Skanska AB

STO:SKA B

Earnings Call Analysis

Skanska Reports Robust Q2 Performance, Highlights Strong Order Intake and Market Outlook

Skanska delivered a solid performance in Q2 2024. The construction segment saw a 6% revenue increase and a 3.5% operating margin. Notably, order bookings surpassed SEK 60 billion, setting a record backlog. Residential sales rose, driven by strong Nordic sales, despite a SEK 169 million loss from BoKlok. Commercial Property Development noted SEK 1.2 billion divestment gains. The company’s first investment property acquisition in Gothenburg contributed to SEK 108 million in operating income. Overall, Skanska maintains a robust financial position and targets sustained growth, particularly in the U.S. construction and European residential markets.

Introduction and Market Overview

During the earnings call, the leadership team discussed Skanska's strong performance in the second quarter of 2024. The company emphasized solid construction operating margins, a strong order intake, and an increase in residential development sales volume, particularly in the Nordics. The market outlook revealed ongoing challenges, but there was optimism about future infrastructure investments and commercial property development.

Construction Segment Performance

The construction segment showed resilience with a 6% increase in revenue, adjusted for currency effects, and an operating margin of 3.5%, slightly up from 3.4% last year. Notably, the US market contributed significantly, with a record-high order backlog of nearly SEK 268 billion and a book-to-build ratio of 114% over the past 12 months. The construction segment highlighted its performance stability, maintaining gross margins at 7.5% and good cost control.

Residential Development Segment

In residential development, Skanska reported a revenue increase to SEK 2.2 billion for the quarter. The number of homes sold rose significantly to over 500 units. Despite a slower pace in project starts, the company stressed the importance of balancing production and sales. Notably, the BoKlok initiative faced losses due to potential supplier issues and underutilized factory capacity, particularly impacting the UK market.

Commercial Property Development

Skanska made substantial progress in its commercial property development with five divestments in the quarter, resulting in a gain of SEK 1.2 billion. Ongoing projects valued at SEK 26 billion and a project completion rate of 77% were notable highlights. The company continues to focus on leasing, with a completion profile indicating a steady increase in leased commercial spaces.

Investment Properties Segment

The investment properties segment saw the first acquisition recorded in Gothenburg. Operating income for the quarter reached SEK 108 million, with an economic occupancy rate of 87%. The company aims to build a portfolio valued between SEK 12 billion to SEK 18 billion, and current progress suggests they are well on their way.

Financial Position and Guidance

Skanska maintained a robust financial position with positive net financials and a tax rate close to their nominal rate of 24%. The company observed a positive cash flow impact from working capital in the construction segment and reported a balanced net investment over the past 12 months. Guidance for the future emphasizes continued selectivity in project bids and a focus on maintaining performance stability across all geographies.

Earnings Call Transcript 2024-Q2

[Antonia Junelind, executive]

Good morning, and welcome to the presentation of Skanska's Second Quarter Report for 2024. I'm Antonia Junelind, I'm the Senior Vice President for Investor Relations here at Skanska.

And joining me here today is our President and CEO, Anders Danielsson, and our CFO, Magnus Persso. Shortly, they will take you through an update on our performance over the past quarter and provide you with an updated market outlook.

And after that initial presentation, we will, as usual, invite you to ask questions during the Q&A session. And I will then ask you to join us by using the HD audio link or the telephone conference number that we provided in the invite or on skanska.com on the Investor Relations pages. And you can just follow the detailed instructions provided by the operator.

So with that short introduction, I hand over to you, Anders, to start the presentation.

[Anders Danielsson, executive]

Thank you, Antonia. Before I jump into the figures, I wanted you to look at the picture here on the right-hand side. That's Studio B, the project development -- commercial project development in Warsaw. Developed by Skanska, constructed by Skanska. And we also leased it out. It's 98% leased. And we also divested it to repeat investors during the second quarter. And we also started the next phase in that area.

If I look at overall, the second quarter during this year, we have a solid performance. Construction, the operating margin is in line with our targets. We also have a strong order intake. Residential development, increasing sales volume, but it is from low levels, but encouraging to see that also continuing in the second quarter.

Commercial Property Development, we have made 5 divestments in the quarter, which is on a high level -- on good levels as well. Investment Properties, the first acquisition was made in Gothenburg, one of the three cities in Sweden that we are focusing on.

