Ncc AB

STO:NCC B

Earnings Call Transcript 2021-Q4

[Tomas Carlsson, President & CEO]

Good morning, everybody, and welcome to this presentation of the fourth quarter and the full year of 2021 for the NCC Group. My name is Tomas Carlsson, CEO. And with me here today, I have Susanne Lithander, our CFO. So let's jump straight into it with a summary of this quarter and this year. And the highlights goes like this. Earnings improved for the quarter a lot but, more importantly, for the full year, EBIT up 34%. Property Development, contributing with 2 office projects in the quarter. We have had a strong cash flow for the full year and for the quarter, and we have a strong financial position. Strong orders received, 9% up for the full year. And we have good demand in all countries and all business areas. We're still working with activities to improve the earnings in Industry. And we took an important step towards our goal of EPS with -- ending the year with SEK 14 EPS. And the Board proposes a dividend of SEK 6. That was the summary of the quarter. So let's talk about some details of this. A couple of examples of projects. This is all from Building Nordics: 2 hospitals, one in Denmark, one in Finland; and then an office building in Trondheim, Norway. Orders received, full year 9% up, a good quarter, and in quarter 4 but also any quarter, overall, good orders received. Orders received, as a detail, in residential and offices, on a really good level, residential, on levels that we haven't seen in a very long time, and office demand, good throughout the company. And this is almost exclusively external orders for offices. Order backlog as a consequence of that building, we have a book-to-bill for the full year of more than 1, and that's a good KPI to look at. And we can see that the net sales, excluding PD, is now flattening out. And we have business areas increasing sales in the quarter. Net sales, overall, growing, including PD. And it's PD and Building Sweden driving this mostly and a little bit Building Nordics. Earnings in the quarter, up from below SEK 400 million to SEK 605 million, 3.8%. I think what I'm most happy about is the overall development of the year, 3.4% for the full year and 34% improvement of the earnings to SEK 1,825 million EBIT, in line with what we have been working with for a couple of years now. The drivers behind this, in the quarter, it's PD contributing a lot. Other and elimination, things relating to the businesses but accounted for other and elimination. Susanne would come into -- go into that in more detail in a little while. And if we look at the full year for the earnings, 34% up again. Contracting, contributing a lot. PD, contributing. And then Industry, lots of things happening in the Industry, lots of one-offs but also a disappointment in the overall Asphalt business. So just to put this into perspective, how much is -- what's the contribution from every business area? Infrastructures, Building Sweden, Building Nordics, around or above SEK 400 million, with improvements in all business areas. Industry, lower due to a lot of things happening in the business area. And Property Development, up 10%, and then a small negative impact from other and eliminations. So SEK 1,825 million EBIT. So what are the drivers behind this? Let's start with the contracting units, and that's margin improvements. We see several consecutive quarters of margin improvements. Building Nordics and Building Sweden, around our internal target of 3.5% after several quarters of improvements. Infrastructure, as we've mentioned many times before, the margin is diluted by a number of large project. That will have an impact on the foreseeable future going forward, but we have 10 consecutive quarters of improvement for -- from Infrastructure. Industry, lots of things happening. First of all, Stone Materials delivering a stable and strong earnings, so that business is doing good. Asphalt in Sweden, Denmark and Norway, clearly unsatisfactory. So we've taken more actions to improve profitability in the remaining Asphalt business. Asphalt Finland, divested. We have a substantial negative impact in the quarter, both from operational results in Finland but also from the divestment. That divestment -- negative impact from the divestment is more or less neutralized by a land sale that we did in the quarter, so that's neutral. And to give you some understanding on the underlying remaining business, look at the graph. The light blue graph, that's NCC Industry, pro forma, excluding operations in Denmark, so it's the remaining business. And then you have the one-offs, both positive and negatives, roughly eliminating each other. So you have an idea on what kind of performance we have in the quarter. And then finally, profit recognition from PD. We have 2 projects recognized profit in quarter 4. Frederiks Plads 2 in Denmark and Next in Finland, contributing a lot in the quarter. We have now 11 ongoing projects in PD. And we have, so far, announced already -- preannounced the sales of Bettorp. That will be recognized in quarter. That's a relatively small project, so it has -- will have a small impact. But then maybe more importantly, Fredriksberg D in Finland and Kineum in Gothenburg. And then we have a number of unsold projects ongoing, and we will get back to you with that as soon as we have something to tell you. And finally, on PD, we're exploring the possibility to extend the scope to business-to-business residential. I want to be really clear on -- there's a couple of things here. One is that we're exploring the opportunity. We haven't done anything yet. We think that there's a good combination with our skill set on overall property development and also our skill set for building residential homes. We're starting with Sweden and Finland. But just to make sure, no consumer business, but it's business-to-business. And then really important offices remain our main product. And then finally, there's a couple of risks that we get a lot of questions on and that are relevant for the investment community. First of all, price increases and shortages and disturbances to the supply chain is evident to us. We are managing it so far, so we don't have any significant impact on the group. Second thing that we've been talking about for a couple of quarters now is the supply of cement in Sweden. We're monitoring the situation, and we're working hard with our suppliers to find alternative sources. But we will still have a lot of uncertainty over the foreseeable future or the short and medium term. And then finally, still COVID-19. In the quarter, we have -- the situation was better. It's really after the period and in the first quarter where we've seen more cases of COVID, but we're handling that in the start of the year, so far, in the same good way that we've been able to handle it throughout the pandemic. And with that, I will hand over to Susanne.

