Skanska AB

STO:SKA B

Earnings Call Transcript 2022-Q1

[Antonia Junelind, executive]

Good morning and welcome to the presentation of Skanska's first quarter report 2022. My name is Antonia Junelind, Senior Vice President Investor Relations and I joined the team this spring.

As you can see, we've decided to change format for these presentations. So you can join us here at our headquarters in Stockholm or you can watch the presentation online via webcast. We will, however, follow the traditional flow today. So first, our CEO, Anders Danielsson, will present the group and business performance and provide some business and market highlights. And our CFO, Magnus Persson, will take us through the financial highlights of the quarter.

After that, we will open up for questions. And you can ask your questions either in person here in the room, on conference call or you can text us via the web page -- webcast web page. And we will answer as many questions as we can.

So with that short introduction, let's get started. I hand over to you, Anders.

[Anders Danielsson, executive]

Thank you, Antonia, and welcome, everybody for this Q1 Report 2022.

If we start to look at the picture here to the right, it's fantastic projects in Malmo called Epic. It's developed by Skanska, constructed by Skanska and also divested to our new investment property, our new business stream.

But let's go into the figures. If we look at the first 3 months of the year, we have a solid performance in the Q1. Construction we can see continuously increased revenue, which is expected, we saw it last year as well in the Q4. Residential development, good performance overall with increasing the profitability, are above our targets there. Operating margin in the construction 2.3%. Q1 is usually a slower quarter in construction, so this year, due to some fixed costs in the first quarter compared to the revenue. But overall stable quarter here.

Return on capital employed in the project development above our target of 10% on a rolling 12 months basis. So is return on equity, 18.3%, where we, as you know, have an 18% target. Very strong financial position, that's important for us and we continue to have that. And we also managed to reduce the carbon emissions with 49% since our base here in 2015 in our own operations, I should say.

Let's go into the different streams starting with construction. Here we increased our revenue with 6% in local currencies. And the order bookings was slightly down compared to last year, but we have a solid order backlog, on record level. And we also have a book-to-build above 100%, 109% on a rolling 12 months. But the order backlog SEK 208 billion, which is really solid. Operating income increased in absolute numbers, but margin reduced somewhat compared to last year.

And we can see that volumes returning. We can see improved activity and coming back to the outlook for the coming 12 months. Supply chain disruptions has been the case for quite some time and during the pandemic and also now we expect that to continue since the war broke out in Ukraine in the first quarter. But we have not seen any material impact of the war in Europe in the first quarter. We have been able to handle and mitigate the cost escalation that we have seen for quite many quarter right now.

Residential development, slightly down on revenue and we have reduced the number of homes sold and started. But we are on a historically high level when it comes to ongoing projects in production. We are close to 8,000 homes in production, which is a good number and we have the capacity to start new projects. We have a good sales rate in the ongoing project. And we have also very few unsold completed. So we can start new projects and that is also the ambition.

Operating income SEK 570 million and we are above our target on the operating margin of 10%. Return on capital employed also above the target of 10%. And they have good activity and strong profitability. And we have not seen any major effect so far. During the first quarter, we have a good pace in all market when it comes to sold homes. The focus is, of course, to start new homes and also focus on the zoning and permitting which has been and we expect it to be bottleneck going forward. But we are in a good position and we have a good pipeline.

Commercial property development, also a bit slower quarter when it comes to number of divestments. But we have divestment in the quarter and those has been on a very -- on an attractive level. So that is continuing to be good. And we managed to be just shy of 10% target on the return on capital employed. And that is a substantial amount we employ in these operations; 35 ongoing projects corresponding to SEK 26 billion upon completion and the occupancy rate 28% versus 42% completion rate, those should be -- those gaps should not be too wide. So the focus is definitely to continue to lease and our projects are ongoing projects.

We have started one new project in the first quarter. And we also can see in the market now, continue to be a very solid investment -- investor's appetite for our high quality buildings and that remains. And we haven't seen any tendency that they sort of want to withdraw from any divestment, which is good.

Soft leasing market 13,000 square meters leased in Q1, we saw as we reported in Q4, higher activity in the fourth -- in the late 2021. But that's sort of soft and slow down really, really big when the Omicron hit us in early January and we also saw that when the war breakout. So we still have good dialogue with potential tenants, but they're hesitant to take the final decision. So we just need to work hard with that. That's the first priority definitely.

And investment properties, new business stream for this year, we announced it late last year. And we're targeting high quality building, offices and the ambition is to have a portfolio between SEK 12 billion to SEK 18 billion in the next few years. And we have a strong and stable cash flow that will give us that and we will get benefit from increased value especially when we have a cluster of building where we develop new areas, that definitely will drive value for the company.

