NCC AB (publ) (NCCB) Earnings Call Transcript

Good morning and welcome to this presentation of the fourth quarter and the full year for the NCC Group. My name is Tomas Carlsson. I'm the CEO. And with me here, I have Susanne Lithander, our CFO. And after the presentation we will open up for questions from the Internet. And with that and with no further ado: the summary of the year and the quarter. And it was a stable quarter for -- after a more mixed year. And the way I think about is this. We have good orders received for the year, strong order backlog towards the end of the year, but however, we have lower earnings. Infrastructure, stable earnings improvement quarter-over-quarter for 16 consecutive quarters. Building Sweden, with a fundamentally strong core but an impact from the write-down in the number of residential projects in the third quarter and the consequences of that. Building Nordics, Denmark really strong, Finland impacted by restructuring costs by closing 1 department. A really challenging year for industry, EBIT earnings around 0, as communicated earlier; and several actions taken and ongoing right now; property development finishing the year with strong earnings in the quarter, but however, the market situation for property development really pending. That's the summary. Let me walk you through the details of the -- or some parts of the details of the company. Overall, our sales SEK 54 billion, fewer employees than we were last year as a consequence of actions taken, but still sales on the same level, Sweden representing just short of 60% of the -- of our operations, Denmark growing a little bit. Orders received for the full year, a little bit less than last year. And last year was a really good year, so good order backlog. And orders received in the quarter, on a normal variation level but on the lower side. And the impact we see here is from residential building, primarily in Sweden; however, on less -- with less impact than you might have expected given the macroeconomic situation. These orders received and the net sales means that we have a book-to-bill for the year of 1 and ending the year with almost SEK 55 million in order backlog. Net sales in Q4 on par with last year. There's one thing that I think is important to recognize; and that is the sales of -- in PD is almost -- or very low, almost none. And that is because the largest piece of real estate that we sold were in the form of a joint venture where we only recognized our part of the profit and no sales. And that has an impact when you compare year after year. EBIT in the quarter, 3.4%, SEK 544 million; and for the reasons that I just laid out, on Building Sweden and the restructuring costs in Finland a little bit lower than last year. For the full year, SEK 1.358 billion, 2.5%. If we try to break this down into the components in the quarter, it looks like this: Infrastructure increasing again, 16th consecutive quarter; Building Sweden lower due to write-downs in the third quarter in the number of residential projects but from a very high level; Building Nordics, also from a high level and quarter 4 2021, impacted by write-downs in Finland but also some other provisions in Finland and Norway; Property Development increasing, compared to last year, due to fundamentally phasing issues over the quarter; Industry a little bit better in the quarter but from a very low level. So you have to understand the starting point here. Overall, SEK 544 million. Earnings for the full year, pretty much the same pattern. You see the impact on Building Sweden from the third quarter. You see the full impact on Industry, leading us to the slightly disappointing and lower earnings of SEK 1.358 billion. Now that's the history. Let's look at the future. And what we see right now is significant uncertainty going forward, many different possible scenarios. And you cannot rule out any of these scenarios, but fundamentally we are well positioned to deal with any type of development going forward. You see both positive and negative development in the market, office and residential market significantly slower. And that should be expected given the interest rate situation and the costs of building. Property market, difficult, both concerning the transaction market and letting. And we really don't know where that is going, but we have a strong market when it comes to Infrastructure, all sorts of infrastructure, rails -- railways and roads, of course, but also water treatment facilities, energy production facilities, energy transformation and that type of infrastructure. And then we also see a good market when it comes to public buildings and the green transition development in the industry. So mixed picture. What we expect to see is that we will have good -- positive and negative development but more variations between segments and over geographies. And as always, for NCC that means that we continue with diligent project selection. In this business, it's really important that you understand what -- who your clients are, what kind of projects you are dealing with, what's the risk profile, using our segment strengths, continuing to use our segment strengths, continued execution discipline in the projects that we are building and adapting resources when needed. We've done that in 2022 and we are prepared to do it going forward as well. And with that, I hand over to Susanne.