[Susanne Lithander, CFO and Head of Finance & IT]

Thank you. Okay. First slide, we have 3 more of our many orders from Q4. You have the stormwater tunnel in Copenhagen to the right, Bromstensstaden and the port in Hammerfest in the very northern part of Norway. The business split in 2021 in our company. To the left, we can start noting that Denmark has increased its share as a country of net sales. When it comes to net sales per business area, Infrastructure has decreased its share, and PD has increased it. Earnings have -- when I look -- when we look at the earnings share, we can also see the reflection of the poor performance in the Industry area. Infrastructure continued to improve earnings and margins. Orders received was SEK 3.2 billion in the quarter, and for the year, SEK 18.4 billion, which is over 30% increase in orders received, primarily driven by Norway, but also the Swedish operations contributes to growth in orders. The backlog is SEK 18.9 billion when we end the year, and the book-to-bill was 1.1. Net sales decreased to SEK 4.9 billion in the quarter, SEK 16.3 billion for the year. That's driven also by Norway that had a lack of order intake in 2020 and the beginning of '21 but also due to the fact that we are having -- we haven't really gotten the pace up in the big new orders that we have received yet, so we are lagging a bit there timing-wise. And also some of the mega projects are in the later phases, and also they don't have a high pace at that phase. When it comes to earning, continued improvement, SEK 115 million in the quarter and 10% up for the year, SEK 391 million. Margin in the quarter was 2.3% and 2.4% for the full year. NCC Building Sweden, orders received were SEK 4.2 billion in the quarter, an increase for the year, basically on the same level as last year. We can see here also that offices and residentials are increasing as share of sales -- of orders, sorry. Backlog increased to SEK 18 billion, and the book-to-bill was 1. Net sales, SEK 4.1 billion, an increase in the quarter but also an increase for the full year, with 4%. And earnings in the quarter was SEK 137 million and SEK 457 million for the full year. Margins were 3.3% for the year and for the quarter. And what drives the improvement both in Building Sweden and in Infrastructure is a more stable project portfolio with higher margins. This slide shows the residential orders for Building Sweden. And as you can see, it varies a lot. And in the fourth quarter last year, we had an exceptionally high level of SEK 2.5 billion in order intake for residentials. 48% of that was for rentals. Building Nordics had a strong order intake in the quarter, SEK 6.5 billion and SEK 13.3 billion in -- for the full year, primarily driven by Norway. Several projects in Norway that has been in the early phase has been registered in the quarter. The backlog increased to SEK 17.3 billion and the book-to-bill was 1.2. Net sales, SEK 3.4 billion, slight increase in the quarter but, for the year, a decrease to SEK 11.3 billion. There are some variations in the area -- in the business area between the countries. Building Denmark has grown on revenue side, both in the quarter and for the year. Meanwhile, both Finland and Norway has declined for the year. Earnings, SEK 172 million is actually up compared to previous year if we exclude the capital gain from the divestment of Optiplan that we did in the fourth quarter of last year. And for the full year, earnings grew actually over 30% if we also exclude the divestment. Margin was 5% in the quarter and 3.6% for the full year. And then Denmark continues to increase its share of net sales in this business area. Moving over to Industry. And the volumes, we can conclude that the volumes are on par with previous years, both when it comes to stone and asphalt. And this slide, we've added to give some guidance on the size when it comes to volume for Asphalt Finland, and the volumes were approximately 15% if we do it in tons. And continuing on, Asphalt Finland had negative impact in the quarter with the divestment, but it was, as Tomas said, pretty much compensated for by land sales. Orders received, down in the quarter and in the year, and that's driven by the Finnish operations. And we can also comment that Stone Material has had a strong order in -- or a good