Skanska AB

STO:SKA B

Earnings Call Analysis

Skanska Faces Weak Property Market But Retains Solid Performance

Skanska posts a strong construction performance with a slight revenue increase to SEK 41 billion and maintains a high order backlog at SEK 240 billion. Order bookings reached SEK 33 billion with a strong U.S. market contributing to a book-to-build ratio of 107%. Despite robust construction, the third quarter sees asset and goodwill impairment of SEK 900 million due to a weak property market, impacting especially the residential (with 277 homes sold and no new starts) and commercial sectors. The company records a financial loss in residential development of SEK 494 million, which includes asset impairment charges and a goodwill impairment in Norway of SEK 160 million. Commercial development incurs impairment charges of SEK 350 million, mainly from land in the U.S. Yet, Skanska's financial position remains robust with an equity of SEK 58 billion and an adjusted net cash position of SEK 4.7 billion, ensuring a strong balance sheet and liquidity of SEK 16 billion available.

Overview of the Quarter: Struggles and Strategic Decisions

The company faced a challenging quarter, marked by a weak market affecting the Residential Development operations, which led to an impairment of SEK 160 million in the Norwegian sector. Despite one-off impairments, the underlying operating result approximated breakeven. Notably, all geographic regions reported losses, with the most significant in the Nordics due to the major portion of operations and goodwill impairment there. A lack of volume persisted, and Residential Development encountered difficulty in initiating new projects amid cost inflation and price weaknesses, leading to zero new units started while 277 units were sold. The company exhibited prudence by selectively activating its land bank to avoid problematic future projects, with ongoing production down to 5,100 homes from 6,800 in the prior year's corresponding quarter.

Commercial Development: Adjusting to Market Dynamics

Commercial Development boasted revenue of SEK 1.4 billion, largely from a lucrative property divestment in Budapest. However, market uncertainties led to asset impairments totaling SEK 350 million, primarily in U.S. land assets. With limited market transactions to gauge, assessing property values remained complex. The portfolio's unrealized and realized gains were reduced from SEK 7.4 billion to SEK 6.1 billion due to the divestment and revised selling values of U.S. properties. Future profits depend on the challenging task of aligning with dynamic market yields.

Comprehensive Financial Perspective: Capitalizing Amidst Headwinds

The company's financial strategy was proactive despite rising interest rates, with net financials at a positive SEK 150 million, and a managed tax rate of approximately 16%. Cash flow, however, shifted negatively compared to the previous year due to flat changes in working capital and reduced divestment pace. Moreover, the net investment territory spotlighted the slow transaction market's impact on capital employed, which increased by SEK 10 billion, largely influenced by Commercial Development and Investment Properties. A robust liquidity of SEK 16 billion was reported, ensuring a stable financial standing, vital for autonomy over decisions and confidence in long-term capital-intensive projects.

A Glimpse into the Market and Future Outlook

Construction remains a strong suit, especially in the U.S., due to an influx of federal funds enhancing the civil operation and building sectors. European markets showed stability in some regions; however, notable hesitations in the building sector warranted a downgraded outlook in Finland and Norway. Residential Development activities are expected to remain low, particularly in the Nordics. Conversely, Central Europe shows more promise. Commercial Property Development saw low activity but offered positive notes from leasing improvements in Central Europe. Investment Properties held a stable outlook, buoyed by quality locations and high occupancy. Overall, despite impairments related to a soft property market, the group stands resolute in maintaining a strong financial position and looks forward to further discussions at the Capital Markets Day in London.

Earnings Call Transcript 2023-Q3

[Antonia Junelind, executive]

Good morning, and welcome to the presentation of Skanska's Third Quarter report for 2023. I'm Antonia Junelind, Senior Vice President, Investor Relations. And here in the studio, I have President and CEO, Anders Danielsson; and CFO, Magnus Persson. They will take you through the third quarter results, including an update on business performance, market outlook and our financial position. After their presentation, we will move to a Q&A session. As usual, you can ask your questions either if you're here in the room with us in person or you can join the phone conference or the audio conference. May I then please ask you to use the HD link because that will offer a better sound quality. And lastly, you can write your questions by using the text field on the webcast page. But we will come back to the Q&A. But first, the presentation.I hand over to you, Anders, to start.

