Welcome to the presentation of Skanska's year-end report for 2016. I'm André Löfgren, heading up Investor Relations at Skanska. And we have a live audience here in Stockholm at our headquarters, but we also have a lot of participants on the web and on the phone. You will all be able to ask questions after the presentation, and it will be held by our CEO, Johan Karlström, and our CFO, Peter Wallin. When we're done with this presentation, have the Q&A, we will also glance into the future a bit. We will look at the reporting structure for 2017 and onwards. Peter will present that part. It's about the structure and also the, the reasoning behind it. But I think first things first, so, Johan, please, the year-end report.
Thanks, André, and good to have you all here. We have a little bit earlier start this morning, but I still can see that we have a lot of people here in the audience there. We are early birds in construction, so we like to be early on. Here on the slide behind me, you see a picture of M25 project, the project that we divested just before the end of the year, part of the ring road around London, and with a very good result. So that leads us into the highlights of the year-end report for Skanska.
What you can see here is that we had a substantial increase in operating income from SEK 6.5-SEK 8.2, if you compare it with 2015, the last year. And especially coming from the very strong performance that we had in project development, all-time high profitability and operating income from the combined businesses, which consist of the three: residential, commercial development, and infrastructure development operations that we have. In construction, it's more of a mixed picture. And some of the units I will come deeper into that later into my presentation here with very good results. But some others with weaker results with underperformance.
And then, of course, we have very much a focus to restore the profitability and come back to the normal level where these units should be. And you can see that we had a considerable increase in EPS, earnings per share, up to SEK 15.89. Very good order intake during the year as well in construction, so we ended up with an all-time high order book, and you can see that the order intake during the year was SEK 170 billion. Return on capital employed in the combined project development businesses overshot it quite a lot, the target of 10%. You can see it's 18.4%. And the board yesterday decided to propose an increased dividend up to SEK 8.25. So with that, start with construction.
Revenue, basically flat, if you compare it with previous year. And very strong result in USA Building and in Sweden. Also very good order intake in these three countries as well, if we include UK there. Book- to-b uild, 123%, and an order backlog of close to SEK 200 billion. That's an indication that it will be increased top line coming years in construction. Operating margin of 2.6% compared to our target of 3.5%, that is something we are not satisfied with at all. Some of the units, like Sweden, USA Building, which I mentioned, delivering very good results, and good margins.
But on the other hand, Poland, of course, is a disappointment, and we are very much focused on to finalize the restructuring of the operation and get it back on track. In USA Civil, we still have some challenges in some of the infrastructure projects that we had talked about before. And we also have some higher cost on the overhead side. But overall, I would say that it's a good performance in all the other units in construction. Moving over to residential development, you can see on the numbers here, both if you look at the revenue, the number of started projects and homes, and also how many we have sold.
That you can see that's an increased, increased volume, increased activity that we have. And the increase in bottom line, the profit, is coming both... It's coming from different things here. First, of course, when we increase the revenue, increase the number of sold units, it helps us because the overhead stays more or less on the same level, there. So that's, that helps. The good market from that standpoint, we have the possibility to start more projects... but we also see opportunities on the sales prices. At the same time, as we have our projects in good order, so we make sure that we can deliver them according to the cost that we estimated. So control over the cost, we see opportunities on the price side, and then an increased volume.
When you mix it all together, that's what comes out of that business. Very good and favorable market operations, especially in Sweden. Commercial development delivered an all-time high here as well, together with the residential development, with a profit of SEK 2.3 billion. We have in the numbers taken down projects in the Energy Corridor, which is a suburb to Houston. It's a micro market, which is depending on the oil sector and the oil price. It's like in a slowdown. There we have seen a slowdown.
Then there we have been a little bit more cautious on the values in these properties, and we have taken it down by SEK 200 million, which is included in the numbers, of course. You see a good return on capital employed in the businesses, and we have 47 ongoing investments now, and at the year-end. And I don't know if you saw already this morning that we have announced another huge investment in Seattle. It's a commercial development office tower, and we've done investment value of around SEK 3.5 billion. So we see more opportunities in all the markets we operated in.
When you look at all the ongoing projects, you can see that the key ratio that we follow, the pre-leasing versus the completion ratio, they are following each other, and we keep them on the level where we think that they should be as a combined portfolio, and it's a very good risk mitigator. Leasing in the increased activity, that the increased portfolio project has also reached an all-time high, which is the value creation, because this is so important that we have the leasing with us, so we can move forward with the divestments when we are coming to the end of the projects, when they are completed from the construction side.
