Skanska AB

STO:SKA B

Earnings Call Transcript 2018-Q1

[André Löfgren, Senior Vice President of Investor Relations]

Okay. It's 10:00 a.m. So let's get started. Welcome everyone to the presentation of Skanska's 3-month report for 2018. My name is Andre Loefgren, and I'm heading up the Investor Relations at Skanska. This presentation is held here in Stockholm at our headquarters in front of a live audience, but we also have a lot of participants on the Web and over the phone. You will all be able to ask questions after the presentation concerning this report. The presentation will be held by our CEO Anders Danielsson and also our CFO Magnus Persson. And with that, I hand it over to you, Anders.

[Anders Danielsson, President & CEO]

Thank you, Andre. Good morning. Before we start with the presentation, I want to take a look at this beautiful building you can see on the screen here, Studio in Malmoe, a project that are developed, constructed and divested by Skanska. It's a very high level of the environmental standards. It's classified in LEED platinum, highest standard.But now let's go into the quarter. In the first quarter, first 3 months, we had operating income of SEK652 million. I will go into some of the one-off charges later on here. If you compare to last year, we also had a one-off. We sold the PPP project last year in the first quarter, A1 in Poland, which was a gain of around SEK900 million. But in this quarter, we have taken restructuring charges of SEK670 million. These are the restructuring charges we announced earlier this year. We took a decision in January to go in to have -- after a strategic review to have a restructuring in several of the business units in the construction stream. So we are taking all those charges in the first quarter now.We had further write-downs in Poland, Skanska Poland, of SEK600 million in the quarter. These are the project that we are completing now. We have -- we had, as you remember, a lot of write-downs last year as well. So this is a project taking from 2016 and earlier. And those project are -- we are completing these. And we are, as you know, in the middle of a major restructuring at Skanska Poland, where we reduced the staff, the people, employees whereby 2,500 people, which is -- corresponds to about 50% of the company. So we're changing the structure here -- the strategy here and going for -- to be a city builder, concentrating our operation to the 6, 7 cities where we have commercial development and residential development operation.The Nordic construction remains strong and stable. We have a positive claim resolution in US. We have talked about it for quite some time now. And we are continuously trying to settle those discussion with our client for cost increases due to design changes and other things. And now we have a positive claim resolution in -- which gives us a positive effect of SEK200 million in the quarter.We have a slower residential market in Sweden and Norway. We have a very strong start of the year in commercial development, coming back to that. And Skanska continues to be financially very strong company.If I go into the streams, start with the construction stream, the revenue here is up a bit, SEK34.6 billion. The order bookings is down with -- to SEK32.9 billion. The book to build is 96% on a rolling 12-month basis. I'm not concerned of that. We have a strong order backlog. And we are more selective when we bid for projects. So this is in line with our strategic direction.The operating income is negative in the quarter, Nordics strong and stable. In the construction stream, we take SEK430 million in restructuring charges in the first quarter. And we also had those SEK600 million project write down, of course, in the construction stream. The claim resolution is a positive effect in US, SEK200 million. And we also have a positive effect from pension curtailments in the UK of SEK300 million.Continuing with construction, restructuring on schedule. We announced in January we are working hard with this to restore the profitability in the construction stream. We have major restructuring in Poland. We are leaving the power sector. We're not bidding for those power projects anymore in the US. We focus on the core business in the UK, core profitable business. And that's also going to plan.Adapt in Czech market. It's a tougher market. So we adapt to a tougher market there. And we are introducing a more decentralized way of working in our company to push more responsibility out to the business units. And we have a smaller team on the group level working closer to the business unit president and the business unit.Residential development. We have -- the revenue is down. We have also sold less homes than we did last year, 615 compared to about 1,000 in the quarter, but we also have been able to start projects, which is a good sign. We have a good position. We have a good position when it comes to the sales rate in the ongoing project. We also have a few unsold completed projects, if you look at the whole portfolio.But the sales pace in Stockholm and Sweden and Norway, especially in Oslo, is down if you compare to previous years. But you should also remember that we are talking about from a very high level. So in my view, the residential market is more normalizing when going forward. But it takes longer time to sell apartment because people are hesitating when they're not sure about how the future's going to look like.But in the longer term, I strongly believe in this stream. We also have an ambition to grow this long term.Commercial property development operating income on a very high level, SEK860 million, gain on sale in the quarter of SEK1.1 billion and return on capital employed on a very, very high level, way above our target of 10%, so strong quarter. And of course, you can see we have 50 ongoing projects. We -- in those, we invest. When we have completed them, we invest over SEK30 billion, which is perfectly in line with our strategy to grow this business. And it's also proof that we are building up value for the future as well.We have started -- we have a good level in occupancy rate and completion rate, 46% versus 50%. And we have started 7 projects in the quarter. And on a rolling 12, we are still on the very high level, almost 0.5 million square meter on a rolling 12 month. So we will -- our ambition is to continue to grow that business for sure.Infrastructure development minus SEK116 million in operating income, which SEK120 million in restructuring charges. We have -- so closed our infrastructure development office in Stockholm and London. And we are focusing on the US market, where we can see a pipeline going forward. And we also was selected as a preferred builder for Rv 3, a highway project in Norway. So we will still look after those -- these projects in the European market, but we will be based and have our competence and resources mainly in US. But that was a good win.And return on capital employed 6.9%. We have a portfolio net present value of SEK3.3 billion. The surplus value is SEK0.8 billion. I mentioned the A1 project previously.The order situation. You can see on a rolling 12 the dark blue is order bookings rolling 12. The order backlog is the staples, and the light blue is the revenue. So you can see here that we're coming down with the order bookings, and now we're meeting and we actually are a bit above now with the revenue compared to the rolling order bookings, which is in line with what we want. We want to be in certain market more selective, and we are reducing the unprofitable units. And we see -- we want potential to continue to stay on the very high level here in the Nordics and the predominant part of the US operation.If you look at the different areas, geographies, we have the Nordics with 95%, Europe 96%. And you can ask yourself in crowns, have you -- we have actually increased. But I can tell you it's not in Poland we have increased the order bookings. US market is also on a high level. So overall, 96% I'm comfortable with, corresponds to 15 months of production.So with that, I first want Magnus Persson, our CFO, to go through the details.

