Good morning, everyone, and welcome to this presentation of NCC's first quarter. With me here today, I have NCC's CEO, Tomas Carlsson, and CFO, Susanne Lithander. They will guide you through the numbers, and after the presentation, we will open up for questions. Since this is a telephone conference, I would like to urge everyone to use the microphone and state your name in between any question. With that, I would like to hand over the microphone to NCC's CEO, Tomas Carlsson. Welcome, Tomas.
Thank you, [inaudible]. Let's make sure that we have the right slide first. Welcome, everybody, welcome to this beautiful Monday morning, and I'm happy to see so many of you here. I will summarize the quarter, and I will give you some insights that we have from what we can see, and then Susa will give you the details on the numbers. Summarizing the quarter, consistent Q1 performance, it's consistent compared to what we've seen historically over actually pretty many years. It's also consistent with what you could expect, given the structure and nature of the company as we are today, with large part construction and large part industry, heavily impacted by the winter season. We have high orders received in the quarter on the back of a strong demand for our services.
If you compare it to last year, it's nominally a little bit lower, but we had one really large project in Finland last year. We're happy about that, but it's not to be expected to have orders on that magnitude. I will get back to this. We have stable operational profit in the quarter, negative, but as you could expect from this type of operation, and we have a healthy cash flow, significantly improving compared to the first quarter of last year, primarily driven by cash flow from operations. In the quarter, we have started two new development projects for the group. One is, maybe as you have seen in the news, at public spots, and then Valle V iew in Oslo. We are continuing the work with the action plan that we launched in October last year.
A couple of things that we have, actions that we have taken during this quarter. We have divested the retail projects of Westway and Kolding, and those are two of the projects divested in the quarter for PD, with zero or very little profit earned in the quarter. But we have, by now, divested 79% of the value of the real estate that we wrote off, we wrote down in October. The divestment process of road service is ongoing and proceeding according to plan. We are expecting to finalize this divestment during this year, and I hope that I will have more news to present in the coming quarters. Then turn around initiatives on the departments and units that were non-performing.
If you remember what I said in October, I said 2/3 are performing, but 1/3 is not performing, and those are the units with specific and very detailed turnaround plans. It's moving along according to our expectations and according to plan. I will detail orders received and net sales and EBIT a little bit, and put into perspective on what you should expect. If you look at orders received and order backlog over the last three years, and those are the years that we have audited numbers for the organization assets today. This is the time period that we actually can give to you. You see a clearly increasing trend, which you think about the control and order in Q1 2018. That has a very long duration.
So what you see is orders received, but it's significantly larger than the net sales, which means that we are building order backlog, and we end the quarter with more than SEK 61 billion in order backlog. We do the same slide for net sales and EBIT. It's not immediately as obvious. But as I have said on several occasions, we have different ways of recognizing profits in the business and the group has different business models. So what happened in 2017 was that we are truly finalizing one large project that was too strong. That was fantastic and good, and we really appreciate it, but it is of a different nature than the more continuous construction and industrial business.
So if we take, if we are asked a little bit to look at the business excluding PD, it looks like this. So this is the net sales and EBIT development for the construction business and the industrial business for the last three years. The increasing net sales and earnings on par with what we've seen last year. I will give you a number of comments on the business areas in detail. I will not give you all the numbers. I will highlight a few things that maybe can help you understand this. First of all, infrastructure, infrastructure. Orders received on a good level. Infrastructure is impacted by the first winter quarter, not as much as industry, but still impacted. Most of the large parts of the infrastructure work become outdoors.
If you compare orders received with last year, it's not as high. However, think about SEK 25 billion, and then think about that orders received this first quarter is significantly higher than the net sales. And also that we are building order backlog, and the order backlog is on a significantly higher level than rolling twelve revenue. EBIT is positive, which is also what you can expect from an infrastructure business in the first quarter, and pretty much in line with my expectations. Building Sweden has normal orders received.
