Okay, welcome to the presentation of Skanska's three-month report for 2016. My name is André Löfgren, heading up Investor Relations at Skanska. And today, as always, we'll do this in a multiple way. We have the live audience, but also participants on the web and on the phone, and you will all be able to ask questions after the presentation. And the presentation will be held by our CEO, Johan Karlström, and our CFO, Peter Wallin. And, they are ready to get going, so, please, Johan.
Thanks, André. And, I want to start to talk about the slide that you see behind me here. And, because safety is very important for Skanska, and we have a special attention to safety because this is important for us that everybody that is on our work sites, coming home every day to their families and to their loved ones without getting hurt. And one week every year, we have a special attention to the safety, which we call the safety week. And you can see a photo of one of the activities that we had on a project, downtown Stockholm, Sergels Torg. And it's a stretch and flex in the morning that you can see here. Very important for us.
So with that, let's have a look at the highlights for the first quarter this year. Increased revenue, and also significant, like, an increase of the operating income. SEK 2 billion the first quarter versus SEK 0.8 billion the first quarter last year. It's especially a strong performance from commercial development, where we have sold one of the major properties. We made several several divestments in the quarter, but especially coming from one of the properties. I will go into more details in a second here. But also, we have also had a very strong performance in residential development. Strong market especially in Sweden. Decreased profitability in the construction sector in the first quarter.
We can see higher seasonality impact in Central Europe, but also in Sweden. Lower activities in the first quarter versus the same quarter last year. And we also had some closeouts of some really big projects the first quarter, 2015, that boosted the margin somewhat there. And you can see that the return on capital employed in the combined project development streams, 15.8, well above the target that we have set up. And you can also see that we have a lot of investment activities in development streams, and you can see that, like, we are continuing to deploy a lot of capital. Strong financial position, which is good for the future, so we can continue to build up the activities on the development side.
We have a positive outlook in the market in general, more or less the same as we presented it one quarter back. We just jacked up our view of the building market in Norway. Otherwise, it's more or less the same as one quarter back. So let's start with commercial development here, and you can see that we pocketed an operating income of well above SEK 1.3 billion. And the divestment gain was around one and a half of that. You saw the, like, you can see here, like, in the total investment value of SEK 4.2 billion in the first quarter. Return on capital employed, well above what we expect here ongoing.
And the activities that we hear, that you see here now, we have 46 ongoing projects in commercial development, and the total investment value is SEK 18 billion for the 46. And of the 46, we have started nine new in the quarter. We will continue to start new projects the next quarter and the quarter after that, and so on. And we will continue to divest project, because this is an ongoing operation that we continue to build up and turn the capital around. And if you look at the 46 projects, you take a snapshot of where we are in the projects, and we are at the pre-leasing of 43% versus a completion ratio in construction of 46%.
That's a very good balance between these two things, that we want them to be quite equal in percentage. It's a very good measurement to mitigate the risks. The value creation in this stream, that is, like, in the leasing. On a rolling 12 month basis, you can see that we have had an all-time high leasing activity of over 400,000 square meters. Let me go a little bit deeper now into the commercial development sector, and I want to start with the project that we divested in Seaport in Boston. 41,000 square meters of offices, plus 2,000 square meters of retail at ground floors, 17 stories high.
Very important for us that all the projects that we build in commercial development are green. Here you can see that we have a LEED Platinum green certificate on this building. That's important for us, because we know that it's important for both the tenants, but also for the investors, that we're gonna be like in the end owner of the buildings. You can see that the anchor tenant here is PwC. When we build a product like this, we always look for some special features to make sure that this is an attractive building for the tenants going forward. Here we have open space, very efficient floor plans. Tenants are moving very often from older buildings into something that they want to see, like, in a modern and efficient.
And there's also some features in the building that's also important for the attractiveness. And that's and here we have a fitness center, we have, like, some terraces, so you can see the overview of the surroundings and the harbor. Here you can see the Seaport area in Boston. It's an old industrial area close to CBD downtown. It's on the way to be developed, like, in a from something that was really, like, on the outside, not really used, into something that is really hot, both for residential development, but also especially for commercial development. You see the three yellow buildings here? That is the Skanska buildings. That is ongoing projects. The one in the middle, you see the red, maybe the red dot there, that is the building that we have just divested.