And as I mentioned, we did our first acquisition here in the first quarter, Epic building in Malmo. Fully let multi-tenant building, highest quality when it comes to sustainability and health certification. Cluster of Skanska developments, we are in that area and it's a coming area and very attractive part of the city. So it sort of hit all the criteria we set up for this stream, new stream.

If I go back to construction and look at the order bookings, as a sales record level on the order backlog. We can see it in the in the bars, the blue bars. You can see in the yellow line has the book-to-build on a rolling 12, going slightly down in the first quarter, but still on a high level, above 100%. And you can also see here order bookings on rolling 12 and also by the quarter, the orange line.

And if I look into each and every region here on the order bookings, it's quite good. The order book-to-build in all geographies, Nordics slightly over 100%, Europe slightly below 100%, but that's expected. We can see some postponement on projects, especially in Central Europe due to the war in Ukraine. But as I said, we have not seen a major impact so far.

U.S., very strong order intake. We have a book-to-build of 120%. And I will come back to the market outlook, but it's an important market for us, over 40% of the revenue. So it is really encouraging. And the amount of production we have in the order backlog, 18%, that is also historically on a high level. So we are in a good position here to continue to be selective in the market, continue to focus on the project where we see competitive advantage and where we can make a good profit from them as well.

With that, I leave it to Magnus to go deeper into the figures.

[Magnus Persson, executive]

Thank you. So if we then -- we start with the construction and income statement. Anders said we grew revenues 14% actually, but the underlying volume was 6% up. So it's a big currency effect. And I think that the volume growth is -- it comes on the back of something we have alluded to in a couple of quarters. We have booked quite a sort of solid amount of work in the latter part of 2021. And then it's been about to sort of be able to start these projects. And we can clearly see now that these jobs, they are coming online, and we're starting to produce in them. Hence we are stepping up a little bit in the volume here.

And I think it's a very good signal because we have not let up in any way, shape or form on the tight bid criteria that we have. So we know that this order backlog we have is solid quality. So it's good growth we're experiencing here. So that is comforting and looks good for the future.

Gross margin 6.8%. S&A of 4.5%, good control of the overhead costs here because we have to recall Anders already alluded to this, that the Q1 is seasonally a slow quarter for us where we normally have a lower absorption of any overhead costs. Nevertheless we managed sort of to come down a bit in S&A here then.

And the 2.3% operating margin, you compare it to last year and say, yes, it's a bit lower, but you have actually to go a little bit further back in history to get some solid reference points. And 2.3% in Q1 is actually pretty good, let's say in construction if we look at how our operation is phased over the different quarters of the year and so on and so forth. Then rolling 12 months, we are trading at 3.7% EBIT margin. And I think the rolling 12 months, that is the relevant measure to use when you compare us against our own targets that we hold ourselves again. So a solid level of performance there.

If we move to the next slide and we look at the different geographies. You can see Nordics keeping up profitability, 2.8%, in the isolated quarter. Sweden 2.3%. Then we have Europe -- something is happening here. I move back. Europe is negative in the quarter. It was slightly positive than last year. And so there's 2 chief reasons to this, one is volume and I already spoke about that on the last slide. It is a seasonally sort of low volume quarter, Q1. On the back of that, you saw bookings a bit slow in Central Europe. And of course we have had the pandemic and so on. So a bit of a challenging volume then in Central Europe, in particular.

And then we have decided to sort of keep the overhead costs where they are because we think we're right sized as an organization. And then you have a lower absorption essentially. On top of this, we have 2 businesses, if you will, 2 business units inside the European operating segment here. It's in U.K. and then it is in Central Europe. Both of these business units are right now changing the legacy ERP system. So that also adds some costs to the quarter.

Underlying performance, if you sort of strip away all of this stuff, I would say it's basically at par with last year. For U.S., 2.7%, so we continue to improve the performance in the U.S. It's been a very solid run, I'll say, in the successive development of performance in U.S. construction operations.

Moving to residential development, we saw revenue decline here, 5% down, at good margins of 16.3% and S&A then a 4.3% take us down to around 12% in operating margin, which again is a good level here. The comparison quarter is very tough here. We were up to 14.8%. So close to 15% in the first quarter in residential development. That is, of course, a stellar result there. So very -- so a good quarter here. And overall the RD markets have been quite favorable during the first quarter, as Anders alluded to, and we will come back to and also commenting in the quarterly report outlook is -- we see some uncertainties in the outlook, but actual quarter have been quite okay from a market perspective.

If we look then at the different geographies, we can see slightly lower margins across all the different geographies, especially in Europe, where it's coming down from 21% to 14%. So how much should you read into this? Well, first of all, you have to look at the volume of the business here in the first quarter. So you have essentially a little bit similar effect here as you had in the construction business, a bit of a volume effect there. And again, overall, across the geography, it's been quite an okay quarter from a market perspective.

