Morning, everyone, and welcome to this presentation of NCC's interim report for the first half year of 2017. Today, NCC's CEO, Peter Wågström, and CFO, Mattias Lundgren, will take you through the report. After the presentation, we will open up for a question. Since this is a webcast, I would like to urge everyone to use microphone and state your name before you ask your questions. Before we get started, just some safety instructions. You will find exits to my right and to my left, and there is also a heart starter, one stair below in the reception area. With that, I would like to welcome NCC's CEO, Peter Wågström, up on stage. Please, Peter.
Thank you, Johan. Interim report for the first half year of 2017. I just want to start it on the picture. You see, the new station of the commuter—for the commuter trains in Stockholm, and just below, 40 meters below the central station in Stockholm. It's a beautiful station, and it's performed and conducted by NCC, so I'm very happy to see it's in operation today. It's operational since a couple of weeks. A very nice station as such. But jumping into the second quarter, 2017, NCC has a high order backlog, a strong order backlog, for the coming years. It's really, really good, and for the rest also of this year.
But we have weak result in NCC Building, even if the margin is up, slightly compared to last year's second quarter, but, it's on the weak side. And NCC Infrastructure, we haven't seen the larger progress in picking in or picking up yet to, really deliver results. In, NCC Industry, we see improved results and strong results in, the quarter. Very happy with that one, and we have new starts of property projects in NCC Property Development. Three of them in, in this, in Sweden this quarter, especially, at Järva Krog, our new headquarters, is started in the quarter. Let's look into the numbers. Orders received, SEK 16.4 billion compared to SEK 17.1 billion last year. It's a strong level in orders received. We were very strong last year, and it's strong also this year.
Net sales, SEK 13.4 billion compared to SEK 13.7 billion, slightly lower. It's connected to Denmark and Finland, and we will be back to that. Order backlog, strong order backlog with SEK 52.3 billion compared to SEK 47.2 billion. Profit after financial items, slightly lower than last year, SEK 522 million compared to SEK 548 million. But last year, we also had a one-time effect from the spin-off of Bonava. That makes more or less the difference in between last year's second quarter and this year's second quarter. The first half year, orders received, strong, orders received, nearly SEK 28 billion in the first half year. It's in the same level as last year, so we have strong orders. Net sales, SEK 25.2 billion compared to the SEK 22.8 billion that we had last year.
We have strong net sales overall in the quarter, our first half year. Order backlog, I was just into, and profit of the financial items, SEK 805 million compared to SEK 240 million, and here we see the effect of the recognized products in especially one large one in the first quarter that gives us a very strong result in the first half year. If you look into market outlook, we have a strong market in the Nordics, strong growth numbers. If we compare to GDP on a very high level, in growth and all over, in the Nordics or in average in the Nordics, I would say. If you look into the segments, new construction in building is very strong. It was strong last year, is strong this year, and on a lower level in 2018.
But we also have to remember that the building products is shorter, so it's very hard to forecast the level. So they normally pick up over time if you have a growth in the market overall. Civil engineering, normally, it's planned for longer period, the larger ones, so it's more stable in the growth figures when you do forecasting. Refurbishment is picking up, and we have a stock all over the Nordic that is 40, 50 years old today, so need to be refurbished, especially when it comes to residential. In asphalt and stone material, nice growth figures. It's picking up on a nice level, both in asphalt and stone material.
NCC Building, we have good orders received in the quarter on a higher level than last year, and we have a very strong order backlog of SEK 30 billion that I'm very happy with. And if we'll compare for the rolling twelve, we are not in the same level since 2016 yet at least, but nearly in the same level all over if you compare the rolling twelve compared to 2016. Net sales hasn't picked up as much, and we will be back to the net sales part. If you look into product mix, we are one of the largest residential contractors in the Nordics, and we can see that in order intake, that picked up in the half year, was a bit low in the first quarter, but now it's in the normal level.
There came in a lot of residential products in the second quarter, and we see that also in production that keeps up the volume as such. We are large in refurbishment and conversions, and we also talked earlier on that we have had a lot of healthcare and hospitals coming in, and now that is starting picking up also on net sales side, but it hasn't picked fully yet, but it's picking up. Geographically, Sweden is the strongest market in the Nordic, and we can also see that in orders received, and we are lower in Finland and in Denmark in the first half year. If we look into net sales, Sweden is the largest market and has had very good orders received and strong order backlog since the last year, and that you also can see in the net sales as such.
Denmark is lower, and here we can see in the net sales that, we have had some postponed products that we now can see is coming in, in this end of the second quarter and beginning in the third quarter, that will pick up the net sales over time here. If we look at some examples, Senaps fabriken in Uppsala, SEK 650 million for Magnolia Bostad is 644 apartments in two blocks in, in really central Uppsala. It's a nice project, where we have been part of developing and helping to do everything about the project planning and design. Another one is, refurbishment conversions, is part of Sergelhuset Stockholm, and the customer is Vasakronan, with a volume of SEK 550 million. It's hotel and some apartments.
We also got from Bonava, one project, as an example, is from 124 apartments in Tollare, in Nacka, and it's worth SEK 339 million. NCC Infrastructure, we have had our orders received at the slightly lower, but we had a very strong second quarter last year. We got several large civil engineering projects that came in in the second quarter, and we didn't see that. We have one that is now postponed in the court, and we will see if it comes in the third quarter here in Sweden, and that's also communicated. And we had hoped that would come in the second quarter. It probably come in the third. Order backlog. A strong order backlog of SEK 18 billion. So we have things to work with for the coming years as such.
Orders received Rolling Twelve is higher than last year, and that sales has started picking up, but hasn't picked up as much as we would like to. But it's the larger project is starting really being in phase in production. In the product mix, groundworks has picked up in the quarter. Sure, seasonal effect because it comes more groundworks through the summer in the warm season than the cold season, and it's a large part of the business area as such. Industry, it's heavy industry that we got some nice contract in the second quarter. And we also can see that roads is the second largest when it comes to net sales, and it's a large part of what is received also.
When it comes to geographically distribution, Sweden has been the largest in the quarter, but Norway has started picking up some products also in the quarter, so it's been increasing compared to last year. Net sales, Sweden is our largest market when it comes to infrastructure, and Norway is the second, as we see here. It's nice when we're picking up some more orders, we would like to increase the part in net sales from Norway also. Infrastructure, some examples. We have a drinking water, this desalination plant at Gotland, with SEK 170 million that we got in second quarter. We got a culvert in Skarvnes in Norway. He has to cover the road, where they doing some... Then developer is doing residential development. Some examples of products, some others is soil remediation in Sollentuna.
Well, just a small one, but that's some part of this business area. And we got some renewal of tram rails and water and black water pipes in Helsinki, where we work in the city center of Helsinki. NCC Industry. We have in the second quarter, strong volumes, in asphalt, more in line with last year, but we have a better mixture of asphalt and the products we are doing, and also to the customers and which customer we have in the quarter. And we have a strong volume when it comes to stone material, and here we also can see that Sweden is our largest market, and that gives a strong stone business for us. We are the largest player in Sweden.