Then we have two other ongoing projects on each side of it in other blocks. Once they are completed, we have leased them fully, fully leased, then there's gonna be divestments there as well. We are one of the major developers in this area, in Seaport, Boston. It's a very vibrant part of the market there. If we go take a little bit wider look at, like, what do we do in commercial development in the U.S.? We have four cities, four metropolitan areas that we have focused upon, where we have activities of commercial development. In construction, though, we have a lot of activities in many different places, but in commercial development, we are focused on four metropolitan areas. Boston, I just showed you.
We have more projects in Boston than in Seaport, but Boston is like in an area driven by biotech and the universities. We have DC, Washington DC., and there we can see a big demand from the governmental sector, from law firms, and so on. So it's a good market to be in. Houston, in Texas, used to be a good market. It's driven by the energy and the oil sector. For the time being, that market is down now because of the low oil price. And then you have up in Washington State, in Seattle, the fourth city that we also have a lot of activities in.
There we see a big demand from high-tech type of companies like Amazon, Microsoft, Boeing is another company that is, like, driving the economy in that area. We are now evaluating and see if should we go into some other cities. We have not made up our minds there, but we are looking at maybe to add some more cities. And once we do that, we will come back to the market and tell you about, like, our plans going forward here. Here on this chart, you can see the development over the years. You can see that we started the business in 2009, and a very small capital employed there. It's one of the first pieces of land that we acquired there.
That's like in the little bar in blue that you see there. And then we have gradually built up with more land, started projects. And today, we have SEK 6 billion of capital employed in the U.S. market in commercial development. And the yellow or maybe it's green line here, that is the return on capital employed. And you can see that, like, and it has been a very good profitability and outcome and return on the capital that we have deployed there. The model that we have implemented here is w e have exported the model from the Nordics, which is the first in commercial in Central Europe, some years before this.
And here we took it to the US, the same model, of building up commercial offices, fill it with tenants, and then turn it around and sell it to the market. And you can see that it has been a successful operation, and this is a very important part of our operation going forward. If I summarize, like, where we are now with the commercial development in the US, you can see that we have, like, around 300,000 square meters of ongoing offices right now as we speak, in six projects. We have sold six projects since we started, and you can see that the accumulated EBIT is, like, around SEK 2.5 billion. And the return on capital employed the last 12 months is over 26%.
So it has been a successful start. If we put that into like in the big picture of the whole commercial development, and here you can see what operations we have. We have CDN, which is the Nordic operation. We have the European one. You see, like, you know, down in Central Europe, that's Poland, Czech Republic, it's Hungary, and Bucharest in Romania. And you see, like in the blue dots, that is the cities where we have operations. And then, we have the U.S. one. And you see the pie chart, that is the capital employed and the distribution. So one third of the capital is in the U.S., 20% is in Central Europe, and the remaining 40% is here in, here in the Nordics.
We believe that that is a very good risk mitigator going forward, because if some of the markets are going down, Houston right now, it's not all markets going down at the same time. So it's like in a lot of different cities, a lot of like in different markets and underlying economic drivers for the market, and we think that this is like a good mitigator for us. Okay, so let me talk about the other streams as well, not only commercial development. And if I turn to residential development, very good market, as you know, especially here in the Nordics and in Sweden. We have sold a little bit more than 1,000 homes and started nearly 1,000. So it's a very balanced portfolio that we have there.
We pocketed in the operating profit of nearly SEK 300 million. You can see that the operating margin and return on capital employed is now well above the 10-10 target that we have set up for the business, which is important for us. The number of unsold completed home has like gradually gone down, and Peter will show a slide about that, so we can see the details there. When you look at the infrastructure development, it's maybe it looks like nothing is really happening here, because it's not like in a big development of the numbers, but I can assure you there's a lot of things and a lot of activities behind the scene here. What we are focusing upon, that is to reach financial close on LaGuardia project, the big terminal project in New York.
In April, we reached commercial close, and now we are negotiating the final part of the financing package. And the plan is, and we are following the plan, that we will reach financial close, midyear 2016, this year, and it's going according to the plan. When we do that, when we, when we will reach financial close, it's gonna be a big order bookings for the construction unit, and it will be around slight. It's gonna be at least $2.5 billion for the construction part for Skanska. We have 70% of the entire contract there. And then it's equally distributed between USA Building and USA Civil, because it's an internal joint venture with a third partner that we work on that project. Construction revenue is more or less the same.