Homes started and sold. If you look at the green line, that's the ammunition, if you will, that we have. It's the new started projects that we need to start projects in order to develop them and sell them [indiscernible]. This has increased since the middle of 2020, very much in line with what we have communicated in terms of our ambitions to continue to grow the project development portfolio here.

On the rolling 12 months basis, then we started here around 4,100 units to be compared to 3,800 that we sold. So it's hard to compare individual quarters because suddenly you get the permitting, you get permit for an individual project and they come out and you can't really plan that quarter-by-quarter. But when you look on a longer-term perspective here, it's clear that we are continuing to drive for sort of a very responsible growth in residential development.

Homes in production, and here you can actually see, I think by plain figures, what I just spoke about, the growth, of course, and number of starts over sold and handed over will be displayed in a growing volume of units under development. And now we have 7,900, it's a solid number. Slightly down then from the fourth quarter because we've handed over a lot of units, of which we have sold 75%. So a very strong, maybe a tad on the high side, the sales rate on the portfolio. And basically no issue at all with unsold completed units. What we develop is in high demand, so we don't have any issue with that.

If we move to commercial development, we had an active quarter, made several divestments here, a strong gain of close to SEK 1 billion. We sold projects in Central Europe. We sold projects in Sweden. We did the first divestment to the new business stream, Epic, very interesting and a very good start of the life of this new business stream, and I will come back to that. And we also managed to divest 2 challenging properties that we have alluded to in a couple of occasions over the last 2 years, which are the West Memorial properties in the Energy Corridor in Houston. Tough market situation in that very specific micro location, and we are now completely out of that. And of course, if you look at the numbers and you do the analysis, you have to recall that these entities are diluting the development margin rate, if you will.

If we look at the realized and unrealized gains, we have 35 ongoing development projects in commercial development. These have an estimated surplus value or unrealized gain, if you will, of around SEK 6 billion. And then on top of that, we have around SEK 2.5 billion in surplus values or unrealized gains in projects that are completed. And then we have another SEK 1.5 billion approximately of surplus in land and development properties, those where we have not yet started a project.

So in total, approximately SEK 10 billion incoming gains that we will realize. And we have been at this level now for 3 quarters, and you can clearly see a big step-up since before. Again, demonstrating evidence that we are growing the project development business stream. And we can also note and which you have on the orange line here on the presentation on the slide, which are the level of realized gains that we sort of recognized in the profit and loss statement on a rolling 12 months basis. So despite the fact that we keep the unrealized gains, a very solid, around SEK 10 billion, we are managing to recognize approximately SEK 4 billion of gains on a rolling 12-months basis, so very strong development of a very good portfolio.

If we look a little bit deeper in the portfolio then, this is the completion profile that we have. A bit complicated slide, but I think by now most of you have learned how to interpret it. On the left-hand side, the light blue bar, you have the completed unsold project, and it is the total investment that we have made into those projects that makes up the height of the bar. So projects for an investment value of approximately SEK 5.9 billion have been completed, but are not yet sold. These are leased to 75%, so a very solid level of leasing in them.

If you back up one quarter, that bar was around SEK 8 billion. And if you back up another quarter, it was up to close to SEK 11 billion. And then you can say it's difficult to sell these properties, but I would argue not at all, it's a very commercial decision to not sell properties too early because value comes when we lease. And we have both the balance sheet and the sort of risk appetite to see this project through to their commercial ends. We much rather complete the property, get the right leases and then we'll divest them. So we don't compromise on the value created for our shareholders there.

If you look forward, the dark blue bars that represents those projects that are not yet completed, but under development. And here you can see then the completion profile that we have fairly few completions expected in the second and third quarter this year, but more in the fourth quarter and then through the next year also. The green line represents then the average leasing rate for those properties.

Leasing is slow. This comes as no news. As Anders has said that came back, leasing came back, we had a decent leasing number in the fourth quarter. Especially November, I would say, it shows that when the restrictions were taken away, potential tenants turned into signed tenants suddenly. So that gave us some confidence that when there is really an underlying demand as soon as the uncertainties that are playing in the market at the moment when they go away a bit. We get more ink on the paper and we can recognize more leases.

We have solid discussions in all our different markets. And do we note a super big difference? It's not really, I mean, flexibility is important for tenants today. You can have expansions, options, break options, et cetera. But overall, no super big difference, I would say. And we have a lot of good discussions and a long sort of list of leads and list of potential tenants here.

