Okay, now it's 9:00 A.M. Welcome everyone to this presentation of NCC's interim report for the fourth quarter and full year 2018. To present the numbers, I have with me NCC CEO Tomas Carlsson and CFO Susanne Lithander. Stefan, it's good. After the presentation, we will open up for questions. Since this also is a telephone conference, I would like to urge everyone to use your microphone before you ask your question. With that, I would like to hand over the microphone to NCC CEO Tomas Carlsson.
Thank you, Johan. Good morning, everybody, and good to see so many here. Just to be crystal clear, and perhaps stating the obvious, 2018 was, performance-wise, not a good year for NCC. As for the fourth quarter, it's a step in the right direction, and we will spend some time talking about why that is our assessment. I give you the highlights for the quarter. We have strong orders received in the quarter. We have strong orders received in the quarter, and it's in the quarter, primarily driven by Building Sweden. We have a healthy cash flow in the quarter, and we have higher earnings in the quarter compared to Q4 last year. Worth to notice here is that we have SEK 152 million in restructuring charges as a part of the restructuring charges that we announced in the third quarter.
Of course, the full year is heavily impacted by the revaluations we did in Q3. We have started 4 new property development projects in the quarter, 2 in Sweden, 2 in Finland. The market as we see it in the end of 2018 is overall stable. If you want to have some nuance on that, we have a good market for infrastructure in Sweden and Norway. We have a good market for office buildings, public sector, the industry is still investing, and the exception from that is the residential market in Sweden and Denmark. I think it's well worth noting that we have found other orders received than residential in primarily Sweden, so we are making up for, for that, slower demand in residential. And the performance improvement program that we launched in Q3 is on track.
We're actually moving ahead a little bit quicker, and I will get back to you. Yesterday, after the board meeting for the NCC board, the board proposes a dividend of SEK 4 per share, which is half of last year. So let me get back to that immediately, and let me elaborate a little bit on this. SEK 4, two payout occasions, one in the spring and one in the autumn. In connection with the third quarter capital markets day and the third quarter report, and after making an assessment and evaluation of the entire company, and also assessing our capacity to pay a dividend, my assessment was that we would have the capacity to pay a dividend of SEK 8. Now, that assessment still holds, and the board supports that opinion.
At the same time, you have to acknowledge, and you have to be a little bit humble for the fact that we, for the full year 2018, had a negative operating profit of minus SEK 764 million. We have also taken a more prudent approach to risk in general, to projects in general, to profit recognition in general, and revenue recognition. And after a long and thorough discussion in the board yesterday, the board came to the conclusion that it's that they want to have the same approach for the balance sheet and for the dividend, and hence, the proposal to have 4 kronor in dividend.
Important thing is we have the capacity, we have a sufficiently strong financial position, but this is only a reflection of a more prudent approach to the balance sheet and to the company. We also launched a pretty comprehensive action plan in October for the third quarter. I'd like to give you some highlights on what we've done. What we see in the company is a high level of activity, externally, as evident from the orders received, but also internally. We announced that we would have coming restructuring charges of SEK 200 million for the coming five quarters. That was because we didn't really know when we would be able to charge this.... We have moved on with a high level of activity, closing offices.
We've had redundancies, and we've taken other restructuring measures, primarily in Norway, but also in other countries, and that is the SEK 152 million in restructuring charges. We also completed the divestment of ViaSafe, which is a smaller part of the road services business. We completed the divestment of the Stavanger Business Park, which had been on the balance sheet for a long time. And we are continuing the process of the entire road service business that is going according to plan. And then we have turnaround initiatives for the third of the departments that we felt were underperforming. So lots of activity, good progress, and we are on track with the plan. Looking at the full year and the fourth quarter, and I will start with the full year.