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

Thanks, Anders, and hello, everyone. I will take you through some details. Let's start with the construction income statement then. I think, if you look at the top line here, we grew this business stream around 8% in Swedish kronas, a little bit more in local currencies. It came up around 12% there. So it's a stronger local growth than what you can actually see in these numbers here.S&A is, as you can see, the same level here. But I think most of you are now looking at the line that says operating income here, which is slightly negative and is already hard for the quarter. Highly unfortunate, but that is where we are.Q1 in construction stream for Skanska is normally a very slow quarter we should recall. And in this case, the quarter is hit by some significant one-off effects, restructuring costs and other sand also write-downs in Skanska Poland. And I will come back to that and also show you in order to be clear on what is the performance of our underlying business here, how this looks.If we break this down into the different geographical markets then, you can say, in the Nordics, we have a very solid performance. You can look at the line where we specify the Swedish construction operation, 3.7%, an extremely strong result, obviously, on the back of a very good market in Sweden, but we're really doing some good projects here and able to earn a lot of money in this business. So that is very strong. Also, in Finland and in Norway, the market is good and good profitability there.If we look at the European part, minus SEK820 million. And obviously, here, we have a large part of these one-off effects. And we have SEK600 million in write-downs in Skanska Poland. That is charged to this part, should be compared then to minus SEK191 million, which was the same quarter last year.In the US, a pretty okay result there, SEK394 million in the quarter, which is 2.6% margin, coming up quite a lot. But once again, this is partly explained by one-offs here. So let's dive into those.What you can see here is, based on the geography, how are the different one-off effects so to split here and the restructuring charges? So let me take you through them. If we start with the Nordics, there's nothing exceptional going on there, except for the fact that it's a stable business here.In the Europe, European part of the construction stream, we have SEK430 million in restructuring provisions taken in the quarter. The majority of this is related to the Polish operation.On top of that, we have, as Anders has already said, stopped our defined benefit pension scheme in the UK, which gives a curtailment gain in the European part there with SEK300 million in the quarter isolated. And I should add here also that, when we do this, we also take down the service costs going forward for the pension arrangements in the UK. So we do expect savings in the tune of SEK140 million on an annual basis in this business here, which is obviously good effect here.In US, the SEK394 million, we had a SEK200 million positive effect here due to claim settlement that we managed to achieve after long and hard negotiations. It's related to the US service business. And we were able to book this profit then in the first quarter here. So the underlying margin here is 1.3%, should be compared then to the 1.6%. So you see it's a slight drop in the margin. I would still say that this is within the sort of the normal variability quarter to quarter in the type of business we are in. So underlying this is roughly the same.We move to residential development. And if we start with the top line, you can see a pretty short drop in revenues here. That comes from the lower sales we have in the quarter. So revenue comes down to around SEK1.9 billion here, down from SEK3.4 billion.On the other hand, you have a very nice gross margin in this business in the quarter, 21%. And the reason to that is that we have a considerable amount of projects that are reaching completion or are very late in the stages of completion as we are able to release risk reserves in the business. And that is taken on the gross -- as gross profit here. So the margin comes up.Despite the volume drop, we still have our organization. So the S&A level is roughly the same. And obviously, then the impact here on the EBIT margin becomes quite large. So the EBIT margin is then coming down.We break this down into different geographies. In the Nordics, we have around half of the operating income then in the quarter compared to last year. But as Anders pointed out, last year, we've had for a while a very, very strong market and been able to recognize profit from some very nice projects here. So this is more of a normalization in the market.And you can also see here that it's the Swedish part of the RD business where the EBIT comes down the most, whilst in Norway and Finland, this effect is less. And to comment a little bit