Operating margin in Construction, 3.5% compared to 3.4% last year. And the return on capital employed in project development and investment properties is impacted on a rolling 12-month basis of a weak property market. And it is also impact in the return on equity, which ends up on 7.3% on a rolling 12. We continue to have a robust financial position. And we also have a reduction of carbon emission in our own operation of 58% compared to the base year 2015.

If I go into each stream, start with Construction. The revenue has increase in the quarter with 6% adjusted for currency effect. And we also see order bookings landing slightly above SEK 60 billion for the quarter. So we have a book-to-build of 114% on a rolling 12-month basis, and the order backlog is on a record high level of close to SEK 268 billion.

Operating income, SEK 1.5 billion, and again, 3.5% margin. The strongest order intake is in the U.S., and that goes both for our building operations and our civil operation. The order back is on a high level, record high. And on a rolling 12 months basis, the operating margin was 3.3%.

Going into residential development. The revenue has increased SEK 2.2 billion in the quarter. We have increased the number of homes sold to -- over 500. We haven't started so much this quarter, but it's more of a quarter effect, I would say, if you look at the more on a rolling 12, you can see. But we have start -- ready projects to start. And we also announced another start in Central Europe here recently.

Operating income, negative SEK 11 million and return on capital employed also negative. So we can see increased sales volume in the Nordics, and we have continued to have a good level of the activity in Central Europe. And they hit we took in the quarter from BoKlok was SEK 167 million. And the underlying -- if you take away BoKlok, the underlying operating margin is 8%, which is slightly below our target of 10% margin.

Operator -- Commercial Property Development, the operating income is SEK 1 billion. So we have a gain on sale of the divestment we made of SEK 1.2 billion. We have 19 ongoing projects, which corresponds to SEK 26 billion upon completion in total investments. And we have completed 23 projects, which is around SEK 11 billion in total investment. And those completed project has a lease rate of 77%. 5 divestment, 4 external on good levels and 1 internal. And leasing activity is on a reasonably good level of 61,000 square meters in the quarter.

Investment Properties, the first acquisition recorded in Gothenburg that is Citygate. We have operating income of SEK 108 million in the quarter, and the economic occupancy rate is at 87%, so on a high level. And the total portfolio of property value is SEK 7.7 billion. And again, here, we have an ambition and target to build up a portfolio between SEK 12 billion to SEK 18 billion. So we are well on our way.

If we go back to construction stream and look at the order bookings over time. So you can see the development of the order backlog, the blue bars. So it continue to increase, as you can see. You can also see the order bookings on a rolling 12 months basis, the grey line here and also the order bookings per quarter, the orange on the revenue that has been increase -- the trend has been increases for a few -- quite a lot of quarters. And there you can see compared to last year, how much order backlog you can also see there rolling 12.

If I go into each and every geography, you can see that the strongest order intake has been in the U.S. We see that the book-to-bill ratio is below 100% in the Nordics and also in Europe. We continue to be selective, but we have a healthy backlog. If you look at the months of production in Nordics, 15 months of production, 15 months in Europe as well. So that is on a healthy level.

So we can continue to be selective and going for a project where we see that we have a competitive advantage and also the right resources. But 151% in U.S. is extraordinary, 24 months of production. And that order backlog is the duration is longer now than before. So it's a large project that we have on -- so that I'm very confident with that.

So with that, I hand over to Magnus.

[Magnus Persson, executive]

Thank you, Anders. So I'll start with Construction. As has been said, revenues climbed 7% in Swedish kronas quarter-by-quarter and 6% in local currencies. And this is on the back, of course, of us being able to book a lot of good work over quite some time now. So it's starting to translate a bit into revenues there. Notable drivers of this is, of course, the U.S., where we have had -- the market is really strong. We've been very successful with identifying and bidding and winning the right type of jobs over there in that geography.

Gross margin, 7.5% in isolated quarter, a remarkable performance stability. If you look on the table here, you can see the 4 different columns of Skanska essential 7.5, 7.5, 7.5 and 7.7. I think it says something on performance stability in such a sort of broad geographical construction operation that we have that moves also with the market there.

Same thing on the S&A. We have good cost control, came in 4.0% in the isolated quarter. Obviously, revenues are a bit up, but if you backtrack through the columns here, you can see that we are able to sort of maintain this in a good way. Operating margin then in the quarter, 3.5%. So a very stable performance in construction.

