Good morning, everyone, and welcome to this presentation of NCC's year-end report to 2017. First, I'd like to apologize for the technical mishap we have. We are a few minutes late, but I'm sure we will have plenty of time. With me here today, I have NCC's Acting CEO, Håkan Broman, and NCC's CFO, Mattias Lundgren. After their presentation, we will open up for questions. Since this is a webcast broadcasted on the internet, I would like to urge everyone to use a microphone and state your name before you ask your questions. With that, I would like to welcome NCC's CEO, Håkan Broman, up on stage. Please, Håkan.
Thank you, Johan. This is my first time in this role on this stage. I will tell you a bit about where we are and what we're doing. Year-end report. As you see, tillförordnad in English is acting, so unlike a normal CEO, I'm an acting CEO. So what actions have I taken? Well, I wanna show you what my priorities are, and there are two only, no more, no less. It's profitability, and it's work site safety. That is what I concentrate on. We need to get control of parts not performing, and that is a main task that we have. We also need to reverse the cost trend in the company, but that is actually what we are doing at the moment. We have initiated a cost reduction program, that I am all behind, of course.
I have initiated it, and we are currently carrying that out. This will lead to an annual overhead saving of SEK 200 million. This is found within the support functions mainly. We will move support functions closer to the business operations, closer to the line organization, where we will have a higher output from those support functions. We will have full effect this year already, and we took the reduction cost in Q4. That was part of the profit warning. The other subject that I focus on is work site safety, and this will be part of our quarterly report in April for the first time. I just want to underline how we work it and what it is.
It is actually something that is measured according to an industry standard called the Lost Time Injury Frequency. That is calculated as work-related accidents with one day or more leave from ordinary duties per 1,000,000 work hours. Our current ratio is, you know, 7.5. That means that we've had 7.5 accidents with a leave per 1,000,000 work hours. Is that good or bad? Well, at least it's good that the trend is pointing in the right direction. We worked in a more coordinated way with this since 2011, and you can see the trend. We had a negative trend in terms of a rise in accidents in 2016, but we are now, as we focus on it, we see effect.
We started the new year strong, I think, in terms of two new very good recruitments. My successor, Tomas Carlsson, who I worked with previously and know well, he's very dedicated in terms of delivering results, very experienced, and he will start in July. The other one may not be as well-known to the market. He's well-known in the industry. That's Kenneth Nilsson. He comes from Skanska. He's been with Skanska for about 30 years. He has a track record second to none in terms of delivering results. He's been able to do turnarounds within Skanska, for instance, in Finland previously. He's now working with the civil engineering for Skanska in the U.S.
So these two gentlemen, they share many, many characteristics, but they do not share the preference for hairstyles, as you can see. Q4, 27, let's start with what is the most important, that is the result. We came out, as we said, close to zero. This is far, far, far from where we want to be, of course. This is bad in every way. SEK 390 million of that is the provisions that we made in December. It's reduction costs as well. The order backlog is, however, good, we think. It's increasing, since we have a good order intake. Net sales is in line with the previous year for that particular quarter.
If you look at the full year, profit after financial items, 1,150, of course, far from where we should be and want to be. I believe that we should state things like they are. Good is good, and bad is bad, and this is bad. 2017 was a bad year for NCC in a whole. However, we have, as Mattias will explain, we have business areas delivering very well. Overall, bad year. As I mentioned, order backlog, good. Net sales on a higher level than previous year. Orders received on a good level. The earnings per share and dividend is the following: earnings per share, a bit above SEK 9, and the proposed dividend is the same as 2017. That is SEK 8. That is what the board has suggested and propose to the AGM.
The decision will be made, of course, in April. If the AGM goes along with the proposition, this is what's going to happen. We will have a divided dividend, into two payments. We've had that for a couple of years now, equally spread between April and November, SEK 4 each time. Group financial objectives, what is the most important one? Obviously, it is profitability. It's the margin, and it's lower than last year. Again, disappointment. This is not where we should be. The target for the group is 4%, it remains 4%, and this is the main focus for me, for the board, and for the executive management committee. This is what we focus and concentrate on, nothing else. We have downplayed our growth target.