There are some things that I think is important to remember here. High orders received for the full year. All business areas are on par with the level last year or higher. The increase is primarily driven by Infrastructure and by Building Nordics. That leaves us with a healthy order backlog for the full year. We've increased net sales as an effect of the orders received from previous years, but of course, not a good earnings number, driven primarily by the revaluations we did in the third quarter. Moving over to the fourth quarter, also high orders received, this time driven by Building Sweden, primarily driven by Building Sweden. And since I know I will get the question about the residential market in Sweden, please remember that construction is not residential market.
It's an important part, but it's not the entire market. Demand for residential project, it's low, but it's still there, and we have been able to compensate for the lower demand from the residential market in other types of construction, primarily offices and public sectors, schools, swim halls, et cetera. Order backlog, same as full year. Net sales increasing due to the high backlog that we've had for a while, and EBIT improving to SEK 257. Now, add to that, the restructuring cost that I think is a fundamentally good thing, that we have had the possibility to take the actions already in the fourth quarter. We have improved operating profits in property development and in NCC Industry. Given the full year, we are, of course, not meeting our EBIT margin and return on equity targets.
That's a, a consequence of that. But if you look at the net debt to EBITDA measurement, with 1.6, which is still a healthy level for this type of company. I'll give you a number of project examples, first, from the construction business. We are renovating or rebuilding an office building that used to belong to the Finnish Railway Administration, close to the railway station, to a hotel. That is a fantastic project. We have been awarded the second phase of the Fehmarn Tunnel project. The first phase is- And that was contingent on that the first phase was moving along according to plan, and that it is. So we have been awarded the second phase of the Fehmarn Tunnel, that is, close to SEK 1.2 billion in value.
We have been awarded new Fornudden School in Tyresö, Sweden, which is a part of a focused initiative from the Swedish organization to focus on schools, where we see that there will be high demand going forward, in the same way as they have been focused in on swim halls and on hospitals. And finally, we've won the Rud Swimming Center in Bærum, Norway, which is the extension of the Swedish initiative for swimming halls. Finally, internally, we have taken decisions to start four new projects for property development. Two rather large Swedish one, one is Bromma Blocks, close to Bromma Airport. We have one-third letting ratio already when we start the project, which we think is good. It is fundamentally not only a building, it's actually more like a block.
And then we have started a Kineum project in Gothenburg, close to, to the big football stadium in Gothenburg, Ullevi. And when we start that project, we have 70, almost 70% letting ratio, from the get-go. In Finland, we have started two smaller project, that is Fredriksberg B and C. We have just completed Fredriksberg A, and we sold that, with a good, very good result. And with that summary, I will hand over to our new CFO, Susanne Lithander. This is her first quarterly report for, for NCC. It's definitely not her first quarterly report. She has a long track record in Swedish industry, from Ericsson, but most recently as the CFO of BillerudKorsnäs. Welcome, Susanne. Thank you.
Good morning! Not going to trip on that. Let's start with the income statement. Top line in the quarter has increased with almost 10%, and that is, driven by the sales of the property development properties that Tomas has already talked about. For the full year, we have increased our orders intake up to SEK 57.4 billion, and that has been the contribution from all business areas, except for property development. If we move further down, our SG&A expenses have, declined both in the quarter and for the full year. The cost ratio is down to 4.5% in the quarter and 5% for the year. That is explained by a cost savings program that was introduced, a year ago, to save SEK 200 million of overhead cost, and that target has, been achieved.
That brings us to the operating profit level of SEK 256 million in the quarter. And as Thomas has already pointed out a couple of times, that is also burdened by the restructuring cost of SEK 152 million, which is part of the SEK 200 million that was announced in Q3. Our financial net, slightly higher than last year's fourth quarter. That is explained by a higher net debt. Our net debt has increased to SEK 3 billion, 2.3 of that is our pension liabilities, and the pension liability has also increased significantly over the year, over SEK 800 million. So after tax cost of SEK 69 million, we reach a net profit for the quarter of SEK 160 million.