Thank you. Okay, since it's the end of the year, we want to share you -- with you the split between our businesses. And when it comes to the net sales part, we can note that Building Nordics has increased, while Property Development has decreased or dropped a bit. On the earnings side, the -- has been a couple of swings. Both Infrastructure and Property Development has increased their shares of earning, while Industry and Building Sweden has dropped on the back of lower performance during the year. Our operating capital, Industry stands for SEK 4.4 billion and Property Development now has capital employed of 8 -- almost SEK 8 billion on -- as they have several large projects in late state, with a high completion ratio. This is the contracting order backlog. And as you can see, Building Sweden and Building Nordics have strong backlogs well above 12 months sales, while Infrastructure is basically on par with 12 months of sale in the backlog. However, Infrastructure have several large projects in Phase 1 or in early phases with customers. And starting with Infrastructure. They had a very stable quarter and, as Tomas said, a 16th quarter in a row with improved performance. Their net sales grew a bit. Their orders booking, I was going to say, grew slightly in the quarter, SEK 200 million. And -- but for the full year, their order booking is down almost SEK 3 billion. The difference between the years is that, last year or '21, we had a -- much more of large orders, so very few really large orders in 2022 for Infrastructure. The net sales is up 6% both in the quarter and for the year on the back of the strong backlog they had. And also we have a very high volume in some of our mega projects. The earnings increased to SEK 124 million, and the margin was 2.4% in the quarter. It's -- for the year, their earnings is SEK 429 million. And a margin of 2.5%. And the improvements are driven both by volume and an improved project portfolio. Sweden continues to be the largest market, but Denmark is growing a bit. And to the right, we can also note that energy and water treatment continues to grow as a share of orders received. And we are -- continue to have a leading position on the market within this segment. Building Sweden had an order intake of SEK 3.8 billion in the quarter, slightly below previous year's fourth quarter. And the order backlog is SEK 18.6 billion, quite strong. The net sales increased a bit to SEK 4.3 billion in the fourth quarter; and for the year, up to SEK 14.2 billion. Operating profit in the quarter was SEK 98 million, in the quarter. For the year, it was SEK 252 million. The margin in the quarter was 2.3%, and for the year 1.8%. And the margin is negatively impacted by cost increases both in the quarter and for the year, and the big write-down in Q3 that we've talked about also has pressured the margin. And we -- a good thing with Building Sweden is that they have had very strong orders received for public buildings, which now stands for 31% of orders received for the year, covering up for the drop in residential. Building Nordics had orders received of about SEK 2.5 billion in the quarter, which is lower than the past 2 years. On the full year, they had SEK 12.3 billion, which is also slightly below previous year but still on a very good level. If we look at the countries: Denmark is going very strong and continues to grow, while Denmark and Norway's had lower orders received during the year. Net sales grew 16% in the quarter and 14% for the year if we exclude currency effects. And here all countries grew their sales based on a good backlog from before. Earnings in the quarter dropped to SEK 95 million, mainly driven by increased costs but also the -- as Tomas already mentioned, the restructuring costs for Finland. For the year, the operating margin -- the operating profit was SEK 347 million, with a margin of 2.6%, and negatively impacted by the material costs, of course. Building Nordics continued to -- then in Building Nordics, Denmark continues to grow their share. And this now stands for 47% of sales. And also here we have a strong hold in residential buildings, 36%; and 32% also in residential which we took in the first quarter's. Moving on to Industry and showing the volumes, we can see now that we had both in the quarter and for the year lower volumes for both stone material and asphalt. And in these numbers, we have excluded Asphalt Finland for '21, for relevant comparison. And orders received and net sales has grown both in the quarter and for the year for both divisions. And that's driven, of course, by increased customer pricing. Earnings in the quarter dropped to SEK 23 million, and to SEK 8 million for the year. Stone material continues to deliver a stable earning. And the low performance is driven by the asphalt operations, and it's primarily within Denmark and Norway that we have poor results. And Industry also have a huge negative impact from the fact that they have had to put money into the -- our pension foundation. Approximately SEK 100 million is the effect. Operating capital is SEK 4.4 billion, with basically no return. And when it comes to sales, asphalt is 27% of sales, and stone -- no, the opposite. Asphalt is 73% of sales and stone material is 27%. And Sweden continues to be the largest market with 56%. This slide shows the volatility in earnings in Property Development. And in the fourth quarter, we had sales -- or we recognized profits from 1 project, Kineum, compared to 2 in the fourth quarter of '21. We had -- no project started in Q4. And we had 11 ongoing projects in our portfolio when we ended the year '22, same as when we ended '21. 80% of our portfolio is in Sweden. It corresponds to 218,000 square meters. The letting in the quarter and for the first half of the year was really low and slow. And in the fourth quarter, we only had 5 contracts signed, corresponding to 1,700 square meters. For the full year, we have 32 contracts signed, corresponding to 32,000 square meters. And on the -- you can see the green and the yellow bar there. Shows the completion ratio and the letting ratio, and the letting ratio is now below at 58%. And the completion ratio is at 68%. Net sales in the quarter was only SEK 77 million, and that came from additional sales in previously sold project. As Tomas said, we had no sales revenue from Kineum, as that was developed in a joint venture. And last year, we had 2 projects sold in the fourth quarter. This quarter, we only had the additional sales, as I just mentioned. Last year, we had 7 projects for the full year. And only 3 projects for '22. Earnings in the quarter was SEK 268 million, would come from Kineum but also from additional profits from previously sold projects and reversals of rental guarantees and development -- provisions for rent -- development risks. Capital employed, SEK 8 billion; and a return of 6.7%. On the bottom, we have -- show the timing, the expected timing, for the sold projects that we have. And for 2023, we have Kontorværket coming in, in the first quarter. And we also in the first quarter have building rights from Fornudden and in Solna coming in to have impact. Adding it up for the group income statement. The business segments have contributed with SEK 609 million in the quarter and SEK 1.5 billion for the year. First, we deduct the costs for headquarters and subsidiaries and associated companies that don't belong to BA. Normally that have a negative impact and the same goes for this year. The big difference between the years is due to the fact that, last year, we had huge refunds from pension and insurance, sickness and pension insurances. Next line, internal gain, is where we eliminate the profits in the PD profits during the construction phase. And we reverse them when we take -- or profit recognized, our PD projects. And last year, we -- as said, we had 7 projects, while this year only 4. And that explains the difference between the years. And in other group adjustments, we have various accounting matters. And the big effect between the years here is due to the fact that we reverse the costs for -- the costs that Industry has to take for paying to the pension foundation we have according to IFRS. We have to reverse that, and we do that on other group adjustments. Financial items, on the same level as previous year even though we've had increased interest rates and an increased net debt. And that's explained by the fact that we have capitalized more interest to our property projects. Tax rate is 18%. And that gives us a net profit for the quarter of SEK 407 million and for the year of SEK 1.069 billion and an earnings per share of SEK 10.29 for the year. Our cash flow for the quarter is slightly over SEK 1 billion, which is good, if you look back. Of course, we get lower contribution from our operating activities due to our poor results or lower results. Property projects also contributes negatively, as we have sold off fewer projects. The positive effect, we get from other working capital, where we have increased our accounts payable significantly in the fourth quarter. In investing activities, we have a lot of movements in the quarter -- or in the quarter last year, we received our payments for Asphalt Finland, which skews the number in '21. In 2022, we have received cash for the Nordic business we sold and also the rebar factory that we've sold but also the land sale we did in '21. So for the -- good quarter but for the year a negative SEK 136 million. Our corporate net debt is SEK 1.56 billion compared to last year where we had net cash of almost SEK 800 million. We have our -- that's driven, of course, by the lower cash flow before financing. And we have a target to be below -- net debt-to-EBITDA to be below 2.5x, and it was 0.8x, so well below target. With that, I hand over to you again, Tomas.