We have communicated and stated repeatedly that we wish to grow by 5% annually during the strategy period, that is now downplayed. However, if we have a functioning business such as we have within industry, we have within PD, we have within Building Sweden, and also departments within civil engineering, of course, that we should scale those up. But if something's broken, we've got to fix it before we scale it up. So we downplay growth as a whole. Now, these are the key financial data in terms of equity, asset ratio, and return on shareholders' equity. Both slightly lower. We still have an accurate asset ratio on target. We have 18% of return on equity. That's where we sort of end the year. Net indebtedness is improved. Excluding pension liability, we actually have a net cash position.
So if we look at the markets and the estimates, what are they for this year? Well, on an annual basis, we have an order construction growth rate at about 3%. New build growth rate, including residential, of course, is 3%. Civil engineering growth rate is about 5%, even higher in Norway and Sweden, where the real growth rate actually is in terms of civil engineering, and that is also where we have our operations. Refurbishment growth rate, 2%. We still have a strong growth rate in stone and asphalt, since that is heavily contract-connected with civil engineering, about 5%-6%, and a stable market for commercial property. So that's the market outlook short term. I hope you agree with that picture. I want to mention a couple of projects to you.
This is a new hospital project that we got in Oulu, Northern Finland. It's about SEK 700 million, and we get this because we have been very successful in terms of getting orders for hospitals lately in Sweden. We have formed a competence center. We draw on the expertise within the group, and this is an effect of specialization and competence, sharing best practice. We are now competitive also in hospitals in Finland. That's nice to see. Another area is where we are successful in terms of civil engineering, also building. Nevertheless, this is one of the larger orders that we were able to land last year. This is Korsvägen, Gothenburg Korsvägen, part of the West Link. It's a railway tunnel with stations, order value, SEK 3.8 billion.
We will conduct this work together with our partner, Vinci, and to Trafikverket, of course. We were able to get this job, not on lowest price, but on the best evaluated tender overall. It was about organizations, solutions, technical ability, competence, and so forth. We gained a lot on the, what is usually called the soft parameters. That is nice to see that, I mean, the lowest price usually plays a dominant part. Here, we were able to—we came out second on price, and we got the job. The last but not least, I want to mention to you is this wind farm in Piteå. It's, it will be one of the largest wind farms in the whole of Europe, actually. 179 windmills will be built.
We do the infrastructure that is actually 130 km of roadwork. We do the foundations for, for these creatures, and each foundation has a diameter of 23 meters. So it's, it's quite a big hole that you have to dig and fill with concrete, 600 cubic meters of concrete, yeah, to have one of these. And if you're thinking about having one of these in your backyard, you, you should have a permit, because they're actually 200 meters high when the rotor blade is pointing straight up. It's an order for SEK 800 million. The customer is a special purpose company, backed by GE Capital and a number of investors. And I also wish to mention a few of our project starts that we have conducted in, Q4 in PD.
Flintholm Company House and Office in Copenhagen, fully let to Ernst & Young. It's not sold yet. Zleep Hotel, it's fully let and sold in Aarhus. Skejby office in Aarhus. It's not fully let, but it's sold to Pension Danmark. And then we have a logistics project just north of Stockholm, Örnsköldsvik. It's not fully let, and it's out for sale currently. Those were the four that we started. Now, I would like to show you a video about a project that we conducted outside of Uddevalla, Riksväg 44. And why is that? It's a civil engineering project where we use skills from various parts of the organization and turned it into a good project, profit-wise, but also with a satisfied customer, Trafikverket. So, please.
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Okay, then I will leave for Mattias, our CFO, to do a deep dive into the numbers. Mattias?
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Häggvik.
What is happening in Häggvik? Is it a big project, business grow, or why is it stopped in Häggvik now?
We have paused production. That is mainly due to the fact that the documentation, by handling them, they are not sufficiently good enough. If we continue to build based on those, there is a huge risk for errors in that project. So it's better to stop and make sure that we have the accurate documentation prior to actually going into the next phase. So, the total contract value was about SEK 600 million. I don't recall the exact number, but it's a fairly big job, for sure. But if we continue now and make a fault later, that's not good. So we actually have an obligation as a contractor to reduce cost, also, to keep it down, especially in these kind of situations. So the contract and the discussion is very constructed with Trafikverket.
I'm confident that we will solve that within a couple of months. There is work conducted now to improve the quality of the documentation. Mattias, please.