Moving over to infrastructure development, very good return there as well, as we sold the M25 project outside London at the end of the year. You can see that that has also boosted up the return on capital employed. In the numbers is also embedded an impairment of around SEK 300 million on the wind projects that we have in our portfolio. Due to the low energy prices, we have taken down the value on those projects. In the first quarter of this year, we expect to complete the divestment of the A1 project, the A1 highway in Poland.
Looking at the trends in order intake in construction, you can see the light blue line at the top there, and you can see the dark blue line, and that's like in a good comparison, because we are comparing the rolling 12 number of order bookings versus the rolling 12 numbers of revenue. And you can see that the dark blue, it's now like in a much higher than the light blue. And the gap there that you see between them, that is what we build up the backlog with. So we're burning less revenue compared to the order intake, which is an indication of how the future will look like if you talk about the revenue side in construction.
Here you can see a breakdown of the order bookings in the various business units in construction. If you take a look at the column that is called Book- to-b uild, the percentage there, that's maybe the best key ratio when you look at the businesses. When it's over 100%, we're building up the backlog, and you can see at the bottom, 123%, and the only business unit that's below 100%, that's Finland.
Nothing to be worried about, because we know that the market, even if it's a little bit flat in the market, we see great opportunities for Skanska, and we have already this quarter in 2017 booked several good orders, and we have announced a big hospital order in Finland, so we see also there a good opportunity. So overall, favorable market situation, and in the U.S., the high number there you see the 140-ish% in order book in Book- to-b uild. That, of course, is very much boosted due to the LaGuardia order, which was the largest project ever that we have booked in Skanska history. So with that, Peter, I leave it to you to go a little bit deeper into the numbers.
Thank you. Good morning, everyone. So income statement in construction. Revenues dropped by 1% point in local currencies for the full year. If you look over the quarters now, you start to see the gradual turnaround of the revenues into the fourth quarter on the back of the very healthy book, bookings that we have experienced over the years. We ended the year with a gross margin in construction of 7.3%, and a sell and admin of 4.8%. And you can see that it's moved up by 40 basis points, predominantly on the back of bidding costs for new projects, but also the fact that we're doing implementation of ERP system in two major business units, namely the Swedish business and the USA Civil business.
Those investments is causing the S&A to increase. Operating margin was 2.6% for the year. That's 9.9% below the target. If we dig in a little deeper into the various units, the Swedish business is very robust and ended the year very strongly. The secret recipe is good control and good management of the projects, and no loser projects. Norway, variable market, but I think stable performance by the Norwegian team. The Finnish team also ended with a very good, stable margin. Whereas the disappointment, as we have talked about, is relating to Poland.
We take a further loss in the fourth quarter by SEK 50 million, and that is essentially the function of some margin fade of some projects and, and, and further costs to deal with sort of right-sizing the business. We are setting it up so the cost level will be adapted to the business volume going forward. Czech Republic had a good, decent, stable year, and they are back, sort of trading back in profitability where we are expecting them to be. UK, also, very special year for UK in many, in many ways, but they did a very stable performance overall. Super performance from the USA Building unit. This is a construction management, so you could expect sort of ranging around 1.5%.
1.8% for this business is very good performance. Civil then, which is impacted continuously of this ERP implementation, and also the fact that we have several projects with a zero gross margin. And we call that could be a bit harsh, but we call it dead revenue, because it actually doesn't benefit bottom line, and it doesn't cover the overhead, so it dilutes the margin. So 2.8%, for the full year there. The market and the business is good otherwise, so there is good with some opportunities to work with. Residential, we are doing quite well within, as you can see. Revenues increased by 8%.
Volumes increased by 12%, so the price mix is negative 4%. We have a surge of affordable homes in these numbers. BoKlok, as we have mentioned in the CEO comments in the report, is doing very well. As you can see, the gross margin is continuously going up, thanks to very good, robust market, but also very good execution of the projects. So we ended with an operating margin of 12.1%, which is very strong for this business. If you dig in, you're going to see the major source, the engine here, is the Swedish RD business, which is doing good and going on all the cylinders, I would say. And actually making an EBIT over and above SEK 1 billion in total, 15% operating margin.
