Good morning. This is Johan Bergman, Head of Investor Relations at NCC. I'd like to welcome everyone to this information meeting that we arranged on account of the press release that we published earlier this morning. With me today is NCC's Acting CEO, Håkan Broman, and CFO, Mattias Lundgren. Håkan Broman will start with a short statement, and then our CFO, Mattias Lundgren, will go through the press release in greater details. After this, there will be an opportunity to ask questions. With that, I will hand over the microphone to NCC's Acting CEO, Håkan Broman.
Thank you, Johan. I have now been Acting CEO of NCC for six weeks. My priority is to put all focus on the business, take control of the parts that aren't performing well, and reverse the cost trend in the company. NCC has become a different kind of company since we spun off Bonava last summer. We are now a construction and property development company that has to focus even more on ensuring that our core operations become more profitable and that product management works even better. I believe that work currently underway in the infrastructure and building business areas is a step in the right direction. But unfortunately, following a review of both completed and ongoing projects, we have identified a need to establish provisions ahead of the closing of the annual accounts. Mattias will soon go into this in greater detail.
The business area managers and I have focused on the parts of operations that aren't performing well. We now have a better understanding of the challenges we face, and we are increasing the support to these parts. NCC's overhead costs are too high at the current rate of growth, and we will therefore reduce these, generating annual savings of approximately 200 million SEK. The purpose of the cost reduction is to ensure an overhead cost level of a maximum of 5% of sales. Our cost needs to be reduced in both the business areas and in group functions. A hiring freeze is already in place in support functions and consulting, support resources that do not work directly in projects or in production. It will also entail personnel redundancies across the group in areas that are not directly related to production or projects.
In 2015, NCC launched a new strategy with a target of annual sales growth of 5% and improving the operating margin from 3% to at least 4%. The focus going forward will be concentrated on improving profitability only. We will not prioritize maintaining growth ambitions of the strategy plan. In addition to improving profitability, work environment, and safety of our people are key priorities. I will now hand over to Mattias, who will provide more details.
Thank you, Håkan. I would like to start by describing the total impact of this on the NCC Group, and then I will move on to the various business areas and what we estimate will happen there in the year-end closing. NCC's earnings for the fourth quarter will be charged with SEK 315 million in total for increased provisions in the construction and civil engineering operations, i.e., the business areas, building and infrastructure. This adjustment means that the project portfolio in the construction and civil engineering operations will have a lower and more balanced risk level going forward.
The earnings of the group will also be charged with SEK 75 million in total, both for restructuring costs regarding this cost-saving package of SEK 200 million that Håkan mentioned, and also for severance pay for the former CEO of the group. Since this is provisions we are talking about, they will not impact the fourth quarter cash flow in the group. In total, after these provisions and charges for restructuring costs, the operating profit in the group is estimated to be close to zero for the fourth quarter. If I move over to the business areas, the Acting Business Area Manager of NCC Infrastructure, Göran Landgren, he has been working to turn around the weak earnings in the business areas since the start of September.
Provisions related to the ongoing project portfolio of SEK 260 million will be charged to the business area's earnings in the fourth quarter. Of these SEK 260 million, SEK 150 million relates to road service and groundwork projects, and SEK 110 million to larger civil engineering projects. This means that after these provisions, the business area Infrastructure is expected to report an operating loss of approximately SEK 100 million for the fourth quarter. Earnings for NCC Building will be charged with SEK 55 million in the fourth quarter related to provisions in construction projects. This is primarily related to three projects in the Danish operations. We do focus on larger, complex projects in Denmark. Operating profit after these provisions is expected to amount to approximately SEK 200 million for the fourth quarter in business area Building.
We expect NCC Industry to report operating profit in line with the fourth quarter last year, if you look at the fourth quarter this year. Finally, business area property development will most likely not profit recognize any property project in the fourth quarter. This means that the business area will have an operating loss of approximately SEK 50 million in the fourth quarter. We will present this and all other information related to the fourth quarter of 2017 in our year-end report on January 25th, next year, 2018. Finally, I would also like to remind you all that these provisions mentioned in Building and Infrastructure are made under the current accounting standard, that is IAS 11, Construction Contracts.
As we have stated in the interim report for the third quarter, NCC, just as all other listed companies, will apply the new accounting standard, IFRS 15, Revenue from Contracts with Customers, starting January 1st 2018. We are currently analyzing the effects of these standards, and the results will be presented in the year-end report for the fourth quarter. But we will not state any impact before it has been audited.
Thank you, Mattias. Now we will take questions.
Thank you. Our first question is over to the line of Tobias Kaj at ABG Sundal Collier. Please go ahead. Your line is open.
Yes, thank you. First of all, I wonder if you can give some more details regarding the projects where you're taking write-downs, if they are already completed or, or when they will be completed?
Yes, I can answer that. I would say that there is a fundamental difference between what we're doing now and what you have seen during the past two years. Previously, we have made write-downs in projects based on historic problems, so to speak. They have been backwards looking, adjusting things that has already happened. What we do now is provisions related to risks identified for the future. So this is a number of projects that has been re-evaluated regarding the risk and possibility balance. Some of these provisions are made in the projects, some of these provisions are made on a central level, based on, of course, not a portfolio valuation, we're not allowed to do that, but based on identified risks in individual projects.
