My name is Pontus Winqvist. I'm responsible for investor relations here in Skanska. The presentation will be held of our CEO, Johan Karlström, and our CFO, Peter Wallin. This is hopefully a live presentation that is also combined with a telephone and webcasted presentation. There will be possibilities to ask questions after the presentations. With that, I think it's time to start the real presentation. So Johan?
Thanks, Pontus. It's definitely a live presentation here in this room. That's definitely something I can assure you. The first slide I want to show you, and that is the fantastic project that we are building here in Stockholm, Solna. We are very proud of that project. It's the first PPP hospital here in Sweden. T he most diverse, most environmentally friendly hospital that is under construction and that also been built a nd it's our largest project ever in Skanska history, if we talk about the money part. Y ou can see that it's on the way up, and you can start to see the shape of it.
I'm sure that we will have opportunities to come back to the project in future presentations in the quarter reports. The project is going according to plan. So with that, I want to start with the very first slide here regarding the report. Giving you a little bit of a snapshot and the highlights from the Skanska world.
The U.S. operation is very good. The market is good. The sectors that we operate in, like the infrastructure, the healthcare, the education part, and also different type of facilities for the IT industry. We see a healthy pipeline of products coming into the market there. The order situation is also good.
We have increased the backlog during the three first quarters this year, and we also have a very good performance in both of the units that we have in the U.S a nd that is, of course, extremely important for us, because the U.S. market is the largest market that we have, and also one of the flagship units that is driving Skanska.
The other one here is here in Sweden, and as you have already seen in the report, that we have also a good, healthy backlog in the Swedish unit, and we also have a good situation if you talk about the operating margin coming there. Overall, we have okay or good results from all the units, all the business units in Skanska, except for Latin America.
I will come back to that unit in a while. The previous problems that we have had, the turnarounds in Finland, in Norway, and in the residential development operation here in the Nordics, we have taken a firm grip around them, and we turned around, changed the organization, downsized some part of it, and now we can see that we are on the right track.
We have black numbers, and we see that the turnarounds and all the programs and the processes that we have put in place, it's on the way to be implemented. Still a lot of work to be done before we are up and running completely on the level where we should be.
The overall order situation that we have in Skanska for the construction units, I view that as, as good. We have a strong and healthy backlog to work from. If you look at the year-to-date number, it has been close to the revenue, 98% book-to-bill.
In the last quarter, though, it was a lower order intake in, especially in, the European business units. We view that as an impact that's coming from the crisis out there in the market, in the macro situation. We'll come back and talk a little bit more about the market going forward. So let's take a look at some of the numbers.
The operating income, more or less the same level as last year, if we exclude the restructuring costs and the Autopista divestment in the comparable period. Revenue up 11% in construction, up to SEK 19.3 billion a nd you can see that operating margin in construction, the year-to-date number is 2.9%. In the quarter, it was 3.9%.
It's always fluctuates a little bit between the quarters during a year, and here you can see a typical seasonal pattern. A s you can see here also, that the order bookings were up compared to... I'm gonna use this one. Were up compared to last year, from 82.6 up to 88.1.
But in the quarter, the isolated quarter is down 23, primarily in the European, as I said. But if you look at the book-to-bill ratio for the 12 months period, or for the Rolling 12, it's 104%. Just one quarter is a very short period to take a look at the order intake, so I think that we should wait to talk about the trend until we see the order intake for the fourth quarter. The backlog is more or less at the same level as it was at the same time last year, 15 months of construction. In construction, in the business unit that we have there, we have now increased income in seven of the nine units.
We see a growth, we see a growth in an expansion in the revenue in the Nordics and in the U.S. That is coming from a good backlog and a lot of order intake the previous year. It takes 12-18 months before the backlog actually really comes into the revenue, depending a little bit of the size of the products, and it differs also somewhat between the various countries.
We talked about the turnarounds in Norway and Finland, and in Latin America, we took a write-down of SEK 180 million in the quarter, and that's coming from, primarily from one product where we have increased costs, but also we have written down some receivables that we have regarding product that has been completed in previous years.
It's a mixed picture out there in the market. Somewhat slower in the Nordics, and when I'm talking about the Nordics here, it's a difference between Norway compared to Finland and Sweden. Finland and Sweden is very similar, similar market situation. Norway, very strong market going forward, but in Sweden, we see a slower market, especially on the residential side. We see a lower demand there.