The loss for the year, however, is SEK -750 million, and of course, that is due to the revaluations and adjustments made in Q3. Cash flow. We had a really strong cash flow in the fourth quarter, almost SEK 2 billion, and that is primarily driven by better earnings than last year in the quarter. For the full year, however, we did have a negative cash flow before financing, which is explained by increased investments in property development projects, but also lower earnings. This slide, we have to explain the segment Other and Eliminations. You see in the box there, we have 3 different items to explain this SEK 76 million in a positive contribution. First line is NCC headquarters functions and some smaller subsidiaries or other subsidiaries that doesn't belong to the business areas.
The effect has been SEK 30 million positive, coming from the fact that last year included a lot of extra cost, and provisions, and reserves, and stuff that has been reversed in this quarter. That's why we have a positive effect. Internal gains is the release of internal profits that we can take when we sell off our property development projects. And other adjustments or IAS pension liabilities adjustments that we have to make to match our local books and group accounts. Then coming into the business areas. Infrastructure. Their order booking is slightly below what it was last year, but still very solid. It is explained by the fact that we had a really big mega order booked in the last quarter of last year, the Korsvägen.
For the full year, they have a very strong order intake, SEK 21.3 billion, and they end the quarter with a very strong backlog. Net sales, basically on the same level in the quarter as last year, significantly higher for the year, but their operating profit level is negative, SEK 144 million. That is due to restructuring cost of SEK 49 million, but also driven by a more prudent profit recognition and a larger share of zero recognition to some of the bigger projects that we've taken that are in early phases. Moving on to Building Sweden, and as Tomas already said, they had a very strong order intake in the fourth quarter. And again, to point out that the share of housing in their orders received has decreased.
It has gone from 37% down to 17%, and we have compensated that with orders from other segment, as Thomas has already alluded to. Net sales, slight improvement for the quarter, but significant improvement for the full year, 11% up.... but with also a lower operating profit level, SEK 109 million. That is significantly lower than last year's fourth quarter, driven by higher revaluations in this year's last quarter. They have a target to reach 3.5% EBIT margin, and for the full year, they were at 2.9%. Building Nordics, they have a decline in their order booking for the quarter. That is explained by a more prudent tendering process in Norway. For the full year, however, they have significantly increased their order booking, and that is driven by Finland, and specifically through the renovation segment in Finland.
Net sales have increased in the quarter a bit, and for the full year. And now I have a blank. And the increases on net sales are driven both the increase in the quarter and for the full year are driven by Denmark, actually. For the full year, they have a negative profit, well, they have a loss of SEK 78 million in the quarter, driven by SEK 95 million of restructuring cost, and also very much explained by poor performance in the Norwegian business. We should note that both Denmark and Finland are both profit-making units. Business area industry show a slight increase on net sales, driven by divisions, stone materials in Norway and Sweden, and also the asphalt division.
The asphalt division, however, is primarily driven by increased pricing for energy cost and bitumen. They have a very solid and stable quarter overall. Their EBIT margin ends up at 155, which is better than last year. Last year did include, however, a big revaluation in Denmark, in the asphalt division there. But for the quarter, they did reach the target on EBIT, but for the full year, they did not reach their overall targets on EBIT or ROE. For industry, we also show these volume slides, stone materials in thousands of tons to the left. And fundamentally, this is a very solid business, as you can see, with a decline, third and fourth quarter of this year, which we explain with an ending of the cooperation in the Aitik Mine with Boliden.
The graph to the right is the volume of asphalt sold in thousands of tons, and, we can note that this is a very stable business to be in. Last but not least, property development. They had a really great quarter, sold off 3-4 projects and, some land in Sweden. So they took 4 projects to, profit recognition. Last year, they didn't have any projects, sold in the fourth quarter. Overall, in the year, during this year, they have sold 9 projects. So EBIT in the fourth quarter was according to their targets, above 10%. However, the year is severely impacted by the revaluations made or the write-downs made in Q3 in Norway, Denmark, and Finland.