Order backlog for more than a year worth of revenues on a very high level, slightly low-growing or on par, and net sales some EBIT on the same level of last year, and net margin of 3% or operational margin of 3%. Building Nordics, increasing orders received. They were a little bit on the low side last year, but they are now on the really high side. The increase is primarily Denmark. A number of projects that we have been working on more or less during the entire last year, which we now have been able to sign a contract for. So these orders received in Building Nordics increased primarily in Denmark, but continued with the orders received in same numbers as well.
Net sales into increasing, EBIT increasing, not yet on the level where we want it to be, but moving in the right direction. All divisions within Building, Building Nordics are now in positive earnings, for some on a very low level. Industry, very, very, very pronounced seasonality and, most importantly, for the asphalt business, pretty much on the level where we should expect, industry to be this part of the year. It's very, very difficult to draw any conclusions, for the rest of the year for industry with the start. But there's a delta compared to the earnings last year, so it's a bit, bit less of a loss compared to last year. And this, delta, all divisions contribute to this, improvement in the delta. All divisions within, industry, contributes to this.
And remember that we have expanded the industry business with investments in, for example, Norway last year. Seasonally low activity. If you look at the stone sales, pretty much on line where we used to be, we, where we have been and then where we should be. Asphalt, the sales is actually up a little bit in this first quarter, but that is completely insignificant because the sales in the first quarter compared to the sales in the coming three quarters, it's very close to zero. So asphalt business is fundamentally close first quarter. Property development, no major projects recognized in this quarter. Nominally, it's three. Nominally, it's three, but two of them was projects that we wrote down in October, so the earnings contribution from them, it's zero or very close to zero.
And then a third small project where we have not fully recognized all profits yet. So this is fundamentally a contractor preparing for the future and starting new projects. We have no major projects profit recognized in this quarter. Now, for those of you who read the list of when we expect to recognize profits in Q2, there were two that we were expecting to recognize this quarter. We have now postponed that into quarter three. It is purely a Danish formality. It's a real estate registry in Denmark that has not had the capacity to file our request for transfer of ownership to the buyer. We are in collaboration with the buyer, agreed on a new date when we do the transfer.
This is purely Danish formalities. Product is sold and done and built and all of that. So it's nothing that we can really influence. Portfolio is focused on Sweden, even though we have started new projects in Denmark and Norway, but more than half of the ongoing projects are in Sweden, and that is according to plan. We have a healthy letting in the quarter, healthy letting in absolute numbers, but also healthy letting if you compare to other first quarters of the recent years. So we have managed to let some 22% of the available space this quarter. That means that the letting and completion status of the complete portfolio is developing towards a less risky profile.
With that, I'd like to hand over to Susanne. Welcome, Susanne. It's you.
Okay. Good morning, or it is morning still, I guess. Income statement. So much is taking it from the business area, and I will just give you the short version on the top level instead. Our net sales has grown 5% compared to the first quarter of last year, and all the business areas have contributed to that growth. But as you saw from Tomas' side, in the Nordic stands out with the 12% growth. Gross profit, however, is basically on the same level as last year in spite of the higher net sales. And that's also explained by the cautious profit recognition that we continue to have in our construction projects, and also the fact that the project we sold in PD did not have a major impact on our P&L. Selling in SG&A is on a normal first quarter level.
On a rolling twelve months, it's on a 5% level, where we expect it to be. The next item on the income statement that we talk about is the financial item that has increased from SEK -8 million to SEK -18 million, and that's driven by the new accounting standard, IFRS 16, which I will come back to with the second slide for your education. That's pretty much the details on the income statement. Moving on to the segment with other and eliminations, that makes the completeness to what Tomas talked about in the business area. On the side, to the, on the little box to the right, you see how it's split it up, and try to explain a negative SEK 94 million in EBIT.
