Ncc AB

STO:NCC B

Earnings Call Transcript 2023-Q2

[Tomas Carlsson, executive]

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

[Susanne Lithander, executive]

Good morning.

[Tomas Carlsson, executive]

So I'm going to do a short summary of the quarter, and then I'll hand over to Susanne. And I'm really happy about this quarter. We see increase in orders received and a higher profit. And the really important message here is that we see a clear demand in many segments of the market, reflected in good orders received and a solid order backlog for the group and for all business areas. And the focus that we've had for some time on prioritized segment pays off. Infrastructure continues to increase earnings. And during the quarter, they have also divested Bergnäset, a scaffolding subsidiary, that we still have, but we expect to close that deal during the fall. Building Sweden and Building Nordics, stable earnings and stable business but we see an impact from the write-downs that we did last year that impacts the margin in the order backlog and hence, also the earnings going forward. We expect that, that will start to improve during the second half of the year.

Industry continues to improve, and we're happy to see the earnings that we have in the industry for the second quarter and then property development. As I think everybody is clearly aware of that it's a slow transaction and letting market in the -- for property development, property development hadn't planned to have anything to recognize in profit this quarter but we expect to see a slower market going forward for property development. Most important, I think there's clear demand in many segments of the market. Orders received on a good level for a second quarter or for any type of quarter, which means that we have won a number of interesting projects. And I've selected 4, we have 1 swimming facility in the Norway in Oslo, we have won a water treatment facility in Regnemark in Denmark. We have been awarded the contract to refurbishment of Avicii Arena or maybe more popularly known as the globe -- Stockholm Globe Arena in Stockholm, and we're building a secure psychiatric hospital outside Oslo in Norway. So that's an example of the type of projects that we are winning.

If we move on. The trend with an emphasis on public buildings continues. We've shown this for some time now but I think there's a couple of other interesting things to be seen. First of all, even though residential and office markets are down, they have not come to a complete stop so we have orders received for both residential projects and office projects in the quarter. And then we see public buildings continuing to increase, in both the areas, building and infrastructure, we see public buildings and public infrastructure increasing in the quarter. So if we continue, as a very clear example of this is energy and water treatment, one of the segments that we have a couple of years ago decided to focus on. We see a clear increase in orders received quarter-over-quarter as a clear trend. And we're also now beginning as on the back of that, seeing an increase of net sales in this segment. We expect that demand for energy and water treatment will continue to be on a high level for a long time going forward. If we move on, solid order backlog of almost SEK 60 billion, we have book-to-bill of 1, which means that we are maintaining the level of the order book backlog for the group.

And if we continue, net sales essentially flat in the quarter, highlighting that we are not going for more sales, but rather for better projects. We continue. And that means that we have an EBIT of SEK 500 million, a little bit more than SEK 500 million, particularly good considering that we have no contribution from the property development in the quarter. So very good for the business area, in the contracting business area and the industry. Continuing. Market outlook. And I'd like to reiterate this, we see activity in the market in many segments, not all, but in many segments. There's a growing demand for public buildings, continued strong long term for infrastructure and industrial development.

The green transition is starting to show but as I'm sure that everybody is aware of residential and commercial market's significantly slower than it was just a year ago. And the property market, both the transaction market and the letting market activities is very low. For us, that means that we will continue, and you've seen this before, to have diligent project selections in all our parts of our business, using our segment strength, and we have several different segments, continued execution discipline in what we do and adopting resources where needed. And we do that on a continuous basis wherever it's needed, it can be decreasing the organization, but it also means increasing the organization in some other parts. And with that, I hand over to Susanne Lithander.

[Susanne Lithander, executive]

Thank you, Tomas. We have a solid backlog in all our contracting units, business unit or business area Building Sweden and Building Nordics are well above the 12% -- 12-month sales rolling. And for infrastructure, we have several large projects in early phases with our customers. Business area infrastructure continued to improve their quarterly improvement, their quarterly performance and both orders and net sales increased compared to second quarter last year. The business area have a very focused segment strategy, as Tomas mentioned. And the energy and water treatment now stand for 44% of the orders in the first half of the year. Sweden continued to be the dominant market, but Denmark is growing their share of sales. Earnings and margin are increasing, and they're both driven by volume and better margins in the project backlog.