Product mix, more or less in line with what is normal in second quarter, when it comes to the different segments in industry. Geographically, Sweden is the strongest market, and it's also growing the strongest, so it's the biggest one. Here we have property development and, Järva Krog. You see our new head office with NCC sign on it, and the building next to it is the second part we have started in the quarter. Market, strong market in property, as such. We can see that the yields is increasing a bit in the CBD of, Stockholm, as we see it, and, due to the vacancy rate is very low and the rents is very high in the CBD.
We can see in the capital cities of the Nordics is stable or going down a bit when it comes to vacancy and yields. Project starts in the second quarter. We have started Arendal Three logistics in Gothenburg, and we started two offices then in Järva Krog. Our new head office is K1 2, and we started the building next to it around 12,000 square meters. I'm happy we got all the permits in place, and everything is legally valid, so we are in full operation with the groundworks for the moment, and it looks about like this for the moment at the site where we're doing all the groundworks to doing the foundations and the cellar.
That means also in the quarter that we increased the number of ongoing products with three, and because we haven't had any recognized in the quarter, so we have just increased to three numbers, and Sweden has increased as we like to see that Sweden is the largest part in the portfolio. In the quarter, we let then 28,000 square meters, and that means 28% of the lettable area in the quarter. So that's a good number. And with that, I would like to hand over to Mattias.
Thank you, Peter. Before I go into the financial figures, I would like to remind everyone that when you look at the second quarter last year, we still owned Bonava up until the seventh of June. So you will see Bonava in the comparison figure for last year, mainly when it comes to the cash flow. Then we paid it out as a dividend, so it's not part of the balance sheet in the end of the quarter, but we will see the effect in the cash flow statement. Having said that, let's look at the income statement, and as usual, I will start from the bottom, looking at profit after tax. Four hundred and thirty-five million, so that is slightly below the profit level the second quarter last year.
If we look at how that was generated, starting from the top, we have a lower net sales in the quarter, and that is partly due to property development, where we had no projects to recognize this quarter. But mainly it's related to the building business area, and we'll come back to that. As a consequence, the gross profit is lower than last year, and last year, we did have a positive effect on the gross profit level when it comes to internal profits to Bonava. That was dissolved. I'll come back to that as well. Selling and admin expenses is on a lower level than last year. And if you look at the twelve-month period, we are now down to 5.1%, so we are closing in on the level we, we think we can afford. The other items is roughly zero.
It's some participations we have in other companies. Last year, we had a large negative effect from a write-down of an IT system, and all in all, that means that the operating profit is slightly below than last year. We do have a financial net, which is on the same level as last year, which means that the profit of the financial items is SEK 522 million, again, slightly below the level last year. Moving into cash flow. The cash flow is seasonally negative. The second quarter is usually negative, and if we look at how it was generated, the operating activities is roughly on the same level as last year. We do invest in the property projects. As Peter said, we have started three projects. We have not recognized any projects, so we do invest here.
It's roughly on the same level as last year. We did have a positive effect from the housing projects last year while we were still owning Bonava. Today, we don't have that business. The big difference, if you compare the quarters, is within the operating or in the working capital in the operations. Roughly SEK 2 billion in capital that we tie in the working capital this quarter, and if you look at the balance sheet, you will see that we do have a build-up in the receivables. Of course, all else being equal, that should be converted into cash in the quarters going forward. Finally, investing activities, roughly SEK 200 million in a negative cash flow. Last year, this is an effect of Bonava, that we had SEK 670 million in negative cash flow.
When we pay out Bonava as a dividend, the cash in Bonava is considered a negative cash flow for the NCC group. So, if you look at the operational part here, we actually invest more, and that is related to the industry business area that we invest in. All in all, a cash flow of roughly SEK 2 billion, or a negative cash flow of SEK 2 billion. So higher seasonal negative cash flow this year. Looking at the EBIT level or operational profit, I will go into the business areas later, but if we focus on the row I- other and eliminations, here we have three different parts that we usually walk you through. The first is the headquarters cost and some remains of our international operations. There, we did have a write-down of an IT system last year.
That is the main part of the large negative figure last year. When it comes to internal gains, we had a large positive effect. When it comes to internal gains to Bonava, that was dissolved. When it comes to the other group adjustments, it's mainly related to pensions. We did have a positive effect last year, and we don't have the same positive effect this year. All in all, minus 67 this year, which is significantly more negative than last year. It's not big figures, but the deviation is large. Moving over to the business areas, starting with building. As Peter showed you, we have good orders received, and we are increasing the order backlog, we have a decrease in net sales, and that is from the Finnish and Danish operations.
It is an effect of a lower orders received level in the previous quarters, not least in the first quarter this year, and that is not fully compensated by growth in the Swedish business. The effect of the lower net sales is a slightly lower operating profit, despite a slightly higher margin in the quarter. If you look at the 12-month figure, the operating margin is still at 1.9%, so same level as last year, and the gap to our strategic target of 3.5% remains. I should also say that the turnaround in Norway is still ongoing. It's going according to plan, but we have not yet reached breakeven, so we are still making a loss at the EBIT level in Norway. Moving over to infrastructure. Again, we have a decent order intake.
It's not on the same level as last year, but here we do have a variance, of course, between the quarters, especially in the civil engineering part. So it depends on when the large project within the infrastructure segment is signed. So we'll see when, when they come this year. The order backlog is higher than it has been if you look at 2016, and the net sales has increased in the quarter. The increase is mainly in the infra services segment, where Peter showed you that we have a lot of groundworks ongoing. However, operating profit and also the operating margin is lower than the second quarter last year.
The reason is, as we've stated before, that we have a negative impact from older projects where we have made writedowns and the margins are low, and we have not yet seen the positive impact from the larger projects, especially in the civil engineering business. They are in the Order Backlog, but we have not yet seen the effect in the income statement. And when it comes to those project, we have discussed the duration in the Order Backlog. The projects are longer, so it takes longer time to see the impact in the income statement in infrastructure compared to building business area. But of course, the operating margin, Rolling Twelve of 0.7, is unsatisfactory, to say the least, and we need to close the gap to a strategic target, 3.5%.
Of course, it's in the order backlog, but we need to see it in the income statement. Moving over to industry, we have a growth in net sales, and the growth is in all three divisions. So it's in asphalt, stone materials, and the piling and foundation business in Hercules. The main part is asphalt. It is a seasonally large part of the business area. And as Peter said, it's actually not volume-driven in tons. It's a project, customer, and product mix. So we get better paid per ton, which drives the increase in asphalt. As a consequence, both operating profit and operating margin is higher than last year. And if you look at the 12-month figures, both the operating margin and the return on capital is over our strategic target levels of 4% margin and 10% return on capital.
