt business for the future -- in preparation for the future season, but it's not the oil prices. So that's the way to think about it, and that's the reason why I'm fundamentally very happy with the way the quarter has started.

Contracting, strong and stable margins on good levels. Always hard to improve in the first quarter. But on the back of slightly higher sales, we have better -- higher earnings also in the quarter. Order backlog strong. And if you compare that, that's the blue line is the net sales, excluding property development, to better reflect the contracting business. More than SEK 60 billion in order backlog, the first time in almost in 2 years. And book-to-bill well above 1, which is really good.

And then finally, before I hand over to Susanne, I'm actually going to talk a little bit about corporate net debt and cash. We have a good financial position now, and we have systematically improved that position by working with invoicing, payment discipline, making sure that we handle disputes we have with customers and everything else you can do. But there's still one thing that impacts the corporate net debt or cash very heavily in NCC and that is property development. Whether we have sold or not sold a project can, as you see in this chart, impact our position quite significantly. This quarter, we have a good net cash position despite the fact that we are in a seasonally low activity, we haven't really sold anything from property development.

And with that, I hand over to Susanne Lithander.

[Susanne Lithander, executive]

Thank you, Tomas. Okay. And we will start with the strong backlog in our contracting units. As you can see on the blue -- dark blue bars here, all 3 units are really close to SEK 20 billion in backlog, thanks to the strong orders received we've had. And it's a level that is well above the 12 month -- 12 months rolling sales on all 3 units. So very strong backlog is a good start. The book-to-bill for those 3 is 1.5. Our infrastructure business area continues to steadily improve. They have a positive book-to-bill in the quarter of 1.3. The orders received was very good, SEK 4.4 billion and even if it's SEK 1 billion below last year, it's still on a very good level, as we last year booked the megaproject Hagastaden in the quarter last year.

Sales is on par with previous year. And as you can see to the right, Sweden continues to be, by far, the largest market with 75% of net sales. Earnings continue to improve, and the profit -- operating profit in the quarter improved to SEK 42 million. And the margin in the quarter was 1.2%. And on rolling 12 months, we have a margin of 2.4%. Building Sweden continue also to have a good development, I repeat, strong orders received in the quarter, book-to-bill 1.5, SEK 4.8 billion in orders, a very good increase compared to last year as well. Among others, we have the big penitentiary in Kristianstad that was booked and also Hogskolan in Dalarna.

Sales on par with previous year in the first quarter. And our earnings continue to improve here as well. It's up to SEK 92 million. And the margin in the quarter improved to 3%. And on rolling 12 months, the margin is 3.3%. To the right, you can see the share or the residential orders that we received as a share, it's 43% of total in the quarter and SEK 2.1 billion, and it's a very good quarter, as you can see, as it fluctuates substantially the residential part. Half of that was also -- more than half of it was for rentals.

Building Nordics continued to grow on a positive trajectory. They have a strong order backlog and good orders received as well, SEK 4.9 billion in the quarter, a very strong order received, order booking driven by Denmark. And worth mentioning is the super hospital outside Copenhagen. They have a book-to-bill of 1.7. And as you can see, Denmark, when it comes to net sales, is the largest market in the business area now and has placed Finland on second place. Sales has increased 18%, driven by the volume growth. Earnings increased SEK 56 million in the quarter, and that's, of course, driven by the volumes. Margin in the quarter was 2%. And on rolling 12 months, the margin is 3.6%.

Moving on to industry and the volumes for industry. We can see that the volumes are up a bit in stone materials. Asphalt is insignificantly -- is insignificant in the first quarter as there's basically no activity, but still up slightly. Again, seasonally, there's very low activity within the industry and especially in the asphalt business. And we always produce a negative result in the first quarter. We have chosen here to show both previous year, both including Asphalt Finland and excluding Asphalt Finland for comparison. As you can see, the orders received has increased a bit, both for stone and asphalt compared to previous quarter or previous year.

Net sales has also increased compared to the first quarter of last year, and it's driven primarily by the stone material business. And earnings negative SEK 300 million, and Tomas has already explained where that came from, but I will repeat. It is not energy cost or oil -- cost for oil. It is basically the 3 parts that Tomas said, it's normal variance, seasonal variance when it comes to repair and maintenance, sometimes you have more. And then we also have the cost for the improvement and the activities that we are taking to improve results in asphalt and also the lack of positive one-offs that we had last year, such as reversals of restructuring provisions and also land sales in Norway.