Norway doing good. As you can see, they now are trending up in volume, especially the Oslo area is where we are growing, and they're doing 11%. Finland, I would say here we start to see signs of the market turning back on to towards positive. I think, the Finnish team has done a good job of weathering the market, and we are improving from the current level. The performance is quite okay in Finland. And last but not least, Central Europe, which is then Prague and Warsaw, nothing else, is doing okay, where Poland continues to be in a startup phase.
Last year in Central Europe, we actually sold a piece of land, sort of one of the remainder of the business, the small business we had in the UK. So if you take away that, SEK 45 million in capital gains on that land piece, you're going to see sort of a good, steady improvement of the performance. 12.1% in operating margin, 17% return on capital employed. The volumes increased quite a bit in the fourth quarter, and as you can see, we more or less increased the started by 20% year-over-year. And despite this increase in volume, you can see started and sold tracking. So that's why you're going to see that the pre-sold-...
The projects we have under construction are 77% sold. So we are still trailing, and we think it's a little bit too high level because we need to start up more projects to sell more. The unsold completed, this small portion, orange portion on top of the bar, is continuing to trend down. And it's not a very high volume given the total size of the business. The third stream, commercial property development, posts an all-time high level again. And that is despite the fact that we have written down assets in the Houston Energy Corridor. So we have a couple of projects in Houston. We have some of them in the Energy Corridor.
They are partially leased, and we have done a write-down to SEK 100 million in those projects. As you know, with oil and gas prices, that is something which is impacting the property prices there. We are continuing to have a good level. This year, we had a more different spread of the activity compared to last year. But we ended then with a 32% margin on the sold projects, or we use the term development profit, which is a markup, and then you end up at 48%. That's a pretty good and staggering number. So if you look on this composition, where you have on the red line, the realized profits and you can compare it to the buildup we have in the portfolio.
And with the leasing we are doing, we are securing value in future sales. So we have a good pipeline. As Johan mentioned, we have just announced our new projects, and as you saw from a few days ago, we also announced the startup of a product here in Stockholm. So leasing is important. Important to mitigate risks, important to build values. And 379,000 square meters, if you want to picture it, you can picture the Freedom Tower on Manhattan. You take that and another half of that building. One and a half Freedom Tower is what we're leasing right now. I think that's hats off for a very well-executed business.
Fourth and last stream, infrastructure development, posts a very good profit of SEK 1.8 billion, thanks to the divestment just before Christmas of M25. And this is sort of a mature project. A1, another mature project, is sort of deemed to be divested now, beginning of this year. And with that, sort of, we have quite a portfolio of remaining project, which needs to be developed in order to realize value. So we have taken the mature project and divested them with good proceeds. And as we also mentioned, the low energy prices has also made it to take down the value of the wind assets. Looking at the valuation, M25 leaves.
Still, we are more or less keeping the unrealized development profit at SEK 1.4 billion. Here, we also have the uplift of A1, according to the contract that we have signed with the investor. So, it's the remaining project, I would say, given what we are divesting, it is kept at a prudent discount rate. Bake it all together, you have the group, you knock down with central costs and add on elimination, in this case, you come to SEK 1.2 billion. We should have made another SEK 1 million to round off the numbers, but this is where it ended. Net financial item has shrunk compared to last year. We have principally, we have a net cash position, and we have no Latin American operation.
That has been the trick. If you look into the fourth quarter, you're going to see that net financial has risen somewhat. That's a function of us having a residential development for the future, which we sort of keep, and we're going to pay a price at a later date, which means that we discount this piece. So this is actually a discount rate being released on a future development into RD. So it's nothing to do with sort of the indebtedness or lack of indebtedness that you can see on the balance sheet. We have SEK 8.1 billion in EBIT, earnings before tax. Tax has on average been 19%, and we end up at an earnings per share of 15.89.
On the tax line, that's a, that's a function of the mix of business we have across the countries and also what type of business it is. Cash flow, it looks poor when you look at this number, but it's actually a very good cash flow. The principal impact, if you compare it to last year on the cash flow, is, number 1, we are continuing to increase investments into our project development businesses. And number two, the proceeds from M25 is booked and is impacting the working capital negatively, SEK 3.1 billion. We got the money into the bank account last week, so we are all sorted there in terms of cash flow. And we are working a lot with our working capital within construction, as you can see.
