Hey, good afternoon, and welcome to the presentation of the Q1 report from Skanska. This is a combined live presentation, webcasted, and also a telephone conference. There will be possibilities to ask questions after the presentations, and the presentations will be held by our CEO, Johan Karlström, and our CFO, Peter Wallin. There will also be, later on here, distributed handouts of the presentation to the audience here in Stockholm. So, and, we shall also try to keep this activity within one hour. So with that, Johan, welcome.
Thanks, Pontus. I want to start to comment the picture that you see on the slide here. That is a photo of the first project that we started up in U.S., five blocks from the White House in Washington, D.C. And that was, we have exported the model of the commercial development properties into the U.S., and this one was the first one that we sold. I will comment a little bit, you know, further down the road here in my presentation regarding the numbers of that project. But it actually shows that it's possible to export that fantastic track record and also the model that we have in Nordics and other parts of Europe.
The result that you see now in the first quarter from the residential development operations is totally unacceptable. We have now intensified a turnaround work to really change the operation, and we will come back to you before the end of Q2 with the solution, what are we going to do with it, and how we're going to run the business. One thing, though, which I think is important to say here, so there is no misunderstanding about the solution, we still think that residential development is a part, is a core part of our business, but we're going to run it and work with it in a different way, in a one Skanska model way. So that's, I think it's very important to state that.
The revenue in construction, you could see that, it grew during, we could see a revenue growth in the construction, and now we have a book-to-build ratio of 107%. And that is an indication of where the revenue will go in the 12-month period from now. And we can also see that in several part, several of the countries and operations that we have in the construction stream, that there is a good opportunity for us to further enhance and build up the order backlog. Last quarter, we talked about the Norwegian and the Finnish operation, and we have started up the turnaround operations there.
We have the two new business, business unit presidents in place, exported from Sweden, from a unit where we know how to run a business in construction, and it has started up well, and the turnaround process goes according to plan. But it will take some time in those operations until we are up to the level where we think that the standard level of performance should be. The first quarter is always a seasonal quarter, if you talk about profitability. Always low, especially in the units where we have a high portion of civil operations, like Poland and Czech Republic. So the numbers that you see there is more a picture of the seasonality that's built into that type of business that's there.
The two other development operations that we have in the commercial property development side, and also on the infrastructure development in ID, is a very important value creator for Skanska. And I will come back to and explain a little bit further of the projects and what we see here. The first quarter, you see the numbers here. We had an operating income of SEK 148, which is SEK 300 below the first quarter of last year. And the main part of that is the difference in residential development. And there is also a difference in commercial development due to fewer completed projects with income from. Revenue in construction is up 16%, in local currency, 14%, compared to the first quarter last year.
That was also something that you could see if you look into the book-to-build ratio that we had last year. The operating margin is 1.2%, barely in line with the first quarter last year. The first quarter is always the weakest quarter, and Peter will comment on the various business units, so you get a little bit of the feeling of the various business unit there. Order bookings is also up 16% in the first quarter, and we have on a rolling basis, 107% book-to-build. And the backlog is now 16 months of work.
So we have a growing backlog at that point in slightly upwards. In construction, the overall situation there, that is that we have quite a good order situation as I talked about. But if you talk about the market, there is a mixed picture there. The Nordics, stable. If we look into the three countries in the Nordics, it differs somewhat here. And the first one is the market in Norway, which is favorable. It's a lot of products on the civil side. Sweden is basically stable, but we can see a tendency in Finland that the market is weakening.
And our impression of the Finnish market, that is a new, or you can say a change from previous quarter. The other European markets are weak, but there are also some differences within the various countries, where Czech and UK is the weakest one due to a lot of cut in the public spendings. The change for us now, if you talk about in construction, that is the American situation and the American market. We see a lot of products coming in, and coming to the market to up for bid, especially large, complex, design, build infrastructure project.
If I jump down to the last bullet here on the slide, you see the operations in Latin America. We had a write-down in two specific projects there. Otherwise, the underlying market is quite okay and good. Some examples of new orders that we have landed during the quarters, and you can see that several of the largest one is coming from the U.S. Research Campus. There is a manufacturing facility and a subway system as well. You see on the picture here, an example of how it looks like when we are in New York and building. I think that you have also seen that we have landed some new projects even after that we closed the quarter.
Residential development. The problem in residential development, that is in Sweden. It's a loss in Sweden due to two factors. The first thing, cost overrun, cost increases in the Swedish operation, and also due to lower volume. We are starting fewer projects and selling less apartments. So that means that the overhead cost is not in sync or not in balance with the volume. That's the two factors that is hitting us right now. That is something that we're working really hard on to come with a solution, and we'll come back to you, as I said, before the end of the second quarter now, with the solution and how we're gonna deal with it.