The 2 lines, you see, the green line and the orange line, that's the occupancy rate, average occupancy rate and then the completion rate -- the completion rate of the property is the green line occupancy rate that's still there. Normally we would say that in sort of normal market conditions, we would like to have these 2 moving in tandem. Now leasing is very slow. Obviously we are big, we have a solid financial position and we closely monitor risk appetite. So we allow there to be a gap between these 2. But of course we would also like to see more leasing. So we're working on that.

Then we come to investment properties. Not large numbers here to talk about. But nevertheless it's the first time. So we have now made our first investment in this stream. We bought, as already said, the property Epic from commercial development. The property is located in a cluster in Malmo in Sweden, the southern parts of Sweden. It's a very nice property, well certificated, lead platinum, multi-tenant building, very high quality and very nice finish on this one.

Property value, SEK 766 million. The transaction was made for a value of SEK 748 million. And then what is the difference there? Because this is the first time we do a transaction, I think it makes sense to say a little bit about it. The main difference is here the fact that we are trying to resemble a market transaction as far as possible when we sell the properties. And that means that any deferred tax will come with a discount of 5.15%. That is the chief difference between the transaction value and the property value or the market value here, which, of course, then comes up as part -- a very small part, but nonetheless a part of the P&L in the first quarter.

We move on. And then we come to the group. If we add up the operating income from all the different business streams, we end up with a number of SEK 2,083 million in the first quarter. Central stream, minus SEK 135 million. So it always goes up and down a bit. But underlying, it's essentially no change to the quarter last year. Eliminations, SEK 95 million, a bit higher and that essentially is a reflection of the fact that we are now producing on bigger project development portfolios, both in residential development and in commercial developments, which means that the eliminations becomes a bit higher.

Net financial items, plus SEK 8 million, which is also a reflection of a big strong liquidity position. And thanks to the changes on the financial market, we can finally see that placements and deposits are starting to yield some sort of return for us. And then together with a higher level of capitalized interest, this sort of ends up in a net financial position of plus SEK 8 million for the quarter. Taxes uneventful, we taxed out at 19.6%.

If we look at cash flow then, the main change to the cash flow this quarter compared to the same quarter last year is net working capital and construction, where we had an outflow of approximately SEK 1 billion. This is quite normal because also here, you have the same type of seasonality as you do on the P&L, where it's not unusual that especially public customers sort of pay a little bit in advance towards the end of the year. And then in the first quarter, we have to sort of earn back that money by producing with a little bit less invoicing then. So it's quite normal that you have some sort of outflow in the first quarter.

And the other one is that, again, we are investing -- net investing to a higher extent now in residential development and in commercial development. So these are the 2 main changes. And also, please note that the dividend of SEK 10 per share were not distributed during the first quarter. From a cash perspective, it will flow out during the second quarter, even if we have already separated it from the equity position, which I will come back to.

Here you have the working capital position then. It is still very strong. We have around SEK 29 billion in net working capital, 20% of revenue. So it's a very solid position to be in here. And as we are now starting to grow the construction portfolio somewhat, that also means that more projects are in the early phases. In the early phases of a project, that's the time in the project's life where you normally have the bigger part of the advances. So that will give some underlying support also to this position.

Investments and divestments, we continue to run into a net investment territory illustrated by the green line being subzero, so to speak. And we have a capital employed at end of the quarter in project development and investment properties of SEK 50.4 billion, essentially growing this part by SEK 3 billion since year-end. Liquidity position, we have SEK 19 billion in available funds. Of that we have facilities with banks, et cetera, of SEK 6.7 billion that we can make use of, only SEK 3.4 billion in external debt, and we have no maturities this year.

So we have a very solid financial position, which takes me then to this slide. Equity end of the quarter, SEK 44 billion. And here, again, the dividend is already separated away from this equity position. Equity to assets 31%, overall super solid financial position, adjusted net cash of plus SEK 15 billion. And of course, this is very reassuring for clients. So as we -- with a balance sheet like this, clients can trust that we will stand there and we will deliver on the contracts that we have signed with them. And that is very important for us. It's a commercial advantage.

And the other thing is that it gives us the opportunity to act on market opportunities should they arise when -- perhaps when others can't, in some cases. So we don't have to chase volume, but we can focus on making the right sort of commercial decisions.

So let me stop there. Over to you, Anders.

[Anders Danielsson, executive]

Yes. So I will address the market outlook in our different stream, starting with construction. Due to the fact that we see some supply chain disruption and we also see some positive news when it comes to Federal funding, especially in the U.S., on the U.S. civil market. We have a sort of mixed picture here when it comes to market outlook. We see stable market outlook when it comes to non-residential building in -- especially in the Nordic operation and U.S. operation, which is the vast majority of our building operation. Somewhat slower in Europe going forward.