When they end the year, they have 18 projects in their portfolio, and, according to their plans, in line with that, they have increased their focus on Sweden. 72% of their space is now in Swedish properties. There's also a healthy leasing in the quarter, 53,500 sq m, and as Tomas explained earlier, that is thanks to the start of two really big Swedish projects in Bromma and Gårda, with high letting ratios. Thirty-seven percent of unlet available space has been let during the quarter. Finally, we conclude that property development ends the quarter with a healthy balance between the letting ratio and completion ratio. They have a 49% letting ratio and a 35% completion ratio. With that, I leave it back to you, Tomas.
Thank you very much. I will just conclude, if I get one more slide. The summary for the fourth quarter is, we had good cash flow. We had healthy orders received, improvement, particularly in Sweden. We had an improvement on the earnings, and especially if you consider that together with the revaluation that we had the opportunity to do already the fourth quarter last year, and we have started four new property development projects. Overall, a good market, and the performance improvement plan is on time. And with that, we open up for questions, and I'm going to move a little bit, so I'm not looking into the projector.
Thank you, Tomas. Let's start here in first quarter.
I mean, the biggest question for me, I guess, is the infrastructure margin. Just to understand that, you're talking about, say, having projects that you are running at zero, as you wrote down in the last quarter. You're starting up projects, maybe they are running at zero as well, but the underlying loss is SEK 96 million or SEK 98 million. How big is the... If you take the overhead, I mean, it's one thing to run the projects, but how big is the overhead in that division? Just to understand where the rest of the projects are running.
Are everyone on zero, and it's the overhead which is the cost, or do you have new problems arising that you have written down and taken the charge for, but not told us?
First of all, no new problems, so it's stable, and I'm confident that we're back on, you know, the way the business should operate. So I'm confident that we are doing the right things, and we are on the right level. But you have to remember this: this is, regardless on how well you are doing or not, this is a low-margin business. So if you have the fundamental overhead for the business area, you consider that we have a large part of the business in Norway running on, and also a significant part in Sweden, running on a zero margin, for a couple of more quarters.
And then, if you, on top of that, add a more prudent profit recognition in the projects that we have, and then on top of that, you add more zero recognition to build in a buffer in the business area, this is the result you get to. I'm really confident that we're moving in the right direction, but expect that improvement to take some time and to be slow, because we're going to be careful, prudent, and deliberate in what we do.
Yeah. So I guess you won't say the number the overhead is on, but-
Was it that obvious?
Yeah. But I can turn it around. I mean, my impression then, from what you're saying, is that on project level, you're more or less running everything in infra on zero.
A large proportion, and then prudent recognition in the remaining part, and then increased zero recognitions is where we sort of build a buffer for you in the company.
Okay. Thanks. Then a boring question, but the division, the roads division and the parts that are for sale, I noticed you've included that in the reporting on the normal lines and not taking it as discontinued operations, which would be outside of the P&L. Is that the way you're going to do it also for 2019, just so we get the numbers right there?
We will have a line like this, so you can see what's this, but we're not going to change the way we do it going forward.
Okay.
Albin Sandberg, Kepler Cheuvreux. I have three questions. The first one, going back to the dividend, I'm glad that you were willing to take that discussion, because sometimes you're just referring to the board. But, if, if we look at NCC in the next two or three years, is there any reason why this kind of cautious view should, should stop? Because I get, like, a dual message. You say that you have the capacity, but still you don't do it, so what would change you?
Well, you know, if you refer to the discussion that the board held yesterday, and that was a very thorough and, you know, talking about different aspects on how you can think about dividend. And the board is very much aware of that dividend has a signal value, and you can read all sorts of things into it. But it fundamentally boils down to the following: You need to have enough capital, and we have that, and then you need to have a safety margin, and we have that, but then you need to think about, you know, how's the company doing right now? And I am full of confidence what we are doing going forward.
