Earnings Call: Q1 2021

Apr 28, 2021

Good morning, and welcome to this presentation of the Q1 2021 for the NCC Group. My name is Thomas Karlsson, and I'm the CEO. And with me here today, I have our CFO, Susan Littanden. And then let me start with the summary of the Q1. It was a really good start to the year. But to you have to remember that this Q1 is always the low season for the NCC Group. Our large business area industry is heavily impacted by the winter season, but so is are also all the contracting business areas. So this is a good start to what is seasonally slow quarter. Consistent performance in the contracting business areas and a better performance in industry, strong cash flow and a good demand on all our markets and for all our products and services. That's the way to think about this quarter. To go get into some details, let me talk about orders received. We have a normal level of new orders, actually above average for the last 2 years. But what's more important is that the orders received is within business areas where we are building order backlog in a significant way. You will see more details of that in a short while. So good orders received in the Q1. I've shown this slide before of residential orders received. And my point has always been this. You cannot draw any firm conclusions from an individual quarter or from actually is 2 quarters in a row on what kind of demand you have in market. Even during times when we have a somewhat slower demand like for the residential segment of our business in 2019, you have individual quarters with somewhat lower orders received, but also really high orders received like the Q2 2019. Right now, we have admittedly a very strong residential market. And you have quarters really strong quarters like the Q4 last year. And this quarter, it's a little bit lower than average. Hence, you cannot draw any conclusions from an individual quarter. I will do the same thing for offices, orders received. And we don't know yet what impact the pandemic will have on the office market. But what we can see is that you see the same pattern with during periods where you have a strong market for offices like 2019, you had individual quarters with really high orders received, but you also have individual quarters with really low orders received like the Q2 2019. And now at the end of last year and beginning of this year, Q4, really high orders received for offices and this quarter, a little bit less than average. Hence, you cannot really have any firm conclusions on where the office market is going. Orders received on a good level means that we are building our Order backlog, SEK 6,000,000,000 improvement during the quarter and also building order backlog in the right business areas. Net sales, a little bit lower, and that's as a consequence of our more selective tendering over some time, I. E, trying to get rid of volumes without a good contribution to the group, which then should lead to that even though we have lower net sales, we should have an improvement in margins, and that's actually what we can see. The quarter's earnings for the NCC Group are always impacted by property development earnings because we recognize profits when we have sold and delivered and leased all of the space in an individual projects, and the projects are a finite number. So let's look at the earnings. Without PD. We have normally or historically, we've had a first quarter with earnings around minus SEK 350 individual quarters, a little bit better, a little some quarters, a little bit lower, but around minus SEK 300,000,000 without PD. Q1 last year was a little bit Better than that, it was minus SEK 273,000,000. And that was, to a large extent, dependent on the improvement on the in infrastructure but also in other contracting business areas, but also improvements in industry. This quarter, we have minus SEK 191,000,000, primarily driven by improvements in industry, and you will see the numbers of industry. So industry is improving a lot. It is, to a large extent, one off effects, but also improvements of production efficiency in the industry, but maybe not where you thought it would come from. And that means for the group, we have including PD, we have an EBIT of minus SEK 144,000,000 somewhat lower than last year, significantly better than what we normal what the level we normally are at and driven by improvement driven primarily by industry. So to sum this up, the market is generally good demands in all markets. We have high level of public investments factors and spending on maintenance. Residential has a good demand, and we see a continued demand for offices. Looking at our financial objectives, earnings per share target, we set that towards the end of last year, NOK 16, 2023. I don't think that the changes for the Q1 is really worth noticing. Worth noticing, however, is that we still have a strong we still have a net cash position well below our target of net debt of smaller than 2.5x EBITDA. Other sustainability targets that we've set, and we've set the targets that we think are most relevant to our industry, and that's climate and energy and Health and Safety. So let me comment on both of those over two slides here. We've set the target of reducing our CO2 emissions scope 12 from 2015 to 2,030 with 60%. That means that we started with at the level of SEK 5.9 billion. We are now at the level of SEK 3.4 billion and the target is SEK 2.36 Now this is primarily due to changes in our fixed production assets. We have now converted most of our asphalt assets to be able