Okay people, it's 10 A.M., so it's time to start the press conference. I would like to welcome you all here to this 9 month report presentation. A special welcome to all you guys who made it here to our headquarters here in Stockholm. But, of course also a big welcome to all you on the web. You will all be able to ask questions after the presentation. We will start here in the audience, but then also move over to the phone conference. The presentation, it will be held by our CEO, Anders Danielsson, and also our CFO, Magnus Persson. With that, I leave it to you, Anders.
Thank you Andrea. Good morning.
Good morning.
Before I start with the figures, I want to look at the picture here. It's Visionary in Prague, project development we have done and also completed. Of course, it's a WELL Gold certificate, and also LEED Platinum, the highest standard in that scale. But first, the highlights of the quarter here. It's a solid, it's a good 3rd quarter. We continue to improve the profitability in the construction stream, which we have done for some quarters now, and I expect that to continue over time as well. So, for me, it's really encouraging to see that the strategic action we took in early 2018 is starting to pay off quarter by quarter v ery important.
It's also very good to see that we continue to perform on a very high level when it comes to project, commercial project, property development, and also in the residential development is on a high level. Operating margin in the construction stream in the first 9 months is 2.3%. We have a 2.8% in the quarter, which is a really big step from last year. We have a return on capital employed in the project development is also above our target of 10%, so we continue to deliver on a high, high level. Return on equity on a Rolling 12 basis is also above our target. We have a target of 18% when it comes to return on equity, and now we have a Rolling 12 of 21.6%.
The market, I'll come back to the market later on in more detail, but overall, we can say, slightly weaker market, but in overall, the market's outlook is unchanged. So I'll come back to the details later on here. Going to each stream here the revenue is SEK 117 billion first 9 months here in the construction stream. We have order booking of SEK 96.8 billion, which gives us a book to build of 91% on a rolling 12 basis. And I can see that that's quite natural for me because we are taking orders in the market where we perform, especially in the Nordic regions.
We also have a good order intake in the United States, and slightly weaker in Europe. But overall, healthy backlog. Operating income, SEK 2.7 billion, and we have operating margin, again, of 2.3% for the first 9 months. The underlying profitability continues to improve. We can see a big improvement in Europe. We also can see gradual improvement in the United States, at the same time as we continue to perform on a high level in the Nordic regions. Our strategic action, one of the main focus is profit before volume, and we are more selective when it comes to which product we should bid for. We have to make sure that we bid for product that we can see a profitable future.
And that means that we need to see that we have a competitive advantage. We need to see that we have the resources, the right competence in place to go for. That's the foundation for running a profitable construction operation. Residential development, we have a revenue of SEK 7.2 billion. We sold quite a bit higher on number of homes during the first 9 months here. And we also started less homes than compared to the same period last year. And that's quite natural for me because you can also see that the last year we started more projects than we sold, and that of course can't continue over time. So now we are more in the balance between the homes we started and homes we sold.
Operating income we have operating margin of 11.4%, also above our target. We have a target here of 10%. And we have a return on capital employed, slightly below our target of 10%, 9.5 here on a rolling 12 basis. And we can see minor improvement in the Swedish construction residential market, but I expect it to be quite slow over time, at least for the coming 12 months. But we can see that the buyers are coming back to the market. We can also see change in the behavior among the buyers. There's a strong trend that they want to buy and sell in the same market, which means that they are buying closer to project completion.
That's a strong trend, and I expect that to continue over time. And the good thing for us is, of course, that we have the financial capability to start projects with the lower sales rates. And we doing that, we are doing that in locations where we believe the market is good, and we have the right product as well. And we also, of course, have, as we have been talking about the last few quarters, a good mix in the portfolio. So we have both more affordable housing, we have a BoKlok, we have also rental, a rental apartment that we invest in here, especially here in Sweden. So we are adapting to the somewhat changed behavior in the market there.
Commercial property development, again, very strong quarter, and it's really good to see how we managed to perform over time here. We have an operating income of slightly above SEK 2 billion for the first 9 months, and the gain on sale of SEK 2.8 billion, which is really strong. Return on capital employed 11%, also above our target of 10% on a rolling 12 basis. We have 46 ongoing projects, so there is a lot of future value in the ongoing projects, of course, and that corresponds to investment on SEK 31.5 billion upon completion of those projects. The occupancy rates versus the completion rates are well in balance around 60%, which is also important that we have a balance between those.
