Good morning, everyone, and welcome to the presentation of Skanska's nine-month report for 2018. I am André Löfgren, I'm heading up Investor Relations at Skanska. The presentation is held here in Stockholm at our headquarters, so thank you all for showing up. And we also have a lot of participants on the web, at the webcast, so thank you for logging in. You will all be able to ask questions after the presentation, and the presentation will be held by our CEO, Anders Danielsson, and also our CFO, Magnus Persson. And with that, I leave it to you, Anders.
Thank you, André. Good morning. Morning. Before I start, on the picture here on the slide, you can see the Powerhouse Brattørkaia we're building in Trondheim. And it's actually the world's northernmost energy-positive building. Going through the figures overall, we have a decrease in operating income. We ended up in the nine months of SEK 2.4 billion. We have already announced the write-downs in the U.S. in two PPP projects, and we also have the impairment charge of goodwill in the third quarter as well. The totaling of that is SEK 1.3 billion in Q3. We have continued to have a very strong performance within project development, both in commercial development and in residential development.
Our strategic review that we started before this year, during last year, the fall, is now completed. We have taken strategic actions that was communicated earlier this year. We also took some more decisions now in Q3, and I will come back to those later on here. But overall, our position is maintained as financially strong. If we go into each stream, starting with the construction, the revenue increased somewhat in the core during the nine months. The order booking decreased. We have a book-to-bill of 87%. I'm going back to each of our markets, but I'll say overall, this is perfectly in line with our strategic action that we took earlier this year.
Order backlog is SEK 88.186 billion, and we are also being more disciplined within the bidding. We are much more selective on what project we should go for in all our markets. The operating margin, 0.2%, unacceptable on the level, and that's very clear for us, and that's why we're taking action, and we're also taking more measures during this quarter. And the write-downs, of course, and charges impacting the profitability. And the measures somewhat on the message. As you know, the strategic action we took, communicated in January, was in Poland. In Europe, we took a lot of action there and reduced the scope to limit the operations to six to seven cities, where we already have commercial property development and residential development operation.
And that's, we are closing a lot of projects from in the geographies where we should leave as a operating unit, and we also are on track. So I would say we're not completed yet. Some of those project will continue in somewhat into 2019, but I'm confident that we will succeed in that plan to reduce the scope in Poland. In U.S., we are already communicated that we will exit the energy sector, and we will also stop building mega Design-Build PPP projects in U.S. And the reason for that, we're leaving the energy sector because that sector hasn't developed as we thought it would be for a few years back.
We also see that the performance is not on a good level, on an acceptable level. And the PPP project, we just think that this mega Design-Build PPP projects in U.S., the risk reward is not attractive enough for us, so we will not bid for those. And the market is very large in U.S. for going for other projects. So we have done our homework when it comes to sweet spot analysis. Look 10 years back, where have we made money? Where have we been successful? So focus going forward in or within those sweet spot analysis. U.K. and Czech Republic, we have done some analysis there as well, so we are focusing our future operation on the core competence, core business.
On a group level, we have done a governance review during the spring. We have a new structure in place since first of July. We also are implementing our new governance framework, if you will, to simplify things for the organization and make sure that we have an efficient headquarters with a management that are closer to the operation, closer to the market, closer to the clients, and that's also going according to plan. Residential development revenue goes down to SEK 6.6 billion. The homes sold reduce by 27% compared to last year. But the homes started is not reducing as much. It is a lower figure, as you see, but not in line.
I can, the reason for that is also that we have another mix today in the pipeline, and also in the project that we start. So in Sweden, we start more BoKlok residential, and also the lower segment affordable housing in Sweden, and we also start more rental residential. So that became a bigger part of the total portfolio in Sweden. In Norway, there's also some decline in the sales of apartments. And we also see a good continued good market in Finland, both in Finland and in Central Europe. So I think we have a good mix. We have diversified portfolio, both when it comes to market and also when it comes to segments. So we have a good position here. Operating margin is 17%.
It has increased in the quarter by release of provision, and also some land sale are included. Return on capital employed are above the target, 10%. As I said, sales pace in Sweden and Norway is still slow. But our ambition, we have a good position when it comes to sales rate in ongoing project. We don't have so much unsold completed, quite low if we compare to the total operation. So we, and we're also, as you know, financially strong company, so we can take opportunities that will show up in the weaker markets going forward. So ambition, long-term ambition, is to grow this this stream. Commercial development, very good quarter, very good operations. Gain on sale SEK 2.4 billion in the first nine months.