The other European market, like Poland, U.K., Czech Republic, and Slovakia, more or less the same picture as it was when we met last quarter, with quite a low market situation. The America, though, has shifted since we last met, and we have a slightly more positive view compared to the Q2 situation.
If you take a look at the large order intake here, and we have ranked them in size. We have the largest product that we have booked in the quarter on the first line. I won't go through them all, but if you look at them, it's like mostly in the U.S. market where we see the large product.
It's actually two things that you can read out of that. First, that is the market where we see the large products in the first place, b ut secondly, it's also a sign of how the market looks like today. Then you can ask yourselves, "Why don't you see a Swedish product up here?" The dominating part of the revenue and the order intake in Sweden, that is smaller sized product.
It's like, you know, the bread and butter a nd of course, they never show up here on this list. But they are really good to have because this is like the foundations for the operations in the Swedish market. Moving on with the residential development, you can see that the revenue is basically in line with previous years, slightly down. We sold around 200 homes less compared to previous period last year, but we have started around 350 less than previous years a nd that is also a situation that reflects the situation in the market.
Operating income, positive SEK 68 million, and we have improved the gross margin, and we have cut the overhead significantly in part of the Nordic operation, which we did before the summer vacation. So now we have an organization and the size of it that is the right size for the market going forward. We are working a lot with enhancing and improving the efficiency or in the organization, and we have also moved close to SEK 2 billion of the excess land bank from the residential development stream into a central function.
We have a small little team that is working on it, to me, and we have started to divest that part of the land bank that we see that we don't need for the time being. CD, commercial development, we have divested, for if you look at the three quarters, SEK 3.2 billion, no divestments in the third quarter.
I have received several questions of "Why didn't you sell anything in the third quarter?" Well, you know how it is. We have a pipeline of products that we have plans to sell, and some of them show up in some quarters, and now we happen to have a quarter with no divestment.
But already in the fourth quarter, into this quarter, we have announced two divestments, and I'm sure it's gonna come more. We have started two new products, so we have now 33 ongoing products with a total investment volume of around SEK 10 billion. One thing that we look at when we look at the portfolio of ongoing product, and that is we compare the pre-lease ratio of that portfolio with the completion ratio of the construction.
Here you can see the pre-lease ratio, which is 64% a nd the completion ratio of the portfolio, that's 56%, a nd it's always good to have the pre-lease ratio ahead of the completion ratio. That is like, you know, mitigator of the risk.
That is one thing that we follow quite closely internally. 44,000 sq m leased in the quarter, and this is that there is still a lot of demand for modern, green office space, which is exactly the product that we have. ID, we sold three hospitals in U.K. during the quarter, and we have two attractive price levels, and we have also sold a fourth one in the last quarter this year. I think that we have already announced that one. We also handed over a highway in Finland that has come to an end of the concession, and we have handed it over to the authorities.
We also invested in the first, or sorry, in the second wind farm in Sweden, actually, in the southern part of Jämtland. I have talked a lot about the financial synergies in Skanska, where we are using the excess cash in construction and using that excess cash for investment in, on the development side.
Here you can see some numbers that we track quite closely internally in Skanska, and that is how much of the intake of the revenue that is going through the books is coming from own investments. Today, we are up to 12%, corresponding to more than SEK 10 billion in revenue for the first three quarters this year, and you can see the breakdown here between the three development streams.
That is a very good way to use the excess cash to get a nice return on the development side, and on top of that, we get construction profit in the stream. So if you look at the return on the excess cash, it's not only the profit we make on the development stream, you have to add the construction profit as well. Coming back to the order situation, and you can see the bars up here, and this is the rolling 12 line. For the dark one, that is a rolling 12 line for order bookings, and the light blue one, that is the rolling 12 for revenue a nd you can see that it's still a higher number, which is 104% book-to-bill.
T his is actually an interesting, if you take a look at the numbers a little bit further down on that slide, you can see that we have increased the revenue from 81 - 90. So the revenue has gone up, of course, because of good order intake in previous quarters.
But also, the order bookings has increased as well from 82 - 81, but the revenue actually increased faster, so that means that we are not, we are... that and that is coming from very good order intake in previous quarter before that period. So order intake in a breakdown of a look at the various countries in the business unit, and here, I think that we should look at some of the numbers.