And we actually managed to start 10 new projects the first 9 months here in the company. And the leasing is really, really, continually really strong. 261,000 square meter leased. You can see the comparison above the comparison period last year. And there we can see a continued very strong interest of our products, both when it comes to investors. We have a very low interest rate in our market, so it's really attractive for all the capital that's out there to invest in our commercial development projects. And we also see continue to see strong interest amongst the tenants, and we can show that by the leasing activity, of course. The order situation in the construction is, we have a book to build of 91%.
You can see here over time, the rolling 12, how it develops. I would say we have a solid and confident backlog in our books. I can also see that that's one of the reason that we're fading out the project that has dead, so-called dead revenue, or that we have taken the losses in previous quarters, and we can see that those are fading out as pretty much as planned. So that's encouraging. At the same time, that we take on new projects that we see higher profitability in. Order bookings, if you look down to the different regions, the strongest region when it comes to order bookings is the Nordic region. We are above 100% book to build.
We have the strongest order intake in Sweden, 114% book to build. We can see a weaker order intake in Europe, especially where t hat is due to that we are more selective in the market, but it's also due to the market itself especially in the U.K., where we can see continued hesitation among the private investor but also among the infrastructure project that are postponed the decision are postponed due to the Brexit uncertainty going forward. But in USA, we have a healthy, healthy backlog. We also took a couple of project recently, as we have been reported of. So overall, 13 months of production that's a good, good position. With that, I leave it to Magnus to go into the more deeper into the streams.
Thank you, Anders. We start with the construction stream and an overview of the income statement here. We had revenues of around SEK 117 billion the first 9 months. It's up approximately 2% if you compare it to last year, but in local currencies, we are actually down in revenue here. And that's completely in line with what Anders just said. We're selective in the bidding, and we're sort of focusing on the sweet spot projects here. Operating income SEK 2.7 billion, a significant step up, obviously, from what we performed last year. But you have to recall here also that last year we had project writedowns and other type of non-recurring items to the tune of SEK 2.3 billion that was charged over the first 9 months.
So if you just back that we're despite that actually coming up a bit in profitability and a bit in margin there, and that feels feels quite good. If you look at the margin part you can see the gross margin is we increased this by 1.5% against the comparable quarter, which is in sort of line with the plan. And also we have a very favorable development of S&A, but here you need to really recall that we wrote off goodwill to the tune of SEK 400 million in the 3rd quarter last year, and this was charged to S&A. So if you adjust for that, the actual underlying S&A last year was 4.2% instead.
So if you base it on that, you can still see that we're working quite hard with the cost level here, and we're successfully coming down in that. And then we had the fantastic S&A level in the quarter here, that's maybe a bit too low on what you can expect, but still we have the right sort of trajectory here for the S&A cost. So in total operating margin in the first 9 months, 2.3%, in line with what we see in sort of the improvement plan here. If we look at the breakdown of the geographies, then stable performance in the Nordic, 3.7%, 3.8% in the comparable period. But inside the Nordics, you can easily see here that there's a shift in the composition of the performance. Skanska Sweden's performance in construction, 3.4%.
That's not the level that you're used to see here. And we had a couple of quarters here with a weaker margin, and there's a couple of reasons to this. One is that in some cases we finish off these projects that we have talked about in many cases where we can release risk reserves to profit. That is one explanation the difference. But it's also so that we have two parts of the organization that are performing at levels that we're not satisfied with, and one is the asphalt operations in Sweden, and the other one is residential construction. A few projects there in the Stockholm area that have been weighing on the margin here. In Europe, 2% margin for the first 9 months obviously a lot better than the negative margin last year.
On the quarter, we were in the high 3% level but then you also need to remember that there's a big seasonality in the European margin where we essentially make all the profit in the latter part of the year especially this is driven by the seasonality in Czech Republic and in Poland, so 2%. And then in U.S., 1.3% margin for the first 9 months, and I don't think I have to repeat myself again and say that we're not satisfied with this, obviously. But we are being sort of diluted in the margin by all the dead revenue that we have to go through in order to complete the projects for which we've taken the write-downs before.
