Good morning, everybody. My name is Tomas Carlsson, and I'm the CEO of NCC. With me here today, I have Susanne Lithander, our CFO. We are super happy that you have prioritized NCC over the school holidays this week, so thank you for that. We have distributed the work according to this. I will give you the overview of the quarter, and Susanne will give you the details, and I will wrap it up in the end. Before we start with the overview, I think it's important that you remember that last year, following my comeback to NCC, we did a comprehensive review of the company, and that ended with revaluations of balance sheet items of almost SEK 1.6 billion.
Of course, that influenced the earnings report for Q3 in a significant way, but it also was followed by a comprehensive action plan from that to improve and build a sustained earnings base from a new baseline for the company. And we also took a more prudent approach to the existing project portfolio at that time, but also a more prudent approach to new projects going forward, both in terms of what we tender for, but also how we recognize earnings in our projects. And I think that's important to take with you throughout this presentation.
Based on that, we have improved earnings from a stable base, and if you adjust for the one-offs or the revaluation from the balance sheet, we have an increase of operational profit, EBIT, on 24% better than compared to last year. That is very much in line with what my expectations has been and also very much in line with starting from a new baseline being better and better over time. We are, of course, following a number of indicators on the market conditions, but based on the data that we have and what we see from this quarter, we have, in general, favorable market conditions, and we have good demand from our services and products.
And you will see that in the orders received on par with previous years, and I will soon get into a little bit more of detail with that. We have an order backlog on a high level. We have net sales on a high level, and cash flow improved compared to last year. This is the summary, and if you'd like to zoom out, this is the time to do it after this slide. Now we will get into more details. Orders received on par with previous years. There's an element that you need to remember here. Building Sweden is up. Building Sweden had relatively low orders received first half of the year but is now in this quarter have a really high orders received.
The opposite is true for Road Services, since we have been extra cautious in tendering, particularly for the geographies where we historically have had bad performance for Road Services and, and throughout the process of selling Road Services. So the delta for Road Services alone is SEK 600 million. So the conclusion here is that, building Sweden, building Nordics, infrastructure, and, industry in sum have a higher orders received this quarter compared to last year. This is true also for the full year. We don't normally talk a lot about residential, since we are not a residential developer anymore, but people tend to be interested in residential markets, so, let's talk about that immediately. This is a pretty normal quarter.
We have SEK 2 billion, almost exactly SEK 2 billion in orders received for residential, so that's almost exactly on the average over the last three years. It's also true, if you break it down to Building Sweden and Building Nordics, that orders received for residential is almost exactly on the normal, on the average for the last three years. What is interesting, interesting to know about this orders received, that it's predominantly 2/3 is rental residential homes, while if you go back to 2017, it was more of the condominium, bostadsrättsförening type of projects. Order backlog is still on a high level. You have seasonal- you have a slight impact of seasonality, and that is industry.
So all else alike, you will have a slight degree in order, order backlog over the third quarter, and that's because the asphalt market works in a way that you, you have orders received in the beginning of the year, and the third and fourth quarter is all about delivery. So there will be a decrease, because of, of industry, all else the same. So, order backlog still on a high level. And then following on the, orders received that we had over a couple of, of last years, we have net sales on a solid level. Worth mentioning is if you compare Q3 this year compared to Q3 last year, we are investing in our own, property development business, and we have an increase of sales to, our internal projects, and those are eliminated.
So we have, actually, in this case, also SEK 600 million more in internal revenue, and that is eliminated in the number that you see here. So it's a reflection of a higher activity on property development. We have profit improved, for the quarter and for the year so far. This is the nominal numbers, and if you compare the nominal number for Q3 last year, it was a loss of -SEK 1.1 billion, compared to SEK 568 million this year, and of course, transferring to the first nine months, the same pattern emerges.
Operating margin in the quarter of 4.1%, rolling twelve, we are at 1.5%, and I think that's maybe the relevant number to look at, compared to full year last year of -1.3%. However, if you adjust for the big write downs following the revaluations, the picture becomes slightly different. This is the easiest way that we've managed to demonstrate it. From the SEK -1.1 billion in last year, we had revaluations of SEK 1.565 billion, bringing us to SEK 457 million as underlying earnings last year, and this year, we have a 24% improvement to SEK 568 million. And with that, I leave you to Susanne Lithander.