Yes. Absolutely, and both Håkan and I are happy to answer more questions later. So I'll have the analog backup if the technology fails us. But as usual, when it comes to finance, I will start with income statement, and I will do the deep dive starting at the bottom with the profit after tax. SEK 34 million, as you can see, for the quarter in last quarter in 2017. It is significantly lower than the same quarter last year or 2016. And if we look at the reasons for that, let's start with net sales. Roughly on the same level, slightly lower than the fourth quarter 2016, but we haven't recognized any project within property development. And those are normally high-margin profit projects, so a reduction in property development net sales leads to a lower gross profit.
Within the gross profit, we also have the provisions made within building and within infrastructure in the fourth quarter, 2017. So a lower gross profit. Moving into selling and admin, we do have a cost-saving program, as Håkan mentioned. We have made provisions for this and also for management changes, and that hits the quarter. Operating profit, SEK 2 million, roughly at the zero level that we communicated previously, we thought we were going to end up with, and we did. Financial items, SEK -21 in the quarter, that is on a lower level than 2016. The reason is that we have a lower debt level in the group, and we have a lower interest rate as an average in the debt portfolio.
All in all, SEK 19 million in loss after financial items, then we have a positive tax effect in the quarter and end up with SEK 34 million in profit for the period. Moving to cash flow. Cash flow from operating activities is on a lower level in the fourth quarter compared to 2016. The main reason, again, is no profits from property development projects. That has an impact on cash flow. The provisions does not have an impact on cash flow, so, this is mainly property development. We also have a negative cash flow since we are investing in the property portfolio. We've had big deliveries to customers, especially in the beginning of 2017. We also had large projects delivered in 2016. So now we are rebuilding the property development portfolio, so we have net investments there.
That will be the situation going forward in 2018 as well. We are investing in the property projects. Other working capital, seasonally positive, SEK 1.4 billion. Slightly higher positive effect, this year or 2017 compared to 2016. Investments, roughly on the same level as 2016. So all in all, SEK 1.2 billion in the quarter. If you look at the quarter isolated, that was a lower cash flow than 2016, but the full year cash flow of SEK 1.4 billion is actually higher than the cash flow in 2016. This cash flow leads to a very low net debt. I would argue that we are a debt-free company, even if you include our IAS 19 calculated pension liability. If you exclude that pension liability, we have a net cash position.
With that balance sheet, I am pretty-- I sleep very well at night, so to speak, as a CFO, and that is also a basis for the dividend suggestion from the board. Moving over to the operating profit, I will go into the business areas later and focus on the line other and eliminations, minus SEK 175 million, compared to minus SEK 11 million in the fourth quarter of 2016. There are three main items here. We have the central cost level, which is lower. It's minus SEK 78 million in the fourth quarter. We have internal gains. That is a profit elimination when Building mainly is building our internal projects that is developed by Property Development. So we eliminate that profit. That has a negative effect in the fourth quarter 2017.
2016, then we could dissolve the previous eliminations, so then we had a positive effect on this line. Finally, other group adjustments. Here we have two things. It is the provisions made for restructuring costs that has a negative impact in 2017, and we also have a negative effect when we recalculate the pension cost according to IAS 19. The fourth quarter 2016, then we had a positive effect from the pensions, but we also dissolved a provision previously made of SEK 50 million regarding Norwegian civil engineering projects. So then we had two positive items on this line. All in all, SEK -175 compared to SEK -11. Moving into the business areas, I'm starting with building. Here you can see a slight increase in net sales, but more or less on the same level.
We have a growth in Sweden and Denmark, if you look at the fourth quarter compared to 2016. And then we have a slight decrease in Finland and Norway. Operating profit is lower, and this is mainly due to provisions made for risks of SEK 55 million in the fourth quarter. Year full year figure, 515 leads to a margin of 2.1%. So a slight margin increase, but well below our strategic target of 3.5%. So as Håkan say, priority number one and two, perhaps even three, is to increase the margin here, and growth is on the back burner. Looking at the geographical distribution, we have the main part of the operations in Sweden, and that is performing pretty well. We have a decrease of the part in Finland and a slight decrease in Norway.
The turnaround in Norway is ongoing, and it goes according to plan. We have stabilized the Finnish operations, where we had problems in residential production in Helsinki. We seem to have gotten the grasp around that problem, so the action plans are moving along. Looking at product mix, as you can see, the residential segment is the largest, both when it comes to orders received and when it comes to net sales. I have received questions, and I will most likely receive questions regarding the Swedish residential market, so I will state already now that no provision has been made that has anything to do with the turbulence on the Swedish residential market. Also, this is roughly SEK 9 billion in turnover that we're talking about. In Sweden, we have 60% rental projects, 40% co-ops or bostadsrättsföreningar.
