Good afternoon, and Welcome to The Presentation of Skanska's Q2 Report. My name is Pontus Winqvist, and I'm responsible for investor relations here in Skanska. The presentation will be held by our CEO, Johan Karlström, and our CFO, Peter Wallin. This is a combined telephone conference and audio cast, and you will be able to follow the slide presentations on the web at skanska.com/investors. After the presentation, we will open up for questions. So with that, I hand over to you, Johan.
Thanks, Pontus, and I will start with the presentation by going over some highlights from the second quarter report. Order bookings increased by 36% in the quarter, and year to date, it was 27%. So it was a very good order bookings for us, and we have especially good momentum in the U.S., with several new orders in the pipeline. Revenue growth in Construction up 11%, and we also have a very high level of divestment activities in the Commercial Property Development. One of the most important things that happened during the quarter was the financial close of the Midtown Tunnel in the U.S.
This was a major breakthrough for the PPP, part of our business in the U.S., and of course, it was really good for the Construction units as well. In Residential Development, we are restructuring the business, as we announced, in mid-June, and it goes according to plan. So if we turn the page and go to page number three, there you have some numbers in brief, from the report, and you can see that, the underlying operating income for the ongoing business, is SEK 1.8 billion.
If we add back the cost for a restructuring of RD of around SEK 380 million, if we then compare that with the underlying ongoing business that we had one year back, which was SEK 1.6 billion, you can see that we are slightly above what we had first half of the year, 2011. And revenue in Construction is up, as I said, 11%, 8% in local currencies, and the operating margin in the Construction stream is 2.4% compared to 2.8%. We will comment a little bit further a little bit later here about the breakdown of the operating margins in the various business units. Peter will dwell on that. Order bookings, extremely good.
We have 61.6 now during the first half of the year, and we have 113% book-to-bill ratio on a rolling 12-month basis. And now we have 16 months of construction backlog in our stream. We see, turning to page four, we see several large projects in the pipeline, and we have now started up a lot of big projects, and they are in an early stage, and we are cautious with profit recognition, especially in the mega projects, like the Karolinska one here in Stockholm. If we talk a little bit about the market, it's a little bit of a mixed market sentiment.
Nordic is stable, the other European countries are weak, but compared to the U.S., we can say that the Americas is the strongest part of the geographies that we operate in right now from a market perspective. The turnarounds in Norway and Finland goes according to plan, and you can see that we have the numbers in black for the second quarter. In Latin America, we had write-downs of SEK 18 million, SEK 80 million, and it's primarily coming from more cautious profit recognition. On page number five, you see several examples of the large orders that we landed. I just want to highlight some few of them.
Important bus depot in Stockholm, in Sweden, shopping center in Oslo, and you can see three examples of mega projects in the U.S. that we landed during the second quarter. In Residential Development, we're working hard with the turnaround plan that we presented mid-June, and we are very much focusing on implementing the new processes and procedures and risk mitigations, and that goes also according to the plan. The operating income landed at -SEK 310 million, but the underlying result, if we exclude the restructuring costs, the write-downs on land in Czech Republic, and the cost for expansion in U.K. and Poland, which is basically startup costs, the underlying result is SEK 103 million.
You can see that, on the revenue side, we are lower than previous years, both on sold and started. Turning to Commercial Property Development, we had a lot of activities on the divestment side. We closed deal for somewhat over SEK 3.2 billion, with a gain of a little bit more than SEK 700 million, which was much higher than previous same time previous year. And it always goes up and down, between the quarters, depending on when we close the various deals. We have started three new products, and we now have an total investment value of the ongoing, 34 ongoing projects of more than SEK 10 billion, which is the highest number we have ever had.
One thing that we track, which is important, that is, of course, the pre-lease ratio, and you can see here that it's 60%, and we always compare that with the rate of completion of the Construction project. On average, for the 34 ongoing projects, we have a completion rate of 50%, and we always strive to have the pre-lease ratio above the completion rate, which it is now, 60% vs 50%. This is a good way to mitigate the risks on the leasing side.
We leased 120,000 square meters a year to date, which is somewhat up compared to the same period last year, and now we have full focus on the leasing activities. Infrastructure development, solid business. The close of the Midtown Tunnel, of course, important. And we can also see several projects coming, especially in the U.S., that we will go after. Now we also have the transportation bill in place in the U.S. market. It's a two-year transportation bill, and that is, of course, good to have that in place.