So as I've stated before, our aim and ambition is to drive the growth in this business area, and you can see, in the cash flow statement that we have made investments here to support future growth. Finally, property development. Here, you do see the lower net sales as an effect of, no projects recognized this quarter. We did recognize one project, an office project in Malmö, in the second quarter last year, and that's the reason we have a lower net sales. The operating profit in this quarter, is land sale and also, some extra profit from previously recognized projects. And the effect is a very high operating margin in this quarter, the second quarter this year.
The twelve-month period has both an operating margin and a return on capital, which is roughly twice as high as our strategic target level of 10%, which goes for both margin and return on capital. Just as I did in the presentation of the first quarter, I would like to point out that in the property table, in the interim report, where you can see all the ongoing projects, we have now increased the number of projects designated to be profit-recognized this year. It was zero. It is now one. It's a logistic project, and of course, we don't give any forecast. I won't give a forecast now, but you will realize that the profit level of SEK 892 million is not sustainable with just that project.
Moving over to the group total, and looking at our financial objectives, starting with the margin. The margin has increased compared to 2016. That is mainly due to a very good first year in property development. We have a gap to close to our strategic target of 4% EBIT margin. And, as we've stated, the margins in building and infrastructure are unsatisfactory. So, the way to close the gap is to get the order backlog into the income statement and increase the margins. Looking at growth or revenue development, we have 4.1% growth in total compared to 2015. That is 2.7% annual growth, and again, that is a gap to our strategic target of 5% average annual growth for the five-year period.
Again, the order backlog has grown more, but to get the revenue up, of course, that needs to come into production, so we see it in the income statement. Looking at the equity asset ratio and the return on that equity, if we start with the blue bar, which is return on shareholders' equity, that is significantly up compared to last year. The reason is mainly the good first half of the year, and that is driven by property development. But this is also the first time you see the full effect of the new NCC balance sheet without Bonava, and we reach a 30% return on equity. The equity asset ratio is slightly below our target level of 20%.
The reason is, in part, a revaluation effect of pensions, but we have also taken the entire decided dividend into account here that reduces the equity. So not only the paid out part, but the entire decided part. Finally, the net debt level, this is excluding our pension debt. Here we are more or less at the zero level, excluding the pension liabilities. So we do have a strong balance sheet and a strong foundation for future growth going forward. And with that, Peter, I hand over to you to summarize.
Thank you, Mattias. Just to summarize the second quarter, 2017. We have three project start in NCC Property Development. Very happy that we started at Järva Krog in our new head office and the office building next to it. We have good results for NCC Industry, especially in asphalt, it has been driving this quarter, and this is also seasonal that asphalt picks up in the second quarter. We have weak result in NCC Infrastructure, and the new project hasn't kicked in, and the larger one hasn't kicked in as, we had hoped for, but it's coming, and it's picking up.
Lower net sales in NCC Building, especially, some effect in Finland and Denmark, but we also can see that the orders received picking up now in Denmark in the end of the second quarter and the beginning of the third, and that will give us, higher net sales over time. We have a higher order backlog in total in NCC on a high level, and we're happy for that for the rest of the year and the coming years. We have favorable market outlook, especially in Sweden, that is, strong and looks strong, for the coming year. We have focused on increasing margins, Mattias was also into that. We have our targets, and we are focused on increasing the margins and towards our strategic targets.
We are having a very strong focus on cost, and in Sweden especially, we have a focus on capacities and securing resources according to the project and the possibility in the market. With that, Johan, I would like that we take some questions, if there is some.
Yes. Thank you, Peter, and we will start here if there are any questions?
Yeah, Stefan Andersson, SEB. A few questions. First, if you could possibly elaborate a little bit more on, I think you mentioned a few times that you are in the phase of starting up some big projects, and of course, there's cost associated with that, and you can't really recognize too much profit. So the timing of this, in the end here, you said something about we had hoped to have started already this quarter. Should we interpret this that it's coming really quick? Is it coming already in Q3, or is it more a prolonged, gradual development?
Oh, it's, it's, if you take for before to the pathway in Stockholm, if you pass on the way to Arlanda today, you can see we are in, in full swing today. We need to get everything into the income statement also. They are, they are up and running, and we had hoped it had picked up even a bit quicker than it has. It's coming, and it's ongoing. They are started, and everything we got last year in, in the quarter two, that's the big part, and they are up and running now. They start when this—when the weather gets and it gets warmer, we start the projects. They are up and running. It's not new starts, it's they are ongoing.
And we should see an impact gradually from-
Yeah
... Q3 onwards?
Yeah.
Then, the loss-making projects in Norway, you probably said this before, and I forgot, but how does... What's the timing on the big ones that has an impact? When are they fading out?
They are, they are faded out now. So, what the impact, and Mattias was into, is the overhead because the, the product that we have, we got some new ones also on a totally different way, level, and we have changed all the processes. And, and that means also that before they pick up and we got the volume up, then we don't cover fully, our overhead. The plan is saying in 2018.
... and then a tricky, maybe nasty question here. But, you, I mean, you mentioned the only th- the only thing we need is to get order backlog's margin into the sales, because they are so much better. And unfortunately, one and a half year ago or so, when we asked, are the margins better in your order backlog than in your sales? You said, "Yeah, they're higher." And-
Mm.
You know, and then things happens that you don't really plan for. So elaborating a little bit on this, have you had development with cost inflation, that has... If you could touch on that, which means that you actually need to get orders with higher prices in order to offset that. And then, of course, we know is that there have been some mishaps as well. But maybe-
Mm
... if you can touch on how certain you are that you actually can deliver on that, that nothing else will happen, and also how you handle the cost inflation, if there is any.
First, it's not cost inflation in that. We have increased our prices towards the customer, due to the good market, especially in Sweden. We're going for full in Sweden. What we, with the new organization now has secured is starting working in the same processes and securing in the way, and that's why I put Klaus also in, in heading the Building and Sweden building as such, to securing that we're working in the same way and handling risk in the same way as we've seen in Denmark. And that's what we now have implemented in Norway, and as we also see that we decided we won't see the same, order received in, in Norway for a while due to that we're working in a different way, and I'm happy with that.
We're doing exactly in securing that what happened in Finland in residential shouldn't be able to happen. It happened, and now we're securing that part in the processes, so we can have the same way as we've been operating in overall. So it's to secure that we can deliver the margins from the order backlog is having the right processes and the right control of things, and that's really what we, I like to establish with the new organization, to be closer and securing that we have the right focus in the business as such.
And then we had some mishaps, then we found out when we changed the organization and starting digging in everything, and then we said, "Better we start taking away these things that people are not following the processes." And that's why I changed a lot of people the last one and a half year in a lot of positions.
