NCC AB (publ)

Good morning and welcome to this presentation of the second quarter and the first half year for the NCC Group. I'm Thomas Karlsson, CEO, and on this call we also have Susanne Littander, CFO. So let's start with the summary. We had a good second quarter and this is the short version on how to understand the quarter. Earnings up compared to last year by 24%, despite no profit recognition in property. The main driver behind this industry, both volumes and earnings are up. Orders received on a good level, which leads to order backlog on a healthy level. Market outlook, we think it's a strong outlook, even though it's still divided the same way that we've seen for some time now. And in the quarter, no property transactions. There are positive signs for the property transaction markets, but we haven't seen any real change yet. So let's start with orders received on a good level. Book to bill in the quarter and the rolling 12 is one. And this orders received while we are maintaining a disciplined approach to tenders, what we tender on, what we tender for, on what terms and with the right prices. And even though we think that the market is fundamentally strong, it's divided. And even though we are in segments with good demand, we see a certain amount of desperation in the market everywhere, but particularly in Sweden and Finland. Hence, companies trying to compete with very low prices. And I want to make clear that we are not participating in that. So, good orders received leading to... a healthy order backlog. And I think it's interesting to see that the order backlog has a good distribution between the business areas. Some examples of projects that we have won during the quarter. We've won a train depot in Hagalund in Solna, very close to our headquarters. Yet another refurbishing project in Denmark. And then we've won a swimming hole in Vanta in Finland. Some examples on what we are working with. Moving on to net sales. The net sales in the quarter are up. However, first half of the year is quite stable. And we see a clearly pronounced Easter effect, i.e. Easter was completely in Q1 that had a negative effect on sales in that quarter. And that was countered by an equally positive effect in the second quarter. So for the first half year on a stable level. What is not stable is the earnings. 24% up in the quarter. And if you look at this over some quarters, it's on a very good level. It's not sales of properties that's driving this increase. So what is it then? Let's look at the quarter first. We have stable earnings in infrastructure, building Nordics and building Sweden. But industry is clearly increasing in the quarter. It's pricing, it's volumes, and to an extent of lower overhead costs. PD didn't sell anything in the quarter, but they did what they could. So compared to last year's small loss, they now have a small profit. That is a net change of 67 million SEK. And Susanne will come back to other eliminations. If we move on and look at the same thing for the first half year, it's pretty much the same pattern. Industry recovering from the slower start of the year and by half year outperforming last year. PD had one large transaction last year in 2023 in the beginning of the year. While this year we only had a small transaction and that explains the difference in property development. More long term. If we look at our financial targets, we have a short and medium term. We have earnings per share target of 16 SEC. We need the property transaction market to start in order to reach that. But we also expect that the infrastructure building, Nordics buildings within the industry will contribute more to this target. And right now we are at a little bit more than 14 SEC. We have a net debt target of staying below 2.5 times EBITDA. And right now we are on 1.48. And then it's important to remember that the second quarter is the quarter where we have the lowest cash flow. Dividend policy states that we should distribute approximately 60%. The board and the AGM decided on 50%, 8 sec, and half of that has been distributed during the spring. Health and safety targets. We have health and safety targets of accident, loss in time injury frequency 4 of below 2. We are right now at 4. We are working a lot to bring that down and to make sure that we have fewer of these of accidents for many reasons and mainly because we care about the people that work in our organization and then finally market outlook the market outlook is fundamentally good It's still divided, but with many strong segments, we see a strong demand for infrastructure of all types. Of course, roads and railways, but maybe more importantly, energy generation, energy distribution, water treatment, water distribution, logistic... facilities and so on. We see a good demand for public buildings, everything from schools to defense, and we see a good demand from the industry. However, a little bit slower demand for residential homes and commercial buildings. The property transaction market remains slow. We see the same positive signs as everybody else, but we see no impact from this yet in the transaction market. And with that, I hand over to Susanne Bittander.

