Material risks and uncertainties

Management of operational, strategic and financial risks is a key prerequisite for NCC’s business and efficient risk management is a necessity for a stable and profitable company. The aim of risk management is to identify risks, assess the efficiency of existing controls and strengthen and develop preventive measures.

NCC has conducted a measurement of the company’s risks and describes below the risks regarded as most probable and that are estimated to have the greatest impact on NCC’s potential to achieve its objectives in the long and the short term.

Top risk on group level

Risk	Description	Control activities
Market
1. Geopolitical situation	The global geopolitical situation has become more uncertain with the Russian invasion of Ukraine but also in several other parts of the world with potential impact on the normal course of international relations, leading to a more complex situations for business in multiple aspects including general inflation and economic development, increase in energy prices and interest rates, contraction in the financing market and higher risk for cyber attacks etc.	The organization has handled and mitigated challenges relating to the geopolitical situation, including cost inflation and disturbances in the supply chains during 2022. We see a continued risk in the coming years with a potential broad impact on the business. For more details about risk description and key mitigation action plans relating to the situation, see section 2, 3 and 9 below.
2. Market volatility	Risk for loss of revenue due to weakening market overall. More specific a risk of underestimating the size and speed of the downturn of the market, and then be too slow to respond. The market sentiment is a material risk for the property development operations both regarding letting and divestments. Also, there are cost increases linked to interest and inflation.	NCC will prioritize better and closer follow-up of market development as well as development for customers and suppliers. Ensure that price increases can be passed to customers (fixed prices from suppliers where appropriate), continuous assessments of right level of blue collars and resource planning. New ways of working regarding letting, project portfolio, and interest management are being implemented.
3. Shortage of material and price increase	Risk for lack of material and price increases in general, for commodities (for instance metals, steel, energy, plastics, freights) due to the external circumstance in the market. Stone Material and Asphalt units are highly dependent on supply of energy and raw material supply such as stone material reserves, bitumen, recycled asphalt etc.	Monthly forecasts on commodities are made and published internally and through the purchasing management team for further actions. Fixed prices in frame agreements and a close dialogue with supplier’s cost. Long term raw material strategies are being developed. To secure bitumen supply, the current supplier base should have multiple key suppliers in a controlled balance. Focus on increasing the number of depots under NCC control and reducing the number of specialty products to minimize the dependency on one single supplier.
People
4. Skills supply & Leadership	The base for NCCs strategic direction is to be a knowl- edge-based company, it is therefore, imperative for us to have the right people with the right attitude and the right skills and experience on board. Successful recruitment, retention and development of people with necessary skills is crucial for the company. Lack of leadership increase the risk that we cannot deliver according to quality, profitability and not be able to retain our employees. The development of managers is essential to drive and deliver quality in projects and retain personnel with desired skills.	Skills mapping and development plan preparing for key positions. Group common development programs are conducted for project management and leadership, such as Mega Project Management Program, Senior executive program, Strategic leadership program and Practical leadership program for site managers. Workshops in Star Behaviors have been conducted to improve culture and behavior in the whole organization. A process to follow up the progress has been implemented. Star behaviors are the basis for all leadership programs. A structured succession planning process is in place to ensure that we constantly replenish with the right competence and experience.
5. Health & Safety	In the construction business there is a high risk for different kinds of accidents. Fatal and serious accidents still occur and often within the three high risk areas such as working from height, heavy crane lifting and use of heavy vehicles. In analyses it is concluded that root causes are poor planning, less affairs from production management, improper and high risk behaviors among workers. Another conclusion is that there are few or poor safety barriers between humans and the risk of an accident. Many oper- ations in the Group feature risky elements for workers that are subject to considerable demands regarding correct train- ing and safety equipment, and not least an established culture that has the health and safety of employees as its highest priority.	Strategic direction that aims to reduce common accidents, and to eliminate serious incidents and fatal accidents. Systematic work to improve and increase the number of digital and physical safety barriers in collaboration with NCC Group Purchasing. The purpose is to increase the level of safety barriers build into the equipment, the machines, and the vehicles we buy, rent or lease, as well as increasing the level of safety barriers we demand for equipment, machines and vehicles used by subcontractors. Intensive work to improve our Site Introduction setup, to align and digitize our safety requirements for NCC workplaces. Every employee, supplier and subcontractor must pass the Site Introduction to access our worksites in the future. This to increase safety awareness. Clarification of what applies to the entire Group and what all managers must know. At Group level distinct directives and guidelines are set for safety work, and instructions are devised for each business area, all to achieve the vision of zero accidents at our workplaces. All reported incidents are analyzed with the aim of improving the injury-prevention effort, with a particular focus on creating a culture that encourages a safe work environment.