to handle large volumes of recycled material and also most of our production facilities to be able to use biofuel instead of oil. The reduction now will to a large or will primarily be driven by if our customers will actually have a demand for low CO2 emissions in what they buy from us. We've also set the target on scope 3 from the largest contributors to CO2 from the construction industry, That is asphalt, steel, concrete and transportation. And we're now working on a baseline to really have a good metric to understand how we can impact scope 3 CO2 emissions. The other large area for sustainability is health and safety. We have several metrics for health and safety. In this slide, you can see the 2 main frequency indicators that is accidents that leads to one day of absence from work per 100,000 worked hours compared to or that is the gray line and then slightly more severe accidents leading to 4 days of absence per 100,000 Worked Hours. We've set the target for 2022 of 3.0. We are now at 3.4 moving in the right direction for the health and safety target. And with that, I plan to hand over to Susan. Thank you, Thomas. Let's start with looking at the strength of our backlog in our 3 contracting units. The bar to the left, you see the backlog with the level it had at Q4. And to the right, you have the net sales on a rolling 12 month. And you can see that we have strengthened and built our backlog clearly in infrastructure. They now have a strong backlog, very well supporting the rolling 12 months net sales. Sweden has also built their backlog during the quarter. And Building Nordics, They have built their backlog over the last couple of years, you can say, especially in Denmark, and they still have a very strong backlog on the same level as in the Q4. So strong backlog, very well supporting our net sales level on a 12 month rolling. This slide shows our contracting units, same contracting units, the margin on a rolling 12 Operating margin on rolling 12 months, and clearly, it shows our continuous improvement travel. 1st quarter is a stable quarter on the same level as the 4th quarter in all business areas. Let's move on now to the business areas details. Infrastructure continues on their steady trajectory of improvement quarter by quarter. Orders received increased to SEK 5,400,000,000 in the quarter, primarily driven by Norway and Sweden to some extent. The backlog is, as we saw before, on a good level, SEK 18.3 and has increased, and the book to bill was SEK 1.6 in the quarter. Net sales is down, and that's driven by the Norwegian unit. And the margin, the actually, the margin is improving from 1% to 1 0.1%. But the earnings are on the exact same level as previous year in the quarter in spite of the lower volumes, thanks to a much better margin in our project portfolio. And the Norwegian drop in sale in the quarter, you can also See on the bar to the right where they have actually a much lower share of sales in the business area. Bilden Sweden has a very strong order backlog, as we saw, and they have a consistent performance in their financials. Orders received is on a good level, SEK 3 point SEK 7,000,000,000 even if it's lower than last year. Last year's number was a bit skewed by 2 big hospitals in Sweden. The backlog is strong, SEK 18.3 and has increased in the quarter. Net sales is, due to the low season, down a bit, but the Earnings are improving, thanks to the better margins in our project portfolio again. So continuous improvements in our project portfolio. The margin, operating margin improves from SEK 2,600,000,000 to SEK 2,900,000,000, and it's on a very stable level. As Thomas showed, residential orders received in the quarter was On the low side. But for Building Sweden, it was on the above average, clearly above average actually. What can be noted here is that the part of the orders received that are residential that are is down to 47% compared to 2 thirds previously. So good order intake on residentials in Sweden in the quarter. Building Nordics, and we come back to Building Denmark, who they have over the past years, 1 2 years actually, Built a very strong backlog, and they are in the Q1 showing a very healthy sales growth. And on the bar to the right there, you can see that they are actually having the same share of Sales in the quarter as Finland have. Finland has historically been always been the largest unit. The order backlog continues to be on a very strong level, SEK 14.9, and net sales are down. That's driven by the Finnish unit that had a gap in their order intake the previous year. Earnings is slightly down in the quarter due to the lower volumes but also a bit higher Tendering costs. Industry, looking at the volumes, You can see that the stone materials to the left are on par with previous year, slightly lower than last year. Asphalt, on the other side, is having are having exceptionally low volumes every 1st quarter. So the volumes in the Q1 for asphalt are insignificant, and it's difficult to draw any conclusions from it even if they are slightly below last year. So industry, we've said it a couple of times, say it again, It is a very low quarter for industry as the asphalt business is basically standing still, and they are always showing negative numbers on their earnings. Orders However, is on a normal and good level as the start of the year. Net sales are slightly down. That is due to the lower volumes we saw on the previous slide. Earnings improvement, a significant improvement of SEK 66,000,000 here. And as Thomas has alluded Earlier, that is driven