Good morning, everybody, and welcome to this presentation of the Third Quarter Earnings for the NCC Group. My name is Tomas Carlsson, and I'm the CEO of NCC. With me, not in the room but online, I also have our CFO, Susanne Lithander. You can think about this quarter this way: stable earnings, really good cash flow, good quality in the order backlog. With that, I could continue as we normally do these presentations. Let's talk about the two big things in the material that we communicated last night. That would be the short-term issue of orders received, and then the long-term development issue of changes to Business Area Industry. Let's begin with orders received. The orders received for this quarter are, no matter on how you look at it, significantly lower than last year or lower than expectations, so they are low.
The questions that you may ask yourself is this depending on the market changing its character? The answer to that is no. Is this an effect of the coronavirus pandemic? The answer to that is equally no. We understand what this comes from, and that makes me comfortable for the orders received and the order backlog going forward. Let me try to walk you through my thinking. If we look at the orders received for the contracting business areas of the NCC Group, they have different characteristics. Let's start with Infrastructure. The business area has had relatively low orders received throughout the year and also this quarter. This is fundamentally due to two things.
We have, for almost two years now, actively been working with more prudent tendering, making sure that we have the right price, the right risk profile, and the right competence to carry out the projects that we tender for. That's true for all business areas and all of the business, but maybe particularly for Infrastructure and even more in particular for Norway. That should have an impact on the orders received. Also in this quarter and during this year, we have a higher proportion of projects in early involvement stages than we normally have. That is, projects where we are working together with our customers to define the project and where we expect that there will be an order received coming later in the process. That gives me a confidence for the orders received for the Infrastructure business area. Moving on to Building Sweden.
Orders received for the quarter, low, absolutely. For the year-to-date period, actually high. Higher than last year and on a generally high level. This is more of a normal variation that we can see in this type of business. Then Building Nordics, where we've had lower orders received throughout the year and also this quarter. Two reasons, basically. Starting with really high orders received last year in Denmark, exceptionally high orders received last year, and relatively good orders received in Denmark year-to-date. A little bit lower in Finland, but we also see that there's lots of activity in both the Danish and the Finnish market. I feel confident that this is just a natural fluctuation. That's one way of looking at it. The other way would be to compare it with net sales.
As long as we have order backlog that is on or about one year's worth of sales, that's a relatively good backlog, and that's true for all business areas. If we are looking at the infrastructure that has a larger proportion of early involvement projects, that means to me that we could expect higher orders received going forward than we normally would do from this point forward. Good explanations and a number of correlating factors that impacts the orders received for this quarter. To me, no drama, and that we know the reasons gives me a comfort for the quality of the order backlog and the business going forward. Order backlog looking like this, on a good level, not the highest level, but still on a high level.
That was the orders received. Let's talk about the other thing, the changes of management and our restructuring plan in the Business Area Industry. First of all, I'm happy that I can appoint Ylva Lagesson as the new head of Business Area Industry. Ylva has a background as an engineer. She has a long career within NCC and outside NCC from all aspects of the construction industry, working in business positions as well as in staff functions. She has been working outside NCC in a number of different positions over the years. Ylva will head up Business Area Industry. She will therefore leave Development & Operations Services. That is our IT and process development unit. We've reviewed the organization, and we see that there's a strong interconnection with finance. Susanne Lithander will, in addition to being the CFO, also take on responsibility for Development & Operations Services.
Susanne has experience from doing this previously, and is extremely well-suited to run both of these functions in the group. Jyri Salonen, the former head of Business area Industry, will leave the group. This is triggered by something. That's triggered by that we see that there's more potential in our Industry business. The Business area has been, and it still is, very stable in its performance. I think that you can expect more from this Business area. Therefore, we are launching three initiatives in the Business area. One is a reorganization of the division Asphalt, a new and leaner organization. We see that there's a strong potential in Sweden, Norway, and Denmark. We expect to have a sustained reduction of our annual cost base with SEK 50 million per year already from 2021.
This comes at the cost for the restructuring at SEK 65 million. We expect to take the majority of that in Q4, but also some in Q1 next year. That's the first initiative. Second initiative is that we now start work to find options on how to exit our Finnish Asphalt business. There's no real strategic fit within the business area or with other units within the NCC Group, and that's the primary reason. It also hasn't really been performing financially the way that I expected it should do when we started the turnaround in 2018. Primarily because it doesn't have a good strategic fit to the Group and the business area. Third, we're moving our foundation business that we run within the subsidiary Hercules. We will move that from Industry to business area Infrastructure.
