NCC AB (publ)

Good morning and welcome to this presentation of the third quarter for the NC Group. My name is Thomas Karlsson and I'm the CEO. And with me here today, I also have Susanne Littander, our CFO. And you will hear more from her in a little while. So let's talk about the third quarter. And the way to think about it, it was a good quarter. We have strong underlying earnings boosted by a one-off capital gain from the sales of a subsidiary. And I'm particularly happy about the 20th consecutive quarter for infrastructure improving the business and that industry has a good quarter back on normal levels. Building Sweden and building Nordics, still impacted by lower margins in ongoing projects, but definitely improving in Sweden. In this quarter, we are not recognizing any profit from divestments of property. The one thing I'd like to talk about is orders received. And this is a quarter with normal orders received that we've seen over the last couple of years. This seasonal variation, the seasonality in the orders received, mainly driven by the fact that our customers are on vacation a third of the quarter. Comparing the orders received for the quarter with last year, it's lower. And I will actually do a bit of a deep dive into that. If we look at the orders received for the third quarter for 2021, 2022 and 2023, we can see two things. One is that infrastructure had a really good quarter last year. and are now back to more normal levels. It depends on a couple of larger projects that they had the opportunity to book last year. While the building business areas, building Sweden and building Nordics are on the same level as we've seen over the recent years, actually marginally a little bit higher. And I've said this before, you should not pay too much attention to an individual quarter when it comes to orders received because of the nature of our business with large orders that can have a significant impact in an individual quarter or even a series of quarters. So don't read too much into the development of the orders received. We have a solid order backlog on the same level as we've seen the last couple of years. The difference here is the larger orders that we saw in infrastructure. And I'll have to remind you that year to date, the first nine months of the year, we had approximately the same orders received as we had last year. We can see a continuation of the trend that we've seen in buildings over some time now with a much slower residential market, a slower office or commercial building market, while public buildings have a strong demand from the market. Looking at net sales, we are year to date slightly up and in the quarter on the same level as we saw last year. And now focusing on earnings. If we look at the earnings in the quarter, operational margin earnings in the quarter without the capital gain from the divestment of buying asset and keeping in mind that we have not recognized any property development projects this quarter. We still have an earning of 614, bringing us to a margin of 3.2. And if you look at the nominal numbers, what we report, it's 789 and 3.5% earnings. The development is driven by these factors. Infrastructure continuing with small improvements for the 20th consecutive quarter. Building Sweden coming back from the very weak quarter last year. Building Nordics on approximately the same level. industry back to normal levels with the clear improvement. PD lower because we didn't sell anything that we did that last year. And then we have the divestment profit. That's the way to understand the development of the quarter. And if we look at the first nine months, The trend is fundamentally the same. The big difference here is other eliminations that on the first nine months is positive. Otherwise, it's fundamentally the same development. And then before I hand over to Susanne, let's talk a little bit about the market outlook. We see that there's a divided market, clearly a slower demand in commercial buildings and residential, but there's a strong demand from public sector buildings, infrastructure in the widest sense of the words meaning, And we also see that the green transition is starting to gain some momentum. We have a strong position in many attractive segments of this development. We see larger local variations than we saw a couple of years ago or one year ago. And we see, looking forward, that the municipalities and the regions, particularly in Sweden, are clearly facing financial challenges and signals a somewhat more muted demand going forward, but that cannot be seen in the numbers for this quarter, and we really don't know what that will mean going forward. And for us, as always, we will focus on building on our strength to continue to select the right projects and make sure that we are active within the segments that we have chosen and we adapt our organization locally where needed. Here in Stockholm, for example, we are right now hiring while we are decreasing the organization in other parts of the organization. So with that, Susanne.