Capital employed is SEK 5 billion, and the return on capital employed is 8.4%. Property development have in their portfolio now 10 ongoing projects, 73% of the projects or of the square meters is in Sweden and the square meters in the portfolio is 195,000 square meters. As you can see, we have no projects in Norway still. We recognized profit on Bettorp in the quarter, a small project in Orebro and sales was SEK 329 million. Earnings was SEK 29 million. Last year, we recognized sales for Valle View in Norway and the earnings was SEK 1.1 billion and SEK 47 million in earnings. When you compare the earnings, we need to remember what Tomas also said that last year, we had to explain the lower number for Valle View and that's because we had to provision full -- make fully provisioned for rental guarantees and also take the cost for VAT for unlet space.

On the bottom, you can see when we expect profit recognize the sold projects in the portfolio. And as you can see, we have no projects coming up for profit recognition in the second quarter. And in the third quarter, we have Fredriksberg D; and fourth quarter, Kineum Garda. Capital employed SEK 6.9 billion. Return on capital employed 6.9%.

We had a very good letting in the quarter. It was 17,600 square meters. 10 contracts was signed. We signed a large contract of Kulma21 in Helsinki, which made that property 100% let. As you can see on the top of the chart, we also have the letting ratio and the completion ratio and there's a good balance there. We have a total letting ratio of 64% and a completion ratio of 61%. Cash flow in the quarter is negative, from operation, negative and from property projects, it's negative as we invest more than we've sold. We've only sold a small project.

And if you compare it to last year, we had a positive impact with a big project in Norway. Other capital employed is also driven by property development that is prepayments that we've had that we no longer have. And investing activity CapEx is positive, and that's driven by the fact that we got paid for the land sale we made in Q4 in industry in Denmark. That's why we have a positive CapEx in the quarter, but negative SEK 360 million before financing.

And last but not least, we come to the segment, Other & Elimination. And on the top row there, we have headquarters and subsidiaries where we have the cost and EBIT impact from headquarter. Negative SEK 60 million, a bit more than last year, and the increase or the difference between last year is basically explained by post-corona normalization, we could say. We are having more activities, we had low cost last year as we had no traveling, no conferences, et cetera. So the cost was depressed for the last 2 years basically. So we have a normalized level of cost, and we also have invested in our IT development plan.

Internal gains, Tomas has already said that. We have a negative impact as we build more than we sell. This is where we eliminate the profits in the construction phase of our PD project. And on other group adjustments, we have the accounting adjustments that we have to make according to IFRS, et cetera. EBIT, negative SEK 170 million. Tomas already been through that. We have low financial net, of course, and our tax is the percentage we used is 16% based on the share of profit for property development, that is tax-free. That brings us to an earnings per share of negative SEK 1.37 and SEK 13.8 for the rolling 12 months.

That's all from me. Back to you, Tomas.

[Tomas Carlsson, executive]

Thank you very much. Let me talk about a couple of other things before we get to the wrap-up. First of all, financial targets, you've seen these before. SEK 16 remains the target after the decision of the buyback of shares. Rolling 12 with EPS was SEK 13.8. We have no net debt and the old dividend policy was to distribute more than 40%. And that brings me to this. That's a nice segue to this one. The decision yesterday was to adjust the dividend policy to say to be distribute approximately 60% of earnings after tax distributed to shareholders.

And of course, there's a caveat here on the general financial position and everything that everybody has. And then -- but that will have an impact next year. This year, we will have an impact from repurchase of NCC shares, and we will repurchase NCC B shares. From now until the next AGM is the time line to an amount of maximum SEK 1.5 billion, and there's a limitation that we can only own 10% of the shares at any given time. So there's a limitation built into that.

Health and safety, we have very -- on an industry comparison, relatively low accident levels, but they have been flattening out now. We will have to improve over the remaining part of the year to reach our target of 3.0. There's a few well-known departments that actually -- that we are working hard with to reduce the accidents even further. Climate and Energy full year 2021. This is Scope 1 and 2 CO2 emissions, continuing to decrease the emissions compared to net sales in 2021. The new thing here is that we have now started to work with emissions Scope 3, way harder to actually know where they come from.

So just in the interest of full transparency, we are measuring what we can measure. So if we look at ready-made concrete, we see -- we measured a decrease of 6%. Asphalt, where we have been working with this for a long time. And for concrete, you might have noticed that yesterday, we announced that NCC Construction Sweden, Building Sweden will only use climate improved concrete going forward in all their construction. Asphalt, we have been working with this for some time, minus 37%, mainly driven by using more biofuels than oil. Rebar steel, minus 41%, that is mainly driven by using other supplies that has a better CO2 profile and transport, that's in progress.