I would also say, if I look at the order backlog, projects that we have received in the new organization during 2016 and 2017, they have a higher margin and a stable margin. So, the mishaps, if you call it that, we had an ingoing order backlog, an ongoing project, not least in civil engineering, mainly related to Norway, and they are long. They cover several years in production, and we still suffer from them. And then we had building, the residential production in Helsinki, and that was mainly projects that were started late 2015 in the old organization again. So the mishaps, if you call them that, they are disappointing, but they are old things from 2015.
When it comes to cost inflation, I mean, I hear from some competitors that you see on some, yeah, on some subcontractors, that they are pushing up prices a little bit. And, are you seeing any, any problems there at all, or?
No, sure, prices goes up, but the other part, you take that with you in the calculation as such. You then, and then you re-increase the price for us to take on the work, so we increase our margins according to that. It's fully booked. So we increase our prices, but that's based also on the higher, some higher prices. But on the other hand, also, we are large companies, we have a fairly amount of frame agreement that is on several years. So we control our cost in a different way than the spot market for the moment. That's the good part.
When the market goes down, the spot market goes down, but on the other hand, in outgoing market, it's good that you are larger and have good frame agreements, because then you are, for several years, and then you're not in the spot market in the same way.
Okay, my final question then. You mentioned yields in Stockholm,
Mm
... started to go up a little bit. Vacancies are extremely low. Could you maybe elaborate on, on, on that? Is it a lot, or what is it driven by, you think, and-
Yeah, that's the normal case when it comes to residential, being in that market for so many years. When you're coming from a lower level, from rent, the rent level is lower, then you can pay a lower yield, because then you can increase and cover and get a higher return on your capital in time with your increasing your rent and income in the property. But now you're on extremely high. I know the last I hear is, like, SEK 9,000 square meter in offices in larger, not just 200-300 square meters, like 2,000-3,000 square meter of office in central Stockholm.
If you need to pay SEK 9,000, then you probably see, okay, then I need to get a better yield from beginning, because it's high—getting that higher in short term or in three to five years' time, mm, not sure. Normally, you see the yield goes up then. It's the normal effect between rental and yields and returns. It's just that. We see it started—as we understand, some investors starting talking a bit higher yields due to that. I think you will see that coming in according to that, the rent levels is high.
Thank you.
Thank you, Stefan. Let's hear from the telephone conference if there is a question.
... Thank you. We have a question from the line of Niclas Höglund from Nordea. Please go ahead, your line is now open.
Yes, good morning, Niclas Höglund here from Nordea. Firstly, I must apologize, I have a very poor line, so maybe some of the questions have been answered. But first please, just some more light on the infrastructure for profitability, please. Could you give any numbers on the ongoing in the Norwegian operations? Will there be any new loss-making project, please?
Should you? Yeah, we don't have any new large loss-making projects. We, I mean, we revise our forecast in the projects continuously, but no, loss-making projects or any significant larger revisions of project forecast, I would say. But the effect is that especially the larger projects, they are in the order backlog, but as Peter said, the production pace has not, at least the first half of this year, picked up. And we are also cautious in profit recognition before we see that the production method chosen is viable and actually delivers, and we keep the time plan, et cetera, in the projects. And that means that in the new projects, they don't deliver that high profit yet.
And any changes, any deviations on the negative side in older projects, is then going straight into the income statement while we don't have positive adjustments in the new ones. Again, not yet. So I would say that's the effect you see in the quarter in infrastructure.
Okay, thank you. And moving on with building, you were also mentioning that you had some delayed project in Denmark now coming in, in the second quarter. Well, you don't report the profitability in Denmark, but looking in the past, those projects tend to have been on a higher profitability. Could you confirm that is that also for these projects? Thank you.
Yeah. We haven't changed anything when it comes to our view on margin request, risk, reservations, and so on. When we do tenders in Denmark, it's the same case. And, and we are focusing in cooperation, agreements and partnering products also in Denmark. So that means from time to time, it takes a bit longer to get them in, but it's the same levels as before, when we're tendering for new products. There is no difference. Yeah, and, and so, if you have an effect in Denmark from the lower volume, lower net sales, it's a lower operational leverage, so it does not have anything to do with the profit margins in the projects.
Okay, fair, fair point. Although the mix, am I wrong to assume that mix are improving with these projects coming on stream?
Well, I think if you look at the orders received and the geographical spread, which we show every quarter, you can see the development of the Danish orders received. And based on that, I think you can make your own conclusion of the mix for the business area going forward. We have not yet seen the large orders, order intake in Denmark this year. So that will, of course, all else being equal, have an impact going forward, at least in the short run.
Okay. My line is pretty poor, but if I move on to cash flow, you have a massive ramp up in receivables, although seasonal. Could you share some more indications? Is this cash advances? Is it more structural issue, or are you expecting to normalize towards the end of the year?
Yeah, we do have... You can look in the balance sheet, and there you see the level of what we call invoiced, but not yet worked out in comparison to the actual receivables. And there are variances in both on the asset and on the debt side. But we do have a seasonal buildup of the working capital. I don't see a risk. If I look at the age analysis in the receivables, for example, I don't see a significantly higher risk there than we had last year. So, from what I can say now, at least, this is a temporary effect in the second quarter, but we will see where we end up in the third quarter.
Fair enough. On the other item, you have, well, you have other and other, which is negative impact from pensions. Is this a recurrent or is it a temporary effect on pension?
Well, it is recurrent in at least in the respect that we had it also in the first quarter. And the reason is that we cover our pension cost by charges on top of salaries. And, of course, we have a safety margin here when it comes to the cost coverage. We do not know the actual cost for 2017 until we have the final settlements with, for example, PRI in Sweden. And from what I can see, there will be a lower positive effect this year than we had last year, and that's what you see in quarter one and in quarter two. But I can actually. I cannot forecast this myself.
We will see what happens when we get the final invoice for the year.
So, in Mattias, to follow up, if rates continue up interest rates, I would assume that the pension cost increases will decline, and you will have some recovery, or is it a fair assumption?
That is one part of the equation, yes. But then you have other parts of the equation, which is life expectancy, for example. So, I don't dare to do that forecast myself. There are specialists out there who do it for us.
My final question, if I may. First, congratulations for finally, I guess, the Järva Krog projects up and running with all the permit delays. Could you give us some more light on the total investment and the book value of the current asset, the current office building, i.e., which would be the land cost?
The only thing we said before is, we bought the property for a bit more than SEK 400 million in 2012. And the investment is, you see there is about 32,000 square meter we're going to construct. So, you have to calculate that from, from that, volume of, of square meters. We haven't said anything of, of, the investments as such. But sure, it's, it's, at least some billion investment that you can calculate anyway.
We have also previously shown that the total buildable area in this investment is 90,000 square meters. So, there you can make your own allocation of the land part in this office part.
Fair point. Sounds very attractive. Thank you very much. That's my question.
Thank you.