One thing that is worth to mention is that, in that document, in that bill, it is also mentioned, especially, that PPP will be a procurement route, that gonna be used in the U.S. And that, of course, is comforting for us and important for our business. Turning to page number nine, you can see that we have 12% of the revenue is coming from internal project, where we invest our own money, and that is according to the business plan, that we use the capital that we have. That's one of the reason why it's going down, the net cash or the net debt situation. And the revenue coming from our own investments, it's around SEK 7 billion, as we speak.
Turning to page number 10, which shows the order bookings and order backlog. You see the two curves there at the top of the slide, and the dark one is showing the order bookings, the rolling 12 for order bookings, and it's clearly above the light blue, which is the rolling- 12 of revenues. And when it's above the light blue one, it's an indication that we are building up the backlog, and you can see that on a- that the book-to-bill ratio is now 113% on a rolling 12-month basis. It is an indication that the revenue will increase the coming years. Looking at the breakdown on page number 11, you can see that we have overall a good order situation.
Nordics, good, especially Norway, where we see a strong market in on the civil side. Somewhat lower order intake in Poland and Czech Republic. Czech is a tougher market. Poland is a little bit better, but on the other hand, we are comparing the numbers with, especially on the book-to-bill ratio, with the numbers where we have had A1 in the comparable period. U.K. is also a tough market, but we have a very good situation with a strong order backlog. Americas is the strongest market from an order situation, and you can see that we have landed quite a lot of new orders in u.s.-USA Building, but especially in USA Civil and Latin America.
In the quarter, we had over 300% book-to-bill ratio for USA Civil. With that, I hand over to Peter.
Thank you, Johan. Let me start by looking at the Construction segment on page 12, where we saw revenue from the year to date amount to SEK 57.2 billion, representing an uptick by 11% in SEK or 8% in local currency. This means that we are maintaining the growth on the top line in construction at the same level that we had for 2011. The gross and operating income is almost similar to the same period last year, but because of the increased revenue, the margins are dropping somewhat.... We are recapping some of the lost ground in the first quarter, and I will comment the businesses on page 13. First of all, as Johan pointed out, we are getting traction in the turnarounds in Norway and Finland. Sweden is progressing well.
As Johan also has alluded to, we have a number of newly started complex projects in many of our businesses. Sweden is one of those examples, as is USA Civil, where we are very conservative on the profit take. So it's more mechanical differences compared to the comparative period than any performance-related issues. The Czech Republic and Poland came back strongly after a tough start on the year because of the harsh winter in that part of the neck of the woods. And we have also taken, as a precaution, taking out change orders in revenues in Latin America. All in all, giving them SEK 1.3 billion in operating income and a 2.4% operating margin.
The Midtown Tunnel close has not given any positive impact on USA Civil in the quarter, but rather a good start on a complex project. If we go over to the Residential Development streams on page 14, it is dominated by the restructuring and write-downs that we announced here before the end of June. Revenue amounted to SEK 4 billion, and in the quarter, revenue actually was up, and number of sold unit was more or less equal to the comparative period. If we turn to page 15 and look at the various countries, the Nordics are hit by the three hundred million in write-downs of projects and restructuring charges that we took.
The Czech Republic is impacted by the SEK 80 million in write-downs of land in predominantly Slovakia, that we took also in the second quarter. If you adjust for this, the profit in the RD stream is more or less equal compared to the second quarter as of 2011. Turning to page 16, homes sold and started. You can see the two lines are flattening out because of the relatively strong second quarter on number of units, where we had started 1,381 units and sold 1,408 units. Among those started, we started our RD business in Poland by starting up a phase of 298 units in the started.
If you turn to page 17, we had 5,348 units under production, of which 60% are sold with binding agreements and contracts. And the inclusion of Poland with no sold units, because that has started in the third quarter, that has diluted the number somewhat, and we are quite content with the sales level right now. Then, if we go to page 18 with Commercial Property Development, again, a very solid quarter, but a very solid business. In the second quarter, we announced and closed the sale of Tenth and G in Washington, D.C., with a very good profit. And then we also sold a hotel in south of Sweden in the amount of SEK 900 million. That property will not be taken into possession by the buyer until 2015.