on those markets, you can say that the RD market in Finland is quite okay. The demand is good. And we are making good money there. In Norway, there's been a market slowdown for a while. But we can see now that the prices are not only stabilizing, on a monthly basis, it is actually coming up a little bit here. So that feels better, so to speak.And if we talk about the Swedish market, it is pretty clear that what is affecting us here, it's not the affordable segment. It's -- the effect of the slower market is primarily in the higher-end segments of what we produce here. And this we can also see quite clearly in the price mix. If you were to look at the revenue effects that we have in the quarter, you will see that not all of the revenue effect comes from sales, but part of it comes from the price mix. And that is not because we have lowered prices for our apartments or houses here. It is because the relative share of the sold units is more affordable here, what we sold in this quarter compared to the same quarter last year.In the European part, the market is good, and we are making good money there.Homes started and sold. We started around 890 units in the quarter, which is to be compared to a little bit above 600 units that are sold then in the quarter. So you can see these two lines on the graph. We are now starting a little bit more than what we are selling. But we believe in this market long term. And we think this is the right thing to do here. And we have a quite sort of low risk in our portfolio, as we feel comfortable with this deviation here that we're starting a little bit more now than what we are selling.We have around 7,500 homes in production. And of these homes, around 73% is already sold. That is one of the risk parameters amongst others that we're continuously following, monitoring and looking at when trying to make decisions on how to approach the current market there.You can also note here that the number of unsold completed units that we have in our portfolio is 135. So that's not a lot if you compare it to the total size of the portfolio under production here. And this actually came down also from the same period last year.Here, you can see the development of the sales ratio for our entire RD portfolio. And on the average, we have now, as I just said, sold 73% of all the units we have in ongoing production. And while that is coming down a little bit, it is actually coming down from very high levels here. And we have been between 70% and 80% for quite some time. And when you are up to 80%, that is in one way of seeing it a little bit too high because, if you have a delay in zoning or something else happens, you have very little to replace that with and sell to customers here. So it's not all bad that this is coming down somewhat. But obviously, we're keeping a very close eye on the development of this metric here.We move to commercial property development. Had a very, very strong quarter. Booked divestment gains of over SEK1 billion. And we sold in total 5 properties here during the quarter. I want to caution you a little bit, especially if you're into the business of trying to forecast our profits going forward. If you were to take this quarter and extrapolate it over the year, I think you would be a little bit off the mark. So it was really a very strong quarter here, the first one.We continue to divest. And if you see behind me now, you can see that the divestment in the first quarter here is very, very high and also that operating margin is coming up here. And if you want, I'm going to give you some sort of sense of direction here. We will probably be in the line -- same line as last year in terms of divestment volume in this business here.We sold the 5 properties for SEK3.6 billion and booked divestment gains a little bit above SEK1 billion. And if you do the math here, you would see that that is a divestment margin of around 29%. So we are at a very high level here, obviously, on the back also of a good market and are quite interested in continuing to grow this business here that have been proving its ability to create value for us for a very long time.We have around SEK8.3 billion in the portfolio of unrealized gains in commercial property development. And continuously then, as we sell these projects, we are booking these gains. And they are in a way moving from the bars you can see behind me to the green line here.And when we do that, we also need to fill up the portfolio to backfill that and continue to develop new projects by identifying the opportunities, buying land, but also leasing because the leasing part is the major value creator in commercial property development.And if you then look at the leasing development, in the quarter isolated, we leased around 460,000 -- rolling 12-month 460,000 square meters, which is a very, very high level here. The market is good for this. So we expect to be able to continue on this good trend here.In