When it comes to residential construction, we have a slower market outlook in construction, but we have a stable or even strong market outlook in U.S. civil, stable in basically all other markets, except for Finland, which is quite slow. But the U.S. civil market, we can see that Federal money are coming out in the market, and we also can see that the different states, especially in the strong area where we are -- have operation on the East Coast and West Coast, we can definitely see that the projects are started, and we have a good pipeline going forward. So we have a strong market outlook there, important market.

When it comes to residential development, we have reduced the outlook that is due to both cost escalation and inflation, but also that the interest rates are starting to pick up. We haven't seen any large effect in Q1 on that, but we expect a slower outlook -- slower market over the next 12 months.

Commercial property development, unchanged, weak due to the fact that the leasing are weak. And again, the investor appetite continues to be strong. We expect that to continue and -- but we have unchanged outlook there.

So to conclude the first quarter, construction, increasing volumes, increasing revenues. Residential development, good performance on a good level. Commercial property development, attractive gains when we sell properties. Investment properties, first acquisition, very encouraging. So we have a robust financial position, a good position and our strategic direction remains. We continue to focus on improving profitability and grow responsibly in the construction stream. We have the ambition and will want to be the leading residential developer and we are in that position in several markets. And we want to continue to grow the commercial property development in different geographies. And we also continue to build up the investment properties portfolios over time, perfectly in line with the strategy that we announced late last year.

With that I'll leave it to Antonia to open up for Q&A.

[Antonia Junelind, executive]

Yes. Thank you, Anders. So now it's time for your questions. And may I please remind you that you can ask your questions on conference call. Just follow the instructions by the operator. Or you can send in your questions by using the text field on the webcast page. Or you can ask your question in person here in the room. And may I then please ask you to raise your hand so that we can bring a microphone so that the online audience can hear your question as well. And also please start by stating your name and organization.

And we will start with questions from the audience in the room. Would you want to go first?

[Albin Sandberg, analyst]

Albin Sandberg from Kepler Cheuvreux. I have 3 questions. Starting off with the supply chain and cost inflation environment. I think it's another quarter now where you state that you have not really seen any real impact on your, let's say, current operations, but you keep mentioning the risks going forward. If we look at your current order backlog, do you feel confident both on the cost inflation side and also the supply chain issue? And if there are any risks, which are the ones that you would like to highlight?

[Anders Danielsson, executive]

Yes. Thank you Albin. The supply chain disruption and the cost escalation, we have seen that for some time, and we've been talking about it every quarter basically. So far we have been able to mitigate that. It has continued -- expected to continue. And mitigation has been that we are very careful when we bid for projects or start new development projects that we have secured as much as possible of the supply chain, including prices and also availability of material. That's critical for us.

And when it comes to external projects, we are also working with our clients to negotiate inflation compensation, clauses in the contracts or split the responsibility or the risk for cost escalation. And we also have good negotiations because everybody understand what's going on. So the client wants also the execution to be in line with the schedule. So we are also, in quite many cases, accelerated the procurement of different materials. So we get them into the sites or another sites close by our project to mitigate the bottlenecks that we see in the market.

Going forward, I expect -- I'm quite confident with our position in the current backlog. I think we have shown now over time that we are able to mitigate that and we are very -- we are disciplined when it comes to selecting projects and also we have good processes in place to make sure that we don't take or speculate in the volatility, they expect to continue. So I'm confident in that.

But on the other hand, I expect also that the cost escalation will impact the ability to buy new homes, for example, in line with the interest rates going up as well. And I expect some projects actually being postponed somewhat because the client might not get the business case together with the increased cost that we come up with. So it's more forward-looking that I see the risk.

[Albin Sandberg, analyst]

And if you see that drop in demand because of clients not being able to basically pay for the projects or the unit, the residential unit, you made some comments about you keep your overhead in Europe and so on. I mean, how quick are you in order to basically adjust for such a market demand?

[Anders Danielsson, executive]

It's -- we can adjust -- most of the overhead is related to personnel, so that we can adjust when we see -- if we see that the revenue will decrease in the next 6 or 9 months. So we have done that adjustment before and we're looking very careful on that. But we have not seen -- as I said earlier, we have not seen that implication yet in the market. We still -- we haven't seen a lot of postponement of projects. And I expect we can look at our own business cases in residential development. We have the ambition to start new projects. And we still see a good demand on the land, demand is really strong in our market and we also see that the business cases work.

[Albin Sandberg, analyst]

And that leads me into my final and third question, and that is on the residential because that's where you're lowering the market outlook basically and still your comment now on being a quite strong market. So how do we reconcile that? I mean, will you be more cautious in starting new projects Q2 going forward? Or is it the sales rate that will determine it? And what do you see in terms of potential organizational changes?