So here we have been quite cautious on the profit take in the quarter. If we look on the gains on slide 19, you can see that we, on a five-year average, have posted an operating income in the CD stream of close to SEK 1 billion, which more or less equates to a 20% operating margin. If you look on the sale of the commercial properties, the sale in the second quarter led to a 20-21% margin on the capital gain. That is, of course, then diluted by the fact that we have been very cautious on the profit take in that hotel that I just mentioned. If we take a look on slide 20, on the portfolio in Commercial Property Development, we started up three new projects in the quarter, two Swedish projects and one Polish project.
And the ongoing projects have an occupancy rate of 60% and a very healthy degree of completion and occupancy rate ratio of 60% and 50%, respectively. You can also see the very cautious profit take on the property mentioned down under on the last line, of which ongoing project sold. Because that markup is then going forward, if we do what we think that we will do, that will increase, so will the profit.... Taking a look on the very important leasing information on slide 21, you can see that we are increasing, and we have posted very good leasing activities in the second quarter, and we are still maintaining the empty space ratio for the full year basis.
Now, leaving CD and going to infrastructure development on slide 22, a very solid business, which in the second quarter saw a positive P&L impact by the fact that Midtown Tunnel was closed to the tune of $15 million in recouped bid costs, giving them an operating income of SEK 189 million. That is then compared to the huge profit posted on Autopista Central in the second quarter of SEK 4.5 billion exactly. So, another good, strong quarter of ID. On slide 23, on the product portfolio in ID, you can see that the unrealized development gain have increased by roughly 10%, predominantly due to the fact that Midtown Tunnel was closed. And, continuing then to the group and income statement on slide 24, this equates to an operating income from the business stream of SEK 1.8 billion.
We had the central charge of SEK 333, and eliminations of -SEK 50, thus giving an operating income of SEK 1.4 billion. Just a quick comment on the eliminations, this was a source of some deviations we've seen in the market, and the fact that we have starting up much more products in the CD stream, will give us a negative elimination, since we eliminate the Construction profit in this, and that is then released once we sell them. So since we have sold quite a few products which are not even started in some instances, it's not much of a positive release you can see here. The income of the financial item was also SEK 1.4 billion, and we have a tax rate of 27%, giving a profit for the period at SEK 1 billion.
Going to cash flow. In the second quarter, we saw further outflows from working capital, and for the year to date, we have SEK 3.2 billion in net outflows from working capital, SEK 2.7 billion from net investments, and then we have positives from the business, thus giving the SEK 5 billion. In addition to that, we also handed out the dividend. So when you compare cash flow from operations of SEK 5 billion compared to +ve SEK 1.2 billion, you then have to take Autopista into consideration, so you're actually comparing - SEK 4.2 billion to the - SEK 5 billion we are showing this period. If we then turn to working capital on slide 26, the working capital is decreasing in the second quarter, which is expected.
It is also expected that this now, due to seasonality, and also due to the fact that we are increasing top line, will increase in absolute terms. As we have stated before, it will increase, is expected to increase in absolute terms, but the relative proportion, the orange line here, will drop since we are increasing top line. Going to the financial position of the group, we had a total asset of SEK 85.7 billion and an equity of SEK 17.8 billion. The visible net debt was SEK 5 billion. We started the second quarter with a positive net cash, and then you have the cash flow adjustments, and dividend out, which explains the net debt situation.
We have what we call the operating net financial assets liabilities, ONFAL, at positive SEK 2.3 billion, and capital employed at SEK 33 billion. Going to slide 28, you can see the reconciliation of the change in financial position. And in addition to the cash flow out, we have also, during the quarter, increased the change in pension liability due to the fact that the long-term government interest rates in the UK and Sweden has dropped during the second quarter, thus increasing the defined benefit obligations. That has impacted the quarter by -ve SEK 800 million, and year to date, -ve SEK 500 million. So all in all, we have the -ve SEK 5 billion net debt, and if we then add back pension liabilities and interest-bearing debt on co-ops, we are at the SEK 2.3 billion in net financial asset liabilities.
Going to slide 29, and the change in equity, it's predominantly driven, of course, then by the dividend handed out during the second quarter, and the pension, offset by the profit from the business. And then last but not least, going to the group investments in capital employed on slide 30. The total development stream capital employed is increasing over both the last, the end of the year, and also compared to June 30, 2011. The Residential Development stream is more or less equal to what we started the year with, and as we get into grips with the reorganization and reduction of land bank in the Residential Development streams, this will drop. And what we talked about in conjunction with announcing the restructuring in RD-...