We are now continuing to increase the working capital, free working capital in construction in absolute terms, and we are increasing also in relative terms to the revenue, so we are at 13.9%. Strong focus on cash flow in our business, and also already upon inception, when we are bidding the project, we are very carefully looking at sort of the cash flow profile. The project development businesses, we have increased capital employed by SEK 10 billion over the year to SEK 37 billion, and it is on the average here, we have produced 18.4% return on capital employed, which I think is quite good number, given the interest rate level we see in our surroundings. Financial position is, is very strong, and healthy.
We have SEK 10.6 billion inflow, and that is despite the fact that we actually prepaid taxes of SEK 500 million, which is at 0% interest rate, and in today's environment, that's a pretty good interest rate. Feels strange to say that, but that's the case. If you look at the change in the financial position, you have the change in working capital in cash flow, which I talked about. Change in pension liability, we increased pension liabilities, principally in the Swedish plan and in the UK plan because of lower interest rate levels. You saw us reduce this debt by SEK 2.7 billion in the quarter because of a sort of rebound of the long-term interest rate.
One of the reasons behind it is, of course, the US election and the president we have in the US with very strong focus on increasing indebtedness. That makes us close with SEK 1.2 billion in net cash position. We add back the pension liability and the interest-bearing, we come at SEK 10.6 billion overall. Change in equity, good profitability and increasing then up to 27.5, so we have a very robust financial position. Johan?
So let's end up here with some comments regarding the market before we open up for questions. And here you can see that overall, the market is favorable. Stable market, very good in some countries, maybe with some weaknesses. It's a little bit weaker in Finland, but overall, it's a very good market on the construction side. The civil sector seems to be extremely good, especially in Sweden, Norway. We see a lot of projects in the pipeline. I have received a lot of questions regarding the Trump impact in the US. Do we see projects already now coming into the market due to the president, what he has stated?
No, we don't see pro-projects coming directly now, because it's gonna take some time. But we know that there is a lot of projects already before the presidential election in the pipeline. It has been also referendums in several of the major cities and some of the states about increased VAT tax on other ways to finance the need for infrastructure spendings in several of the cities and states. And we see great opportunities in the U.S. going forward. Regarding residential development, very favorable markets, especially in Sweden, but also strong in parts of Norway around the capital.
Finland is an okay market, and we also see a stable performance on the market side in Central Europe, in Prague and Warsaw, where we have operations. Commercial development, overall, good. Leasing is good, a lot of demand on the leasing side. We see great opportunities on the transaction side as well, in the low interest rate environment that we see now. And just in one micro market that we talked about, the Energy Corridor in Houston. Otherwise, it's a very, very good market in the various locations where we have operations. On the PPP side, there is a lot of discussions.
Will it be capacity for the administration and the governmental bodies to prepare all the parties now, now that will come to get themselves ready? And that's gonna be a bottleneck. That could also be one reason why it's gonna be going over more towards PPPs. So it's not only because of the financing side, but also the capacity of the science side. Because if you go with a PPP project, then you move the design work over to the contractors. And that also, like you can say, that's one reason to also move over projects with a PPP setup. So we believe that that could also boost and increase the PPP market in the U.S. Otherwise, we see some projects coming in U.K., and it's also been an announcement of some infrastructure projects in Norway.
With that, over to André?
Yes, thank you very much, Johan and Peter. We will open up for questions, and we will start with the audience here in Stockholm, and there will be microphones running around here. Per, will you start up there?
Thank you. So Andreas Brock at Coeli Asset Management. Two, two questions, please. You know, the order book is improving massively. U.S. is getting red hot. You are going to face a lot of cost inflation in the U.S. going forward, not on raw materials, but also on the labor side, and if Trump, if the Trump events happen, it's going to be even more. Are your contracts structured so that you will be able to handle this cost inflation? Second point, on the residential side, the EBIT margin of 15% in Sweden, that's, in my opinion, too high, for, for the long term, for sustainable. Would you agree? And secondly, what about the land bank? What kind of investments will we see in the, in the Nordics going forward in the land bank? Thank you.
If I start with the first question, then Peter can think a little bit about how to answer the second one here. So, coming back to your question regarding how we deal with the underlying cost increases and how the contracts are structured, especially in the U.S. And the way we do it is that, if there is a product with a long duration, we always have a discussion, what type of increase, what type of risk will the owner take? So it's a, first, it's a larger dialogue in the contract, what risks we have to take and what risk the clients have to take. And then, of course, we don't want to take on a lot of risk that we don't understand if you talk about the cost increases.