The board is full of confidence in that we are doing the right things, but that is not a known entity. It is something that we are planning for and going forward with. And also, you know, we didn't make any money in this year. So, you know, given that, the discussion was how prudent should you be going forward, and we came up with SEK 4. You should not read in any type of magic understanding about where the markets are going. That, I'm sorry, Board, that was not the idea. It is not a reflection of that we see hidden or strange risks in the company. It's more, it's only a prudent approach to the company.
Well, acknowledging that the company hasn't been doing well for a couple of years, we're doing the right things, but that's not a known entity for now.
... Okay, thanks. And then obviously order intake very strong, although, in the past few years, NCC has not really delivered on the volumes. You've been on the company now for quite some time. Do you feel that the order intake during Q4 is well controlled, the risks are well mitigated and so forth?
That is absolutely—I mean, this, this is the business where we handle risk, but I absolutely feel that we have a more thorough process on assessing the projects that we, that we take on. And so it's a good thing. And we have order intake in areas where I think we should have order intake. And if you look at, infrastructure, it was driven a lot by Norway, and that is, the Follo Tunnel, which is performing well. It's the extension of a well-performing contract, which is good. And then the other large contracts that we have won in Norway, we have scrutinized them very thoroughly before accepting the contract.
Okay, thanks. My final question is just, so I get the restructuring choices right. The SEK 200 million is still valid, and you've taken SEK 150, so there's SEK 50 more to go in-
Yes.
Yeah. Okay. Thank you.
Niklas Haglund , Nordea. A couple of questions from me as well. If we start with building margins, you also in the building is both in Sweden and I guess in the Nordics, you talk about dilution. Could you elaborate a little bit on more on the sort of magnitude of dilution and maybe on timing, where these large projects will start generating profits? Thank you.
For Building Sweden, I see the earnings in the quarter are more of a temporary effect. There are two effects that you have to factor in here. One is that we have a spillover from write-down effects, write-downs that we did in the third quarter, and that is impacting the third quarter for Building Sweden as well. But I assess that that is short-lived. And then when you compare to the fourth quarter last year, it was also actually positive write-ups in a number of large projects that ended. So I'm fundamentally confident that Building Sweden will be back on track with where they should be.
That's also partly the reason why I'm emphasizing this, that we have managed to compensate for the residential market, because people tend to read in too much in the residential market. Building Sweden is fundamentally a good business.
On the Nordic side, are there any more, I mean, loss-making projects, or any sort of hiccups?
Nothing out of the ordinary, because there will always be some write-ups and write-downs. We have profits in Finland and Denmark, which is good. And the reason why we split the big business area to a Swedish and a Nordic part was to acknowledge that the Nordic had different stages of turnarounds, and we're working with that throughout all the countries.
And then a follow-up on the infrastructure part. You're mentioning that the Danish and Finnish operations are and Swedish are doing better than the Norwegian. Could you elaborate a little bit on the sort of magnitude of losses you're operating with in Norway for the full year, excluding charges?
They are unacceptable, too large. We think it will take some time to get back on track in Norway, but we think it's doable. You have to remember that the profits that we have in Finland and Denmark are encouraging, but not where we expect them to be long term.
You're also talking about that it will take time, but, I mean, when will these projects be finalized?
The big projects that we made write-downs in Norway, and that was probably the largest impact, they will be finalized during the second quarter next, this year. It's 2019, this year.
Yeah. And then my final question is on the central and admin line. A lot of provision reversals. Could you give some guidance on the sort of underlying costs on a more of a central line, all else equal?
I would say that we have one-off effect this year that makes the quarter a little bit lower than you should expect going forward, but we're aiming for 5% as a run rate.
On an SG&A line?
Yes, SG&A.
Okay. Thank you.
Thank you. Erik Granström, Carnegie. I had a few questions on property development. Do you sort of foresee any opportunities for divestments in 2019? You do have two major projects in Solna running right now. At least one of them is, for understandable reasons, running at a high letting rate. Do you foresee sort of the opportunity to divest that, or would you like to complete it fully before you divest it?
Yes. The short answer is yes. We see a potential for selling the development projects this year as well.