We have a return on capital employed equal to last year. We have 56 ongoing projects. It's a lot of opportunities in this market for us. We have a strong position where we have our footprint. SEK 33 billion in investment, upon completion, of course, in those projects. We have 45% occupancy rate, 55% completion rate, and that's also a trend we can see now. As we increase our operation in the U.S. market, we see a trend there that the tenants they decide take the decision later on in the process.
So I'm not concerned over this, if you will, gap, if you will, because we have a good pipeline of tenants, and it's a high activity amongst our tenants for signing up for our projects, and also continue to be a strong interest from investors. Infrastructure development, this the comparable period includes A1 motorway in Poland that we sold last year, early last year. We also have decided to close down the project development within infrastructure development. And the reason is, we took a decision earlier this year to close down Stockholm and London office. We also now took a decision to close down the project development in U.S., and that's a consequence for being not that we're not going for those mega Design-Build PPP projects.
We're not saying that we're leaving, totally leaving this sector, but we don't think we have enough pipeline projects in the pipeline to defend the permanent organization for project development. But we do have a lot of assets, as you can see here, SEK 3.5 billion in value. So we do have a strong asset management organization to take care of this portfolio and make sure we get the most out of it, both when we manage it and when we divest them. The order situation within construction, we see we have a gap there between the book-to-bill, rolling twelve, and also compared to the revenue. And that's... I'm not concerned over that, going into each market in a minute here.
But that's in line with our strategic initiative, strategic action to reduce the risk within the construction stream. I want to see more predictable, more predictable profitability, more steady profitability going forward. So it's profit before volume. We are going to prioritize, be more selective, and keep our bidding within our sweet spot analysis going forward. So this is a consequence of that. And if you look at each market, Nordic, that performs on a good level today, they are holding up the book order backlog 100%. You can see a bit slightly lower in Sweden, but I think the pipeline in Sweden is very promising, so I'm not concerned over this, and you shouldn't be either.
Europe, 86% book to bill rolling twelve, that's in line with our just explained our strategic action, mainly in Poland, but also some action in Czech Republic and U.K. And U.S., the same story there. I want to see improved, steady performance.... if you disregard those two projects and the goodwill write-down in U.S., we are performing on a good level. So, I'm sure, I'm confident, and it's an important market for us, and the market is strong. So I'm confident that by being more selective, keep ourselves within our core competence, I'm confident that we will succeed on going back to profitability again. So that was, Magnus, can you go into the details, please?
I would love to. So let's start with the income statement for the construction business stream then. As you can see behind me, we have accumulated revenues in the SEK 215 billion for the first nine months this year. It's up compared to the same period last year. And as I mean, as Anders already outlined there, with order bookings are coming down around 15% versus the comparison period. So this means that the growth in construction revenue will not continue because as you also can see, backlog is now coming down here. So we will have an inflection point when revenue will start to come down there over 2019 and 2020. So I think that's an important sort of piece of information to carry with you if you're trying to forecast the company going forward there.
If you look at the S&A level here, we have around SEK 5.2 billion in sales and admin to a S&A percent of 4.5%. In that, we also have the goodwill impairment charge that we have in the U.S. here. So if you take that out, you will come to sort of the true underlying S&A, which is then 4.2% there. And obviously, SEK 200 million in operating income for the first nine months, 0.2%, is deeply unsatisfactory. And you can also see this on the chart at the top of the slide here. Since the beginning of 2017, we've had a lot of project write-downs and sort of one-off charges that has pushed our result in this business stream down.
I will go through this and give you an overview over how it has impacted the different geographical regions in a couple of slides here. If you look at the results for the different regions, then the Nordic is strong. We have an operating margin in total of 3.8%, here, little bit lower than last year, but still a very, sort of good level. Sweden, is even better, it's 4.8%, and in the isolated quarter, we actually have 5.2% in Sweden. So very, very strong performance, also, of course, on a good market there, but, but nevertheless. In Europe, -SEK 564 million for the first nine months. And this is, I mean, the, the big impact there is, of course, the problems that we're suffering in Poland.