Building Sweden had a solid order booking and sales and the backlog, as we saw, is strong. The business area continued to shift the order booking from residential to public buildings, and public buildings and refurbishments were almost 70% of the orders received for the first 6 months. But we can also note that the residential is actually 18% of orders received for the first 6 months. Earnings decreased as an effect from reduced margin in the backlog, as Tomas also mentioned, from the write-downs in a few residential projects last year. Those few projects are being finalized during the third quarter, which means that the effect will fade towards the end of the year. Building Nordics are growing in both sales and orders. And in the quarter, the order growth is mainly driven by Norway. Net sales grew in all 3 countries and the book-to-bill was 1.3 in the quarter.

Segment-wise, public buildings dominates and was 49% of orders received in the first half of the year. Earnings are down and they are also impacted by the lower margins in the backlog from write-downs last year that were due to cost increases mainly in Finland and Norway. And Finland has, during the quarter, also executed on restructuring activities. Denmark continues to deliver very strong earnings and they stand for almost 50% of sales in the business area now. This slide shows the volume per quarter for stone material and asphalt. Stone material had lower volumes as an effect from the low activity on the residential market and asphalt volumes are on a normal level. Business area industry shows good progress and has a good start of the year. Orders are down, but that's mainly a timing effect between the first and the second quarter. First quarter was exceptionally strong, specifically in Norway. Net sale is up on stone material in spite of volume decrease but asphalt is also driving increases and those increases is for the both of the divisions driven by customer price increases.

Earnings and margin are on the right track, and the improvement is mainly driven by the asphalt business in Norway and Denmark. And the explanation in addition to increased customer pricing is lower cost, primarily within energy. Capital employed is on a normal level but with a really low return due to the last year's lower earnings. Property Development had no profit recognitions of sold projects in the quarter, and that explains the negative earnings, no revenue -- low revenue and cost. We have 7 ongoing projects in the portfolio. Of those, we have 3 projects and a piece of land that are presold and the expected timing of profit recognition you can see on the slide, and it's only part II of the land sale in Solna that we will expect to profit recognize this year. The others, you can see during 2024, Q1 and Q4 and Park Central in 2027. So we have 4 ongoing projects that are not sold and we have 4 completed projects that are not sold that we will keep as current assets until we get the right price for these properties.

Capital employed, SEK 8.8 billion and the return 8.4%. In our portfolio of 217,000 square meters, we have a total completion ratio of 70% and a letting ratio of 58%. And letting in the quarter was better than last year, but still on a very low level with only 7 contracts signed in the quarter. And after the business areas, we come to the segment Other and Elimination. First line, we have the cost for headquarter subsidiaries that are not part of the BA. Next, we have internal gain, which is negative as we eliminate the risk where we will eliminate the profit when we build in our property development projects, and we haven't sold or profit recognized any, so it's negative. In other adjustment is where we have large deviations from last year, and those are explained by IFRS pension liability accounting, and it's driven by changed discount rates primarily.

Financial net is on the same level as last year due to the high degree of capitalization of interest in ongoing PD, property development projects. But as we now have completed our property development, some of our property projects that will have an effect on financial net moving forward. Tax rate is 17.5% in the quarter, and that gives us an EPS slightly above SEK 14. Cash flow in the second quarter is seasonally negative as we start up operations in asphalt, and that builds up working capital. In the second quarter of last year, we sold our rebar operations, which makes the comparison -- which made the comparison period for investing activities last year a bit skewed. So our corporate net debt has increased with SEK 1.4 billion due to the continued investments in property development. And it is -- but it is, however, still very well within our upper limit of 2.5x EBITDA at 1.4x. And that's all from me. Back to you, Tomas.

[Tomas Carlsson, executive]

Thank you, Susanne. I'm going to wrap up. But first of all, let's talk a bit about -- a little bit about health and safety because the development is moving in the wrong direction. We've seen a number of accidents over this quarter and actually in the last quarter as well, mainly in one division. And these are relatively minor accidents but we take them very seriously. So we've taken action in that division, and we expect to see an improvement going forward. Most of the business is doing very well on health and safety, but one division that had a larger number of accidents than normal. If we move on to climate and energy. We are going to present the development for the first half year in the November report. So there's nothing new here. We see that this is the numbers from the end of last year. But we will come back to that in the end of -- in next quarter.