And if we looked on the different geographies then, you can see on the right-hand side, you have the operating margin for different geographies. The Nordics comes down slightly to 3.3%, but Sweden improved the full percentage unit up to 4.0% up. Finnish market is a bit tougher. In Norway, we have, as Anders was alluded to before, we have big, long jobs according to our way of recognizing profits, we are always cautious in the beginning of large complex jobs that stretch over a long time period there.

Europe is performing really well, a 3.8% margin in the isolated quarter. Good in both of those geographies, U.K. and in Central Europe and the U.S., 3.6% continues to perform at this high level, which is extremely positive, of course, because this is where we have the -- currently the strongest market and are booking a lot of new jobs.

We're going to residential development. We recognized SEK 2.150 billion in terms of revenues in the isolated quarter, which is top line growth there of 30% quarter-over-quarter. Clearly, better sales in the Nordics, it's picking up. We can see that when we look at the number of sold units, relatively speaking, in the quarter, a bit slower sales in the Central European residential development operations, but still at a good level.

Operating income, minus SEK 11 million in this is as we have also explained more in detail in the quarterly report, a cost charge of BoKlok of minus -- or loss for BoKlok minus SEK 169 million. If we take that out, the remaining part of the operations have an operating margin of 8%, which sort of given where we are with the residential market is a quite decent performance today.

Going to the geographies. Again, you can see here we have either 0 or negative on all the different reported geographies, but the BoKlok effect impacts all these different areas. And in the Nordics, the impact of BoKlok has minus SEK 68 million. And in Europe, it's minus SEK 99 million. Underlying reasons to the BoKlok losses there. The biggest -- the 2 biggest impacts is us having provided for potential supplier problems that we have identified in the U.K. And we also have a cost overhang from the factory that is currently underutilized, given the market appetite for these type of assets at the moment.

There are large differences across the geographies with the European market being clearly stronger. And then the Nordics is catching up. It is starting to improve. As I said, we are selling, but we have a somewhat lower profitability there, relatively speaking, to the European operations. So the sales mix, how much we sell in different geographies is clearly impacting the sort of [ screen ] results there, and we'll probably do that for some quarters going forward as well.

Homes started and sold. We sold 515 units in Q2, which is up then from 343 in the same quarter last year. So we actually grew the number of sold units by 50% there, very solid. Started 37 units, quite a lot lower than the same quarter last year. And first is a quite large variation in this quarter-to-quarter. In reality, we'll have to look at more over some time to make sense of the numbers.

But there are a couple of things that I think is important to sort of be aware of. We have a lot of units already to sell from. And I will come back to that on the next slide and show you. And given the volume, the sort of capacity of the market, we shouldn't be sort of have too much units to sell from either.

The other thing is that it is harder today to find the right business cases. Costs have been going up, prices have been challenged. So we are very selective when we decide to start the project. There is sort of a smaller part of the land bank we have available than usual that is where we can identify the right business cases and then start projects. So that's another reason to this.

We then look at the homes in production and completed unsold units, it looks like this over time. We had around 4,000, at the end of the second quarter. And if you take the light gray part of this bar and you add the purple one, you end up with roughly 2,000 units, which is the number of units that we have now unsold that we are able to sell from, which is not a particularly low figure.

You backtrack a year or two, you can find higher figures. But if you go further back, this is about the size we'll have up for sale. So we have a pretty balanced portfolio in that sense. Sales rate is improving. We came in at 51% in the first quarter, now we're at 57%, which is very positive. And also the unsold completed is reduced. In the first quarter, we reported 707 down so completed, and now we are down then to 671. So it's pretty clear that the activities we are doing on the market is gaining some traction, and we are selling better here, especially in the Nordic part of the operations.

We'll Move to commercial development. As has been said, we made 5 divestments in the quarter, which is maybe the most divestment active quarter we had for quite some time, very solid. Three of these divestments were made in the Nordics and two of them were made in Europe. One of the transactions was an internal transaction where we sold a property in Gothenburg called Citygate to investment properties. We amassed gains of SEK 1.2 billion in the second quarter, and the divestment margin of this was around 20%. That's quite solid.

The divestment market it remains difficult. And the appetite varies, I would say, significant across assets and across geographies. So it's not unlikely that on a project-by-project basis, the sort of profitability performance will be a bit more varied over the coming quarters as we continue to sell off the currently completed yet unsold properties.

