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

Good morning, everybody. I'm Tomas Carlsson. And with me here today, I have Susanne Lithander, our CFO. And now this is the last report from Susanne Lithander that you will hear as she is starting to phase into her retirement. So from tomorrow, we will have a new CFO for NCC. So I'd like to take this opportunity to say thank you, Susanne, for all these reports and also welcome to Katarina. And with that, we move on to the summary of the quarter. The way to think about the quarter is it's a good performance for the group. We have yet another quarter with high levels of orders received, SEK 14.1 billion. We have industry -- business area Industry, stone and asphalt having a record high Q2 earnings. I'll get back to that in a little while with SEK 448 million. We have improved margin in the contracting business. And altogether, we have a stable group EBIT of SEK 635 million. If we look at it a little bit on the underlying earnings, it looks like this. Contracting, robust earnings, improved margins. However, lower sales as we've been talking about for some time now due to low orders received in the beginning of 2025 and also in the end of 2024. We have really good orders received in recent quarters, and we have higher quality in the order backlog. Industry record high Q2 earnings. Actually, I would say it's a record high first half year earnings. So we've actually on a better level than we were last year, and last year was a really good year at SEK 448 million. Property Development, SEK 8 million earnings, no profit recognitions in Q2, one property sold in the beginning of the third quarter. And then the underperforming part, other and eliminations, it's lower quite significantly, and it's all explained due to higher costs for legal disputes, and I'll get back to that in a little while. Altogether, stable for the group, higher operating profit from operations was offset by the increased of the costs from legal disputes. This is the sort of the high-level summary of the group. If we move on to earnings, stable earnings. And as you can see, this is the level where we've been at the second quarter for some time now. I don't think it's worth commenting that more, but what's more interesting would be what's driving this. So if we move on to the next waterfall chart, I think about it as fundamentally 3 parts. It's the contracting parts, Infrastructure and Building, Building Sweden, very stable, small changes driven by lower net sales in Infrastructure and Buildings and Building Sweden managed to actually improve despite lower net sales. Very strong improvement from Industry, stable from Property Development and other. The big change here, the big difference here is the legal or the dispute cost. Now we've always had dispute costs in our business. But since the termination of the Korsvägen project last fall, our dispute cost has increased, and we think it's appropriate to report that separately. And if you look at the report, it's on Page 13. Now how can you think about this going forward? We think that, unfortunately, this will probably continue for some years. It will have a high degree of variation from quarter-to-quarter, but it may have be significant numbers on individual quarters. And we think that going forward this year, the second half will probably be pretty much the same as the first half of this year. If we move on to orders received, you've heard me say frequently, don't pay too much attention to an individual quarter or actually even 2 consecutive quarters. But now we have something different here. We have 3 consecutive quarters with high orders received on the back of 5 quarters with a little bit lower orders received. And this is -- first of all, it's the explanation of the lower net sales in the beginning of this year. And then it's -- I think it's a testament to the strong demand that we see in the market. And we have the strong orders received while still maintaining a very prudent approach to order -- tendering. Moving on to the order backlog. This has, of course, an implication for the order backlog. So we've increased the order backlog. We have on the first half, we have a book-to-bill of 1.2. And in the quarter, we have a book-to-bill of 1. And I think it's well worth noting that we've increased the backlog with SEK 5.2 billion over the last 6 months. And if you add to that, that we have phased out a number of 0 margin profit recognition projects from the order backlog and also that we have a larger proportion of early collaboration projects that tend to have a better quality and a better stability, I think it's fair to say that we have a higher quality in the order backlog. And if you would like to see some examples of projects that we have in the orders received and in the order backlog from the last quarter, we have, for example, a new sorting plant for LKAB in Northern Sweden. We have a school and sports hall in Lilla Edet. We will be refurbishing the national archives in Helsinki, Finland and refurbishment of residential homes in Upplands-Bro, Sweden as a few examples. But we're also winning early involvement projects. And these are some examples or try to give you some flavor. We won the new hospital in Kiruna, Sweden. We won a Center for Social Psychiatry in Trondheim in Norway. And then a couple of large defense buildings in Sweden. And I think it goes without saying that we cannot communicate where and what they really are. It goes with -- comes with the territory, so to say. Net sales stable, particularly considering that a large volume of bad nonperforming projects are out. However, as I've said, we have somewhat lower sales in contracting due to the lower orders received in the end of 2024 and beginning of 2025. With that, earnings -- our financial targets, we are at SEK 13.2 at earnings per share on a rolling basis. And as I've said, we expect Contracting and Industry to contribute more to the earnings per share, but we need a profit contribution from Property Development to reach the SEK 16 target. Net debt on 2.05. I think it's well worth noting that we have a seasonally low cash flow always in [ NCC ] in the second quarter. But this quarter, I think it's for particularly good reasons, and it's largely driven -- or the change is largely driven because of the strong performance from industry, i.e., accounts receivables have not yet been converted to cash. And then dividend policy is same as always. With that, we move on to health and safety. We are on trajectory going down. We are now at 3.3. We have seen improvements in many areas, but we still have some way to go to our target of 2.0. Well worth noting that this is a very low level. And then before I hand over to Susanne, we have a continued positive market outlook, general market demand, particularly where we are well positioned for infrastructure in a wider sense, include not only rails and roads, but also energy generation, water treatment, energy distribution and water distribution and things like that. Industrial construction and public builds, strong demand. Strong demand for asphalt in all markets where we are active. And slightly higher market activity in commercial property. I'm not saying that because we sold a part of Bromma Blocks, but in the dialogues we have and in the statistics that we see from the market, it seems to be a slightly higher market activity. And with that, I hand over to Susanne.