terms of the portfolio, when the market is so good, we can also afford to be a little bit more -- sort of have a little bit higher completion rate in these projects than what we have a leasing rate in them.And infrastructure development, not a lot actually happened in this business stream during the quarter. We did not do any investments or divestments. The major thing I would like you to note here is the restructuring provision that we took in the first quarter of SEK120 million. And when we compare this to last year, I would also like to point out the effects here of the A1 project that we divested in Q1 2017.In terms of the ID portfolio then, obviously, if you don't make any divestments or investments, not a lot is moving here. The little movement you see is due to the time effect of the discounting of the cash flows here. So it's not a big movement. Going out to the quarter, around SEK3.3 billion in value in the portfolio here. And over the remainder of 2018, we do not have any projects that are ready to divest here. So you can expect that to -- would be no major divestments this year.If you take it all together into the group, we had around a little bit more than SEK900 million in operating income from the different business streams. And then you have to subtract the group central costs, which is SEK299 million. And if you compare that to last year, you will see that there's a big growth. But this is the last part of the restructuring provisions, so SEK120 million. That is within the minus SEK299 million in the central part there. So if you make that comparison, we're actually down a little bit there. And then you have eliminations. You come down to the operating income for the entire group here of SEK652 million.If you take the SEK652 million, in that, obviously, we have the effect of the write-downs in the Polish business. We have the different one-off effects and restructuring charges. So the total negative impact here is minus SEK770 million in the quarter isolated. And then you can compare it to the previous -- same quarter previous year when we had a SEK900 million capital gain from the divestment of the motorway in Poland.Coming down a little bit more, we have in net financial items not a big movement. You can say, when we sold the motorway in Poland was one positive effect from the release of foreign exchange derivatives. Tax rate 20%, not a big movement there either. The change you see from last year here is basically due to the business mix.Looking at the cash flow. On an optical level, you can see here that the cash flow comes down a bit Q4 to Q1. What we need to remind ourselves are again this motorway that we sold in Q1 last year. And we also received the proceeds from the earlier divestment of the M25 motorway in the UK. And if you take that total, it's close to SEK4 billion in cash flow that came in Q1 2017. And if you adjust for that, the cash flow this quarter is actually pretty good.And talking about pretty good, the net working capital in the first quarter. I think all of you who are following the construction business know that the Q1 normal have an outflow of working capital in our business. In this case, it goes up. And I think that warrants an explanation. But we have booked the restructuring provisions and the provisions for loss-making contracts. That has a positive impact on net working capital. We've also managed to secure the cash from the claim settlement in the US business, which is a positive impact on net working capital. And we have a generally good development in this area in the Swedish operations also. So taken together, this makes up the somewhat odd effect you can see in the Q1 working capital there.We continue to invest, which seems quite likely -- quite reasonable, given the values that we are able to create here in the commercial development business and our long-term ambitions within the whole property -- within RD and CD here, where we really -- we can really make good use going forward of the strong balance sheet that we have here.And if you look at the different parts here, you can see that, for commercial property development, we have grown capital employed around SEK5 billion here over the last year, you can say. And in total, we have a capital employed around SEK42 billion now for the project development business streams here. And we aim to continue to grow this.The financial position for the entire group. It has been strong for a long time. It is still very strong. We have a slight increase in the net debt from minus SEK1.1 billion to minus SEK1.6 billion, not a big difference. And our own internal measure of dry powder for making investments is what we call operating net assets and liabilities, which we have now at SEK9.3 billion. So we're well geared to continue to make use of the strong value creation abilities that we have in the property development part there.Okay, Anders, now it's time for market.