We will, we will define the excess land bank, and that will not be reported in the RD stream from the third quarter. It will, however, not leave the balance sheet until we actually sell something or restructuring something. Commercial Property Development is increasing, and commercial and ID is where we are going to pump the cash in, amongst the development streams. With that, Johan, I hand over to you.
Thanks, Peter, and let's have a quick look at the market outlook on page number 31, starting with Construction. In general terms, we can say that it's stable for the entire stream. But of course, there is differences between the various geographies. Very good and strong market in the U.S., especially on the civil side, with many large civil projects. And, it's not that the entire market has increased, it's more that it has shifted over from smaller projects to more huge complex design-build projects, which is exactly the sweet spot for us. And on top of that, we now can see that the transportation bill is in place.
The other market in the U.S., the building market that we also are involved into is a little bit of a mixed picture. But several of our segments that we are active in, such as healthcare and data centers, also looks good. In the Nordics and Poland, more stable, and we can see that, especially, the Norwegian market in the civil sector is strong. Weaker market, though, in Czech Republic and U.K. due to the public deficit. Turning the page to the Residential Development, we overall, it's a slightly declining market in residential. Norway is the strongest one here, if I compare it with Finland and Sweden. Somewhat weaker in Finland, with declining prices.
Poland, if you talk about Poland and U.K., it's we only look at the micro markets where we are active in, in Cambridge, outside London and in Warsaw, in Poland. And it's fairly stable where we have our operations or our start-up organization. Czech Republic, we see a considerable decline. Turning to page number 33, the market outlook for Commercial Property Development. It's still a growth in Commercial Property Development sector, but it takes long time to lease the premises. The investors are active, but more picky when we talk about the transactions and the properties that they are interested in.
They only want to go for the best locations and properties with long and stable long leases and stable tenants. Nordics, in general, good, but more uncertainties in Finland. High demand in Poland. It's a good, stable market, and we are active in five, six cities there, so it's a very important market for us going forward. U.S. is also stable, but it takes longer time to lease the premises. Increased potential for the PPPs in the U.S., several projects in the pipeline, and that is, of course, important for us. Fewer in U.K., so it's more of a balanced situation between the various geographies where we have our operations.
So going forward, I think I have touched upon several of the things that you have on the very last slide. I just want to highlight some of them. So the summary is good opportunities in the U.S. We are a strong player, and we will use the platform for further growth. Norway and Finland, moving in the right direction. And in Residential Development, we are implementing the new processes and way of working according to what we presented in mid-June. In commercial development, we see further opportunities for value creation. But of course, it's very much depending on the leasing situation, because that's how that is the way how we create and increase the value of the properties. And in the U.S., we see more opportunities for PPPs.
So with that, I think that we can maybe, Pontus, open up for some questions from the audience.
Yes, then we will start with the audience from the telephone conference. So please open up for questions.
Our first question comes from Mr. Jaap Kuin from ING. Please go ahead.
Good afternoon, gentlemen. I have a couple of questions. The first one is on Sweden and the margin. Let's say the last four years, your average margin in the second and third quarter has been over 5%, and we see now quite a drop. So could you please help me interpret this drop in margin, explain why this is happening? And I think my second question would be on Poland. Do you think the—I think you said the outlook is stable, but if I look at order bookings and sales growth in the quarter, it's actually looking quite negative. So could you please also help me understand that one? And then my final question would be about the U.S.
Could you maybe describe for me the competitive landscape over there, and maybe talk a bit about margins on new projects in the US C ivil side taken in? Thank you.
Okay. So let's start with your first question regarding Sweden. We have several large projects in Sweden, like the Karolinska one, and which is in an early stage, even if we have been on the project for some time, but it's a mega product. And now the revenue starts to kick in on the top line, and our methodology to book the profit very cautiously in the beginning of the product is, of course, one of the factors that is driving down the margin. So it's not that the underlying businesses has another profitability. It's more that this is more of a situation of large product and the impact for them and how we book the profit.
One other thing that I also think could be mentioned here, and that is the asphalt business has had a very slow start due to weather conditions, but also the municipalities were very slow in booking the orders or handing out the orders as for us, which means that we started very late compared to last year. In that business, we have a lot of fixed costs, so that, of course, which we have to take each quarter. That's one of the reasons why the first quarter, by the way, it's always lower, and we can see an impact of that also in the second quarter. Going to your next question regarding Poland and the profitability.