[Anders Danielsson, executive]

We have a high sales rate, and I can easily expect the lower sales rate in the ongoing projects. So we have a good position. We have almost no unsold completed, very low figures there. And we have the financial strength to start new projects. If I look at the other external market, it could -- might be the case and that's also why we're lowering the outlook on the residential construction. That -- the external client might not be able to start new projects because the banks require high sales rate before they allow them to start. But we are in another position. We can choose ourselves, which could be a competitive advantage.

[Antonia Junelind, executive]

And we do have another question from here.

[Markus Henriksson, analyst]

From Markus Henriksson, ABG. Also on the residential development theme, with a lowered outlook in Europe, do you think still that that might be offset somewhat by the ramp-up in BoKlok in the U.K?

[Magnus Persson, executive]

I can take that. Well, essentially, you're talking about 2 different market sectors in 2 different geographies. So whether or not that offset each other, that's very hard to say. I mean if I say something about BoKlok in the U.K., we have just started this business. We started a few projects there. We expect to hand over some units. So very big underlying demand for that type of residential units in the U.K. I mean, U.K., first was a big market, obviously, but maybe that type of that level of affordability of quality housing, that's not what that industry has been trying to produce in any sort of great numbers before. So we are a very welcomed addition, I can say, to the housing or residential producers in the U.K. So great hopes for that.

In Europe, I think what you see here in the first quarter with slightly lower volumes, I mean, it's really hard to speculate about the future, obviously. We are cautious because we see overall attendances if we have inflation, we have interest rates that are coming up, and we have potential impacts on the labor market and so on. But I'm not going to sort of say they're going to take each other out; it's very difficult to say.

[Markus Henriksson, analyst]

And then also on the margins in rest of Europe, they were exceptionally high in RD last year. And now it's down to 12.1% here in Q1. You mentioned volume and that you have, yes, lower absorption rate. But what do you think for margins in that region going forward? Was it like exceptional 2021 and we should expect normalization of margins.

[Magnus Persson, executive]

I think that the market there before, it has been exceptional for quite some time. And we have been coming from a situation where prices or costs have been lower when you sort of start the project and you have the price increases on apartment and a very large demand. And of course, that puts us as a developer in a very favorable situation. If you can say that maybe that's a bit of a market imbalance that there has been and it's very difficult to say how long will that be around them. But clearly we've had a few quarters with, I mean, the comparison quarter with 21% and other quarters that is about 20% that I think is not something that should potentially be extrapolated far out into the future.

But we expect a very decent profitability from the business. I need to add that. It's a very fine business we have. And there is a good demand there and the willingness to pay, of course, is also very strong there, so.

[Markus Henriksson, analyst]

And then also on the cash flow, you highlight SEK 7 billion from commercial development here in '22-'23. Is it quite tilted towards this year or evenly split for those 2 years?

[Magnus Persson, executive]

I'd say it's normally more closer in time than that because we -- it's seldom that we pre-divest so far out in time. So without giving you a specific split.

[Markus Henriksson, analyst]

Last question, salary inflation in your different geographies, what do you see currently?

[Magnus Persson, executive]

Yes, there is definitely salary inflation going on. I think we see it in all our different countries then to varying degrees. I think it's perhaps most challenging in Central Europe is my view on that. Then where we are working, we, of course, work with Unions a lot and we have Union agreements and so on. And they are normally renegotiated, of course not every year, but every third or second or third year and so on. And in most of our markets, we think that the Unions are very strong in sticking to the agreements, which is very good because it gives, of course, us an ability to train people and sort of make sure we get skilled people and the resource certainty also and at the same time you can sort of handle these swings in salary costs and that otherwise could go very much up and down. So it's something that we're definitely looking after, and we need to handle. But there's no like immediate concern, I will say, on that. Maybe you want to add, Anders.

[Anders Danielsson, executive]

No, I mean to build on that, when we price the projects, we have a predictability due to the fact that we have a long-term agreement with the Union. So it's -- and we also get prices and quotes from our subcontractors. So we are able to price that in when we estimate the projects.

[Antonia Junelind, executive]

So then we will move over to questions from the conference call. Operator, do we have someone calling in?

[Operator]

The first question comes from the line of Pam Liu with Morgan Stanley.

[Pam Liu, analyst]

I have 3, please. The first question is for construction. So in construction in Europe, you mentioned that the loss was a result of the slow start due to seasonality. Now I know that in the usual times, this could typically be recovered or caught up in the following quarters. However, given the location of the slow start projects and the ongoing war and the fact that you already see early signs of postponed project in that region, what do you think is the probability of recovery or catching up later? Or what is the risk of not being able to do so? And then in the U.S. part, in construction, I believe you have more exposure in building management or, sorry, in building construction management rather than civil. Do you see that balance shifting towards civil more significantly going forward?

