Earnings Call: Q2 2021

Jul 21, 2021

Good morning and welcome to this presentation of the Second Quarter Earnings for the NCC Group. And my name is Thomas Carlson. I'm the CEO. And with me, I also have Susanne de Pander, the CFO of NCC. Let's start with the summary of the quarter. We are continuing on the improvement trajectory that we've been on for some time. We are on the by track. This is a good quarter, but we still have more work to do. All contracting units better than last year margin and earnings. We have strong netting in property development. The industry still has potential to improve And we are experiencing a strong continued demand for our products and services. And you will see that in the orders received in the presentation. Moving on to next slide. Comparing quarter 2 this year to last year, this is the bridge. I will walk you through the 3 business logics that we have: Contracting, Industry and Property Development. And then starting with contracting. Improved earnings, improved margins, Orders received significantly higher than last year and they are higher in all business areas. And that translates into good margins for the contracting business on a rolling 12 basis. Building Sweden and Building Nordics are both at 3.2% margin, while Factor is improving to 2.2% margin continuing the work that we've been doing for some time now. The good orders received also translates into a strong order backlog with all Business areas within contracting having higher order backlog than net sales and also building order backlog in the quarter. That was contracting. Now over to industry. Industry have Earnings and volumes on par with last year. We see a positive impact from the efficiency program that we launched last year. We have concluded all activities, but we have negative impact from loss making asphalt unit in Finland. For the full year estimate, it's on the same level as 2020, but we have recognized the losses earlier this year in connection with exploring possibilities to exit the business in asphalt Finland. And then finally, let's talk about property development. Isolated Property Development looks very much lower than is very much lower than last year, minus NOK 93,000,000. This is due to the simple fact that we have not recognized any project in profit this quarter, while we did that in the last year. So last year we had SEK 68,000,000 positive earnings later we had by minus SEK 25,000,000 in the quarter this year. This is totally expected. If you look at property development earnings over a longer period, it's pretty clear that you have high variance due to when we sell and when we recognize the profit for individual projects. 2019 was very back loaded with low and actually negative earnings in the beginning of the year, but with several projects recognized in profit in the 4th quarter. The Following year 2020 was front loaded with the large sales in the first quarter most importantly K12, our main office in Solna, while the following quarters had fewer projects recognized and also negative earnings in Q3. In this year, 2021, We have so far only recognized 1 and the relatively smaller project in Q1. And in Q2, we have not recognized any project at all while we're investing for the future. So how can you look at the future? We have communicated the dates to several projects that we have sold and when they will be part of the profit recognition for this year. And we can clearly see that 2021 it was Vale View in the beginning of the year. No project this year and in quarter 3 and at quarter 4 we have 3 projects each for those quarters that will contribute to the earnings in 2021. So once again, this year is heavily backloaded with earnings for property development and a pretty normal development for that type of business. What's maybe more important for profit development, that's the future value creation concerning lefting. Lefting can go up and down between individual quarters, But since we are coming out of the pandemic period, we saw that we after all had pretty normal letting over 2020. But on the lower side, we finished with a strong quarter 4. Quarter 1 was again on the normal level, while quarter 2 is on a high level of letting. What's encouraging is that normally when we have had Lots of left in a single quarter that the driver will be one single contract for a headquarter office, letting all or most of the one building. That was for example the case in Q4. But in Q2, this is driven by several medium sized lapping in several locations in our market. And to me that is at least an indication of a very high demand on the market and we are experiencing high activity from companies interested in Latin Europe space. And then moving on the summary for the quarter, the bridge contracting up, improved earnings 30 set up compared to last year. Industry on par with last year, but some challenging challenges with Asphalt Finland and we still see room for improvement for industry, Property Development, no project recognized the profit this quarter completely according to what we have communicated earlier. Other eliminations back on a normal level for the quarter, leaving us with EBIT of SEK487 1,000,000. Since net Sales is down a little bit on the back of on lower order intake and no sales in PD, we are increasing the overall margin for the group to 3.8%. I think it's interesting to look at the first half year because we have some phasing Effects in the quarter and if you look at that, we can see that contracting is up, industry is up, PD completely according to plan is down, while impact of the other LME, it doesn't have the impact of sale in Dispack