The revenue down 38% in the quarter, but the number of apartment is down 30%. So that means that there is a change of price mix, so it's less of the expensive apartments. There's just more of the first-time buyers and that type of apartment in the mix of sold apartments. And you can see that we have also lowered the started one from 837 - 480 apartments in the quarter. Commercial property development, we now have, we have started since we last met during the first quarter, four new products.
If I remember right, when we talked about how many products we had at the end of the year, it was a record number of products that we had in under investment. And now we have increased it with four new, and the total volume of investments is close to SEK 10 billion. One thing, one measurement that is important to follow when we talk about the products on the development, that is the pre-lease ratio versus the completion rate on the product. And you always want to have the pre-lease ratio over the completion rate.
So, and you can see here that the pre-lease ratio in the combined portfolio is 50%, and the completion rate is 48%. So that is a good risk mitigation factor to follow those ratios. In the quarter, we signed 26,000 square meters in new leasing contracts. And after that, we closed the first quarter. We also signed with Nordea 24,000 at Entré Lindhagen here at Kungsholmen in Stockholm, which is also a good sign that our products are interesting for the market. Infrastructure development preferred bidder on a waste treatment project in UK. And we have also reached financial close in two projects here since we last met, and that's a Woodlands School, a minor project in UK.
After that, we closed the quarter. In the beginning of the second one, we finally signed the Midtown Tunnel project that we've worked on, I think it's for six or seven years. That is a major breakthrough of the PPP model for us in the U.S. market. Very important for us to go in there and be established as a player in that market. Of course, it's also good for the civil operation. For our part, it is SEK 4.4 billion in order bookings. The good part with an ID project is that the cash, the equity will go in several years down the road, but the cash flow on the project is positive with upfront payment.
So for Skanska, with the financial model that we have, the ID project, that is part of the engine to feed the investment and development side with capital. We see more projects out in the market, in all the various geographies where we operate, even in the U.S. But one thing that you have to bear in mind regarding PPP projects, it's a long process, and it's always a slow process until we reach financial close and can book them. Here you see the financial model of Skanska, the One Skanska Model. You see construction on one hand side, and you see the investment or developments, development operations on the other one.
The internal revenue that we now have, that's coming from the investment on the project development of doing in construction for internal work, that's 12%. And you see the breakdown a little bit further down on the slide there, that's half half of the internal revenue, that is for PPP projects or for the ID. So the ID part or the One Skanska Model, that is now a really value creator for the group. And of course, you can see that we have also increased activity on the commercial property development side. Order bookings on the rolling 12, 107%, as I've mentioned, and I think that the graph, the interesting part on this graph, is to follow the two lines at the top there.
When you have the order bookings is always—if it's over the revenue line, the light blue one, then it's an indication that how the revenue will how it will go the coming 12 months. Order bookings, I will comment each business unit here. Sweden, it's a stable unit, and I will say it's an okay backlog, and I think we are very confident with the backlog that we have there. Norway, a very strong backlog, and with many projects, and we I think that we can take it a little bit slowly here to book new projects, even if it's a very favored market.
The Finnish market, though, is going somewhat down, and, I see, fewer, and that's the reason why we see a little bit, you know, fewer, order bookings in Finland. Poland, okay, Czech Republic and U.K., coming from the situation that they have, cut in the public spendings. The Americas, the U.S. units, including Latin America, we see a lot of activities there, especially in USA Civil. Large, complex, design, build projects, mega projects. It's not that the whole market has increased, it's more that we see more of the type of large project that is interesting for us. Bridges, tunnels, complex road constructions, and various type of infrastructure projects. So with that, Peter, I'm gonna hand it over to you.
Thank you, Johan. So let's go into the meat, even if the first quarter is not so much meat. And, I'm going to go through the various business units now and start with construction. If you look on construction, as Johan said, we have seen a good book to build for some time. So the revenue is growing by 16%, that's 14% in local currencies. And, as you can see, the profit more or less stayed stable, which means that the operating margin drops to 1.2%. The gross margin is a bit lower, and I will come into that in a few seconds, but we are keeping the selling and administration costs in shape.