[Anders Danielsson, executive]

Thank you, Antonia. And before I go into the figures, I want to look at the picture here, you can see on the screen to the right. That is office building. We have developed, constructed in Budapest, Hungary, and we also leased it out and managed to divest it in the third quarter, very nice building.To summarize the quarter before I go into each stream. We have continued to have a strong performance in the Construction stream, and we have also been impacted by a weak property market. So that has resulted in asset and goodwill impairment of SEK 900 million. On the Construction side, we have an operating margin in the quarter of isolated over 3.3%. Return on capital employed in Project Development, overall, 0.7% on a rolling 12. Return on equity, 9.5%, rolling 12. And we have maintained a strong financial position, which is extremely important for us in this market. We have managed to reduce the carbon emission since 2015, which is our base year. Reduction has been 58% so far.So now I move into each stream, starting with Construction. Revenue is pretty much flat. Order bookings, SEK 33 billion. And we have a rolling 12 book-to-build of 107% and a historically high order backlog of close to SEK 240 billion. The operating income, close to SEK 1.4 billion and which corresponds again now 3.3%. We have a robust order intake for several consecutive quarters in the company, and the order backlog is on a high level. And the rolling 12 months operating margin is 3.8%, and that's well above our target of -- for the whole Group. So the solid performance continues, which is really important, of course.I move on to the Residential Development stream. And here, we can see reduced revenue, of course, since we have sold less home in the quarter, 277 homes sold. We hadn't started any homes in the quarter. And we had operating income of minus SEK 494 million, which is to -- then we have taken charges for goodwill and impairment test for predominantly land, and we will come back to that. Operating margin negative and the return on capital also negative, of course.And we can see that we have lower than normal sales volume in all markets, except for Central Europe, where we actually can see the strongest market right now, especially in Poland, but also some good signs in Czech Republic. And we continue to work on the turnaround program we have in our low-cost segment, Boklok. And as you also can see in the report, we took operating charges in Boklok also in the quarter of SEK 160 million.Commercial Property Development, operating margin -- operating income is negative. We have a gain on sale of close to SEK 200 million, which was made in the quarter. Return on capital employed 2.3% on a rolling 12. And we have -- today, we have 29 ongoing projects, which corresponds to SEK 31 billion upon completion in total investment.The completion rate in the portfolio 61%. We are lagging a bit with the occupancy rate 36%. And if you exclude the rental residential we have in the Commercial Property Development is 44%, and that's a relevant figure because in our rental residential project, the market works that we rented out very close to the completion of those asset. And we have -- didn't start any new projects in Q3. And again, we divested H2Offices in Budapest in the quarter. And we do have a very, very nice portfolio of very high-quality assets, and we will show you how much lease leasing activity and the leasing position we have in those. But the transaction market is very hesitant today. But when the transaction market start to works, normalize, we are in a very good position.And moving on to Investment Properties. Here, as you know, we're targeting high-quality, sustainable office to build up of office portfolio of between SEK 12 billion to SEK 18 billion. which will generate a stable and good cash flow. And today, we have a stable operational performance and the occupancy rate in our portfolio today is 91%. So we have continued to lease out in that stream as well.Construction, again, looking at the order bookings. Here, you can see the development during the last 5 years, so we are in a good position. We have a healthy, strong order backlog. We can allow ourselves to continue to be selective and go for project, where we see we have a competitive advantage. We have a good track record in the history, and we also have the right team in place. So that is critical for a successful Construction operation.And here, you can also see the development on rolling 12 when it comes to order bookings, the light gray. The orange line order booking per quarter, more volatile, of course, but you can see the revenue as well, which is today pretty much flat in local currencies. And the book-to-build in -- on a rolling 12 is also on a historically high level, 107%.And if you go into each geography and look at the order bookings, you have the quarter, you also have the rolling 12 months and the months of production. Strong overall in the Nordics. It's especially the Norwegian operation, where we have won healthy, good projects in the last 12 months. And we can also see a strong order intake in the U.S., where the market is -- continue to be strong. So overall, 107% and the months of production is also important to look at. We have 18 months today of production, which is also on a high level. So I'm confident in the size of the order backlog. I'm also confident in the quality of the backlog.So with that, I'll leave it to Magnus.

