Good morning, and welcome to NCC's interim report for the first nine months. My name is Johan Bergman. I'm Head of Investor Relations at NCC. With me here today, I also have NCC's CEO, Tomas Carlsson, and CFO, Mattias Lundgren. They will guide you through the numbers, and after their presentation, we will open up for questions. Since this is also a telephone conference, I would like to urge everyone to use a microphone in the Q&A session. With this short introduction, I would like to welcome NCC's CEO, Tomas Carlsson, up on stage.
Thank you, Johan. Welcome, everybody. As you may know, we had a capital market meeting last week, where we presented the findings of the review that we have been conducting about the current state of the business, as well as the preliminary Q3 report. Now, first news for today, the preliminary Q3 has now transformed into final Q3, and they are exactly the same. So that's the highlight. We're going to, together with Mattias, I'm going to walk you through a brief summary of what we presented at the capital market meeting, and then we're going to present the final Q3 numbers. So here it goes.
News that we presented on last week, it goes like this: We have now concluded the business review that I initiated in May, and as a consequence of that, we have revaluations of SEK 1,565 million that impacts the third quarter of this year. That means that last week it was preliminary numbers, and now it's final numbers, saying that we have net sales increasing to SEK 14.3 billion compared to SEK 13 billion before, and that we have a highly disappointing earnings of SEK 1.1 billion. This is, of course, not good, and we have, therefore, a comprehensive action plan. And I will give you the very, very high-level overview of that plan in a little while. The findings from the review can be summarized like this: There's a strong, healthy core in NCC. It...
Approximately two-thirds of the business is performing good or very good, and that's good news. But that leaves a too large part of one-third that is underperforming or, in many instances, even loss-making. We also conclude that we have an uneven performance throughout the group, where we can find good performers as well as underperformers in every country and in every business area. This is, fundamentally good, the way I see it, because that means that, we can make money in every country, and we can make money in every business area. Market conditions are generally good, the only exception being residential markets and fundamentally, the Swedish Bostadsrättsförening, where we have, since some time now, very much weaker demand.
We have identified and isolated the challenged areas within the NCC group, and with the revaluations, we are reducing the risk profile across the group, and the revaluations has very low impact on cash flow. That's the summary. The insights that we've gained from this review can be described in four different topics. The first two has impacted the revaluations 100%. The latter two, number three and four on this list, has, to a smaller extent, impacted the revaluation, but it's mainly impacting the underlying business. It's about the approach to claims and how we recognize profits and revenues in connection with claims, where we have now a more prudent approach. We have taken decisions to exit a number of smaller business segments and markets.
You can find examples of that in all of the business areas, but the large ticket here is that we have taken a decision to exit the road service business, and that we are now exploring opportunities to find other owners for the road service business. We have a number of findings relating to risk profile in tendering, in project management, and in cost control, where we have taken a number of actions. Those actions can be summarized in four buckets. It's about organization and team, where you have seen that we have, during the last two months, made a number of changes. We have a flatter organization, we have a more transparent organization, and we have new individuals coming in on the team, and this is largely done, so check on that. We have taken the decision to exit businesses.
That is ongoing, and we have three major turnaround plans. One is for Civil Norway, one is for Building Nordics, one is for the long tail of underperforming departments, where we will have a more granular approach in terms of the profitability on a department level. And the fourth one, which we are launching now, but we will have to continue on the long-term basis, is a number of initiatives on project management and cost control, where we last week launched NCC Project Academy in a collaboration with the Royal Institute of Technology in here in Stockholm. Which is a way for us to secure that we have key competence for now and for the future in NCC. That's the high-level summary.
Third quarter 2018, as a consequence of all this, means that we have orders received on SEK 12.7 billion. That's exactly the same number. Actually, if you break it down to millions, it's exactly the same as last year. Net sales increasing to SEK 14.3 billion. As I said earlier, order backlog is on a very healthy level of SEK 56.6 billion, and then disappointing earnings of -SEK 1.1 billion. Adding the first nine months leaves us with these numbers: orders received of SEK 44.1 billion, and then we have net sales of SEK 39.5 billion. Order backlog on the same healthy level as we had in the quarter, and then earnings so far of -SEK 1 billion. That's the summary in short.
Mattias will walk you through the business areas in the details in a little while. I'm gonna give you an overview of the business areas and the market situation before Mattias comes on stage, and here goes. Infrastructure. What you should notice on this, on order backlog, is that we have order received on par what we had last year. We have a very healthy order backlog, but for the sake of expectation management here, a large part of that order backlog is a number of really large projects, and the most important of that one is the Gothenburg Railway Station, which is an order of almost SEK 5 billion.
