Good morning, and welcome to this conference call regarding Skanska's six-month report. My name is Magnus Persson, and I am responsible for investor relations. The presentation today will be held by Johan Karlström, CEO, and Peter Wallin, CFO. You will all have an opportunity to ask your questions to Johan and Peter after their presentation. With that, I hand over to you, Johan.
Thank you, Magnus, and I will start with the very first page in the package that you have, hopefully in front of you. There you see the photo of the National Museum in downtown Stockholm. We just started a renovation on that project. It's a SEK 700 million contract, and it will be completed in 2017. So let's move over to the highlights for the six-month report. What we see here now is an improvement in most of our home markets' underlying economies, which means that the market outlook continues to improve. And we see an increasing order bookings, and we are building up the backlog.
The operating income came in at SEK 1.6 billion, which is lower than the SEK 2 billion compared to the same period last year for the first six months. In the SEK 1.6 billion, we have then included the SEK 500 million restructuring cost and write-downs in Latin America that we announced last year, last week. Sorry about that, last week. We will now focus on the operation and maintenance going forward, and the focus will be on the petrochemical and the oil and gas sector. Looking at construction, the revenue is more or less flat compared to the same period last year. We had a very strong order bookings up 16% if we compare it year-on-year.
Very strong in Sweden, Finland, Poland, and in the U.S., but especially in the UK, where we have more or less doubled the order intake compared to the same period, so we see a shift there in the market. The operating income came in at SEK 1.2, including the reduction charge and the write-downs in Latin America, of course, and we see a very good performance in Sweden and in Finland and in the Finnish operation. We will comment further on the various business units. Looking at residential development, we see a lower volume in the overall business there.
We have fewer projects ready to start in Sweden, even though the market is very good and favorable here, but we are very strict and rigorous to make sure that we have the design completed before we start up a project, to make sure that we have the right profitability in all the projects that we now start up. In Finland and Norway, there is also lower volume, but that's more due to the market situation in these markets. But even with the lower volume, we continue to improve the profit, both in absolute terms and margin, and we are on a journey towards the 10-10 target , which is 10% EBIT margin and 10% return on capital employed. We're taking it step by step towards that target.
Moving over to commercial, commercial property development, we have a very high activity in the commercial development businesses. We have a divestment of SEK 2.3 billion in the first half of the year, and if you noticed, we just announced today, this morning, one further divestment, and that is the second project in Washington, D.C., that we now have sold very favorable, on favorable terms. Today we have, right now, 31 ongoing projects, including the eight new projects we have started so far this year, with a total investment of SEK 11.5 billion. We now see a favorable market, and we will continue to capitalize on that and start more CD projects, and CD projects on speculation because we see an opportunity here.
When you look at the completion ratio versus the pre-leasing ratio, which we follow very closely, you can see here now that the current situation is that the pre-leasing is somewhat ahead of the completion ratio. That's where we usually want to have it. Now, when we will start up a lot of new projects, which we will take advantage of the market, we expect that the completion ratio, the pre-leasing ratio will be lower than the completion ratio, temporarily, once we start up a lot of new projects. You can also see that we have a high leasing activity with a number here.... In infrastructure development, the value of the portfolio has increased by SEK 400 million to SEK 5.3 billion.
In Q2, we were selected as the preferred bidder for the I-4 Ultimate project, the big highway in Florida. Here we are the investor of 50% of the equity, and the construction value for Skanska will be around SEK 6 billion. We put it into the order booking once we reach financial close, that will be either later this year or beginning of next year. We have also been selected for another project in the UK, which is the Papworth Hospital. We have been selected as the preferred bidder, and that happened in the beginning of Q3.
Here we are also a 50% equity partner, and the construction value for Skanska in this project is SEK 1.5 billion, and we expect to reach financial close in the beginning of next year. If you turn to the next page, you can see some of the larger orders that we landed in Q2. One of them is a big extension of the light rail system in California of SEK 3.8 billion. A project in UK for the Defence College , a bridge around Manhattan, and then several offices, and then you at the bottom there, you see the renovation of the National Museum in Stockholm. Turning over to the order situation, and you can see the rolling twelve diagram that we have there.