Unrealized gains at the end of the second quarter, SEK 2.7 billion. We had SEK 4.2 billion at the end of the first quarter. The difference there is obviously then of SEK 1.5 billion. The main change here is the properties that we have now sold and hence realized that gains, SEK 1.2 billion. And the remaining is support -- it's some smaller value adjustments and some smaller changes to FX that sort of makes up the balance of the changes there.

Completion profile. We had at the end of the first quarter, SEK 12 billion in invested money in completed unsold properties. Now we are down to SEK 10.5 billion in money invested in completed unsold properties. They are leased to 75% so that's a good level. And we have also, during the quarter, added 2 more that have been completed and moved into the purple bar here from previously being blue.

And if you recall, we reported in Q1 that we had some completion slippage in a few properties towards the end of 2024. Unfortunately, one of these properties have continued to slip a bit in time and are now expected to be completed in the first quarter in 2025 instead.

If we look at leasing, lease as has been said, 61,000 square meters in the isolated quarter of which 33,000 was in multifamily residential's and 28,000 was in commercial spaces. If you track the green and orange or if you will, yellow line here on the graph, you can also see that the leasing and completion rates in our commercial portfolio are now meeting each other again, which there has been a gap between these 2 for a while indicating that we have complete sort of reached further in terms of completing the properties that we have done in leasing, but we are catching up in terms of leasing here, which obviously is positive. The leasing market remains relatively soft, with continued betterments in Europe and the Nordics, whilst the U.S. is quite slow still.

Investment properties. As I have already said, we took on board one new property that we acquired from the commercial development stream during the quarter, Citygate in Gothenburg and report now a very solid EBIT of SEK 108 million, of which SEK 58 million are directly related to IFRS accounting effects following this internal transaction. So on a like-for-like basis, you should look at operating net and add the S&A expenses to get the feel for the traction in the portfolio.

On a group level, the central item here, minus EUR 159 million, we essentially follow our sort of cost -- costing level at the headquarter organization with SEK 170 million to SEK 180 million in cost per quarter. In addition to that, we have the legacy business that has been no particular effects from that in the isolated quarter here. Net financials continues to be positive, SEK 146 million through a very well-managed central liquidity portfolio. And we taxed out very close to our nominal tax rate at 24% in the quarter.

We were balanced in terms of cash flow in the quarter with SEK 300 million positive. And then we handed out or distributed a dividend that was previously decided by the Annual General Meeting during the second quarter, leading to minus SEK 2.3 billion then in cash flow, taking minus SEK 2 billion in total for the isolated quarter here, quite an improvement from the minus SEK 5 billion in the comparable quarter.

If we look at free working capital in construction, we had a positive impact here on cash flow in the isolated quarter of SEK 600 million. The actual portfolio position remains at around 17% of revenue. And the trend that we have been alluding to over quite a few quarters now is still with us. It is slightly more difficult in the negotiations with clients to achieve the sort of front-loaded payment plans that we would like to have, which is something that we carry with us in order of internal and strategic planning, obviously. So that is the development that you can also see if you look on the slide that I'm showing you on the slightly downward slope of the green curve.

Net investments were in balance in the second quarter, as already been said, and also for the rolling 12 months. And at the end of Q2, we had around SEK 67 billion in capital that was employed in our different property-related operations.

Very strong liquidity access, SEK 21 billion, should we need it, and we have been working a bit during the quarter to reshape the maturity profile of our stock of loans and credit commitments and matching this in a good way to our -- the profile of our ongoing investment commitments. So we are very satisfied and very comfortable with the liquidity position of the group as we stand today.

Looking at the balance sheet then remains very strong SEK 58 billion approximately in equity, SEK 1.8 billion in net cash, and that is then after having distributed this year's dividend to the shareholders.

With that, Anders, I hand back to you.

[Anders Danielsson, executive]

Yes. And I will go into the market outlook overall here, I start with construction. Stable market outlook. We haven't changed any market outlook from last quarter. So the U.S. remains the strongest market in construction, both for building and civil, the infrastructure investment is going. It's a large pipeline there, definitely for the future.

In the Nordic and Europe, civil market is more stable in most countries. We have a more weaker outlook on the Building, segment driven by the residential market and also commercial market. But sectors like energy in this industry and defense provide opportunities for the future. So we are sort of reallocating some of our resources to those segments.