First, you have the NCC headquarter, including the smaller subsidiaries and associated companies, basically on the same level as last year. A very small improvement there comes from our insurance company. Internal gains is the area where we do see some movement during the year. This is where we eliminate the projects on this level, primarily PD, and when we start projects in PD, this increases and continues to grow until we take the projects there, and then we recognize and deliver the projects from property development. Huge adjustments, the same, some smaller adjustments, primarily within pensions this time. Now, we come to the new accounting standard and the effect that have on our books. First of all, we have the income statement, and as you see, the effect on the income statement is negative SEK 5 million, so immaterial on the total level.
However, we do see some movements between the lines. We do reverse the leasing costs in the EBITDA, so a positive impact on EBITDA with SEK 143 million. That comes back instead as depreciation of our right of use assets. So, our depreciation increases with SEK 147 million, and also our financial cost increases with SEK 11 million. So all in all, immaterial impact. The balance sheet impact is SEK 1.4 billion, and that is shown as the right of use assets within fixed assets, primarily. And on the liability side, you find them on the long term and short term interest bearing. The cash flow for the period, you don't see any impact, but there's also movement between the lines.
There's an improvement on the cash flow from operating activity with SEK 162 million, and there is a decrease for the same amount as cash flow from financing activities. That's clear. Our net debt has grown significantly since the first quarter of last year, from SEK 1 billion to SEK 4.8 billion. First, you have the other corporate net debt that has gone from a net cash position to a negative or net debt of SEK 700 million, almost. We have the lease debt or the lease liabilities that are now SEK 1.9 billion. And our pension liabilities grew during last year to current level of SEK 2.3 billion. As you know, we have our financial targets in this area.
We have a target to have net debt to EBITDA below 2.5x, and after the first quarter, we are on a level of 2.4x. Within, but rather close. Finally, our cash flow for this quarter was strong. Very good cash flow in the quarter. This slide also shows 2017, and as Tomas has already said, we had a major impact from pre-funding system that skewed the numbers or the comparison for 2017. On here you can see that the cash flow from operating activities has improved, and as I just said, that comes from IFRS 16. The cash flow from costly projects slightly down, but that's more of a timing issue. Investing activities also a bit down, and that comes from our investments, a little bit lower investment in our asphalt business.
The big improvement here really comes from the working capital, but primarily driven by prepayments in our infrastructure business. And with that, I hand back to you, Tomas.
Thank you very much. And only for me to wrap up, before we move on to questions. The way to remember the first quarter is consistent Q1 performance, consistent with what we've seen, the first quarter over many years with the group, and consistent with the structure of the company that we are. High order, we've continued good demand from the market on our services. The only exception to that rule is residential, where we will see a little bit more muted markets in Sweden and Denmark. But when it comes to offices, public buildings, infrastructure industry, we see good demand. Stable operating profit in the quarter, healthy cash flow in the business. Two new property development projects are on hand. A long-term improvement plan is on track. And with that, we open up to questions. Stockholm.
Thank you. [inaudible] , Nordea. A couple of questions. If we start out with the, with the building operations, what, what are your sort of main takeaways from the building? We see, so many improvements.
Building or Nordics? No, both.
Both. Quickly, the deviation this last year is on the in the Nordics, while Sweden is stable. What were the most surprising for you in the first quarter? What stands out?
No surprises is the big thing. And I think we remain with the good demand in the building sector. We have been able to compensate for the more muted demand in residential. However, if you look really, really, really carefully, we actually have an increase in residential in Sweden, but I think we shouldn't read too much into that. But we have been able to meet the demand from other sectors. Nordics, what we see is that we have a continued good demand, and in Denmark, we have been able to conclude a number of negotiations during the quarter. For example, the new Hilton Hotel in Copenhagen that we have been working with for quite some time.
On the building side, you're talking about slightly more muted continued market than the res market in Sweden.
In residential.
Yeah.
Yeah.
What would you say that the mix in the backlog is right now for Sweden, on a profitability level? Would you say that the projects you're taking on, are you expecting sort of them to reach your target, or would there be slightly more pressure until to meet the mix?