Second question is, what do you see in terms of the overall inventory of new homes in Sweden? And then the third question, if I think about the rising interest rate and now obviously we haven't had raising rates for a very long time, and it is also something that is completely out of your control. But in your opinion, how long do you think it takes for raising rates to fully impact on things like housing price or biased appetite? And what would you do during a period of rising rates particularly, let's say, on the commercial side, I would expect you to perhaps slow down new development. So what would be the strategy during this period?

[Anders Danielsson, executive]

Thank you for the question. I will start with the 2 first ones and then Magnus will comment on another one. The first one, in Central Europe, as you -- as I said, we have a slow start. That's normal for the seasonal effect. We have a lot of civil operation, asphalt and concrete, which is -- we have fixed costs, but we are not -- we don't have the revenue. And the normal thing that we do catch up during the rest of the year, and I expect us to do that this year as well. And the reason why I say it is because we have the vast majority of revenue in hand. We have a good order backlog and we don't need to fill up much more for this year. It's more a concern going forward, if I look at the market. So I do believe in that.

When it comes to U.S., we have a split between building and civil. We don't declare how much or how that split looks like, but I don't expect it to be very different. We have a very healthy backlog and very healthy pipeline in the U.S. building and good performance, and our clients are really investing. We can see that we are in the right places.

And the same thing with civil. We do see -- expect an increasing market, strong market, and we are definitely in the right places, very strong in the New York area and up to Boston, Washington D.C. and on the West Coast, Los Angeles down to San Diego up to San Francisco, Seattle. And those are the places where we can see really increasing investment in infrastructure and the need is enormous there, I can tell you that. So I have a good outlook there.

[Magnus Persson, executive]

All right. Pam, this is Magnus. I will try to answer your 2 questions on Residential Development. Let me start with your last one regarding interest rates and the time that sort of how long will it take from an interest rate hike, et cetera, until customers may be impacted and what would we do about that. I think it's a good question, obviously.

But first of all, it's important to sort of understand that banks, if you take Sweden as an example, they are not calculating with these low interest rates that have been on the market for the mortgages when they assess whether or not the customer will be able to get the mortgage to fund their apartment. They have been calculating with completely different rates. So I'd say on that end, there's definitely upside, quite significant upwards room, so to speak, for even more rate hikes before the banks would start to think that this is too expensive for many individuals.

Then the other thing is it might be -- if it becomes more expensive to borrow money, even if the bank would allow a customer to borrow money, maybe they would not like to borrow because it sort of crowds out other things they would like to do in their life. That's very difficult to speculate on. But I think if and when we would have an interest rate and an impact on the labor market; that is a bit of a sort of cocktail you don't want on the residential development market. That is what we have seen historically. But when you have sort of the wrong type of development on the labor market, that is what really impacts the residential development. I hope that was satisfactory for that question.

And then you had a question regarding the Swedish residential development operation and inventory. But I did unfortunately not catch your actual question on that. So if you may repeat.

[Pam Liu, analyst]

Yes, just to see what you see as sort of the overall inventory of new homes in Sweden? Do you see quite a lot of inventory or a low inventory, which could suggest that the demand can still drive for sort of new -- I suppose it's -- well, so I think we always said that there is a structural shortage in house in Sweden. So I would like to understand the inventory position to see whether that is still the case? Or do you see there's a lot of inventory, therefore the start will be slower?

[Magnus Persson, executive]

I think the situation still persists. There is definitely sort of an underlying demand for new homes, new homes at the right prices and the right locations in Sweden. We don't see that situation have changed.

[Antonia Junelind, executive]

So then, operator, do we have a final question from the conference call?

[Operator]

Yes, we have a question coming from Mr. Gregor Kuglitsch with UBS.

[Gregor Kuglitsch, analyst]

Maybe I can just start on the construction margin. I believe sort of in the previous conference call, your comment was along the lines of, basically there still sort of being an upward trajectory. And I want to understand whether that view has changed at all and you now don't expect further improvement from kind of the levels that you achieved, say, over the last 12 months or 2021?

And then I've got a few questions on commercial properties. So I think if I look at the detail, you kind of sold a bunch of the assets in Houston at sort of very low margin or nearly no profit. And I guess the question is, is that it? I think you were alluding to the fact that that is it. But in terms of the sort of margin dilutive property sort of being essentially booked through the P&L. So that's the first question.

Second question is, again, you alluded to it, you sort of said, well, you want to have those 2 lines, the pre-lease rate and completion rate kind of aligning. And obviously if ideally leasing goes up, but what if it doesn't, what would you do? Would you slow down essentially new launches? And yes, those were the 2 questions from commercial.

