NCC AB (publ) (NCCB) Earnings Call Transcript & Summary

Welcome, everybody, and good morning, and welcome to this third quarter earnings call for the NCC Group. And I'm Tomas Carlsson, the CEO. And with me here, I have our CFO, Susanne Lithander. And I will start this presentation by summarizing the quarter like this. We have a very strong EBIT growth in the quarter, 15% plus compared to last year, driven by 2 things: all-time high profit in industry. We are really happy about that, SEK 461 million in profit for industry, but also solid development in the contracting business with EBIT margin about 3% at this quarter. So current earnings in very good shape. And we're also really happy about the large number of early involvement projects that we have and that we have won during the quarter, and I will get into more details about that. But currently, we have approximately 40 projects above SEK 500 million -- estimated volume of about SEK 500 million. So overall, a good quarter now, but also a positive outlook through our early involvement projects. Earnings quarter-on-quarter developing like this: SEK 767 million in the quarter comparing to the same quarter last year. It's a clear improvement. And then it's also important to remember that we had a small profit from property development in the third quarter 2024. And this year, we have a small loss mainly driven by the exit from the Norwegian property development market. So growing earnings. Orders received stable, but what's more important is the early involvement projects that over time will convert into orders. And this is in line with what we have been working with in all business areas, working together with our customers in earlier phases and developing projects together with them. Normally, we don't talk about the size of the early involvement projects, mainly because we really don't know at this point what the final order sum will be. But we can talk about what our customers have communicated from their side. So for example, we have during the quarter won the contract for power line development for a large part of Sweden, Västra Götaland, for the customer, Svenska kraftnät, and they have estimated the volume of that to SEK 7.5 billion. We are also happy that we have won the contract to continue to develop the new prison in Trelleborg in Southern Sweden. It's a 110,000 square meter building. And then bear in mind that the normal office normally has a price tag of around between SEK 35,000 to SEK 45,000 per square meter. So then you get an idea about the size of this project. And then finally, SSAB, I have announced that they will invest EUR 4.5 billion into a completely new steel mill in Luleå. We have won the construction contract for the hot mill part of this. It's the largest part of the construction building, and we will develop at least 150,000 square meter building for this important steel development. This is a large building. The footprint is at least 150,000 square meter, but it's also a tall building. It's approximately 50 meters high at its highest, and it has a really complex foundation for the steelmaking process. So these are some examples of large recent wins in the quarter. And just to remind you, we have press released a number of early involvement projects like this over the last couple of years. This is examples of projects like this. It's not all of the projects that we have. As you can see, there are, for example, no projects relating to defense in this. And these are -- we have a smaller part of them in the order registration and in our net income, but most of it is typically not in the order backlog. So these are some examples that we have press released. That brings us to an order backlog that is in line with the strategic priorities. It's negatively impacted year-on-year from the strengthened currency of the Swedish krona. But you can also see that the sales is relatively flat, and that's because of the order backlog, but also that we have early works in the projects that are yet not order registered. That impacts sales quarter-on-quarter. So it's a stable development for sales and a strong volume of early involvement projects that will convert into orders. Orders that we have actually registered in the quarter is, for example, we have a prison in Kristianstad, slightly smaller prison than the other one in Trelleborg. We have already registered a police office in Karlstad in Sweden, and refurbishment of a residential area in Kolding in Denmark, one of our key competencies in renovation in Denmark. So net sales in line with recent years, you can see the NCC blue bars develop quarter-on-quarter. And we've also marked where we have PD development of large sales, most notably the fourth quarter last year. This means that we have financial targets like this. We are on a rolling basis on an earnings per share, SEK 16.2, but I would like to remind everybody that, that is impacted by the high earnings from PD in the fourth quarter last year. And we don't expect to have anything like that in PD this year. We have very low net debt. Susanne will come back to that. And as you know, we have -- or the AGM decided on a dividend of SEK 9 plus SEK 2. And the second tranche of that is coming within a few weeks. Before I move on to health and -- to other topics, I'll have to say something about the project Korsvägen in Gothenburg. Our client, the Highway Administration of Sweden has terminated the contract. We think there's no motivation for this termination. And more importantly, we have a strong opinion that the termination lacks legal grounds, and we intend to file substantial damage claims within near future. It has no impact on the third quarter. And the profit has been -- we have not recognized any profit in the project from the start. So it will not have an impact going forward. It will rather strengthen the margin in Infrastructure. But we will have to make everybody aware that we will decrease the order backlog for Infrastructure with roughly SEK 1 billion in the fourth quarter as this project is terminated. Moving on, targets, climate and energy. I may remind you that we changed our target for emissions since we reached the previous target that we have. We have a new target now on Scope 1 and 2 of minus 75%. We have, as of half year 2025, reached minus 60%. And then we have a Scope 3 target of minus 50% until 2030. We are measuring that in 3 big topics: ready-mix concrete, steel reinforcement and transportation. We're having a very positive development for ready-mix concrete and steel reinforcement, but an increase for transportation, and that is completely due to the lower emission reduction obligation that has been implemented in Sweden. Health and Safety, we are working towards a target of LTIF4 of equal to or lower than 2 at the end of 2026, and we are in this quarter lowering the accident frequencies to 2.9. So we're well on the way to reach that target. But this is an ongoing hard work, and we are really focusing on this. And finally, before I hand over to Susanne, we have a continued positive market outlook in the same way that we have had it for quite some time now. We think that there's generally a good market demand. We see a particularly strong demand for infrastructure of all kinds, not only the most normal or usual types of rail and railway, but also energy generation, energy distribution, water treatment, water distribution. We see a good demand for industrial and public buildings. We see an emerging demand for defense. We have since before strong demand for hospitals and other related buildings. We see strong demand for asphalt and stone and an increasing requirement for better infrastructure in the Nordic countries, and that drives the demand for asphalt and stone. However, commercial properties and residential remains really cautious right now. That's our outlook. And with that, I hand over to Susanne Lithander.