So that dilution effect is still with us, and we've guided to you before that we think we will be out of the majority of this in 2021. Shifting to residential development, and also here you can see a growth in the volume. We took in SEK 7.2 billion in revenue for the first 9 months, and the growth there is approximately 9%. Gross income SEK 1.3 billion is a fairly big step down, actually, from the gross income in, or gross profit in, the same period last year, which was SEK 1.6 billion.
But we also at that point, were quite open in saying that a fairly large part of the profit here at that last year came from the sale of land, and also from the release of risk provisions that we had been able to avoid releasing to cost, but we could release them to profit as we completed some very successful projects there. Operating income, SEK 818 million, then. Gross margin, 18%. I think that's a very defendable level of the gross margin. S&A cost, 7%, and then the operating margin at 11.4%. And if we then look at the underlying margin here, taking away the impact from the divestment of land and a profit from that, and also from sort of excess level of provisions, these effects now are much more normal than what we had last year.
So you can say we're still at around 10% in terms of the EBIT margin here in performance of RD, and it's quite similar actually to last year. If we look at the different regions, you can see Nordics had 10.7% margin, and a very high margin than last year for the reasons that I just explained, and similar for Sweden, 10% versus 17% in the same period last year. A very strong performance in Europe, and in this case the European RD operations in the quarter is quite small in terms of volume here. But they had a fairly large release of these provisions from successful projects. So you will see a margin that is very, very high in the RD operations in RDE.
I just want to guide you that that is not what you should be sort of looking at as an underlying performance here. A lot of that is related to the release of the risk provisions. But at the stream level underlying is around 10%. Starts and sold units, Anders commented already, you can see the starts on a rolling 12-month basis are now below the sold units. Nothing strange with that. It has been the opposite for quite some time, where we have started more units than what we have sold, and at some point in time, this need to balance out. We started 1,700 units, approximately, first 9 months, so around 1,000 units less than what we started in the same period last year here.
The majority of the difference here is actually related to the European operations, especially in the 3rd quarter, as you can see. Homes sold slightly higher than last year, 2,300 units, versus 2,200 units. Homes in production, we are trending at the level now of 6,500 units in the portfolio. We have a sales rate of 70%, which is, you know, good in many ways in terms of market exposure, but it is also, I would say, on the high end of the spectrum where we should be here. We can take maybe 60%-70% is a reasonable level, especially now when we have a market, a consumer behavior, when they want to buy late in the later stages of the project. We need to have more inventory to sell to the market.
So it's quite natural to have a lower sales rate now. And against that background, the 70%, we shouldn't really be above that. We need to watch who have things to sell there. And you can also see that the unsold completed is coming down quite a lot from year-end, and also from the 2nd quarter, which of course is a sign of a healthy portfolio. We're selling what we complete there, and we're also selling the things that have already been completed. We have a good churn of that stock, of the unsold completed. Shifting to commercial development then, it's already been said, fantastic performance. Year to date, SEK 2 billion in operating income, which is higher than last year, and last year was a very good or a very, very good performance in commercial development also there.
So if you add then the joint venture, we sold one, one property in the form of a JV in the U.S. in the 1st quarter, which is not added to the gain on sale in the P&L. But if you still do that, we have a gain on sale of SEK 2.8 billion here for the first 9 months. So that's a very strong level of performance. And in terms of the unrealized and realized gains out of the portfolio, we have unrealized gains now in the portfolio of around SEK 8.4 billion. And you can see there's a quarter- by- quarter, a step down here in the unrealized gains, but that is simply because we now have realized it. So we have a SEK 1 billion step down in unrealized gains. We have around SEK 1.1 billion in realized gains in the last quarter.
So the things go together here in a good way. Then you can track the green line, which are the gains that we are realizing on a rolling 12-month basis. So you can see that this is then coming up successively also between the 2nd and the 3rd quarter. If we take the portfolio that we have of the ongoing projects, unsold ongoing projects, and we split this out, then you should read this slide here, as the bars represent the investment value of the properties in the portfolio when they are completed. The time scale is when we expect to complete the properties, and the line that you see, that is the leasing rate of these different properties.