The book-to-bill ratio that we follow is 102% on a 12-month basis. But if you take a look at the year-to-date number, we are ending up with 118% book-to-bill, which means that we're building up the backlog. So if you turn the page, I'm gonna make some comments regarding the various business units, where you see the breakdown of the numbers. Starting with Sweden, good order intake. We are more or less keeping up to 100% book-to-bill, and you should be aware of that the revenue that we compare the order bookings with includes the high burn rate that we have on the Karolinska project.
I think that it's a very good sign of both a strong market and a good organization of how to handle the situation here in Sweden. In Norway, we have overall a stable situation, especially strong on the civil side. In Finland, it's a good, very good order intake, despite the weak market there. So I think that we are positioned in a very good way and targeting the projects and the part of the market where we see opportunities for us.
In Poland, we had a very strong first half of the year, and, but you should be aware that the book-to-bill always is used to be over 100%, especially in the Q1, as the construction industry traditionally have a very low activity when you compare the revenue versus the order bookings. But nevertheless, it was a very good order intake there. Czech Republic, we start to see a light in the tunnel on the civil side. It's too early to say anything about the shift on the building side there. I think that we should wait and see for some more quarters before we change our view there.
But we definitely see more projects coming in the civil sector. USA Building, very strong in almost all the sectors where we operate, in aviation, in healthcare, in commercial offices. And we are involved in all these sectors, and we see good opportunities going forward. USA Civil, also very strong order intake in the Q2, and we see several large projects that's gonna be booked in the nearby future, the 12 months coming here, like the I-4 project that we are the preferred bidder for. So we expect that the order bookings in USA Civil will pick up, and we are building up the backlog there.
In Latin America, we, it's gonna be a much lower order intake now when we focus primarily only on the operation and maintenance side. So with that, Peter, can you take over and comment, the income?
Thank you. I will that, you do that, Johan. Starting with the construction and the income statement there. The revenue is almost flat, growing by 1 percentage point to SEK 59.4 billion, with a gross income of SEK 4.2 billion. Operating income amounted to SEK 1.2 billion. So if you take a look on the margins, gross margin 7.1% down compared to last year, only because of the charges taken in Latin America. Selling and admin up a little bit. Part of the restructuring charges is treated as overhead, so underlying selling and admin is still kept in very good order, despite the very high bidding activity, leading to an operating income of, operating margin of 2% for the first half year.
So that would equate to 2.8%, excluding the charge we took in the Q2 for Latin America. Going over to the next slide, with the various business units. Sweden, as Johan has stated, very strong numbers across in this business units, SEK 500 million flat, very good and easy number to remember for the first half of the year, with a 3.6% operating margin. And the answer is still no, we have not touched the profit take on New Karolinska Hospital. Norwegian business, did okay, stable with SEK 171 million in EBIT, 2.7% operating margin. Finland, on the other hand, with a very tough market, perhaps one of the toughest markets we have in the portfolio currently, did very well, 3.5% operating margin and SEK 109 million.
Poland, coming on strongly in the Q2, reduced operating margin compared to last year, was a tough comparison because we concluded some very profitable projects in the Q2 last year. The underlying profitability in Poland is very good, and the market is picking up. Czech Republic in the Q2 did not quite fully make it on the break-even level for the first half of the year, but we are seeing more stability in this business. And then turning to another stable business, UK, which fared at par with the operating margin last year. The growth in revenue meant that EBIT increased over last year to SEK 217 million. USA Building, which made SEK 148 million in EBIT, 1.1% operating margin.
Here, the top line is below last year's level by 6%, and principally, that's because of the winter impact in the Q1, and also the fact that we had some very big, high-burning projects in the beginning of last year. I'm sorry. If you then take a look on the EBIT margin for the first, for the Q2 in USA Building, we have taken a project down slightly, which has impacted the operating margin. Otherwise, very stable and good business. USA Civil had a very high top-line growth by 16%, over the first six months.