If you first see, you can see like in a big divider, if you look at the book-to-bill ratio here, the rolling 12 numbers, you can see here is a divider between Europe. Do you see Europe here, and then the Americas a little bit further down? Well, and you can see that there is a big difference. You can, the good, very good order intake here in the Americas.
Then you can also see that in Norway, the book-to-bill ratio, we are keeping up with the revenue. T he previous period, last, was we have 34% down compared to previous period, but we are not eating from the backlog. So don't really look at the change in the order intake.
The really interesting number, that is the book-to-bill ratio, where you can see if we are eating backlog or if we are adding backlog. So that's the best ratio, I would say, that you should take a look at. Norway and Finland, further comment there.
The somewhat lower order intake you can see here compared to previous period is not only a reflection of the market. Norway's is not a reflection on the market because the Norwegian market is still good. But if you take Finland, we are also cautious about the orders that we book. We have raised the bar and the request internally for the profit level, and that's coming from the turnaround process.
If we have raised the bar, then we are more picky, the projects and the profit that we will book. That's also a reason why you see somewhat lower order intake here. USA Civil, a very strong and good order intake, and that's a fun, good fundamentals and the situation for the situation going forward. With that, Peter, I hand over the tools here to you. Thank you.
Thank you, Johan. Coming into construction and the performance per business stream. In construction, we saw the operating income amounting to SEK 2.6 billion, more or less, at the same level as the last year's nine-month period. The gross margin was lower at 7.9%, and we didn't increase S&A as quickly as revenue, which meant that the selling and admin in percentage terms was lower, giving us an operating margin of 2.9%.
Digging in the various business units, Sweden did a very strong third quarter this year, as did a lot of the businesses. In Norway and Finland, we have continued to see the gradual pickup and improvement in results in those businesses. They are not by far at normalized levels yet, but gradually we're taking them back on safer grounds.
In Poland, we are now starting to see how the business looks like without the famous motorway project in Poland that we completed more or less in the third quarter and fourth quarter of last year, meaning that we took a very big improvement in profits in the comparable period.
So 4.5% in the current prevailing conditions in Poland is a very good margin. The Czech, a very tough market, while still keeping it at a decent 1.9%. U.K., very tough market also, keeping it at a very good rate of 3.5% in operating margin, a nd USA Building, steady as a watch, together with USA Civil.
If you look on the Skanska USA Civil number of 8.7%, and then you recognize that we made an acquisition at the back end of last year, which is actually diluting the margin as a startup of the business. So if you take away that acquisitions, we are actually in double-digit margins in Skanska USA Civil.
Then the odd one out in construction this time is Latin America. We are continuing to take down now claims in completed projects. So over the nine-month period, we have taken SEK 360 million in write-downs and write-offs in Latin America. Residential development, more or less flat in terms of top line a nd the operating income is -SEK 242 million.
This, of course, includes the hit of SEK 380 million that we took in the second quarter , and that impacts both gross margin and selling and admin. So if we look on the various areas, you can see that Sweden was the area which was mostly hit by the write-downs I just mentioned.
T hen you have a big pickup despite that, because of the very hot market in Norway, and a fairly good number in Finland. Czech, you have the write-down of land of SEK 80 million, so that explains sort of the negative compared to last year. It's a very tough market, but we are able to find good deals even in the Czech Republic. The other doesn't look so sexy, but that's startup businesses.
One happy part there is the startup of the Polish business that we did in the third quarter. We are progressing well with the sales, and we have started up the first unit in a project called Ostrobramska with 300 units, and it looks very promising on the demand on the market. Another promising thing is, if you take the third quarter and look at the Nordic RD business that we restructured now in the third quarters, the numbers actually look quite a lot better.
We have much to do, and we are not at safe terrain at all, but we have a nice progress towards healthy margins and a healthy return. Sold and started on RD, we're still keeping up the sold and started on fairly good levels.
As we now are adjusting the volumes, both to a somewhat more sticky market, but also to the fact that we are trying to find the sweet spot at a lower volume than what we had anticipated before, means that you will see the black line sort of starting to weakening a little bit here.
I f we take a look on the balance, so to say, you can start to see those signs on the homes in production, which is now going down. Of which sold is increasing by one percentage point. We essentially started up the Polish project in the second quarter with no sales at all, and now we are progressing with the sales.