Residential development continue to be weak market outlook in the Nordics, stable in Central Europe. And we can see an increase in activity also in the Nordic from -- but it is from low levels. We expect recovery to take some time. It will require further decreases in interest rates. And there is a cost-of-living pressure and impact on low-cost segments continues.

Commercial Property Development, also unchanged weak market outlook. We have reduced macroeconomic uncertainty. Slowly improving real estate investor market in Nordics and Central Europe, also where we have made our divestment this quarter. And we also can see some early positive signals from the occupier market in the U.S., but it is a polarized market. So it is the high-quality buildings in the right location, but it's also what we can offer in the U.S.

Investment property, stable market. It is also here a polarized occupier market. But it's a strong demand for high-quality spaces, and we have a good leasing ratio and rents expected to remain stable.

So if I summarize the group, it's a solid performance overall in the second quarter. Construction, operating margin in line with target, strong order intake residential development, increasing sales volume from low levels and commercial property development, 5 divestment recorded in the quarter on good levels. Investment Properties, first acquisition in Gothenburg, and we're maintaining a robust financial position.

So with that, I hand over to Antonia to open up the Q&A.

[Antonia Junelind, executive]

Thank you, Anders. Yes. So now we will open up for questions from the audience that is joining us online. And as mentioned before, you can ask questions by using the HD audio link or the telephone conference number that has been provided in the invite to this press conference. And you can also find those details on our web page, skanska.com, on the Investor Relations pages there. And when you call in, you can just follow the detailed instructions that will be provided.

So with that, I will then ask the operator to please introduce to us the first caller.

[Operator]

The first question is from Simen Mortensen with DNB Markets.

[Simen Mortensen, analyst]

Congratulations on good result. I have a few questions. When I look at the book-to-bill, it's strong in very many of the segments, but the Swedish division at 89% kind of stands out. One, how are you looking at the improvement of that in the short-term, or how are will you be needing to restructure, et cetera, in Suite? I'll ask my question one by one, if you can answer that one first.

[Anders Danielsson, executive]

Yes. No problem, Simen. Thank you for that. Yes, the book-to-bill rates 89%. I'm not very concerned of this situation. We have a healthy backlog and also the duration of the backlog. We are selective in Sweden. And we are focusing on segment and also geographies, where we can see we have a competitive advantage and also that we have the right resources.

And so we are continuing to reallocate the resources from the resid market and commercial market to more industry, other social investment -- social infrastructure investment that we can see and also if you can see future market. So I'm confident that we will be able to take advantage of that in the future.

[Simen Mortensen, analyst]

And following a bit, my question is on the residential starts that were [indiscernible] basically this quarter, but you still have a high inventory, especially in Sweden, 528 units.

Just wondering, how quickly you can expect Skanska to start, new starts in the Nordics and especially Sweden, will focus still be on selling off completed unsold homes or how are your appetite to taking on development risk in the residential in RD in the short-term?

[Magnus Persson, executive]

Simen, this is Magnus. I'll try to answer your question. I mean that's -- it all depends on sales as we go, obviously, and the opportunities we have. So it's very difficult to say that we would sort of start quicker or so on. We do want to have a balance between what we produce, what we have in stock and what we sell. And that is something that we continuously assess.

We have opportunities to start projects in Sweden, and we will do that when we think we need to start them and when the economics of the different projects reach the right level for us to underwrite the business case. And both of these things have been sort of slower than what we have been accustomed to maybe over the last 5 or 10 years because it is more difficult to get the economics right in the business cases at the same time as the current sort of stock of unsold units have been depleting at a slower pace due to the slow sales pace then.

So we don't feel any stress at all and we have the ammunition we need in case we need to start projects there, and we do that when we feel the sort of situation as the totality is warranted.

[Simen Mortensen, analyst]

And another question is on CD. The U.S. now has 48% of the capital employed of that operations. We don't have to go back many quarters to look for write-downs in the U.S. Can you tell us a bit about your divestment plans and what we can expect us from the outside in terms of the profitability when those developments come, and at what time you plan to do U.S. divestments? The 5 in the quarter were in Nordics and in Europe, and if you can read anything on to that?

[Magnus Persson, executive]

Yes. Let's try and answer this question. I mean, we have a number of properties in the U.S., as you say, not all of these properties are obviously complete and are ready to be sold. So we and especially in this market, it's -- you sort of need to complete or need, but it's easier to sell something that is completed. So we have a few very limited amount of properties that are sort of ready to be sold in the U.S., and that market is considerably slower than what we can see also in Europe even on the divestment market.