It's flat compared to the first quarter last year, and order bookings, more or less the same as you can see here, SEK 30 billion. Very strong ordering. It's a little bit uneven, though, if you go into the various business units. Sweden, Poland, and USA Building has like been strong. I don't know if you remember when we talked here and we discussed the order intake for USA Building in the fourth quarter last year. We said that we could see that it was postponed to a lot of projects that we're working on. They were like pushed into 2016. And now we can see that several of those projects are now coming back, and, and, and you can see an increased order intake versus the first quarter last year.
Book to build, 87%, and a good and a strong pipeline of products. So we have a positive view of order intake for the entire stream here, going forward this year, not only in the US, but also in all the other of the business units. We still have a challenging situation in the US, in one of the big infrastructure products. We are taking, gradually taking more costs, on that product. We are negotiating with the client. We have not reached a commercial agreement, with the client, which means that it's gonna take longer time before we actually put in some income there, which means that we take 100% of the cost, but not any income.
We also see some seasonal impact that I talked about, and some in the comparative period, we had some big project that we closed. So we have some extra profit coming in the comparable period. So with that, Peter, maybe you can help us and go through the details here.
I will try. Thank you, Johan. Okay, good morning, everyone. Okay, let's talk about construction and the order situation here. As Johan said, it's been a fairly good order bookings quarter. We are up 2% in local currencies to SEK 30.3 billion, which means we will equal the revenue in the first quarter. However, the most interesting part is looking at the book to build on a rolling twelve-month basis, and there we are at 87%, which happens to be the same number as we reported for the full year, 2015. If we look into the details and to the various business units here, you can see a quite huge difference then between Nordics and Europe.
And if you look on the, third column from the left, the book to build rolling 12-month, you can see that all in the Nordics and in the Europe is over and above 100%, which means that we have booked more than we've burnt over the past 12 months. That is not the case in U.K. and the U.S. businesses. Now, the pipeline, being strong is especially true for U.K. and the U.S. businesses, so we are not at all concerned about this. And, LaGuardia has been mentioned many times, probably will be mentioned a few times more on this, morning exercise, but it will have a very huge impact, when we book that project. Looking into the construction and income statement a bit more, first quarter is always a weak quarter, compared to the full year.
We report an operating margin of 1.5%. For the full year, 2015, we were at 2.8%, so you can see the difference in terms of the seasonal impact. Going into the various businesses, starting with Skanska Sweden, you can see quite a lower margin of 2% compared to 2.8%. 2015, in the comparable quarter, we booked a large project that we completed. That is not the case this year, and that had a huge impact on the numbers in the first quarter last year. There is no big issues in Sweden. This is a seasonal impact on the very big asphalts and concrete business, which is actually operating with huge costs during the first quarter of a year.
So the Swedish business is performing very well. Norway, stable performance, Finland, stable performance, very good. And if you notice that I'm not making the comment on the seasonal impact in Finland and Norway, because they have winter as well as you know, surprise, surprise. That is that they do not have any asphalt and aggregates business as to Sweden. So that's one of the reasons of the differences between the three markets here. Poland and Czech, we've commented before, it is business as usual when there is no business during the first quarter in the civils business. You can also notice, if you look on those two businesses, that the sales level is much lower compared to last year. So here we're burning through in terms of backlog.
In Poland, also, I would like to draw the attention that we completed a very profitable project into 2015 numbers, which also distorts the comparison. The performance is, however, according to plan. UK operates well, and here we have a number of big projects being started. We have a certain delay here, which impacts the margin. We're back to normal in USA Building, as you can see from the margin, and in the USA Civil, as Johan commented upon, we've had further new design changes in some of the projects, which has meant that we have taken the hit in terms of the full cost and not taken any revenue to the income statement. That has impacted the margin.
We are also making a comment in the report, because as you know, the project impacts the gross margin. What we're doing to improve our control in the business is also that we are investing in a new ERP system in the civil business, and this is having a huge impact on the S&A in this business over the next coming years. So we just make the notice that you will keeping the gross margin and selling and admin more percentage as an explanation here. This will have an impact on the operating margin in the coming years. Residential, we've had a very good development, continued good development, and you can see revenue going down 11%.