The reason why I'm mentioning this is that that large order backlog will have a very long duration and will not be transformed into net sales within quickly in next year. That, I think that's important. And then we see a growth in net sales in infrastructure, and that is primarily Sweden growing. Now, if you look at the distribution of geographies, there are basically two things to say here on infrastructure. This is primarily a Swedish business, but we also see that we are winning orders in Norway, and I think that's good. I will show you a couple of examples of orders in Norway in just a few slides. Always growing, if you look at the orders received, it is primarily one big railway contract, and we think that good.
think that is good because we have a legacy of having good business in the infrastructure in Norway, and the Norwegian infrastructure market is the largest in the Nordic area. In absolute numbers, it is actually, they have a larger infrastructure investment program than Sweden have, even though the population is roughly half of the Swedish population. And then, on, the product mix, I think there's one thing to note here. Railways is very dominating in the orders received. That's the same, it's the Gothenburg Railway Station. If you look at net sales, that's a very small percentage. And even though I normally don't do forecasts, I'm going to go out on a limb here and say, I think that part of net sales will increase gradually over the years.
Examples of projects, and this is the big one, Venjar–Eidsvoll, close to Lillehammer, if you want to have a geographic location on this, 1.7, and note that the customer is Bane NOR, which is a different customer compared to the projects where we have the challenges in Norway. For the same customer, we have an expansion of the Follo Rail, Follo railway line on the outskirts of Oslo. This is a project that is rather large, but not a mega project, and I think it's good that the Norwegian organization is actually focusing on medium-sized projects instead of only going for the really large ones. That was infrastructure. Moving on to building, and I think it's worthwhile mentioning, last week, we talked about the two new business areas, business area Building Nordics and business area Sweden.
In this presentation, it will be building because that was the organization up until the end of October and up until the end of the quarter, so we are reporting according to the organizational structure that was applicable at that time. Order backlog and orders received is fundamentally on par, a little bit down, but the important message here is that we have a healthy backlog. We have not been focusing on winning projects, but rather making sure that we can deliver on the project portfolio that we have, not getting into the type of project overreach that we've seen in other places. Now we're getting into a situation where some parts of the building organization needs to focus a little bit more on sales.
Looking at the distribution, I think the important insight from this slide is that when we split the business areas, we will have two business areas that are of roughly equal size, Sweden actually being a little bit larger, but over time, that varies. The second insight from this slide is that Finland has had very good orders received, and won a number of important projects, and I see a good development in the Finnish organization. Then finally, on the product mix. Residential is impacted, both in terms of orders received and in terms of net sales, of a low extended period of lower demand from the market. However, I think this is important to note, that it's still a large proportion of both orders received and net sales.
And the last insight on this one is that we have a good demand in all the other segments within building. So we have a residential lower demand in primarily Sweden, but we have a good demand in all other sectors. Examples of projects from building, this is some attractive apartments in Hellerup, Denmark. Our client is Danica, and I think they are for sale now. So if you're interested, go onto their website and look at one of these apartments. We're starting to build them right now. I think they look spectacular. And the second example is something that we see a lot, increased demand for different type of public service buildings is like schools, but also other types of public services. This is an example from Norrköping in Sweden. Moving over to industry.
Industry has lower volumes in Q3. However, if you look at stone materials, which is one of the volume-driven businesses that we have, the decrease that we see compared to last last year's Q3 is primarily one contract with high volumes and basically no contribution that we have ended. So the difference here is a high volume, low contribution project that we have ended. And if you move on to asphalt, you see a slight decrease in tonnage. It is referable to two countries. It's Asphalt Finland and Asphalt Denmark, and last week's capital market meeting, we talked about them as turnaround subjects within within business area Industry. Sweden is delivering according to expectations.
If you look at the distribution and product mix, we can see that industry is largely a Swedish story. It's largely an asphalt story, and in addition to that, we can see that Norway is developing in a good way, and increasing volumes, and net sales. Then finally, last but not least, property development, which is a quarter where things are going pretty much according to expectations. We have sold three properties, one in Finland and two in Sweden. That means that the number of projects under development decreases with three. And you can see that the property development has a clear Swedish focus, and for the short and medium term, that will be a Swedish focus for property development going forward.