We have been spoiled, as has the market been spoiled, with very good EBIT margins, and because of differences over the year and the fact that we are ramping up some very big projects, taking a very conservative profit take, margin drops a little bit, and now we are starting to see the 6%-7% margin we are taking, but that could fluctuate between the quarters. And then last but not least, the Latin American business, where we have taken then SEK 500 million in the Q2, giving a total of SEK 1.167 million for EBIT and 2% for the stream. Turning over to next stream, residential development, the volume is down 19% compared to last year's first half.
The price mix is positive by 4 percentage points, so in total, revenue is down by 15%. Gross income is up, selling and admin is more or less equal, so the operating margin, operating income increases despite the fact that volume has decreased. Gross margin continues to go up, 13.6%, very good number, and selling and admin is kept at a fairly good and stable level as well, meaning that the operating margin is close to 8% for the stream as a whole. Looking into the various markets, the Swedish market is very strong, and here we see an increase in both margins and in EBIT, despite the fact that we have seen a lower volume.
As we have stated before, we are very conservative in starting new projects until we feel that they are ready to go on the market. Norway, a market which is stabilizing now, and where we have a lot of projects in the very late stage, meaning that we are quite content with the profit take on those projects. The margins are good. In Finland, tough market, the EBIT is fairly stable and margin is increasing. Other European countries, meaning a business in Czech, which is doing very well, a start-up in Poland, which is still having high cost for selling and admin, compared to the volume. And then we have a run-off of the UK business, doing in total then, very good compared to last year.
And we are also selling some pieces of land in the UK business, which meant that some smaller gains from selling that land is included in the quarter. Then turning over to the next, sold and started, you can see that the volumes are dropping a little bit, and we are around 3,000, below the last year level on a rolling twelve-month level. But you can see, as we have stated before, that the volumes are very stable, and we are also intending to keep them at these levels. Then homes in construction, next page, you can see that that has dropped quite a bit compared to last year.
That's a fact that we have handed over a lot of apartments in the Q2, which you can also see in the cash flow, where we have recorded a lot of divestments with a positive net investments for the stream. 70% of the current stock is already sold with binding agreements, which is actually have increased further compared to the Q1. The unsold completed is still at a reasonable level, and this is not old stock. This is a big churn in this 490 units. So they change quarter by quarter, and we are not concerned by at the level they are compared to the business as such.
Turning over to the third stream, commercial property development, the EBIT amounted to SEK 312 million, which was up compared to last year. We have divested the properties with a gain in total of SEK 408 million. And as Johan mentioned, you can see that we continue to sell properties. If you then turn to the next slide, having a more long-term view over the divestments, you can see that they are still trending above the SEK 6 billion mark, with a close to SEK 1.5 billion EBIT, in total, around 23% margin.
You might find the Q2 a bit lower in terms of percentage of the development gain, but that is due to the fact that we are cleaning up some properties and projects now in order to refocus part of the business in Central and Eastern Europe to more lucrative projects. Around the 20% mark is still where we are on a long-term level. Turning over to the next slide, taking a view of the portfolio, you can still see on the graph at the top there that we are continuing to increase the amounts of ongoing projects. And as Johan alluded to, we will continue to take advantage of the very positive market we are seeing now, and we will continue to ramp up this investment speed.
To do that, turning to the next page, leasing, it has to be at a very high level, and it is at a very high level. Second quarter this year was a bit lower than last year, but we have a lot of activity on this level, so we feel that we will continue to keep it at a good level. Turning to the last stream, Infrastructure Development, you can see a very stable and good operating income. Last year, we sold a number of projects with gains of SEK 118 million. This year, we have only stable performance in the current projects, and part of that is that we have very good profitability in Midtown Tunnel, M25, and NKS on the investment side.
Turning to the next page and taking a look at the portfolio, you can see that it's increasing by SEK 400 million, half of which is due to that we have increased the underlying value, and part of it is due to effects that the krona has, the are lower compared to the other currencies. Going to the next page and rounding up, in total, we have an operating income of SEK 1.581 billion, compared to SEK 2 billion last year. The Latin America is the explanation for the reduction. You can see that net financial items is lower.