If you look at the Stockholm market, where the turbulence is largest, that's SEK 700 million in yearly net sales when it comes to bostadsrättsföreningar or cooperative housing. 1% of the group's total net sale. Moving into orders received, order backlog, and net sales. If you look at it, orders received has dropped, if you look at the fourth quarter isolated, while the order backlog was on a higher level than the fourth quarter in 2016. We have the luxury, especially on the Swedish market, where we have a strong order backlog, to be selective to only tender for projects with a risk profile we find to our liking. Orders received as an effect of being selective has dropped during 2017 compared to 2016, and net sales is slightly lower if you look at the full year figure.
I should also mention that the duration in the order backlog is longer now than that it was three or four years ago. So a larger proportion, big projects, not least hospitals and other public buildings. Moving over into infrastructure. Again, starting with financials, we have a growth in net sales. This is partly due to weather. It was mild weather to a large extent in the fourth quarter. That is very good for groundworks, but we can also see production pace picking up in the larger civil engineering projects that was received previously in 2016 and start of 2017. I have mentioned the S-curve, I will mention it again. In the beginning of these larger projects, there's a low production pace, and then it gradually picks up.
So it is an S-curve, and now we have seen that the pace is picking up in several of the large projects, not all. Operating profit is negative in the quarter, and that is due to the provisions made. That also has an impact on the full year figures, and the operating margin is negative, both in the quarter and in the full year. This is, of course, not where we want to be. The strategic target is 3.5% in operating margin, and it remains on that level. So here, all focus is on margin expansion and increasing the profitability. The geographical distribution, here you can see that Sweden is the dominant part in the business area, and we have been very successful on the Swedish civil engineering market, especially.
When it comes to the large infrastructure investment in Sweden, we have taken a fair share of that. We have a decrease of the Norwegian part, where we have not been as successful when it comes to the large civil engineering projects. We have also a focus there, since we have had problems with projects, so we are being selective there, taking the right ones in. Moving over to the product mix, the two largest segments, it's roads, driven by the large infrastructure investments, of course, and groundworks, which is smaller to mid-sized projects, both around these large infrastructure investments. But I would also say that every vertical building, whether it's a hospital, it's residential project, or an office building, always starts with some excavation works and groundworks. So that it drives the groundwork market.
We have, as an effect, higher orders received in the quarter, and we have a significantly higher order backlog in the end of Q4 compared to 2016. If you look at the full year figure, orders received are significantly higher for the full year as well, and net sales has now started to increase. That was not the case in the first half of 2017, but they have started to grow in the second half. This is very much an effect of previously received large projects within civil engineering, but we also have a growth when it comes to the groundwork segment. Industry. Again, starting with financials, we have a significant growth in net sales, I would say.
This is, again, partly due to mild weather, which is good for this business, if we have mild weather in the fourth quarter, but we also have increased our own sales efficiency. Operating profit SEK 142 million is improvement compared to last year, and the full year level of SEK 577 million is a record level for this business area. So the operating margin, 4.7% for the full year, is on top of the strategic target, 4%. Return on capital, 13%, is on top of the strategic target, ten percent. So here we have the profitability we want, and we are focusing on growth.
Talking about growth, if you look at the volumes, both for stone materials and asphalt, the fourth quarter figure is well above the level we had both in 2015 and 2016. As I said, partly due to weather, but also due to our own efficiency in sales. The product mix and also the geographical distribution is fairly stable in this business area. It is a long-term industrial business, but I would like to point out that we have an increase in the foundation business under the Hercules brand. Here, we have also made an acquisition. Lots of this is organic growth, but we have also made an acquisition in Norway to support future growth. Finally, property development. Again, financials, we have very low net sales in the fourth quarter.
This is due to the fact that no project has been recognized, profit recognized, and handed over to customers. That leads to a negative operating profit and negative margin in the quarter. However, the full year figure, SEK 601 million in operating profit, is a very high historical level if you look back. Operating margin, 23%, and return on capital, 16%, are both well above our strategic target here. It's 10% in margin and 10% in return on capital as a strategic target level. So we have a good profitability, but we have a lack of projects to be recognized in 2018. You have the property table in the report, and there you can clearly show that there's one project to be recognized in 2018.