Management
6. Management of operations	Within the contracting operations, the main operating risks are project selection and project management. There is also a risk regarding failure in the ability to implement what’s decided according to the processes and strategic initiatives. There is an overcapacity in the market for Industry in all geographical areas. The season is limited and there is high competition to provide large volume in a short period of time. This leads to unpredictable pricing. In addition, Asphalt is volume driven business and there is a risk for higher cost per ton in case of low volume. In 2022 the overcapacity has worsened even more due to external circumstances in the market which have led to decreased volumes.	NCC assigns priority to submitting tenders with identified risks that are manageable and calculable. Various contract formats and partnerships with customers facilitate the management of different risks. These operating risks are counteracted through NCC’s project selection, assessment of tenders and operational control systems. Specific for Business Area Industry: Work with sales steering and improved tender evaluation/price setting to secure right volume Work with cost steering. The plan includes actions to reduce capacity in certain markets, and the importance of continuously assess the capacity and make necessary adjustments in time. Work to tighten up processes, both in terms of clarifying what to implement but also how to follow up and control including to utilize transparent data etc.
7. Supply chain	Low barriers of entrance bring in many new suppliers and exposes NCC to business risks in the areas of cost, loss of revenue, brand/reputation and employer branding. The responsibility for supplier control is decentralized and handled locally, with the exceptions of pre qualification of international and central frame agreements suppliers. There is especially high risk in labor intensive categories (sub contracting) where NCC in many cases is also exposed to a long chains of subtier suppliers, which increases the complexity in materials supplies and staffing on the site.	International and frame agreement suppliers are pre qualified through a process of analysis, strategies, supplier selection, and supplier assessment handled by specialized central purchasing teams. There is currently an ongoing work to develop and implement a common supplier control process which will be applicable also for all local suppliers.
IT
8. Group Common IT Development	Failure in implementing common IT developments leads to a significant amount of sunk cost in development without realized benefits implying lack of commitment and readiness for change in NCCs operations. If failing, NCC will face new end of life situations in the future both in terms of technical lifecycle and fit in for business needs.	Dedicated resources for leading the program and a business approach (future processes and way of working at NCC) before selection of the tools. Clear roles and responsibilities have been defined to ensure business alignment and maximum benefit realization. Process framework and governance are put in place and Common Process owners have been appointed already for some pro- cess areas. NCC has developed and implemented a common way of working with Business Change Mgmt. and is continuously working with building capability to ensure sustainable change. NCC is continuously following up the ongoing implementations and benefit realization to ensure that we are progressing as planned.
9. IT security (information security)	Technical development, digitalization, information driven, and dependent societies are expected to provide opportunities for new types of cyberattacks and network exploitations. Artificial Intelligence driven solutions are becoming a reality and will introduce new security vulnerabilities. It is fundamental to continue to follow the fast changing technical development, ensure proper security governance and planning to prevent any unsupported IT systems, poor control of the IT infrastructure or outdated processes.	NCC Security Strategy and roadmap, in combination with NCC IT development roadmap required short-, medium- and longterm activities to mitigate information security risks. NCC continues with the establishment of an Information Security Management System and a Cyber Security Operation Center which increases the threat monitoring ability and capabilities for resilience to security incidents
Compliance
10. Compliance	Risk for penalties and sanctions, branding, law suites, cost of disqualification in public tenders due to compliance breaches.	Training in competition law has been developed including follow up of the training started in 2021. This training is now included in the mandatory training program. A new updated mandatory training program in compliance has been developed to be launched next year.