If you look on the number of sold units, they go up 4%, so you have a price mix of -15%. This is selling more affordable housing compared to the previous comparable period. However, the gross margin is increasing quite dramatically, meaning that we have very good control over the cost level here, and we are also having a very conservative profit take in this business. We are keeping selling and admin under control, which means operating margin is at 11.2%. That is only the development margin and nothing in addition to the construction, which is reported in the construction stream. If we look on the various markets, the Swedish market is working excellent, red hot, and we have good execution here, meaning that we can capitalize and keep the impact to the bottom line.
Norway, we have come a bit further on the developments of projects here, and we are selling more, increasing the margin. Finland, improving the margin in a very tough market. I would like to draw the attention to last quarter, the previous year, we were selling a lot of units to end investors with a certain discount, which distorted the numbers somewhat there. The Finnish organization is doing a great job. Central Europe, as you can see from the footnote, that is Poland and Czech. It's really Prague and Warsaw, and it also states UK. It's because we have one piece of remaining land that is out of the books now. And this business operates quite well. Mind you, that the Polish business is still in a startup level.
The Czech is working good on a pro forma level, i.e., working at a good, stable volume. As you can see, we started 988 units during the first quarter. So in total now, we are in balance with the sold. As soon as we put something on the shelf, it's almost sold directly in the markets, which you can see in the next slide, describing the sales level in the projects. 77% out of the stock of 5,878 units under production. Unsold completed is continuing to be reduced, and we are now down to 200 units.
So you can see over the past five years, we have never had this many units in under production, which is sold, which I will come back to. So we'll need to start up more products in RD. Commercial development, Johan has talked a lot about, and there is much to talk about because there is so much profit. So we are at SEK 1.4 billion here in EBIT terms. And if you look on the divestments, the divestment gain compared to the sales value is at a record thirty-four percent. If you would take a seven-year history and would do the same comparison, you would find that the margin has been on average twenty-two percent. So what, what, what, what is that? Well, there is a huge demand for our types of products in the current market. Investors are seeking returns.
So that means that the rent levels are fairly stable, but the return requirement is going down, yield compression. So that increases the values. So you can see how the gain is going up. We are continuing to sell products, of course, in the current market, so don't be mad at us if we continue to be higher in margins on the CD. Another interesting thing to look at is the bars on this graph represent the unrealized profit. And as you can see, the line is the reported profit. And if you then compare the Q4 graph compared to the Q1 graph, it only goes down a little bit, but the reported profit is going up quite a bit. Why is that? Well, we are selling much higher than what we internally assess the value to be.
When we start up new project, which is also the part here, six projects being started in the first quarter, we are quite conservative in our profit estimate and our value estimate of those projects. So, this bodes well for having a good risk mitigation when we start up new projects, because we can't account for that the current yield compression will continue for eternity. Leasing is another risk mitigator and value creator, and here we are continuing to increase leasing, and we exceeded 400,000 sq m on a rolling 12 month basis. Coming into infrastructure development, here we report a lower operating income. We have increased the product development costs, and you also remember that we sold the Bart's and Royal Hospital last year. That was in the books Q1 2015, which means that we got return 2015.
But if you sell something, you don't get the return anymore, but we have pocketed the profit in Q4 last year. So that's one of the reasons why the EBIT goes down compared to previous years. As Johan said, much is happening despite the fact that the EBIT number doesn't move that much, and we built up the value quite a bit in the portfolio. And we had a 15% return on capital employed. If you bake it all together in the group from all the streams, you knock down the central costs, and the central costs did not include any costs relating to the close down of Latin America. Zero. And you end up at close to SEK 2 billion in EBIT for the first quarter for the group.
Net financial is also improving, as we have talked about, having low interest rate or negative interest rates in some jurisdictions. And then, of course, also selling Latin America has meant that we are decreasing financial net quite considerably now. There is some one-offs in this because you do mark to market in these numbers. So the actual financial items is actually much less than what is reported if you look on a pro forma level. So, that with the 21% in taxes, that's a profit for the period of SEK 1.5 billion or SEK 369 earnings per share. Cash flow first quarter, often negative because of the working capital. Working capital outgoings is much less compared to last year, but we are in a net investment mode.