Thank you, Susanne. Let me wrap up with a couple of other items before we open up for questions. First of all, health and safety. We had not-that-encouraging trend in health and safety this quarter. It's few accidents in a limited number of departments, but this shows that we will have to work even harder and continue with this -- with the health and safety work going forward. Targets, financial targets. Let me start with the dividend policy that says roughly 60% of profit after tax. The Board proposes to the AGM SEK 6. That is the same as last year. And that is 55% of the profit after tax, unchanged dividend as proposed by the Board. Net debt, as Susanne said, well below the target of 2.5x of EBITDA, so lots of headroom there. And then we have the target of SEK 16 EPS for this year. We came from SEK 14 last year to SEK 10.3 this year or 2022. The target remains, but let's be clear. It is tougher to reach than we originally anticipated. It's depending on some kind of opening in the real estate market. And it's depending on that we get traction on the improvement projects for Industry, but the target remains. We executed a repurchase program for -- during 2022. The program concluded in November when we reached the 10% threshold of the number of shares that we are allowed to own. And NCC has repurchased share for approximately SEK 1 billion and currently owns a little bit more than 10 million Series B shares. And then some practical information. The Annual General Meeting will be held on March 31 at Space Conference Center in Stockholm. That's in the exact center of Stockholm. More information will be published later -- no later than 4 weeks ahead of the AGM. That is beginning of March. And the annual report will be published, at the latest, on March 10. So before we end this, let me summarize this. We are a fundamentally strong -- in a good position for a market which is really a mixed picture with strong parts and more challenging parts. We have a stable financial position, overall good position, but there's a substantial uncertainty about the current economic climate, our market as well as macroeconomic impact. And residentials and commercial property is most exposed on the negative side. That is to be expected. And with that, operator, we open up for questions.