If you dig into net financial items, you can find that the interest net has improved quite a bit, despite the fact that we are increasing the duration in the portfolio, and also taking advantage of the very low long-term interest rates. The reasons why net financial items are still keeping as it is, is due to FX changes and fair value of derivatives. Taxes is kept at 25%, meaning a profit for the period of SEK 1.093 billion. Turning over to the group cash flow, the cash flow from operations is negative SEK 2.8 billion. You can see the turn of the tide in the Q2, which came in at SEK 450 million positive.
The reason for the negative cash flow compared to last year is primarily lower net divestments. As you may recall, we have reported a project sold in the Q2 in the income statement, but we will collect the cash now during Q3. The same goes for the project which we announced today, the second project we sold in D.C., where we will record the profit in the Q3, but we have already now then received the money in the Q3 as well. So, with the cash flow seasonal patterns, we are quite content that the cash flow will have a natural strengthening during the second half. Then of course, paying out the dividends to the happy shareholders is also carving into the cash flow in the Q2.
Looking into the free working capital of construction, you can see that we are maintaining close to the same level that we had in the Q1, which is fairly good. Normally, Q2 drops considerably, also, as does the Q1. Despite the fact that we had a lot of outgoings then in the Q1, we are maintaining the level here. We are winning a lot of bids now and hope that increased volume will lead to an increase in absolute terms as time goes by. The important part to keep track of here is the type of projects that we're winning, where design build, and specifically ID and PPP projects, does tend to have a very much more positive cash flow structure than normal construction projects.
Going over to the financial position of the group, it is stable, and we have an operating net financial asset of positive SEK 800 million. And it's, we feel that this is a good level to be at, given the investments we can make in projects in our commercial development area, specifically. Going over to the change in financial position to the next slide, the negative cash flow of SEK 5.5, and then we have taken up the pension liabilities in the Q2 and in the Q1 due to the fact that interest rates are falling, while we have increased the defined benefit obligations in our existing pension plans. So that leads to the change of negative SEK 6.3.
Going over to the equity, dividend is handed out, having an impact on equity, and then profit for the period, where, of course, the Latin American creates a little bit of a dent in that profit for the period. But the closing balance is more or less at par with last year, despite the fact that we have taken down pensions. Then going over to group investments and capital employed, you can find that we haven't been a net investor in RD and a net investor in CD. And if you take a look on the capital employed since year-end, as we have stated before, we have transferred the remaining part of the excess land bank from central to the residential development.
So if you adjust for this close to SEK 600 million, you're going to find that we are continuing to decrease capital employed in RD, and you will find that we are continuing to increase capital com, capital employed in commercial. Infrastructure is stable, so we are in line with what we have said and where the market is most favorable. Johan, please continue.
Yes. So move on here. Let's move on here and take a look at the market outlook, and we will start, of course, with construction here. Overall, we have a positive view about the market and markets if we combine them, and we can see that they continue to improve. If you look at the arrow for the combined Nordic operation, you can see that it's green, which means that we have turned it up one notch. And what you see here is a favorable market in residential, and that, of course, is good for our own residential development, but it's also good for the building activities and the construction part because we do project not only for our own operation, but also for external clients on the residential side.
The civil side is a little bit of a mixed picture, if you'll take a look across the countries in the Nordics. Very strong in Norway. We see a lot of projects coming up in the public side there. A lot of need for tunnels and routes and rail routes and so on. Sweden, stable. Here, it's very important to follow what's going to be the outcome of the election, and we'll see what will happen here in Stockholm, especially, if the politicians decide to continue with the infrastructure program that has been decided with the current government. Finland, weaker.
It's going down, and it's going down both, I would say, not only in civil, but across the board on all the construction activities. That's the only market across all the home markets we operate, where we see a decrease in activity in the construction sector. If you turn over to the European countries, a big shift, I would say, sorry, in UK. We turned it up in the Q1, one part of it, and now we take up move up also in the other part of the sectors here....