order intake, both in the quarter and for the year. Net sales are basically on par with previous levels. And also here, Stone Materials are very stable and increasing both in Sweden and in Denmark, while Asphalt and primarily then Asphalt Finland is declining. Earnings was SEK 2 million in the quarter and SEK 220 million for the year. And in this SEK 2 million number, we have SEK 161 million of losses in Finland. And as Tomas said, the remaining parts of Asphalt did not perform well. And the reason for that is primarily driven by higher cost that we've not been able to compensate for in our pricing. Property Development, 2 projects recognized in sales, giving us SEK 1.5 billion in revenue, SEK 4.8 billion for the year. Earnings was SEK 179 million compared to SEK 54 last year. We had 2 projects recognized in sales, as Tomas said, Frederiks Plads and Next. Last year, we also had 2 projects, but they were really small. For the year, we've recognized 7 projects. And last year, we -- or 2020, we recognized 5. We've also had 2 land sales in Denmark, and we've also had resolutions of provisions from earlier sales in the earnings. We have 11 ongoing projects, which is about 200,000 square meters, and 74% of that is in Sweden. We sold one project in the quarter, Fredriksberg D. We have signed 23 letting contracts in the quarter, and that corresponds to 14,000 square meters, which is significantly lower than last year when it was around 30,000. So many contracts but with smaller. And this is the letting and completion ratios. And the status is that our letting ratio is 58%, and our completion ratio is 57%. That was the business areas. Now moving over to other and elimination that had a significant impact on earnings this quarter. Starting with the first line item. NCC Headquarters and subsidiary continue -- containing our headquarter costs and our subsidiaries that don't belong in the business area. And as you can see, we have a positive number here, SEK 33 million in revenue for the quarter. And that is due to the fact that we booked the SEK 124 million in sickness insurance that we got repaid in October. So that explains the deviation on the first line item. Internal gains is also positive due to the fact that we've sold 2 large projects and we're not building as much. This is the line where we eliminate the profits in our building when we build our PD projects. And as you can see, also for the full year, the deviation is quite large. And that's due to the fact that we're not investing as much in PDs we're selling. Other group adjustments contains accounting adjustments. And the big difference here is for the full year when we, in 2020, had to make a reservation for the sales leaseback according to IFRS 16 of our headquarters here in Solna on about SEK 120 million. And then also Road Services is only this year, including Road Services in Norway that has not been divested. Okay. Moving over then to the financial items. We have a lower financial net due to lower corporate need for average corporate debt. And also, our tax rate is quite low, 15% for the year, due to the fact that we have a large portion of PD projects in our earnings. Cash flow, we have a very strong cash flow. First of all, our earnings have contributed significantly, of course, SEK 2.8 billion in the year and SEK 975 million in the quarter. Property projects has a positive effect. And here, you can see that we are -- our level of investment is on a lower level right now as we are not -- as we have a positive net here. Other working capital, negative SEK 626 million in the quarter, is explained by prepayments -- lower prepayments from customers. And investing activities is positive. This is where we have our CapEx usually, but the positive here, it is explained by the cash flow from the divestment of the Finnish asphalt business. So all in all, SEK 1.9 billion, strong cash flow for the year. Our net debt has decreased to SEK 2.9 billion compared to SEK 4.8 billion last year. Our corporate cash is SEK 766 million at year-end. Both pension liabilities and leasing liabilities has decreased substantially and the pension liabilities due to actuarial changes. And our net debt target is to be below 2.5x compared to EBITDA. And we are -- since we have net cash, we are negative. Moving back to you, Tomas. Thank you.