It can be, for example, for asphalt, which is very much oil dependent, and so on. So very often, they take the risk on cost increases on some of the materials. It differs between the contracts, though. So that's like, kind of the first part of the risk mitigation we do. The second part is that all of the risk that is like ending up in with us, then we say, "Okay, what can we get quotes? What can we have a back-to-back with suppliers and subcontractors?" So that's also one of the things that we work upon when we structure the whole deal and the contracts, both upstream and downstreams to the clients.
Then you say, "Okay, what is then left with us that we can't protect both ways?" Then what? And then we make an estimate and an assumption, what should be additional cost and contingencies that we have to set aside as a separate part in our estimate to cover the remaining risk that is that we have to bear. With the situation that we now face in the market, this is something that we are fully aware of. It's something that we discuss on a daily basis in there. Because we know by experience, it's easy to make these mistakes here. So it's something that we have a very close focus upon.
Are you seeing-
Sorry?
Sorry. Are you seeing any contracts already now, you know, contracts you took three, four, four years ago, that you're starting to get problems with profitability-wise already now? Are there-
Due to cost increases?
Yes, in the U.S.
Not really, because this is something that we have had on a radar screen and focused upon, like, you know, all the time. So this is, you can say, an ordinary risk management work that we work hard upon, all the time. But of course, in today's environment, this is like in a very, very high up on the radar screen.
Thank you. And on the residential side, would you say 15% is a sustainable margin in Sweden? And secondly, on the land bank, are you increasing your... I mean, can you increase your land bank purchases?
Well, it was interesting to get the question of it, it's too high, because we have had the other issue, I would say. What we're doing, we're looking ahead in the future, because you're alluding to land bank, which means essentially that you need to build, buy something to develop and sell within five to six years. So when we do that, we have the magic default of you have to hit 16% gross margin in that sort of acquisition to hit the 10%, to create the 10% return on capital employed. So that's, that's the formula. Then we always work with finding efficiencies, improvements, to hike the margins.
Sustainable, long-term, 10 years, not 15% is going to be really high, but we will continue to strive to hit good levels. We are acquiring land. We try to find land which is not... Because the sweet spots with very small sizes now, you have a lot of investors chasing at very high prices. We try to find the land pieces which is more complex in its structures, which is both consists of rental, commercial, and co-ops. So that makes plays very well to the one Skanska advantages that we have found in many projects.
They are larger, these investments on land that Peter just described, and there are fewer players that can take those on.
Basically, your main competitive advantage going forward is the balance sheet, both in the U.S. on the bonds and, you know, also in the Nordics, the balance sheet.
The balance sheet, including that we can combine the project development operations, so we don't have to just a commercial development or just a residential development operation. It's like when you can build a big piece of land, and then you can divide it between the various units.
Excellent. Thank you so much. Thank you, gentlemen.
Thank you.
... All right, Tobias?
Yes, thank you. Tobias Kaj from ABG. Congratulations to a very strong report. And, I would like to start to ask regarding the Swedish construction margin in, I mean, in the full year, it was up, ten points, so not a very big deviation. But in the fourth quarter, it was a very strong improvement to almost 6%. Is it some individual's project that has contributed to this very strong figure in the, in the quarter?
It's always a mix between the closeout of projects and the performance in various parts. It's also a big part of our operations is the asphalt and concrete operation, which is very seasonable. Then you need to know how will the year end, so to speak. Don't really look at just one individual quarter, look at the rolling twelve profitability. That's a better indication.
In your guidance, you say that the demand in the housing market in Sweden has improved even further from a very strong situation. Do you see problem with the overheating in that market and cost increases?
It could be, and that is something that we have to focus upon a lot. We see opportunities not only in the major cities, but also in other, you can say, like in university cities, like Uppsala, like Linköping, and so on. And the cost increases and to have control over the cost and to make sure that we have an efficient design, but also that the projects are completed, if you talk about design before we start a product, that is the best way to control the cost. We know by history, that if we go back several years, that was one of the major problems we had, and we will not repeat that.
We make sure that we have the product designed and ready to start before we go, because then we can also have control over the cost.
You don't see any, you know, indication of margin dilution at the moment because of increased cost inflation in Sweden?
No, we don't see it, like, from that side. But on the other hand, this is something that we had to really have to look at to see and follow the development on the cost side.