If you look at the current status, it's a logistic project in Sweden. Based on the current status, there will be a low level of net sales and profit from this business area in 2018. We are, however, and as Håkan showed you, we are reinvesting and rebuilding this portfolio. We have currently 22 projects after the four starts, three in Denmark, one in Sweden, and that is on a high level if you compare to history. We are investing. That also means we have a big focus on the letting as we start new projects, that is the gray area here. In the fourth quarter, we let 30% of the available square meters, and that is also a high level if you look at the historic data. A high letting leads to a good risk profile.
The blue line here, it's the letting ratio in the portfolio, and then you have the reddish line, which is the completion ratio. So you can see that we have a positive spread in the risk profile, and the gap has increased, which is a good thing as we invest. You can also see the low completion ratio, average completion ratio in the portfolio. That means that there's still a lot of production to do in the projects, and that means handover will not take place in the near future. We are investing, and we are creating value, but you will not see that value until mainly 2019, 2020, only a minor part in 2018. Finally, before I hand over to Håkan, to summarize, I would like to mention a new accounting policy that comes out. It's a European standard called IFRS 15.
It will have an impact on how we recognize profits. It will have an impact in building and infrastructure, mainly. Today, we use something called IAS 11, percentage of completion, and we will, starting January 1, 2018, use IFRS 15. Still percentage of completion, but two major changes. One is the basis for profit, profit recognition. We will, in the future, look at our enforceable rights according to the contract and applicable law, case law or written law. Today, we base, of course, any claim or additional work on our right to payment, but there will be a larger focus on the enforceability, finally, the enforceability in court. The probability today, before we include an income, is more likely than not, 51%, if you will. In the future, it will be highly likely.
So we increase the probability level before we increase any claim or additional work in the income. If you ask me what is highly likely, I would say somewhere 70%-80%. All else being equal, this leads to the fact that income from claims and other additional work in projects will be recognized at a later stage in the projects. This will have some effect. We will reverse some claims that we recognize in today's standard, but we will not recognize that currently, at least, with the new standard. That has an impact of SEK 346 million on the equity. We will release a restatement of our financial figures, and we will do that well ahead of the Q1 reporting in 2018.
We are also currently discussing with our auditors whether or not this will have an impact on the property development part. I hope it won't have, but it is an ongoing discussion. Whether or not that change will happen, I don't know, but if it happens, it won't have an impact on equity. It will not have an impact on equity, but we'll come back to that in the restatement. With that, I hand over to Håkan to summarize.
Thanks. Okay, short summary. Higher net sales, but lower earnings in NCC Building in the fourth quarter. Negative result in NCC Infrastructure, so as we've been into, big throwback for us, but nevertheless, our focus also. Improved result in NCC Industry, all-time high over the year. Four property projects started, and a high order backlog and a good market. Our job is now to benefit from that market. So-
Thank you very much, Håkan. We will now open up for questions, and we start here at Tennispalatset, so Albin will get the microphone shortly.
Hi, Albin Sandberg, Handelsbanken. I have a few questions. I start with Håkan and your comment about Acting CEO, and I agree with you that it's a good thing that you've signed up a permanent CEO as well. I guess from an outsider point of view, it's just a bit curious to understand how do you work with the incoming CEO? Because, I mean, we've seen from peers, I'm not saying that it's going to happen to you, but when you have a new head, people take a different view on risk of projects and maybe some strategic works. So you see he kind of on board on what you are doing, or should we expect some U-turn here in the summer when he comes on?
We see there are limits to what Tomas can do, given his present positions, but I have obviously, obviously, communication with him. And in terms of major changes to the organization, that will not take place unless that would be sanctioned either by the board or him. So, in terms of how you look at the portfolio and the value of portfolio, that I cannot answer. But our estimation and the judgment that we presented the result of in December, that stands. We've been through the entire order book in terms of starting from the departments that had a bad, bad trend. Of course, you start where you have the problems, of course.
And given that it has taken a little bit of time now since you came with that announcement, how long do you think these kind of problematic projects will last that you know of today?