Now, going into the various business units here, Johan described Sweden as a stable unit, and with the operating margin of 2.8% in the first quarter, you can say that they are very stable, given winter conditions and a big civil operations. In Norway, we are showing black numbers, which is a good sign in a business which have struggled for quite a bit, and also a big civil proportion and a winter climate. In Finland, you see a loss, and it's due to the winter. Both Norway and Finland, we have had as turnaround candidates for quite some times, and you will not see sort of the margin sky rising here. You will see a gradual increase as we get more and more comfort in those businesses.
And then Poland and Czech Republic, we understand that this has caused some level of nervousness out in the market. If you come to the first quarter last year, Poland had a very profitable infrastructure project, which made us a bit spoiled, and it's made you a bit spoiled as well, with very good margins in the Polish business. This is Poland excluding this very profitable project. We have still further potential in that project, which we have not taken to the books, and we have also been very conservative on the profit recognition in the business. This is a good long-term business. Czech are struggling quite a bit with the market.
Again, if you look on Poland and Czech, they have had severe winter conditions, which is, sounds like, storytelling if you look on how the weather's been in Europe and in the U.S. But, that has caused the numbers to drop quite a bit. The Czech market is a difficult market, but it is a profitable business. U.K., talk about tough market and talk about great margins. Even though they have a very tough and severe market conditions in the U.K. with a lot of cost cuttings, we have a very nice backlog and supports the business quite well. So we have had a good run in the first quarter. The U.S. businesses with USA Building is doing great, as is U.S. Civil. The, really, the...
If you look on this list, the business unit we are not happy with is the two write-downs we did on two projects in Latin America. One project we have taken down to zero, and one project we have reduced the profit take, and we think that we are in a conservative level here. Residential development. As Johan said, the sales has dropped 38%, and the overhead, the selling and admin, has increased, which means that it leaves a loss for the quarter at SEK 22 million. That selling and admin, we have talked about for the past few quarters, that we will reduce the cost somewhat, because the volume of the business doesn't correspond to the costs incurred. And we have actually reduced the costs, but the volume is much lower. If we look on the various markets, Sweden is the problem.
We have taken a write-down of SEK 40 million in the Swedish business because of cost overruns in the first quarter. That doesn't tell you the whole story, because exactly as Johan said, the volume of the business doesn't support the cost of running the business, so you don't have fixed cost coverage. And the price impact in Sweden, if you look at it, is we've sold 24% units less, but the price makes the revenue go down 60%. So last year, we've sold, in the first quarter, an average per unit SEK 3.9 million, and this quarter, SEK 2.1 million. And of course, if you have half a reduction in price, in that magnitude, and it's not because we have lowered the prices, it's because it's different kinds, types of products.
One's a premium type of product, and another is a very core value. Norway, on the other hand, has done a great business, and we—it's a good market, and we have started much more units there. The Finnish market is soft, as Johan said, so we haven't started as much as we did last year. We have good order in Finland, I have to say. Czech Republic, tough market. I think that we should be happy with close to 8% in operating margin there. And the other reflects costs in the startup markets, the Polish market, and the UK. And come Q2, you will see the first number of sold apartments there. So if you look on the curves here, the blue curve dictates sort of the started, and the light blue curve dictates the sold.
If you take a look after the Lehman crash, we were almost reaching the volumes pre-Lehman in the early late 2010. Now we gradually decreased due to the uncertainty in the markets and the lead times for closing, getting, selling apartments. This will also have an impact on cash flow, which I will come back to. Looking at the sold status of the 5,183 units we had in our production operations, we've pre-sold 61%, and that is up from Q4 at 58%. So we are selling good in the stock we have. We are a bit cautious on starting up new projects. Talking about commercial property, we haven't sold any major properties during this first quarter.
And as Johan said, we sold a lot last year, which meant that the operating net from those have decreased, so we're just kept in the black.... We have reported a sale now in Q2, and we have further sales lined up as well. So talking about sales, this is not a one-off. This is what this business is all about. It's a recurring business of investing and divesting. Over the time frame here from 2007 Q2 to the first quarter in 2012, on average, we've sold for more than SEK 4 billion per year, each year. And on average, the gain has been SEK 900 million, as you can see. So that's a margin of 22% and the markup over investment of 28%.
Further on the commercial, we've started, as Johan said, we've started four projects with an estimated cost at completion of SEK 700 million, and an estimated market value at completion of SEK 900 million. And the excess value, you can see the difference between the market value and the carrying amount upon completion of SEK 4.1 billion. To that, you should also add the elimination of internal profits of SEK 248 million. So that's the excess value on group level increases. Leasing is a key driver for creating value in this portfolio. Leasing is also a way to mitigating risks. And with the current level of close to 250,000 square meters per year, if you picture Empire State Building, that's Empire State Building standing there, Per.