There's a better strategic fit and a better business fit between Infrastructure and Hercules. I think that will be beneficial for both Infrastructure and also for Hercules. That was the big plan that we launched yesterday. In addition to this, and this is completely unrelated, our head of purchasing, Harri Savolainen, has decided to leave NCC to pursue another opportunity, and we wish Harri good luck with that going forward. That was the two big things from yesterday's news. From now on, I will stick to the regular schedule we have for a quarterly report. Net sales for this quarter, a little bit down compared to last year. Two main reasons. One is that PD hasn't sold any property this quarter.
That is along the lines of the nature of the property development business, where properties sold whenever they are ready, and it's not normal that we sell some property every quarter, or not even actually for more than several quarters. Building Sweden has somewhat lower net sales because on the back of lower orders received last year. We will see for Building Sweden that they are maintaining the profit and increasing profitability. Operating profit in the quarter is on par with last year. I think it's well worth noting that the contracting business and industry are on par or better than last year. Since PD hasn't sold anything, they have a lower earnings than last year. In contracting and industry, they're on par or better than last year.
We have increasing profitability and the 4.4% profit in the quarter. Health and safety remains an important topic for us. We had a small uptick last quarter. We have the same level of small downtick this level. This is the one-day absence frequency for the group. We see the same pattern on a stable but low level for the group on the frequency for four days absence. As a part of this job with health and safety, we, in September, held our 10th Awareness Day. Every year, all employees and subcontractors for the NCC Group take time during the same day in September to think about how can we improve health and safety on our site. That's true for the projects as well as our offices. Some few words on the market.
We see some signs of a slowdown in some segments due to the effect that the corona pandemic has had on the general economy and society. We have a strong underlying demand for our products and services. The long-term negative impact from the corona pandemic and the decrease in GDP is still very hard to assess. It depends on how long it will be. It also depends on what kind of mitigating actions society will take. We see signs of slower decision process, mainly in the commercial property market. That may have an impact going forward, but also equally hard to assess. Our ongoing projects had no significant impact by the corona pandemic so far. In summary, stable earnings, good cash flow, and order backlog in good shape. Margins and earnings better or on par with last year.
All contracting business and Industry, property development, no sale, which of course, has an impact on the earnings. Strong cash flow. Different drivers behind the lower orders received. Prudent tendering, more early involvement, normal quarterly variation. Order backlog higher than net sales in all business areas. New head of business area Industry and a plan to boost performance to unlock the potential of Industry launched yesterday. In addition to the normal summary, please remember that we will have an extra EGM on November 12th, where the board has proposed a dividend on SEK 2.5 million for this year. With that, I hand over to Susanne Lithander.
Thank you, Tomas, and good morning. We start with our largest business area, Infrastructure. They had an orders received of SEK 2.9 billion in the quarter, and SEK 10.9 billion for the nine-month period. Both periods below last year. As Tomas has already explained, for Sweden and Norway, this is due to selective tendering and more than usual number of orders in early involvement phases. They end the quarter with a back level SEK 18.1 billion. Net sales decreased in the quarter to around SEK 4 billion, but on the nine-month period, they grew 1.6%, coming from the Swedish operations. Operating profits and margins continue to improve, and it's the seventh consecutive quarter for the business area with improved earnings compared to previous year. EBIT was SEK 110 million in the quarter, and the margin was 2.8%.
The improvement comes from volume in Sweden and improved margins in the project portfolio for both Sweden and Norway. We still have a prudent approach to profit recognition, and we continue to recognize some of the large, complex projects in early phases to a zero margin. Road Services on the bottom there. Now a smaller business due to the prudent tendering after our decision to divest the business. The negative earnings in the quarter is due to a revaluation that we've made of the remaining contracts that we have in our business in Norway. On this next slide, we have some more details around the divestment of Road Services. The Finnish and the Swedish operations sold to Mutares are now closed the other day, and the divestment of the Danish operations to Arkil is in process, and there's competition filings there to be done.