[Operator Instructions] We have the first question from Markus Henriksson from AGB (sic) [ ABG ].

Tomas and Susanne, 3 questions from me. First off, could you elaborate a bit on how you think about 2023 for Industry given that you're amid a tender period in the asphalt business?

Well, that's a question that I really can't answer, for the reason that I don't want to answer it and also for the reason that I can't answer it because we just started the tendering period and it's way too early to say anything about that. In general we have taken lots of action in the asphalt business and have a clear target of improving the business in 2023.

Then you mentioned restructuring costs in Finland in Building Nordics. Could you highlight the amount here taken in the quarter and then actions taken? You mentioned closed one department. A bit more detail there would be helpful. And then time frame before you think you could see some results from this restructuring.

Well, first of all, we are exchanging -- we are replacing the manager for divisions Building Finland. That's the first step. So we have the business area now acting as interim manager of Building Finland. There's a recruitment process ongoing, so if you think you're a candidate, please raise your hand at some point. And then we have large variations of the earnings within the Finnish business. And this department that we decided to close is in Central Finland. It has a long history around the performance, and we see that the market for foreseeable future will be relatively weak in that area. We expect to see an impact from that during this year.

And the amount taken in the quarter?

Well, we really don't want to give the exact amount. We have several -- I mean it's not big enough for that, but it's also a part of, as Tomas explained, a lot of other things not going in the right direction within that department. So we have lots of other costs as well in that specific that are not restructuring costs by -- as we can say.

Okay, fair enough. So the way to see it, probably no more restructuring costs, but as Tomas mentioned, it's going to be affecting the core coming quarters as well looking at it.

We think that we've taken all the restructuring costs for that now.

Last question. You highlighted the office market is significantly slower. Could you elaborate a bit here in terms of investor appetite, leasing activity and in terms of potential order intake in building?

Well, raising -- interest rates going up has an impact on financing costs for new projects. This has an impact of yield requirements for the clients, so that's one side of the equation. And then on top of that, you have increasing building costs in general. So you have more expensive development and then you have higher yield requirements from the investors. And on top of that, you have what we think is some kind of development in the tenant market or how you think about an office. We have learned throughout corona how to use the office in another way. And we think that they will be more developed into meeting spaces and places where you develop thoughts and ideas together with your colleagues. And on top of that, you have a general uncertainty in the market. So right now, low letting, low activity on the transaction market, dependent on several factors. And then we have to act accordingly, so being more careful, making sure that we develop what we have, lease what we have and being cautious starting new projects.

The next question is from Erik Granström from Carnegie.