Ncc AB

STO:NCC B

Earnings Call Transcript 2023-Q1

[Tomas Carlsson, executive]

Good morning, and welcome to this presentation of the First Quarter for the NCC Group. I'm Tomas Carlsson, the CEO. And with me here today, I have Susanne Lithander, our CFO.Main message for this quarter is this. We had good earnings, but more importantly, good orders received in all business areas, in all business areas and in basically all countries. Infrastructure continues to improve quarter after quarter. Building Sweden and Building Nordics on a seasonally low quarter, they had a somewhat slow start. Good cash flow from property sales, of course, but also from our overall business, Industry, early days still, but they had a good start of the year so far. What really drives the earnings in this quarter is that property development sold one fully developed project and one piece of land, driving earnings in a very clear way.Good orders received. This is actually one of the best quarters that we've had on recent years. Book-to-bill in the quarter is 1.4, meaning that we are building order backlog. But there is a difference in the orders received and the order backlog that we're beginning to see now. If we look -- compare residential offices and public buildings, we can see that for a year now, we've had a downward trend for both residential and offices. While at the same period or a little bit longer period, we've had an upward and growing trend for public buildings. This becomes even more clear if we compare residential and public buildings for Building Sweden, a year of decreasing orders in residential, but also a year with increasing orders from public buildings of all sorts from hospitals to schools and prisons and whatnot that the public sector needs. This means that we have a solid order backlog. Book-to-bill over the last 12 years on a rolling 12 basis is roughly 1, meaning that we have a backlog of almost SEK59 billion.On the back of the strong order backlog that we've had for some time now, we have steadily increasing net sales. Now EBIT is seasonally low. Construction work is harder to do in the winter season. The contracting business areas and industry are essentially flat in earnings over this quarter, while PD recognize profits from one developed project and one piece of land sold. And then we have a clear effect on other eliminations, as Susanne will walk you through the details of that.Market outlook. Look, we see a continued strong market for infrastructures of all kinds, not only roads and railways that we normally think about, but water treatment of all sorts, energy generation, energy transmission and industry, a growing demand for public buildings. But as we all read about residential and commercial markets, significantly slower in our immediate outlook. With this in mind, the focus areas for NCC, as we have been -- it has been for some time now, diligent project selection, making sure that we understand what kind of projects that we bid for and what we engage in, using our segment strength, areas where we have -- our knowledge and expertise gives us an edge, continued execution discipline and adapting resources where needed in this changing environment.And with that, I hand over to Susanne.

[Susanne Lithander, executive]