Road Services Norway, that will remain within the company. Will be reported moving forward when we have closed the above divestments in other and eliminations, but operationally, they will be managed by the BA Infrastructure in Norway, but they will not be reported within Infrastructure. Moving on to the next slide. This Building Sweden had a lower order intake in the quarter, SEK 2.4 billion, which is normal variance between the quarters. For the first nine months, the order intake has increased approximately SEK 2 billion, and the backlog grew to SEK 17.6 billion. The increase includes the large hospital projects for Region Sörmland in Q1 of SEK 2.4 billion. Worth mentioning is that public building has increased and accounts for 32% of the orders booked for the first nine months. Net sales decreased in the quarter and for the nine-month period to SEK 9.6 billion.
That's due to the lower order booking last year, of course, but also in the quarter, July and August net sales were somewhat lower than usual, but after the vacation period, it picked up again back to normal pace in September. Earnings were SEK 78 million in the quarter and SEK 255 million for the nine-month period. That's basically the same level as last year, but with improved margins from the improvements in the project portfolio. Margin was 2.9% in the quarter. Moving over to the next slide that shows the order bookings by quarter for Residential. The third quarter this year, as you can see, was above average, SEK 1.2 billion, and more than 70% of that was for rentals. Next slide is Building Nordics. Their orders received for the quarter was SEK 1.2 billion and accumulated SEK 6.7 billion.
Compared to Q3 last year, the decrease is due to several large projects that was booked in Finland. For the nine-month period, the decrease is due to exceptionally strong order intake in Denmark during the second quarter last year, and Tomas already mentioned this. The backlog, SEK 13.7 billion, is still a high level for the business area. Net sales, SEK 2.8 billion in the quarter. It's a decrease primarily due to the Finnish operations in the quarter. For the nine-month period, net sales amounted to SEK 8.8 billion, and that growth is driven by the Danish unit. As you can see, Finland is still the largest unit with 50%, followed by Denmark, that has increased its share to 36% of sales over the nine-month period. Earnings in the quarter was on the same level as last year, and it increased for the nine-month period.
The increase in earnings is driven by the sales growth in the Danish operations. Project margins continue to be subject to cautious profit recognition. The margin in the quarter was 1.8%. Moving on to the next slide, Business Area Industry. The volumes for stone materials are down in the quarter, and the volumes for Asphalt were on par with last year's third quarter. Next slide in Business Area Industry. They had an order intake of SEK 2.4 billion in the quarter. A slight decrease compared to the same quarter last year, due to the fact that the Danish Asphalt unit had a very strong third quarter last year. For the nine-month period, orders received were SEK 9.5 billion, which is also decreased compared to last year, that's primarily driven by the lower bitumen prices for the Asphalt unit. Net sales were SEK 4.1 billion, decrease in the quarter.
The nine-month period decreased to SEK 8.9 billion. That's driven primarily by the decline in bitumen pricing in Asphalt. Sweden is the largest market with 55%, followed by Denmark. Earnings was SEK 395 million, which is slightly better than last year, and it's due to the improved earnings from the Asphalt business. For the nine-month period, operating profit was SEK 290 million. This is a decrease, and it's due to the lower volumes in the Swedish stone business. The margin was 9.6% in the quarter. On rolling 12, the margin is 3.8%, to compare with a target of 4%. Return on capital employed is 8.3%, and that's also below their target of 10%. Moving on to the next slide on property development. Net sales was only SEK 18 million in the quarter and SEK 2.3 billion accumulated. We had no property sale in the quarter.
Accumulated, we have big impacts from Fredriksberg B and C in Finland and also, of course, our headquarter in Solna, K12. Earnings was SEK - 11 million since there was no project recognized. After the third quarter, the rolling 12-month margin is 15.3%. Return on capital employed to 12.2%, above their target of 10%. Next slide show the project starts. We only had one project start in the quarter. Fredriksberg D office project in Finland, which is 73% let to MTV. Totally, we have started three projects so far this year, and at the end of the quarter, we had 15 ongoing projects. Next slide, the letting. The letting amounted to 37,400 sq m for the nine-month period and 11,900 sq m in the third quarter.