[Anders Danielsson, President & CEO]

Yes. Thank you. About the market, I start with the construction. The Nordic, it's a bit of a mix build -- a mixed picture here. It's the building market is -- if you look at the commercial construction, it's good. It's very good. So it's lower on the residential construction in Sweden. Stable market in building in Norway and Finland. Very strong civil market in Sweden and also in Norway. But the competition is fierce, so a lot of competitors from all over Europe trying to compete for those projects, of course. Finland, it's stable, civil market.We'll go to Europe. Poland, the building markets continue to be strong. So it's stable in that sense. Brexit continues to impact the UK nonresidential market on the commercial side. Stable civil market in the UK and Poland, weaker in Czech Republic. And we also see, due to overheated market in Poland, a rapid cost escalation, especially also in Czech on the building side there.US continues to be good market but continued fierce competition.Look at the residential market. There's uncertainty in Sweden and Norway. As I said earlier, it takes longer time to sell apartments, especially in Stockholm and Oslo. Slower -- much slower pace. Finland steadily improving. There we can see that GDP is growing. Consumer confidence is increasing. So it's improving markets for residential development. And Europe, where we are based in Czech and Prague, also in Warsaw in Poland, it's a good market still.Commercial development is -- continues to be a very good demand for our products, both on the tenant side for leasing and also on the investors to buy our developed properties. And that goes for all the geographies, the Nordics, Europe and US. So it's a good demand and good appetite for both tenants and investors here.Infrastructure development. We can see a good pipeline in -- for PPP projects in the US. But the competition is considerable. And we see a thin pipeline in Europe, as very few projects. We have a couple of projects in Norway, where one of them, Rv 3, we were selected as a preferred bidder. But otherwise, it's quite thin.So with that, Andre, Q&A.

[André Löfgren, Senior Vice President of Investor Relations]

Thank you, guys. So let's open up for questions. And we start with the audience here in Stockholm. And after that, we take all of you on the phone. And please state your name and the company you represent. And we have first of all -- I know his name, Niclas Hoglund from Nordea.

[Niclas Hoglund]

Yes, that's me. Well, let me just start out with a couple of questions. Firstly, on restructuring, the shortage was slightly high. Then you -- what you guided for is SEK70 million above what you said in the fourth quarter. Could you elaborate a little bit? Does this imply that the SEK1 billion in savings will be higher as well, or since you've accelerated the pace, should we expect the sort of the positives, i.e. low costs, to materialize sooner than you previously guided for? Yes, I'll come back with another question.

[Anders Danielsson, President & CEO]

I can answer that. It's the same strategic action we are taking for those charges. And we are in the middle of it. We are taking the actions during 2018. And we will take the charge, but take all the charges in Q1. So it's slightly higher than the SEK600 million we announced in Q4. But it's not any changes in the strategic actions or directions.