Thank you, Tomas. Okay. Here are the highlights for our contracting units. And as you heard from Tomas, we are very happy about our strong increase of early involvement projects, or as we call them also Phase 1 projects. These projects do take a little longer to land as orders in our order book. And often, they also come in, in part over a longer period of time depending on the size. Building Sweden show improvement in both margin and earnings despite lower sales volumes, and they do have a better project portfolio moving forward. Building Nordics continued with a good performance -- improvements, and it's primarily driven by Denmark. And our Infrastructure business continues to be very stable with really solid performance. Green Industry has made good progress with the customers, SSAB and LKAB. They now have 3 Phase 1 agreements in place to date. And our contracting margins are going in the right direction. We have 3.1% as a total for all of them. In Q3, as you can see on this slide, the dark blue here is Infrastructure, and they are very stable. Building Nordics and Building Sweden have upward trending. And Industry have an all-time high third quarter, and they have a very strong overall development with increasing volumes and good operational efficiency in asphalt, and they have higher productivity in stone materials. And as Tomas alluded to, demand is fueled by increasing funding for road maintenance in both Sweden and Norway. We've said it several times now we have higher volumes in asphalt. Stone materials, on the other hand, have lower volumes, but with a better and more profitable mix. And earnings are up 36% in the quarter and 32% year-to-date. And the margin is up to 5.7% year-to-date. And if you round that without decimals, I guess they reached their target of 6%. And it is driven by the increased volume and operational efficiency in asphalt and better product mix and productivity in stone materials. So both divisions are doing really well. Capital employed decreased to SEK 4.4 billion due to the improved working capital and the return has gone up to 17.1%, which is clearly outperforming the target of 12%. Property Development still has a challenging market and with very low letting in the quarter. And our portfolio consists of 6 completed projects that are not sold and 3 ongoing projects that are sold. And as Tomas said, in the quarter, we did divest our properties and exited Norway. Letting in the quarter was very low. Only one small contract was signed, and the letting ratio in our total portfolio is 81%, and our completion ratio is up to 66% after the quarter. Earnings was minus SEK 10 million, and the lower earnings is explained by less rental income from the properties that we sold off in Q4 last year and also the divestment in Norway. The exit from Norway has 0 effect on earnings for the year. But timing-wise, we have a slightly negative effect in Q3, and we expect to have a slight positive to the same size in Q4. Capital employed is lower, thanks to the divestment of our properties in Q4 last year. Last segment, other and eliminations. Earnings in the quarter for this segment is on par with last year. The third quarter always is always seasonally lower, as we have said a couple of times, and the slightly lower cost in group costs is primarily driven by timing effects when it comes to our IT investments. Internal gains and pensions and other adjustments are on the same level as last year. So the segments added up to SEK 767 million in operating profit. Our financial net is on the same level as last year despite the fact that we have a much lower net debt, and that is explained by the fact that we are not allowed to capitalize interest on our completed property projects. Tax-wise, we have also a higher tax rate than we usually have. It's 24.5% year-to-date, and that is explained by the profit recognitions that we don't have in Property Development. So that brings us to a net profit of SEK 534 million with an earnings per share of SEK 5.5 in the quarter. We have a better cash flow in the quarter due to all 3 items on the top. We have improved earnings. We have less investments in property development, and we have a better working capital. We do have a bit higher investing activities or CapEx. That is primarily driven by machinery in Industry, but to some extent, also by our IT investments, but they are on a quite normal level for the quarter. And our corporate net debt decreased to SEK 1.4 billion due to the divestment of properties in the end of last year. And as Tomas showed, our net debt-to-EBITDA target is to be below 2.5x, and we are below that at 0.5x after Q3. So with that, I hand back to you, Tomas.

Thank you, Susanne. I think almost you could stay because I have only one short message here. We are now reporting a very strong performance in the quarter. We also have a positive outlook on the general market, but we also have a positive outlook because of the high number of early involvement projects that will provide growth going forward. We see a good demand in contracting and in asphalt and stone. And the ongoing strategic review of industry, we haven't said anything about that for now because it's ongoing and we have nothing new to report, but we have a really high interest in that, and we expect to come to some kind of conclusion within a limited number of months. Thank you very much. And with that, operator, I open up for questions.