In UK, and we definitely see an bigger order intake, both in our own books, but we also have a positive view of the markets going forward. Poland, a good and stable market, and in Czech Republic, we start to see the first light in the tunnel. And, of course, it's interesting to see if it is a trend that will stay, and that is something that we will continue to have a very close look at. In the U.S., overall, we think that it's good, with the market is good in several of the sectors where we focus, and that is in big, complex infrastructure projects, across a lot of states, both on the West Coast and on the East Coast.
We see activities on airports, we see big needs there for upgrading of those. The healthcare sector has started to, we see some movement there now when the reform, the healthcare reform has landed. The comments that you see here regarding Latin America, that is now, from now on, it's a comment regarding the O&M sector, because that's the market that we will focus on going forward. Moving over to residential development, follow very much of what I've just said about the construction sector. Sweden, strong, Norway, stabilizing, we expect a slight uptick and then some increasing activities here, second half of the year. In Finland, the residential development market follows the overall economy here, and it's, it continue to be very slow.
In the other European operations here in residential development, we have some small activities in Warsaw and one in Prague. The Prague operation is a small one, but it's a very good profitability, and we can see now that the market has stabilized from a very low level, though. In commercial development, overall, it's a favored market across the various countries and geographies where we have operations. But there is no change because it's the same view as we had last quarter. But we see opportunities here to start new projects, not only for to starting project, but also for leasing and also for divestments. We get a lot of questions regarding the Ukrainian crisis and the potential impact there.
We have seen no impact on the commercial development activities in Central Europe. It's actually rather the opposite, because there is a lot of international capital that used to go into the real estate or real estate market in Ukraine and in Russia, that is now seeking other geographies, and we can see an increased activity and increased interest in the nearby geographies where we are active. So we see opportunities there for us. So the last comment I will make is regarding the market for infrastructure development. Good in the U.S., there's a lot of projects there. It's actually more projects than we have capacity to go after, but much thinner in the market in Europe. So with that, Magnus.
Thank you, Johan. So let's move over to the Q&A part of the teleconference here, and, we will start with questions from the conference call, and then finally, we will have questions from the web. Please remember to state your name and what the company you represent when you ask your questions. So I ask, operator, do we have any questions on the line?
Thank you very much. Just to remind participants, if you would like to ask a question, please press zero one on your telephone keypad now. Our first question comes from the line of Mr. Jonas Andersson of Danske. Please go ahead. Your line is now open.
Yes, hello. My first question is actually regarding the U.S. margins. You talked about a project change that hit the margin. Can you elaborate on the magnitude if we will see the margin coming back to normal levels again going forward, or if margins are a bit weaker, also adjusted for that?
I have to make, like, 2 different comments here, separate comments for USAB and USAC. I don't know if you asked about both of them, but let's comment both. Starting with USA Building. We took a small write-down in 1 project there that has impacted the margin. Overall, the rest of the business in USA Building is very healthy, and we see the normal margin in that part of the operation. So that's the comment I can make regarding USA Building. In USA Civil, the margins and the profit fluctuates always a little bit up and down, depending on project closeouts, but also start up of big projects.
But we have also said that, going forward, the margin will slowly go down to a somewhat lower level. And so we—that is what we start to see here now in USA Civil.
Thank you. And another question is regarding the housing sales in other Europe. It's pretty much up, and is that totally relating to the Czech Republic, or is it also the divestment of land impacting the sales volume?
Yes, it's impacting the sales volume. Or the Czech is up a little bit, but it's the sales of the land that's all that also boosts revenue somewhat.
Perfect. Thank you.
Thank you, Jonas.
Thank you.
Next question, please.
Just to remind participants, if you would like to ask a question, please press zero one on your telephone keypads. You can press zero two to withdraw your question at any time. And our next question comes from the line of Mr. Erik Granström of Carnegie. Please go ahead. Your line is now open.
Thank you. I would like to start off with a question on Latam, if I may, regarding the fact that we do know that you've taken a charge of SEK 500 million in the quarter, but what would you—what could you say about the operations excluding that? It seems like the actual reported number, adjusted for that write-down, is not as bad as you could probably fear. So what could you say of your sort of gut feeling of the O&M business going forward for Latam?