Regarding the Polish operation, you came back with, with a slight loss also in the fourth quarter, due to that you have adjusted your, your cost level in the operation. Are you at the right level now, or do you need to adjust the level further?
We view that we are at the back end of the restructuring program, so this is like in a more finalizing it now. And we also see a little bit of a different backlog in Poland, because if you look at the order intake, it's actually over 100%, if you talk about the book-to-bill ratio. But it consists of a little bit different type of product if you compare it before. Before, it was shorter product, and you more or less burned this the whole revenue in the same year. Now, we have a little bit longer duration in some of the projects, which means that the backlog also goes into the year after 2017.
So we want to have the revenue on a cautious level to make sure that we have control over the business.
Regarding residential development, you had a very strong 2016, both in terms of profitability and in terms of production starts. Given the current market situation, do you plan for a similar level of production starts this year?
Yeah, well, we are, we are, this business doesn't lend itself to doing sort of quick accelerations and decelerations. When we have ready to go and launch project, as we had during the fourth quarter, and as you can see from the sales rate, as I commented upon, it remained very stable. We, we, it depends when the projects are ready to be launched, and we fulfill the default sales levels that we have. We are maintaining the same level. That's the approach we are having.
Thank you.
Thank you. All right, any more questions from the audience? Otherwise, we will open up for questions from the participants on the phone. Okay.
Ladies and gentlemen, if you have a question, please press zero-one on your telephone keypad, and you'll enter a queue. We have a question registered from the line of Erik Granström from Carnegie. Please go ahead, sir. Your line is open.
Good morning. Thank you very much. Let me start. I have a few questions, and maybe I could start with ID, just to make sure I get everything correctly. Peter, you mentioned the sort of rechanging of valuations in terms of wind power, but just to make sure, that did not hit the EBIT in the quarter, did it?
Yes, it did. SEK 300 million. That's why it's SEK 300 million is mentioned in the report.
Okay, so the EBIT was affected by a negative SEK 300 million, just as it was in CD, but whereas that was in Houston then?
In total, impairments on write-downs of SEK 500 million in the fourth quarter. That's correct.
Okay, thank you. Very clear. And then if I could just ask you a few questions on the U.S. operations. Peter, you mentioned that building is, you stated that 1.5% is a margin that we should expect for building. Now you're reporting 1.8%. I do know that you always would like to report higher margins than, you know, general construction standards, because obviously, you know, do not consider yourself the standard in the industry. But how should we view that? I mean, does that mean that you think 1.8% is sustainable going forward, or that we should sort of look for more of a 1.5% margin for building? Obviously, we won't see that as of next quarter, but, but I think in general.
The strategy for USA Building, as you know, is primarily construction management, which is a low-risk, low-margin type of business. The overall strategy for USA Building is to gradually, slowly move it into a more complex type of projects in conjunction with USA Civil. One example of that is LaGuardia. It's a 50/50 split between USA Building, USA Civil. So we are moving resources, we are moving capacity from a low-margin, low-risk business into a higher risk, yes, but also in higher margin operation.
We won't go faster in that change than we have people, because if we, if we don't have the skill set and the people to understand another type of contract types, it's dangerous. So but over time, that shift is going to be a slow shift over to that. And we see great opportunities in the market now for you as a civil and you as a building to work together. There are projects, they are, you can say that they are like in a half-half in between building and civil. Airports, for example, LaGuardia is a good example of that. It builds a lot of civil work, but it's also a lot of building work, and we see great opportunities to combine it in those projects.
And it's very seldom that these projects, when you see the combined where we combine it, that are Construction Management. So that's like the overall strategy to slowly move it over into that side. We will just you don't get it wrong here now. We will of course keep the Construction Management operation as well. That's going to be like in the near and middle term future, it's going to be the major part of the operation.
Okay, thank you. That's all.
Our next question comes from the line of Niclas Höglund from Nordea. Please go ahead. Your line is now open.
Yes, good morning. Okay, let's start out with the commercial development pipeline. Now, as you mentioned, you've started up a lot of new projects at the same time, you report record profits from the segment, from the business area. Could you elaborate a little bit on the outlook for more recurring earnings from the stream going into 2017? What should we see as a good earnings level, given that you have sold a lot of projects over the last, well, 3-4 years? Thank you.