[Tomas Carlsson, President & CEO]

Thank you very much. [Technical Difficulty] And I think this is approximately where we cut out. So let's reiterate. We set the financial target of SEK 16 2023. And I think that SEK 14 2021 is a good step towards that goal. And as Susanne has already mentioned, we have a net cash position. We have a dividend policy of distributing at least 40% of after-tax profits. And the Board proposes SEK 6, which corresponds to 40% of the profit after tax. We have a health and safety target. 2021 was pretty much flat on a very low level. And we have some work to do -- be done until to reach the target of 3.0. But we know what unit needs to work more with us. And then just to remind everybody, we have a climate and energy target. We report that twice a year with the first and the third quarter. So we will get back to that to the -- in the first quarter report 2022, but we will also report it in the annual report. And we're getting into the season of annual general meetings. We're planning to have the opportunity to get back to a live meeting like you see on the slide here. AGM, April 5. But since the corona pandemic is still a little bit situational -- it's still a little bit fluid, we will come back and confirm the latest -- at the latest 4 weeks before the AGM on the format for the AGM. And then the annual report will be published at the latest on the 15th of March. To wrap it up, 2021 was a good year. It was a good fourth quarter, but more importantly, it was a good year. Substantial improvement and consistent earnings improvement for the group, continuing on the journey that we've been on for a couple of years now. Strong orders received, 9% up on the full year, but more importantly, with the right projects. We're still very selective on how we tender and what kind of risk profile we have in the projects. Good demand in all markets and in all business areas. Good cash flow throughout the year, which leads to a solid financial position. And with that, operator, we open up for questions.

[Susanne Lithander, CFO and Head of Finance & IT]

We'll start with the questions from the web to see if we have the teleconference open. So we have one question from Simen Mortensen from DNB. With a high number, with 48% of orders received in Sweden Building being in rental, how do you expect the removal of the investment support program for rentals to impact bookings going forward?

[Tomas Carlsson, President & CEO]

Well, 48% of the orders received in the residential segment. It's not 48% of the overall orders received. I think important. We see that there are certain projects that may be impacted by the removal of the subsidiary. But overall, we think that there's a demand for rental residentials.

[Susanne Lithander, CFO and Head of Finance & IT]

We'll see if we can get the web questions up. Or if not, if there are any more questions that can be sent in over the web.

[Tomas Carlsson, President & CEO]

Bear with us or send your questions in the -- on the web.

[Operator]

Sorry. Can you hear me as well? Just want to double-check.

[Tomas Carlsson, President & CEO]

Yes.

[Operator]

Perfect. I'll make it live again. Just one moment. Please go ahead. We can hear you now, speakers.

[Tomas Carlsson, President & CEO]

All right. Again, questions to -- from the live audience. And again, we apologize for the technical malfunction here.

[Operator]

[Operator Instructions] Our first question comes from the line of Erik Granström from Carnegie.

[Erik Granström, Financial Analyst]

Hopefully, everything works fine now. I have a few questions. I would like to start off with Building. Tomas, you mentioned that you're quite satisfactory with the development of profitability within Building Sweden and Nordics. What should we expect going forward from here? Do you feel that they have both reached a profitability level that should be expected going forward? Or do you think that there is still some things to be done in order to improve profitability further?

[Tomas Carlsson, President & CEO]

Well, there's still some headroom to have a full year of meeting our targets. So that would be my first expectation. And then what I think is important is when -- once we've reached stability on that, our focus will be on having bottom line earnings growing rather more than the margins.

[Erik Granström, Financial Analyst]

Okay. That makes sense. And in terms of Infrastructure, you have improved profitability. But given the fact that it's quasi or capital-intensive business, the profitability sort of hasn't reached the Building stages. Could you explain a little bit of what you see going forward in terms of your order backlog, how you see the mix and how you expect profitability within Infrastructure to develop?

[Tomas Carlsson, President & CEO]

Well, a couple of comments on that. First of all, for us, it's not a capital-intensive business since we don't own any capital -- or very little capital-intensive business. We rather have more prepayments normally in the Infrastructure business. So we have a good cash flow position and a financial position for the Infrastructure business. We have a number of large projects in the order backlog that we will have to deliver over several years going forward. That dilutes the margin. But the orders that we've won over the last 3 years are on par with what we see in the Building business areas. We had really good order intake -- orders received in -- over the year, particularly in the beginning of the year. And that was projects that we've been working with for a long time in the design phase, and that was converted into orders received in our books. So good quality projects. So I expect to see continuous improvements in the Infrastructure business, but we have a significant effect of dilution from ongoing large projects.

[Erik Granström, Financial Analyst]

Okay. And then moving on to Industry. You -- aside from all the one-off effects in Q4, you mentioned that you're not satisfied with the profitability within the Asphalt operations so far. And you also mentioned increase in costs that can't be pushed, at least wasn't pushed in Q4 forward. Could you give some more details on that? What -- is it input costs that are escalating that you can't push forward? Or is it something internally that you're not pleased with?