[Operator Instructions] The first question comes from Keivan Shirvanpour from SEB.

I have a couple of questions. And the first regarding the industry, which had very strong profitability. Could you maybe say something about how much of this could be extrapolated? Would you say that this is sort of a new normal? Or is there any type of temporary effect? You mentioned this increased funds for road maintenance, for instance.

I mean it's notoriously hard to extrapolate. But what we see is that we have an underlying better operational discipline in the whole business area. So that's one contributing factor. And then we work quite a lot with pricing in both stone and asphalt and that is a contributing factor. And then third, we have a better mix of volumes and in terms of price. And then we have higher volumes in asphalt. So all of that is contributing. Now the way I hear your question is, is this a normalized higher demand? I think we will see a higher demand going forward for the foreseeable future driven by many reasons. But asphalt is also a highly weather-dependent business. And we've had a really good September. So going forward, it depends on do we have a good weather in October and November to really determine the earnings in Q4. But we have a positive outlook for the demand.

Okay. Good. And then I also have a question on Korsvägen. First of all, what constitutes a significant claim? Is this something that you could quantify?

No. But it will be significant.

Okay. And then the second question on the same project is that you mentioned that you recognize this at 0 profit. But could you say anything about what is the remaining share of the project, which then implies what is the theoretical size of and potential impairment if you would lose this appeal?

I don't want to speculate in that because there are so many moving parts in that. So I really don't want to do this. We were well on track of finalizing the project to 2030. We've been at it since 2018. So that gives an indication of how much was built. There's actually no claim for the remaining parts, but there are other claims, but we think that we have a strong position in this.

Okay. And then I also have a question on the property development. Do you have any ongoing dialogues with potential buyers? And are you hopeful that you maybe could close some transactions before year-end?

We have ongoing dialogues. Whether we can close them before the year-end depends on a lot of factors. I don't know. But I think it's important to say that we sold the best projects last year. So I don't expect the same type of loss end of the year earnings that we saw last year.

Yes. Okay. And then just a final question, and that's related to the elimination costs. So it was quite low. And if you look at last year Q4, it went up by nearly SEK 100 million Q-on-Q for Q3 versus Q4. And you mentioned the seasonal pattern. Would you say that this is a reasonable assumption for Q4 this year as well?

Yes, I would say that.

[Operator Instructions] The next question comes from Julia Sundvall from ABG.

I have a question on the Infrastructure segment. We see a little bit weak order intake and downward order book. Was it only a strong last year? Or could you elaborate a bit more on that one?

Julia, order intake for Infrastructure in the quarter is a little bit lower and it has actually been there for some time. And the reason being that we are focusing more on the early involvement projects, and we're really happy that we have won a number of really large early involvement projects that will convert into order intake in the years to come. For example, we have the large contract for Svenska kraftnät, Västra Götaland region. That's, as Svenska kraftnät has communicated, it's a SEK 7.5 billion project. But we've also won transformer stations in Stockholm to a significant value. We've won other types of smaller projects in an early phase. So even though the order intake may at face value look a little bit low, I'm really happy with the large number of early involvement projects that we have.

Yes, yes. And do you think this trend is something we're going to see going forward? Or should we come to a bottom?

I think that we will see a larger -- I think we will see lots of early involvement projects. However, it will take some time before they are converted into orders received. It depends on the project and there are many different types of projects, but we will see phases of the projects coming relatively soon and that over time, it will increase the order intake.

Perfect. And on the Building Nordics, Finland is weak, you say. Could you elaborate a little bit more on the situation there and what needs to happen going forward to that to turn around?

I'd like to nuance that a little bit. The market in Finland is weak generally in Finland. We've taken quite a strong action a couple of -- 1 year or 1.5 years ago in Finland. And I actually think that our Finnish organization is doing pretty good on that market and compared to competitors in Finland. And it's actually only one department that is slightly underperforming right now. So the market is tough. I think our organization is doing quite well. We're working with the one department that is underperforming.

[Operator Instructions] There are no more questions at this time from the phone. Back over to you.

Thank you. We have 1 question from the intraweb.

Yes, correct. So Henrik [indiscernible] has a question here. He recognized our strong earnings development and wondered what would it takes for you to consider to raise our profit target? I guess it's meaning the EPS target.

Well, we have an EPS target that is based on the assumption that we will need a contribution from Property Development profits to reach it, but we are also gradually increasing the expectation of contribution from contracting and industry. Depending on the development in the strategic review of industry, we will have a thorough look at our earnings target, and we'll get back to that after the Project India, as we call it, is finalized. Very good. If there are no further questions, thank you all for listening in. And we are open to take your questions if you reach out to us. And I guess you have our contact data. And see you around and see you for the fourth quarter report in February. Thank you all.

Thank you.