Welcome everyone to the presentation of Skanska's six-month report for 2019. I am André Löfgren, and I'm heading up Investor Relations at Skanska. And I would like to introduce today's presenters, which is our CEO, Anders Danielsson, and also our CFO, Magnus Persson. And after the presentation, you will all be able to ask questions over the phone. With that, I hand it over to you, Anders.
Thank you, and good morning, everybody. If you look at the screen here on the first picture, I want to see. It's one of our commercial development projects in just south of Stockholm. It's called Stockholm 01, and it's under construction. If you look at the overall six-month report for 2019, we have a strong Q2. It's encouraging to see that the profitability in construction continues to improve. And it's also good to see that we're able to maintain a good profitability in Residential Development, despite the challenging market, especially in Sweden. And we continue to have a very strong performance in commercial property development. Operating margin in construction, 2% in the first six months.
We have a return on capital employed in product development, 10.9%, and the return on equity is just below our target of 18%, 17.4%. We have a slightly weaker but still supported market outlook. If we go into the streams, starting with construction, the revenue is SEK 76.2 billion. We have an order booking, book-to-build of 89% on a rolling twelve basis, and that's not concerning for me. It's in line with our strategic action we took 1.5 year ago. And we also can see that it's in the market where we have good performance in the history, we also have a higher order intake. The order backlog is SEK 184 billion, and operating income is SEK 1.5 billion.
We have operating margin in construction, again, of 2%. So, our action, it's encouraging to see that our action is starting to work in the right direction. We see now for the Q3 in a row, continued improving profitability, and I also expect that to continue in the future quarters. And that's also that we continue to be more selective, by that, reducing the risks in the backlog. Residential Development. We had revenue for SEK 4.8 billion. We slightly improved, increased our homes sold to 1,585. Reduced the homes started, and that's one reason is we're adapting starts to slower sales pace, and we also see some challenges with inefficient zoning processes in some of our market, which restricts us from starting projects. But, the overall profitability is good.
We have an operating margin of 12.4% and a return on capital of 11.6 on a rolling twelve basis, well above our target of 10% operating margin, 10% return on capital employed. The market is still quite slow in Sweden. In Finland, Norway, and Central Europe, it's strong. We can see now that the Swedish market has stabilized on a lower level, and we have adjusted our costs to that. Going to commercial property development, very strong quarter again. We have a gain on sale of SEK 1.6 billion, and we have a return on capital employed of 10.5%.
We have 48 ongoing projects, and with the good occupancy rents, it's equal with occupancy rate is similar to the completion rate, which it should be, and we managed to start eight projects in the first six months. The leasing activity is very high, continue to be very high, and we have a very good interest, both from tenants and investors. I'm glad to see that we deliver good result, and we also managed to increase the unrealized gains for future profit. The order situation in construction is as expected, I would say. We have a book-to-build of 89%, again, in line with our strategic action we took some one and a half years ago.
And if we look through for the different geographies here for order bookings, we can see that in the geographies where we have been profitable in the past, for example, the Nordics, we have a book-to-build, which is above 100%. The largest decrease in order bookings is in Europe, and that's also in line with the major restructuring on Poland and also some actions in Czech and U.K. So we continue to be selective in bidding in Europe and in the U.S. The order bookings for the first six months in the U.S. decreased by 1% in local currencies.
Magnus, please.
Dive into the financials, starting with the construction business stream. The revenue, SEK 76.2 billion. We're down 2% in revenue year to date, down 3% in—sorry, up 2% in revenue, down 3% in local currencies. We are growing in the Nordics here, counted in Swedish krona. US and Europe are roughly flat in Swedish krona counted, but, of course, coming down then in the local currencies. We're improving the gross margin compared to the same period last year by a full percent here, which is a good development. We continue to see here successive improvements in this area. Of course, this will take some time.
We gave some more details regarding our dead revenue that we have to execute on at the capital markets some time back here. That execution on the dead revenue is done according to plan here. S&A, we're coming down in S&A expenses. Part of that is relating to the one-offs we had in the beginning of 2018, but also underlying, we're improving the cost situation, the construction business stream. Operating margin, 2%, had a very strong quarter at 2.9%, if you look at the quarter isolated. Part of this was due to damages awarded to Skanska from a court case in Norway. But if we adjust for that, we were at 2.4% margin in the quarter isolated.