So to wrap this up, strong orders received in the quarter despite all the uncertainties in the world around us. Steady progress in the earnings development for the business, good letting in property development. Inflation well managed so far, even though we've seen the situation for a year now. Repurchases of shares and change of the dividend policy from next year.

That was all from us now, and we open up for questions, and there will be a clear hierarchy here. First, questions from the room, then from the webcast and finally, from written questions from the web. So -- and you -- we will have to ask you to speak into a microphone for the benefit of everybody.

[Stefan Andersson, analyst]

Stefan Andersson, SEB. A few questions then. I know you don't give guidance, but the industry division is a little bit tricky, given that you divested some part of the business that doesn't impact this quarter. So I'm just a bit curious there on the top line, the top line is growing. But could you -- despite that, you gave an indication if you expect the full year top line to actually be positive? And then also on earnings, we see that Finland you had some costs in this quarter, but also Finland was burdening for the full year. So potentially could we see that you actually recapture some of that loss you had in Q1 and actually come on breakeven or something like that for the full year?

[Tomas Carlsson, executive]

Definitely, we expect to have a breakeven, absolutely.

[Stefan Andersson, analyst]

Sorry, I'm indeed -- what I'd enforce is that you had B plus the exporters.

[Tomas Carlsson, executive]

No, I think I understand what you were asking. We were not happy with the development in -- particularly the asphalt division last year. We took a lot of actions and we have several ongoing initiatives. And I'm -- I think we're doing the right thing, and I expect to see improvements, but it will take some time. I expect that we will have a better development this year, definitely. And I think it's important not to extrapolate the lower earnings this quarter to the full year because those are 3 very distinct buckets of activities that are not continuing into the rest of the year.

It's the reversal of provisions and land sales that we talked about, that will not continue. We will not have that comparison going forward. We had reversal -- we had more maintenance and that's our decision that we've taken to have more maintenance and repairs this year. And we booked that as a cost during the quarter. And then we have some initiatives that we've worked with this year to have a better planning for the rest of the year, and we don't expect to see that going forward.

[Stefan Andersson, analyst]

Okay. On orders, I mean, you had a couple of quarters with really good order intake, and that's long discussions that you had, I'm sure. But we're also seeing material costs going up quite a lot and interest rates moving a little bit, financial costs going up. Are you seeing -- I mean, could it have been even higher order intake? Put it that way, if we didn't have those issues. Are you seeing hesitations from some clients who really can't get the whole thing together?

[Tomas Carlsson, executive]

No. We don't see that in a systematic way. You always have anecdotical stories about someone who stopped the project because of the current fab of what people are talking about. It used to be Corona. Now it's the war in Ukraine, before that or something else. What we could have seen, and this is highly counterfactual, highly counterfactual. We are even more careful about the bids we give. We have shorter validity of the bids. We make sure that we have more contingency baked into our -- built into our estimates and so on. So we are even more careful. But we actually see a really good demand on the market.

[Stefan Andersson, analyst]

And then the final one on -- the letting is really good. Is part of that also relating to the properties you sold? And should we expect some reversal of rent guarantees coming through the system as well?

[Tomas Carlsson, executive]

Yes, you should then you have.

[Markus Henriksson, analyst]

Markus Henriksson, ABG. A few questions from me as well. When do you expect the debt revenue in infrastructure to pan out? And what is the margin potential if we look at a trailing 12-month margin of 2.4%? And what would be the actual margin if we were to exclude the debt revenue?

[Tomas Carlsson, executive]

I really don't use that expression because for several reasons. But what you're referring to is projects where we have lower profit recognition even though we have revenue. Unfortunately, it will continue for several years. And underlying, it depends on what kind of assumptions you do, but it would be a -- on competitive levels.

[Markus Henriksson, analyst]

All right. Fair enough. Then could you highlight the provisions and the land sale last year? How large was those figures?

[Susanne Lithander, executive]

Do you want to give those numbers?

[Tomas Carlsson, executive]

In Q1.

[Susanne Lithander, executive]

In Q1?

[Tomas Carlsson, executive]

Yes.

[Susanne Lithander, executive]

Okay. Yes. Well, the total was SEK 52 million, and you can basically split all the reasons that we gave into with it into 1/3.