This level is on par with the previous quarters, as we have mentioned, and Tomas has mentioned, letting is impacted by the coronavirus pandemic uncertainty. There is activity in the market. There's a lot of uncertainty. Moving on to the next slide, the ratios. This slide shows that we continue to have a healthy relation in our portfolio between our letting and completion ratios, with a higher letting ratio of 58% and a completion ratio of 51%. Next slide, the rest of the income statement after having looked at the business areas. The business areas have earned SEK 592 million in the quarter. Then we look at the other and elimination segments that typically has a negative impact. First, we have the cost for headquarters and smaller subsidiaries and companies that don't belong in the BA.
The costs here are seasonally lower in the third quarter due to the vacation period. This quarter they were actually positive SEK 17 million, but that's due to the fact that the explanation to why it is so much better than last year, even if we had low costs also last year. Last year, we also had insurance damages in the cost there, which we didn't have this year. That's why we have a positive impact this year. Next item is internal gains, where we eliminate the profits in property development projects during the construction phase, and we reverse them when we recognize profits in our PD project. Negative SEK 35 million is the net impact in the quarter as we haven't recognized any projects in property development, but we continue to build.
In other group adjustments, we have various accounting adjustments. The main impact in the quarter is an adjustment for pensions according to IAS 19. In the accumulated number there, for the nine-month period, you have a large impact of negative SEK 180. That comes from the IFRS 16 adjustments we have to make for the sales and lease back of the new head office in Solna. That adjustment we have to reverse according also to IFRS 16 over the period of time that we lease the contract, which is 10 years. So every quarter it will have a very small positive impact moving forward. That brings us to an EBIT of SEK 567 million, same level as last year. For the nine-month period, we're up 57% to SEK 981 million compared to SEK 626 million last year.
That improvement is primarily driven by the profit recognition of K12 in PD, property development, also the significant improvements from Infrastructure. We have lower financial net due to the fact that we have lower corporate net debt, our tax cost is low, that's explained by the fact also that we have a large portion of our profits for the first nine months coming from property development and the K12 recognition. The net profit for the period is 488 million SEK and 839 million SEK for the first nine months. Next slide is our cash flow. We continue to have a very good cash flow, for the first nine months it was 63 million SEK. Even if it's negative, it's still good for the quarter. Compared to previous years, it's a significant improvement.
Cash flow from improved profit comes from PD and our construction unit was almost SEK 800 million in the quarter, and it was SEK 1.6 billion year-to-date. We continue to invest in our property projects, but we have fewer projects started and fewer ongoing projects than we had last year, and we've also sold more. The big quick K12 has a big impact here as well. We had four more projects ongoing last year, significantly less projects ongoing. That affects this item. We have a negative impact from working capital in the quarter, but it's much less negative than last year. Primarily, we have had good collection and decreased accounts receivables, and that's explaining the improvement here. Investing and CapEx is slightly up in the quarter, but on a quite undramatic level.
For the year it is lower, that is due to the fact that we have pushed investments, especially in the machinery within Industry. Continued strong cash flow. Moving on to the next slide, our net debt. That has decreased significantly compared to last year the same period. It was SEK 5.1 billion compared to SEK 8.1 billion Q3 last year. Corporate net debt is only SEK 175 million, our pension liability decreased to SEK 2.7 billion. That's mainly due to actuarial changes. To be specific, it's the inflation rate assumption that has been lowered. The remaining net debt, SEK 2.1 billion is the leasing liability according to IFRS 16 accounting. The increase compared to last year is driven by the sale leaseback of our head office. As you know, we have a target to have the net debt EBITDA ratio to be below 2.5 x.
After the third quarter, we are 0.08 x. With that, I hand over back to you, Tomas.
Thank you, Susanne. Before I do the summary, I have a couple of things to talk about. The first one is, again, to remind everybody that we have an EGM on November 12th. It's a digital EGM. You can vote digitally or by mail. Remember to register for that and to vote. More information on ncc.com/ir, and the proposal is 2.5 SEK per share in dividend. Please remember to do that. Second thing is that we will have a Capital Markets Meeting on the 18th of November, where we will do some updates on what we've been doing since our Capital Markets Day two years ago. For more information about that, again, go to ncc.com/ir to read more about this Capital Markets Day. I hope that I will see a lot of you participating in that Capital Markets Meeting. With that, back to the summary.