So ideally, you would like to have a high leasing rate on the properties that is soon to be completed, and then a lower leasing rate as you go out in time there. Which is more or less exactly what we see here. Of course, the real life isn't so nice as the theoretical model, but overall, we have a nice slope down of the leasing rate in the portfolio against the completion, expected completion time of the properties there. We have a bit of a weak spot in the 2nd quarter 2020, but it's nothing that we're concerned about. It's three properties, and it's all about when do you actually approach the market to secure the leases also there.
In terms of leasing, we had more than 200, I think we had 260,000 square meters leased year to date, which is a very high number. You can see the blue bars here, we're on a Rolling 12-month basis, securing around 500,000 square meters of leased space. Then you can see the percent of completion, and you can see the leasing rate, which represent the two different lines here. Ideally, they should be aligned with each other at approximately the same level, and which is what we have also now. You can see that they are moving up quite a lot, and that's a sign that the portfolio is getting on the average a bit more mature. The reason to that is that we've had a bit slower start on new projects, the latter few quarters here.
We are fighting a bit with the external cost escalations on the construction market in the U.S. and also in Europe, which makes it tougher to make sure and make ourselves confident that we have a solid business case before we start the project. So this delays our starts to some extent, and that is also quite evident in this chart here. If we look at the group, then we have the income from all of the business streams I just went through, SEK 5.5 billion versus SEK 3.1 billion last year. And then we have central items, minus SEK 141 million, a very big step down from what we had last year, around minus SEK 640 million then.
You need to remember that in the 2nd quarter this year, we released the provision that we held centrally for what we call the R4 case in Czech Republic. That meant we could release the profit, and that amounts to SEK 212 million which we took in the 2nd quarter. In addition to that, we nowadays have what we call asset management inside this central stream, and that is the former ID business stream in Skanska. They contributed with SEK 50 million here year to date, so you can get the comparison right. It'll take us down then to the operating income, SEK 5.4 billion versus SEK 2.4 billion, and then we have net financial items, minus SEK 69 million year to date. Here we have something that is called interest costs from lease liabilities.
On January 1, 2019, we, as everyone else, introduced IFRS 16 as a way of accounting for leases. That essentially moves the interest part of the lease cost from the cost of goods sold down to the financial line in the P&L. That is approximately; we are trending now at around SEK 60 million per quarter in that year. Then someone who is quick to do the math can see that the difference between 2018, when we did not have that cost, and 2019 is not so big. But that is because on the other part of our interest-bearing liabilities, that is not pertaining to leases, the interest cost has come down, partly because of the sort of falling interest rates on the market there.
Taxes, we're taxed at 16.5% year to date, which is a little, little bit lower than what we've been used to, and also significantly lower, I'd say, than last year. But last year, we had to write off some tax assets in Poland, as we could not make use of them for loss deductions. So that explains that. So earnings per share 10.75 in the first 9 months of the year. In the remaining PPP portfolio, we have six assets. Not a lot has happened in these assets over the quarter. We see some increase in the present value from the cash flows, but this is mainly due to the time factor here, than nothing else. We haven't sold anything, and we have not acquired anything.
Cash flow, minus SEK 4.5 billion operating cash flow for the first 9 months, lower than obviously by around, 4.5 billion than, than last year. And I'll come back into a little bit on why that is the case. Dividend and then cash flow before any change in the net debt minus SEK 7 billion, to be compared to minus SEK 3.6 billion last year. And the big swing factor in the cash flow is the net working capital, where we have had a much larger outflow now in the first 9 months this year than what we had in the first 9 months last year. And there's a couple of things I think we need to recall in this. One is that 2018 was a pretty good year in terms of net working capital cash flow.
Year to date, we had approximately zero impact of that. And normally, the 3rd quarter of the year, this is the quarter where we have been in full production in the construction, construction arm, and cash has sort of been flowing to the projects. So that's the low point of the net working capital, but we were at zero last year. And the other thing is that we have booked up these loss-making provisions that we have talked about before for when, when we write down the construction project. And what we see now is that as we are completing these projects, of course, we're putting the cash into the projects which is hitting the cash flow. So these two effects, taken together, explain the change in the, in the cash flow, in the cash flow from working capital here in construction.