But also, we want to point out now that in the third quarter, all the European units are back in black, so we're not losing money any longer here. So that feels really good. I'll say the problems that we've had in Poland, they're much more ring-fenced now. I feel that we have them well under control, but it's a journey to take to return to a decent level of profitability. In USA, then around -SEK 800 million, and I think you all know the charges that we've taken there, SEK 520 million in the second quarter, and now SEK 900 million in project write-downs in the third quarter, and also the impairment charge. So that sort of explains the -SEK 800 million here.
And that takes us down then to SEK 231 million. If we then look at the distribution of the project write-downs and the one-off effects here, I'm not going to go into this in detail. It's a little bit of a service to you to keep track of all the sort of major result impacts here. But in total, for the first nine months here, we've had charges of SEK 2.3 billion, which can be compared to SEK 1.1 billion over the same time period last year here. And here you can also see how this is distributed between the different types of charges that we have had and in the different geographical regions.
We move on to residential development, and of course, anyone who has been following the Swedish and the Norwegian residential market is not surprised by the fact that the revenues are coming down for the first nine months. We have had a revenue decline here, market driven of around 34%. And if you look at operating income, then SEK 1.1 billion to a very good margin. I want to emphasize that a part of this operating income for the first nine months, around SEK 500 million, comes from gains from divestments of land and the release of provisions in this business stream. And that actually means that the underlying operating margin that we are trading at currently is more like 10%.
This is a sort of very important piece of information if you're trying to assess the capacity, sort of the underlying trading of the company right now, given the market situation here. The 10% is where we're at for the first nine months and also holds true for the third quarter here. If we're looking at the distribution over the different geographical regions, as you can see here, we have a very good margin in the Nordics, but this is also where we have had this, the effect of the land divestments and the release of the provisions here. Almost all of that is in the Nordics, and about half of the effect you will find in Sweden then. Market-wise, I'd say the Swedish and Norwegian markets are, of course, a bit slow.
We'd argue that the Norwegian market may have come a little bit further than the Swedish market in terms of stabilization here. The Finnish market is good, and so is the Czech market and the Polish market, which are the geographical national markets we are into in our European part of residential development. Homes started and sold. As you can see, we are still starting more projects, more units here than what we are selling. But in fact, sales in the third quarter now this year was actually higher than the third quarter last year. Then we have this mix here that Anders also spoke about. We have a much larger share now of affordable units and rental apartments than what we've had previously. So, you will also recognize that mix situation if you look at the revenue per sold unit.
You can see that this is coming down, and this is entirely, I would say, a matter of this mix. That's the big effect there. Even though we have this situation where we are starting more than what we're selling, we're also, of course, handing over a lot of units. So if you look at the units we have under production here in the stock of production, it's basically at the same level. You can say if you compare it to one year back, it's down around 500 units here, so it's coming down a little bit on a yearly basis. But the sales rate in the portfolio is still very good. We're at 72%. I think this is a very healthy level.
We are not at all worried about an excess exposure here to the residential development market. Of course, we're keeping this measure sort of our eyes closely peeled on this and how we develop here, because it's really important that we sort of keep track of that here. The other thing I should point out here is the development of the unsold completed homes, because you can see a fairly big uptick here to 261 units. It was around 130 units the last quarter. It's a pretty big sort of nominal uptick here. But you need to compare that to the overall volume of this business in order for the analysis to make any sense.
If you place the 260 versus the 7,500 we have on the production, it is a really small number that we have sort of completed but not yet sold there. So the exposure there is low. We go to commercial property development, first nine months of the year, amounting to around SEK 1.8 billion in EBIT, which is in line, I would say, with the same period last year, which was a very strong year. Gains from divestments, first nine months is SEK 2.4 billion. So we're looking at another very strong nine-month period here, and we've also had a super good start of the fourth quarter.
I hope that most of you noticed the release that we had some time back of our sales of the 121 Seaport property in the U.S., to a very significant capital gain on that one. And if you add then the pieces together, it's easy to come to the conclusion that this year will also be a very strong year for our commercial development. We are now rolling at around SEK 12 billion on an annual basis in terms of divestments in this stream. And if you look at the green line here, you can see the operating income on a rolling twelve-month basis. So we are sort of producing an operating income that is quite steady and quite high now from this portfolio.