I think we have approximately the same type of profitability in the new orders we received. We are also, for delivery, more cautious and more prudent in what kind of projects we take on and where we bid. To build the Nordics, we definitely see, you know, better profitability, because we are being more cautious. We are working with more with general risk contingencies. We are being more selective in building.
Then we go to infrastructure. You mentioning that you're continuing to monitor the loss in road services. Can you share some thoughts on the timing and maybe also regarding the losses of SEK 5 million? Should we expect more or less breakeven contribution from road services, or are there any side costs included in that number?
Well, we did the major write downs in October. So now it's ongoing business, and the old contracts that are continuing, not, you know, contribute that much. The process is ongoing. We have now sent out the information memorandum to actually a large number of potential buyers. We expect that we will start negotiation with a number of potential buyers within the next couple of months.
Looking at the rest of the operations, is this having problem with some of projects in Norway, for example, what's the sort of status on those? You mentioned that, well, the issues are showing possible numbers, but are they still losses in those projects in the quarter?
Well, they are a lot better performing. The projects that I talked about in October, at that point, we estimated that they would be completed during the second quarter this year, and that assessment still holds. So we're continuing gradually, you know, improving the business in for infrastructure and you know.
Follow up, we've seen that the share of large orders, started in 2018, has increased. Could you share some thoughts of the sort of dilution from, I would say, cautious recognizing these projects in an early stage? Do you think have had a negative impact on the sort of profitability that you're showing us there?
Well, it for sure increases the profitability level. We are being prudent. We have a more prudent profit recognition, particularly in the large projects, but also in other more complex projects. Then we have we are doing zero profit recognition on projects where we think that there's size or complexity involved like that, and we are accumulating the zero recognition in this quarter. As a prudent measure for recognizing for profits.
Will that continue to expand through the year, or have we peaked?
That would be my expectation, that we will continue at least this year and probably into next year, and be more prudent on the profit recognition. Talk about the projects, the average duration of our projects is two years, and until we are actually through one of those cycles, we will continue to be more cautious.
Yeah. You took a major step in Q3 last year, but
Absolutely. But if you remember, if you look at the write-downs we did, and that is balance sheet items with the exceptional road service. It was contained in disputes. It was balance sheet items from property development, and that was the main explanation of the write-down, different projects.
Then on property development, you mentioned these two projects in Denmark that is sort of pushed into the second quarter. Could you elaborate a little bit, are those two projects also among these sort of write-down projects?
No. No.
These are normal
These are real projects.
This is real.
Real projects.
Real earning.
Yes.
Yeah. And could you also share some thoughts on the ongoing interest and rental market for the K-12 and K-11? I mean, the properties in your main headquarters, we haven't seen any major leases in the K-11.
No. I mean, the demand for rental, for office space is, is high in Stockholm area, and we are negotiating with a number of potential tenants, but we haven't concluded anything yet.
The project, at least the K-12, will be finalized during the year.
Yeah.
Do you see potential for development property already this year?
That could be one option.
What would be the
We have several options that we are working, thinking about.
Any thoughts of any interest from any buyers?
We haven't started that process.
Okay. No problem. My final question,
You have plenty of time.
Just, well, we're seeing that the tax cost, or in this case, tax earnings in the first quarter, it's only 16%. And because normally, this sort of percentage down to the first quarter is communication for the to the full-year expectations. Are you pointing us towards 16%, or is it more likely to be in the 10%?
With confidence, Handover, this is,
No, we're not pointing in any direction. We're not.
It's more the normal situation.
Yes.
Okay. Thank you.
Okay, let's hear from the telephone conference from your call.
Did we cover all sections in that segment?
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Okay.