So why are the bars still so high up, as you can see here? Because that is the cause of the loss-making provisions. So when you look at the cash flow for Skanska and try to understand the net working capital contribution you really need to look at the cash flow profile and not only the balance sheet items which is what you see at this slide here. Investments, divestments, and capital employed, residential development, we're roughly at the same level as we were in the start of the year. And for commercial development, as you can see, we have increased invested capital by around SEK 10 billion since the start of the year, so that's quite a lot.
And a big part of this is, of course, the production we have, and notably, the two big towers in the US also is contributing to this. Financial position, total assets SEK 128 billion, and we had an equity at SEK 13.3 billion. Interest-bearing net debt, -SEK 14 billion, looks a lot, but you have to recall that we have added here the lease liabilities if you compare it to last year. And the adjusted net debt, -SEK 3.9 billion, where we have said that we wish to not be below -SEK 9 billion here, and a comfortable equity-to-asset ratio of 23.6%.
Okay. Going to the markets in the different, starting with the construction stream. In the Nordic, there is quite a mixed picture when it comes to the building market.
We can see a continuous slow market in the residential construction, but we can see a strong, continuous strong, infrastructure market and also the commercial market. And the civil market, both in Sweden and Norway, are good. Finland, stable, but we do see a slowdown in the residential market in Finland, so that's also why we report that a bit slower outlook the next 12 months. Europe, unchanged. Brexit, as I've been talking about, influencing the market negatively, both in the commercial and infrastructure market. Central Europe, stable. In the Czech Republic, though, we can see a slight improvement in the civil market, and that's due to that we can see now that more EU money coming into that market.
It has been a gap between the programs, so to speak, so but we can see a slight improvement there. But of course, we continue to see cost escalation in Central Europe, and that will influence us, of course. I think it's leveling out now. It's not as high increase that we have seen the last few years, but we can still see it. In the U.S., there continues to be a good market, but still continuous fierce competition, and the funding is on a healthy level, and the main funding for the project we can see in the pipeline comes from the states. So, we're not seeing so much federal money. But there's a good healthy level on the state level.
Residential development increasing construction cost in all our markets. So we have to be aware of that. We have to make sure we are cooperating internally in a good way to find the right solution, the right product, to make sure we have the business case secure before we start the project. I expect the Swedish market to continue to be on a slower level. We again, I can see a stable stabilization and also in the prices in the market. Stable market in Norway, and again, a bit slower in Finland. Europe has also slowed down a bit after very strong growth the last few years, but it's still a good demand in the market for residentials.
Commercial property development, here as well, we can see increasing costs that we have to be very careful about in the project when we start the project, but the market is very strong. The interest is very strong from investors in all our markets, and we also have good interest from tenants. I can also comment on the U.S. market, that we believe that the yield compression might have level out now, but it's still very good demand from investors there. Summarizing the group then. The underlying profitability in construction is improving very important. We have a strong balance sheet, and we can take advantage of the changed behavior in the market, the residential development market, that the buyers want to buy closer to completion.
We have an attractive commercial property development portfolio, so I'm confident with that. We can see high market activity in many of our geographies and segments, with a few exceptions in construction. Project development challenged by cost escalation in the construction market. We have to take care of that, address that carefully. The execution of the strategic action we took two years, soon two years ago, is going as planned. So with that, I'll leave it to Andrea to start the Q&A.
Perfect. Thank you very much, guys, Anders and Magnus. We will start with questions from the audience, and after that, we will hand it over to the telephone conference. I see some hands in the air already. Please state your name and where you work at, Tobias at the ABG?
Yes, thank you. Tobias Kaj from ABG. I would like to start to follow up what you mentioned on the construction margins in Sweden, that you had some problems within asphalt and in some resi projects. Regarding the resi projects, are they completed, or will we continue to see more negative effects from them? And regarding asphalt, is that project-specific, or is that more, a tougher market that result in lower profitability?
I can comment on that. If I start with the residential project here in, mainly in Stockholm area, there's a few projects. Some of them are completed, and some are still ongoing, but we believe, of course, that we have taken the charges that that's needed to complete those projects. When it comes to asphalt, we have made quite major restructuring of the business due to low performance for some time. We have seen that. We believe that we should see improvement here in the 3rd quarter. That hasn't happened, so we have made further action on that business. We think it's a good market, and historically it's a good market and good operation for us.