And this is the Q3 in a row now, where we have no large project write-downs, which feels, of course, really, really good, and we have an increased stability about the construction business stream. If we then move to the different geographies, all construction units are back in black numbers here in the Q2. Of course, that's something that's very good. If we look at the Nordics, remain at a good margin. We have 3.6% operating margin year to date, and 4.9% in the isolated quarter, which then, of course, includes the SEK 200 million from the Norwegian court case there. Sweden has an okay performance at 3%, 3.9% in the quarter isolated.
The comparable period here, I want to point this out, is quite tough, because over 2018, we completed some very profitable projects in Sweden, which then gave us the ability to release accumulated risk provisions. So it's not, it's not an easy comparable quarter. I would say the underlying performance here of the Swedish construction business is at least at par with last year. In Europe, Q2 we see all black figures, and of course, in Poland and in Czech Republic, we almost always have a negative Q1 due to seasonal effects. So we're carrying some of that effect with us when we look at the year-to-date numbers. But if we look at the quarter isolated, this is at 3%, which is then clearly a good number.
In the US, 1.2%, while we are happy here that both our construction businesses there are making money now, we're of course not fully satisfied with the level of this. But again, we're returning to the matter of the dead revenue and the projects that we are working to complete that have been challenging for us here. So it's a journey, but we're definitely on the right path there, and it feels more stable. We move to Residential Development. Here we can see we grew our revenues year to date 15%, slightly more than that, actually, in the Q2 isolated. The gross margin is coming down a bit here, but this is still a respectable level, 19.5%, given where we have a majority of our RD business now.
The market in Sweden is, as Anders pointed out, considerably slower than what it has been. S&A is coming down. This is largely driven by the increase in volume here, but we are also, and have also undertaken actions to adapt sort of the organizational size to what we believe is the right market outlook. The effects of that have already begun and will continue to have an impact there. A good EBIT margin, 12.4%. The Q2 isolated was stellar at 14.9%. Revenue per sold unit is up somewhat versus the comparable period, but this is mainly because we sold more rental units in the first half of 2018, compared to the first half of 2019.
If we look at the different geographies, you can see good numbers across all different geographies. Nordics, 12.3% margin, Sweden, close to 12, and Europe, 13% there. As all quarters, there are always some effects of release of risk provisions, and we've been on this topic before. Doing this is a quite normal part of the business, because if you have a well-functioning business, you always have some risk provisions. And if you manage to deal with these risks, you will get an added effect from that. If we make the adjustment here, the underlying performance is still at around 10%, which is sort of the level we think we should be at long term.
I can also point out here that year to date, BoKlok stands for, I say, close to 60% of the sold units in Sweden, which would be roughly the same level as in the comparison period. Homes started and sold. On a rolling 12-month basis, you now see in the graph at the top that we are in the balance here between the starts and the sold units. But if you look at the table at the bottom of the chart, at the slide, you can see a difference here. We sold 1,585 units here to date and started 1,140 units.
Part of this is due to the adaptation to the, to the market, and part of this is, because it is a, a bit more challenging in some places to advance the zoning processes, so we can start projects here. We're still keeping the number of units under production at the same level as in Q1, roughly 6,500 units, down a bit, down 1,000 units from year-end, but compared to Q1, it's the same. Sales rate, 69%, and we have decreased the unsold completed homes quite a lot. At the end of Q1, we had just north of 400 units that were completed unsold, and now we're down to 270 units. And we have a good churn on this, on the sort of backlog of completed unsold units, so this does not worry us at the moment here.
Overall, we're quite comfortable with the risk profile and the volume that we have in the RD portfolio at the moment. Commercial property development continued very strong performance. We had a gain on sale in the first six months of the year, SEK 1.5 billion, and in the quarter, isolated of SEK 1.3 billion, and then additional gains from the divestment of joint ventures of SEK 133 million in the Q1 of the year. In EBIT, SEK 1.2 billion year to date, SEK 1.1 billion in the Q2. If we look at the development margin in year-to-date numbers, it's around 23%, which is, I think, maybe a little bit lower than what is sometimes expected, but this is first and foremost due to the mix of the units that we are selling, so it moves up and down a little bit there.