by positive effects from 1 off items. What that is, is that this year, We have had several small items that are one off costs that are Better than last year. Last year, we had a couple of negative effects instead. So overall, the most The largest part of the improvement comes from one off effects. But as Thomas said, we also see some production efficiencies coming through. That is, however, not tied to what you may expect to the restructuring that we talked about in the Q4. We have executed on the restructuring plans, and about 100 people have been made redundant. We expect to see the effect of that as our volumes in asphalt are being delivered. So you will see the effect of the cost savings as The deliveries are picking up in volume in asphalt. We also communicated that the annual saving was expected to be about SEK 50,000,000 We stick to that number. We actually believe that it's going to be higher than that, Almost reaching up to SEK 70,000,000 for the year. And that, as I said, you will see it coming through as the volumes are being delivered. Property Development. We will spend a bit more time on property development this report. We Thomas already said, I will say it again, We recognize profits. We take our projects to the income statement when they are sold, completed and handed over to our customers. The earnings can vary depending on how much we've rented and how much rental guarantees and how long our rental guarantees are, etcetera. This slide also shows clearly the earnings for Property development varies a lot between the years, but mostly between the quarters that you business area, of course. And in the Q1, we have Recognized profits on one project in Oslo, Vale View. And as we have communicated earlier, The earnings of that project is impacted by provisions that we have to make on long rental guarantees. But also In Norway, we have also provision for the VAT on the rental. And that is really the explanation on decent sales in the quarter but quite low earnings level that we can't get from this project. We have one new project started in the quarter, Project Kulma 2021 in Finland, we have also sold one project, Fredriksplatz, in Denmark. That means we've continued to have 15 projects in our portfolio with 230,000 square meter letable space. In the quarter, we have signed 15 contracts. We had had very good letting in the quarter with 5 signed contracts in our ongoing portfolio, but also letting in 14 projects that are already sold and recognized in profits previously. So a good letting in the quarter. To be noted here is also that Sweden now has 52% of the lettable space, Norway, with the profit recognition of Vale, is has 0 projects ongoing right now. This slide is the includes the exact same Information that you have in the tables in the quarterly report, 15 ongoing projects. They are all almost all of them are offices in very strong locations. To the left, you have a time line where you can see when we expect to profit recognize our sold projects, so projects that are already sold when we expect them to take them to our income statement. Q3, we have one more office in Finland. And in Q4, we actually have 3 projects that we expect to recognize the profits. And we also have sold projects that we recognized in profits next year in Q4. That's the plan. And to the right, You also have the list of all our ongoing unsold projects. And behind them, you can see the percentage Completed and the percentage let on each and every one of them. This is a summary of the status of our letting and completion ratio. And as you can see, We have a health relation with a higher letting ratio of 57% compared to the completion ratio of 52%. And again, Strong letting in the quarter with 15 new contracts signed in our current portfolio. That was brings us to the income statement and the last segment in the group, other and elimination. 1st Item on the list is headquarters and subsidiary. That's the cost for the headquarters and also earnings from Subsidiaries, smaller subsidiaries that don't belong in the BA, slightly minor impact. This line is always negative. The impact Eliminate the profits in PD during the construction phase on the same level as last year. The big swing here is other group adjustments where we have our accounting adjustments. And the big change from last year is the fact that last year when we recognized K12 in our profits, this office here, We had also to provision for the period of rental of 10 years that we have according to IFRS 16,000,000. So that's the big change in other and elimination. Bringing us to an EBIT of negative SEK 144,000,000, as Thomas has already shown. Mentionable is our financial net. That is much lower than previous year due to the fact that we have very little financing need. And what also could be mentioned here is that we have an estimated tax rate for the year of 19%. Cash flow is good. We've said that many times now that we have a good and strong cash flow, so also this quarter, primarily driven this quarter by continuous improvement in our working capital. The big difference between the years is that we have the project that we sold in Property Development, this year was a smaller project than it was last year. Last year, we had the profit recognition of K12 in our numbers. This year, it was Valeview, which was a smaller project. And also CapEx investing activities is increased from last year, and that is our industry business that is investing in machinery. So a very good cash flow, SEK 586,000,000 before financing. Last but not least, We