Thank you. Okay, let's start with looking at the three contracting units and starting with the order backlog. We clearly see here that both Building Sweden and Building Nordics have a backlog that is above the 12 months of sales rolling. And infrastructure is a bit below. But in infrastructure, we have a lot of phase one in the pipeline and a very strong pipeline. We also compare the margins in the contracting units and clearly you see here the 20th consecutive quarter of infrastructure improvement. We can also see that Building Sweden is bouncing back a bit after the write-downs from last year that has been pressing the margin for the full year. And building Nordics is on a different trend. They have had problems in Norway with write downs and a tough market in Finland with increased cost. But if we look into the different business areas and starting with infrastructure, as Thomas already showed, we had not any big, large orders in the quarter, which explains the difference from last year. We see sales on the same level. And their strategy of focusing on their segments has clearly paid off. And energy and water treatment is the largest segments, and they stand for 40% of orders received in the nine-month period. Sweden continues to be the largest market as a share of sales, but Denmark is increasing as well. And earnings improves. As you can see here, we have excluded Binasset in the numbers and they continue to improve on margin. And as Thomas said, the margin in the quarter is 3.8%. And on rolling 12, it's 2.9% now. Moving on to Building Sweden. They have stable orders received and also stable net sales. And we can see here that public buildings and refurbishment is the largest segments and public buildings make up for 45% of orders received in the first nine months. And here also we clearly see that the earnings are bouncing back after the write downs that has been pressing them for since last the same quarter of last year. even if they are still not on a really high level, but they are at least bouncing back as expected. Building Nordics, they continue to grow in both orders and sales. It's driven by Denmark and Norway when it comes to orders, but also some currency help here. And when it comes to sales, all the units contribute and also some fuel by the currency. Public building dominates also in this business area and they now stand for 43% of the orders received over nine months. Denmark is the largest market with almost 50% now. And here you can see the margin is decreasing. And it is depending on write downs in Norway and a very weak market in Finland. Industry. And this slide shows the volumes. And stone material, the volumes are down, slightly down. And we believe that's due to the fact of the residential market. And the asphalt volumes are on par with previous years. So stable volumes in asphalt. And as Thomas said, we are seeing that industry are returning to more normal earning levels, increased sales due to increased customer pricing. And earnings and margins is also improving significantly, explained by the increased customer pricing, but also some lower costs when it comes to energy and maintenance. We should point out that the strongest improvement comes from asphalt, but stone material is also improving significantly and doing a good job. They have a capital employed that is on a normal level, 4.8 billion, and the return is almost 7%. Property development, and we had no profit recognitions of projects in the quarter, hence the negative earnings. And this is the normal earning level that we have in property development, or that we've had over the past four years, to point out that we now have 201 in earnings after nine months. And as we can see on this picture in the middle there, we have the profit recognition timing of the pre-sold projects. And for the remains of the year, we only have the land sale in Solna part two, which is a significantly lower value than a normal project would have. We have seven ongoing projects and we have four completed projects that are not sold. And the operating capital employed is now up to 9.2 billion and the return is 5.7%. This is the current portfolio. We've split it up between the completed projects and the ongoing projects. And as you can see here, the seven ongoing projects of the three we have pre-sold, we only have 34% letting. The four completed projects, they have a strong letting or a high letting level. They are almost 90% let. And of the 200,000 square meters that we have in the portfolio in total, we have a higher completion ratio than letting ratio. And the letting is low in the quarter. We've had very few lets and very few square meters let. So that is what we are focusing on. After the business areas, we come to the segment other end elimination. And we have the headquarters cost and the subsidiaries that is not part of any BA. There we have a big discrepancy between last year and that's due to the fact that we had huge positive items in the accounting last year since we received payback from insurances. sickness insurances. Internal gain is positive. Even if we have not sold any projects, we've had adjustments in ongoing and discontinued or ended projects that impacts the internal gain level here. And in other group adjustments, we have a large positive number because of the discount rate changes. We have increased our discount rate from 185 to 385%. Financial items are low, I would say, in this market due to the fact that we capitalized on the interest rates for PD in ongoing projects. And our tax rate is 18.5%. Cash flow is good in the quarter, still negative over the nine-month period. The improvements in the quarter comes from working capital and also from the fact that we have been paid from Binance at the divestment in infrastructure. And the negative cash flow for nine months is of course due to the fact that we haven't sold any more properties. Our corporate net debt has increased to 2.8 billion. We are still well below our target of having a net debt to EBITDA of less than two and a half times. It is on 1.06. So that's what I had. And with that, I hand over to you, Tomas.