... You want to take that? It varies. And it's anything from two months to two years, in reality. What the weight is, I have actually not calculated it, but what we have done now is that we have made provisions, and that is a fundamental difference if you look at least from the two-year perspective I have as CFO. Previously, we have identified a project that has gone wrong, and then we have adjusted the profit based on what had gone wrong in the past. Now we have made a risk analysis in the project portfolio, and we have made provisions for things we see as risks, not actual things that happened, but risks. That is a fundamental difference, I would say.
Do not interpret that as sandbagging, because if there was not actual risks, we would not have made the provisions, of course. But there is a difference. So that also has a -- when can you then state whether or not that risk is handled? Sometimes actually after production has been completed. So, but I would give it a two-year perspective.
And then I wonder about the SEK 200 million cost savings that you're referring to, just I fully understand that. So if we compare NCC 2018, all else equal, with 2017, we should see a cost base that is SEK 200 million lower.
I can respond to that because I've initiated it. We have an overhead of currently about SEK 2.9 billion, and we will lower that to SEK 2.7 billion.
Okay.
That is in full effect this year. We took the reduction cost last year for that. And we will reduce number of activities that we do not see any profit coming from short term. We will obviously say goodbye to a number of consultants involved in projects that we will either stop or simply pause, and there will be redundancies also within NCC.
Follow-up also, if you would have kept your growth ambitions, would that cost saving still have been available, you think?
I think we always have to look at cost. If you're not effective in cost, then, I mean, every krona you save is a krona on the bottom line. Every krona we sell currently is we get to keep 2.1% of. So it's good to keep 100% and focus on that side as well.
My final question is just on the dividend, and you touched upon it, coming back to the health of your balance sheet and then maybe your cash flow and so forth. I guess formally, it's still a percentage of your EPS that is the policy that it's based on. You know, I think it was good, it was in line with our expectations that you kept it. But I guess, is it sustainable to have such a high payout ratio going forward, or you're saying that your EPS will be higher in 2018?
We are definitely not giving any forecast regarding profit levels, because we don't do that. But from my perspective, we have a good cash flow, low net debt, so it's only logical that the board decides not to keep all that money, but pay it out in dividends. Then, of course, that puts a pressure on the equity asset ratio. And we have stated that we want a long-term equity asset ratio of 20%. All else being equal, we will most likely drop temporarily under 20%, and then we will, with earnings, come back up to 20%. So I would say that's what limits the long-term payout ratio, that we need to keep some of the profits to keep the equity asset ratio up.
Thank you.
Tobias Kaj from ABG. Regarding your ambition to improve profitability, do you think that you will need certain local areas or certain segments in order to do that? And, and if so, how big part of the turnover do you think you will be affected of?
I hope I understood the question, but what we do, since infrastructure is, is the problem child currently, we have recruited the best possible resource on turnarounds for that particular business area. And he will start on the third of April, and he is already sort of probably considering what to do, but nonetheless, he has a proven record to do this in a structured way. What these actions will be, well, we will have to see. But we have already started to support the, the projects with problems, departments with problems, to ensure that we have the right resources, they have the right focus, and the forecast stands. That's what we have done. And that exercise was done, sorry, in November, December. It's continuing, ongoing, and we have no reason at this stage to change it.
Nevertheless, as we proceed, I mean, we will take measures. If I look at the provisions made when it considers restructuring, and they are based on the plan of our current acting manager in that business area, Göran Landgren, that does not include closing down any geographies. And the same goes for building. We are focusing on the turnaround in Norway and getting to the bottom of the problems in Helsinki we used to have there one year ago. But we are not closing down operations. We're not leaving any local market.
And also, if I can follow up on the equity to asset ratio question from before. If I understand it right, for some, especially large infrastructure projects, there are requirements of that the group needs to have a certain equity asset ratio. What kind of level is you required to hold them?
There, there are different requirements made in public procurement. And they can be stated as equity in relation to the contract sum or equity asset ratio or similar key ratios. They are related to the legal company that tenders for the job. And if you look at the equity asset ratio of NCC AB, the parent company, that is above 50%. I don't see a problem with legal requirements in tendering.
Okay, thank you. And, one final question, if I may. Regarding property development, you have completed projects of some 38,000 square meters, of which roughly half was completed also one year ago. And in those projects, the letting ratio is slightly above 50% on average. Given that it seems that the leasing activity in completed projects are quite slow, do you see any risk of write-downs in those projects?