Financial risks & reporting

Risk area	Description	Control activities
Interest-rate risk	The interest-rate risk is the risk that changes in market rates will adversely affect NCC’s cash flow or the fair value of financial assets and liabilities.	NCC’s Group Treasury Policy has been adopted by NCC AB’s Board of Directors and constitutes a framework for risk mandates and limits in the NCC Group. The Group’s financial activities are organized centrally, thus providing an adequate overview of financial positions and risks. Refer also to Note 36.
Exchange rate risk	The exchange rate risk is the risk that exchange rate changes will adversely affect NCC’s income statement, balance sheet or cash flow statement.
Refinancing risk	Refinancing risk is the risk that opportunities for financing will be limited and/or that the cost will be higher when loans that expire have to be refinanced, which could adversely impact NCC’s operations, earnings and financial position.
Liquidity risk	The liquidity risk refers to the risk that NCC does not have sufficient payment capacity at a given time, which could adversely impact the Group’s ability to fulfill its payment obligations.
Credit and counterparty risks in financial operations	Credit and counterparty risks in financial operations refers to the risk that NCC’s financial counterparties are unable to fulfill their obligations to NCC.
Customer credit risk	Customer credit risk refers to the risk that NCC’s customers are unable to honor payments to NCC for delivered goods and services.	At NCC, customer credit risks are managed through Group-wide procedures for identifying and assessing risks, both before agreements are reached with customers and continuously in operational follow ups. NCC’s credit risk in accounts receivable is highly diversified given the large number of projects of varying sizes and types in a multitude of customer categories.
Percentage of completion profit recognition	In assignments involving construction contracts, NCC applies percentage of completion profit recognition, whereby profit is recognized at the pace of completion. Should the anticipated profit from a project deteriorate during the project’s production period, this could result in a need to reverse profit recognized earlier.	By means of project management, meaning continuous monitoring of production calculations, reconciliation of work completed, project forecasts, etc., it is possible to ascertain that the information is accurate.
Supplier risk	Risk that sub-suppliers enter bankruptcy and cannot deliver orders.	Supplier controls and development of the supply chain.

Sensitivity and risk analysis

	Change	Result effect after net financial items, SEK M (annual basis)	Effect on return on shareholders' equity	Effect on return on capital employed (percentage points)	Comments
NCC Infrastructure
Volume 1)	± 5%	61	1.0	0.5	For NCC Infrastructure, a one percentage-point increase in the margin has a significantly larger impact on earnings than a 5-percent increase in volume. This reflects the importance of pursuing a selective tendering policy and focusing on risk management in early project stages.
Operating margin	+/–1 percentage point	163	2.7	1.4
NCC Building Sweden
Volume 1)	± 5%	53	0.9	0.5	For NCC Building Sweden, a one-percentage-point increase in the margin has a significantly larger impact on earnings than a 5-percent increase in volume. This reflects the importance of pursuing a selective tendering policy and focusing on risk management in early project stages.
Operating marigin	+/–1 percentage point	139	2.3	1.2
NCC Building Nordics
Volume 1)	± 5%	52	0.9	0.5	For NCC Building Nordics, a one-percentage-point increase in the margin has a significantly larger impact on earnings than a 5-percent increase in volume. This reflects the importance of pursuing a selective tendering policy and focusing on risk management in early project stages.
Operating margin	+/–1 percentage point	113	1.9	1.0
NCC Industry
Volume 1)	± 5%	25	0.4	0.2	NCC Industry’s operations are affected by such factors as price levels and the volume of produced and paved asphalt. An extended season due to favorable weather conditions increases volumes and, because the proportion of fixed costs is high, the impact on the margin is material.
Operating margin	+/–1 percentage point	108	1.8	0.9
Capital rationalization	± 10%	5	0.1	0.7
NCC Property Development
Sales volume, project	± 10%	79	1.3	0.7	NCC Property Development’s earnings are predominantly determined by sales. The potential to sell property projects is largely dependent on the leases signed with tenants. An increased leasing rate facilitates a higher sales volume. The value of a property is also determined by the difference between operating expenses and rent levels, and thus a change in the rent levels or operating economy of ongoing projects could change the value of such projects.
Sales margin, project	+/–1 percentage point	47	0.8	0.4
Group
Changed interest rate, net debt 2)	+/–1 percentage point	9	0.2