from K12 that we experienced in the Q1 last year. So we have a positive effect on Kaaba and Elen for the Q1. So overall, good development in the underlying business for the group. Orders received at SEK16.568 billion that's increase of slightly north of SEK 3,800,000,000 that's a 30% increase. Also worth noting that book to bill is 1.3% for the group. It's more for infrastructure, but all business areas have more than 1 in Boxerbyld building order backlog for future. We normally comment on residential orders received. The good order orders received totally is not driven by residential orders. We are on a not unusual level this quarter, but below average. And as I've pointed out over several quarters, this is not necessarily driven by the market. You can have Good orders received in a bad market and you can have good orders received in a bad market. So it's not the only conclusion is that it's not driven by residential orders. What we do have is a more focused approach to segmentation on products and customers. And I'd like to highlight a number of large number of water and Sewage Projects that we've won recently. These are 4. We have won in partnership development of Maljeta Lund, the sewage treatment plant in Oslo, Stockholm. We've also won Phase 1 of the development of the waterflew treatment plant on Chapal, a huge one for Stockholm. We're working with Phase 1 and we Hope that we can translate that to Phase 2 and 3 in coming quarters. We've also won an order of SEK240 1,000,000 for a water treatment plant outside Oslo in Gardemurren. And likewise, we also won in Tungsensverket outside Uppsala in Sweden. Water treatment is the area where we have unique expertise in helping our customers developing the water infrastructure for all of the Nordic countries. And I see lots of potential within this segment. Moving over to order backlog. We are now having the 2nd consecutive quarter where We are building order backlog and we are now again back above €58,000,000,000 in order backlog. Net sales, however, slightly lower than previous Q2. It's roughly 1 third driven by property development notes recognizing any project, the remaining 2 thirds from digital, buildings and infrastructure on the back of lower back orders received previous years. And then finally, market. Generally good demand in all markets, all markets and all business areas. High activity demonstrated by orders received, but by also strong netting. The one dark cloud that we can see on the horizon now is something that happened after the end of the quarter and that is The risk that the large cement factory on Gotland in Sweden would have to close. We are not directly a large customer to Cementa, but we are a large customer to concrete. The impact of a complete stock translate would have enormous effect on NCC. But more importantly, It would have enormous effect of the entire construction industry. It would have enormous effect on the mining industry. And it would have really material negative impact on the society at large in Sweden. Industry investments would come to a grinding stop. We could see manufacturing units, you could see windmill parts, you You can see all sorts of industry investments. You could see hospitals, schools, residential project coming to stop. You could see the mining industry coming to a stop. Our assumption is that this will be solved because of devastating impact on society. But we're working together with suppliers and industry and the industry associations and preparing for the case that it wouldn't happen and also trying to help I'll help Samantha sort out this problem. This is the big risk that we see right now. Otherwise, very positive market, very positive demand for our products and services. And with that, I hand over to Susanna Thanden. Okay. Thank you. And we start, as usual, with our largest business area, infrastructure. And they continue with a consistent performance improvement. Order intake in the quarter was strong, SEK 6,800,000,000 And the increase is primarily driven by civil Norway. The book to bill ratio was 1.6, Both in the quarter year to date. The backlog has increased, as Thomas already showed, from the beginning of the year. Net sales decreased in the quarter as an effect of a bit lower e order intake in Sweden and Norway last year. And on the pie chart to the right, you can see that Sweden has increased its share of net sales from 72% to 79%. Operating profit, €10,000,000 higher than last year In spite of the lower sales volumes, of course, a reflection of higher margins in the project portfolio. And the margin in the quarter increased to 2.8%. Building Sweden also continues to improve steadily. The order intake in the quarter was good, euros 4,200,000,000 and higher than last year. The increase primarily driven by a couple of large projects in Jotobori. The backlog is strong, and it has increased up to SEK 18,700,000,000. The net sales increased in the quarter to SEK 3,700,000,000. Earnings has increased to €129,000,000 in the quarter, and that's driven by volume but mostly by improved project margins. And the margin in the quarter was 3.5%. And looking at the residential orders for Buildings Sweden, they have been below average, as you can see here on this Slide where the blue line marks the average. And the rental share of residential orders have declined From having been almost twothree for quite a while to around 40% this quarter previous quarter. Business Area Nordic had a good order intake Or a more normal order intake of SEK 2,900,000,000. It's an increase compared to Q2 last year, and it was driven by a couple of large orders in Denmark. They