Thank you. As another reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. Okay, as there appear to be no further audio questions, I'll return the conference to you.
Okay, thank you. Is there a final question here? No? Everything been answered to. So thank you very much for coming.
Thank you.
Thank you.
Thank you.
Good morning, everyone, and welcome to this presentation of NCC's interim report for the first half year of 2017. Today, NCC's CEO, Peter Wågström, and CFO, Mattias Lundgren, will take you through the report. After the presentation, we will open up for a question. Since this is a webcast, I would like to urge everyone to use microphone and state your name before you ask your questions. Before we get started, just some safety instructions. You will find exits to my right and to my left, and there is also a heart starter, 1 stair below in the reception area. With that, I would like to welcome NCC's CEO, Peter Wågström, up on stage. Please, Peter.
Thank you, Johan. Interim report for the first half year of 2017. I just want to start it on the picture. You see, the new station of the commuter trains in Stockholm, and just below, and 40 meters below the central station in Stockholm. It's a beautiful station, and it's performed and conducted by NCC, so I'm very happy to see it's in operation today. It's operational since a couple of weeks. A very nice station as such. But jumping into the second quarter, 2017, NCC has a high order backlog, a strong order backlog. For the coming years, it's really, really good, and for the rest also of this year.
But we have weak result in NCC Building, even if the margin is up slightly compared to last year's second quarter, but it's on the weak side. And NCC Infrastructure, we haven't seen the larger progress in picking up yet to really deliver results. In NCC Industry, we see improved results and strong results in the quarter. Very happy with that one, and we have new starts of property projects in NCC Property Development. Three of them in Sweden this quarter, especially at Järva Krog, Solna, our new headquarter, is started in the quarter. Let's look into the numbers. Orders received, SEK 16.4 billion compared to SEK 17.1 billion last year. It's a strong level in orders received. We were very strong last year, and it's strong also this year.
Net sales, 13.4 compared to 13.7, slightly lower. It's connected to Denmark and Finland, and we will be back to that. Order backlog, strong order backlog with SEK 52.3 billion compared to 47.2. And profit after financial items, slightly lower than last year, 522 compared to 548. But last year, we also had a one-time effect from the spin-off of Bonava. That makes more or less the difference in between last year's second quarter and this year's second quarter. The first half year, orders received, strong orders received, nearly SEK 28 billion in the first half year. It's in the same level as last year, so we have strong orders. Net sales, 25.2, compared to the 22.8 that we had last year.
We have strong net sales overall in the first half year. Order backlog, I was just into, and profit of the financial items, SEK 805 million compared to SEK 240 million, and here we see the effect of the recognized products in especially one large one in the first quarter that gives us a very strong result in the first half year. If you look into market outlook, we have a strong market in the Nordics, strong growth numbers. If we compare to GDP on a very high level, in growth and all over, in the Nordics or in average in the Nordics, I would say. If you look into the segments, new construction in building is very strong. It was strong last year, is strong this year, and on the lower level in 2018.
But you also have to remember that the building products is shorter, so it's very hard to forecast the level. So they normally they pick up over time if you have a growth in the market overall. Civil engineering, normally, it's planned for longer period, the larger ones, so it's more stable in the growth figures when you do forecasting. Refurbishment is picking up, and we have a stock in all over the Nordic that is 40-50 years old today, is need to be refurbished, especially when it comes to residential. In asphalt and stone material, nice growth figures. It's picking up on a nice level, both in asphalt and stone material.
NCC Building, we have good orders received in the quarter on a higher level than last year, and we have a very strong order backlog of SEK 30 billion that I'm very happy with. If we compare for the rolling twelve, we are not in the same level since 2016 yet at least, but nearly in the same level all over if you compare the rolling twelve compared to 2016. Net sales hasn't picked up as much, and we will be back to the net sales part. If you look into product mix, we are one of the largest residential contractors in the Nordics, and we can see that in order intake that picked up in the half year was a bit low in the first quarter, but now it's in the normal level.
There came in a lot of residential products in the second quarter, and we see that also in production, that keeps up the volume as such. We are large in refurbishment and conversions, and we also talked earlier on that we have had a lot of healthcare and hospitals coming in, and now that is starting picking up also on net sales side. It hasn't picked fully yet, but it's picking up. Geographically, Sweden is the strongest market in the Nordic, and we can also see that in orders received, and we are lower in Finland and in Denmark in the first half year. If you look into net sales, Sweden is the largest market and has had very good orders received and strong order backlog since the last year, and that you also can see in the net sales as such.
Denmark is lower, and here we can see in the net sales that we have had some postponed products that we now can see is coming in in this end of the second quarter and beginning in the third quarter, that will pick up the net sales over time here. If you look some examples, Senaps fabriken in Uppsala, SEK 650 million for Magnolia Bostad is 644 apartments in two blocks in really central Uppsala. It's a nice project, where we have been part of developing and helping to do everything about the project planning and design. Another one is refurbishment conversions, is part of Sergelhuset, Stockholm, and the customer is Vasakronan, with a volume of SEK 550 million. It's hotel and some apartments.
We also got from Bonava one project, as an example, is some 124 apartments in Tollare, in Nacka, and it's worth SEK 339 million. NCC Infrastructure, we have had orders received that is slightly lower, but we had a very strong second quarter last year. We got several large civil engineering projects that came in in the second quarter, and we didn't see that. We have one that is now postponed in the court, and we will see if it comes in the third quarter here in Sweden, and that's also communicated. And we had hoped that would come in the second quarter, will probably come in the third. Order backlog. A strong order backlog of SEK 18 billion, so we have things to work with for the coming years as such.
Orders received, rolling twelve, is higher than last year, and that sales has started picking up but hasn't picked up as much as we would like to. But it's the larger project is starting really being in phase in production. In the product mix, groundworks has picked up in the quarter. Sure, seasonal effect, because it comes more groundworks through the warm season than the cold season, and it's a large part of the business area as such. Industry, it's heavy industry that we got some nice contract in the second quarter. And we also can see that roads is the second largest when it comes to net sales, and it's a large part of what is received also.
When it comes to geographic distribution, Sweden has been the largest in the quarter, but Norway has started picking up some projects also in the quarter, so it's been increasing compared to last year. Net sales, Sweden is our largest market when it comes to infrastructure, and Norway is the second, as we see here. But it's nice when we're picking up some more orders, we would like to increase the part in net sales from Norway also. Infrastructure, some examples. We have a drinking water desalination plant at Gotland, with SEK 170 million, that we got in second quarter. We got a culvert in Skarvnes in Norway. It has to cover the road, where the land developer is doing residential development. Some examples of projects.
Some others is soil remediation in Sollentuna. Well, just a small one, but that's some part of this business area. And we got some renewal of tram rails and water and black water pipes in Helsinki, where we work in the city center of Helsinki. NCC Industry. We have, in the second quarter, strong volumes in asphalt, more in line with last year, but we have a better mixture of asphalt and the products we are doing, and also to the customers, and which customer we have in the quarter. And we have a strong volume when it comes to stone material. And here, we also can see that Sweden is our largest market, and that gives a strong stone business for us. We are the largest player in Sweden.