[Magnus Persson, executive]

Thank you, Anders. So let's look at the income statement for Construction. We had revenues of close to SEK 41 billion in the quarter. In Swedish krona, that's up a couple of percent; in local currencies is down a couple of percent in terms of business volume. Gross margins, 7.3%, slightly up from the last quarter, keeping a stable S&A coming down to an operating margin of 3.3%, slightly lower than the comparable quarter last year. Rolling 12 months, we're still at 3.8%. So we continue to have this sort of long-term stable performance from the Construction business. And there are no particular one-off items in the quarter that you should be aware of to take into account when you analyze the business.If we look on the different geographies, Nordics, 2.8% margin, somewhat down then from same period last year. And the deviation there, you can see Sweden is the same 3.5%. So you find the deviation in the other part of the Nordics, which then obviously is Norway and Finland. And I'd say that's within sort of what happens with normal swings between quarters here.Europe, decent profitability, 2.9% and then a very strong quarter in the U.S. We have good performance there operationally speaking, and the markets are strong in the U.S. as well in comparison to the other markets we're in. So what happens in the quarter is a bit stronger performance in the U.S., a bit weaker in the other parts of the Nordics sort of compensate each other to [ totally ] solid quarter in the Construction performance there.If we look at Residential Development, a slightly different story. We recognized revenues of SEK 911 million in the quarter, which obviously is quite low. And it is so that the Residential Development market is -- stays weak to very weak in almost all the geographies we are present. And as Anders already alluded to, we have a bit of a different market situation in the Central European part of the operation, especially in Poland, which is going very well. So a good sales pace and prices are sort of moving in a favorable direction there.Gross income, we recorded a loss in the quarter at the gross level of minus SEK 142 million. And in that number, we have recognized asset impairment charges to the tune of SEK 320 million. Those charges are mainly related to land. And the absolute majority of the charges are to be found in our operations that cover the affordable segment of the housing market under the brand Boklok. That's where we can find the majority of this.If we move down to the selling and admin, minus SEK 352 million. Also here, a very high number. But included in that number, we have impaired a goodwill position in the Norwegian part of the Residential Development operations. The size of this impairment is SEK 160 million. So if you take us down to the operating result and minus SEK 494 million, adjusting for these one-off impairments, which obviously not impacting our cash positions, we are roughly breakeven in the quarter, you can say.So backing out from the isolated quarter, it's fair to say that we are still suffering here by a lack of volume in the business. If you will take away the impairments on the gross level, we have a decent profitability coming out of the projects, but S&A is sort of still too big in relation to the gross profits that we managed to make with a slow market that we can see today.If we move on to the different geographies. All geographies then recorded a loss during the third quarter. The biggest one is in the Nordics. It's also where we have the biggest part of the operation, obviously. And the Nordics also then, of course, at the operating level that includes the goodwill charge that we have taken in the Norwegian operations.If we exclude the part of our business that addresses the affordable segment, both European and the Swedish part were actually making a profit in the quarter. The rest of the Nordics was not, but that is due to the goodwill impairment there. That sort of charges that. And in addition to give you some more flavor on that, in addition to the fact that the affordable segment is making up the majority of the asset impairments, they are also recording a running operating loss of around SEK 160 million in the isolated quarter. So that's a pretty big effect on the isolated quarter from that part of the operations.And in Europe, despite the minus SEK 54 million, if we sort of make the same adjustment there, we do actually have a good profitability and a good drive in the Central European part of the business.If we look at homes started and sold, we started no new projects, no new units in the third quarter. And it is more difficult today to find and underwrite a solid business case because we have, for quite some time, as you know, seen cost inflation, and we also have a weakness in prices. And -- we do not want to start projects that we are not convinced ourselves about that this will be a good project for the Group and create value. So 0 here on that line. We managed to sell 277 units though. But I think it's important to sort of send the message that we prioritize very hard, and we activate only the part of our land bank that are really good today in order not to get into problematic projects out into the future.If we look at ongoing production, we had 5,100 homes around that in production end of the third quarter, down then from 6,800 at the end of the comparable quarter last year. So we have handed over, obviously, a lot of units here to buyers then.Sales rate, 54%. This is what happens when the market slows down, and we, of course, continue to produce sales rate falls. And despite a few starts, we have a good amount of inventory to sell from in this business, which is good, of course, if the market sort of comes back to us. And as expected, also the unsold completed units, they increase. I think we have been alluding to a very high likelihood that this will happen for some quarters, as the market slows down, our production machinery doesn't slow down. It continues to producing the projects we have started already. So it's inevitable that this pot grows before we managed to sell it off to the external market.And the important thing to bear in mind here is that we need to have a good churn of these units, so they do not grow old on our balance sheet, which would