We have 323 completed unsold, and that is a sort of a big increase compared to the second quarter, third quarter of last year. The principal amount is in Sweden, and the principal amount of apartments is completed during this year. So it's not an old stock, and we are working very actively to sell from that stock.
Coming into the commercial development, as Johan said, we haven't sold anything in the third quarter, which means that here you are starting now to see then, for the first time in a long time, a negative operating income in the third quarter. That's essentially the impact of the organization working with creating these fantastic values, and the fact that we are selling properties at a much quicker pace.
So we don't have to enjoy the operating net from the rentals, because as soon as they are completed, more or less, we sell the properties a nd we have more sales in the back pocket. Looking at the divestments, over a rolling 12-month level, over a long period of time, we have posted gains of SEK 1 billion per annum.
That has been done under a sales value of around SEK 4 billion. One divided by four equals 25%, so that's a pretty good margin we have on that. As you have seen on the sales we have done thus far this year, we have a gain of SEK 741 million over SEK 3.2 billion sales value, which equates to 23% in margin.
To some extent, that is due to the project that we reported in second quarter that we're taking in at a guaranteed price, and we are gradually sneaking it up, because we have just started that construction. If we look on the stock of properties, we have a total carrying value now of SEK 12.8 billion, and that will be SEK 17.4 billion upon completion. So the ongoing projects that we have been talking about have a 27% embedded markup at SEK 12.7 billion in estimated market value.
W e are keeping the occupancy rate and the completion rate very much in sync, and the occupancy rate is greater, as Johan already has alluded to. Leasing is very important, and we intend to continue to lease corresponding to leasing Empire State on an annual level.
We have been very successful, especially in the continental and Eastern Europe this past quarter. Now, last but definitely not least, infrastructure development. A very strong third quarter. We've sold the three Midlands hospitals in the third quarter, and in the fourth quarter, we announced selling a fourth Midlands hospital.
This has been done with a value which is exceeding by far the internal market valuations by year-end. So if you look on the gains here, you can see that the underlying profitability in this business, the cost of going after these projects, and the revenues you get is more or less a wash over a year b ut between the quarters, you can have huge swings.
The underlying factor here is, of course, the values that you build up in the business. We saw the New Karolinska, and that is part of this portfolio. So we are still sitting with an unrealized development gain of SEK 1.4 billion. That's SEK 3 billion, if you look on the impact on the equity report by the end of the third quarter.
We have not changed the assumptions made in the beginning of the year, and the demand for this type of assets is very hot out there in the market. So boiling it down to the group of SEK 3.4 billion, and then we take out the central cost at SEK 487 million, a cost which we have sort of curbed. T hen we have the eliminations, a - SEK 93 million.
The eliminations is essentially taking out internal profits between construction and commercial property in ongoing projects. So if we don't sell any properties in the commercial projects, you will see this number being negative. If you do huge sales, you reverse those right out, eliminations, so then you can have a positive numbers. I think that some of the analyst community can look at their models and perhaps tweak them a little bit between the quarters here.
That gives you an operating income of SEK 2.9 billion. We have a negative financial items, taking us down to an EBT of SEK 2.7 billion a nd at a tax rate, which is 26%, which is more or less, I would say, the normalized level, given where we have the earnings, you get an earnings per share of SEK 4.87.
Cash flow. We have an operating cash flow of -SEK 4.9 billion for the nine months, and then we have also made a SEK 2.7 billion in dividend, handed out in beginning of April. If you look on the cash flow in the third quarter isolated, it's a huge improvement, because what we have done now with the growth plan is essentially to take a step up in terms of the development activities.
Now, we are at the more balanced level in terms of investments and divestments. So in the third quarter, you can clearly see that we are more or less zero on net investments, and that is including the CapEx in construction. Compared to the last third quarter last year, we had a -SEK 1.1 billion. So here we have +SEK 100 million and -SEK 1.1 billion .
It's about starting up a program, and now we are at sort of a balanced level, investments, divestments, given how we see the market. We can control the cash flow, and if we, for any reason, see that the downside risk is too much, we can sort of stop investing and thereby increasing cash flow. So it's a very good and nice model, which I think that a lot of other businesses wish they had.
So one thing of creating that engine of growing the business is how the working capital changes in construction. You have seen this curve, and we call it the free working capital a nd we ended the third quarter at SEK 15.8 billion, roughly, in absolute working capital in construction, negative for those of you who are into accounting.