Think about this quarter as stable earnings, good cash flow, and order backlog in shape. Margins and earnings better or on par with last year in the contracting business and in Industry. Property development hasn't sold anything. Strong cash flows. A couple of different drivers behind the low orders received, all in line with prudent tendering and more early involvement, all in line with our activities to have a better quality in the order backlog and then some normal quarterly variation. Order backlog for the group higher than net sales in all business areas. With that, we open up for questions.
Thank you. If you wish to ask an audio question, you may do so by pressing zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, it's zero one on your telephone keypad if you wish to ask an audio question. There'll be a brief pause while we wait for questions to be registered. Our first question comes from Stefan Andersson from SEB. Please go ahead.
Thank you. A couple of questions from me then. First of all, on the Hercules revenues, could you maybe indicate what kind of size we're talking about and when it comes to revenues that is moving there? I guess profitability is low, so I don't need that one, but just to understand what we're moving and is it going to be done already in the fourth quarter, or do you move it to the year-end? Are you adjusting the history if you move it now in the fourth quarter?
I think that's primarily a question for you, Susanne. We will operationally move Hercules immediately, but from an accounting perspective, it will be done from 1st of January. It's a relatively small part of industry. It will have an impact but no major impact.
Yeah. Revenue, sorry profitability-wise, is it rather low or is it in line with the industry?
It's profitable, roughly in line with the industry.
Yep. If we go to the construction parts, hearing from some other players out there a little bit about the lower demand means that there's some price pressure or competition heating up in some other areas. Is that something that you've seen at all, or any comments on that?
No, and I realize that this may sound very strange, but during third quarter, we haven't really seen that. We've seen activity from our customers on approximately the same level as we've seen before, and we've continued to work with projects approximately like before. Now, some of the projects have not been signed during the quarter, but that's come up later. For example, we announced a big railway depot in Stockholm yesterday. That is more or less the effect of work done in quarter three. So far we haven't seen it, but going forward, it is very hard to assess what will happen, given the impact of the pandemic on the general economy.
Thank you. A question on your development business there. How do you think about that? You do have a strong balance sheet. You've been talking about beefing that division up, and at the same time, I guess hotels and retail should be out of the question. It's office space. What is your think? Are you willing to take the risk to start on speculation here, or do you have to wait until you have tenants aboard to a large portion? In that case, how are those discussions going at the moment?
We have a day-to-day opinion on that, but right now, with the heightened degree of uncertainty in society in general, we are more prudent when it comes to starting new projects. That doesn't mean that we're not starting projects. We have started Fredriksberg D during this quarter, and we have other projects planned. As a general rule of thumb, I would say we would like to have a somewhat higher degree of pre-let before we start.
Okay, my last question, a little bit of a follow-up, I guess, on that. Given the very strong balance sheet and you're way below the debt level you've been talking about as a target, alternatives to beefing up the development stream then, if let's say that you're not able to really beef that up, could you see any alternatives? The obvious one would be to look at acquisitions, for instance, to get growth going, or something else that I can't think of. Do you have any ideas there?
We have the same alternatives as all companies. The nature of those are that we will come back to that when it happens.
Okay. Thank you. That's all from me.
Thank you. Just as a quick reminder, if you wish to ask an audio question, you may do so by pressing zero one on your telephone keypad. Once again, it's zero one on your telephone keypad if you wish to ask an audio question. Our next question comes from Albin Sandberg from Kepler Cheuvreux. Please go ahead.
Yes, hi there.
Albin.
I just had one question, and that was on Susanne's comments on the cash flow. If I understood it correctly, that you've been quite disciplined on, let's say, CapEx and so forth, but is this a level that is now sustainable or if activity picks up, then that number also needs to come up? I didn't really get it what you meant.
On CapEx or on cash flow in general?
Yeah. Well, I guess both.
Yeah. Susanne, would you like to elaborate? I have an answer, but maybe you would like to elaborate first.
You go on. You're in the room.
Okay. CapEx, we are on a somewhat low level because we have postponed some investments in Industry, basically preparing for the changes in Industry that we've seen now. I would expect that those investments would go up somewhat going forward. That's my first part of the question regarding CapEx. Second is general cash flow. We've been working quite actively on making sure that we get paid for whatever we have due to be paid. You can see that rolling 12, we have almost SEK 4 billion in positive cash flow. It's a combination of sold property, but also we've invested in property, which goes the other way, higher degree of invoicing, and also collection. I don't think you could extrapolate the cash flow, in general, going forward, but we will try to maintain the discipline we have now.