continue to have a really strong backlog at SEK 14,900,000,000. Net sales decreased in the quarter, and it's primarily due to decline in the Finnish operations in the quarter. And to the right, you can see that the Danish and Finnish operations are on the same level in relation to share of net sales in the quarter. EBIT in the quarter increased to €88,000,000 in spite of the lower volumes, And the decrease is driven by improved margins in the projects. And the margin for the business area was 3.3 Percent. Moving on to business area, industry. And when it comes to tonnes of materials sold, we can see on the slide that the volumes are on par with previous years, both for stone materials and for asphalt. Continuing with industry. A remark to this slide is that we have removed the order backlog in our report And on the slide here, as we also have removed or moved Hercules from industry, Industry is a short business, and we think that the more important indicator is orders received and the backlog is not as relevant for industry with such a short business cycle. Net sales is also on par with previous years Previous year with the change of the split between the countries only where Norway has increased and Finland has decreased its share. Earnings are on the same level as well, as Thomas has already shown. And we have positive earnings from Impact from improved earnings from Stone division and also from the restructuring of the asphalt division, but that was offset By the poor performance in the Finnish unit. Property development, we have talked quite a bit about already. Net sales in the quarter come primarily from rental income. And in the second quarter, we actually had one really Small, financially insignificant project recognized to profits with 0 effect on earnings, Viboy Retail. Last year, we recognized profits of 2 projects in Finland, Fredriksberg B and C. This is our project portfolio. And during the quarter, we have started one project, an office project in MIMO, in Jotterberg. And as I mentioned before, one minor residual project was sold with no earnings effect, which makes us continue to have 15 ongoing projects in our portfolio. And totally, in the portfolio, we have 250,000 Square meters, letable space, 60% of which is in Sweden. And as you can see on the slide, We have no ongoing business in Norway at this point in time or no ongoing project, I should say. Letting, Thomas has already mentioned that we had a strong letting in the quarter, 24 contracts Signed to be compared with 8% last year, and that's the dark blue area on this chart. That corresponds to almost 20% of the available unlet area. And to be noted, It's also 14 of the 24 contracts were let in already sold and profit recognized projects. And this graph shows the summarized Status on letting and completion ratios, and we continue to have a health relation in our portfolio between letting and completion ratio, With a higher letting ratio of 59% than the completion ratio of 55%. That brings us to our last segment, other and elimination, that we break out like this. First item, NCC HQ and subsidiaries includes Smaller subsidiaries and associated companies that don't belong in a business area, and that is slightly lower than last year, Packed the negative impact. Internal gains are eliminations of the profits during the construction phase in property development, which is reversed when we recognize profits in our property development projects. As we haven't made any profit recognitions this quarter, We have only built up eliminations of internal gains, and no reversals has been done. So that has increased to minus €33,000,000 In other group adjustments, we book accounting adjustments Months we have to make, usually concerning pensions and other IFRS adjustments. In the quarter, they're in line with last year. For the 6 months Period decrease comes from the IFRS 16 provision we had to make for the sales leaseback of our HOIIT quarter here in Solna. And for now, we also include the financials for the remaining parts of road services that we haven't sold. And in this quarter, it includes the capital gain from the divestment of Road Services in Denmark. That gives us the operating profit of SEK487. To be noted on this slide also is our financial net is lower, and that is due to lower financing needs And lower interest. And our tax rate is approximately 18%. Cash flow in the second quarter is typically A challenged quarter when we start our industrial operations. And we do have a negative cash flow before financing, SEK772, a bit more negative than last year. Contribution from profits are good, as we've seen. We have higher investments in property projects than last year as we haven't offloaded any projects In the quarter, last year, we had exceptionally good cash flow from our property projects in the first half of the year with 3 Sold projects or profit recognized projects. Our working capital has increased, driven by the startup of industry during the quarter. And also our investments in machinery and equipment have increased also due to industry business. Our net debt has decreased from SEK 5,200,000,000 to SEK 4,900,000,000. Decrease is primarily driven by the reduced Pension liabilities according to IAS 19, but the leasing liabilities have also decreased somewhat. Corporate net debt had moved from net cash of SEK 73,000,000 to net debt of SEK 7.55 due to continued investments in property projects and the dividend payout. And our net debt The EBITDA target ratio is to be below 2.5x. And after the second quarter, we are at 0.38x. And on that note, I will hand it back to you, Thomas. Thank