If you look at the bottom of the slide, you can see the capital gains from the sales value of the properties we've had for the first nine months. Sort of the margin on divestment here, if you put it like that, is 27%. So we're, we're still operating here at a very sort of strong level of profitability. We have 56 ongoing development projects, as Anders said, and inside the portfolio of these 56 projects, we have unrealized gains of around SEK 8.6 billion, and realizing on a rolling twelve-month basis here, around SEK 3 billion of these gains that we have in the portfolio then. And we have been circulating around SEK 9 billion-SEK 8 billion in unrealized gains in the portfolio here for quite some time.
So we're a very sort of strong portfolio in the making here. Leasing, you can see on the blue bars here that leasing on a rolling 12-month basis is coming down, and leasing is a bit slower, as you can see in the numbers there. This is not a cause for concern here, because what we can see, but what you cannot see, is the pipeline we have of lease negotiations and the dialogue we have with potential tenants, and this is very strong. So, it takes a little bit longer time, I'd say, for some tenants to make decisions here, but this is not sort of any cause for concern here. You can also see the gap now that we have between the percentage of completion in the portfolio and the level of leases in the project.
It's increasing a bit, but again, we're not concerned. We're on a strong market, a good yield situation, and so on there. If we go to infrastructure development, not a lot has happened there in terms of the numbers. Anders told you also about our decision to sort of stop shop with the project development part of ID here. We had the restructuring costs in the first quarter, which you may recall, SEK 120 million. And then we have divested a motorway in Norway in late May this year, and also received some additional payments from previously executed transactions. And this in total makes up the SEK 58 million in gains here that you can see.
Project portfolio, we have an assessed market value of the portfolio of SEK 3.5 billion, and the increase since last year here is mainly driven by currency effects, and also by the pure time value of the net present value calculations, you can say. You can also note the slight investment there of SEK 0.1 billion, and this is just a pre-planned equity injection into one of our SPCs that has been committed for a long time here. So it's not any new investment that we're making. If you add everything together, you come down to an operating income from our business stream to SEK 3.1 billion, and then we have central costs around SEK 630 million. Some eliminations, which takes you down to SEK 2.4 billion in operating income for the group.
You can also note the slight uptick in net financials. We have a very, very efficient financial operation in Skanska, so this increase is due to very well handling of excess cash through low-risk financial placements. The other thing that sticks out a little bit here is the tax rate. We're moving from 9% in tax rate to 16%. This is almost entirely explained by the business mix, in what country are we making what transactions? And last year, we had a major transaction in Poland. It was a motorway that we sold in the first quarter. We were able to do in a very tax-efficient manner.
And also last year, a larger part of the gains from commercial development came from the European and the Nordic operations, while this year it's from the U.S., and there's a difference in the tax situation here, explaining then the difference in the tax ratio. Cash flow, if you look at the rolling twelve months here, cash flow looks pretty good. For the first nine months of the year, it's improving a little bit, though it's still below zero. I would argue that's quite normal for this time of the year. And if you compare it to last year of SEK 2.9 billion plus, a large part of that are proceeds from ID divestments that were kept in as working capital there.
And that takes us down to total cash flow then of SEK 3.6 billion then for the first nine months. In construction, we're keeping up a very good work in terms of prepayments and the net working capital. We're currently at the level of around 14% of revenue and have been there for a while. And I think this is very strong performance in this area to be able to stick to that, especially since we are increasing sort of the relative share of contract models that are not automatically sort of lend themselves towards this type of free cash flow here, like various type of partner agreements and so on. So that's a strong performance.
Obviously, if we now will go into an inflection point with the revenue in 2019 and 2020, the overall revenue in construction will then come down, and this will, of course, impact the nominal amount of this free working capital. Right now, we have around SEK 23 billion here that we can utilize, but then that will come down. So I think that's also important to bear in mind if you look forward here. In terms of our investments and divestments in capital employed, we continue to increase this. Now, the numbers in the table that you have here are comparison against the same period last year, and then you can see that RD and CD are increasing here.