In addition to what we have realized in the quarter, SEK 1.3 billion, we've also grown, as Anders pointed out, the unrealized gains that we carry in our portfolio. We moved up to SEK 9.4 billion unrealized gains in the CD portfolio from SEK 8.9 billion after the Q1. So, you can see the value creation in total here during the Q2 was SEK 1.3 billion that we took the profits and half a billion that we have increased unrealized gains, so around SEK 1.8 billion. And long term, we continue, and we have for quite a long time here, continued to grow the unrealized gains in the portfolio at the same time as we're growing the level of realized profits there.
The recent development that we have seen in the market of the interest rates, both in the Swedish krona and dollar and the euro, is of course positive and gives a good support to commercial development going forward. We've basically seen the rate curve flattening out quite far out the curve here, so that feels really good to us. And we can't really feel any negative impact, neither on tenant demand nor on investor demand in this business, despite there's been a lot of talks about this, I would say, in the market and media. If we look at the completion profile of the current portfolio, we have a comfortable position here. The units that are for completion quarters all have a very good occupancy.
We've actually a fairly good occupancy rate, even in the units that are expected to be completed in late 2020, so a very comfortable situation there. Look at the leasing, a good continued high pace of leasing, and both the percent of completion, of the construction works of the portfolio and the occupancy rate is moving up in tandem. They are right now quite synchronized. We have a portfolio that is becoming more and more mature. And, of course, this feels good because we have, sort of also a lower risk in the portfolio, and given what we see in the market here, it gives us a good commercial position to, I would say, take advantage of this.
If we now look at the group, total operating income from the business streams at SEK 3.3 billion, up from last year, that was at around SEK 2.5 billion then. Central costs looks a bit strange here, -SEK 60 million, but then you have to recall that around SEK 200 million of that are release of a risk provision that we have held centrally due to a situation that was resolved with competition authorities in the Czech. And we have issued a separate press release regarding that during the quarter here. Elimination, SEK 17 million. Total operating income year to date, SEK 3.2 billion. Net financial items, -SEK 100 million. A big shift from the same period last year, but the main reason to this are the interest costs that comes along with the lease liabilities that we have received due to the introduction of IFRS 16.
Taxes at 16% year to date versus 18% in the last year. If we now look at the cash flow, cash flow from operations, that is down compared to last year. And the main reason to this is that we have a negative development of the cash flow from net working capital. And we've had, as we have said on a couple of occasions here, some of the projects that we have been struggling with, when we take loss provisions, that increases, of course, the working capital on the balance sheet. But as we then execute on these projects, we will have a cash flow impact of that, and that is what we see here.
We also have considerably higher tax payments year-to-date 2019 than we had last year, due to the fact that we had been sort of paying quite a lot of preliminary taxes in 2017, so we received a fairly big refund on that. In the Q2 alone, we also have a fairly large difference in the net investment here. We're net investing more in the Q2 this year in commercial development than we did in the Q2 of 2019. Working capital in construction, as you can see, the rolling 12-month ratio here is keeping up well at about 15%, so that's, of course, very good. But as I already said, this is impacted by the loss provisions in the balance sheet that we have here, and this will unwind over the coming couple of years.
Investments and divestments, we're still in a net divestment territory, the group on a rolling 12-months basis, driven quite a lot here, if you look at the graph on top of this slide, the green line, by the significant divestments that we had in the Q4 of 2018. A year to date in 2019, we are net, net investing here. Capital employed, coming down in Residential Development as quite as expected, around SEK 1 billion. In commercial development, we are increasing the capital employed quite a lot, but we have to recall also here that around SEK 4 billion of this increase is directly related to the right-of-use assets that come along with IFRS 16 introduction. Financial position, we have total assets up to SEK 125.5 billion from SEK 116 billion.
Again, significant effect of IFRS 16, SEK 8.5 billion of this 10 billion in difference is due to IFRS 16. We have a, it's a quite comfortable situation in terms of adjusted net debt, -SEK 2.8 billion compared to the external target we have here of -SEK 9 billion, and a good equity to asset ratio of 23.6%. Finally, the PPP portfolio that we now carry and account for in the central stream, no underlying operational changes here. We're continuing to develop the unrealized development gain a bit positive up to SEK 1.3 billion.