Thank you, Tomas. Let's jump directly into the business areas, and we start with infrastructure. Infrastructure had a very stable order intake in the quarter, SEK 4.5 billion, same level as last year. They also have a very positive book-to-bill ratio, both in the quarter and over twelve-month rolling, and they end the quarter with a strong backlog of SEK 22 billion. Net sales increased to SEK 4.2 billion, primarily driven by the larger projects, work- up rate in Norway and Sweden. As you see on this slide, we show—we will try to show the adjusted operating profit for, adjusted for the revaluations we did last year in the quarter. However, when it comes to infrastructure, it says 55, and that includes Road Services. The correct number to compare the 46 for infrastructure is negative 184.
And the big, improvement there comes from the Civil Norway unit. EBIT margin, 1.1%, still on the lower side, but that is also, continuously impacted by our cautious profit recognition, and that we have a number of large, complex projects that we recognize to zero profit to the P&L. So slowly and steadily, the margin is improving. On the bottom there, you see, Road Services that we break out now that it's up for divesting, and the only thing worth commenting on is what Tomas already said, that the orders received is, down substantially due to our tendering or prudent tendering. So intentionally, the orders received are down. Other, overall, we can comment on the Road Services. They are performing according to our expectations.
Building Sweden, as Tomas said, had a very strong orders received in the quarter, up to SEK 3.7 billion. Over a third of that is residential units, and two-thirds of that is rentals. Net sales, slightly down in the quarter and also cumulated, and over 50% of the sales come from housing and refurbishment. And here, we don't break out and show the adjusted profit for Sweden, and that's due to the fact that Sweden was, in Q3 last year, part of business area Nordics. So the total adjustments made last year was for business area Nordics, and it was SEK 295 million. The profit on Building Sweden does include revaluations from last year.
The EBIT margin this year is on a stable, underlying level, impacted by continuous work with turning around certain, some of our units in Sweden, and the work with the long-term sustainable improvement continues in Sweden. Building Nordics shows really strong improvements on all levels. Orders received up to SEK 2.7 billion, and also increasing on a rolling 12 and accumulated. They have a very strong backlog, ending the quarter at SEK 16.7 billion. In the quarter, Finland is the unit that drives the increase, and for the nine-month period, Denmark is the big contributor. Net sales increases as well, up to SEK 2.9 billion, and that's primarily driven by Finland and the Finnish unit that are working up their orders that they took in the end of last year.
And 50%, also here, the majority of the work, of the sales comes from housing and refurbishment, primarily in Finland and Denmark. Earnings in the quarter is SEK 53 million, which is a substantial improvement from last year. Also, when we exclude the revaluations, margin 1.8%, and of course, that is also impacted by our cautious, profit recognition. Business area industry, we can summarize this chart with only one word, and that's stable or stability. Industry delivers on par on both, sales and earnings compared to previous years. They have a good margin in the quarter of 9%, and their return on capital is 8.4%. Volume-wise, we see steady volumes for both asphalt and stone materials.
As you can see on the graph to the left, stone materials is increased, has increased compared to last year, and the asphalt sold volumes are very stable. Property development, net sales of SEK 335 million. We have recognized sales from two projects in the quarter, two projects in Denmark, compared to three projects in last year's Q3. Over the nine-month period, we have recognized profit on six projects, compared to five last year. Earnings last year was heavily influenced by revaluations of properties in Finland, Denmark, and Norway. When we look at the earnings for this year, we should remember that over the nine-month period, we have taken to the profit some of those projects that we actually decided to remove or to sell off, that we didn't take much profit on.
They were basically not contributing to our profit level. Earnings EBIT margin in the quarter, 5.6%. Capital employed is now up to SEK 6.1 billion, and the return is 8.1%. We have started in the quarter 4 new projects, 1 office in Finland, 2 offices in Sweden, and a school in Sweden. We have a total of 19 projects in our portfolio now. 70% of the lettable space is in Sweden, and the total lettable space is 250,000 square meters. We have had an exceptionally good letting ratio during 2019. We have let 26,000 square meters in the quarter and 86,000 square meters over the nine-month period, and this is better than we've had over the past 5 years.