[Anders Danielsson, executive]

I can start with the first one. If you look at the first quarter, as I said, it's usually a slower quarter. But we have not changed our ambition here. We have a 3.5% target in construction. That's definitely a target to be at or above that level. If you look at the rolling 12 months, we are at 3.7%. So we have not reduced our ambition in the construction profitability.

[Magnus Persson, executive]

And I will go on with your CD question, you said you sold Houston, is that it? I assume you referred to sort of problematic assets. And then I can just…

[Gregor Kuglitsch, analyst]

Yes, just slow margin, yes.

[Magnus Persson, executive]

I can just confirm that the 2 properties we had in Houston, that's definitely sort of the sizable problematic asset we have and that is now completed, sorry, sold. So we've dealt with the problem. And then the final question was, what if leases don't increase? Well, I mean, that's a what-if question. Let's see what happens then. But obviously we don't go into any type of speculative projects that we don't have the capacity to complete. We have a good risk tolerance. We have a solid balance sheet, and we constantly balance sort of our need to start new projects for future profit at the same time as we cannot take on too much risk in terms of sort of if leasing were to lag further. So that's a constant evaluation. I can't say what would you do? We will see if that happens, I don't think you will.

[Gregor Kuglitsch, analyst]

Sorry, I had one final question, which I forgot to ask before. So your stock is obviously down quite a bit. You've got SEK 15 billion of firepower. What's your attitude or philosophy around share buybacks?

[Magnus Persson, executive]

Well, we can't comment on that. I don't want to comment on the share price. Others will have to make up their assessment. What we do over here is that we try to manage a company to make as much long-term sustainable value for the shareholders as possible. And then others will have to price that. And in terms of share buybacks and other alternative corporate finance measures, we think the best value for our shareholders is to employ this capital in a very profitable, highly sustainable property development projects.

[Antonia Junelind, executive]

Okay. So we would want to answer as many questions as we can. So do we have any more questions on the conference call, operator?

[Operator]

We do. We have a question coming from Marcin Wojtal with Bank of America.

[Marcin Wojtal, analyst]

Firstly, on construction, just following up. I think as the previous quarterly call, you were indicating that in 2022, profitability should be higher in construction than in 2021. So, is that still the case obviously, considering somewhat changed operating environment?

My question number 2, could you please clarify a little bit your outlook for commercial property? I mean the comment that you made in your site, you're basically saying that there is cost escalation and the price uncertainty and it might lead to postponed projects. So are you saying that you are perhaps slowing down your investments in commercial development or it relates more to the market situation? I see that there was only one project that you started in Q1, but I don't know if we should extrapolate that for the rest of the year.

And lastly, order intake in construction, you have a strong backlog, but are you becoming more selective in construction in terms of order intake, considering supply chain and some of the other issues that you mentioned?

[Anders Danielsson, executive]

Okay. I will answer your first and third question. When it comes to -- we don't give any forecast for the profitability. What I've said is that our ambition is to continue to focus on profit before volume, and our mission is to continue to increase profitability. And we are on a good level now, 3.7% rolling 12 months, but we will not lower our ambition again.

Order intake, yes, we're going to be selective -- continue to be selective. We're not changing really our ambition here. But we are more -- we are careful when we go into project. The selected product where we can see we have a competitive advantage, where we can see that we have a history of profitability, and we have the right team in place, that's critical. And otherwise we are very careful with the processes of securing prices, supply chain, avoiding bottlenecks and that's definitely going to continue.

[Magnus Persson, executive]

Then Marcin, you had a question about the commercial development outlook, if I understood you correctly. Always slowing down, always start to refer to the market in general. Like I say, all the market outlooks that we published in our quarterly reports, they refer to the market outlook. We can be, in some cases, be in a sort of a certain position in the market. And foresee what we see is that we still have, today have a very strong investor market. The leasing market is slow and we will sort of project-by-project deal with this situation. Our ambition is to continue to start more commercial development projects and to continue to grow this business, but we will not do any sort of rush starts where we don't have full control over the costs or where we think it might be on the fringes in the city area. So there might be a sort of too big leasing risk or something like that, especially given where the market is today.

So in terms of being only one start in the first quarter; that is not to be extrapolated. I mean these starts, they are a little bit depending on permits, et cetera, et cetera. Sometimes you do more, sometimes you do less.

[Antonia Junelind, executive]

Okay. So thank you now for your questions. If there are any more questions, I need to refer you to come back to us in the Investor Relations section, and we will continue to answer any questions you might have because it's time for us to wrap up this presentation.

So I want to say thank you for joining us here at our headquarters in Stockholm today. And I also want to say thank you for participating on our webcast. And a recorded version of this webcast will be available on our web page shortly. So thank you for today, and see you again for our second quarter report in July.