[Niclas Hoglund]

No more gains then.

[Anders Danielsson, President & CEO]

No, the gains, we are going to be materialized during -- some of it during the half year of '18, but also some of them in '19. But on the other hand, we also see decrease of revenue.

[Niclas Hoglund]

Okay. And then moving over to Poland, I think that's probably one of the reasons why people got additional worried here. We've seen that you're getting out of Poland or part of Poland. The write-downs, the SEK600 million, are all of those related to where you're closing down sites? And could you give us some more light on what type of projects and when they will be finalized and your conviction that you've taken as much as it will take?

[Anders Danielsson, President & CEO]

Yes, the predominant part of the write-downs in Poland during the first quarter is from projects that were, one, booked and -- built and booked in 2016 or earlier. Now we have a completely different view on when we are selecting the projects from 2017 and going forward. We are more selective. We are also more careful how we bid them, so both on the risk assessment and the estimation. So the predominant part, and to the other part of your question, we will complete those projects during 2018, some of them. A minor part will continue into 2019 as well.

[Niclas Hoglund]

Okay. And a follow up on that, will there be any dead volumes related to these ongoing projects, or could you give us a feeling on the kind of dilutive effect on Poland or on Europe for the remainder of the year?

[Anders Danielsson, President & CEO]

It will have an effect over in Poland, of course, since we are completing those projects in 2018, the major part of them. But on the other hand, the good news is they are quite short projects. It's shorter projects than we have seen in other parts of Skanska.

[Niclas Hoglund]

Okay. And then my final question on the US. We've been waiting for these claims to be -- well, to be on a positive note. And it's probably the first time we hear that you have these positive claims. Could you elaborate a little bit on the SEK200 million in relationship to your total claims, or if it -- how much of this SEK200 million, what were you asking for, or were these sort of costs? Did you get 50% back, or did you get 10% back? And also, on this, adjusting for, as Magnus pointed out, the underlying margins was quite much weaker than last year in the US, although of course, it's wintertime, and also, in the US, that has a negative effect. But could you elaborate on the underlying margin trend in the US following these reclaims?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

That was a lot of questions in one there. Let me start with the first one. In terms of the claim and sort of the total package and how this works, I think that the commercial part we want to keep to ourselves here. In this case, we went out and sort of communicated again because it's -- the claims release because it's substantial. We have been talking about these claims for a long time. And it in a way distorts the reading of the underlying performance of the business unit here.

[Niclas Hoglund]

And a follow up then on that note. In the projects that are still ongoing, related to these claims, will you have a higher underlying profitability as well since you will now be able to book cost I would assume?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

The projects are not completed yet. So I think it's a little bit early to say actually.

[Niclas Hoglund]

And do you expect the sort of underlying profitability in the US to gradually turn already this year, assuming -- and are you expecting more claims already in 2018?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

As we have said many times, we are not satisfied with the underlying performance in the service business, as you know. And we are working very hard on coming back to the level where we think they should be. But to say that that will be in a way fixed this year, that will not happen. You need to recall here also that part of the problems we've had that has led to these gains relate to very large projects. And that also means that part of the order backlog in the service business is in a way damaged to the extent that we don't recognize any profit from it as we go through the revenue and put down the work to the ground there. And that has a major dilutive effect. And that will stay with us this year. It will stay with us next year and a little bit into 2022, even if the dilutive effect was sort of gradually decreased there.

[Tobias Kaj, Research Analyst]

Tobias Kaj from ABG Sundal Collier. I would like to start with also a question regarding the write-downs in Poland. And given that you already in Q4 came with some write-downs, and now you come back with a quite significant amount again, can you be more specific about what has changed since Q4?

[Anders Danielsson, President & CEO]

What has changed? We are continuing to complete the projects that were taken 2016 and earlier. And it's a lot of projects. So it's cost increases and also cost for delays in those projects and for liquidated damages. And so it's increased costs and that we are taking as a hit now as we complete those projects.