That's 100 floors in Empire State Building, so each quarter, 25 floors. That's another way of portraying it, but it's a great thing for this business. Now on a few floors, we have Nordea, as Johan said. ID, last but not least, even though the numbers are small, the business are doing great. Income from joint venture is actually increasing despite that we sold Autopista Central, and that is because Autopista Central was held for sale at the year-end, which means you didn't take any profit in 2011. And to that, then, we have added more projects coming into the mature operating stage. Midtown Tunnel will create some more positive impacts on ID numbers. Talking about ID numbers, the way to look at it is the value created in this business.
We changed the value of the business by doing cash flow valuations of the projects, and we've upped the valuations on an unrealized development gain of SEK 100 million only in the first quarter. We haven't added any more projects. Now, Midtown Tunnel will impact this in a positive way, of course. We are seeing a very good demand for ID projects, so we are looking forward for making some divestments during 2012 as well. Now, with all that pulled down, you have SEK 351 million in operating income for the group. Then, you have people like me, who costs money, and you have to take that away. And the central costs, which also then includes businesses which are on the run-off, and also strategic initiatives, was SEK 169 million.
That's an increase compared to 2011. In 2011, you had a positive one-off for one of these run-off businesses, so... Then you have had costs for strategic initiatives this quarter. That is the reason for the increase. For all you Excel fanatics, I can guide you that you should be in the tune of SEK 750-800 million on the central level for this year. Elimination is negative in the first quarter, and that's the fact that we are backing out internal profits on the commercial and residential projects we're doing. So when we sell projects, this reverses, and that's the comment I made earlier, so that's why it was positive for the full year 2011.
That will give you then a net profit of SEK 130 million, which is only 27 öre per share. The tax rate now is on a more normalized level, reflecting where we make money and the different tax rates in those countries. Cash flow. The cash flow for the quarter was -SEK 2.7 billion, and it was somewhat better than the last, the quarter, the same period last year. The different items is that we had lower net investments this time around compared to the last quarter, but we have more outgoings from working capital, from the cash, compared to the first quarter last year. Talking about working capital or free capital, as we say, free working capital. If you don't notice a difference, I can give you a hint.
The bars is going upwards... We have taken away the negative notation. That's the only difference. We are still talking about the same good negative working capital. From now on, we will call it free working capital. The bars represent the absolute amount, and the first quarter ended at SEK 18.6 billion in working capital. The red curve is the net working capital in relation to revenue, and since revenue has grown so much, the percentage number have dropped somewhat. As you can see, in each of the, the dark- see if I can get this to work, the dark bars is the first quarter. So you can see the first quarter is always negative, and it can be more or less.
The fact that we have a number of very mature, profitable construction project, which is closing in to an end, means that all the prepayments we have done, if it's not profit, some, some of it is leaving us because we are settling with subcontractors and suppliers. But we've kept the cash, which is good. Financial position. Another thing which we are talking more about now is the operating net financial assets/liabilities. That's the shortest name someone has invented instead of investment capacity. And that is our view on the group's net cash position. Because what we have done is we have taken the net debt or net cash, and we have then added back the net liabilities for pensions and for housing, co-op loans. Because that is the true cash.
So when we look at investment capacity, and we'll and when we look on dividend capacity, we will look on this number. The total asset shrunk somewhat compared to year-end, which is not strange, given that the working capital is leaving us. And the net cash position was SEK 0.5 billion in the first quarter, compared to SEK 2.9 billion in the beginning of the year. So now you understand where part of the SEK 2.7 in cash out was. Talking about which cash flow, SEK 2.7 negative, we had a positive SEK 0.3 from pensions. We had a very good performance on our pension funds, so that made the debt to be reduced somewhat in the first quarter.
Then the net operating financial asset was SEK 7.1 billion, compared to SEK 9.5 billion in the opening balance. And we, as Johan said, we deploy money in our development streams. We've had a fantastic run, and continue to see a fantastic run in the commercial stream and in the infrastructure stream. We are much more to do in the residential stream. And on that, the cash flow, the curve on the sold and started apartments, you saw that we had a higher level of started, roughly 18-15 months back. Those money will now be reported in the cash flow when we are handing over those apartments. So with that, Johan, [inaudible].
So, let's move and talk a little bit about the market and the outlook going forward. In general, it's a stable situation, and you can see the arrows here up in the right-hand corner. That's a new thing that we have from now. And when it's gray, then it's no change. If it's green, it has been changed up since last quarter, or if it's red, it has been changed down. So this is something that we have introduced, and we will continue it, to just help you to guide you about, you know, changes of the outlook. Stable in most of the operations and the countries where we operate, but absolutely, it's tough competition out there. It's not an easy ride.