Some of the reasons is, of course, growing the CD business, as we talked about, and investing in our RD business. So we are in a very good position from a cash flow point of view. This is another graph, which we normally discuss to a great deal with you, that is the free working capital in construction. As you can see, we are at a very good level, given that it is a weak first quarter. So the fourth quarter, you have a lot of incomings and settlements on the construction side, and then the cash leaves in the early into the new year. But we have maintained cash flow quite good here now. And so cash flow compared to revenue in construction is going up in a percentage terms, not only in absolute terms.
That is to the fact that we are focusing a lot of this, not only in the actual business, but also before we bid for projects. Cash flow and profit goes hand in hand. On the investment side, we were at SEK 29 billion in capital employed in our development streams. You can notice that the SEK 9.3 billion in residential will increase because of the sold percentage of projects in our current stock. Now, we will start to complete that stock, and that means that the capital employed will increase before we actually hand over the completed units. And also, as you understand from what we are talking about, we will continue to start up new projects in commercial development. And then also, infrastructure development will book something when it comes to closing LaGuardia.
My last slide is showing a very strong financial position. We had an inflow, our view of looking at our investment capacity of SEK 10.3 billion, compared to SEK 5.9 billion the year before, which is a very strong number. The Seaport deal, this is my last comment on the Seaport deal. The SEK 3.8 billion in sales price came in in April, and the dividend went out a few days afterwards. We had a few hundred million over and above the dividend. We are continuing to be at a very good level from a balance sheet point of view. Johan?
Yeah, some few comments regarding the market before we open up for questions here. And you can see here that it's very much the same view of the market as one quarter back. Strong situation in Sweden, especially on the building side, there's a lot of activities. On the civil side, yes, we see a lot of activities, but on the other hand, it's a much tougher market situation from a competitive standpoint. A lot of the international players are here. We see them in Norway as well. Somewhat weaker, though, the market in Finland, but our situation in Finland is like in a very good shape. U.K. strong. We don't see any real impact from a potential Brexit. Public sector completely untouched.
They will definitely, like, continue. On the private sector, some questions, but no real impact. We follow it very closely, and then we'll see, like, the outcome of the referendum, and then, of course, that's something, will it be something that's gonna impact us? Hard to say now. Polish market, also strong, and all the other central European countries as well continue to improve. In the U.S., we see a lot of projects, PPP projects. We see infrastructure projects. We see the aviation sector on the building side, also picking up. So there's definitely a lot of projects that's like in the market. And, I've got questions regarding the presidential election and in the U.S.
Our view is that, regardless of who's gonna be, like, the next president, we don't think it's gonna have an impact on the business environment in the U.S. The need for infrastructure and the need for social infrastructure is there, so it's gonna be built in the U.S. market. Strong market in Sweden, in RD, Residential Development, strong as well in Oslo. The market is divided in Norway. The regions which is depending on the oil is down, but otherwise, it's like in a very strong market in Oslo.
Finland, Finland is somewhat weaker, but we view the market there, that they have reached rock bottom, and we haven't really seen an uptick, but we see that it's more or less flat now. Good market in Central Europe, in Warsaw and Prague, where we have operations. We talked about commercial development. As long as we have the low interest rate environment, we expect that the yields will continue to be on a low level, which means that the demand from the pension capital will still be there, and investors, like, are really interested to invest in our assets. The leasing sector is also good across the board, except for Houston.
On the infrastructure development side, good in the US, some movements and discussions in Norway, and maybe some openings, like in a, of a door here for a PPP project on the Eastern link in Stockholm. We'll see where the politicians will go with that one. I think that we should like, open up here for Q&A.
Yes
André
Let's do that. And let's start with the guys here in the room. Please state your name and the company you work for, and Niclas is hungry.
Yes, good morning, Niclas Höglund. Sorry, Nordea. Just a couple of questions. Maybe when go directly into the US Civil part. Could you discuss a little bit on the sort of the difference between the fourth quarter, the accelerated costs? Could you elaborate a little bit on the sort of the magnitude or the running rate losses in the operations? And then on the ERP, I mean, covering a lot of companies, implementing ERP systems tend to be rather costly. Maybe if you have some experiences in other region that you want to share with us, and shed some light on this sort of increase in SG&A.
On Civil also, sort of a final question, we previously talked about an underlying margin trend of around 6%-7%. Should we expect, given these circumstances, that you will be well below that level? Is it more reasonable to expect 5%-6%, until you sort of recover or potentially recover these losses? Those were the questions on Civil. Thank you.