[Tomas Carlsson, President & CEO]

Well, it's a rather complex field. But if you want to see the big drivers, it's not that we haven't really got the effect from the reorganization that we did last year. And we're working with that to get better profitability. And then it is increased -- what we mentioned is the increased cost from mainly bitumen, i.e., oil product, that we should have been able to handle in a better way, but we didn't do that.

[Erik Granström, Financial Analyst]

Okay. And given that 2021 was a year that you made quite substantial changes to Industry, should we expect this to happen in 2022 as well? Are you looking into further divestments that could affect the overall business area? Or is it much more of an internal process from here on out?

[Tomas Carlsson, President & CEO]

We -- as I've said, for the entire group, we're done with the big divestments that we have been planning for some time. We will continue to do more organizational pruning, if you will, smaller divestments. But it's primarily -- it's all about the internal processes from now on.

[Erik Granström, Financial Analyst]

Okay. And then I have 2 final question. One is regarding rental development. You mentioned that you're looking into it, but it is still offices that you continue to focus on. In terms of the way that we should view it, in terms of the financial part, do you expect to have substantial costs associated with building up an organization that will look into sort of this area within Property Development, I assume it will be located in?

[Tomas Carlsson, President & CEO]

First of all, commercial office properties, that's the main business for PD going forward. So make no mistake about that. Second is, marginally, we will increase the organization a little bit but not in a significant way for the group.

[Erik Granström, Financial Analyst]

Okay. And my final question was a little -- a bit of a detailed question on the report itself. In terms of your financial items, you mentioned that, obviously, the net debt situation has improved and interest rates have also been in favor. But the financial items in Q4, to me at least, seem quite large. And you mentioned that there were other financial items that affected the quarter in itself. Could you explain what that was just so that we have an understanding of what happened in the quarter specifically?

[Susanne Lithander, CFO and Head of Finance & IT]

In the fourth quarter specifically, we moved an item from Property Development financing to the financial net instead of keeping it up in the earnings in EBIT. It was a correction.

[Erik Granström, Financial Analyst]

Okay. So it would have been reported within PD, and now it was reported as a group financial.

[Susanne Lithander, CFO and Head of Finance & IT]

It was reported as a financial net cost -- financial cost instead of cost -- operating cost in PD. Correct. And it was a correction of SEK 15 million.

[Erik Granström, Financial Analyst]

1-5? Is that...

[Susanne Lithander, CFO and Head of Finance & IT]

Yes.

[Tomas Carlsson, President & CEO]

Any further questions?

[Operator]

We have one further question from Stefan Andersson from SEB.

[Stefan E. Andersson, Analyst]

I think I have 2 questions. But just to start where Erik ended there, with the development on the rental side, have you identified land in your land bank already that could be suitable for rentals? Or do you need to actually try to find that land now from here on?

[Tomas Carlsson, President & CEO]

We have an ID.

[Stefan E. Andersson, Analyst]

So there could be opportunities in the land bank. Is that correct?

[Tomas Carlsson, President & CEO]

Absolutely.

[Stefan E. Andersson, Analyst]

Yes. Okay. Good. Yes. And then on -- a question on the development side as well. If I remember correctly, the Bromma Blocks is one of the bigger ones that you have in the development portfolio, size-wise. And you're closing in on finalizing that property. It's not being sold yet. And I guess the lease rate is -- it has a little bit more to wish for. So I'm a little bit curious just how you think about that. This comes back to my estimates, I guess, because that would have a big impact on 2022 if you sell it in '22 and a big impact on '23 if you sell it then. So I guess my question is really what's your thinking about selling that. And I'm sure I'm not going to get that -- any answer on that. So instead, I'm asking a little bit about the lease rate. How is it progressing? Are you struggling a little bit with filling it up? And could you elaborate a little bit on that?

[Tomas Carlsson, President & CEO]

We've had lots of interest for leasing in the Bromma Blocks. Recently, we've signed some contracts. And we're now working hard with filling the remaining part of the business. We get good lease rates. And as you said, you will not get an answer on when we sell it.

[Stefan E. Andersson, Analyst]

And then when we see the lease rates coming here to next quarters, is there any reason for not divesting that one if at least rates are closing in on 100?

[Tomas Carlsson, President & CEO]

Fundamentally not, but we'll see.

[Operator]

And there are no further audio questions.

[Tomas Carlsson, President & CEO]

Very good. We have any more web questions? If there are no further questions, thank you all for listening to us. And again, we apologize for the technical issues here, but I hope you got the message from us today. And thank you all.