Financial targets. We are around the rolling 12 basis now on SEK 14 compared to the SEK 16. We have stated that in the report that this is contingent -- if we tweak that target, it's contingent on more activity in the property development transaction market. We think it's very hard to predict when that will come back and what will happen. So a caveat on the property development market but the target still stands. Net debt is smaller than 2.5, 2.5. As Susanne pointed out, lots of headroom from 1.4 where we are now and the dividend policy around 60%, and the AGM decided on SEK 6, half of it has already been paid, and the remaining half will be paid during the fall. Continuing, we do the targets going forward. As I've said, it's contingent on the property, the market but we are planning to hold the Capital Markets Day later this fall to talk about the business and our targets going forward.

And with that, we will wrap up. And I think the most important message here is good orders received. And even more important, there's a clear demand in many segments of our business. Good earnings in general and a positive development stable financial position with the loss of headroom to our debt target and a strong balance sheet. But the property market timing for normalization of market is really, really uncertain. And with that, operator, I open up for questions.

[Operator]

The first question comes from Erik Granström from Carnegie.

[Erik Granström, analyst]

I'll have a number of questions, but I think I'll start off with the Building segment. Tomas, you mentioned that you're pleased with the development in general with the profitability coming from a period of when your -- you still have some order backlog, legacy projects that are hampering margins. Could you remind us again of the projects that you have made write downs in, when do you expect to have those completed? And when should we expect those to have been removed from the order backlog?

[Tomas Carlsson, executive]

Erik, just a short quick reminder. We did 2 things with regard to building business areas last year in the third quarter, we had a limited number of residential projects in the Stockholm area where we actually have the project management issues but we also had general pressure from price increases in certain parts of the business in both Building Nordics and Building Sweden last year. That influenced the margin in the order backlog. We expect that to start improving over -- during the next quarter and throughout this fall.

[Erik Granström, analyst]

Okay. Good. And also in terms of competition for new projects and new orders within building, have you witnessed any increased competition for nonresidential buildings given that the residential market has obviously turned for the worst during 2023?

[Tomas Carlsson, executive]

Well, there's 2 parts to answer that question. The first is yes, definitely. And that always happens when the residential market, it's only a part of the business, but it's a large part of the general construction business. So companies that used to be very much focused on residential tends to be focusing on other parts of the construction business. That's true. And they tend to compete on price. So that's true. But the other part of the question is this -- of the answer to the question is this, we are very clear on maintaining our line on what kind of risk profile and what kind of price we want to have. And as you've seen, we've continued to win orders because what our experienced and sophisticated customers realize is that in the long run, you cannot run this type of business without having a decent profit margin and pricing in risk. So even if the low price competitors win some we see that experienced and sophisticated customers are relying on NCC being there for them. So we are very clear to hold our line, make sure that we have profit margins and that we price risk.

[Erik Granström, analyst]

Okay. And sort of a similar question then within infrastructure or more in the sense of what kind of adjustments have you made in terms of what kind of orders are you going for within infrastructure in order to make sure that you have the right competence and perhaps lower the competition within the order backlog?

[Tomas Carlsson, executive]

The easiest way to understand that is to look at the chart that Susanne showed about the distribution of orders received. We are deliberately decreasing the proportion of roads and railways and increasing the proportion of energy and water treatment.

[Erik Granström, analyst]

Okay. And in terms of the continuing positive development of profitability within infrastructure, which has gone on for quite some time now you report 3% EBIT margin in Q2. Obviously, we will have a boost in Q3 with the divestment. But going forward, are there any -- to look in Q2 specifically, were there any major completions that boosted the profitability in Q2? Or do you do you see that the profitability trend that we've seen now in Q2 is something that you would expect to continue in the second half of the year and going into '24?

[Tomas Carlsson, executive]

I continue -- I always expect the margin to improve. But underlying -- if we exclude the profit from the sales of Bergnäset, I expect the positive trend for infrastructure to continue. The margin is diluted by a number of larger projects that we won a long time ago, but during this year, 2 of them will actually be finalized. And that will have a positive impact.

[Erik Granström, analyst]

Okay. That's very clear. And then within industry, you mentioned that it's a lot of the asphalt and paving operations, that is, at this point, at least driving both volumes to some extent, but also profitability. Do you think that you can maintain this kind of a level given that I would assume that the demand for aggregates is coming down because of a weaker residential market. Do you think that you can maintain the balance there?