Okay, thank you. Okay, for some more details then around our contracting units, we start with the business areas around that. Infrastructure had strong order booking in the quarter, driven by a couple of large projects, like the submarine dock in Bergen, Norway, the decking of Göta tunnel in Göteborg, and some large additional orders on ongoing projects. Both our building units are lower than the second quarter of last year, and we continue, however, to have a very solid order backlog in all of our contracting units, well above or in line with 12 months of net sales. The book to bill for contracting was 0.9%. Our project portfolio in contracting is driven by public investments and careful segment selection. The largest segment for infrastructure is energy and water treatment. And the large increase that we see in roads and railway is driven by the Breivika project in Norway and some really large additional orders in ongoing projects. For the building units, the largest segments are refurbishment and public buildings. The large part of other buildings in Sweden is explained by a couple of industrial buildings and a train depot. Net sales and earnings show stability. Net sales increased in infrastructure. Earnings and margins are on par with or improved compared to Q2 of last year. And on rolling 12, we can see the margins here for the contracting units as well. And infrastructure continues to improve. Building Nordics is back on the right trajectory. And building Sweden is stable on a challenging market. And finally, our new business area, Green Industry Transformation, where we have the management team in place and the initial team. And we have signed a strategic collaboration agreement with LKAB. Moving on to industry that had a very strong quarter and were up on all KPIs, basically. Orders received net sales and earnings. They had a very strong start of the season, obviously. Successful have they been in their implementation of turnaround activities. The volumes are higher in both asphalt and stone materials compared to the last year's second quarter. And earnings are up 30% driven by increased volumes in asphalt and increased volumes and prices in stone material, but also lower overhead costs. Stone material are showing really strong performance for the first half of the year. Capital employed is a bit lower than last year, 4.85 billion, and the return has gone up to 9.7%. Property development, they still have a challenging market situation. We have 10 projects in the portfolio and they are all office buildings. During the quarter, we had no projects sold or started. We signed four new letting agree contracts, all of them in MIMO. The letting in the quarter was slow with only the four contracts I just mentioned in MIMO, 3,300 square meters, which makes the letting go up to 71% for that particular project. The letting in our total portfolio is 72%. And for the completed projects, it's 82%. Completion ratio for our total portfolio just happened to be also 82%. Earnings was up 30 million or was 30 million up 67 million. And the improvement compared to last year is due to increased rental income in our completed projects and additional revenue from certification of a previously profit recognized project. Capital employed is up to 9.9 billion with really low returns. We have, as I said, 10 projects in our portfolio. And on the timeline, you have the two ongoing and sold projects, MIMO and Parc Central. And they're expected to be profit recognized in Q4 for MIMO and 2027 for Parc Central. We also have two unsold projects that are ongoing. And we have six completed unsold projects. And now we come to the segment other and elimination. EBIT in the quarter is 40 million below last year. And that's explained by the first row in this table where you have the common group cost. The cost increase is driven by continued investment and modernization of our IT platforms and our applications. The IT development stands for approximately 30% of common group costs and is expected to increase additionally 40 to 60 million in the coming year. The cost level is usually equal between the first and second half of the year with some variations, but with a clearly lower cost level in the third quarter due to the vacation period. And also green industry transformation. They stand for slightly less than 10% on the cost on this row. The rest of the income statement, we have the segments bringing us to 623 in operating profit. Our financial net is 34 million euros. And the increase from previous year is due to higher corporate net debt, higher interest costs and less capitalization of interest in property development as we have more completed properties now. Our tax rate has increased to 20% also due to fewer sales of properties. And our cash flow. is seasonally negative as industries start up their business in the second quarter, which draw a lot of working capital. Cash flow before financing, however, is better than last year due to better earnings, less property investments, and a lower negative effect from working capital. We also have lower capital expenditure primarily in industry compared to last year. And our net debt is on the same level as last year, 3.4 billion. And our net debt target is to be below 2.5 times. And we are below that, as Thomas showed, at 1.48 after first quarter. Back to you, Thomas.

Thank you, Susanne. And with that, the only thing that remains is for me to wrap up this presentation. Remember this, good quarter financing, earnings up 24%, good orders received while maintaining operational discipline. Industry has a strong quarter. Other business areas are stable on a good level. Property transaction market remains slow, but we have a fundamentally positive outlook for the market, even though the market remains divided. And with that, operator, we open up for questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone 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 handsets while asking a question. Anyone who has a question may press star and 1 at this time. The first question comes from the line of Shirinapur Evan with SEB. Please go ahead.

Good morning and thanks for taking my questions. My first question is regarding industry which had a very strong profitability in the quarter but there's quite a still large upside to your internal target of 6% for industry. What do you believe will drive this improvement and when will this be achieved?

Thank you. Good morning. Well, first of all, we think that we're on a trajectory where we are continuously improving. And we're working with the same levers as we have been for a year now. We're working with the pricing and the market. We're working with our internal processes and our own cost structure. And I think there's nothing magical about that. But it requires lots of hard work and discipline over the coming quarters. And as always, we're trying to improve one step at a time. And that will lead to the target.

Okay, thank you. And my second question is for Building Sweden, which continues to have a quite weak profitability at 2% EBIT margin. So I'm thinking out what will drive profitability here. Is it phasing out of all the projects or what should we expect here in the upcoming quarters?