We made the sort of what we assess to be a necessary valuation adjustments to these properties, if you recall, in the fourth quarter report for 2023, which sort of makes the valuation of this today to reflect, where we think the market is. Then we continuously reassess that because the market is developing.

We don't have any ambition to sort of sit on properties that are completed. We still have our sort of the business model is to develop and sell. But we do have the financial endurance, if you will, to not have to fire sell things if we can't get the right bids for them. And that is a balancing act all the time, because you will get bids for properties that are very low. There's always willing takers to cheap prices.

But -- so it's a bit of a mixture of being patient and at the same time, not to being too patient and wait for prices that might not occur in the end. So we're reading the market continuously. And when we think the timing is right, we are putting these properties out and testing the appetite for them.

And as we stand currently, we do not have any property on the market in the U.S. So that's why we're not selling something now. We need to sort of make -- take them to the position where they should be sold first.

[Simen Mortensen, analyst]

And my last question goes on the tax rate in Q2, kind of a high corporate tax rate given so much divestments in CD, if you can give any coloring on that -- the correlation, which we have seen in the past between CD divestments and payable tax?

[Magnus Persson, executive]

As a CFO, I always appreciate the question on our taxes. It's been too little to low down. And the 24% tax that we have in the second quarter actually rhymes very well with our nominal tax rate that is around 24%. And historically, you have seen us recognize lower taxes.

The reason for that is mainly business mix but also the fact that as we hand over properties, basically recognize them in IFRS as transactions in Sweden, which is a very sort of tax-efficient way of divesting properties through legal structures, then we have sort of a positive tax effect, if you will.

But when the mix of handing over properties to external buyers in Sweden is lower, partly due to the market, but also due to the fact that most of the properties that we are selling in Sweden now is going to investment properties, then that positive impact on taxes is much lower. So that is essentially the reason you can say.

Then we have across the different geographies we are operating in, seeing not big, but over years, sort of smaller increases in the nominal tax rates in countries, and all of this has sort of added up to us now reporting at 24% instead of a lower number.

[Operator]

The next question is from Graham Hunt with Jefferies.

[Graham Hunt, analyst]

I'll ask two and I'll ask you one by one, if that's okay. First, on BoKlok. U.K. clearly is still an issue there. How should we think about these costs going forward? Are the supplier issues now fully provisioned? And can you quantify the ongoing U.K. costs if we just assume activity remains the same?

[Anders Danielsson, executive]

Yes. Thank you, Graham. BoKlok, we have taken provisions as you recall, both in the first quarter and second quarter due to the supply chain in the U.K. predominantly.

Of course, we -- everything we see or everything we are concerned or see the risk, we take the provision in that quarter. So now we are taking the full provision for the risk we see in the supply chain in the U.K.

And it's a small operation we have in the U.K. So -- and we haven't started any new projects for quite some time, and we're starting to reach completion of the ongoing project. So I see that the risk is decreasing quarter-by-quarter here, definitely.

[Graham Hunt, analyst]

And second question on commercial. Can you speak to the reasons for the project slippage that you mentioned? Does this affect the return that you expect on the property when you do sell it? And then maybe you could speak to any differences between the local markets you're in, in the U.S. in terms of demand between Seattle, Washington, D.C. and Texas?

[Magnus Persson, executive]

Of course. Graham, this is Magnus. In terms of the slippage, it's quite easy. We've had some delays in the facade supply. And also, we have been, again, hit by a local strike that in totality, it sort pushes the completion of this property over a month end, which in our reporting pushes at the full quarter in the external reporting. So that's a very simple reason.

It has no effect on sort of the profitability of the project in itself. Of course, we potentially, theoretically would tie up a little bit more capital over another quarter, but that's in the whole grand scheme of things, that's insignificant.

The second part of your question related to the demand over the different 4 geographies where we are active. It's not a huge difference, I would say, but it looks a bit -- the shape of it is a bit different. On the divestment market, it's about the same situation and all different foreign markets, I would argue.

On the leasing side, we see a bit more activity on the East Coast and it's a bit slower sort of a return to office trend on the West Coast. So I'd say, in that case, Seattle would be slower in terms of the sort of return to office and hence on the leasing demand. But on the divestment side, it's basically the same.