What was your question regarding Poland? Can you repeat that one, please?
Yeah, sure. I think in your outlook on Construction, you say the outlook is stable for Poland. And if I just look at the book-to-bill ratio for Poland and also the sales development, it appears to be turning down, and I was just wondering how to reconcile these two facts. Also, given the negative news items coming out of Poland, with the large builders there having some issues.
The very last one, I'm not aware of the negative news. But okay, let's... We are coming from a situation where we had a big part of the business from the mega project A1, the big highway project of which is or was a PPP project. That project has now been done. It has ended, and that was a very profitable project. The underlying business in Poland is increasing, so the volume that you see today should be prepared with 2/3rds of the volume in 2011, if you put the mega A1 project on the side. So that's the way.
The business there is increasing, and it's healthy, but it will go down to a more normal margin level. In the U.S., talking about the competitive landscape, and I guess that you're interested in the civil side there.
Yeah, exactly. Thank you.
As I mentioned in my start-up here, we see more larger, complex design build projects. It's. Of course, there is other competitors there, but they are fewer compared to the middle-sized ones, the middle-sized projects. On the middle-sized projects, around $50 million, it can be between five up to 10 different competitors. When we talk of the mega projects, it's less, which means that it's better for us. But of course, all the large players are active in the market. In the sup- if you to call it the super mega projects, the really big ones, they are so large.
So the mega projects, the competitors, they go together in joint ventures because it's hard to execute such a large project just for one company, which means that there's gonna be even fewer competitors on those. So, all in all, it's a competitive market, but on the larger projects, we have a better advantage.
Would you say that... Because I think previously you indicated that the margins should normalize in the US civil business over the longer term to towards, let's say, 6% margin. Do you still feel that's the case?
Yeah, I think that, you know, if you go, if you look at, last year and the, the, the year before, it was, somewhat higher, and I think it, should go down. But on the other hand, the, the top line will grow. And, there is an interesting thing that happened this year because you can see in the order bookings that it's, the, the order booking is going up, which is an indication that, the coming years it will be significantly higher revenue in US Civil. The, the, the large project, and especially the design-build projects in the U.S., there is a design phase before you hit the ground, and the revenue is coming, that means there is some delay before it's coming in.
But the cost to bid the projects, and also the projects that we are not as successful on, we take the cost immediately, of course, with the organization that we have to be. So that means that we have some cost now to bidding for all the mega projects, including the one that we land, but the revenue and the bottom line for that will come with some delay.
Very clear. Thank you.
We have a question from Mr. Will Morgan from Goldman Sachs. Please go ahead.
Good afternoon. I've got a few questions, please. The first one is, again, on this point about margins. You say that clearly they are somewhat depressed because you're more conservatively accounting large projects. But you've also said that in a number of areas, and you mentioned USA Civil, you mentioned Poland, that there is some degree of normalizing downwards of the margin that you would expect. And what I'm struggling with is that your order book is clearly very high. Your move to large projects is quite evident. And therefore, one might imagine that there will be continued conservative accounting of large projects that start up. So I just wondered how we should think about over the next 12 months, let's say, the evolution of your margin.
Are you expecting actually, maybe, you know, a year plus of perhaps slightly more depressed margins in Construction while this kind of shift to larger projects gets underway? And if so, could you just elaborate a bit more about which divisions you're seeing that in? The second question I just had was on the RD restructuring, and you've talked about the cost savings you hope to achieve. I just wanted to get a general sense on how we should be thinking about this, because do you think that these cost savings will mean that this business effectively has a step change in normalized profitability as a result of lower costs? Or is--are these cost savings effectively to enable the business to more rapidly return to profitability than would otherwise be the case, given a slightly more depressed environment?
If I could just leave with those two, that'd be great.
Okay. Hi, Will, it's Peter here. Quite a couple of small questions you asked, and I will try to answer them as best as I can. As you alluded to, we are doing a lot of bigger projects, and we are taking a lot of costs head on right now within the design phase. I mean, I would say that we still have our margin target, but of course, when there is more design-build contracts out there in the market, this kind of mechanical impact will happen in the market. So I would say that you would see it predominantly within USA Civil, but also to some effect in Skanska Sweden.