you very much, Sasan. Let's talk about Targets for a few minutes now, starting with financial targets. Just to remind everybody that we have earnings per share target for 2023 of NOK 16. This quarter you can't really read much into that number because the back loaded nature of the PD business this year, but we're moving in the right direction. Net debt lower than 2.5 percent EBITDA and we're well below that as Sasan pointed out and then a dividend policy of at least 40% of the tax. We also have ESD targets for the most important Topics for our industry. First one, Climate and Energy, where we have 2 targets, Climate and Energy Scope 12, we have not updated these numbers. We do that twice a year, once as reported first time in quarter 1 for the full year and then in quarter 3 for the first half year. So we will get back to that in quarter 3. But we are also working with the method how to measure Scope 3 for the most important types of material for NCC and that is concrete, steel, asphalt and transports. In our industry, we also think that health and safety is a dangerous business. We are working a lot with Health and Safety. We have we are measuring a lot of things with Health and Safety, but our main target here is the TIF, the lost time injury frequency 4, which is the European standard measuring accident where you lose 4 working days or more or 4 days or more. We have a target of 3 at the end of 2022. We're moving in the right direction and we're currently at 3.2. So finally, summing up this presentation, we are on the right track. This was a good quarter, still more work to be done to further improve the business. We have strong orders received throughout The business, all contracting units performed better than last year. Industry has the potential to improve property development moving as planned and in the quarter really strong letting Overall demand continues to be strong. And with that, operator, I open up for questions. Thank MCC Group. M4C Group. And our first question comes from the line of Sven Wathenson of DNB Markets. My question is on the Finnish operations in industry you highlighted in the report there was some Problems in Finland. Can you please tell us a bit about how is this a recurring item? Is this something To be solved? And in any way, what kind of time frame are you expecting to see any improvements And that's kind of operations in the actual segment. Thank you very much. Thank you very much for that question and I think it's an important one. And I'm going to bear with me for a while now because I'm going to go back to 2018. And we did not write down the value or write off the business asset business in Finland because at that time We had long track record of more than disappointed and negative earnings in Finland for many years before that. But the organization in Finland came up with what I assess to be a credible turnaround plan for asphalt Finland for 2019 and they operated with that plan 2019. So In the quarter 2 of 2019, they were still pretty upbeat even though The numbers really didn't forte that they were really upbeat and said we are going to be able to improve on last year. We are going to be able to get to a 0 margin in 2019. Disappointingly that didn't happen. So we had a pretty significant loss in 2019. And the organization came up with yet another turnaround plan in 2020. Same story again, positive about the probability to meet to actually execute on the turnaround plan 2020. In the 2nd quarter 2020, they said, we're moving in the right direction. We're going to get to 0 result. And so we didn't recognize the loss that year. That didn't happen. We had a significant loss also in 2020. This year and that's the reason why we last year communicated that we are exploring opportunities to exit the business of Afzal Finland. So that has been ongoing since the end of last year. This year, we are also operating to be as efficient as possible, but We don't think that we will be able to reach 0 earnings in Afton Finland this year. So the difference is that this year we have recognized the cold fact that it will be yet another year of this face point in earnings for Assal Finland. The full year estimate is that it's going to be in the same range as we see in 2020 2019. So it's a question of recognizing the hard facts of life earlier in the year. We this is not This is an asset that we're trying to either sell or exit as we've communicated before. And then We are working hard with that. I don't want to give a time frame because we want to make sure that we do this in the most responsible way for their shareholders. Okay. Thank you for a very good answer. Just Just a follow-up, Nat. Do you think the base case for recovery will be that you turn it around or you actually are able to sell it to somebody else? My absolute intention is to sell it. Thank you. And in terms of Just capital employed and sales in property development. There has been a few sales announced. There is a lot being builded. Marketing is very heated. Could you please tell us a bit about just how much you expect to ramp things up here? And How important it will be to have more property under development to reach your EPS of $0.16 in 2023? The short version of that is that it's really important for us to have a healthy property development business. We're expanding it. Now the cycle for property development is so long. So we really by now we really have a good standing of all the projects for 2023, but we're building for the future after that as well. So this is really important for us. Thank you. Those were my questions for now. Thank you. And currently, the last