And that is, of course, thanks to the fact that we have started projects where we have had already let out a substantial part of the space. We also look at this slide, that we show that we have a very healthy relationship when it comes to letting ratio versus completion ratio. As you see, we have a, a strong relation or a very healthy relation here with a higher letting ratio than completion ratio. Moving on to our last segment, which is other and eliminations. We split it up into these two items in the quarter. First item, NCC headquarters and group adjustments, including HQ cost. It also includes subsidiaries and smaller companies that don't belong to any business area, and also some accounting adjustments that we do. That line shows a negative of SEK 31 million in the quarter, to be compared with SEK 88 million last year.
We need to remember that last year, that number included revaluations as well, and if we compare apples to apples, they are on the same level. Internal gains is where we eliminate the profit in our property development projects during construction phases, and they are on the same level this quarter as they were last year. The reversal, we reverse, need to explain this again, reverse the eliminations as we take profit recognition in the PD projects, so they can go either way. But when we do recognize profit, we have a positive here. That brings us to the overall income statement for the group. As Tomas already pointed out, we have a slightly lower net sales in the quarter, and that decline comes from Sweden and building. Property, building Sweden and property development is what I'm trying to say.
Accumulated numbers, all the business areas are increasing their sales except for building Sweden. Our cost ratio is low in the quarter, and it's seasonally Q3 low. The rolling twelve number is probably a more accurate number, with 4.8% as a cost ratio of selling in G&A. Our EBIT, SEK 568 million, and as Tomas showed, that is to be compared with the SEK 457 million that we get when we adjust for the revaluations of last year, and that is an improvement with 24%. Financial items, slightly higher, driven by IFRS 16 leasing adjustments. We can actually note here that we have a higher corporate net debt, but we have lower financial cost for the same due to the low interest rates we have right now.
Moving on to net debt, that has increased additionally up to SEK 8.1 billion. As you see on the bottom here, our corporate net debt has grown SEK 1.2 billion. That is driven by our investments in property development projects. Then we have the pension liabilities that has grown up to SEK 3.3 billion, and that is driven by IAS 19 adjustments that we have to make. We have actuarial changes. We have changed the discount rate down to 1.5%. And on the top, we have the leasing liabilities that we have had to increase due to IFRS 16, up with SEK 1.4 billion. Last, and certainly not least, the cash flow improvement that Tomas mentioned. Looking at it over the 12-month rolling period, it's very evident that we have a very good and solid cash flow from our operating activities.
Even if you, from that number, remove the IFRS 16 adjustments of SEK 400 million, it's still a good cash generation from our operating activities. We also see that our properties, property projects, investments, of course, is reflected in our cash flow. It's increasing with SEK 600 million, so that has the same effect here. Investing activities is going down compared to last year, and that is due to the fact that, our business area industry is, investing less in their machinery and equipment compared to last year. So, a good cash generation over a longer period with a little glitch in the quarter, you could say, but that's timing issues, and we expect that to come back during Q4. That was all I had. Tomas, back to you.
Thank you very much. So before I get to the summary, I would talk a little bit about what we said a year ago. The message from Capital Markets Day and the Q3 report a year ago was this: We're setting a new baseline on how we evaluate and assess our projects, but also how we think about profit recognition and also how we do our tendering in the company. So key messages were build on our strong and healthy core. We could conclude that we had approximately two-thirds of the business that were performing or outperforming, but far too large part, or one-third that was not performing, so build on the strong and healthy core. Going back to the core, focus on projects, customers, and geographies where we can compete and where we can deliver good value.
We also took the new approach to risk, a lower risk profile in the projects. However, not lower ambitions with regards to the business. Then finally, clearly, the objectives that we had was to restore profitability, and to have a better consistency. In addition to that, we said, you know, we had significant reevaluations, and a comprehensive action plan launched together with that. Being in my mind at least, very clear on that, building a sustainably stronger company will take some time. That was the key messages from a very long presentation last year.