In the U.S., it's not only the large, complex infrastructure project that we see in the markets, it's also a healthy pipeline of hospital projects and projects for the data and IT industry. It's like, in the niches, in the sectors where we operate, within the U.S., we see now more products coming to the market. In the Nordics, on the whole, stable, somewhat brighter in Norway and a little bit weaker in Finland, and also weaker outlook in other European countries. In residential development, Norway also good, if you talk about the price increases, stable in Sweden. When we talk about the U.K., it's the micro market that we operate outside London in Cambridge, because that's where we have focused our start-up activities there.
We have started a project, and as Peter said, you're gonna see the first product is gonna be sold during the second quarter. It's more interest than we expected for the first project that we have started there. And during the quarter, we will also launch the first project in Warsaw. Slower in Finland and weaker in Czech Republic. In commercial property development continued good demand for our niche of modern green properties and offices. And we also see stable vacancy rates. We see attractive valuations out there when we, when we're gonna sell the completed projects. And now we go for more land investments in Central Europe and in the U.S.
Of course, looking at the opportunities here, going forward in Sweden and especially in Stockholm, it's important for us to invest in more land. Here you see green. That is a change since last quarter. We see a slightly better market for PPPs or for OPS, as we call it in Sweden. Differ somewhat though, between the market. If you go way back several years, it was more or less a steady pipeline of projects in U.K., and very slow in other markets. Now, we see a situation where the U.K. market, much lower than it was before, but other market has started to catch up, like U.S., Latin America, and also in some of the countries in Central and Eastern Europe.
So we think that there is more of a balanced situation in the PPP market in the various geographies where we operate today. Going forward, this is what we focus on for the time being. We see opportunities in the U.S. to build up the backlog and go for the large, complex, high-risk projects there. But this is something that we understand and we are good at. The challenges are in construction. That is to continue with the turnaround and stabilize the businesses in Finland and Norway. Opportunities in residential, that is two startups, Warsaw and London, and of course, to turn around, if you talk about challenges, the Swedish operation, which we will come back to you about.
Commercial development, that is the true value creator in product development that we have had for many years, there. And we are building up the portfolio of project. We have seen that it's possible to export the model to the U.S. We sold the first project, $140 million of an investment of $85 million. You can do the math about the percentage of the profit there. It's very good. I don't think, though, that you should expect the same high level going forward. It's gonna be more of a normalized level on profit on those projects.
But we have several projects in the pipeline in the four cities, Boston, Washington, D.C., Houston, down in Texas, and Seattle, up on the north, up in the northwest corner. And for us, it's important to continue to build up that, the portfolio of projects, not only there, but also Central and Eastern Europe, including here in the Nordics. And that is a challenge, because it's a challenge for us to find new lands. So that is one of the most focused thing for us here in Stockholm, to build, continue to build up the land bank. Talked about the infrastructure and the value creator, and it started to be a really true value creator on the side of commercial property development as well.
So all in all, the two streams, commercial property development and infrastructure development in product, in the product development sector, that is a good example of the One Skanska model that we have. And we are determined that residential development is gonna be turned into the same profitability as well. Thanks. So, Pontus? Yes. Then we will open up for questions, and we will start here with the audience in Stockholm. So Petr Cigánek.
Yes, thank you. Could you maybe still comment a bit more on your performance, both in Poland and Czech? Because still, if you look at your historical performance in Q1, both of them look exceptionally weak.
If you start with Poland, if you go back, we have built, you know, the A1 project for many years. So 2012, this is the first year without the A1 project. So now you see the true picture of seasonality of the operations that we have in Poland. So this, I'm not nervous about the Polish operation, if you talk about profitability. It's more like it's gonna be the swing over the year, but at the full year, you will not be at the same operating margin level that we've been in the past, because now you are back to a more normalized operation.
Czech Republic and including Slovakia, which is one unit, there you have the same swing there as well. But on top of that, you have quite a depressed and tough market due to cut in the public spending and lower activities and fewer projects in on the infrastructure side.
... Okay, could you perhaps also comment, because this is the first quarter you are fully consolidating your U.S. acquisition. Can you say anything on that performance?
I think that the performance have been stable, although we have been quite cautious in the profit take on in the new business. But it is there are no hiccups. The integration work, and we are just started the integration work, is going, I would say well, as with a well-planned and well-carried-out acquisition. And we really believe the market potential for the basis for the acquisitions we made. The current market with a presidential election coming in November in the U.S. could mean that some of the big overhaul of the old coal-fired plants that we have been talking about could be slipping into sort of 2013.