Product mix, more or less in line with, in what is normal in second quarter, when it comes to the different segments in industry. And geographically, Sweden is the strongest market, and it's also growing the strongest, so it's the biggest one. Here we have property development in, Järva Krog. You see our new head office with the NCC sign on it, and the building next to it is the second part we have started in the quarter. Market, strong market in property, as such. We can see that the yields is increasing a bit in the CBD of, Stockholm, as we see it, and, due to the vacancy rate is very low and the rents is very high in the CBD. We can see in the rest of the cap...
The capital cities of the Nordics is stable or going down a bit when it comes to vacancy and yields. Project starts in the second quarter. We have started Arendal Three logistics in Gothenburg, and we started 2 offices then in Järva Krog. Our new head office is K12, and we started the building next to it around 12,000 square meter. I'm happy we got all the permits in place and everything is legally valid, so we are in fully operation in with the groundworks for the moment, and it looks about like this for the moment at the site, where we're doing all the groundworks to doing the foundations and the cellar.
That means also in the quarter, that we increased the number of ongoing products with three, and because we haven't had any recognized in the quarter, so we have just increased to three numbers, and Sweden has increased, as we like to see, that Sweden is the largest part in the portfolio. In the quarter, we let then 28,000 square meter, and that means 28% of the lettable area in the quarter. So that's a good number. And with that, I would like to hand over to Mattias.
Thank you, Peter. Before I go into the financial figures, I would like to remind everyone that when you look at the second quarter last year, we still owned Bonava up until the 7th of June. So you will see Bonava in the comparison figure for last year, mainly when it comes to the cash flow. Then we paid it out as a dividend, so it's not part of the balance sheet in the end of the quarter, but we will see the effect in the cash flow statement. Having said that, let's look at the income statement. As usual, I will start from the bottom, looking at profit after tax. SEK 435 million, so that is slightly below the profit level the second quarter last year.
If we look at how that was generated, starting from the top, we have lower net sales in the quarter, and that is partly due to property development, where we had no projects to recognize this quarter. But mainly it's related to the building business area, and we'll come back to that. As a consequence, the gross profit is lower than last year, and last year, we did have a positive effect on the gross profit level when it comes to internal profits to Bonava that was dissolved. I'll come back to that as well. Selling and admin expenses is on a lower level than last year. If you look at the 12-month period, we are now down to 5.1%, so we are closing in on the level we, we think we can afford. The other items is roughly zero.
It's some participations we have in other companies. Last year, we had a large negative effect from a write-down of an IT system, and all in all, that means that the operating profit is slightly below than last year. We do have a financial net, which is on the same level as last year, which means that the profit of the financial items is SEK 522 million, again, slightly below the level last year. Moving into cash flow. The cash flow is seasonally negative. The second quarter is usually negative. And if we look at how it was generated, the operating activities is roughly on the same level as last year. We do invest in the property projects. As Peter said, we have started three projects. We have not recognized any projects, so we do invest here.
It's roughly on the same level as last year. We did have a positive effect from the housing projects last year, while we were still owning Bonava. Today, we don't have that business. And then the big difference, if you compare the quarters, is within the operating or in, in the working capital in the operations. Roughly SEK 2 billion in capital that we tie in the working capital this quarter. And if you look at the balance sheet, you will see that we do have a build-up in the receivables. Of course, all else being equal, that should be converted into cash in the quarters going forward. Finally, investing activities, roughly SEK 200 million in negative cash flow. Last year, this is an effect of Bonava, that we had SEK 670 million in negative cash flow.
When we pay out Bonava as a dividend, the cash in Bonava is considered a negative cash flow for the NCC group. So, if you look at the operational part here, we actually invest more, and that is related to the industry business area that we invest in. All in all, a cash flow of roughly SEK 2 billion, or a negative cash flow of SEK 2 billion. So higher seasonal negative cash flow this year. Looking at the EBIT level or operational profit, I will go into the business areas later. But if we focus on the row other and eliminations, here we have three different parts that we usually walk you through. The first is the headquarters cost and some remains of our international operations. There, we did have a write-down of an IT system last year.
That is the main part of the large negative figure last year. When it comes to internal gains, we had a large positive effect when it comes to internal gains to Bonava that was dissolved. And when it comes to the other group adjustments, it's mainly related to pensions. We did have a positive effect last year, and we don't have the same positive effect this year. All in all, SEK 67 this year, which is significantly more negative than last year. It's not big figures, but the deviation is large. Moving over to the business areas, starting with building. As Peter showed you, we have good orders received, and we are increasing the order backlog, but we have a decrease in net sales, and that is from the Finnish and Danish operations.
It is an effect of a lower orders received level in the previous quarters, not least in the first quarter this year, and that is not fully compensated by growth in the Swedish business. The effect of the lower net sales is a slightly lower operating profit, despite a slightly higher margin in the quarter. If you look at the twelve-month figure, the operating margin is still at 1.9%, so same level as last year, and the gap to our strategic target of 3.5% remains. I should also say that the turnaround in Norway is still ongoing. It's going according to plan, but we have not yet reached breakeven, so we are still making a loss at the EBIT level in Norway. Moving over to infrastructure. Again, we have a decent order intake.
It's not on the same level as last year, but here we do have a variance, of course, between the quarters, especially in the civil engineering part. So it depends on when the large project within the infrastructure segment is signed. So we'll see when they come this year. The order backlog is higher than it has been if you look at 2016, and the net sales has increased in the quarter. The increase is mainly in the infra services segment, where Peter showed you that we have a lot of groundworks ongoing. However, operating profit and also the operating margin is lower than the second quarter last year.
The reason is, as we've stated before, that we have a negative impact from older projects where we have made write-downs and the margins are low, and we have not yet seen the positive impact from the larger project, especially in the civil engineering business. They are in the order backlog, but we have not yet seen the effect in the income statement. And when it comes to those project, we have discussed the duration in the order backlog. The projects are longer, so it takes longer time to see the impact in the income statement in infrastructure compared to building business area. But of course, the operating margin, rolling twelve of 0.7, is unsatisfactory, to say the least, and we need to close the gap to a strategic target, 3.5%.
Of course, it's in the order backlog, but we need to see it in the income statement. Moving over to industry, we have a growth in net sales, and the growth is in all three divisions, so it's in asphalt, stone materials, and the piling and foundation business in Hercules. The main part is asphalt. It is a seasonally large part of the business area, and as Peter said, it's actually not volume-driven in tons. It's a project, customer, and product mix. So we get better paid per ton, which drives the increase in asphalt. As a consequence, both operating profit and operating margin is higher than last year. And if you look at the 12-month figures, both the operating margin and the return on capital is over our strategic target levels of 4% margin and 10% return on capital.