So if I start to answer part of the question here, talk about like in the project, and then I'm gonna hand over to Peter, who's the expert in ERP system. So, talking about like kind of the problem on, you know, one of the projects that If we go back to the like in the Q3, we had a profit warning on six projects. One of the projects continue to have problems with and costs is like in a showing up the additional cost for new design changes and design problems that causes more costs on that project. We believe that a big part of that is something that the client should be responsible for, because it's not a design build project we're talking about.
The design is on the client. It's a big project, it takes several years to complete, and we have ongoing negotiations. We believe that's gonna take long time before we reach a global settlement there with the client. And as long as we don't have a global settlement, we take the full cost, and we don't have take any income on the other side there for that additional cost. On the other hand, you can like in US Civil, it has also been like in a balance with some write-ups and some good numbers in other projects, a little bit like in a balanced situation there as well. So that's like what we can say about that project. ERP system, Peter.
ERP system, and being the expert, I share your experiences, Niclas, on the ERP implementations that I have seen and been responsible for. Right now, we are doing a huge change of ERP system in the Swedish business as well, and that has been going on for some quite some time. This is a constant need to sort of do this, and you represent a bank, and I guess that on a bank, that's one of the most difficult decisions to be taken. So we have experiences within the business. Thus far, this has been executed very professionally, and a process which has going on for quite some time.
Why we make the comment now is because now it's implementation time, and now it is when it really hits the S&A to a large degree in the next coming years. We are very much focused on making sure that it is successful. Given how we work together on a national level in USA Civil, we find this as a very good example of improving our transparency and our view into projects. So we think it will benefit us in the long run.
Just to follow up, I hear no numbers here. Could we get a comment on the sort of underlying margins in the operations? 6%-7% seems to be a little bit high at the moment, especially given the sort of pressure on S&A. Could we say anything on the dilutive effect from these projects? I mean, you take the costs, you've taken down your gross income from these projects, but it has a dilutive effect on the sort of the total civil. What's the sort of sensitivity compared with last year on rolling 12 or something?
We understand the need for you to ask questions on the numbers, but because we are, it's also a question of negotiations and discussions with clients, we will not be able to give you any numbers right now.
Great, thank you.
Jan Ihrfelt , Swedbank. Actually, four questions. I'll take the first one right now. LaGuardia project, $2.5 billion, is that the total number, or will it be more later on? And the timeline for it is how many years will it last?
Just to be clear, it is the Skanska portion of the total number. We- so that is like, you know, the $2.5 billion that I mentioned here, that is, it's gonna be at least $2.5 billion. That is like, you know, 70% of the total value, the construction value. I hope that is clear. It's like, you know, even distributed between USA Building and USA Civil, because it's a joint operation between the two there, because it's both civil construction and building construction in the project like that. We have the third party there. The timing is that we expect it to be financial close at mid-year this year.
If it's gonna be, like, you know, just before we close Q2, or if it's gonna slip into Q3, nobody can say. But
And construction, construction time.
Yeah, uh
That's part of your question also.
Yeah, construction time, it's gonna take like, kind of, several years, to build. We actually already started construction there, because we have already some advanced contracts with the client, because they want to get going, there. So we are. If you are there, you can already see some Skanska yellow equipment, driving piles and so on. And then it's gonna be some years ahead. I don't have exactly the complete, maybe you know the completion time.
Close to six years. Mm-hmm.
Going to residential, Central Europe had a very good margin in the first quarter. Were there anything extraordinary in that profit?
No.
Okay, you can.
I'm sorry. All markets reported good margins. The especially high percentage, Norman, is because of a very low sales value base. And we have the certain movement in the UK, but it wasn't that big. The important thing which we stress on Central Europe is that, the Czech business is operating on the long-term volume basis, whereas the Polish is building up, but the S&A is undermining the market compared to what they will do if they perform on a pro forma level.
Okay, thanks. And you had a very good profit in CD, which everyone could see. And we're talking about yield compression, et cetera, which is favorable for your business. Could you comment anything on the land prices and how the market for land has developed in your prospect for the future?
Yeah, yeah, if we're like kind of competing here, who should going to be the one that's taking the questions? The land price is like in a [inaudible] both like in a question which I think that's applicable both for RD and CD. And we can see that, like you know, the asking price for land is absolutely going up now with the divestment prices that we see, both on residential and for apartments and for the commercial buildings on CD side.