If you compare the more recent sort of dates here, the increases in RD is sort of flattening out here due to the market situation in Norway and Sweden in particular. But we believe in this long term, we are long term generating very, very good value from this business, and we would like to continue to grow these parts of the group, yeah. The financial position, we have around SEK 170 billion in total assets to SEK 28 billion in equity. Very solid equity-to-asset ratio here, 24%. And net debt at the end of the third quarter of -SEK 3.7 billion, and I think this is also a good level. We're improving here since last year. Capital employed for the entire group, SEK 46 billion then.
And here I also would like to point out some of the effects that we are having or will have from the introduction of the new lease accounting standards, IFRS 16. As you know, this will come into effect January first next year, and it means that we will have to put sort of the lease values on the balance sheet in a different way than what we have done before. Our assessment of this and the effects for Skanska that we have is that this right- of- use assets value for us will be around SEK 9 billion. This is, of course, a very large sum that will end up on our balance sheet. The majority of the rights of use assets are found in the commercial development business stream and in the construction business stream.
It's made up primarily of office buildings, it's made up of land leases, and also various types of yellow machines and cars. So these are the biggest effects and the distribution over the business streams. And we will, of course, come back to you later on with a more detailed analysis here on the impacts on our balance sheet and also on our key ratios, because I think that's very important to understand. But now we have sort of the big-ticket explanation here to how that will impact us. Okay, Anders?
Thanks. Addressing the market in our different streams here, starting with the construction. The Nordics, it's a bit of a mixed picture in Sweden. We have a strong, very strong, civil market. We have a strong commercial construction market, but we see a decrease in the residential construction market in Sweden. The rest of the... It's a stable market in Norway and Finland, and overall, strong civil market, very strong civil market. In Europe, Poland, the building market is stable. Brexit in U.K. continues to influence the non-residential market, the commercial construction. We have a stable civil market in U.K., also Poland. Weaker in Czech Republic, has been weak for a while now, so that's why we're taking some measures on that.
And we also see very low unemployment rates in Central Europe now, so we see the rapid cost escalation in both Poland and Czech Republic. So that's something we have to be very careful about when we both bid for project and start commercial development, residential development. But we're on top of that. USA, the USA continue to be a good market, but it's fierce competition. The infrastructure market is, the pipeline is very promising. We have most of those decision are also taking on a state level and city level, so we can see continue to see a very strong pipeline there. Residential development, the Nordics continue to be a very uncertain market, slow market in Sweden and Norway.
Stable market in Finland, and also robust market in Central Europe, Czech and Poland. Commercial development, strong all over. We have a strong interest from both investors and also from tenants. Very low vacancy rates, especially in Sweden, if you look at the Nordics. Europe, strong demand from both tenants and investors. U.S., strong appetite and good tenant demand, so we can see historically low yield level, and I think continue to be good appetite for our projects. So by that, I leave it to André to start up the Q&A.
Yes, exactly. Thank you very much, guys. And we start with the questions from the audience here in Stockholm. So, we have microphones running around. Albin, first one out.
Yes, hi there, Albin Sandberg Kepler Cheuvreux . I have three questions. Starting off with the construction units, Anders, you said, also in the report, you spent the first nine months reviewing the operations and so on, forth. I guess to some extent, in a company like Skanska, there's so much going around, so you will always have to review it. I mean, going into Q4, do you feel like your bulk of that review has been done so that we start on a clean sheet in Q4?
Yes, as I said, the review has been done, and or we have reviewed that. We started that review last year, in the fall, and we took some strategic actions in January this year, and then we have continued to do the review. Some part of that is taking quite some time, because they are complex, very large projects. So now we have completed the review, and taken the measures that we think is enough.
Great. And a few quarters back, when those kind of write-downs started in the U.S., you also stated in those reports that you expected some kind of recouping on some of the charges. Is that discussion still valid, and have we seen any positive impact of that in Q3?
We haven't seen a big amount of that in Q3, but I do think that some of those cost increase that we see in projects, we're not responsible for. And, we will try to recover from those over time. But, today, we have taken all the costs that we see for completing those projects, and then we will take any income when we have finalized the agreement with the clients and other parties.
Great, thank you. Then on the, I wonder, you did change the market outlook quarter-over-quarter, even though I found your results Q2 isolated quite good. With kind of weakening market for quite some time, so I just would like to understand what exactly is happening in Q3 that makes you... I'm sorry. I usually lower this.
