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 |
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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. |
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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 |
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3. Shortage of material and |
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. |
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People |
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4. Skills supply & |
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. |
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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. |
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Management |
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6. Management of |
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. |
Specific for Business Area Industry:
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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 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. |
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IT |
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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. |
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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. |
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Compliance |
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10. Compliance |
Risk for penalties and sanctions, branding, law suites, cost of disqualification in public tenders due to compliance breaches. |
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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. |
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. |
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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. |
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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. |
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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. |
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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
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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 |