So, as I've stated before, our aim and ambition is to drive the growth in this business area, and you can see, in the cash flow statement that we have made investments here to support future growth. Finally, property development. Here, you do see the lower net sales as an effect of, no projects recognized this quarter. We did recognize one project, an office project in Malmö, in the second quarter last year, and that's the reason we have a lower net sales. The operating profit in this quarter, is land sale and also, some extra profit from previously recognized projects. And the effect is a very high operating margin in this quarter, the second quarter this year.
The 12-month period has both an operating margin and a return on capital, which is roughly twice as high as our strategic target level of 10%, which goes for both margin and return on capital. Just as I did in the presentation of the first quarter, I would like to point out that in the property table, in the interim report, where you can see all the ongoing projects, we have now increased the number of projects designated to be profit-recognized this year. It was zero. It is now one. It's a logistic project, and of course, we don't give any forecasts. I won't give a forecast now, but you will realize that the profit level of SEK 892 million is not sustainable with just that project.
Moving over to the group total, and looking at our financial objectives, starting with the margin. The margin has increased compared to 2016. That is mainly due to a very good first year in property development. We have a gap to close to our strategic target of 4% EBIT margin, and, as, as we've stated, the margins in building and infrastructure are - they are unsatisfactory. So, the way to close the gap is to get the order backlog into the income statement and increase the margins. Looking at growth or revenue development, we have 4.1% growth in total compared to 2015. That is 2.7% annual growth, and again, that is a gap to our strategic target of 5% average annual growth for the five-year period.
Again, the order backlog has grown more, but to get the revenue up, of course, that needs to come into production, so we see it in the income statement. Looking at the Equity Asset Ratio and the return on that equity, if we start with the blue bar, which is return on shareholders' equity, that is significantly up compared to last year. The reason is mainly the good first half of the year, and, and that is driven by property development. But this is also the first time you see the full effect of the new NCC balance sheet without Bonava, and, we reach a 30% return on equity. The Equity Asset Ratio is slightly below our target level of 20%.
The reason is, in part, a revaluation effect of pensions, but we have also taken the entire decided dividend into account here that reduces the equity. So not only the paid out part, but the entire decided part. Finally, the net debt level. This is excluding our pension debt. Here we are more or less at the zero level, excluding the pension liabilities. So we do have a strong balance sheet and a strong foundation for future growth going forward. And with that, Peter, I hand over to you to summarize.
Thank you, Mattias. Just to summarize the second quarter, 2017. We have three project start in NCC Property Development. Very happy that we started Järva Krog and our new head office and the office building next to it. We have good results for NCC Industry, especially in asphalt. It has been driving this quarter, and it's also seasonal that asphalt picks up in the second quarter. We have weak result in NCC Infrastructure, and the new projects hasn't kicked in, and the larger one hasn't kicked in as we had hoped for, but it's coming, and it's picking up.
Lower net sales in NCC Building, especially some effect in Finland and Denmark, but we also can see that the orders received picking up now in Denmark in the end of the second quarter and the beginning of the third, and that will give us higher net sales over time. We have a higher order backlog in total in NCC on a high level, and we're happy for that for the rest of the year and the coming years. We have favorable market outlook, especially in Sweden, that is strong and looks strong for the coming year. We have focused on increasing margins, Mattias was also into that. We have our targets, and we are focused on increasing the margins and towards our strategic targets.
We are having a very strong focus on cost, and in Sweden especially, we have a focus on capacity, so securing resources according to the product and the possibility in the market. With that, Johan, I would like that we take some questions if there is some.
Yes. Thank you, Peter, and we'll start here if there are any question.
Yeah, Stefan Andersson, SEB. A few questions. First, if you could possibly elaborate a little bit more on, I think you mentioned a few times that you are in the phase of starting up some big projects, and of course, there's cost associated with that, and you can't really recognize too much profit. So the timing on of this, in the end here, you said something about we had hoped to have started already this quarter. Should we interpret this that it's coming really quick? Is it coming already in Q3, or is it more a prolonged, gradual development?
It's if you take for before to the pass way in Stockholm, if you pass on the way to Arlanda today, you can see we are in full swing today. But then we need to get everything into the income statement also. So they are up and running, and we had hoped it had picked up even a bit quicker than it has. But it's coming, and it's ongoing, so they are started, and everything we got last year in the quarter two, that's the big parts, and they are up and running now. And they start when the weather gets and it gets warmer, and we start the projects. So they are up and running. So it's not new start, it's they are ongoing.
And we should see an impact gradually from-
Yeah
... Q3 onward?
Yeah.
Then, the loss-making projects in Norway, you probably said this before, and I forgot, but how does... What's the timing on the big ones that has an impact? When are they fading out?
They are, they are faded out now. So, what the impact, and Mattias was into, is the overhead because the, the product that we have, we got some new ones also on a totally different way, level, and we have changed all the processes. And, and that means also that before they pick up and we got the volume up, then we don't cover fully, our overhead. The plan is saying in 2018.
And then a tricky, maybe nasty question here.
Okay.
But, you, I mean, you mentioned the only, the only thing we need is to get the order backlog margin into the sales, because they are so much better. And unfortunately, 1.5 years ago or so, when we asked, "Are the margins better in your order backlog than in your sales?" You said, "Yeah, they're higher," and-
Mm-hmm
... you know, and then things happen that you don't really plan for. So elaborating a little bit on this, have you had development with cost inflation that has... If you could touch on that, which means that you actually need to get orders with higher prices in order to offset that. And then, of course, we noticed that there's been some mishaps as well.
Right.
But maybe if you can touch on how certain you are that you actually can deliver on that, nothing else will happen, and also how you handle the cost inflation, if there is any?
First, it's not cost inflation in that we have increased our prices towards the customer, due to the good market, especially in Sweden. We're going for full in Sweden. What we, with the new organization now has secured, is starting working in the same processes and securing in the way, and that's why I put Klaus also in, in heading the build- and building as such, to securing that we're working in the same way and handling risk in the same way as we've seen in Denmark. And that's what we now have implemented in Norway, and as we also see that we decided we won't see the same, order received in, in Norway for a while due to that we're working in a different way, and I'm happy with that.
We're doing exactly in securing that, what happened in Finland, in residential, shouldn't be able to happen. It happened, and now we're securing that part in the processes, so we can have the same way as we've been operating in, overall. So it's to secure that we can deliver the margin from the order backlog is having the right processes and the right control of things, and that's really what we- I like to establish with the new organization, to be closer and securing that we have the right focus in the business as such.
Then we had some mishaps, then we found out when we changed the organization and starting digging in everything, and then we said, "Better we start taking away these things that people are not following the processes." That's why I changed a lot of people the last 1.5 year in a lot of positions.