We strongly believe that we will gradually come back to that profitability that we should see.
Regarding the cost overruns in the residential projects, has that only impacted construction, or did you see a negative impact in residential development as well due to that?
Mainly, impacted the construction, definitely. You can say it's in a few projects that we haven't had enough control over the cost. We are seeing cost increases that we should have been able to estimate before.
Within residential development in the Nordics and in Stockholm, the margin is clearly below the target of 10%, and within the segment reporting, most of the profit is recognized when the units are sold. Does that mean that you're now starting projects where the profitability is not reaching the 10% target, or is the lower margin more related to completed projects where you have had problems or needed to reduce your prices?
I would say the underlying profitability in the RD stream in Sweden are still at the 10% that we have been reporting previously.
Okay, thank you for taking my questions.
Stefan Aronsson, SEB. A few questions, starting with the commercial side. I fully understand you're not going to give me any numbers, but if you look at the three regions, and the margin potential from them, how do they differ, if you could grade them?
Right, yeah. You mean, I was not sure I caught you, but you mean the Nordics, Europe, and the U.S., how do they differ in terms of the margin?
Exactly.
I'd say it differs much more project to project than what you can see, like, a structure difference across the regions there. So I'm not sure you're sort of hitting the right point. The region by region margin can vary quite a lot, depending on what we have in the portfolio.
Okay. The reason was the.
Yeah
The strong margin in the quarter coming from Eastern European.
Yeah
Properties, primarily, it seems like you have good margins in those, but that, that's property related. Okay. When it comes to, you took a big charge for the legal discussions, and so on, in the US, or add-on jobs and so on, that you didn't know you were going to get paid for or not. Could you maybe elaborate on where you are at that? You are hoping to get some of that back, and you are in discussions, I understand. You know, you're more or less positive where we stand today to retrieve some of that, and maybe some of it had already been retrieved, I don't know.
Yeah. I can start.
Yeah.
Yeah. You're referring to the project write-downs that we were taking last year, just to-
Yeah, but parts of it, the part where you had claims that you-
Exactly.
Hope to get.
I mean, some of this, some of when we claim money, this is not money that has flown out of the company yet. Then, it's often a big discussion with the clients, unfortunately, often late also in the projects here, to come to an agreement on who is supposed to pay for this then. And in many cases, this has to do with changes in the design that has caused disruptions in the production, and also maybe additional costs related to the design then. So I say, yes, some of those costs we still expect that we could potentially recoup them. They are not lost yet. And some of them, even if we have seen the cash outflow from the company, that's not necessarily us recognizing that this is our fault.
We can still claim the client for the, for the money here, of course. But unfortunately, this process tend to be quite long. So it's not a, it's not a quick fix to, to sort of come to resolution on them.
So we haven't seen a lot yet, and you're still hopeful. That, that's the conclusion? Yeah.
Yes.
Coming back maybe to the earlier question on residential, then the final question. Looking at the underlying margin in the quarter, adjusting for extremely high profit in Europe, it seems like the underlying. That the quarter was around 7.5%, maybe. Would that, if I interpret you correctly, that's an unusually low. That's not the normalized level, because you had this impact in Sweden. Is that correct?
Yeah, that's correct. That, that's correct. I mean, partly, as you know, quarter by quarter, this goes up a little bit all the time. So looking at one isolated quarter is a bit dangerous. But I will also say we have this fairly big positive impact in Europe, and, in the Nordics, we have a almost at least a corresponding sort of impact of some projects that we take a cautious profit recognition in, which is why on the stream level, we say that the total effect of the sort of land and the provisions there is quite normal now, but that's at the stream level. Inside that, it's distributed in a different way.
Thank you.
Niclas Höglund, Nordea. Firstly, if we start out with the U.S. margin, I mean, we saw, well, a quarter-over-quarter, pretty healthy development, margin is 1.1% in the 2nd quarter and now bouncing a little bit to 1.4%. Could you help us to sort of explain, is all of that delta related to that revenue fading a little bit? Or could you help us understand this result?