In the quarter, we leased approximately the number of square meters that you can expect from a third quarter. It is a quarter with two summer months, where activity normally in the decision-making on if you need more office space is normally pretty low. For the portfolio, the mix of letting ratio and completion ratio, last quarter they were exactly the same, now they are moving in the right direction. We have, and I know you need to look carefully on this slide, but there's a difference where the letting ratio is somewhat higher than the completion ratio, moving in the right direction.
A project that we are starting now in property development is Bromma Blocks, and for those of you who are familiar with Stockholm, you know that that is a growing retail area, but we will add some space to this. There will be office space, there will be a hotel, and we will also have a Maxi ICA store in that building, or in, it's actually several buildings. With that, I'm handing over to Mattias Lundgren to give you all the details about this. Welcome, Mattias.
Thank you, Tomas. So, the financial figures, and I will start with the income statement as usual. And if we take it from the bottom, you can see that we have a very negative profit after tax, -SEK 955 million in the quarter, significantly lower, of course, than the same quarter last year, and heavily impacted by the revaluations in the quarter. And if we then look at how this result was created, we have an increase in net sales. It is an increase in all business areas, very small in some, but still. But mainly this is driven by building, where we have an actual increase in net sales that is pretty significant.
However, the gross profit line is then impacted by revaluations, so you don't see this increase in net sales in the profits. Selling and admin is also impacted by revaluations. In this case, it's provisions for restructuring costs, SEK 75 million. That explains most of the increase from last year, and we have some currency effect as well. The other items, minus SEK 46 million, that is impairment of intangible assets. Financial items are on the same level as last year, despite an increasing net debt. We have lower interest rates that compensate for an increase in net debt. All in all, financial items are on the same level. EBT, minus SEK 1.133 billion. I will go into the business areas later.
I will now focus on other and eliminations, minus 65 compared to minus 62. On the surface, roughly the same level. If you look into the details, you can see that we have a negative impact from revaluations in the HQ costs. This is mainly provisions for restructuring, but we have also made a write-down of intangible assets here. Internal gains, it is slightly positive. PD has made divestments, so we can dissolve previous provisions and eliminations of internal gains. Other group adjustments, we did have a provision for this intangible asset. It's an IT system that was written down, so that is actually neutral when it comes to EBIT effect. All in all, minus 75 in the quarter, compared to minus 62 last year. Business areas.
Infrastructure, we have a slight increase in net sales, but it's roughly on par with last year. EBIT level, significant impact here from the revaluations. But even if you exclude the revaluations, we do have a negative EBIT level in the quarter in the business areas. And just as we stated last year, last week, this is due to cost overruns in some civil engineering projects. It's mainly on the Norwegian market, so it's the civil engineering Norway part that has the cost overruns. And it is in projects with a high work operation, so they're very near to completion. And that also has a cash flow impact that you will see later on. I will not go into the different parts of the revaluations. We did that last week.
So moving over to building, that was, as Thomas already said, it was one business area, during September, and from first of October, it has been split into Building Sweden and Building Nordic. So in, the Q4 report, you will see this reported as two business areas. Net sales has increased. It is mainly, in the Swedish part of building, and to, to a smaller extent, also in, Denmark. EBIT level is heavily impacted, again, by the revaluations. But before revaluations, the underlying business is actually performing a bit better than last year, and this is mainly the Swedish part. And, and, you saw the figures last week.
So Sweden is performing better and actually on a decent level, if you look at the underlying performance, while the Nordic part is performing on a significantly lower and unsatisfactory level. And that's why that is part of the main turnaround plan. Moving over to industry, we have an increased net sales, and just as we've said a few times now, this is actually driven by a cost increase. So bitumen and energy costs has increased, and that means that mainly asphalt prices per ton has increased in the market. Everyone was aware of that going into this year. Price level was increased in the market, and then we have some index contract. So this is a bit neutral. So it increases the price, it also increases the production cost.
It's EBIT neutral and has a slight negative impact on the EBIT margin. However, the main impact is the revaluations, 150 million SEK. And if you look at the underlying performance before that, you can see that it is lower than last year. And here, the main part is the foundation business. It's Hercules that is performing on a lower level than last year. And again, that is in focus, and you saw the action program for that last week. Finally, property development. Here we have an increased net sales. We have made 3 profit recognitions, and two of those has an impact on net sales. It is mainly the office building, Alberga, in Finland that has an impact on net sales, and to a lesser extent, the Arendal logistic project in Sweden.