So, I cannot give you a clear answer because it's a range of projects that we make provisions for.
Okay, thank you. And in infrastructure, can you mention anything regarding which geographies the write-downs are related to?
Well, the business area is, if you look at the market footprint, mainly focused in Norway and Sweden, and this reflects where the provisions are made.
Okay, and is it equally split between Norway and Finland, or is...?
No, Sweden and Norway. But we, w e have not stated the split between geographies. We focus to specialize this business area by product, so we track this by product.
Okay, thank you. I also have a question regarding Property Development. I think you didn't have any project or any profit recognition in Q3 either, but then the loss were SEK 9 million, compared to around SEK 50 million now in Q4. Can you give some details about why the figure is so much bigger now in Q4?
Well, the Property Development business area have income not only from the sale or profit recognition of new projects. We make provisions when it comes to rental guarantees, for example. So if we have a good letting in a quarter in previously sold and recognized projects, we get profit from that. And we also have an operating net, of course, in unsold projects. So for the fourth quarter, this year, we have lower profit from other items, so to speak, including land sales.
Okay, thank you. And one final question, if I, if I may. When I calculate, I get, implying the, or based on, on the guidance for the business unit, it seems like central and, and central expenses will be around SEK 100 million in, in Q4, if we exclude the SEK 75 million charge. Which seems like a quite high number in a historical perspective. Is that correct? And, and if so, why is, is the, the cost much higher in this quarter than before?
Well, we are only at the thirteenth of December, so we state approximate numbers for the business areas. We still need to do the year-end close before we have the final figures. But I would like to remind you that if you compare to last year, we actually made a risk provision in the third quarter centrally, and then we dissolved that provision in the fourth quarter when we made a write-down of a project in civil engineering in the fourth quarter. So you have a positive impact of roughly SEK 50 million centrally last year, and of course, we will not have that this year. That has an impact on the comparison with 2016.
Okay, thank you.
Okay, our next question is over to the line of Erik Granström at Carnegie. Please go ahead. Your line is open.
Thank you. My questions have been answered, except perhaps coming back to the last question from Tobias. If I word it this way, given what you're reporting in terms of EBIT for the different business areas, and then given the fact that you say that SEK 75 million will also be a provision, I assume that will be taken centrally. If we add that up, we end up with an EBIT of SEK 100 million or SEK 101 million, to be exact. So then the question is, you're still stating that the overall group EBIT will end up at zero, so either central admin is an additional SEK 100 million, which to me sounds extremely high for a single quarter, or there might be something else. So what are we missing here?
I would answer like this. Well, first of all, you're correct that the restructuring cost and severance pay of totally SEK 75 million for the two items will be taken centrally. What you perhaps miss is that we state approximately when it comes to the figures. We are still only at the 13th of December, so there's still two weeks to go, and we have not completed the year-end closing process. We have barely started it. So these are approximate numbers for the business areas, and if there are minor deviations or deviations of 5-10 million SEK in each, or perhaps even more than that, the central cost will, of course, be correspondingly lower. So these are approximate estimates to guide you.
Okay, thank you. That's all I have.
We are now on the line of Niclas Höglund at Nordea. Please go ahead, your line is open.
Yes, good morning. Most of my questions have been answered, of course, but could you shed some more light on the restructuring charges? Maybe an approximate split of the severance payment, and maybe, well, out of these SEK 200 million in annual savings, could you give us some more light on the timing and, I mean, what could... Because you took some charges also in 2015, and the reason why you haven't seen any, the lower costs related to those charges. Thank you.
Well, when it comes to a split of the SEK 75 million, we have a preliminary estimate of the restructuring costs when it comes to the cost-saving package. This has to be confirmed, of course, and it remains to be seen what the final amount is. When it comes to the severance pay, the former CEO's compensation package is specified in the annual report for 2016. So you can make a pretty good estimate by looking there. I hope that answers the question.
And the restructuring? No, what about the SEK 200 million in savings? Can you shed some more light on timing and well, commitment to get those savings in the books, so to speak?
Well, we are looking at three major things, I would say, when it comes to this SEK 200. It is a reduction of activities, and that kind of cost reduction happens quite fast. We are looking at a reduction of external costs when it comes to consultants and other external help, and that is quite fast to reduce those costs. And as Håkan said, we will most likely have redundancies as well when we move forward, but that will take longer time to have an impact. So you should see some impact in the fourth quarter this year, actually, when it comes to stopping some activities, but then starting January next year, in the first quarter, you will start to see the impact.
We are very committed to save SEK 200 million, looking at a full year effect.
The run rate will be already in 2018 or more tapered to towards 2019 and 2020?
We have a very clear ambition to have a run rate of 200 already next year.
I can add, Håkan here. I can add that we can shed some more light on this in January.
Super. Thank you.
Just to remind all participants that if you wish to ask a question, please press zero and then one on your phone keypad now. Gentlemen, as there are no further questions at this stage, may I please pass the call back to you?
Thank you very much, and I'd like to thank everyone for calling in this Lucia morning. Thank you very much.
This now concludes today's call. Thank you all very much for attending, and you may now disconnect.