Thank you.Our backlog, start with that. We have a solid backlog in all of our contracting units, well above 12 months of sales in one case, in line with 12 months of sales. Business area infrastructure continues on their path with continued improvements, and they are on their 18th consecutive quarter with improvement. They have increased both orders received and net sales. They have a positive book-to-bill of 1.2. Sweden is the dominant market and water treatment -- energy and water treatment are growing, and they stand for more than 1/3 of order booking in the quarter.Earnings are improving, and the margin on rolling 12 months is now up to 2.6%. Business area Building Sweden also had good orders received. They have a book-to-bill of 1. Their net sales are growing on the back of good order backlog from the previous years. And as Tomas said, they have been very successful in shifting the portfolio, moving from residential to public buildings and public buildings make up for 50% of order booking in the quarter. Earnings are down due to the write-downs we had in a few residential projects last year, and that presses the backlog, the margin in the backlog downwards. They also have inflationary costs that are pressuring the backlog.Building Nordics had strong orders received, mainly related to 2 really large orders, a hotel in Aarhus, and a continued phase in the large hospital in North Zealand. Sales are increasing as well. It's primarily driven -- it's driven by all 3 countries, actually. Book-to-bill is 1.4 for the quarter. The earnings are down, also impacted by write-downs and cost pressure in -- primarily in Finland and Norway. Denmark continues to deliver a strong earning, and the share of net sales for Denmark is now almost up to 50%.Volumes in industry, stone material has somewhat lower volumes compared to the past first quarters, 2 years back, but with a higher revenue driven by the increased customer pricing. Asphalt volumes in the first quarter are always insignificant, and we cannot draw any conclusions from that. They had good orders received and a solid start to the year. Orders increasing as well as net sales, and that's driven by increased pricing to customers. And the quarter is, as always, seasonally negative, even if it's slightly better than previous year's first quarter. And that is driven by improved earnings and margins within the stone materials business.Property development recognized one project and land sale with building rights here in Solna compared to only one small project last year. We have, in our portfolio, 11 ongoing projects. So, we have also started a project this quarter. And for the remaining part of the year, we only have one pre-sold property, and that's the part 2 of the land sale here in Solna. Our capital employed is up to SEK8 billion, and the return is 9.4%.Of our 200 -- almost 220,000 square meters, we have a completion ratio of 64%, which is well above or above the letting ratio of 56%. Leasing or letting was okay during the quarter. And after two -- a couple of really slow quarters during last year, we actually signed 11 leasing contracts in the quarter. And after the business areas, we come to Other and Eliminations segment and the rest of the income statement.First, we have the NCC headquarters and subsidiaries, which is on a normal level for the quarter. Internal gains is positive, and that's, of course, due to the fact that we sold a large project within PD. Group adjustments are impacted by IFRS accounting when it comes to the pension liabilities. And it's the changes of discount rates that has the biggest impact.Financial items are positive, and that's due to high capitalization of our interest costs within PD or property development. Our tax rate is 17.5%. That brings us to an earnings per share, rolling 12 of SEK13.47. We had a good cash flow. It's positive in the quarter. That really stems from the improved operating profit level. We had also improvements in other capital employed, and that comes from accounts payable.In investing activities, we had last year in the comparison with the first quarter, we had a really large payment of land sale in Denmark, which skews the numbers here. And I would say that investing activity is on a pretty normal level for the quarter. Our corporate net debt is well under our upper limit of 2.5x EBITDA or at 0.7x. And the increase in net debt is due to the fact that we made our share buyback program last year, but also that we continue to invest in our property development.And last year, in 2022, we repurchased maximum amount of our shares. And during the AGM, it was decided that we should cancel 80% of those shares. And at the same time, we will make a bonus issue and restore the share capital so that it is unchanged. This is underway. And once we are done, we will send out a press release.And with that, back to you, Tomas.

[Tomas Carlsson, executive]

Thank you very much.Before we wrap up and open up for questions, a couple of other related topics, health and safety target. We have broken the trend that we saw before at the end of the last year. So, we are now decreasing the number of accidents. We have long-term LTIF4 target of 2 2026 with an intermediate target of 2.75 this year, moving in the right direction and well worth mentioning is Building Sweden with 0 accidents over the first quarter.Climate and energy targets, this is a reminder. This is the same numbers that you saw after the fourth quarter. We update this twice annually after the fourth quarter and after the second quarter. So in the quarter, you will see the updated numbers. We're moving on a good and steady pace towards the target of minus 60% 2030.Financial targets. Right now, we -- as you know, we have an earnings per share target of SEK16. We are now at almost SEK13.5 million. That target still holds, but to be very clear, it requires that we see some more activity on the transaction market for property development in order to meet it. Net debt target is lower than 2.5. And as Susanne pointed out, we are at 0.7 now, so well within that headroom.Dividend policy, approximately 60% of profit after tax. The AGM decided on SEK6 divided into 2 times -- to pay out during 2x of the year. The first payment has already happened.So in summary, good orders received, definitely activity in the market, but a shift in the focus from residential and commercial to more infrastructure and public sector building. Earnings solid in a low activity quarter with a strong contribution from property development. One developed real estate and one piece of land sold and a stable financial position for the group. Definitely, the impact on the residential and office market and property market timing for a more open market uncertain, which is really depending on the general economy and interest rates.So thank you for that. And operator, we open up for questions. And Susanne, you may come back.

[Operator]

[Operator Instructions] Our first question is from Markus Henriksson of ABG.

[Markus Henriksson, analyst]

First one, question on infrastructure. The margin looks very strong here in Q1. Anything that stands out here in terms of one-offs? Or should we view this as a stable level for Q1 going forward?

[Tomas Carlsson, executive]

Markus, no there is nothing extraordinary. This is a pretty stable quarter, 18th consecutive quarter improving margin.

[Markus Henriksson, analyst]

Very good. Then I'm curious about industry for 2023. Could you elaborate a little bit on how the tender period have been going or helping us in any way on the asphalt business for the full year?

[Tomas Carlsson, executive]

Well, it's early days still. If we talk about asphalt specifically, it's early days still, but tendering so far is going well and we have higher orders received than we had the previous years. So, we are happy so far, but it's still early days. Stone material, slightly lower volumes. There's a seasonal pattern for stone, but it's not as pronounced as it is for asphalt. But we see slightly lower volumes, but we have higher prices and all in all, higher revenue.