Thank you, Susanne. And I have some additional information. I have a reminder and I have a summary left before we open up for questions. Health and safety. We are now back on the level where we've been for some time now at LTIF 4 of 3.9. We still have some work to do before we reach our targets, but this is a priority area for us and we are on the low level for the industry. Climate and energy targets. This is the update from the first two quarters of this year. Scope 1 and 2, we have a target of minus 60% until 2030. And we are now at minus 58. So we are rapidly working towards that target. Scope 3 is somewhat more complicated, but we are working with the four prioritized segments and making Progress in three of them while we're still working with transportation to be able to catch the correct date on that. Financial targets, dividend policy known since before. The second tranche of that will be paid in a little while. Net debt, as Susanne pointed out, well below our target of 2.5%. And then on a rolling 12 basis, 16.21 EPS. So the question is, we can still reach this, but it's dependent on the property development market. And we'll get back to that in the fourth quarter. Now, a reminder, Capital Markets Day already next week, November 9th. Welcome to Scandic Continental or online. And we will have an update of the business from the management team, including all the business area.

managers managers so in summary the gain the quarter strong earnings strong underlying earning earnings things and boosted by a one-off capital game in a one-off capital game industry back on normal level and then orders received seasonally norm orders received seasonally normal this is the normal level

The big difference here is within infrastructure where we see a really strong demand and we cannot read anything in regarding the construction.

market from these numbers.

It's clearly a more divided market, variations regionally and between segments where we see that, for example, For example, Denmark is really strong, but also northern Sweden. So with that, operator, we open up for questions.

And Susanne, what do you think?

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handset while asking a question. The first question comes from the line of Simon Mertenson, DNB. Please go ahead.

Thank you and congratulations with a strong result. But I have a few questions from my side. In terms of the other segment, there was a big beat there versus what a lot of people perhaps was expecting. And you say change in discount rates is part of the other reason for the beat. Can you please explain what is behind and what you clarify, what you mean by change in discount rates and how that's been raising the EBIT in the quarter, please?

It's the discount rate for our pension liabilities.

Okay. But it's no operational cash flow from that, I assume?

No, no, no. That is IFRS accounting, IAS 19.

Okay. Thank you. And the other one is the margin in Sweden. Just a question here because it's been on a bit of a declining profile. How would you describe what we're now seeing with historical levels refers to what is the market effect? What is the cost effect on the market and price on execution? There seems to be some legacy projects still from the residential where there were write downs. or what is the main element of issues you see for the current margin being as they are versus the historical levels we have seen for building Sweden?

I think the answer is very much contained in your question. And there's two main drivers. One is legacy from projects that we wrote down last year. And since they have not been delivered yet, we continue to deliver on a lower margin level. And then it's the general market in Sweden.

Absolutely. Can you say how much the effect of these legacy projects eventually are in terms of the size of them and the revenue or such? Not really.

Because it has an impact on fundamentally everything or a large part. It becomes very complicated to have a definition of that.

A question comes to property development. We all know the situation and liquidity in the commercial property development, but you still have four very large projects now completed on the balance sheet with some 87% letting ratio, several of them, one in 100, several over 90. But the capital committed here in the balance sheet seems to be 4.9 billion SEK. How are you thinking about this in terms of selling them in the current market or are you wanting to wait and expect lower interest rates or how do you address the situation and how much are you willing to commit this capital as completed projects? in today's market going forward.

I will reiterate what I said this summer. We are not participating in any fire sales of property development. We have a strong balance sheet and we can hold them for some time. However, that's not our business model, so we'd like to sell them. But we want to see a more normalized market. And for all practical purposes, we are continuously re-evaluating what we should do with them.

Are you actively trying to sell these assets in the market today, or are they more waiting and hoping for interest rates to fall?

We are making efforts to sell them, but we will not accept any type of price.

Understandable. You also just noted in the report, my final question, that in Finland there were some implementing some organization changes to align the businesses to strengthen the profitability and such in the report. Can you just describe what you have been doing there?

Well, what we have done is we have changed the organization. We have restructured the organization and we have a lot of redundancies. We have decreased our cost levels.

Has there been any one-off impact in Q3?

No, not really.

Okay, thank you. Those were all my questions.

Thank you. As a reminder for questions, please press star and one. Once again, to ask a question, please press star and one on your telephone.

If there are no further questions, we thank you for listening in to this presentation and we remind you this was a good quarter. Don't read anything into the orders received. This is on a seasonally normal level and the decrease compared to last year is within the infrastructure. Thank you all and see you next time. Thank you. Thank you.