You shouldn't expect sort of the volume with this business to take off immediately.
Long run, it's a very strategic investment into the renovation and building of power plants into the energy sector in the U.S., and we think it's absolutely right for us, you know, to slightly shift into that part of the civil operation as well. We have had some presence there, but we have been a small player, and now with the acquisition, we have increased the activities there.
Okay, and then just a question on your performance in residential, where it seems like you are clearly underperforming your competitors. What's the main mistake? Have you started too expensive project? Because it seems like you have taken in quite a few unsold in your books, in Sweden, for example, or is it only a cost problem?
The problem is limited to Sweden, so we like, this is a Swedish problem. And it's not controlling the cost in the project. It's like in a cost overruns. And then when you see cost overruns in project, then we are more hesitant to start project, so then you see a lower volume. So then it's like kind of hitting us in two ways. With two high overhead costs, because we cannot start up projects until we are dead certain that we can deliver on the cost level, and the older ones we have had cost overruns. So that is like, you know, the two things that is, that is like impacting us at the same time.
And then you aimed for a much larger business volume, of course, which is then visible in the organizational costs. I wouldn't be too concerned about the completed projects increasing.
Okay, it's not related to one or a few... It's not related to one of, a few sites, or?
No, no, it's spread.
Okay, thanks.
Thank you, Peter. Yes, Jonas.
I have a follow-up question on the residential business. Can you elaborate on the options you have, what to do with that business?
We have looked at various options there, and we think that this is the right thing for us to continue with. Residential development is a normal part and an important part of a business for a company, Skanska, with big presence. Long term, this is something that it's gonna be built a lot of residential buildings and apartments, because there is an underlying need. Sweden is growing, large cities, they are growing because of all the people moving into the cities from the countryside and from the outside as well. So this is... It is right for us to be there, and but we will come back to you and tell you, this is the model we're gonna work with.
So that will include some extra costs then in Q2?
That is exactly what we're gonna come back to you and talk about, you know, what is gonna, what, what's so speaking in that solution.
Okay, thank you. A question on the Midtown Tunnel as well. I guess you have some reversed bidding costs for, for that project that will pop up in Q2.
Yes.
Can you elaborate on the size?
For the group as a whole total, they are in the tune of $60 million.
Okay. Thank you.
Thank you, Jonas. Yes, please tell your name and where you are from us.
My name is Adam George from Dieter and George. And I asked, could you tell us a bit more about what actions you are taking when it comes to this residential problems in Sweden?
That is what we are keeping for the next press conference, or you know, what we're gonna have present to all of you, that you're gonna be the first one hearing it, you know, from, from me, together with all the colleagues here, once we are coming back. Thank you. Any more questions here in Stockholm? Niclas.
N iclas Höglund, Swedbank. Maybe not going into too much details then on residential. Today, you're having more than SEK 13 billion in capital employed within residential. Should we expect that in combination, that you streamline your the business, that you also can release cash? And maybe follow up on the statement you had, Peter, regarding the cash potential in this year, when you have sort of delivering these products that you have under construction. Thank you.
... If you look on the SEK 13 billion, SEK 6.8 billion of them is in land bank, and that is, I would say it's not really in line with the volumes we're seeing in the business right now, so that kills the returns quite effectively. The other chunk then is, of course, ongoing projects, and making use of the land bank and starting projects when you can control the bid costs will make sort of the investments then grow on the ongoing projects. But when it comes to the big numbers and any impacts, and back and forth, I'm gonna do like you, Juan, I'm gonna defer the question until later.
But when, just a follow-up.
Yeah.
When you, you talk about SEK 40 million write-downs or costs in the quarter related to Sweden-
Mm-hmm.
Is that also related to, to write-downs in the land bank, or do you see-
No, no, no.
So-
Ongoing projects being more expensive, i.e., we have taken a too-high take on the profit margin compared to what it actually ended, so. Just a follow-up there. Mm-hmm. And that is, we have not lowered the price. So like in a selling out of the market, we have competitive prices. That, so that's not the problem. It's like, you know, the cost that increases.
Just to conclude, when you look at the land bank, do you see any immediate risks of write-downs within that part? Or is it just related to business operations?
If you look on the land bank, we have an estimated excess value of the land bank of SEK 1 billion. So SEK 7.8 billion is the estimated market value of the SEK 6.8 billion on book. So on the whole, the risk is extremely small, I would say.