T hat gives you roughly 14.4%, 14.5% of revenue. So that's a downside trend, and as we have said before, it's very much a function of completing and closing mature, profitable projects where we are settling with subcontractors and so forth, a nd the fact that all the bookings we have done in previous quarters haven't started to come into revenues and cash flow generation just yet.
So, in the third quarter, we saw an improvement in construction in the negative working capital creation, and, in the fourth quarter, the seasonal pattern is the close out of projects means that we will see a strong positive impact here. The financial position of the group is still strong.
We have a total turnover of assets of SEK 86.5 billion, and the equity of 18.4%. That gives you an equity to asset ratio of 21%. Then we have done everything to sort of adjust the values of our defined benefit obligation, so that is embedded in that number. We have a net operating financial asset of SEK 2.1 billion, which is how we track the investment capacity in the group.
The net debt was -SEK 4.9 billion, so there you can see the +SEK 100 million in cash flow in the third quarter, because we ended the second quarter at -SEK 5 billion. Then we have had a change in pension liability apart from the cash flow at -SEK 7.6 billion.
The pension liability negative there has decreased, because we haven't moved the assumptions on the DBOs in the third quarter, but we have had a positive improvement in the assets. So that means that the -SEK 700 million is now a -SEK 400 million. So other than that, it's very limited changes.
In the fourth quarter, as Johan said, we have two sales of commercial properties coming online. In the second quarter, we announced the sale of a project in Prague, which will come in settlement in the fourth quarter. A lso, we announced then the fourth project being sold in the ID business. So in total, the deals that we have announced and will be settled, and or have been settled to date, is SEK 1.4 billion.
In addition to that, perhaps we could get some more deals coming online as well. The equity situation is, of course, impacted by the dividend made, more or less offset by the profit for the period. Then we have had the pensions and a bit of the translation differences, and that is, of course, the weakening of the dollar since year-end on the balance date. So that's a closing balance of SEK 18.4 billion. So now, when we have taken SEK 1.9 billion into the central part, to the excess land bank, we have SEK 24.8 billion in development streams.
As you will see us continue to reduce investments in RD, gradually making use of the land bank we already have, which is now SEK 5.7 billion, and that is excluding the excess land banks. The SEK 5.7 billion has a building right, so 20,700 building rights. So that's essentially almost seven years of production.
So we'll continue to decrease that down to 4-5 years. So in addition to what I told about closing commercial development deals in the fourth quarter, working capital, you will also continue to see a positive impact of the deceleration on the RD side, making, handing over the keys to apartments and not starting as many new projects. With that, Johan?
Yeah. Thanks. You need your paper?
No.
No? Let's comment, the market, which I think can be important for us going forward. That is that what we can see here, there is, in general, quite a stable situation. Some changes, though, since last time we discussed. A lot of competitors, though, in the market, and they go to places like Norway, where they see a favorable market showing up.
The U.S. operation, and especially on the civil side, as I talked about earlier, we view as very favorable today. There's a lot of... It's not that the market by itself had increased, but it has shifted over, so we see more large, complex design- build projects, and some of them are also with the PPP type of contract.
T hat is exactly what we want to see, b ecause the, you know, in these projects that are so large, there is less competition, compared to the middle segment. I expect that Obama will continue with, and stimulate the infrastructure as he has did the last years.
On the building side in the U.S., we've, as you know, we don't go for the entire building operation or the building market. We focus on healthcare, aviation, high-tech buildings, and some commercial offices. There is a healthy pipeline of products in the healthcare industry a nd now with the healthcare reform, that will, of course, now continue, it's gonna be... We believe it's gonna be an underlying demand, increased demand for healthcare, and then, of course, it's gonna be a requirement for new hospital and various facilities, which is a good market to be in.
In the Nordics and in Poland, we see a weaker building market, and that is especially on the residential development side in Finland and in Sweden. Czech Republic, U.K., same picture as last time. Going into the residential development sector and the market there, there is some uncertainties, of course. Norway, they are living in their own oil bubble.
If it's a price bubble, I don't know, but they have a very strong underlying economy there, and we see a completely different pattern there in, if you talk about the residential development sector compared to the other two countries in the Nordics where we have operations.
O f course, now when we see layoffs coming in in Sweden, in various industries, and will that have an impact on the uncertainties in the market? Will people buy a new apartment? What we have seen in the third quarter is that it takes longer time before people decide to make an investment in a new apartment.