I'll try not to give you a financial forecast here. If there was a need for write-downs, they would have been made in the Q4 reporting. And that has been audited, so we agree with the auditors that there's no need for write-downs at the moment. On the other hand, of course, there's a reason that they are still unsold. We will sell them on the market when we feel we get the price that we are satisfied with. We are a very financially stable company. There's no rush for us to sell them. Does that mean we will get write-downs in the future? I cannot really say.
In general, regarding the leasing activity, it seems like, I mean, Q3 was a very weak quarter overall. Now, Q4 was quite strong, but, but most of the leasing in Q4 seems to be related to, to new started projects with a high occupancy ratio, while existing project activity seems to remain quite low in the quarter. Is there any specific reason why you, in a very strong rental market in, in the Nordics, have quite low activity in your developments?
Leasing is a long-term process. It, it's like any strategic sales process. You work with, quite often, top management in companies. Is this the right location for them, given their strategy, their competence need, et cetera, especially when it comes to office buildings? So it is long term. And then when you start projects, you have had the pre-letting process, so then you get the boost naturally, because then you start, and you get the leases into the statistics. So I would say that is part of the Q4 effect, and then we've also landed some other contracts.
Thank you.
Yeah, from Sebastian. A few questions. If I... I think I start where you started as well, with, sorry, the fixing the problem, as you said. I mean, in order to fix the problem, you have to know what the problem is. So, you know, we're in the best market we've seen in maybe a generation or something like that, and have been for a few years. High tender prices, you can pick and choose a little bit on the project side. But not going into details, but just try to take it on an overview level, what is your view of the problems? Why has all these projects the last few years been going so wrong?
If it was an easy fix, we would have done it. So just to say that, but nevertheless, if you want to sort of aggregate it, the problems into one word, it's project management, in all phases of the project. That has to be tighter. It's like, I usually say it's like playing the tennis. If you don't look at the ball all the time, you will miss the next shot. That is what we have to do, continuously focus on the cash flow of the projects, on the production, as we proceed. But a good market doesn't mean that you have to have high margins. You can see that in other companies. There is also a war of talent out there.
There is a higher turnover of the really skilled people, and if a project is hit by a higher turnover of skilled people, that also drains the experience of that particular project, and that has hurt us to some extent in some projects. So there are various reasons, but mainly project management.
Yeah. From your answer, I understand you both had a very high turnover, losing people that you should have kept, and maybe also taking on more projects than you had capable people to actually run.
At the time.
Yeah. What are you doing now to... I mean, are the war continuing? Are you going to steal people from Skanska? You already did, of course, but, I mean, how do you understand you need to find these people. Do you—
We need to find them.
Or do we steal them? How do you-
We need to concentrate our recruitment process, and that we do, on finding the actually, the, the really, good production people. We had, as an example, we had a problem in Gothenburg some time ago, one or two years ago. That is reversed now, since we are actually a high order intake. Now, people want to—the really good people want to work for us. That has been reversed. If you are successful in taking on the right jobs at the right price, you will draw attention from the specialists, the ones you want to have.
... Thank you. Then, the next question is probably relating a little bit to what Björn was talking about before. If you look at the, as a sales analyst, we are picky sometimes. But I remember in Q2, you used the word to guide us on property development. I think you said, well, the wording was, we have few projects to recognize in the second half, and we see now we're talking about a negative result of SEK 60. So in this report, you used the word, we have few property developments to recognize in 2018. So of course, I kind of try to understand if you're using the same terminology, like the second half, is that where we should look?
Or should we, that we should look in, in 2017, I fully understand. But should we look at 2010, 2011 kind of activity? Do you understand? You used the same words, I'm trying to understand if it, if it means the same thing.
If I had a crystal ball, I would be able to answer that question. What I can say is actually what you see in the table of our property projects. That one project is sold and designated to be recognized. Then, of course, we have another one, a large project, Mölndal Galleria, you can see that. It has a fairly high completion ratio, and it's done as a joint venture, so we know who to sell it to, so to speak. Whether or not that sale will happen and all the conditions will be fulfilled for that to happen remains to be seen. So, as they say in Dalarna, [Foreign language] . We have more time. I mean, when the last-
I should say that because I actually come from Dalarna, so.
Yeah. But-
You stole my line there.
Yeah. But now we have a 1-year period to actually do the deals and complete a few projects. That's more time than the last time I said there were a few projects. Most likely, that will lead to a few more deals. Most likely, I don't promise it.