have a good financial position. Our corporate net debt is a net cash position. And as Thomas already said, we then have also are well below our target or being 2.5x below net debt to EBITDA. The big change here from last year, we have a change from SEK 4,500,000,000 to SEK 4,100,000,000 in net debt. That is primarily driven by lower pension liabilities, And that is also driven by IAS 2019 Actuarial changes to the liability. So that's pretty much what I had to convey. Handing over to you, Thomas. Thank you, Susan. And for me, it just remains to wrap up. In a quarter that is seasonally always weak, we had a good start to the year. 1st quarter with consistent performance in the contracting business and improvements in the industry, strong cash flow, Good demand, good order intake, good building order backlog with SEK 6,000,000,000 in the quarter. Thank you. And with that, operator, we open up for questions. Thank Our first question is from Sander Anderson of SEB. Please go ahead. Your line is open. Thank you. First on the industry part, the nonrecurring item. I mean, I guess it's around SEK 50,000,000 or so, if I understand your You probably don't want to give a number, but it seems like to be significant. Could you maybe elaborate on what kind of positive one off we're talking about? Sure. We are talking about land sales, for example. We're talking about closure of sites, Lower machinery maintenance In some sites. So there's a lot of small items adding up. It sounds like a big number to add up small things, but That's the way it is. And it's a lot of some of it, as we said, is production efficiency, but most of it is, For example, these examples I gave. And it's the aggregate of one off costs that we had last year and not this year and then gains this year that we didn't have last year. So it's an aggregation of Exactly. Negative one offs last year and positive one offs this year. Okay. Okay. So the Obviously, 1 offs in the quarter are significantly smaller. So it's just in the comparison. Okay. Just in the comparison. Yes. Okay. Good. Then maybe if you can help me a little bit on the still on the industry. When it comes to the revenue drop Year on year, it's rather significant this quarter in absolute numbers. Don't talk about percentages here because It's a small quarter, I know that. But it's down almost 500. And could you maybe elaborate on How much is sold and moved units? And how much is due to winter or asphalt lower asphalt sales? Hercules Foundation is Yes. So how much is moved operations or sold operations? That's and how much is due to weather, put it as well? Basically everything. In the restated numbers, The difference shouldn't be that big. Okay, good. Thank you. Numbers are restated, so the comparisons should be like to like. Sorry, my wrong. I was looking at my own numbers, too many reports today. Okay, good. I'll see you there. Then on Stefan, just to be clear, operations for industry is running pretty much as expected, basically doing very little in Q1. But we don't see any changes when it comes to prices or volumes or market or anything like that. Okay. Thank you. And then on PD, this is more a, I guess a philosophical question. But when you do divestments, I mean, some of your competitors, they tend to keep the office buildings and Fill it up with tenants and have a P and L. It's all up and running and then they divest it. That's to them, that's a way To maximize the profit. You have a tendency to sell early, give rent guarantees. And I would guess that The disadvantage is, of course, the risk of the rent granted, but probably you don't get the same kind of top price. So My question is you have such a strong balance sheet. Why are you in such a hurry to divest? And why don't you just keep the properties until you fully Fill them with tenants. Well, that's a really good question. And you're completely correct that we tend to sell them when we have some unlet spaces and then give a guarantee. What we've seen in the most recent sales is that the Discount that we've had to give for that has been really small. We have to do a provision because we think we will let the space, but the discount we have to give on the price is really small. So we've thought it motivated. I'm not ruling out at all that We would keep some of our projects a little bit longer for the effect that you're talking about. That's not that's Absolutely possible. We do a case by case evaluation. Okay, good. Then also give you a little bit room to maybe speculate here, see what you want to say. But You have the target of EPS of 16 set out there. And a little bit curious on Just your thoughts on the journey there, if you could elaborate a little bit on that. I mean, if it's you need You could do it by top line, you could do it by margin or combination, acquisitions and so on. And then at the moment, I guess, margin is the thing that moves up. But could you maybe elaborate a little bit on where you stand today and how you see that journey? Well, the main driver will be margin improvements. We are not including a lot of top line growth, some but not a lot, mainly margin improvements. We understand that the cycle for the PD investments are very long, so we have a pretty clear understanding on what will happen over the next couple of years, and we have a plan for that. And then For industry, we try to use the capital a little bit more efficient and get more out of the assets we have. Okay. Thank you. That was all I wanted to ask. Thank you. Our next Question is from Fredrik Sion of Carnegie. Please go