Thank you. Can I just ask a question on construction, then? Well, you're talking about the acquisition on the civil side in the U.S. Could you give us maybe a bridge analysis on the impact on the sales and EBIT from that acquisition? Because, like, in my mind, it has a very positive impact on earnings, well, above my expectations. What was the mix, negative mix on the margins, the impact on the-
From the acquisition-
growth side? Yeah, exactly.
From the acquisitions. It's so many different impacts, but the acquisition itself added 900 million on an annual basis, 900 million SEK to top line. So part of that, of course, a fourth of that roughly came out in the first quarter. And when we showed you the numbers of the acquisitions, that acquisition did in the tune of 4% operating margin. And USA Civil last year made 9% operating margin, so you have a certain mix there. But again, you have also a very cautious profit take on the rest of the project, so it's hard sometimes to talk about cause and consequence. And one thing that I've, it's like, when you look at the construction operation, don't look at it from a quarterly basis.
The right thing is the rolling twelve, I would say, especially in the U.S., where we have the large projects.
And you've previously been very cautious when you were seeing these very high margins within the Civil US, business. Would you say that you're now down to a more normalized level now with the 6%, or slightly above that?
I think that if you look at the order backlog in the U.S., it's a very healthy order backlog. It's still a lot of large projects, and there are some long tail ends from the good times as well there.
Okay, thank you.
Thank you, Niklas. Any more questions here in Stockholm? Then we can ask our friends on the telephone conference.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from Mr. Andreas Ståhl from Cheuvreux. Please go ahead.
Hi, it's Andreas Ståhl from Cheuvreux. Just wanted to follow up on, on the most recent question there first. You, you were talking about a healthy margin in, in the backlog on the civil side in the U.S. Could you also indicate what you're seeing in terms of margins on new contracts? And then, secondly, just going back to the Polish construction business, you had an EBIT margin of around 9% last year. If we exclude the A1 project, could you just indicate roughly what, what the margin was on the rest of the projects? Thank you.
Let's start. I'm gonna start and take the first part of the question, then I'll leave the second part to Peter, so he can think about that. Coming back to the U.S. civil market and the big projects coming in there, and what we see now in the U.S., that is large design build mega projects, both in infrastructure but also in energy sector. And of course, we have, like, in a mid-sized project, a smaller one as well. But the new thing is that, you know, several of those really large ones. And a design- build project, higher risk, but there is also a higher margin in them, because risk and return, they go together. So that's basically the only thing I can tell you.
It's not back to the heydays, four or five years back in New York, when it was a fantastic market, with large project, very few bidders. That's not the situation. I don't think that we're gonna see that again. It's more a normalized market, several players that are interested for it, for the big projects. But we think that we have a good position because this is the niche and the capacity that we have there, but we are not the only one.
Okay, and then, the favorite Polish question. Yes, they did 9.9%+, last year, and of course, a big contributor to that is A1. When you have a project like that, you are automatically, I would say, much more cautious on all the other projects in terms of profit take.
So putting the answer in a different way, I would say, on a long-term basis, the Polish business should work on an operating margin around 4%-5% on an annual basis, give or take. And, of course, the A1 have done a positive impact, and we have still not taken out all on that project either. So, the margin could be a bit 4%-5% plus. But, and we have a business that has grown quite dramatically, so excluding A1 now, you have a business which have grown, and we have also added a new company and have increased the civil proportion with the acquisition of PUDiZ.
So again, coming to the fact I'm only looking on the isolated first quarter becomes really dangerous when you have a high civil proportion.
Perfect. And just one follow-up question on Johan's comment regarding the design build contracts. Are we talking a lot of fixed-priced contracts here, or how does it work, generally speaking, if it's possible to?
Sorry, I missed what you said about-
Is it, is it a lot of fixed-priced contracts when it comes to design build, or how, how does it work?
Okay. You asked about the fixed-price contract? Yes. When we talk about infrastructure project, that is for the public sector, and they only talk about fixed price or lump sum, which is called over there. Yes, it is one price for, basically for the whole piece. We're talking about tunnels, bridges, large road constructions.
Thank you.
Thank you, Andreas. Any more questions from the telephone conference?
Our next question comes from Mr. Green from ING. Go ahead.
Good afternoon, gentlemen. My question, firstly, on Norway, please. You've returned to a small operating profit. Would it be too aggressive to assume, let's say, 2% margin for the full year, given that, let's say a normalized margin would be also around 4%-5%? And then my second question would be on the commercial developments. Thinking about costs, in the long term and your margin development in the long term, the margins in commercial development over the years have trended down somewhat. How do you see, basically, your cost developing versus your profits on completion? Is that spread declining, and how do you see that developing going forward? Thank you.