The O&M business that we have there that is focusing the oil and gas and the petrochemical side has been a profitable operations, and will continue to be a profitable operation there. It's a lower risk, and of course, it's a lower reward, of course, because it goes together. But there's part of the operation there is like has an underlying profitability. But what we have also said is that we expect that the total Latin American operation will reach break even during the time frame it will take to close down and finalize the E&C projects.
They have it goes for the rest of this year, of course, the whole next year, and have some tail ends into 2016.
Okay, thank you. And then my final question is actually, it's on Norway, and you do state that the market in Norway seems to be rather stable, although the civil market is very strong. Could you just mention a little bit of how you feel the turnaround in Norway is going? It is somewhat surprising, perhaps, that the margin in Norway is not improving quarter-over-quarter, given that Q2 should be a better quarter for the operations within construction in Norway than Q1.
It is, you're right. It's a little bit of a mixed picture in Norway right now, if you start to look at the market. The offshore economy impact impacts the that part of Norway, like in the West Coast and the Stavanger area, and the onshore economy is much stronger. So it's like in a divided economy right now. The civil sector, though, and yeah, looking at the projects that are publicly funded is very strong, but we are not the only one that has have realized that. There's a lot of competitors from all over Europe there.
So it's a lot of projects and challenging projects, and I think that that's a little bit, well, what I can say regarding reflecting the market there.
Okay, thank you. And then my final question is, is on the divestment of the, CD project that was announced this morning. It... If, if I'm not mistaken, I believe that the project was completed, sometime in the fall of 2012. Could you say something of how long this divestment pro, process has taken? When did you actually start the divestment process of, of, of the property, and, and are you, are you pleased with, the, the return that you are getting on on this divestment price? Thank you.
It was a lot of last questions, Eric. But we actually started the sales process in back end of the Q1 this year. And you're right, we completed this project some time ago, but we have focused on increasing the leasing rate with before we went to the market. And as you might recognize, the D.C. market with the federal cutdown and so forth did make it a longer process than we had hoped for initially. Despite that, because of the very hot market and the very appealing investments, this we are still happy with the return on the sale.
Okay, thank you.
Thank you, Eric. Do you have any more questions?
Our next question comes from the line of Mr. Marcin Wojtal of Bank of America. Please go ahead. Your line is now open. One moment, please.
Sorry about that.
Go ahead.
Can you hear me now? I'm sorry.
We can, we can hear you now. Thank you.
All right. My first question is on Sweden and Swedish margin in construction. Can you provide some color? Is that margin sustainable, and also are you recognizing a higher margin from the Karolinska Hospital project relative to last year? Yes, that would be my first question.
Okay, so let me comment that one first. As Peter said, in the presentation, we have not changed the profit outtake on Karolinska. It's a long project. It goes over many, many years, and we want to keep it on the conservative level where we have. So the profit that's coming from Sweden, it's the profit coming from all the medium-sized and small projects from all the cities and the businesses that we have. It's a well-run operation, and it has a very strong position. So, I'm pleased, and this is like in a what the organization can achieve and deliver, when everything goes in the right direction.
All right. My second question is on Commercial Development. Can you perhaps provide some guidance in terms of capital gains that you are targeting from disposals this year? Or perhaps, are you targeting an increase in gains from disposals versus last year, in 2014?
Okay. As you can see from the graph, we are showing over the 12 months, rolling 12 months, we are at a very stable and somewhat growing level. So we have been showing between SEK 1.2 billion-SEK 1.5 billion in gains on an annual level for quite some time, and there is nothing that will change that going forward. We had a very high level of activity, divesting and developing new projects, and as we are increasing the capital employed in this stream, the gains from CD divestments should continue to increase going forward.
All right. Thank you so much.
Thank you, Marcin. Do we have any more questions?
Again, just to remind participants, if you would like to ask a question, please press zero one on your telephone keypads now. We have no further questions from the telephone lines.
Okay. Then I would like to say thank you to all of you participating on this conference call, and we hope to talk to you again in after the Q3.