Okay, and let's go into the market outlook, starting with the construction. It's slightly weaker, but still high activities most of our markets. Start with Nordics here. We have a mixed building market and a very, very strong civil market in Sweden.
The building market is strong on the commercial, the commercial construction, weaker due to the weaker residential market in Sweden. Stable market, building market, and strong civil markets in Norway, and Finland continues to be stable. In Europe, we can see that the Brexit impacts not only the non-residential construction, which we have seen for quite some time now. We can also see that the civil market is a bit slower due to the fact that the Brexit process sort of disturbs the decision for starting new projects on the civil market as well. Poland, stable. We have a stable market, but building market, but weak civil market in Czech Republic. We can continue to see cost escalation in Central Europe, even though it has flattened out somewhat.
Very strong market in the US, continue to be good market both in civil and building, but still fierce competition. Go to the Residential Development. Slower market in Sweden. It has stabilized on a lower level now, but and I don't expect it to increase in next 12 months. Norway and Finland, stable markets, quite, quite good market. And as in Central Europe, it has been very strong growth, and the growth has slowed down somewhat after a period of very strong. In commercial development, very good market, very good appetite from investors, very attractive building for tenants, so we don't see any slowdown there in any of market, Nordic, Europe, or US markets. Good tenant demand. To summarize this, on a group level, then, construction gradually improving, very encouraging, important.
I expect it to continue to do that in the coming quarters. We're adapting to slower sales pace in Residential Development, especially in Sweden. We're building up unrealized gains in commercial property development and to harvest in coming years. And we can see a high market activity in many of our geographies and segments, but still, again, fierce competition.
And with that, I'll leave it to André to start up the Q&A.
Yes, thank you. Thank you, Anders and Magnus. Yes, let's open up for, for questions, which will be over the phone, because it's just us here in the room.
Thank you very much. So, ladies and gentlemen, if you wish to ask a question, could you please press zero and then one on your phone keypad now in order to enter the queue. And then after I announce you, just ask that question. And if you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. And we first go to the line of Tobias Kaj at ABG Sundal Collier. Tobias, please go ahead. Your line is open.
Thank you. Good morning. I would like to start with a couple of questions regarding your construction margin. You mentioned that you expect a continued improvement. Should we expect an improvement continue year-over-year, or also compared to the level we saw in the first half and in the Q2?
Yes, you should expect improvement year-over-year. We have seasonal effects, as you know, especially in the Q1. That's my—you should look at more on the rolling twelve basis.
Okay, thank you. And regarding your construction margin in Sweden, you have, for many years, talked about that Sweden should be a +4% margin market. Now you are a bit below that level in the first half. Do you still think that Sweden should reach roughly 4% for the full year, or should we expect a lower margin? And if so, for how long?
If we commented on the quarter, we have seen, especially on the Q2 now, that we had last year, very profitable project that we completed. And that's quite normal in a unit like Skanska Sweden, well-run, well organized, and well performing. So you should look more on the rolling twelve basis here as well. And I don't see any changes when it comes to performance. The underlying performance has not changed.
Okay, thank you. And, I also have a couple of questions regarding Residential Development. The first question is regarding your margin outlook. You've talked before about some 10% guidance at a normalized level. Did I understand it correct now, that you indicate that you have roughly 10%, excluding the effect of reverse provision, and that including that, it should be slightly better? And, I mean, you were at +12% for the first half. Should we expect a similar level for the second half?
Hey, Tobias, this is Magnus. What we say is that the underlying performance will take away these effects of provision and land sales, and so on. Then we're trading at around 10%. Yes.
But you expect positive effects of those provisions also for the second half or?
I mean, there, there are always some effects from provisions in a well-run business. I can't give you any specific expectations on that. I think the important thing is to look at the underlying performance, and there we're, we are trading out around 10% there, so.
Okay, thank you. One final question. Regarding starts in Residential Development, you mentioned that you have started less than you have sold, and you mentioned zoning is a problem. Do you see that as a problem for the second half as well, or do you expect a recovery in number of starts?