And then, the final question on the accounting regulation. Just, this is difficult for you to answer, probably, but just for us to understand the possible effects on, on, on your, accounting for next year. You're saying that if the probability was 51% or more, you would recognize it. I guess if you go down and ask a project leader who just made an extra work, is the probability more than 50% that you will get paid? I mean, you will always yes—everyone would say yes. So how often are you in a situation, you know, early, mid in a project, where you actually don't recognize it?
It's actually-
It's a big question, because now you have strict regulation.
I can respond on the first part, but if you ask a project manager, is the entitlement legit? Yes, of course. It's 200% legit, he would say. Then you have to ask someone else that can make a more sound judgment, looking into and actually has the expertise. And I'd rather be more sort of reserved in actually taking a stance rather than be too offensive. But that's why we do what we do.
Right.
So rather than actually-
Do you think you?
But we will never put out a claim. We will never do that unless we feel that we have an entitlement, of course. Have we done the job, we want to get paid. Simple as that.
What you're saying is that we will see an effect on your accounting from this, but... That, that's what you're saying?
Yeah. There will be an impact since the formal level is increased from 51%-
Yeah
to, well, I say if you ask me, 70%-80%, there are difference of opinion here. And that of course, when we do this second opinion review, with our own contract managers, whether or not it is enforceable in the end of the day, in a court, they will not say it's enforceable, I guess, until at a later stage when they have more documentation, when they have discussed this with the client a bit further. So it will delay income recognition of extra work. Not necessarily only claims, it's about all extra work.
Okay, let's hear from this telephone conference, if there is any questions.
Thank you. Ladies and gentlemen, if you have an audio question for the speakers, please press zero-one on your telephone keypad now. There will be a brief pause while we register questions. Our first question comes from the line of Erik Lundström from Carnegie. Please go ahead, Erik, your line is open.
Thank you very much. I just had one question, it's a bit on the detail. You mentioned that you had a positive tax effect in the quarter. Could you specify what that tax effect was and what it was related to, please? Thank you.
Yes, I can. It's related to two things. One thing, and that's perhaps the easiest thing to explain, is that if you have a negative result, you get a positive tax effect. Then the size of the positive tax effect has to do with larger relative share of property development profit in the group. And of course, that is mainly Torsplan, but also other property projects. And there, the way we do transactions by selling shares in a company owning the project is tax efficient. That's not the reason we do it that way, it's just the easiest way of selling things. But it leads a tax efficient structure as well. And the impact is a positive in the fourth quarter.
Okay, thank you.
Thank you, and as there are no further questions registered, I'll hand back to you in the room.
Thank you. I have a question from Simen Mortensen at DNB, from the web. Could you comment on the increase in accounts receivable versus revenue? Now at 16.2, increase from 14.5 in 2016, but actually, from 12.7 in 2013, so an increasing trend, though.
Yes, I think I can. First of all, from my perspective, the important thing is the net of the working capital. So we also have an increase if you look at the interest-free liability part. But we are focusing on cash flow and getting the cash in our projects. That's the foundation of good financial risk management in the projects. Of course, this means we want to invoice the customers as much as possible, as early as possible. And if we are good at that, the first step you see is a higher level of accounts receivable, and then that is converted into cash. So I would argue that's the effect you see, and I do not see a trend with a higher proportion of overdue receivables.
Okay, thank you. Is there a final question?
On the order backlog, if you—I don't know if you look at that detail, but if you look at the property development base and the work that you might do for them in developing new properties, are you... I mean, we are seeing delays in starts. If they're already committed to an order with you, I'm not sure. But the question is then, do you have projects that are being delayed, and how are you treating them in the order backlog? Are you thinking about taking them out because they never will be built? Or are all the projects that you have in the order backlog on the residential side for Sweden in a stage where you are close to actually commencing work?
I cannot answer for all the projects. But as I said, roughly 60% of the volume in residential production in Sweden is rental apartments. We don't see that Allmännyttan, as it is, mainly, who is our customer there, will stop producing new rental apartments. When it comes to the private customer part, those developers that we work with are large and financially stable repeat customers. HSB is one example, Riksbyggen, of course, Bonava, and other companies, and we have not seen any cancellations so far. That's what I can say. Whether or not there will be cancellations... I don't think so, but that's my opinion and not the forecast.
Okay, that sums it up. Thank you very much for coming, and see you next time.
Thank you very much.