Can I just add there?
Yes.
That I think, not that we give any forecast, but if you go in and look into our balance sheet, you will find that we have a lot of large prepayments in large contracts, and we work those off, so to say. Sometimes they are being worked off heavily, which we are in a state right now. I can see that that will have an impact moving forward, working off of large prepayments in larger projects. That will have a negative impact.
Thank you.
On the working capital side.
Yeah. I understand. Just Tomas, I think you mentioned there the changes you do in Industry now. Why now, why not back in 2018 when you did your first real review, that it had underperformed as far as I could understand you. Of course, NCC is a big operation. Post that, let's say, action, do you feel NCC is in a steady state mode or are there any other, let's say, big tasks on the agenda?
A couple of things on that. Industry had a steady and quite good performance over the years and still have. This action is not prompted by underperformance per se. We think that there's even more potential to be unlocked from Industry, and that's the trigger. Why we didn't do it earlier was that when I restarted two years ago, I spent the most of my thinking and the team's thinking about on the really underperforming units, and then gradually more attention to other parts of the business and see what kind of potential we have going forward. That's the reason why we didn't do it earlier. You had another part of the question that I actually forgot to do when I answered. What was the other part, Albin?
No, it was more, obviously you have a capital market space, and maybe we'll come back to that. Is NCC done now?
Yeah.
Sort of in a steady state-
Yeah.
Is there anything else?
Yeah, exactly. My general attitude is that you're never done. Maybe we will have not these big changes every quarter, but you're never done.
Great. Thank you very much.
Thank you. There appears to be no further questions, so I will hand back to the speakers. Apologies. There appears to be a few more questions registering now. Our next question comes from Tobias Kaj from ABG. Please go ahead.
Yes. Thank you. I just want to follow up on Industry. You say that you aim to do cost reductions of some SEK 50 million on an annual basis, which is almost 40 basis points on the margin. Do you feel that you need to do this to be able to meet the 4% margin target, or do you see reason to maybe change your margin target for Industry due to the savings?
The driver is not comparing to the target, the driver is what can we do to be more competitive. We haven't really put it into a perspective of meeting or not meeting the margin target. We'll come back to targets on the Capital Market Day.
Okay. Thank you.
Our next question comes from Erik Djurström from Carnegie. Please go ahead.
Thank you. Good morning. I had two questions. One was related to Infrastructure and the fact that you are now moving the Road Services part, or basically the Road Services part in Norway. Should we assume that is an operation that is up for sale, or is this something that will stay on with NCC and the effect that you had in Q3, should we expect that to be a one-off or is there a risk in the backlog for coming quarters as well?
It's definitely not the business that we will sustain. It's six contracts, and we will not take on any further, but they are pretty long. It's not the business where we aim to remain. Anybody that wants to buy it, call me immediately and we'll talk about it today. I'll make a time slot for that. There's a reason why we still have it, just to be clear. These are contracts with some built-in risk. They are long, and they are service contracts with earnings depending on how much it snows and what kind of maintenance you have to make on Norwegian roads. I would say that there's not a big risk, but compared to what I would like to see, there's somewhat of an elevated risk going forward. We're not talking about huge project risks.
Okay. Thank you. My final question was then again on Industry and the idea there. Should I interpret it as the opportunities that you see within this business area is mainly related to cost savings, basically, these are all internal adjustments that you are making in order to fine-tune the profitability, or is this, in terms of opportunities, a way for you to grow this business?
We see a short term, and now immediately we see an opportunity to do cost savings, but we see also opportunities to improve and grow the business in general. With the exception of Asphalt Finland, that is up for sales.
Okay. Given that this kind of a market in the Nordics seems to be rather mature, are there low-hanging fruits in terms of growing this operation in the Nordics, or is there something else that we should be aware of?
No low-hanging fruits, but we think that we can increase both margins and consistency in some parts of the business.
Okay. Thank you very much. Thanks for having me.
Thank you. There appears to be no further questions, so I will hand back to the speakers.
All right. If there are no further questions, thank you for attending this reporting of the third quarter. Also remember, EGM and Capital Markets Meeting coming up in November. Thank you, all.