[Markus Henriksson, analyst]

Okay, 3 buckets. Perfect. Last question, you reiterated SEK 16 per share despite the share buyback. So in which segment do you see weaker demand relative to last quarter since that is actually lower than -- yes, based on the share buyback program? You still have SEK 16 per share and you will repurchase up to 9.2% of shares.

[Tomas Carlsson, executive]

Well, Susanne and I didn't participate in that discussion since we're sort of subject to effects of that. But the reason stated by the Board not to adjust it is that they see repurchasing of shares as an investment, any type of investment. If it benefits shareholders, it should benefit the group as also we're remaining with that target.

All right. We have one more question at least one more question.

[Unknown Analyst]

[indiscernible]. With the rapid inflation in costs, how do you handle it in the practical terms versus the customers? Do you have clauses mainly that they are -- take the risk of higher prices? Are -- and second question, are there shortages of anything except to that potentially?

[Tomas Carlsson, executive]

That's a very big question. I'll try to ask it in a -- answer it in a somewhat informative way. First of all, when you think about how we handle inflation in the construction industry and in general in NCC. First of all, our products are not set. So if you -- normally, when you think about inflation, you think about that you're manufacturing one type of product and if you have an increase of price to that product, you will have an impact immediately. That's not our case because our products are different. They are in different stages.

And depending on if we have a project that we've won, but bid for over the last 4 or 5 years -- 4, 5 months, we knew that you had an inflationary situation and we've factored that into our bids. If you have a project that's ongoing in an early stage, then you have one situation. If you have a project when you have ongoing in a later stage, we've probably already done the purchases, we have agreements. So the type of project and where you are depends a lot, and you can also do redesigns at least to a limited extent to have a more favorable cost profile.

And then the second part, which -- that you hinted at was contracts. And we have a large proportion of our contracts where we have some kind of a cost plus component for certain parts or we have a balance in the risk profile of the contract, and then we have index clauses. So you have a portfolio of things that we are dealing with. And so far, we managed to do it. And then cement, cement is actually not a shortage right now. It's a risk of a major shortage, but now there's no shortage at all. There are shortages reflected in longer lead times until you get certain types of material and preferably more notably steel and frames for buildings. We've seen that before. So we have a preparedness to order very early. Sometimes we order a year ahead.

[Unknown Analyst]

Add on. Okay. Have the number of legal issues increased of late between you and your customers? Because would first -- price increases, there are usually discussions.

[Tomas Carlsson, executive]

No. Well then, operator, do we have any questions from the broadcast?

[Operator]

There are no questions from the phone conference.

[Tomas Carlsson, executive]

Stefan has one more or a couple more or 5?

[Stefan Andersson, analyst]

Only 2. And my first one, I'm thinking about the asphalt business and the move to more environmental materials you're being used. Are you seeing any difference in the quality? And I'm not sure if you can -- if you want to comment that, but that could impact the replacement cycle that the asphalt is torn down quicker and so on by using the new material.

[Tomas Carlsson, executive]

No. And I'd like to expand a little bit on that because that's a pretty common perception that recycled asphalt would have not as good properties as virgin material asphalt. We have very strong data on that working with recycled asphalt now over the last 15 to 20 years. And authorities in all countries has raised the same concern. Swedish authorities came to the conclusion that you had the same property maybe 10 years ago. And also last year actually increased the percentage of recycled asphalt that you can have in the mix because they are confident that that can happen.

Norwegian authorities has been the slowest, but they came around this year and allowed for a larger proportion of recycled asphalt. And they are actually putting more emphasis on the type of sustainability profile that you can have on your deliveries this year than we've ever seen in any Scandinavian countries.

[Stefan Andersson, analyst]

Yes. It was more of an opportunity question than a concern question from me, but thank you for the answer. On the accident side, I probably should know this, but I'm just curious to see if -- are you measuring your own personnel only? Or are you measuring also subcontractors on the site?

[Tomas Carlsson, executive]

As a frequency compared to work time we're measuring our own staff only. Subcontractors, we are measuring in the number of accidents. And the reason for that is that we don't have a reliable database on the number of hours worked for subcontractors. And in some cases, that's considered to be privileged information for our contractors. So we really can't have a -- we're working towards a system where we can have that, but it's more complicated than you could ever imagine. We have 35,000 people from subcontractors working on our sites and relatively few accidents.

Anything from the web?

[Operator]

No.

[Tomas Carlsson, executive]

No? In that case, thank you all. Have a really good day, good Thursday. And looking forward to talk to you all. Thank you.