question on the phone lines is from the line of NCC Group. I'd like Start off with industry again. Were there any one off costs relating to the Finnish operations in the Q2? And second of all, We've heard from some peers that there was a late start to the season. Did that in any We influenced the profitability in the 2nd quarter. So far, maybe you want to answer that question on one off? No. As Thomas has already explained, we are more cautious in our profit recognition when it comes to Asphalt Finland. That's it. No other extraordinary one offs. And then as related to Season start, we can't really say that. We think it was a pretty normal start of the year. Some parts of the business started somewhat a little bit later, but some parts started a little bit earlier. So overall, a pretty normal start after the winter. Okay. And then moving over to building and infrastructure, a clear margin improvement there and we have witnessed it for a couple of quarters now. Was there any kind of larger project completions in the Q2 that contributed materially to profitability? No. Very clear. And then my final question relating to cement situation there. How do you foresee that this situation will be resolved? Is it likely that we'll see a temporary extension of the current agreement? What would you say is the most likely outcome? I don't want to speculate in the most likely outcome. However, anyone that spends some time trying to understand the impact of the construction industry, the mining industry and society in general understands that it has to be sold before the end of October. And that's my assumption that the political system will find a solution. How that solution will in the end look, I don't want to speculate on that. Perhaps one final question relating Peter, you have been quite active in divestments, which will impact results positively in the 3rd Q4. And should we say I mean, you've guided for an 18% tax rate long term. Anything in particular you want us to highlight In terms of tax rate for the second half considering this fairly large divestment? Well, The divestments in PDR typically note are tax free. Okay. Yes, I'm aware of that. But do you think anything you want to say regarding tax rate then for the second half? Well, no, not really. I had to try anyway. Okay, thank you. I know. Our next question comes from the line of Stefan Anderson of SEB. Thank you. A couple of questions from me only. Going to the construction side of the business, those three divisions In general, I'm a little bit curious on the margin development here. The quarter is rather good. It's a step up. How should we view that? There's no I mean, in the comments, you say it's the gradual work you've done that Start to shine through. Just wondering how excited we should be. Is it More relevant to look at the 12 months rolling basis or the first half, is that a good indication of the journey, so to speak? I think you should be equally excited as you should have been over some time now with the long term development that we're working and I think that's important. We're really working hard making sure that we select better projects that we are more on top of delivery that we make sure that we have a prudent profit recognition in the project and doing that everywhere. And that's an ongoing gradual work. So Rolling 12, rolling 24 is the most relevant metric, I think. And then coming back then to the material prices. I know you've been very focused on getting partnering deals and avoiding risks and so on. Coming back to that, are you at all concerned about that you would get any hits from Higher material prices, if they keep on these levels? Or are you totally full of that? Now let's start with this. My part of my job is being concerned about all sorts of things. So of course, I'm a bit concerned. But on the list of things that are concerned, it's not on the top of my mind. What we saw was increase in the beginning of the year and we I've so far managed to handle that through our contracts with suppliers, with the contracts with our customers in our approach to tendering. What we've seen over the last couple of months is more of a flat development, but still on a high level. And so far we've been able to handle that. On a more macroeconomic point of view. If we have even further increases or if we maintain prices on this level that will translate to higher construction costs. That's the natural dynamics. Okay. And then the final question is On the order backlog, which as you indicated, it's been growing now for 2 quarters. But if you look at the Orders you have there, is there some big ones that takes time to start up and get Full production, just to understand how many quarters of lag there would be on until we see effects on your sales, if you could say anything on that? We have some big ones that will take some time to start, but we are We're more of a steady state now than we were a couple of quarters ago. And we still have Phase 1 projects that we expect will be translated into more orders received, but that is consistent to you yet. What I would like to highlight is that we Still have some old projects in the order backlog, primarily for infrastructure that dilutes the margin for infrastructure for at least a couple of years going forward Thank you. And currently there are no further questions on the phones at this time. Let's Wait a little bit. All right. If there are no further questions, I'd like to remind everybody that we're on the right track. This was a good quarter, but we have more to do. And then with that, I wish everybody a nice and pleasant summer. Talk to you later. Bye bye.