So the startup of our new projects is actually self-regulating in a way, because we ask for a pre-sales requirement of a certain percentage of the apartments, a nd if it takes longer time before you reach there, it reaches that hurdle, then, of course, we wait until we put the shovel in the ground and start a project, and then that's what you see in the numbers.
Czech Republic, same picture as last time. In CD, in commercial development, relatively stable, if you talk about the vacancy rates across the board in the sectors and in the part of the cities where we focus on our operations. It's less investors, though, out there in the market, and it's coming from problems to get financing.
So I view that our view is that the investors they are more picky today. They want to go for really prime products, modern offices, you don't have to refurbish it, long leases. They want to have it energy efficient or green. T hat is exactly the type of product that that we are focusing on. So I think that we are here in the right spot. But we can see that there are fewer buyers. When we go out with a product, there are fewer, actually, investors. But there's still interest, definitely, for our prime products.
I t's basically the same across the board, b ut what we have seen, as Peter said, that we have been successful, especially in the cities in Poland, to lease out the vacancies that we have in the ongoing projects. Infrastructure development, some slowdown in the PFI area in the U.K., but we also see an increasing interest, especially in U.S, a nd that is, of course, interesting for us, because we can combine our resources between the ID side and the U.S. civil operation, where we go for the large projects.
The last slide, the focus areas that we're now working on, and you can see the various streams here, is that if it started with construction, the biggest opportunities that we have now, that is the U.K. market in the U.S.
So that is something that we will take an advantage from. We also continue with our strategy to expand our civil operation a nd we have been clear about that and said that we will see how we have plans, both how we can expand it on a greenfield way, that we start up with our own resources, and we are gradually continually looking at the acquisition opportunities also in the market.
Challenges in Latin America, of course, to turn it around, as we talked about in residential development. Good situation with the first big project that we started in Warsaw. It started up quite well, and I think that we have find the right product for that market.
The focus is going to be to make sure that we run the operation here in Sweden in a profitable way, and coming up to the profitability level where we should be. City, very good and strong pipeline of products, the 33 product that is ongoing. We will seek to divest them as soon as possible, as we have leased out the space.
Some challenges here to find—to build up, continue to build up the land bank, because we're using up the land bank quite fast now with all the products we start up. We have to build it up again. In infrastructure, we see opportunities in the U.S. With that, Pontus, I think that we can maybe open up for questions.
Yes. Then we will open up for questions. Sorry, I hope now that everyone that tried to dial in earlier are on the line. So we will extend this session somewhat in order for you to be able to ask questions to Peter and Johan. But we start here with the audience in Stockholm, if you have any questions. We have one there from Jonas. P lease, please tell your name and which company you represent.
Yes, Jonas Andersson, Nordea, here in Stockholm. Well, I have questions regarding the strong margins you have in the US civil business and in Sweden. Those margins were rather weak last quarter, and it seems like it's going back and forth in a way. Can you say if there is something extraordinarily positive hidden in the margins now, or is that normal margin going forward?
I think that what you should look at, don't look at the margin in an isolated quarter. Even it out during some quarters, and I think that take a look at the three quarters and take the average. That is like, you know, the best way to view it. It differs between the quarters, depending on which product you close out or products that you start up, you are cautious on it. So it can fluctuate somewhat. So that's the best way to do it.
Regarding the U.S. Civil, you have told us that, okay, the margins we see now, they are not sustainable in the long, long term. Have you anything more to add to that? It's keeping up pretty well.
Yeah, it's keeping up quite well, but I think that, you know, as we build out and acquire companies and start up in new areas, in complete new geographies, like the West Coast, like Midwest and so on, I don't think that we should expect to have such a high margin as we, as you have seen in the past, primarily coming from the New York area in these other markets. So over time, it's going to be diluted.
Given t he order intake now, what do you expect for 2013 in terms of local currency sales? Is it flat or is it up or down?
I don't think that we should go into and give you any forecast here. But, if you look at... Let me phrase it this way. If you talk about the market situation, I think that we will see more or less the same type of market as we see today. That's in going into the first half of 2013. Beyond that, I have difficulties to have a really view of.
Okay, thank you.
Thank you, Jonas. We have Niclas there.