It was built, the action plan was built on four pillars, and what we see now is that it's starting to deliver results, but we still have lots of work to be done, and there's lots of activity going on in the company. Organization and team, we did most of the actions actually before the Capital Markets Day and the third quarter, but we have continued on divisional and department level in the company throughout the year. So now we have a clear structure, we have removed levels in the organization, and we have new appointments in the organization. That was, to a large extent, done. We have fine-tuned that during the year.
And then the second pillar was exit or divest non-performing businesses where we don't think that we, within reasonable time, can actually turn them around. The most significant part was the road service part, and the process of divesting road service is ongoing. We have lots of interest in acquiring the road service business, but we also may need have to make sure that we have a reasonable outcome, that is, that we can justify for the shareholders. Most other assets that we identified and wrote down the value of have been sold. 89% of the land held for development within property development and the properties that we reevaluated has been sold, but we have also closed asphalt plants, we have shut down offices, et cetera. So most of that is done.
Third pillar was specific turnaround plans for the departments that were underperforming. Those turnaround plans are in place since the beginning of this year. We're beginning to see results from them, but that will have to continue for the foreseeable future going forward. And then the fourth pillar was improved processes and training in the organization. Basically, two thing, two things: a new structure and process around tendering and how we acquire new projects, and then secondly, NCC Project Academy, an initiative to raise the competence level for our core business of running a project. So that is the action plan that we are working with. Two first pillars are, to a large extent, done. Third one is ongoing, and we have launched the improved processes and training.
As I've had frequently pointed out, this is about changing behaviors in an organization, and that takes time. Summing up, the third quarter, market conditions remain generally favorable. Just to be clear, we are also following a lot, following the indicators in the market, indicating something else, but from the data we have, and from what we see in the third quarter, we have good demand for our services and products. Order intake is therefore on par with previous years, and we have a strong order backlog in the company, and the underlying base of the company has been stabilized. The action plans are starting to deliver results, but the full effect will take time, and turnaround work is still really, really, really intense in some units.
And as an effect of that, Q3 earnings with 24% improvement of underlying operational profits. Thank you, all. We open up for questions. So let's see who gets to ask the first question.
Thank you. Tobias Kaj from ABG. I would like to start off where you're saying that, improved profitability, it takes time to, to change, the level. You have a target of 3.5% for your core operations. When do you think it's reasonable to reach that level?
It would be really easy for me to give you a date now. I won't, but I will give you the following: You have to factor in a number of things. First of all, when we set the new baseline last year, we have an average duration of those projects for two years. So those will have to be. We have to work with those projects until we have delivered them. And in addition to when you compare to before and after Capital Markets Day of Q3 last year, we took a more prudent approach on how we recognize profits in the existing project portfolio at that time. Then on top of that, you have to remember that a significant part of that, and particularly for civil engineering, is a number of really large projects.
We can talk about Centralen in Gothenburg, Korsvägen, we can talk about Lund-Arlöv, we can talk about a few others, with several billion SEK in project value. Those will be running for several years, and we are taking a really prudent approach on how we recognize profit from those projects, both in terms of forecast, but also in terms of zero recognition. The reason for that is pretty simple to understand. If we would overestimate the profits that we recognize for those projects in, let's say, five years, and then the first quarter in the sixth year, we would realize that it was 1 percentage point lower, the effect on that quarter would be devastating. So we are super cautious, not eliminating all risks, but taking a more prudent approach.
Then on top of all of this that I've said, we are taking a more prudent approach when we are tendering, and what we recognize from the projects that we are winning. And we are actually winning on par with previous years, even if we are more selective. So it will take some time, but I will not give you a date.
But if it takes... I mean, if you have two years duration and maybe one extra year-
Mm-hmm.
To build the buffers, so we say three years from one year ago, the development, will it be gradual, or should we expect it to be kind of back-end loaded as well?
I would say that you would typically expect that it's gradual, and this is what you see in the third quarter. However, you have a certain impact of seasonality in the business, where typically, quarter one is pretty weak quarter. Quarter four is a little bit weaker, so you have a seasonality. And then just to be completely transparent, in any type of change process, we will expect to have some disappointments from time to time. That is bound to happen, but gradually is the starting assumption.