Niclas, I'm going to interpret your question because you crack up a lot very down here at least. It's very hard to hear. So if you please could speak very much closer to the microphone. I think you are talking and asked about the recurring level of divestments within the CD stream. And we are, so of course, continuously going to divest. We have now been all-time highs two years in a row, and of course, going over time, we will increase the level as we are increasing the investments in this stream. It could vary somewhat between the years.
Now we have been around the SEK 10 billion mark for two years in a row. I think that given the size of that business, that could be in that range, we are divesting.
Okay, and the profitability, given that, of course, land prices have moved up over the last couple of years, should we expect the profitability level to be also up on these levels, or that the returns should come down to, well, towards your target?
You are completely right that the land prices is increasing, and, and we are also benefited, of course, by the very positive, sentiment, on both the leasing side and on the, the investor side. I'm not going to give you a forecast for the level because we are the 48% in development profit is a hard act to follow. And, and, we are, you can say, as a default, on average in the portfolio, we, we are looking at the development profit in the tune of 25%, more or less. And, and, so the 48% is a hard act to follow, I would say, over time.
And when we start a project, then we also put in some cautious assumption of how the market conditions will look like, because we don't know how the interest rate environment will be 2-3 years down the road when we are coming to completion. But as long as the interest level and the lower yields that we have today consist, then of course, it's going to be great opportunities for the business to deliver over and above the request that we have internally.
So just maybe a clarification. Well, in the report, you were talking about SEK 5.9 billion in cash flow that will support 2017 linked to already divested projects. The reason for clarification is then, is the A1 divestment included in that number, or since it will be reported in the first quarter, will that add to the cake, so to speak?
Niclas, can you get the question? Can you help us out with the question?
Yes, I think I will. I, I'll try. He was talking about the already sold but not handed over, investments or divestment we had in commercial development and, in ID. If that number that we have in the report is also included in the A1 project or not?
I think the numbers we are mentioning is only relating to the CD deals we have, which means-
Then M25.
Then M25, which was around SEK 3 billion. So and A1 is not mentioned. And A1, if you recall from the press release, was SEK 1.4 billion.
Thank you very much.
Thanks, Andre.
Our next question comes from Tobias Loskamp from HSBC. Please go ahead. Your line is now open.
Oh, yes, good morning. First question that I have is a clarification on the USA Building, where margin obviously was pretty strong in the year. I just want to clarify, is there also kind of a reversal of the impairments that you have taken in the last year?
Reversal of?
Write-downs from the last year.
From the last year. I would say we have overall performed well. We have some impact of that, but not to a great deal. The business is doing well, and doing well.
Okay, so the regular, the regular impairment reversal level. Okay. Then I have a question on the dividend. How did you look at the SEK 8.25? I mean, the dividend payout ratio has clearly come down. Have you looked at it that way, or have you just looked at an absolute increase?
Well, you can start, and I can add.
Yeah.
There is a lot of things regarding dividend. It's like a crystal ball. The dividend reflects, of course, the increased profit. It also sort of looking at the opportunities we have to invest money. And I would say that the press release following the interim report for the fourth quarter is a good sign of that. We see continued good growth in project development opportunities, and with the return of 18.4%, I think it is for the benefit of the shareholders to continue to invest money in our business in the way we are doing.
It has been a lot of questions and comments regarding, will it be a pot-- should it have been a potent- an extraordinary dividend? The way we view that extraordinary dividend is that if we don't know what to do with the money and the capital in the company, then, of course, we have to, like, in a correct, balance it. That's not the view that we have, because we believe, and we can see that we have opportunities to invest the capital and use it for good investment and give the shareholders return in the business we have. That is in the project development operation, which is performing on a very high level. Over time, we definitely think that there's going to be good opportunities for us there.
So, therefore, that has been like in the discussion, how we balance what should be dividended out to the shareholders, and what we think that we can continue to invest and give the shareholders a good return on in the business.
Okay, no, makes perfect sense. Then a question on the M25 disposal. Can you just run us again through the cash flow impact? I think you said that the cash flow will only come in or has only just come in. And is that disposal then reflected in the NPV already or not? So if you could give us an update there, thank you.
The NPV. Well, the sales price was SEK 3.1 billion. We got some limited proceeds just before New Year's, and then the remainder was paid as of last week. So it's not reflected in the sort of cash balance we reported in the report. It has happened after the report period.
Mm-hmm. But in the NPV, so also in the NPV, the M25 is still included?
Do you mean the net unrealized development profit in the stream?