Niclas Höglund, Swedbank. A couple of questions, if I may. If, if we move over to the residential development side, you've now moved the SEK 1.9 billion into the central on building rights. Can you please give us an update? Is there any downside risk to that value when you look at the market right now, and maybe a little bit more on the timing of when you can release this cash?
Well, to start with, I think that we will have different solutions for different parts of this SEK 1.9 billion. So they could be either write out sales, they could be exchange swaps, or they can be sort of a financial structure of any sort. T hen, of course, it could be a very quick solution in the last case, but then gradually in the other two cases a nd we already have a couple of deals lined up. So I can say based on that, I don't lose sleep over the value in the SEK 1.9 billion at all.
Great. T hen moving over to values in infrastructure development. Could you elaborate a little bit on where the sales prices of these hospitals were compared to your sort of estimates on, based on more or less their cash flow models? How much higher?
I can say that they were quite a bit higher. I don't want to give a percent number, but they were quite a bit higher.
More than 10%?
Quite a bit, it has to be more than 10%.
Great. T hen you're also, I think, pretty positive on the commercial development side. You're talking about several more opportunities here in the fourth quarter other than what you announced so far. What about the pricing right now, compared to the also your unrealized gains of SEK 7 billion, which you have, which you're talking about in the report?
Yeah, I mean, talk about semantics there. We are higher than the market values. I think that we've been around close to 10% over the estimated market values a nd rents are stable, and yields are stable, so that level still prevails, I would say.
T hen my final one on the cash flow side here, you were talking about the working capital. We've historically seen a positive support in the fourth quarter, and you were also saying that some of the projects taken so far this year, you haven't seen the positive effect. What have you seen so far in the quarter when you look at the cash flow?
You mean in the fourth quarter?
Yeah, exactly.
Well, that we will come into talk about in February. But I mean, I can say that the seasonal pattern towards the fourth quarter is very strong. I think I mentioned that the asphalt and concrete business in the second quarter was one of the sources of the poor working capital development there a nd I can say that those guys really have sort of sharpened their sort of and gotten their act together in terms of both market and cash flow a nd we will continue to see more of that in the fourth quarter, I'm sure.
Thank you.
Thank you, Niclas. Any more here in Stockholm? Then we will continue with our telephone conference. Do we have any on the line?
Thank you. As a reminder, if you wish to ask a question, that's star one. You have a question from Tobias Kaj from Carnegie. Please go ahead.
Yeah, thank you. I would like to start and ask regarding Latin America and the write-down there. Is the write-down in completed projects, or should we fear that we will see more negative news in coming quarters from the projects where we see problems at the moment?
We always take the scenario when we face a situation like this, to take the brutal facts and take the write-downs of what we see, and we have knowledge about. The total write-downs of SEK 180 million, it's coming from two different types of projects. On one hand, it's one ongoing project where we see increased costs, and on the other hand, it's receivables or claims on projects that were completed previous years where we have had a discussion with the owner, with the client, of how much we should receive.
Can you say when the ongoing project will be completed?
It's gonna be completed next year.
Oh, okay. R egarding, if I can come back to the U.S. civil margin, even though Jonas asked you a few questions, after the Q2 report, you said that you have seen a quite big impact of higher cost due to very high bidding activity, and I guess that's still the case. But still, you're saying that excluding the ICI acquisition, U.S. civil margins are up year- to- date compared to last year. Does that mean that the underlying earnings is up several percentage points compared to last year?
You have a situation where, with a lot of projects out there, which we invest in bid costs. We have a huge part of the organization that is actually working in on these bids. They take several months to put together, and it's a lot of people that are working, some consultancies as well, if you talk about the design bid project. So very, very expensive, actually, to bid. So that's an investment for the future, and that is still the case, because we see a healthy pipeline of those projects come to the market.
I'm sure that it will continue in that way, as I talked about. The underlying profit in the U.S. Civil operation, excluding the acquired company, is, as we talked about earlier, higher than the number that you see here.
If I also may ask one question to Peter Wallin regarding cash flow. I'm not sure if I understood you correctly, but did you say that from this point, we should expect that investment and divestments will be roughly at the same size going forward?
Yes. Not isolated quarters after isolated quarters, but over a 12-month period, yes.
Does that mean that we should continue to see increased capital employed in commercial development and infrastructure development and reduced in residential development?
Yes, if we, as I said, if we still see the potential of value creation as we do in the current market, that will be the case a nd we also, coming back to what we said in the second quarter, we are redeploying capital from the low-return RD stream to the higher-return commercial stream and ID stream. So that is sort of a cause and consequence of that as well.