Well, it's some, it's not a big problem, I would say, but it's two reasons. One, we are adapting to the market sales pace we have in different projects, and we start the project when we feel comfortable on the sales rate in that specific project. But we have some project that it takes time in some of our markets that to get the zoning in place. And right now we can see that stopping us from starting some project that we probably would have start anyway. But that it's a cycle as well. So we have a pipeline. We have a good pipeline of in the land bank, so it's not as I see it, a long-term problem.
Okay, thank you for taking my questions.
Okay, we now go to the line of Niclas Höglund at Nordea. Please go ahead. Your line is open.
Yes, good morning, Niclas Höglund here. A couple of questions then from myself as well. If we start out with the construction stream, and more down to the U.S. operations, we're still not seeing any major improvement here if we sort of adjust for provisions as of last year. And, I'm quite surprised on the very low margin levels in the Q2 of 1.1%. Is this according to plan, or have you seen any further provisions in the major projects ongoing?
Oh, Anders here, and I would say it's according to plan. It takes time. We have a lot of debt revenue, as we talked about on the capital market days, some time ago, and that influence us. And the vast majority of the business is going as planned. And we can see that our project that included in the debt revenue also executed as them, but the issue is they don't contribute to anything for the profit or the S&A.
Right. And so, okay. And moving on to Europe, where, well, recovered maybe a little bit stronger than I would expect. Are there any one-time gains here, or have we seen now a normalization of the underlying profits in Czech, Poland, and UK?
Hi, Niclas, this is Magnus here. There are no major one-off effects. We have, as we have communicated, sold a couple of businesses in Poland, which has some effect, but, but it's quite small. It wouldn't sort of disturb the picture when you look at the numbers here. Then the quarter is quite a strong quarter. Always have to be. There's always a swing between quarters, obviously, here.
Okay, but now we're back to more of a normalized level, you would assume, or, or is there any risk for it to happen?
All the units in Europe are making money. They're all in black, which I think is a normal level that they make money.
Right. And then I have a couple of questions on Resi. I don't really sort of understand the delta here in Sweden in Residential Development. You're down to 4.8% margin in the Q1, and now you're up at 16.3%. We're seeing a very strong development also in the underlying average selling price. I mean, if you were to sort of comment on the underlying trend, and what you're seeing in sort of profitability in Sweden, is 10%, really the level where you should be after 16.3% now in the Q2?
I think what we said was that we're trading at 10% underlying here for the stream. And I don't want to go into and dissect the individual geographies here and sort of give underlying numbers for that. So I think you can, we can say that we think that there's a decent level where we are now. Then, of course, also in Residential Development, it depends on what happens in the individual quarter quite much. We can never forget that, and need to look at some sort of averaged over time to really track the changes in the performance of the business. So I wouldn't write.
Yeah.
I wouldn't take it as too big of a signal what one individual quarter gives.
Right. And a follow-up on that, you are sort of reiterating that 60% of the underlying sold units are related to BoKlok. And have we seen that materializing also in the sort of completed and the average selling price? Should this have a negative impact on sort of the sales mix in the portfolio going forward, or is it already sort of matched versus last year?
I'm not sure I understand your question, Niclas. Can you specify it?
Sorry, sorry. Well, BoKlok then being more affordable, i.e., a lower price per unit, and the sort of improvement in or the strengthening of BoKlok relative to the other co-op production, would that imply lower sales price per unit? Have we seen that already in the numbers now, and there's no sort of negative sales impact going forward, or is that still to be expected?
Okay. In year to date, we had roughly 60% to BoKlok of the sold units. So, and we had roughly the same level year to date last year. So any dilution of margins that I guess is what you are after here, that is already part of the results that we are reporting on.
Right. Just wanted a confirmation on that. Then my final question, if I may, on commercial, we're seeing very strong, healthy, underlying profitability, but there are only two new projects started. Do you have zoning problems also in the commercial, on the commercial side? Or what's keeping you on the sidelines on starting new projects?
I can, I can comment on that. No, I, I wouldn't say so. We, we have a very, very good pipeline, and it's always a challenge to find new land for the future, but we are working hard on that and quite successful as well. And we also, if you look at the first six months, we, we actually started eight projects. So we have today 48 ongoing projects, so it's not that we see any, any problems with that.