Mölnlycke Galleria does not have a net sales impact. That was a joint venture, so we're selling the shares, and we get a profit from that, but it's not included in the net sales. So EBIT level, again, heavily impacted by revaluation items in the third quarter. If you exclude those, the underlying business has a positive result, thanks to these three transactions. So, I've talked a bit about cash flow, and, if you look at it, you can see from the history that the third quarter is not our strongest quarter when it comes to cash flow. But this year it is actually a bit weaker than it has been previously. So, the cash flow from operating activities is impacted by these cost overruns, mainly in civil Norway, but also in some other parts.
Hercules business within industry is one example. It is cost overruns, it is in late stages, so it's not full cost. It costs, it's actual cost, and it's actual cash flow. That is why we have a lower cash flow here. We are still net investing in property projects. We are building up that portfolio, and that has a negative impact, less so than last year, thanks to the profit recognitions, but still negative, and then negative other working capital. And as we said, the Alberga project in Finland, there we got a down payment at signing in Q2, which explains why this is negative. We cannot, unfortunately, be paid twice for the same project. So, we had a interest-free debt or liability to the buyer there.
That goes out of the balance sheet, so we have a negative impact here in the working capital. It's neutral if you exclude that. Then we have slightly lower investing activities in fixed assets in industry in the quarter. All in all, -SEK 574 million in cash flow. So moving over to objectives. As we stated last week, the board has decided to reduce the number of objectives, so we are now only focusing on financial objectives in the group. The objectives and target levels in themselves are unchanged. So, what we now will focus on is the operating margin, which should be 4% or higher for the group. The net indebtedness, which should be under 2.5 times EBITDA, and then return on equity, that should be 20% or higher.
We also have a dividend policy that at least 40% of the profit of the tax should be paid out in dividend. So 4 objectives going forward, but the objectives are unchanged. Now, looking at the levels, EBIT margin, of course, heavily impacted by the revaluations in the third quarter, so it is negative at the moment. The net indebtedness level is close to 13. And, of course, this is not due to a very high net debt. This is due to a very low EBITDA. If it had been slightly lower, the bar would have gone to the negative side, not due to a net cash position, but then we would have a negative EBITDA. So if you exclude the roughly SEK 1.6 billion in revaluations, the net debt level is 1x EBITDA, roughly.
It's not a high net debt, I want to make that very clear. Return on equity, due to the revaluations and the negative profit level, that's negative at the moment. And what the dividend level will be, that's up to the board to suggest to the annual general meeting next year, so we'll see where we end up. With that, I hand over to Tomas to summarize.
Thank you. And just before we open up for questions, I'd like to highlight a few things. We see strong positive drivers in the market. That's how we see the market today. We see large infrastructure projects in Norway and Sweden, ongoing and planned. Infrastructure is sort of predictable what will happen over a number of years. We see a generally strong demand in building, and the exception being residential market, but in general, we see a strong demand in building. We see a number of demographic factors that is driving demand for schools, hospitals, nursing homes for the elderly, and other type of public sector type of buildings. We see growing cities. Urbanization is very real in all of Scandinavia, and we also see population group growth.
The Nordic region is considered to be reasonable, stable, and with reasonable growth projections going forward. What we do now is that we have a new baseline for the NCC group. We will build on our strong and healthy core that we have in all countries and in all business areas. We will have an organization that is more focused on projects, customers, and geographies where we can add value, and we have lowered the risk profile in the projects and in the balance sheet. But that does not mean that we are less ambitious. We are. Risk profile and ambition does not go hand in hand. They are not contradicting. We have as high or even higher ambitions going forward, and it's we have a clear main objective, and that is restore profitability for the NCC group and, and have a better consistency in our earnings.
Thank you all for listening, and we will now open up for questions.
Yes, and we start here in the room, if there is any question. Okay, you can think about it. Let's go to the telephone conference.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Please hold until we have a first question.
Maybe you will have to ask questions you want.
Yes, but they will be very nice, though.
Ladies and gentlemen, just a reminder, in order to ask a question, please press zero one on your telephone keypad. Thank you.
Christian?
There seems to be no questions.
Yes.
Given the fact that we presented basically the same thing last week, that is not completely unexpected. Before we end this, and I thank you all for listening in to this, I have one more important thing to do, and that is say an official thank you to Mattias for your tenure as CFO and for your efforts during the last quarter here. Thank you, Mattias.
Thank you
Thank you all for listening in, and, see you, if not else, for the fourth quarter report. Thank you.