Those are the divisions which are mainly impacted by this phenomenon. When it comes to RD and the step change on the margin, it is the savings will come gradually. I think we talked quite a bit on this on the Capital Markets Day on that the biggest changes is when you can make very cost and production-effective solutions early on in the project, which means that the project you are taking to the market right now you have more limited savings potential in. So the step change is not from one day to the next, but it's rather over time.
I would say for it to really bite, you will need at least two or three years, and I think that is the message we were trying to convey, a few weeks ago.
Okay, thanks for that. If I just go back to the USA Civil business, because I guess to some extent, I'm getting a little bit confused about how to think about margins, because it seems to me that there are three factors going on. On the one hand, there's the kind of normal long-term sort of shift west of the business, and to some extent, that is normalized, bringing the normalized margin maybe down from where we've seen in the last couple of years. Then on the flip side, you've got the positive, that you've got, clearly a move to potentially higher margin, high risk projects in, in the large projects arena in the U.S. And then offsetting that again, is the fact that you've got all the kind of start-up costs. So I suppose net-net, I'm just...
I suppose we would just think that the margin should sort of gradually normalize. Are we still thinking this kind of normalizing down towards the kind of 6% level in USA Civil? I mean, just to get some kind of sense on where you think that would settle, because there are quite a lot of push and pull factors going on.
In the short time frame, all three factors drive the margin down. When expanding the business to the west, the business will be larger, but margin-wise, it will go down. Normalizing the northeast business, we are coming from the heydays with very successful products, and now coming to them, there's still a big portion of that still in the revenue. So that is also will drive the margin down. The new projects that we are now starting up on the East Coast, and but also on the West Coast, we take a very cautious profit recognition on, because we want to be cautious in the beginning. And on top of that, we have the bid cost for the mega projects.
So it's a little bit of a trend shift here, and there is... You're completely right. There are different factor that goes on at the same time here.
... Okay, perfect. Thank you very much. We have a question from Mr. Tobias Kaj from Carnegie. Please go ahead.
Oh, sorry, I had—I was muted, I think. I would like to continue to ask a question regarding the U.S. civil operation. And if we look at the margin in the second quarter, it's down some 350 basis points compared to the same period last year. Is it possible to say how much that is related to the acquisition and lower margins in that unit? And how much is related to, you know, the fact that you are in an early phase of many large projects? And finally, maybe how much is related to increased bidding expenses that you have at the moment? And also, how long time will you continue to see high bidding expenses? Is that for another couple quarter or for a longer period?
If I start with the very last question, the bidding expenses. I think that, as long as we see mega projects in the pipeline coming to the market, we will see higher bid costs. And I see that this higher proportion of higher bid costs because it's also shift over to the mega projects. But we're also, at the same time, expanding the business of the West Coast, so we are taking on high bid costs on the West Coast, and there we basically have very little little revenue. So it's like in a... So I think that going a little bit further down the road, it's gonna be more normalized bidding costs.
But, it's still gonna be quite high, which is good for us because that is the type of projects that we want to go after. Can you, you asked about the ICS, so Peter maybe can-
Yeah.
ICS is amounting to roughly SEK 1.2 billion in the year-to-date numbers in top line. So of course, that is taken at a very sort of cautious profit recognition. We are in the midst of the integration work with ICS, so that's impacted numbers quite a bit. Also, we are right now, we have a very high SG&A number impacted by the bid cost, as we talked about. So roughly 50/50, if you divide between the two various factors, is the difference between last year and on top of which you have a cautious start-up in some projects. So it is predominantly then ICS bid costs and to some extent, cautious profit take.
Okay, thank you. If I also can ask one other question regarding the cash flow and the property divestments you have done in the first half, if I understand it right, you have not received the payments yet. And if we exclude this SEK 900 million divestment in Malmö, how much do you expect to receive in the second half due to sold properties?
SEK 1.2 billion.
Okay, thank you.
We have a question from Jonas Andersson from Nordea. Please go ahead.
Yes, good afternoon. If I may continue with the US civil, I'm just wondering, are there no reversed bidding costs for the Midtown Tunnel included in that result in Q2?
Hi, Jonas. Jonas, yeah, no, no, no recoup bid costs whatsoever. We have a Midtown Tunnel with hefty contingencies instead, so we have a safety margin.
Okay. Another question regarding the free working capital. It's down pretty much in Q2, and you say it was expected, but will this come back again, or is it will it stay at this level and continue down?
It will, by all means, increase in absolute terms, and but decrease in relative proportion to revenue.