There's something wrong with that microphone, but I can repeat the question maybe for the listeners there. That, the question, what are the differences we see in Q3, since we wrote down the expectation for the construction residential market? And that's not the residential part. The residential part is actually unchanged when our market expectation. Still slow, but unchanged. But what we can see on the construction side, overall in Sweden, where we changed the market expectation, is that it's actually starting fewer residential projects overall in Sweden, but our residential development is unchanged.
And then also the comment that you and also some of your peers are making about the hesitance among customers to sign up early in residential projects. I mean, if this were to become the new norm of how the market will look like, would you be ready to take more risk on your balance sheet and start anyway? Or do you feel that it's requirement from banks that holding you back from starting a new project in that?
We have a very strong financial position. It's our decision, which is, of course, a good position to be in. And we have and we review project by project and take the decision about the pre-sale rate before we start the construction. And so have we done it the last few years. And in a very good market, very good position or location, we can have a very low, or in some exceptions, we have zero pre-sale requirements. But we take that decision. I would say the average is around 40%. And we can see that it's hesitation in the market today in Sweden and somewhat in Norway as well. But I'm confident that we are in the right places.
I can see in Sweden an underlying strong need for new apartment going forward. But I think we have seen too much bulk of high-end apartments, especially here in Stockholm, that needs to be sold out in the market before we can start to see an increase. So I think I expect it to be slow in the high-end market for some time. But we also refocus our portfolio somewhat, so we are more diversified, and we can do that by being more diversified, both when it comes to geographies, where we have our operation, but also on the segments.
My final question is on the IFRS 16 comment that... You see, historically, at least, you have been quite good, I think, in providing segment aside from IFRS, which I found happens more. So my question is just, do you think your own fall calculations?
Yes, we'll do that. I mean, this is the right-of-use assets that end up on the balance sheet. If we sort of define things the way the key ratios are defined today, then it will impact that, yes.
Thank you.
Yes, hi, Niclas Höglund , Nordea. A couple of questions from myself as well. First, maybe a follow-up on, on Albin's question on sort of the US review. Today, this morning, you also announced that you are postponing your Capital Markets Day. Despite that this sort of current review is already done, could you maybe shed some light on why you're postponing the, the Capital Markets Day?
The reason is that we want to give you as good a picture as possible over the status in the company and the future plans. That's why to give you a better picture on the strategic action that we are completing now, so we postpone it a couple of months, and we will have it in the later part of March.
Great. And then moving on to the Construction U.S. You talk about the sweet spot analysis. Could you share some data on the delta on profitability, maybe comparing with, well, the U.S. energy or the larger projects compared with the sort of medium-sized sweet spots?
Yes. So we don't comment on individual projects or segment on project. But I can say that our... If you take away those two projects and the goodwill write down we see in the third quarter, we have an acceptable healthy level of in the operations. Then, you know, we have a mix in U.S. We have a mix of U.S. building projects, where we have a low risk, low margin operation, and we have also the U.S. civil, which is higher risk, higher margin, more like the European operation. So I expect, as I can see that already today, that we are performing on a healthy level, and I expect us to keep ourself within a sweet spot analysis and continue to do that going forward.
The market is good, so we can be selective.
And a follow-up on that. I'm assuming that then, that you also adjust for all the debt revenues that you're having right now on projects that's sort of diluting profitability.
Yes.
Would you like to sort of share some more thoughts on the net revenues in the? Well, in the previous comments, you mentioned $800 million for next year. Could you share some numbers also for 2020? Is it on similar level?
No, I mean, what we have said in was that for the US operations, we expect around SEK 800 million in net revenue going into 2019 here. And for the problem projects here, this will, they will of course, be completed sort of down the line. So, I'd say that amount will be probably done and over by 2021. But I mean, it's maybe a little bit too optimistic to say that there will never be any net revenue in a construction company. So I think that's you need to be a bit cautious of sort of assuming everything away here.
But there's been some concern since you've mentioned that, well, these two projects taking choices right now are within the PPP scope, ongoing projects, and well, there are only two of those, ongoing, as far as I know, and the sort of completion times goes well beyond 2021. Is it isolated projects within the PPP that is, well, creating these debt revenues, or shouldn't we expect it for the full time of, for example, LaGuardia?