Within industry, you reported very stable revenues. However, you showed that volumes are increasing, especially for stones. Does that imply that you see price pressure?
That implies that we see a mixed difference in what kind of products that we are delivering.
Because also, if you adjust for the one-off last year, the EBIT margin was down a little bit, even though it was only 30 basis points-
Yes.
but still a bit low.
But it wasn't stone.
It was not stone.
No, it was not stone.
If I can continue and ask regarding your-
This is our main chore today, so we can continue forever.
But regarding your balance sheet, and you had a quite big negative effect on your pension liabilities. If you could give some more flavor, because in the first half, I think the long interest rates was down some 60 basis points in Sweden, and in the third quarter, some 30 basis points, but all of the revaluation came in Q3.
We didn't do much of revaluations in Q2, so we took it now.
Is it still... is the effect still on the liability side because of lower interest rates, or is it that your assets are declining?
No, it's just actuarial changes. We didn't change. We could have changed it, or if you ask some people, they probably thought we should have changed it in Q2 already, but we chose to change it now in Q3.
Based on the negative effect on equity, your equity to asset rates are declining to 7% now. Is that a risk or for your operation, and especially given that you increase your investments in property development, is that sustainable?
Well, so far, we have not seen any, we haven't seen it preventing us from taking business. We do have good ratios in our companies out there. It's the group level that looks low. We have no problems getting funding at good rates, so obviously, it's not preventing us at this moment in time.
We actually see no impact. I have a personal reflection on that. If you compare us to some of our peers, the big difference is that we don't have any residential development, which means that we have less assets on our balance sheet. So in my mind, equity to asset ratio is not as relevant. We are, of course, on a very low level, and the change you see from the pension fund is from low to low. And we're working with that, and the way to do that is to have profits going forward, but it's not an issue right now.
Okay. Thank you for taking my questions.
Yes, good morning, Niclas Höglund with Nordea . A couple of questions from me as well. If we, more or less on the same note on margins, when I look at Construction Sweden, which has delivered more closer to the targets previously, and we saw that the underlying margins came down to 2.3% from 3% in the first half. Can you sort of help us to understand the sort of delta? Have you done any major project writedowns at this point, or do you see a lower underlying profitability? Could you please help us there?
I think there's a number of things to recognize for Building Sweden. The first one is that they are also impacted by the more prudent approach we have on profit recognition going forward. So that impacts the overall business area. But that's not all of what you see this quarter. What you also see is that you have a normal variation from quarter to quarter, depending on a lot, you know, a lot of factors. When do you end projects? When do you change within the normal range, when do you write up and down forecasts, et cetera, et cetera? So you have a normal variation within the business. So this is impact by prudent profit recognition and normal variations.
On top of that, you could say that, you know, 2.3 is lower what they've done before. It's still on par with competitors on the market. Is that good? No. My expectation is that we should gradually move towards our target for Construction Sweden as well. But you shouldn't read basically anything into this quarter other than the general prudence.
Okay. Moving on to infrastructure, could you provide a timeline for the sort of legacy problem projects you're talking about, a big part of or, a part of, of your production is, is profit recognized with sort of zero due to a more prudent approach? Could you help us with sort of understanding how big part that is sort of zero or close to zero recognized?
We talked about eight projects in Norway last year. Those are more or less done at this point. We still have two large part that is not performing within the infrastructures, equally divided between Sweden and Norway. Those are gradually decreasing. We will not get down to zero next year, but we will have a significant decrease as we enter into the first quarter. That will improve profitability for infrastructure. What we are doing is that we are increasing zero recognition for the really large project, and that has a negative impact over the coming quarters in infrastructure, and has had a negative impact.
So the dilution effect will most likely continue.
For some time.
Okay. On, when you look at the sort of order backlog, could you give us a better feeling on how big part that is sort of more up to you to sort of set a low profit recognition, and where you see the sort of margins are more in line with your expectations and target, while these sort of weaker kind of projects, which will be finalized into next year?
Well, that would be really... Without, you know, giving a false impression of that, you know, we have one group of bad projects and everything is fantastic. There's a gray zone between those two. What we can see, however, is what we have won this year has significantly better margins and contingencies underlying, but we will be prudent in recognizing it. It's one thing of doing an estimate, and another thing of actually knowing what will happen.