Okay, thank you.
Thank you, Tobias. Do we have any more on the line?
You have no more questions from the phones. You have just had a question from Tobias Loskamp from HSBC. Please go ahead.
Yes, good afternoon. I have a couple of questions. The first one is on the Nordic civil engineering market. You're making a comment that the competition gets more intense. Is it the market where you would expect, let's say, over the next one or two years, the margins levels on the new orders to be a bit lower than what we have historically seen o r is it something you still feel comfortable with?
You, did you ask about the civil market in the Nordics?
Yes.
Okay.
Yes.
Yes, it—you're right. We see increased competition in the civil market. We have seen it in Sweden for some time, and for those of you that are here in Stockholm, you can see the brand names of the big international civil contractors that building a part of the infrastructure here in Stockholm.
N ow with the fairly favored market in Norway, there is a lot of big projects design build projects building out the infrastructure in Norway. We have started to see the same pattern there as well. The big international players coming into the market, which is, of course, understandable.
But do you see yourself in the competition, let's say, let's say with, let's say, more longer lasting, you know, presence in the country to sustain your margins also on that?
I think that we should view it, that these companies, they are here, and they will stay in the market. They are not going in just for one or two projects and backing out again, because they see, they see several projects that that's gonna be built in the Nordics. and given the situation in the other part of Europe, which is down due to the Euro crisis, they move into the sectors and the places where they see opportunities.
Yep, makes sense. Then, on the Polish market, can you maybe describe a bit more the order intake situations, the pricing in the market, and also the payment morale of your clients in that market? Has it been stable, or is it... Do you, let's say, see similar challenges as competitors of-
Yeah, if you, I don't know how much you follow the other competitors or the other players in the Polish market, but if you do, I'm sure that you're aware of that, several of the large players in construction there, they have a lot of problems a nd we have been able to stay out of those problems.
We have focused on our strategy of closing out the big project, and at the same time regionalize our business and going for the bread-and-butter market, and the midsize and the smaller products in that market, which I think is the right strategy that we see there. The margin that you see, the 4.5, it's a good market in the situation that we have in Poland. Payment morale from clients, I view that it's okay.
Okay, sounds good. T hen, in the nine-month report, you have basically downgraded your expectations for the residential development market in the U.K. I know it's a very small market, but given that you're just ramping up a business, does it even make sense to continue ramping it up? Isn't it better to focus on the, let's say, Nordics home market, instead of going into a weak market now o r do you see this more on a very long-term perspective?
W hen we go into new markets, we always have a long-term perspective. We never go for just one or two products. So that's like, you know, the fundamentals of our strategy. We focus on the Nordic markets as well. We think that, the Nordics is the... That's a place where we should be, of course. In the U.K., we have a small little startup in Cambridge, like in a micro market, in the part of London, where we see an opportunity, and we are following that project and those plots that we have there very closely.
So you would expect the, let's say, the business there to run in line with the plans and in line with the profitability that was expected, or is there also a bit of a delay?
Well, the timing for the expansion and for the buildup in the U.K. is gonna be decided by, gonna come from how the market goes, and the sales in those products.
Okay. T hen a very last one. Let's say, you said Q3 is not a—you cannot conclude on a trend yet, but if you look at the order intake in October in construction, is it a continuation of Q3, or would you say that it's a slight pickup, or how would you describe it?
We will come back in February and tell you, and you're gonna be the first one, together with all the others, to hear about it.
Okay, fair enough. Thank you.
Thank you, Tobias. We also have a couple of questions from the web. One is from Simen Mortensen on DNB: How do you see the Polish market developing? Have you seen more competitive bidding? It's a very competitive market in Poland, as I dwelled upon earlier, and what I can add here is that it will continue for sure. What we are seeing is that more than one of the competitors actually going into Chapter 11, given that they have been too aggressive in the past, and it's now floating up.
Another question from the same persons here is: Are you done with your losses in Finland and Norway? I hope so. We always take the losses, like, you know, just directly, and we're working hard on it to turn it around, and you can see that the numbers are in black now. Thank you. With that, we ask one more time if we have any more questions from the audience here in Stockholm? I do not think that we have any questions from our telephone.
No, you have no questions on the phone.
Yes. Okay, so then-