In Norway, we're going to be extremely cautious to recognize profit. I think it's important to build up a healthy, you can call it a little bit of a buffer here and have some contingencies in the various projects. So, the profit recognition will be cautious. Even if the project looks better, we're gonna keep it on the conservative side. That's the reason the number that you're gonna see, according to the plan, is gonna be lower, because it's gonna, we will wait some time here, some years, before we really lift it up to the level where it should be. Okay, and then the next question is regarding our commercial development business.
As I said in my presentation, since 2007, on average, the markup has been 28%. And of course, that is also a blended impact on projects which we have kept for a longer period, on which you then have a higher carried increase of the valuations. But even that, despite that increase in the turnover rate in the portfolio, then reduced the percentage somewhat. But we are still really confident and bullish about that we can stay well in the low 20s, continued on the commercial side.
Maybe if I can just follow up on that, maybe your outlook on, let's say, the financing side for real estate, banks may be less willing to finance. Do you see anything you should be worried about? Also because maybe with your focus on the Nordic market, is there anything you are worried about there?
Well, our focus on the Nordic market is actually then being a bit diversified, as Johan has talked about. We are entering the U.S. and doing more and more in the U.S., and we are also doing very much more in the Central and Eastern part of Europe. We have some bank people here in the room, so perhaps you can hook up with them. But we are seeing that this is playing into our favor because of our strong financial position. Of course, we are tracking in terms of the investors in the various markets, because in the Central Eastern market, for example, German investors and Dutch investors in the various funds are a very big contributor to the deals there. And so, what's happening with the funds and so on, is something we are keeping track of.
Given the current market conditions, property investments, where we have good tenants and a good lease level, it seems to be extremely attractive right now.
Okay, thank you.
Thank you. Then we take the last question from the telephone conference.
Our last question comes from Mr. Will Morgan from Goldman Sachs. Please go ahead.
... Hi, good afternoon. I've got three questions, if I may. The first one, I realize you will come back to us with your solutions, I guess, for the real estate business. I just wondered if you could comment a bit more on where you see the problem still. And the reason why I ask this is because you presented, I think, a while back at an analyst day the business model and how you could be pretty nimble in the face of a down-turning market to effectively shrink the level of capital committed. And I think you had already mentioned that you were seeing a change in mix of properties sold, likely to skew more towards lower-cost properties. And yet it seems that this withdrawing of capital and shrinking of volume is now causing these cost overruns.
I just wondered whether or not you see this as an issue of specific management failure in particular parts, or whether or not it's a problem with the model itself that needs to be addressed. I just wondered if you could comment on that generically. The second question I had is regarding working capital within the construction business. I think you mentioned that there are some quite big outflows there. Obviously, it's seasonal, but certainly relative to what was happening last year, there does look to be quite a severe deterioration. I just wondered if you could comment on how you're expecting this to pan out for the full year, whether this is kind of one-off impacts or whether there is something more sustainable going on in the mix or the type of business.
The third question is just on the Latin American write-downs. I think you have some write-downs in the third quarter of last year as well. I just wondered if you could say whether or not these write-downs relate to those projects, or whether these are write-downs from new projects. Thank you.
Okay. If I start with the two first one, I'm going to hand over the third one to Johan-
Thanks.
to make the ends meet. The Capital Markets Day, I was not CFO, but I think you refer to the value concept we have under the BoKlok concept, where we tie very little capital in terms of land bank, and where we have an industrial concept. That concept has worked... are working extremely well, and that's something which have increased in terms of volume. So that's why-- that's part of the explanations why the average cost, price per unit have decreased, especially here in the first quarter. When it comes to management failure or anything, that I will leave for others to decide. But we have... I think that we have underestimated some of the issues that lie in the interface between construction and residential development.
On the second question regarding working capital, yes, the outflow was with this quarter. They were greater two years ago and even greater three years ago. The corresponding quarter last year, you had a big inflow in some of the units. So this goes back and forth. On an annual basis, the working capital, the negative working capital, should follow the revenue line, and as you can see from the revenue, it grows. So the net working capital, or the free working capital, as we say, should increase in absolute terms. However, due to the fact that we have very profitable projects coming to an end, the percentage number in relation to revenue will continue to decrease.
In L.A., we are talking about two new projects.
Okay. Thank you, Will, and thank you, Johan and Peter. With that, we close down the conference. Thank you.