Why did it come down now in Q2?
Well, as you see from all the dark blue bars in the graph, Q2 continues down from Q1 of seasonal past patterns, and also, of course, due to what's happened to top line overall. And as we have also stated, the fact that we are closing out profitable project also means that we are settling with subcontractors and material, et cetera, which means that some of the cash that we've been holding on leaves the company. And I should also say that we have quite a few design-build projects in early phases, and that also has an impact on cash flow, because you are not starting to invoice them right away with big down payments.
It takes some time before that bites, and that will sort of support working capital in the second half of the year of 2012.
Perfect. Thank you. I also have a question regarding Poland and Czech Republic. Well, coming from really low numbers in Q1, the numbers in Q2 are really strong. Should we look at this as... look at the first half of the year, or should we look at the Q2 with the really strong margins when elaborating on the future?
I think that you should look at the first half of the year.
Some costs that you had in Q1, you have taken them back, so to say, in Q2?
Correct.
Perfect. Thank you.
We have a question from Niclas Höglund from Swedbank. Please go ahead.
Yes. Hi, Niclas Höglund , Swedbank. A couple of questions, if I may. If we go back to Sweden, you were also mentioning tender costs in the report. As you also did it in regarding US Civil. Could we maybe get a better feeling on the underlying profitability if we exclude these large projects?
The underlying profitability in the Swedish operation is basically the same. There's more mechanics.
So it's more mechanical. But would you say that the underlying profitability is still or on improving trend if we go back a year?
No, it's basically the same, and then it goes a little bit up and a little bit down, depending if you close out a large product or if you are in an early stage of large products.
So what would you say that about the pricing in, in Sweden?
I would say that it differs in between the sectors and so on, and it's fairly the same as it has been. It's a little bit different if you compare it to the U.S. In the U.S., we said that we have it's good with the large with the mega civil products. What we can see here in Sweden is that on the large product on the civil side there is international players coming in, and it's tighter margin, a tougher competition on those because they are more interested in it. Further out small, medium-sized and smaller products out in the countryside it's more like you know the usual players and then less competition, actually.
Okay. Then moving over the Atlantic again to, to the US Civil, could you elaborate on the organic growth? We, we got the, the sales number for the first half, and part of that is probably related to first quarter as well. What would be the organic growth rate in US Civil in the second quarter?
Do you have that, Peter?
Roughly in line with inflation, i.e., 2%.
Okay. And when you look at the infrastructure development, you were mentioning that the NPV for projects are coming up. Was this fully related to the Midtown Tunnel, or have you seen any lower yields or time effects also impacting these numbers?
You talked about ID now, Niclas?
Yes, ID.
Yeah. No, it's the impact of Midtown Tunnel. We have not changed any assumptions with regards to yield levels, et cetera, other than to the incremental increase we get from a new investment.
And-
Also, remember that the equity investment, when you look at capital employed, that is not due until 2015.
Okay. And then, follow up on the infrastructure. You're very positive on the outlook for new products, but what's your outlook for transactions? How is the investor market right now?
It is very good. You are seeing what's happening in the stock markets every day, and people, life pension funds want something more stable to invest in. So, as we stated in Q1, we are testing the waters with a few investments here, and we are quite hopeful that we will be able to close some pretty good deals in the second half.
Okay, looking forward to that. Thank you.
We have a question from Mr. Marcin Wojtal from Bank of America. Please go ahead.
Yes, hello. Thank you for taking our questions. First question would be on Latin America. I see that there was a write-down of SEK 80 million in the second quarter. I just wanted to check if that region should normalize in the third and fourth quarter, and what would be the normalized margin in the region? Second question would be on Swedish residential. Just putting aside your restructuring program for Swedish residential, could you perhaps give us a bit more detail in terms of what you are seeing currently in the market, in terms of prices? And also, I saw that you actually reported an increase in revenue in the second quarter in the residential. Could you elaborate a little bit on that? And third question on commercial property.
I appreciate that you mentioned that in the last five years, your average gain has been in the range of SEK 1 billion. I mean, do you perhaps have a number in mind in terms of what you are targeting, in terms of capital gains on commercial property sales in the full year 2012?