So that is like, that is, something to really watch, because, like, when we buy a piece of land now, then it's a project that's gonna start maybe three upto seven years from now, and then sold two years after that. So we have to base it on, like, you know, not like in the sky-high prices that you see in the market now and low yields. We have to base it more on, like, in a normal situation. And what we, so when we make our own, our own calculation for investments of land, we put in, like, an, you can say, a more conservative yield compared to what you see in the market now.
If we then reach the requirements that we have internally of profit, development profit, then we go for it. We still see that there is possibilities, you know, to buy land with that type of calculation, but of course, it's tougher.
Okay, will it hurt your margins going forward with this?
Sorry?
Will it hurt your margins going forward with this rising land prices?
Like now, we have, you can say, like, an extra boost on the margin, given the low interest rate environment and the low yields. But if the market is, like, going down long term, the interest rates are going up and the yields are also, like, going up, then, of course, it's gonna be somewhat lower development profit. But I think that we can definitely run the business according to the targets that we have on return on capital employed, which we have shown in the past when it has been other interest rate levels in the market.
Okay, and a final one, and this is one for Peter.
Is it an ARP question?
It's no, it's a tax question.
Okay.
Do you have any guidance for 2016?
What we guided on stands the same. We are reporting 21%, and give and take, it will be around that number.
Okay, thanks.
Okay, any more questions from the audience? No. Okay, let's move over to the phone conference then.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. The first question comes from the line of Fredrik Cyon from ABG. Please go ahead.
Good morning, Jens. A few questions from my side. Starting off with USA Civil, going back there, you didn't want to quantify the effect of this ERP costs, but, can you tell us when you believe you will be able to reach the margin target you have guided for?
We don't have a guidance for USA Civil.
But in the past, you've indicated where the long-term ambition should be, and given that you take extraordinary costs now in the short term, will that make it more difficult in the coming years to reach that target or?
Of course, it's gonna be like in a tougher to reach the, the, the margin expectations that we have in USA Civil, due to the ERP system. We have taken some of the costs already in 2015, and we have it 2016, and it will continue two more years after that.
But you said that some of those costs were already taken in 2015. Are you saying that it's gonna be even a harsher impact on 2016, 2017?
When it comes to ERP system, then, from the expert here, Fredrik, before implementation, you cost the development to some extent. When you have implemented the system, you do, you do a depreciation, amortization of what you have capitalized in terms of cost. And, and it's the latter part which, which give a greater impact in the next coming years.
Okay. Then moving over to Poland, you said that you had a very profitable project that was completed last year. When was it completed? Did it have a positive impact throughout 2015?
Well, we had a positive outcome in the very first quarter last year from that project. It was like in the end part of a bonus that came from the client. There is also another strategic shift that we've done in Poland, and to some extent also in Czech Republic, that I think it's important to be aware of, and that is like in a way shifted over to more middle size and smaller projects, more like in a bread-and-butter type of project, and which is like a risk mitigator. In the public sector, which is a big client there, they have a tendency to budget it on an annual basis, these projects.
So they hand them out, like in the first quarter. There is like bidding activities there, very low activity, very low activity in the, like in the first quarter. Then the market gets those products, build them, and like kind of close them out. I'm talking about the smaller and middle-sized product now, during the year. So it's a higher activity in the second, third, and the fourth quarter, and then, like in a, the cycle starts all over again. So that's like in a, because of like in a, some more strategic shift, we see the seasonality impact being even higher than it used to be in Poland.
And on that impact, Fredrik, if you look into the order bookings and the backlog, you also see the number of months in production. And when it comes to Poland, it's the lowest number. It's around eight months, which sort of just shows your statement that it's a high churn rate within the year of the backlog in Poland compared to the other business units.
That's very clear. Then moving over to RD, two questions on RD. Just to clarify, in Central Europe, margin was obviously very strong. There was no positive impact from land divestments. Is that correct?
Land divestment in what area?
In Central Europe.
In Central Europe? Well, no. Well, Central Europe then includes a part of UK, and we had a release, a certain release of a previously sold land bit there. That was the impact, nothing else. The only land we are doing is land investments, otherwise in Prague and Warsaw, to build up the businesses.