[Operator]

Next question is from greater or Gregor Kuglitsch with UBS.

[Gregor Kuglitsch, analyst]

I had a question on the commercial. So just looking at what you've kind of disclosed, I think, in terms of unrealized gains, I think there's sort of SEK 2.7 billion left, including the stuff that you've already divested. And I think arithmetically, the margin is really low if you compare it to the market value that you disclosed.

So the question to you is, is that -- I mean I guess it's your best assessment, but just explain to us, obviously, you printed 20% in Q2 on divestments, I think. So are you basically saying you just sort of sold the most profitable ones in Q2, and you don't expect much margin on the rest? Or is it sort of conservative in terms of the assessment? So that's question one.

And question two is on coming back to residential in BoKlok. So I guess what I want to understand is how quickly could you eliminate that loss? I mean, I appreciate the provision probably is a one-off. But the sort of recurring losses on the factory, I think, in Sweden. Basically, how quickly can you eliminate that operating loss? That's been my question.

[Magnus Persson, executive]

I'll start with your first question, Greg, and then Anders will take on the BoKlok question here. In terms of the CD and the SEK 2.7 billion that we report now in [ UDG ] and how that is distributed. I mean if you follow the call, I'm sure you did, you also heard me say that the attractiveness for investors for properties is very different across different geographies and asset classes. And some of the divestments we have now made during this quarter has been to significantly better terms than what we had expected in our internal valuations.

And I'm sure we will end up in situations where that is not the case. But when we value the properties, we, for obvious reasons, can't value them as if we were in a short competition -- bid competition with investors. So we need to value our properties based on sort of what we think the market is on the average. And so have we sort of sold off the best stuff? I don't think so time will tell, right?

But we are happy and that we have managed to make some really good deals now in the second quarter. We know the quality of our properties. We have made a good mark and say in the local markets where we made these transactions. The others will look at those marks as well, and we are sort of confident in the quality of the remaining portfolio. But what that will look like profitability-wise, I wouldn't like to speculate on that, obviously, beforehand.

[Anders Danielsson, executive]

And if I go to the second question regarding BoKlok and started in the U.K. We have taken provisions close to SEK 100 million, the vast majorities depending on the provisions in the supply chain -- issues in the supply chain. We have very few ongoing projects. So now we have taken the provisions that we think is necessary to complete those projects. So that's what you see now in the second quarter.

Regarding the factory located in Sweden, we have a operating loss there. What we have done during quite many quarters now is to reduce the number of people employed in the factories. So we're reducing, and we will continue to adjust ourselves and the operation accordingly according to the market. So that's the actions we're taking to -- so the risk operating risk will reduce quarter-by-quarter.

[Gregor Kuglitsch, analyst]

Can I come back to the unrealized gains, sorry, just looking at Q1 to Q2, I think it was SEK 4.2 billion, now it's SEK 2.7 billion, so it drops to SEK 1.5 billion. And obviously, that's largely the gain you booked. In practice, how does it work? So if you sell, for example, a property and you had it in for 100, but you sell it for 200, you then -- I guess I would expect the unrealized gain to be higher, I guess, if you sold above your internal appraisal, if you see what I mean, right? You're telling me the SEK 2.7 billion is what's left, right, of what's not sold, right? I want to know if I'm interpreting correctly.

[Magnus Persson, executive]

Let's see if I can bring some order to this over the phone. It's not entirely simple. But if we have assessed sort of a surplus value in a property to say, SEK 500 million in Q1, and we sell that property for a gain of SEK 1 billion during the second quarter. The adjustment to the surplus value in the external reporting will still be only SEK 500 million because that is the basis for the valuation we had during the first quarter.

So it's entirely possible that there are sort of gains and profits coming out that has not been part of the unrealized gains that was included in the reporting, which makes this tricky to track, especially when we sell multiple properties and some of the properties are sold below and some of the properties are sold above.

And I think given the information we give you; it will be very difficult sort of to backtrack that. I think the best advice is to give our Investor Relations team a call and see if they can give you any sort of color on that, if a deal comes and you are unsure about how to interpret things.

[Operator]

[Operator Instructions] Your next question is from Arnaud Lehmann with Bank of America.

[Arnaud Lehmann, analyst]

Firstly, a couple of questions on construction. Just Q2 construction margins, pretty solid as you highlighted. Is there anything to mention in terms of gains or on completed projects or maybe losses or anything a little bit one-off to mention for the second quarter?