Thank you, Tomas. And the first slide here is the summary of our contracting units. We have Green Industry Transformation and Building Nordics had a strong order booking in the quarter. For example, as Tomas mentioned, we had the next phase in the sorting plant in Gällivare from LKAB. Building Sweden continued to improve and higher earnings and margin. on lower sales. And the overall lower net sales and higher margins reflect our more selective approach to picking the right projects and improving the quality in our backlog and portfolio. This slide shows the backlog in dark blue and in lighter blue, the net sales on rolling 12. And even though the sales volumes are a bit lower at the moment from lower intake in the past year, both building units have solid high-quality backlogs now. And in the picture here, we have also shaded the area of sales for the West Link projects in the rolling 12 number for sales in infrastructure. And infrastructure has several large projects in early phases, not yet converted into order booking. An example is the Atløy Tunnel, which is SEK 1.4 billion that was registered in the order books right after the closing of the quarter in the first days of July. So it looks fairly good also for infrastructure when it comes to a good backlog. Continuing on with net sales and margin for the contracting units. Net sales in Infrastructure is down, which is primarily explained by the West Link project. The margin improved slightly due to improved quality in the project portfolio. In Building Nordics, net sales is lower, mainly due to currency effects and lower volumes in Norway and Finland. The lower volumes there are somewhat compensated by growth in Denmark. Earnings and margin is lower due to the temporary lower volumes in Norway and Finland. Building Sweden continues to improve, and they have lower sales due to the disciplined order intake, but the improved quality is clearly reflected in the higher margins now. Moving on to Industry. They continue their strong overall development and margins -- and earnings are on a record level for second quarter. Asphalt demand is strong and volumes are really high. And stone material had really good development in prices and product mix. This slide shows the volumes in tonnes for both asphalt and stone material. Compared to the same quarter of last year, the asphalt volumes have increased, which is also what drives the earnings improvement in that division. Stone material business had lower volumes, but they still improved earnings due to better product mix and good pricing. Earnings are at SEK 448 million in the quarter, and the margin on rolling 12 is now improving up to 7%. Capital employed increased due to increased working capital as always, when operation starts up in the second quarter for Industry and it increased a little bit more than usual this year due to the high amount of receivables, thanks to the increased sales. The return, however, is strong at 21%. Moving on to Property Development. Property Development have a higher net operating income for the completed projects in the quarter. And we do see some signs of increased market activity also when it comes to letting. End of the second quarter, we still had 6 unsold completed projects and 3 sold ongoing projects in the portfolio. To be noted, we did sell a part of one of the completed projects, Bromma Blocks after the quarter ended. This will have a positive impact on sales and cash flow in Q3, but no impact on earnings. Letting was pretty much on the same level as Q2 of last year with 4 contracts and 3,600 square meters let. We also had a couple of letting contracts signed right after the closing of the quarter in the beginning of July. The completion ratio for our total portfolio was 72% and the letting ratio improved in Q2 to 84% for the total portfolio. And to that, we can add our own move, the headquarter move to Bromma Blocks that will add 14% additionally in letting ratio. EBIT was SEK 8 million in the quarter, which is an improvement, and that's due to a better net operating income in Finland. And the capital employed has decreased, and that's due to the write-down of a couple of completed projects in Q4 of last year. Other and eliminations. And the second line here on this slide is the dispute-related costs. And in the first 6 months, there is approximately SEK 100 million impact on EBIT from increased costs for disputes. And as Tomas already said, but needs to be repeated, we have since the Q4 chosen to have these costs in other and elimination instead of in the BA Infrastructure as they have increased substantially since Q4 and are anticipated to remain for some time. To comment on the other items, the HQ costs are slightly higher, but within normal variation between the quarters. Internal gains are negative as we continue to invest and build on our ongoing property projects and have no profit recognition of properties. And in other adjustment, the change relates to IAS 19 pension accounting adjustments. And the income statement, the segments added up to an earning of the SEK 635 million. Our financial net was SEK 24 million, which is lower than previous year, primarily due to lower interest rates on our debt and also more capitalization of interest to our property projects. We also had higher pension assets and lower leasing debt that had a positive impact on our financial net. We have a high tax rate of 26% due to the limitation of interest deduction for primarily Finland and Norway. And our net profit was SEK 452 million and an EPS of SEK 4.62. Our cash flow is seasonally negative as industry start up their business in the second quarter. And this year, the change in working capital is more negative than last year, primarily due to the increased sales in Industry that generated a higher level of accounts receivable. We also have less advances from customers -- customer advances from infrastructure that have a negative impact on our working capital. And we also increased our investments in ongoing property projects. We have added Yrket in Solna that we are also building on. And finally, our net debt -- corporate net debt is SEK 2.7 billion, SEK 1.3 billion higher than last year due to the more negative cash flow and the increased investments in ongoing property development projects. And last year, we also had cash in the beginning of the year from the sold properties in the end of December '24, and this we didn't have this year. So our net debt-to-EBITDA target is to be below 2.5x, and we are below that at a ratio of 2.05x after Q2. So with that, Tomas, I hand back to you.