I would also say as, as a... If I look at the order backlog, projects that we have received in the new organization during 2016 and 2017, they have a higher margin and a stable margin. The mishaps, if you call it that, we had an ingoing order backlog and ongoing project, not least in civil engineering, mainly related to Norway, and they are long. They cover several years in production, and we still suffer from them. Then we had building, the residential production in Helsinki, and that was mainly projects that were started late 2015 in the old organization again. The mishaps, if you call them that, they are disappointing, but they are old things from 2015.
And when it comes to cost inflation, are you seeing any? I mean, I hear from some competitors that you see on some of the subcontractors that they are pushing up prices a little bit, and are you seeing any problems there at all, or?
No, sure, prices goes up, but the other part, you take that with you in the calculation as such. You then and then you re-increase it, the price for us to take on the work. So we increase our margins according to that. It's, it's fully books. So you need, we increase our prices, but that's based also on the higher, some higher prices. But on the other hand, also, we are large companies, we have a fairly amount of frame agreement that is on several years. So we control our cost in a different way than the spot market for the moment. That's the good part.
When the market goes down, the spot market goes down, but on the other hand, in outgoing market, it's good that you are larger and have good frame agreements, because then you are, for several years, and then you're not in the spot market in the same way.
Okay, my final question then. You mentioned yields in Stockholm.
Mm.
Started to go up a little bit. Vacancies are extremely low. Could you maybe elaborate on that? Is it a lot, or what is it driven by, you think, and?
Yeah, that's the normal case when it comes to residential, being in that market for so many years. When you're coming from a lower level, from rent, the rent level is lower, then you can pay a lower yield, because then you can increase and cover and get a higher return on your capital in time with your increasing your rent and income in the property. But now you're on extremely high. I know the last I hear is, like, SEK 9,000 per square meter in offices in larger, not just 200-300 square meters, like 2,000-3,000 square meters of office in central Stockholm.
If you need to pay SEK 9,000, then you probably see, okay, then I need to get a better yield from beginning, because getting that higher in short term or in three to five years' time, mm, not sure. Normally, you see the yield goes up then. It's the normal effect between rental and yields and returns. It's just that. We see it started—as we understand in some investors starting talking a bit higher yields due to that. I think you will see that coming in according to that, the rent levels is high.
Thank you.
Thank you, Stefan. Let's hear from the telephone conference if there is a question.
Thank you. We have a question from one of Niclas Höglund from Nordea. Please go ahead, your line is now open.
Yes, good morning, Niclas Höglund from Nordea. Firstly, I must apologize, I had a very poor line, so maybe some of the questions have been answered. But first, please, some more light on the infrastructure for profitability, please. Could you give any numbers on the ongoing, let's say, in the Norwegian operations? There being any new loss-making project, please?
Should you?
Yeah, we don't have any new large loss-making projects.
Okay.
We, I mean, we revise our forecast in the projects continuously, but no loss-making projects of a, of... or any significant larger revisions of project forecast, I would say. The effect is that especially the larger projects, they are in the order backlog, but as Peter said, the production pace has not, at least the first half of this year, picked up. We are also cautious in profit recognition before we see that the production method chosen is viable and actually delivers, and we keep the time plan, et cetera, in the projects. That means that in the new projects, they don't deliver that high profit yet.
Any changes, any deviations on the negative side in older projects, is then going straight into the income statement while we don't have positive adjustments in the new ones. Again, not yet. So I would say that's the effect you see in the quarter in infrastructure.
Okay, thank you. Moving over to building, you were also mentioning that you had some delayed project in Denmark, now, I mean, in this second quarter. Well, you don't report the profitability in Denmark, but look, in the past, those projects tend to have been on a higher profitability. Could you confirm that, is that it also for these projects? Thank you.
Yeah. We haven't changed anything when it comes to our view on margin request, risk, reservations, and so on. When we do tenders in Denmark, it's the same case. And we are focusing in cooperation agreements and partnering products also in Denmark. So that means from time to time, it takes a bit longer to get them in, but it's the same levels as before—when we tendering for new products. There is no difference.
Yeah, and so if you have an effect in Denmark from the lower volume, lower net sales, it's a lower operational leverage, so it does not have anything to do with the profit margins in the projects.
Okay, fair, fair point. Although the mix, am I wrong to assume that mix are improving with these projects, coming on stream?
Well, you, you, I, I think if you look at the orders received and the geographical spread, which we show every quarter, you can see the development of the Danish orders received, and based on that, I think you can make your own conclusion of the mix for the business area going forward. We have not yet seen the large order intake in Denmark this year. That will of course, all else being equal, have an impact going forward, at least in the short run.
Okay. My line is before, but if I move on to cash flow, you have a massive ramp up in receivable, although seasonal. Could you share some more indications? Is this cash advances? Is it more structural issue, or are you expecting to normalize towards the end of the year?
Yeah, we do have you can look in the balance sheet, and there you see the level of what we call invoiced, but not yet worked out in comparison to the actual receivables. And there are variances in both on the asset and on the debt side. But we do have a seasonal buildup of the working capital. I don't see a risk. If I look at the age analysis in the receivables, for example, I don't see a significantly higher risk there than we had last year. So, from what I can say now, at least, this is a temporary effect in the second quarter, but we will see where we end up in the third quarter.
Fair enough. On the other items, you have, well, you have other and other, which is negative impact from pensions. Is this a recurrent or is it a temporary effect on pension?
It is recurrent, at least in the respect that we had it also in the first quarter. The reason is that we cover our pension cost by charges on top of salaries. Of course, we have a safety margin here when it comes to the cost coverage. We do not know the actual cost for 2017 until we have the final settlements with, for example, PRI in Sweden. From what I can see, there will be a lower positive effect this year than we had last year, and that's what you see in quarter one and in quarter two. I can actually—I cannot forecast this myself.
We will see what happens when we get the final invoice for the year.
So in Mattias, to follow up, if rates continue up, interest rates, I would assume that the pension cost increases will decline, and you will have some recovery, or is it a fair assumption?
That is one part of the equation, yes. But then you have other parts of the equation, which is life expectancy, for example. So, I don't dare to do that forecast myself. There are specialists out there who do it for us.
My final question, if I may. Well, first, congratulations for finally, I guess, the Järva Krog projects up and running with all the permits delays. Could you give us some more light on the total investment and the book value of the current asset, the current office building, which would be the land cost?
The only thing we said before is, we bought the property for a bit more than SEK 400 million in 2012. The investment is, you see there is about 32,000 sq m we're going to construct, so you have to calculate that from that volume of square meters. We haven't said anything of the investments as such, but sure, it's at least some SEK 1 billion investment that you can calculate anyway.
And I, we have also previously shown that the total buildable area in this investment is 90,000 square meters. So, there you can make your own allocation of the land part in this office part.
Fair point. Sounds very attractive. Thank you very much. That's my question.
Thank you.
Thank you.