[Anders Danielsson, executive]

It's Anders here. There's nothing material in the quarter as more business is ongoing as usual. We complete projects and we start new projects with a lower profit take. So nothing -- no material one-offs in the quarter.

[Arnaud Lehmann, analyst]

Okay. And maybe a more kind of looking forward question about construction, in particular, in the U.S. I think next time you will be reporting Q3 results will be the day after the U.S. elections. One topic that is mentioned, depending on the outcome of the election that could be labor availability in construction. So is it already an issue for you? And do you see it maybe a rising risk going forward, especially post-election?

[Anders Danielsson, executive]

Now we don't see a large risk on that. We are very careful to -- when we bid for a project that we have the right resources in place before we even bid for a project because that's a big key for success. I have a profitable project.

And when it comes to the -- the vast majority of our business is in unionized cities or states. So -- and we have -- we have been there for decades. We have a very good relationship with unions in our different market geographies. So also there, we don't see any issue with that.

[Arnaud Lehmann, analyst]

And the last one is talking about net cash on the balance sheet. You've had a bit of a reduction in the net cash position in Q2. I think this was mostly from the dividend payment. Could you give us an indication of the outlook for net cash? I think you've got a few commercial development disposals to book in the second half, but is there something on the investment side to highlight?

[Magnus Persson, executive]

Arnaud, this is Magnus here. Yes, as we are reporting or writing out in the quarterly report, we have some transactions that we have already signed and booked that will yield some cash inflow in -- during the rest of the year. So you can count that in. And apart from that, as we normally say in terms of working capital it might have some swings. It's very difficult to forecast and the rest of that depends on the development of sales in both RD and CD and profitability in construction, which we don't provide any guidance for.

[Operator]

We have a follow-up question from Graham Hunt with Jefferies.

[Graham Hunt, analyst]

Just two on construction, please. First, in the U.S., I'd just like to get your thoughts on -- you're signing a huge volume of work there. Are you still comfortable with that scale of order intake that you're able to hit your 3.5% or above margin target for the group? Just trying to square those two things off, as I understand that there's been a big shift internally in Skanska over the last few years towards focusing on profitability, but top line still seems to be growing very, very strongly.

[Anders Danielsson, executive]

Yes, I'm very confident that we can handle the order intake that we have seen now in the U.S., then we also see increased revenue in U.S., and it is a very healthy backlog, I would say, and also the -- I'm confident that it will provide the group -- contribute to the group's overall performance in the construction stream. So I'm confident in that and satisfied.

[Graham Hunt, analyst]

Understood. And then just a second on the U.K. construction market. I noticed you signed a contract there very recently in London. Any signs of any improvement in that market? It has been weak for some time and also in the context of the new government that's now in place.

[Anders Danielsson, executive]

Yes, there remains to be seen. It's encouraging to hear the new government focusing on infrastructure investments in the future. So -- but definitely be helpful for the economy in the U.K. and also helpful for the industry as well. But it's too early to tell and too early to see any real improvement. So we expect the market to be slow for another 12 months but encouraging for the future.

[Operator]

Next question is from Staffan Bulow with Nordea.

[Staffan Bulow, analyst]

I just have one question and that is regarding the bidding margin. I recall last year on the Capital Markets Day; you showed a graph of bidding margin and how that has developed since 2019. And as of Q3 2023, it was around 9%. So I was wondering, if you could elaborate on how that business margin has developed in the last quarters since then?

[Magnus Persson, executive]

Yes. Staffan, this is Magnus. But I think you can safely say that the bid margin is around the same level as we had in -- as we reported at the Capital Markets Day then.

[Operator]

[Operator Instructions]

[Antonia Junelind, executive]

Operator, do we have anyone else calling in or is the line now empty?

[Operator]

The question is -- the queue is empty, and we have no more question at this time.

[Antonia Junelind, executive]

Okay. Very good. So that means that we have answered all the questions that you had for us today. If you have any more questions afterwards, don't hesitate to reach out to the Investor Relations team and myself.

A recorded version of this audio cast will be available on our web page later today. And we will be back with more comments on our third quarter report in the beginning of November.

So I will now close this press conference. Anders, Magnus, thank you for your presentations and answers here today. And for those of you that have been listening in, thank you so much, and have a great day.