So it's nothing about the cost overruns in the core or in-
No.
Okay. And then moving on to project development. Well, you have sold a couple of projects for the fourth quarter, but we also see that you will sort of finalize a couple of projects, and especially one in, outside in Stockholm. I heard that you're planning to move into a new head office in-
In a suburb.
In the, it's not CBD, but still, it's a decent location.
Yeah.
Moving in now in, well, eighteenth of November.
Mm-hmm.
Could you give us, maybe some flavor on how the divestment process is ongoing, and what kind of yield assumptions we should expect in the suburbs?
Well, that was a lot of detail. We can say that we have left the ninth floor to 3M during the quarter, which is really good. There's a divestment process ongoing, so stay tuned for more press releases.
Could we expect closure before year-end?
Stay tuned for more press releases.
Okay. Thank you. Those are my questions.
Questions from the telephone?
Okay, questions from the telephone, online?
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. So once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Simen Mortensen of DNB Markets. Please go ahead. Your line is open.
Hi, gents, and thank you for taking my question. I have one question regarding the other and elimination lines in the quarter, because when I look at the quarterly results, I see, especially in the footnotes, that you state that head office and the results from small subsidiaries and associated companies is totaling -SEK 7 million versus -SEK 22 million, SEK 122 million one year ago. And if you can just give us a bit of coloring of what are these small subsidiaries, associated companies, and how they have affected the results this quarter, because those figures in the report are not the same as in the presentation.
Well, the big impact, the companies that we talk about are companies like our own manpower company, for example, and NCC Montage. It is our insurance company, it's our treasury company. So those are basically the companies I think that corresponds on that. And we did have lower costs on HQ overall. Q3 is a low quarter when it comes to cost, so the cost level was a bit low in the quarter.
This is SEK 115 million deviation year-over-year.
Yeah
in EBIT effective. So if you can tell us a bit, what is the big deviation between that as SEK 115 million?
The big deviation is that we did have cost for revaluations in the quarter last year.
Okay, thank you.
And, and, and-
My next question also goes-
Adding to that, Susanne highlighted that in her presentation, but I think it's well worth repeating. If you look at SG&A cost levels, I think it's worth looking at the rolling twelve level of 4.8%. That was more of a guidance than I normally do.
Good. Thank you. And the second one goes on in terms of the level of net debt. It rises significantly the quarter, partly due to pension, pensions, but it's overall at a very high level, which is moving close to your net debt to EBITDA target of 2.5. How do you see net debt developing forward? You have some sales in Q4, but in terms of overall risks, and your possibility to continue to grow within property development.
I think, without giving any forecast, our fourth quarter is a strong quarter when it comes to cash flow. So we do expect to, to reduce our corporate net debt during the fourth quarter. And when it comes to our net debt to EBITDA target, we are now below that, the 2.5 times that we have been above for quite some time now. So, I don't think it's that worrisome, and we expect cash flow to improve in the fourth quarter, as I said.
Thank you. The other questions I had, had been asked already. Thank you.
Any further questions?
Once again, if there are any further questions on the phone, please dial zero one on your telephone keypads now. Okay, there seems to be no further questions from the phones at this time.
So if there's no further question from the room? That's good.
Rutger Smith. Not that it matters so much now that you are divesting the Road Services, but I'm just curious to know, that seems to be a special problematic area, not only in Sweden, but in Norway and possibly elsewhere. Why is road service such a difficult area to get a decent profitability?
My and our conclusion last year when we decided to divest it is that because it's significantly different from our core business. We are a project management company, that everything we do, everything from supporting systems to how we develop people, how we attract people, what we reward people for, is about projects. While road service is, as the name implies, a continuous service, work, and we do not have the infrastructure to run that. That was my conclusion a year ago, and I'm even firmer in that conclusion now. I think that Road Services could be a really good business for someone who understands how to run that type of service business. Thank you, all.
Thank you for prioritizing us over the school holidays, and look forward to seeing you again during the quarter and for the presentation of the fourth quarter in 2020. Thank you all.