[Tobias Kaj, Research Analyst]

And given that you still will continue to complete projects during '18 especially, should we expect that you will continue to come back with write-downs in Poland in coming quarters as well?

[Anders Danielsson, President & CEO]

Of course, we are reviewing all ongoing projects every quarter. And we're taking all the costs that we see. So we have done that in this case.

[Tobias Kaj, Research Analyst]

And then in US, we talked a bit about underlying margin trend and so on. And it seems like the cost inflation in US is relatively high. Is that a problem for you? Is that a reason for falling profitability in the US operation?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

I don't really recognize picture there that we can see that the cost inflation is particularly high for us at least. I think one thing that has been written quite a lot about recently is, for instance, the steel tariffs here. And there's been quite a lot of speculations on how will this impact costs and so on. That is, of course, possible that it will impact costs if we see price increases from foreign suppliers to the US. It's not farfetched to think that domestic suppliers will take the chance to increase prices a little bit, too. But it's too early to tell here. And our exposure to the tariffs in direct way is very low because we do most of the purchases domestically there.

[Tobias Kaj, Research Analyst]

And wage increases. It seems like they have finally picked up a bit in US. Is that a problem for you to push through in your contracts?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

We don't have like a general problem here in the US with cost increases to the extent. Then you can say that, generally speaking, the possibility to push costs down to subcontractors is different in the two different businesses here and depending on the contract [indiscernible] there.

[Tobias Kaj, Research Analyst]

In your residential development streams, as you mentioned, you actually started more units in Q1 this year compared to last year. But the number of sold units is declining. Should we read that as a sign that you expect the activity to come back? And given that we are almost half into the second quarter, can you say anything about the activity in Q2, if we should expect a continued decline in number of sold units, or if you feel a stabilization in the market?

[Anders Danielsson, President & CEO]

The -- we're not commenting, of course, the Q1 -- Q2 numbers. But we can see it takes longer time to sell apartment. And we are in a good position when it comes to -- or where we are located, our projects. And also the sales rate is on a comfortable level. So we can start projects. And these projects we also have sold, presold apartments. And that's good. So in every market condition, there's going to be opportunities. And we have the financial strength to take care of the -- to grab them, opportunities in the market, and we intend to do that.

[Tobias Kaj, Research Analyst]

And as you start more units than you sell in the quarter, you see a decline in the ratio of sold units to 73%. Can you indicate what kind of level you would be worried at if it continues to come down from the current level?

[Anders Danielsson, President & CEO]

As Magnus addressed earlier here, we are comfort -- we have been on a very high level between 70% and 80% sales rate for a long -- for several years now. And it's difficult -- it's something we follow, but it's also -- very carefully every month, every week. But it's also depended on where are the -- what the sales pace, where are our project located. So the location is crucial for -- and we believe in this business. We believe that we are in the right place. And we also can see that we are diversified. Our portfolio is diversified because we are in geography. We also are in segments that are less volatile, for example, the BoKlok, the affordable homes, are much more less volatile than the premium segments. So predominant part of our residential development operation are in the core and affordable.

[André Löfgren, Senior Vice President of Investor Relations]

Thank you. Any more questions from the audience? If not, then we move over to the telephone conference. So please open up for questions and follow the instructions from the operator.Operator: [Operator Instructions] Our first question comes from Miguel Borrega from UBS.

[Miguel Nabeiro Ensinas Serra Borrega]

The first question is on the residential segment. Can you give us a little bit more flavor on your expectations for your margins in Sweden specifically? Obviously, it fell from 16% last year to 11.6%. Do you see any further declines this year for the full year?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

I understood your question such that you're asking us for guidance on the -- in terms of what we expect for RD margin for the full year here. And we don't guide on margins for the full year in RD. So I think you can take the -- you have to look at the trend, and you have to follow the market and make an assessment of that. Given what we said here in the presentation, I think you have plenty of leads to do that.