Thank you, Susanne. And I will only wrap this up with a summary of the quarter. We think it's a good performance in the quarter, and we think we have a positive outlook. We base this on high level of orders received, not only in this quarter, but in 3 consecutive quarters. We have record high earnings in industry in asphalt and stone, improved margins in the contracting business and a stable operating profit. And with that, operator, I open up for questions.

[Operator Instructions] The first question comes from the line of Julia Sundvall from ABG.

Just a couple of questions from my side. Starting with Building Nordics. I hear you say the weak margin is due to the lower volumes. And we see the order intake is up. Should we expect the margin to gradually come up? Or should it be a shift quite fast? Or how should we think going forward?

I think the margin in Building Nordics is generally on a good level. We expect it to gradually come up above that level in Building Nordics.

Okay. Yes. And you say Finland is strong in the order intake. I was just wondering, is it improving margin overall? Or is it just the bits and pieces of the market that you have been able to win?

I think that the most important thing is that we've been able to eliminate bad projects. So the wins are generally in good quality -- of good quality.

Yes. Yes. And should you say that with the wins overall, the overall new orders, can you say anything about the margin there?

In generally, you have somewhat higher margin than the average in Denmark. And you have, in general, a slightly lower margin in Finland due to less demand in Finland compared to Denmark.

Perfect. And then moving on to the sale of the Hangar 5 Bromma Blocks. I know this will be a hard question, but I had to ask you. Can you say anything about the margin on the project?

No. And we have an evaluation of the entire project, and we intend to do this report, the result when we have sold all the 3 parts that this project consists of. So, so far, we will do 0 profit recognition, and we will only recognize the revenue and flow in Q3.

Yes. And how close are you to the sale of the rest? I hear you say that you see some light in property development in the market. And how close would you say you are [indiscernible] Bromma Blocks?

Right now, it's not imminent.

The next question comes from the line of Erik Granström from DNB Carnegie.

I would like to start with the Industry segment. It seems like asphalt volumes are up about 1 percentage point or so in the first half of the year, but volumes and sales for industry is up something like 4%. So obviously, prices seems to be driving this. Can you talk us through how you are able to push, I would assume, increasing input costs over to clients? And should we expect this sort of profitability to continue for the second half of the year?