ahead. Your line is open. Good morning. A couple of questions From my side, starting off with the infra unit, Norway has decreased to 14% of sales. Is The are you targeting to reduce it further? Is this a reflection of the business plan you set out a couple of years? Or is it more Of temporary nature due to individual orders? Well, we spent pretty Much effort trying to end and get out of bad projects. So Lots of the volume drop you see in Norway is projects that weren't really contributing anything to the group. We try to be more selective, but definitely we would like to win more in infra Norway, but only if we can see that there's the right risk profile, that we can get the right price and that we have the competence needed for each project. So we don't want to get into the situation where we were a couple of years ago. Very clear, Thomas. And moving over to a unit you spent some extra time on in this presentation, namely the PD unit. So if you look at the rolling 12 month return on capital employed, it's about 3%, not particularly impressive. What is the main issue? I mean, you have been selling projects for more than SEK 2,000,000,000 on a rolling 12 month basis, so it's not that bad. What are the lessons learned and what are you trying to do differently from here on? Well, one the main reason is that we have increased our PD portfolio. So we have more capital invested if you compare it to 2 or 3 years back in the portfolio. So we haven't really seen the profits from that yet. What we are trying to do is to use the capital more efficiently. You can see that from the sales of, for example, NEX in Helsinki or forward funding. But this is an area that we will be working with a lot going forward. It will It will take some time, several years before we can actually get it up, but that's actually a priority. And then moving over to a detail in the PD portfolio, I noticed K11 is now 100% completed and you have a Very good lifting ratio. Can you remind us of the scope of that project? And is it fair to assume that it's sellable at this stage? It's actually there's a process of selling it, right, that we've started right just recently. So we hope that we can sell it within the near future. The exact square meters, dollars 7,000,000, dollars 8,000 or something like that. You have to don't hold me accountable for that number. It's relatively small. Yes. I can I'm sure I can find it And then finally, on your financial position, you had a constraint of 2.5 times EBITDA. Now you're at the net Cash position. Do you consider you being overcapitalized at this stage? Are you Seeing room for share buybacks or extra dividends? Or is that too soon considering you're not meeting your targets on margins, etcetera? We're considering all options, and we'll get back to that when we have decided. That Our next question is from Simeon Mortensen from DNB Markets. Please go ahead. Your line is open. Yes, hi. Thank you. 2 of my questions has already been asked by the other guys. Just to follow a bit up, especially on the order Backlog situation versus the revenue development, which if you look especially in the Infrastructure division and Building Nordics, We see that the backlog continue to fall year on year, quite significantly in the infrastructure down 22% minus 12 in Nordics year on year. And we see deep Q1 revenue declines as well. How are you looking Of actually turning this around, what kind of stability you see for your revenues, especially in these two segments where the backlog is Declining that much, and we see the revenue dropping that much year on year. Could you please help us how much does the order backlog influence What we should expect for the full year 2021 in these two segments? It has an influence. But I think It's important to remember the following. We had a certain level of net sales or orders to see if those tend to be correlated over time. But large proportion of that was not contributing to the profits. And we still have a portion that not contributing to the profit. So our priority now and has been for some time is to make sure that We deal what we have in the order backlog to make sure that we get rid of the low performing projects, that we get better projects in. And then in that process maybe or deliberately having lower orders received compared to a couple of years back and then hence a lower order backlog, but with a much better quality. Over time, that is not sustainable. But we will get to a point and for some units, we are there already where we also will start to build capacity to increase, but don't expect that to happen this year or maybe not even next year. We will continue to focus on quality of order backlog and quality of the projects that we win because that will over the short and the medium term contribute more to profits and to cash flow. Sorry to understand you correctly, then your margins and everything, is your target to reach that NOK 16 EPS in 2023, that's true. You're still sticking to that target, Daesir. Absolutely. Absolutely. Thank you. Thank you. My other question has been asked already by the other guys. Thank you. Thank you. There will be a brief pause while any further questions are being registered. I think we have no? It's been asked. There are no questions from the audio line, so I'll hand back over to the speakers. Okay. If we have no further questions, then thank you all for listening in to this presentation of the Q1 of for NCC Group. See you in other occasions. And if not, see you at the next quarterly presentation this summer. Thank you all.