[Tomas Carlsson, executive]

That's our ambition, definitely. What we see is that the volumes for aggregates is clearly going down. We think that -- our opinion is that this is a reflection of the decrease in the residential market. It has clearly been offset by increases in prices. And we've done a lot of work during the last year or actually a little bit more than that on pricing on aggregates and we expect that, that can continue. On asphalt, the levels are pretty much on the same level as they were a year ago. We see both cost decreases, mainly energy in Denmark and Norway, but we also see price increases in the volumes that we've sold.

[Erik Granström, analyst]

Okay. Good. And then finally, within PD, you mentioned that the divestment market and obviously, the letting market is quite tough, probably not completely surprising. But at the same time, you also stated that you do not want to divest assets that are completed unless you get the right price, have you been in the selling market and tried the pricing? And is there a substantial difference between what buyers are willing to pay and what you are willing to sell for? Or are you much closer in terms of whether or not you would like to divest something. Could you just explain a little bit your thinking behind the potential for divestment.

[Tomas Carlsson, executive]

Yes. Obviously, the market for transaction has changed because of the interest rates, that's clearly clear. But we also see a driver -- there's a transaction market, clearly, but it's significantly lower and it's very -- it's projects or real estate in very particular locations. And also there's a market driven by maybe other reasons and a different rationale than we have for selling our real estate. Having said that, we are continuously sounding the market. We have been sounding the market, and we are continuously sounding the market. And we think the gap is right now too large, driven by reasons that are not entirely justified by the value of the project.

[Erik Granström, analyst]

Okay. That's fair enough. But at the same time, I mean you do have the balance sheet to handle completions of PD projects. So that shouldn't be an issue. But at the same time, as you're building capital from that area, the return on capital employed is about 8% now. There is a risk that you will continue to trend lower in that perspective if you decide not to sell anything. How do you balance the return on capital employed with getting the right price, so to say.

[Tomas Carlsson, executive]

Let's adjust very much adjust my question. And what we do is we try to balance both price, cash flows, balance sheet and timing in that equation. And it's an ongoing process where we try to factor in all of that.

[Erik Granström, analyst]

Okay. And then my final question is regarding any sort of other potential non-core units that you would like to divest. You are divesting now a smaller unit in -- within infrastructure in Q3. Have you gone through the entire company and looked at other non-core areas that you would like to divest? Or is this something that just came up here and now?

[Tomas Carlsson, executive]

This is the end of the list from the work that we started 2018 but any type of well-functioning company does continuous pruning. So I'm not ruling out that we would divest a smaller unit, but it's nothing big is planned.

[Susanne Lithander, executive]

Okay, we have...

[Operator]

There are no more questions from the phone at this time.

[Susanne Lithander, executive]

We have a couple of questions from the web. Starting with questions from Simen Mortensen. One question about PD. What's the rationale and strategy for holding on to completed PD projects? I think you may have talked about that already a little bit, but is there another reason than just waiting for a better market? And perhaps related to that, assuming that there is no more asset sale in PD, what would then be the target for EPS?

[Tomas Carlsson, executive]

I think I will elaborated on PD, but just to recap, we think there's a balance between what kind of price we get cash flow, balance sheet and timing, and we're continuously monitoring that. But we think that we should have a good enough price before we sell, and we have the opportunity to hold on them for a longer period of time. Having said that, we are not intending to be a real estate company holding on to companies -- to real estate for a long time. We have not specified the part of PD for the EPS.

[Susanne Lithander, executive]

Good. And then we have a question from [ Evli ] being more market related. How would you describe the Nordic construction market? In which countries do you see weakness the most?

[Tomas Carlsson, executive]

First of all, I think it's important to recognize that there's clearly demand in several parts of the market. That's the most important thing to recognize. There are differences between the countries where maybe Finland is the most challenged, but that's -- it's a marginal difference.

[Susanne Lithander, executive]

Okay. No more questions on the web at this time.

[Tomas Carlsson, executive]

And if there's no more questions from the operator, thank you all for listening in to this presentation of the second quarter for the NCC Group. Look forward to talk to you and see you around, and have a nice summer. Thank you.