I can comment on that. I would say the underlying performance in the U.S. operation are good. But we do have this dead revenue that we need to complete those projects, and that will take us some time. But it's actually fading down now, quarter by quarter, and at the same time, we can see a good performance in the underlying business, and that's encouraging. But it will take some time.
A follow-up. You mentioned the very strong announced orders in the 4th quarter, and we saw, was it yesterday, $7.3 billion order on the light rail in Washington. More civil based, if I understand it correctly. Would you say that this is a show of new confidence in the civil market, you sort of highlighting the competition? Do you need that for more of a strategic filling the sort of production pipeline, or should we expect healthy profitability?
Yes. We are very selective now when we, which geography we go for in the civil operations. We're also very selective with type of project. Which risk level do we have? Do we have the right competence in place, the right resources? And do we have the right contract, of course. And this that you're referring to, we announced yesterday. Well, that is a so-called ECI project. It's early contractor involvement. So we have been working with that project since 2016, in the first stage. And we have developed together with the client the design. We have defined the cost of the project. So we... In the typical project that we are much more confident about the cost and about the expected profitability level.
And we do have, we have a strong, strong presence in the West Coast and the East Coast in the U.S. for a civil operation, especially from the New York area and also from the California area. So we have also moved some strong resources to Seattle area, the Washington State area, to help them out. But we do have a strong history there as well. We have lately completed three large civil project in that area. So it's one of the core geographies, definitely.
Right. And then coming back to Sweden, a little bit, you, you talked about the sort of issues in, in the quarter. And looking at rolling 12-month basis, we're down at 3.5%, margins in Sweden, compared with more close to 4.5% over the last, well, at least 8 years, since 2010. Is there any structural reason for you to sort of be on these lower levels in, in Sweden now, which is, w ell, we haven't seen that in the past, or, or should we expect a recovery?
Yeah, I mean, as we said, we have issues then in the asphalt production business and in the residential construction part in Stockholm here. It's not like these problems have suddenly materialized over the quarter. We've had a too low profitability by our standards in the asphalt business, for instance, for some time here, that has weighed on the margin. But we have been quite convinced that we will sort of have a quick return from that. And now, when we have developed all the action plans and taking some of the actions here, we can see that it's a little bit more, it will take a little bit more time to sort of get there. So hence, in the interest of being as open as possible, you know, just defining the problem here, or what is weighing on the margin then.
So is it a structure problem? You see, in a project-based business, you can in a way say the problem is the project. But this is not only projects in the asphalt. We have, of course, production facilities, and it's more of an industrialized production in part of this. So it's a little bit different type of problem.
Okay. And my final question is related to the commercial development part. Well, you, you mentioned that you have a very strong pipeline, and, and you also mentioned the two U.S. projects, which is sort of. Well, you are investing in part of the sort of buildup of, of capital employed with SEK 10 billion. There are media speculation on, on those U.S. projects and also on a large Swedish project that are all being finalized now in the 4th quarter. What, what is the sort of expectation of, of divestments, and, what should we expect from, from that?
Yeah, we don't give any forecast when we are planning to divest the project. But I can tell you, we're in good shape. We're in good shape in those projects, both when it comes to leasing and completion. And so I can guarantee you, we will communicate directly when we have some good news there, but we're in good shape.
A follow-up. Normally, or at least going back in time, there's always been a tendency for a healthy divestment toward the end of the year. Is there any reason to expect that to be different this year?
That was a very leading question, Niclas. But you go try.
Yeah. Okay. Thank you.
I have three questions, please. The first one, could you just update us on the net working capital situation, so I fully understand that? You referred to that already in the, at the Capital Markets Day.
Yeah
That you were expecting potential SEK 5 billion outflow. I understood it, but partly because of your downscaling of projects, but it seems like not at least with these two projects that you announced now for the last two days, that you still grow the business when you can. So, are those SEK 5 billion still relevant? And, how much of that have we already seen now as of Q3?
Yeah, the SEK 5 billion are still relevant. I think a testament to that is that when we communicated the SEK 5 billion, we'd had a very good run on net working capital for 2018, which was the basis for that discussion. Now, we're in Q3, the year after, and we see that we have a significantly lower net working capital position, or significantly, so a worse cash flow from net working capital. So I think in a sense it confirms the view that we had that we need to, to stay on our toes in terms of where, where this is going here, you know? And how much of that is consumed, I can't really answer that.