Yes, or the, what you call it
The 1.4 billion reflects A1 that will be divested and closed during the beginning of the year now. M25 is gone from that, which you can see in the material.
But the SEK 1.4 is A1 and the whole-
The remaining part.
... and the whole portfolio-
Correct
... of projects in ID.
Okay, now that makes sense. And then lastly, could you comment on the next to the Swedish or in ID, you had a couple of write-downs in Sweden. What happened with the power price assumptions? How did it compare to your original expectation, and what's up with the U.K. project that you have said that is not further pursued?
... That was many words and not very clear. Did you hear, André?
Yeah, I heard, but I couldn't make sense of it.
Did you refer to the—you said write-down in Sweden. Was that correctly understood?
No. So in ID, the write-down of SEK 300 million that you have reported-
Yeah.
Could you give some more background to what has happened-
Yeah.
with the power prices.
Okay.
Regarding the Swedish wind project and the UK project, where you have written in the report that you have, you are not further pursuing it. What's, what's happening there? Thank you.
Not pursuing the UK project.
The, the, the-
The wind power project.
The wind, the wind power project. Yeah, yeah, yeah, yeah. It's. So the wind power is the Swedish. We have two investments in one wind power park in Sweden, in the north of Sweden. We have adjusted the values to reflect the energy prices and then energy production for those. That's to that basis. And the remaining wind investment or exposure that we have is opportunities and options to develop rights for building onshore wind plants in Scotland, actually. And we have actually taken down previously capitalized costs to pursue those. We will continue to pursue those, but we have written down the capitalized costs. And when I say pursue, we will pursue to get the rights to develop the wind.
It doesn't automatically mean that we will develop the wind.
So the wind parks will remain, let's say, a core area of activity for Skanska, or is it something that you found not to be that?
I think wind is a good investment from a sustainability point of view, but not from a financial point of view. So we're gonna find different sources to invest money in than wind. It's not a focus area going forward.
Okay. All right, very clear. Thank you.
All right. That was all the questions on the phone I've heard. I think we're done with 2016. Maybe we could just quickly move into 2017 and talk about the new reporting structure.
Okay. André said that we will look into the future, and what could be more exciting to talk about than the new external reporting structure of Skanska then? We have talked about rebalancing the group, increase project development to be more in sync with construction. So this is the way we have portrayed that journey. And if you look at the EBIT contribution between these two types of business models we have, you can see that project development has, for a number of years, become bigger and bigger in the proportional share of the group's EBIT. And that is, of course, an impact of the fact that we have ramped up investments over many years.
So the step up on investment level is actually doubled if you compare to sort of what it has been in the past. The reporting doesn't really reflect that, and we have been very much detailed on the construction side, where we more or less kept the reporting standard for 16 years now. So we are reporting per country in the construction part, in the RD part, but then only on sort of on the larger scale when it comes to commercial development. So we have decided to adjust that to reflect how the group is looking and how the group is operating. So in construction, we will report on the larger areas, Nordics then being the Nordic countries.
We will break out Sweden because it is such a big part of the group. The U.S. will be grouped and Europe, and Skanska will actually have U.K. as a part, continued part of Europe. So that, that's the way we have decided. That's not a referendum. And, in residential, we will reflect this as well. So we are, in that way, harmonizing the way we are reporting through and through. And if you look into the past, and this is the construction stream only, the bits and pieces have been balancing over sort of the past 10 years. And what... The only thing you can see is the European bits has probably shrunk somewhat, thanks to good growth prospects in the Nordics and in the U.S. businesses.
And if you look in the tables into the report, the coming Q1, this is what you will find. You will find this grouping in construction. You will find this grouping in RD, which means that we will report the same headline numbers, the revenues, the operating margins, and so forth. And when it comes to the comments we are making in the report, we will make comments similar to how we are reporting the areas. Of course, if we have something very special that pops out in a specific country, then we will mention that. That's of course correct. And perhaps more importantly, how we describe the market outlook will be exactly as we're doing today.
So you will find the arrows with colorings and everything, because this is a good, simple way to actually show what we're seeing in the marketplace. So coming from the first page, we will continue this balancing. Now, when project development has grown over and above that of construction, the target is, of course, to continue to grow construction and the earnings in construction so we can grow in tandem. So that is the secret recipe. André? And, let's open up the questions on this theme as well. Any questions from the audience? Crystal clear. All right, perfect. Thank you much, and see you with this new suit on in Q1 2017. Thank you.