[Miguel Nabeiro Ensinas Serra Borrega]

Right. And then just a follow-up question on the increase in homes started. Can you give us more color on how much capital you are prepared to put on the ground in current market conditions? Do you feel you need to invest more this year when house prices and I presume land prices are falling? So would you prefer to slow down your investments or step up your investments?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

Okay. I understand your question that you're wondering whether we are prepared to increase the capital employed in the RD business here, given the market situation. And the answer to that is that we continuously evaluate the market now because it has been coming down in the latter part of 2017. And it is still very slow sales, especially in part in Sweden and in Stockholm. And we make these decisions continuously. So we have no strategy that we will cling onto for the full year here or look down a level of capital employed that we say we want to have exposed to this market. We are more quick footed in that in trying to make the right commercial decision, depending on where the market goes. And the defining time for the RD market here is very much May and June. So these are important months to keep track of here in the second quarter, both for us and also as we're trying to read the market.

[Miguel Nabeiro Ensinas Serra Borrega]

All right. Then just maybe a last question, personal question for the management team. So you've been on the job for a couple of months now. And with all that is going on with the restructurings, the difficult market conditions, do you have any observations or anything you feel you want to do different from here, any views on slightly different strategy, perhaps with regards to leverage? Thank you.

[Anders Danielsson, President & CEO]

Yes, I'm new in this position, and so are Magnus, but we're not new in Skanska. I've been part of the senior management team for 4.5 year now. So it was -- the strategic initiative that we announced in January, we worked with them for several months during end of last year. So I strongly believe these are the right actions for -- to restore the profitability in construction and also to continue to develop and increase our operations in project development, especially residential development and commercial development. So I'm very confident. And so my highest priority is to do just that, restore the profitability in construction and continue to grow project developments. And we have -- the new team have had a very good start. We are a smaller team now, but it's good dynamic. We're working closer to the business unit president and business unit. So I'm confident that the action we are taking are the right one.Operator: [Operator Instructions] The next question comes from Marcin Wojtal from Bank of America Merrill Lynch.

[Marcin Karol Wojtal, Analyst]

The first one is on commercial development. Would you be perhaps prepared to provide an indication of how much you expect to achieve in 2018 in terms of disposal gains in that division after booking SEK1.1 billion in the first quarter? And question number two, regarding the construction division, you mentioned cost inflation in Eastern Europe, but what about Sweden? Do you see any increased pressure in Sweden? I'm alluding a little bit to the increase in the CPI in the country, but also, I'm alluding to the weakness of the Swedish krona. Do you see that as having any impact on your Swedish operation?

[Anders Danielsson, President & CEO]

Can you start with the first one?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

I can start with the first one. Hello, Marcin. This is Magnus Persson. I understood your first question as if you seek for guidance in the divestment gains for commercial property development. And I think, by now, you know that we don't do those predictions for ourselves. We leave that with a glad hand to you. I did give you a guidance in the presentation in terms of divestment volume that you can expect roughly the same or maybe a little bit less than last year.

[Anders Danielsson, President & CEO]

And regarding the second part of the question, the cost escalation that we see now rapidly increasing in Central Europe, we don't see the same trend in Sweden. So and we're not hurt by -- in a big extent either. But we are -- closely monitor it, of course.

[Marcin Karol Wojtal, Analyst]

And if I can have one more question, if you don't mind, regarding your UK construction and this pension impact that you mentioned, did I understand correctly that you anticipate a recurrent SEK140 million positive impact from the new pension arrangement on your construction business? Can you clarify it a little bit?

[Magnus Persson, Executive VP, CFO & President of Skanska Poland]

Yes, you received that message very clearly and correctly. We expect to have around SEK140 million lower annual cost for the pension arrangements in our UK business unit.Operator: Thank you. There appears to be no further questions. I'll return the conference back to you.

[André Löfgren, Senior Vice President of Investor Relations]

All right. Thank you very much. That's all for today. So thank you so much for all your attention, and enjoy the rest of the day and the week and the months ahead. See you in Q2. Thank you.