Okay. Thank you, [inaudible] . I just had a question then, perhaps on the balance sheet. You were talking about that you, you're moving in towards that net debt to EBIT target that you have, you're at 2.4x now, and the target is 2.5x. I assume that you expect the sort of EBIT situation to improve going forward. That's obviously part of the action plan. But what in terms of your overall sort of net debt situation, how do you feel about that? Or do you feel that there's something that you need to do, or is there anything that will automatically happen throughout the year that we should take into account?
No, I think we're comfortable with the situation we have. We will carry the Q3 number in the calculation, and that's really what pushes it down to the level where we are. But on the financing perspective, we feel confident.
Any situation in terms of the investments that could change that picture? I'm, I'm thinking about if there are any effects from divesting road services or, or PD in particular for nineteen.
No, I don't see that. I don't see that.
Okay. And then perhaps moving on to building a little bit and talk a little more about the residential market. You mentioned the fact that you've sort of been able to step up the activities outside of residential in order to sort of build up the backlog. In terms of profitability, do you feel that there is any differences between the segments, particularly for Building Sweden, then obviously?
No, not really. We have, you know, variance of profitability within different customer segments, more than between segments. So, we see pretty much the same type of business. We are being more selective when it comes to building in all segments right now. But, I'm really happy that we've been able to meet the slowdown in the residential with other sectors. But I'm also really happy with the work that finally the Sweden organization has done, focusing more on rental residential than project sales. In Sweden, that's a job that they have been working with for several years now. So it takes part of the turnaround time. They made a strategic decision two or three years ago.
[inaudidible], go ahead.
First, to add, to add on to that, going back, before you, you came back, there was also the talk about this renovation wave coming and the good opportunities in that area, staying on the residential. Is there anything you can say on the development on that front?
Well, we do, we do renovation. I think it's not as clear, particularly in Sweden, it's not as clear-cut as you see in, in Finland and Denmark, but it's part of what we do. But it's not this huge wave driven by a need to renovate that people have been talking about for a long time. It's happening all the time and on approximately the same level as before.
Then, going back to Q3, I think you mentioned the SEK 300 million remaining in costs for activities.
Mm-hmm.
That's being corrected now, but I think 150, 62 something was taken into Q4. So another 50 waiting for, I guess, unless you, you-
It's a
Yeah, you could
That was the estimate, and the estimate was also that that happened during the remaining part of 2018 and during 2019. We were able to take a lot of action end of 2018, and therefore had lots of restructuring costs. I think we will have restructuring costs during this year as well, but you should think about as smaller portions happening, you know, throughout the year.
It won't be highlighted as a cost?
We probably will be highlighting it if it is, significant and material.
And, to that, should we expect it to be connected to the divestment and what happens? Is, is that part of it, or, or is it
It's not an estimate on the divestment, on the earnings of the divestment of road service. We can really not forecast what will happen with that. It's more in connection with whether we pay for services, if we have the right size organization from somewhere, or if we have to, you know, make changes to the organization.
Thank you.
Aldin, please.
Yeah, Aldin from the [inaudible] to follow up questions. Just on the road to sale, you seem quite confident that that will actually happen, but you don't get the price that you're looking for.
Nothing is certain, but just in taxes, but we have a really good process.
There is no way to holding it in order for you to improve the performance and thinking that you can push it?
That's always an option, but that's not what we're aiming for.
Then also just on your comments about being prudent in the profit recognition, I guess it's one of follow the industry a long time, I think prudent has always been a key word, so I wondered who everyone here, but now we have an aggressive revenue recognition. But I just wonder if are you overly prudent now because of what happened in the past, and you are new, or do you think it fairly reflects the projects that you're working with right now?
Look, I don't know what the previous management communicated. I really don't know that. And it's hard for me to assess whether we are being more prudent or not. I think we are, you know... There's a range of how you can think about profit recognition. We try to be at within that range, but at the more prudent side. That doesn't mean that all projects are risk-free or nothing can happen, but we try to be really careful.
Thank you. I think that concludes all the questions. So we would like to thank everyone for coming. Thank you.
Have a continued good Monday, and then see you around. Thank you. Thank you very much.