I can start with the first part of the question regarding Latin America, and then hand over to Peter with the remainder of your question. We are more cautious about the profit recognition in Latin America. There are huge claims on and change orders on the mega products in Latin America, and that is basically how it works down there, especially for the big client, Petrobras. We are cautious to take in the payment for those. We take the full cost, of course, and it can be a little bit bumpy than between the quarters, as it takes some time before we settle with the client.
So, that is what you see here now in the second quarter. The operating margin should be somewhere between 3%-5% on a normalized basis in that business. So Peter, can you take the RD and CD part of the question?
Sure. RD, yes, we reported higher sales numbers in the quarter on the same number of units sold, and that is very much due to the fact that we are increasing Norway quite a bit. In Norway, people have enormous amount of money due to gas and oil, so they are prepared to pay quite a bit for their residential units. So that explains part of it. In Sweden also, we have sold a number of very well-located premium products, so that helps the revenue up. If we look on the sales prices, which was also a question you asked, it's fairly stable in Stockholm and Gothenburg, but it's more weak in the southern part.
When we talk about stable, we talk about a few percentage points improvement year-on-year in Stockholm and Gothenburg, and a few percentage points negative in the southern parts of Sweden. CD, if you look on our CD business year-on-year, we are selling properties. Over the past five years, we've sold properties in the tune of SEK 4-5 billion per year. The profit level is around 20% of the sales value, so that is approximately. That, that's sort of the equation to look for.
Okay. Thank you very much.
We have a question from Mr. Peter Trigarszky from Danske Bank. Please go ahead.
Yeah. Hi. Just three small questions. First of all, in Sweden, how big is Nya Karolinska right now, of sales? And then secondly, could you say anything on the restructuring you're taking in Nordic, if it's only Sweden or you're taking any cost in the other markets? And then finally, the CD project you divested in, Malmö, which is going to be finalized 2015, will the profit there be recognized step by step or when you're handing over the project?
Oh, hi, Peter. Starting with the Swedish NKS building, or NKS project, NKS will, per annum now, during the next couple of years, have a turnover per annum of about SEK 2-SEK 2.5 billion per year. So the first half of this year, we've posted roughly SEK 1 billion in revenue on the project with a very low profit recognition. RD, the predominant part of the restructuring and cost charges is against the Swedish business. CD, that we... I would say that we have a number of moving parts in the agreement, and fulfillment of those and establishing of those moving parts will make it possible for us to realize chunks of the gain.
But of course, at settlement, you should also expect a certain amount of the profit take to happen. But I would rather say that is, it will be done over time, so we will have to come back to that little baby over the next three years.
Okay. When you're mentioning it, then, NKS is, so you are getting some contribution on EBIT ?
Yes, but below the average margin, which means a dilution.
When should that be up at, you know, where you are today?
Well, everybody seems to think that we have a lousy profit margin, so we think that we will—depends on certain critical bits of the project being completed, but do not expect any visible impact until the end of 2013, beginning of 2014.
Okay. Thank you.
Thank you, Peter. Then it's time for the last question.
We have a question from Mr. Fredrik Skoglund from Deutsche Bank. Please go ahead.
Hi, I have a few questions. The Midtown Tunnel, how large was the big costs, and how will you handle that going forward? Also, when in full pace, the Midtown Tunnel project, will that impact the margins for US Civil substantially, and in what way? And also, if you could elaborate a little bit more on second half on orders for the US Civil, obviously, you expect it to be strong. Can it be as strong as it has been in the first half?
Okay, if I start with the easy question, and then I leave the other two to Johan. The bid costs. We had a total recouped bid costs of $60 million to Skanska, of which ID have reported $15 million now in the second quarter. So you can do the math and see what the difference is, and that is now embedded amongst the safety margins in USA Civil and will be released as the project is going forward. If you talk about the profit on a project like Midtown Tunnel in the Construction stream, it's a healthy margin with a good level of contingencies. So we hope that it's gonna be a margin that's gonna help us to increase the overall margin.
But of course, we will be cautious on the profit recognition here in the beginning of such a large project. Then I think that you had the questions regarding the number of new order bookings in the second quarter. You know that it always goes up and down, especially in USA Civil, how we land the project here, and it also takes some time after that you are the low bidder until the contract has been signed. So I don't know exactly where the new orders will land, but in which quarter, but going forward, I think, I'm looking at the future for USA Civil, I'm very positive about the business there.
Okay. Thank you.
Thank you, Fredrik. And with that, we close this audio cast and telephone conference on Skanska, and we wish you all a nice summer. Thank you.