[Markus Henriksson, analyst]

And then my question on leasing relative to some other peers in the sector, you showcase very good leasing activity in the quarter. Do you view that as that everything happened here in Q1 based on that the second half of last year was a bit weak? Or have you seen a continued interest here into Q2?

[Tomas Carlsson, executive]

Well, we're happy with the letting that we've seen in this quarter. We definitely see activity on this market as well, but it's too early to tell if we can see a more long-term shift.

[Operator]

The next question is from Erik Granstrom of Carnegie.

[Erik Granström, analyst]

I had a few questions as well. Just like to start off with your comment, Tomas, about the EPS target. You mentioned that it depends on the outlook of the property market as well as industry developing in a positive manner. In terms of the property market, obviously, you can't control that, but what you can control is whether or not you are actively trying to sell any of your assets? And if we look at the assets that you have, a number of those, for example, the ones in Gothenburg are nearing completion and they are more or less fully let. Are you in a process to try to find buyers now? Or are you waiting for the property market to change?

[Tomas Carlsson, executive]

For a couple of our finalized projects, we are in the process of selling them. But the general activity level on the real estate market and the transaction market is very low. So, we will sell them if we get the price level that we think is fair.

[Erik Granström, analyst]

Okay. So it's more or less a question of price rather than actual liquidity in the market?

[Tomas Carlsson, executive]

Well, those are sort of connected.

[Erik Granström, analyst]

Oh, for sure, for sure. But it is that you're looking for a fair price. And if that's the case, you are more than willing to divest it in?

[Tomas Carlsson, executive]

Absolutely. And our plan says that we are going to divest a couple of projects this year. And that's why I'm talking about that in the context of the EPS target. That's the plan to divest a couple of the projects this year.

[Erik Granström, analyst]

Okay. And then regarding your comments about the shift in the order backlog as well as the order intake, where you highlight that residential volumes are coming down, whereas -- and also the fact for general commercial assets, but at the same time, you see infrastructure and community services and public buildings increasing. Does this make a difference in terms of your profitability, that mix change? Does it matter to you in any way in terms of profitability?

[Tomas Carlsson, executive]

If so, slightly positive.

[Erik Granström, analyst]

And is that because infrastructure tends to have higher profitability? Or is this within building as well?

[Tomas Carlsson, executive]

Well, residential tends to have a generally lower margin level.

[Erik Granström, analyst]

Okay. Okay. Good. And then regarding building, you mentioned that the order backlog is still sort of hampered by what more or less happened in 2022. Could you remind us again of those projects that you've made adjustments to last year? When do you expect to have those projects [ proceeded]?

[Tomas Carlsson, executive]

You might remember that we had in -- at the end of September last year, we did write-downs in a couple of projects in Sweden and a couple of projects in Finland. Those are relatively short, and we expect the margin in the order backlog to be coming back to more healthy levels towards the end of this year.

[Erik Granström, analyst]

Okay. And regarding Finland, you mentioned that you're doing -- you're making some changes in Finland in order to improve your profitability and your execution in the Finnish part of building. Could you say something a little bit about what you're doing and perhaps what kind of costs you incurred here in Q1? And do you expect to incur more cost because of this? I assume an organizational change.

[Tomas Carlsson, executive]

It is organizational changes. And the easiest way to think about it is that we're focusing more on the major cities in Finland and actually closing a couple of offices in smaller cities. We've had some costs. We expect to have a net positive effect on the full year.

[Erik Granström, analyst]

Okay. Perfect. And then my final question regarding the elimination part, central eliminations. You mentioned that the activation in terms of business done within PD affected it. Was this largely a Q1 effect? Or do you expect this to affect net financials throughout the year as well as you have, in general, higher activation of interest rates? Or is this -- was this very much a Q1 phenomena?

[Susanne Lithander, executive]

This is a Q1 phenomena. So, we will see negative financial net for the rest of the year.

[Operator]

Thank you very much. Ladies and gentlemen, we have no further questions in the queue at this stage. And I would like to hand the call back to the management for closing remarks or any online questions submitted.

[Tomas Carlsson, executive]

Since we don't seem to have any other questions, thank you for listening in to this presentation of the first quarter. And I look forward to meeting you in the coming quarter. Thank you.