Okay. And then my final question on property development was, you mentioned you had land sales, which is then obviously affecting the profitability in Q4. Was that purely affecting the EBIT line, or was there any sales figure in that? Because usually land sales tend to be profitable?
The land we sold were the land that we wrote down in the third quarter. As you may remember, we wrote down one finished office property in Stavanger that has been sold. We wrote down an additional nine pieces of land and property in Denmark and Finland, and that has been part of what we've sold. We sold three pieces of that, and then we have sold finished projects in Finland and Denmark.
Okay, but if we were to-
The land is not that profitable.
No, okay.
That's the short-
So it's basically not boosting the figures to any great extent?
No, no.
Good. That's basically what I was-
No
... looking for. My final question is, again, on infrastructure, and perhaps sort of try to twist the question another way to see if we get another answer.
Mm-hmm.
If you were to exclude those major projects in Norway where you've made write-downs, which will be completed in Q2, if those would have been out of the books in Q4, would Norway have been profitable for infrastructure?
I haven't done that exercise, but my thinking about it for 15 seconds, I would say yes, but on a low level.
Okay, thank you.
Thank you. Is there any more questions before we let the telephone conference-
Oh, we have one more here?
Mattias Holmberg from DNB. Would it be fair to assume that road services would be divested within one year?
My ambition is to go ahead as quickly as possible, but we want to get the fair value for it.
Am I fair to assume that this division have...? You tried to sell it before you started at NCC?
No.
The overall more cautious profit recognition in both in infra and building will that drag down the margins for a couple of more quarters before reversing that effect towards the end of these projects towards completion in let's say two years' time? So we should expect-
What part? I missed the first part of what you said.
The more cautious profit recognition in building and infra, would it be fair to assume that that will drag down the margins now for a couple of more quarters in the beginning of those new projects in infrastructure and as well in building, and then reverse that effect, a more positive EBIT margin towards the end of the projects sometime next year?
There are three parts of that. Would it be fair to say that it would impact the earnings on the buildup phase, and it will be a slow improvement? Yes, because we will try to build buffers in the system. Second part was, will it be fair to assume that we will re-release those buffers at the second part? No, that's not the plan. The plan is to have a stable and long-term business. And third part was, will that impact those two impacts be evident in 2019? And I would say, no, the buildup will be evident, but we will not release any buffers in 2019.
Thank you.
Okay, let's hear if there are any question on the, from the telephone conference.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from the line of Tobias Kaj from ABG. Please go ahead.
Yes, thank you. Most of my question has been asked, but regarding the dividend, you say you have the capacity to pay SEK 8. However, when look at the equity ratio, it's at 11% at the moment, and around 10% adjusted for change in accounting from 2019. How long would you be willing to go in terms of equity rate, equity ratio? You don't have any target low anymore, but do you still think you can operate at single-digit levels, or?
That is a question that is really important and was part of the consideration that was made yesterday. Assets to equity ratio is of course one key metric to look at. Given the structure of the company, where most of our assets is current assets, it's perhaps not as important, but we're looking long-term to improve on that.
Okay. And also regarding your financial target, I mean, you kept the return on equity target of at least 20%, but given the very low equity base at the moment, that would only imply like 5.5 in EPS for 2019. Why did you keep the return on equity target of 20% despite your margin target of 4%, which rather implies a return on equity of something like 40%?
The short answer to that is that we will have to consider that more going forward. The change on targets that we did in October was to emphasize that we... I think we had 15 different targets for the group, and what we wanted to do was to cut down the number of overall important targets for the group and maintain a few ones. The return, we understood that we were really far from meeting any type of return on equity target this year. So what we said is that we will have to revisit that and find some kind of return target that better reflects the type of business that we are in now. But we haven't done that, and that it's there are good causes to come back to that.
Okay, thank you very much.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. As there are no further questions, I'll hand back to the speakers.
Thank you. Is there any final question here in Stockholm? Okay, then we thank everyone for showing up. Thank you.
Thank you all. Thank you.