I can comment on the PPP project that we see the write-downs on. We are about halfway through in those projects. We have done the review. We have, of course, used the 50% completion on those projects to estimate the cost for completion. So we have a better position there, and we also have most of the design is completed. We also done most of the procurement, so we are in a better position to judge that, and that's what we have done. And we're also taking the cost we think is needed to complete those projects.
...Super. And then moving over to residential part. You're mentioning that you're improving the mix, and you're also sort of including a higher share of residential rental apartments. Could you maybe share some number of how big part the rental is of the ongoing production maybe, or some- And also a reflection on the side, on profitability, on EBIT related to BoKlok and the rentals, how will that impact the mix going forward?
I would say when we see the performance today, it's very high due to completing the profitable product that we started a few years back. But we also said that the current mix, we have an underlying performance of around 10%, and that's with our mix today. Our BoKlok participation in the portfolio has increased from last year, from 50% to 60%. The rental residential is not. It's a minor part of our total operation, but it's still included. But we still have this, we have quite a good performance level and profitability on those as well.
Super. And then my final question, if I may. On the commercial development side, you've had an excellent, well, very strong performance with well, EBIT margin contribution of 27%, and you're also well, talking about a very strong pipeline. Given that you now sold the Seaport project, what's your sort of thoughts for 2019 and 2020? Have you sort of sold the good stuff, or is there anything more to sort of sell?
We create the good stuff in this business stream, and then we sell it, so that hasn't stopped. No, I mean, we still have sort of big ambitions in commercial development. And for 2019 and 2020, I'm not going to sort of give you guidance, but you can see where we are portfolio-wise there. And obviously, these projects that we have now, 56 of them, will be completed, will be sort of the profit will be recognized. And normally, I'd say on a portfolio like this, you would expect sort of a turnover of maybe three years or something. Something with the mic there. If that was sort of roughly answering your question, then.
From a margin point of view, should we expect it to decline or these high returns?
Okay. Now, the margins there, of course, you need to relate to the sales price. As we all know, the yields are, you know, very, very low in many places, and I have a hard time seeing that yields will sort of go further down. So it's a lot market driven here, obviously, and we try to make the best deal possible out of every market situation where we are in. So it's, I mean, I can't give you a straight percent, percentage answer on that question, as I'm sure you understand, but depends a lot on where the market is when we are there to, when we are in a position that we want to sell the project.
The gains. Since the divestment in Boston is, well, it's in the U.S., and you have higher taxes in the U.S., now, with these charges and write-downs you have taken, is there a opportunity for you to sort of utilize these, you can say, losses in the U.S. in order to have it more tax efficient, into the fourth quarter? Or should we expect the sort of average 25% tax on that divestment?
I mean, of course, we use all the sort of tax possibilities we have in that sense, so we're not letting any loss benefit from any loss, so to speak, leave unutilized there. So that will be used. But I think 16%, since year to date, I think it's sort of reasonable to for the year. Yeah.
All right.
Any more questions? Yes. Up there, we have Stefan Andersson.
Stefan Andersson, SEB. Going back to residential, just trying to understand how you put your arrows there. I mean, it's a year since we saw the residential in Sweden weakening when it comes to starts, and now you take down your arrow to a negative. I mean, how, what kind of... What is the criteria for you to have this as an outlook? Is it your ongoing production you're trying to measure, or are you giving us the information on the future outlook of the market? And then also, connected to that, why is it flat on your own residential development, while you see a weakening in the construction side?
The reason the arrows, to be clear, is our forecast 12 months ahead. What we can see now in the total construction, residential construction industry in Sweden, is that we expect a fewer, much fewer construction project will start. That's of course, we're not only constructing our own projects in the project development, residential development, we also have external clients. So we don't expect, we expect less order intake from external client when it, when it comes to residential construction. But we also see that our own residential development are quite slow, but it's unchanged. We don't believe in 12 months ahead that it will stabilize, it will stabilize. It will not decrease a lot more. We don't think it will increase a lot more.
We think it's continue to be quite slow in certain markets, especially in Stockholm.
... just, basically, you don't think you're a little bit late to take down the arrow, then? I mean, do you think this is a good outlook to now take down the arrow?