Phasing out quarters won over the last one, one and a half year. It is a market where we see more price pressure than they are operating on a market where we see more price pressure in Sweden and Finland than in other markets. And we're maintaining a high level of profitability. discipline and prudence when it comes to tandering and what kind of projects we enter into and how we operate. And I'm positive that we will see continuous improvements over the next year.

Okay, so you would say that new projects that are being taken on have better profitability than those that are in the backlog currently?

Yeah, absolutely.

Okay, thanks. And then my last question is regarding property development. You have quite some projects that are finalized but not sold yet. Do you have any updates on this or do you have any discussions or general strategy to be able to divest these assets?

We have discussions. Nothing firm right now. Our intention is to, during the fall, we will do some... We will test if the market has come back in a more structured way.

Okay, that's for my questions.

Thank you very much.

The next question comes from the line of Granstrøm Eric with Carnegie. Please go ahead.

Thank you and good morning. I had some questions as well. Starting off with Thomas, you mentioned competition in the market, and especially within perhaps the building area. How do you handle competition? Do you go for larger projects? Do you go for different kinds of projects? Could you tell us something about how NCC handles increasing competition in general?

Thank you very much. I will answer your questions, but before, I think it's important to recognize that Even though we think that we have a fundamentally good market, there are many companies that has been almost only dealing with residential buildings or to a large part dealing with residential building and commercial buildings. And they tend to be in a distressed and slightly desperate situation now competing on price. I want to be clear that we are not participating in that. And we have been clear to the organization that we're not participating in that. The way to do it is the segment selection that we've done, we're trying to have a larger proportion of our projects in segments where we have an edge where it comes to experience, where it comes to knowledge, where we have a track record, and where we also see that the customers appreciate other factors than the lowest price, such as continuity, quality of what you do, ability to run the process and things like that. So we have been for quite some time working hard on differentiating on knowledge, know-how, competence, and our ability to use data to the benefit of our customers. And that's the way we handle it.

All right. Thank you. Clear enough. And then within industry, the obviously volumes, especially within asphalt, was clearly higher in Q2. Is this, should we view this as a temporary effect due to Q1 being slightly lower? And meaning that you expect this to come down then in Q3, Q4? Or how should we view, in your view, going forward, specifically the effects on volumes in Q2?

We don't give any forecast, but we can conclude that we have a higher order backlog at this time than we usually have. And the order backlog in this for industry means basically for asphalt. We think we have a good momentum and I have a positive outlook for the rest of the year.

All right. And then on... Financial costs. I think you mentioned the fact that you do have some effects of less capitalization of your projects, meaning that what we saw in Q2, is this something that we should expect all things being equal? Obviously, net debt can move and interest rates as well. But just in terms of capitalization, do you expect those levels to be similar for the rest of the year, given that you're not focusing on starting new projects within PD right now.

So Sam, I think that's a question for you.

Yeah, and I would say it all goes together with how much cash you bring in from the other units, basically. But I would suggest that it would increase slightly, but not a lot during the second half of the year.

All right, thank you. And then you mentioned that you had some payments made in Q2 within PD due to previous recognized units. Could you say something about the magnitude of that? I understand PD doesn't have much of a result in Q2 because obviously you didn't sell anything, but it was still quite a positive figure for being this kind of quarter. So could you perhaps tell us How much is rental income now that you have completed a large portion? And obviously that is contributing versus the one-off that you saw in Q2.

When rental income sort of balances out the fixed costs for the property development organization, what we've seen in this quarter are a bunch of other positive small effects. The biggest being, the largest being that we managed to get the certification of one project done earlier than we previously thought, and the last part of the payment for that building was realized. And then we've managed to do small lettings in previously sold and handed over projects.

Okay, so basically what you're saying is that unless you change the composition of the portfolio, you're doing about break-even in terms of covering the fixed costs. Sort of. Yeah, okay. And then finally, regarding the mentioning of IT costs within central eliminations, do you expect this level of of IT costs to remain in 2025 as well, or is this something you expect to tail off towards the end of this year?

Written in the report that it will increase during next year.

Okay, so the trend will continue up going into next year as well.

Yes, 40 to 60 million.

All right, perfect. Thanks. I must have missed that. Thank you so much for those more questions.

Thank you very much.

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all right if there are no further questions we thank you for listening in and remember that we've maintained an open approach so if you reach out to us we will try to do um we we will arrange a meeting or some kind of presentation if you are if you want that thank you very much and have a fantastic