I think the important part here is to look at the cash flow and not sort of blindly look too much at the balance items of working capital. It's the cash position that we want to have there.
Thanks. Then, if you just could, help us understand also the comments you're making about, on the one hand, cost escalation, and at the same time, a bit slower market outlook. Is it just the late cyclicality of input costs, or is there any structural reasons for input costs coming up, such as lack of resources? Or if, I guess, if the market outlook goes down, I would have guessed maybe the outlook for cost input should come down as well, or maybe that's the case.
Of course, it's quite natural. When the market goes down, we can see quite quick cost decreases among suppliers, subcontractors, and so on. So, that for sure will happen. But to date, we have not seen that yet because the market is still very overheated in Central Europe, for example. The unemployment rate is on a historically very low level, so we do see pressure on costs still upwards. But of course, that will sometime level out, and we can see that leveling out now, especially in Central Europe.
Then my final question on the commercial property side, and maybe referring to the Stockholm One project. I mean, some of your property peers so far in Q3, there's been some report about potential weakening demand for tenants. Is that something you see, or do you feel that the outlook is as strong as it was after Q2 or Q1?
No, we think we still have a very good demand from tenants on our properties. We don't see any weakening demand, really.
Thank you.
All right, any more questions from the audience? No. In that case, we will move over to the telephone conference, and please follow the instructions.
Thank you ladies and gentlemen on the phone, if you do wish to ask a question, then please press zero one on your telephone keypad now. Our first question comes from the line of Simon Mortensen from DNB Markets. Please go ahead, your line is open.
Yeah, hello, this is Simon from DNB. I have three questions for you guys. I was wondering if you can first off, give us an update on the PPP portfolio. It's still a huge value in the balance sheet, but little comments in the report. How are you progressing with sales and divestments in that portfolio?
Hi, Simon, this is Magnus here. Thank you for your question. You asked for an update on the PPP portfolio. We have essentially three projects in the - sorry, six projects in the portfolio, of which three are sort of completed in construction. And we will, of course, communicate, not when we go in and start the divestment process, but at the time when we have an agreed contract with someone to sell the asset there. But the plan is still this is a run-off portfolio. We will complete all of these assets, and then we will put them to the market after the ramp-up period and when we have exited the equity lock-up period.
So, no guidance on timeline on realization of that portfolio?
Sorry, I didn't catch that, Simon. Can you try again?
So when are you completing these projects?
When are you completing the projects?
When we are completing the projects? We are completing the c onstruction works.
The construction works. The last project in the portfolio in terms of construction completion is 2021-2022.
Another question comes down to residential development. I do see that the plot values in the balance sheets are increasing quite significantly. It's now at SEK 8.4 billion. It's up, roughly SEK 2 billion in two years, 35% in three years, and it continues to take up more capital. How much are these more expensive plots, if that is impacting the RD margins, or is it something else that is the reason that the RD margins are coming down?
We have a hard time understanding you, Simon. Can you speak up or speak even more clearer? SEK 8.4 billion, we got.
Yeah, the plots in RD are up significantly year-on-year. SEK 1 billion, it has been growing annually for the last three years. How much of this is a cost element versus a volume element in your land bank?
Are you asking about start, or what, what number are you asking about, Simon?
The plots in residential development. The land bank.
Plots.
Yeah.
Uh-huh, the land bank. Yeah, thank you.
Volume or increased prices.
Volume or increased prices that is driving the growth in the land bank. I think that's a very good question. Of course, we've had a favorable economic situation in most of our markets for quite some time, and that is driving land prices up. There's no question about that. Then where we are now, I'd say we have a. In some places, we have a land bank that might be a bit too big, to be frank, and in some places, we have a land bank that might be a bit too small. I think on the average, we have a land bank that is quite defendable given the sort of volume ambitions we have.
Thank you.
Thank you l adies and gentlemen, if you do have a further question, please press zero one on your telephone keypad now. As we have no further questions from the telephone lines, I'll hand back to the speakers in the room.
All right. Thank you very much. Then we're done for today. And, yeah, happy Thursday to you all.