We believe so for the construction part, not our own product development.
Then when it comes to, I mean, Magnus, you talked about not to worry about the unsold houses there in the residential side. Nice to see. I mean, but the movement is probably what we look at. Even I fully understand your comment there. But so to put you a little bit on the spot, going into the next two quarters, do you expect that share to increase or decrease?
I'm not going to forecast that for you, Stefan. You can do that.
Okay.
Yeah.
And then the last question on residential then. It seems like the property developers have been summoned by Nasdaq to talk about the accounting methods, because they vary a lot. Have you also been summoned, and what is your stance when it comes to trying to uniform the accounting? Where do you think it's going to end up? Will everyone go towards your model of percentage of completion, or would it be the Bonava model, or what do you think?
I think the word summoned may be a bit harsh here. We've been invited to the stock exchange to discuss this. I think it makes a lot of sense to try to sort of agree on the interpretation of IFRS 15 in the context of property development here. Because we can just observe how different developers are applying this in a different way. And I think for anyone reading and being interested in external financial reporting, this must be a bit tricky to sort of compare the situation for different companies here, and also the underlying risk that the different companies are carrying in their portfolio here. As you know, we have a sort of dual reporting. We have IFRS reporting, and then we have our segment reporting.
And, the interpretation that we have now is that in our IFRS, our interpretation of IFRS is in line with what is sort of being proposed there, so to speak. So, we will be there at the stock exchange at that meeting, of course, and discuss this.
Thank you.
Thank you, Stefan. All right, any more questions from the audience? If not, we will hand it over to the phone conference. So please just follow the instructions from the operator. Thank you.
Thank you. If you wish to ask an audio question, please press zero, followed by the one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero, followed by the two to cancel. Once again, to register for a question, it's zero followed by the one. Thank you. Our first question comes from Martin Basa from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Oh, yes. Good morning. So I've got a few questions. The first one is on commercial development. Can you indicate if you expect to sell any additional assets in Q4? And also considering the large divestments that have already been announced in Q4, can you indicate if you expect EBIT for the division in 2018 to be actually up versus 2017? So that would be my first question. Then question number two, just coming back on your residential business. Obviously, margins have been better than expected this year due to provision reversals and land sales.
Could you indicate if you expect those effects, provision reversals, et cetera, to continue in Q4 and perhaps into 2019, and if those should be significant? And maybe lastly, could you provide some indication for operating working capital for the fourth quarter? Because optically, there wasn't really an outflow in the nine months, but obviously there are some other impacts which perhaps make it less clear. So I would just like to see some indications from you if you expect a significant improvement in Q4.
I think we're going to give this a try, Martin. It wasn't that easy to hear you, but go ahead with what you think you heard us.
See the Q4 compared to last year.
Aha.
EBIT.
EBIT, you're asking about this quarter's EBIT and commercial development versus last year's. I'm not going to give you that. We think, if you tally the result up until today, the first nine months, and on top of that, you add the divestment that we have already announced, you can see that this year will be a very good year. In terms of what we will do in Q4, we have to wait for the Q4 report to get to that. And the second question here, I think concerned residential development, and whether or if I read you correct, Martin, or heard you correct, whether or not this differential between the reported margin and our underlying margin will continue into Q4 and 2019 and 2020 and then going forward. Was that correct, read from my part?
Yes. Yes, definitely.
Yeah. Okay. No, I can tell you that, the provision release and the land sales, the effects of this that we've had for the first nine months and in the third quarter are exceptionally large, and we don't expect that differential, level of that differential to continue.
Mm-hmm.
The last one, yeah, I think you need to repeat, Martin.
Sorry, sorry. Can you hear me well right now? Is it better? Sorry, so the question was on operating working capital. Do you expect a significant improvement in the fourth quarter of 2018?
Working capital.
The working capital?
That's right.
What I expect to happen with working capital in Q4 of this year?
That's right.
Okay. Well, again, Martin, we see no particular reason for a sudden change in that, but you will have to wait for the fourth quarter report.
All right. Thank you.
Well, thank you.
Thank you. As another reminder, to register for a question, please press zero, followed by the one on your telephone keypad. There will be a brief pause while questions are being registered. Thank you. There appear to be no further audio questions. I return the conference back to you.
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