Right. Okay, there's no more question. Thank you.
We now go to the line of Gregor Kuglitsch at UBS. Please go ahead, Gregor, your line is now open.
Hi, good morning. My question is around cash flow. If you can help us out a little bit, how you see the dynamics going forward, particularly as it relates to sort of your legacy project losses that I think you flagged will unwind. So, I want to understand what kind of, where you see the trend in your, I think you define net debt in a particular way. So that was SEK 2.8 billion as of Q2, where you see that trending, I don't know, over the next 6-12 months, say. And then related to that, I guess, is the revenue outlook for construction. So, construction revenues have continued to be kind of flat, roughly. Do you expect them to decline in the second half of next year? If so, how much?
Or is there offsetting factors to the sort of underlying shrinkage? Obviously, we can see order intake is trending down now for a period of time, so I want to understand how you see that shaping up. And then finally, and I think this is probably a difficult question, to answer, but do you expect material-- Is, is any sort of big divestment in commercial still earmarked for the rest of this year, or you don't want to commit to timing? Thank you.
Hi, this is Magnus here. I will try to answer your questions here. Let's see if I am successful with that. In terms of the cash flow and the net working capital, how that interacts with the projects, as we have communicated. I mean, when we have a project that we forecast to be a loss maker, then we have to book up a loss-making provision in the balance sheet, and that we do. That is a non-cash item. Then, as we execute on these projects, of course, it takes cash to put the works in place. So, you're sort of leading the cash development with changes in net working capital there.
So therefore, we do expect some negative impact from this in the, first of all, in the, in the cash flow, but also that the net working capital, based on the balance sheet items, will come down as we complete these loss-making projects here. In terms of the commercial development, impact, or sort of projects that are for sale and commercial development, we never forecast anything with regards to the segment sales, i.e., when we sign sales contracts, this one. But what I can tell you is that we have sold commercial property development projects but not yet transferred them. And when we transfer them, we receive the cash.
So the total cash impact that will come from transferred projects is SEK 2.5 billion-SEK 9 billion, of which around SEK 3 billion will come our way during this year, and the remainder in the coming years.
Any, any direction on the net debt, where you see it trending? I know that under the capital market, you're saying no more than, I think, SEK 9 billion, but I guess that was kind of a limit. Do you have any indication where you think it'll end up?
We like to keep below SEK 9 billion. Also, the revenue for construction here, you're, you're correct with the bookings. We are, we have a book-to-bill that is below 100% for Europe and for the US, which is exactly in line with the strategic initiatives that we are executing on, while we have a booking that is above 100% in the Nordics, where we have sort of overall, in general, more, more well-performing business done. In terms of the revenue outlook, we never give an outlook, but we have said that we late 2017, early 2018, expect the revenues to come down around 9%. We don't see any major shift to that, but of course, one significant matter here is currency fluctuations.
As you know, the Swedish krona is moving significantly against some of the key currencies, so this is a bit hard to translate. But that's my answer.
Fine, basically. Okay, thank you.
Okay, before we go on to the line of Marcin Wojtal of Bank of America Merrill Lynch, if anyone else has any final questions, please press zero and then one on your phone keypad now, and we go to the line of Marcin.
Yes, thank you, and good morning. So just one outstanding question on commercial development, and specifically on development margins in the Q2, which, if my calculation is correct, it was about 22%, which is a little bit lower than in previous years. And you mentioned that it is due to mix effects. So, can you maybe provide a bit more detail? What are these mix effects? Is it because you're selling properties a bit earlier in terms of completion, or maybe you're selling projects which are in smaller cities? And is that quarter, let's say, representative of the current market situation, or it was just a little bit low due to these factors?
I can comment on this. I can comment on that. Yes, it's definitely due to the different mix between the different quarters. One example is, we are in, within commercial development, we are mainly in the office building in large cities, but we also have logistics, which has a different setup, and we also have offices, developed offices in smaller cities. So, I would say it's due to that different mix, simply.
All right, thank you.
Okay, as that was the final question in today's call, may I please pass it back to you for any closing comments at this stage?
Right. Thank you all for listening in and for your interesting questions that contributed to a good dialogue. So, I just want to wish you a great rest of the day. Thank you.