And then on, started units, you had a very strong year in terms of startups in RD last year, but you have very few unsold units, and it sounded as though, you're in growth trajectory still. Is that a correct statement?
Yeah, well, we have sorted out more, and a s long as we can start up projects which are completed to be put to the market, and that is just reinforced again. We do not start up projects which are not ready to go to the market, where we have done a prudent assessment of cost and are fully prepared to sell the units. And now the market is very receptive, and we are trying to get a lot of projects going to the market, but only the projects that are ready to go to the market.
And then my final questions, CD, obviously a very strong Q1. Can you tell anything about your view on CD gains for 2016? You've indicated in the past and given us some guidance on that.
We will continue to sell projects, and they will come like in each quarter. And we have an increased activity overall in CD. So gradually, over time, it will be a bigger part of the pie. And you have also seen it if you go back in time some years.
I mean, we will continue to sell products we are ready to sell in the market. And we have a very favorable market development right now in terms of prices. So this will continue to give more and more bottom line.
If you look at the selling list today versus one year ago, I guess, selling list is partly a function of the completion rate. How does that look today compared to a year ago?
It's strong, stronger. There's a lot of products that is ready for divestment.
Thank you.
Okay.
Next question comes from the line of Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead.
For the returns in CD, you talked about increasing land prices and possible change in yield compression. When you look at the target on return on capital employed, is that the 10% we should look at, or, I mean, you're now at 15%, but 10% is the longer term target still?
The 10%, that is like in a target that we have combined for the product development operation, like in the threes, all the three streams there. Now we have a good momentum in the market. And we believe that we can definitely reach the 10%, and then we'll see, like, in how it's gonna turn out, like, in the long run.
Okay. And on the, You have now 46 projects in the pipeline. Can you say anything about the size of this? Is it fairly even? I mean, this quarter you had Boston was fairly big, I guess, but how does it look on the other 46 projects?
Yeah, I think it's, like, in a very easy to understand, like, you know, if you go back to my presentation, where you can see, like, you know, the three parts, CDN, CDE, and CDUS. And you can look at, like, in the capital employed that we have there, and how it's, like, in a distributed between the three units. In CDN and in CDE, there are somewhat, like in a, I shouldn't say smaller, but it's not the mega, mega projects there. In the US, there is a tendency that the average size of the project is, like, in a larger. Everything is, like in a big, big in the US, even the residential development projects. Sorry, commercial development project, sorry.
If you remember, like, in the slide I showed regarding the Seaport project, you could see, like, there were, like, two other projects on the side there. Two very interesting ones that will come to the market once we reach the completion and also reach the leasing ratio, which gonna be, like, close to 100% before we go to the market with them.
Okay, thank you very much.
The next question comes from the line of Erik Granström from Carnegie. Please go ahead.
Thank you. I just, I had three questions that I just wanted to go over with you guys. The first one is on CD, and you ahead of the report, you, you press released, obviously, the Boston divestment, but you also mentioned now in the presentation that you had reported some gains within CD in Q1 related to other projects. Obviously, Boston is, is by all means, probably the biggest one. But could you give us some indication of how many projects did you report in Q1 as well, just so that we, we know sort of the, the balance there?
The CD, and we were gonna keep your Excel sheet updated, Erik. It's three smaller projects recorded in the CDN business.
Okay, thank you very much. And then, actually, I hate to be sort of redundant here, but Peter, once again, going back to the ERP and something that I reacted to when you stated that there was gonna be a huge impact on SG&A in civil. To me, huge is fairly big. Could you give us some sort of guidance in terms of the percentage of SG&A that you are at the level right now, and what we could expect in the coming two years?
I perhaps misspoke then, because I was referring to huge being the difference between what we incurred so far and what we will incur going forward, because that was another question we had from the audience here. So my bad. When it comes to the impact on the S&A, it could be as much as 0.9% per year in the next coming two years.
Okay, thank you very much. Perfectly clear there. And then finally, and, and I know that we- all of us has probably touched upon it, and I'll try once again. In the UK, you stated that you had released some land divestments in Q1 that affected the numbers. Were these in the SEK tens of millions, or are these so small that it's, it's more or less the underlying profitability that we are seeing in Central Europe, in RD in Q1?
They are below 10.
Okay, perfect. Thank you very much.