constitute a risk. But it's something we look very closely on, and we do have a good churn and not like a big part of units being very old there. So it's more a consequence of current market dynamics, if I put it like that.If we look at Commercial Development, the income statement here, we recorded revenues of SEK 1.4 billion, and the majority of that came from one property divestment in Budapest, H2Offices, as Anders showed you the picture, about on the first page, a very nice project. But we managed to sell at very decent yield levels, actually below our own underwritten business case. And I think this is a testament to that when there is a willing buyer, our properties are very attractive. The situation on the market is more about the willingness to close, but we have very attractive properties, which we can see when we do deals like this.We recorded a loss at the gross level here of SEK 56 million. And due to the market uncertainties with raising -- rising interest rates and overall sort of [ opaque ] future for the transaction market, we have recorded asset impairments also in Commercial Development to the tune of SEK 350 million in the isolated quarter. The absolute majority of this also here is land and it is located to the U.S. part of the business.And I have to say, it remains very difficult to assess appropriate market values for Commercial Properties today due to the fact that there is very little comparable transactions going on. And even if there are a few, there's no real depth in the transaction market. So you have very little empirical data to rely on when you make your assessment of what would sort of a buyer accept in terms of price and what could we sell this for. And that's a fact. That's where we are now with this.If we look at the surplus values in the portfolio, see if we get it up, there we go. Unrealized and realized gains for our unsold projects in the portfolio. We had SEK 7.4 billion in the second quarter. Now we have taken that down to SEK 6.1 billion. There's 2 chief reasons to that. One is that we have sold the property, as I just told you about, and obviously, then that goes out of this. That's around SEK 200 million.And in addition to that, we have reassessed the selling values of a few properties, mainly also here in the U.S. operations. It is, as already said, difficult to assess, where we have the market values now. And historically or maybe rather principally we have always done it like this that when we start the project, we have a conservative yield assumption when we go into the business case, conservative yield and rent that we underwrite. Based on this conservative yield assumption, we reported surplus values here.Now actual market rates at the point in time when we start a project has, therefore, almost always been below our own yield assumptions. As market yields are now coming up, we have enjoyed the benefit of having a buffer in the surplus values between the assumed yield that this is based on and the actual market yield. But those yields now are coming up, this buffer is more or less consumed for us. And the consequences of this is, of course, that we will see more direct link between changes in our assessment of what the market yields are going forward and the surplus values that we will report there, which is essentially our expectation of future profits to be recognized once we divest these properties.If we look at the completion profile of the portfolio of projects here, it looks like this. You recognize the slide. And on the left-hand side, you have properties, projects essentially that are completed and unsold. We have just shy of SEK 10 billion in investment value in those properties that are leased to 76%. So a good amount of leasing in these properties. And these are, of course, properties that to the largest extent, are ready to be sold when we can sort of identify and agree with the buyer.Then we expect to complete the small property in the fourth quarter and some more properties in the first, second and third quarter of next year. And the green dots represent the leasing, average leasing in those properties that are expected to be completed in each respective quarter then. So this is the way it looks. So you can say second and third quarter in 2024, we expect to complete projects for quite a lot of investment value.If we look at the leasing, we had average leasing in our portfolio of commercial buildings now, excluding to Anders' earlier point, the rental residential properties that we have ongoing of an average of 44% in the portfolio and a percent of completion, physical completion of these properties to around 60%. We leased 30,000 square meters in the quarter, rolling 12 months. This is 190,000. And we can see the trend in leasing is shifting a bit. It was downward sloping for quite some time. We're starting to get a bit more foothold on the market, especially in the Central European operations, where there is activity on the leasing market, and we actually continue to sign deals.After that, I would say, we have the Nordic markets that is still slow, and the slowest market at present is the U.S. market. The trends or the sort of situation is -- hasn't changed very much. Tenants are still asking a lot about flexibility, both flexibility in terms of lease agreements, also flexibility in terms of the physical space that they rent, expansion contractions and these things. The demands that clients or tenants have on the fit-outs, level of fit-out in the buildings are high and they have been increasing for quite some time.On the other hand, we have a positive rent development on the market. Obviously, the contracts are adjustable by CPI changes and so on, and we still have tenants that sort of accept these changes. So the development in the rent is good then.Investment Properties, we recorded an operating income of SEK 31 million. Here, the portfolio is leased on the average to 91%. We haven't made any transactions into Investment Properties from commercial development during the third quarter. So the portfolio is essentially the same as in the second quarter here. We have not made in this quarter any changes to property values here. But of course, this is mark-to-market, and this will move in conjunction with changes on the market.Look the Group -- the operating income from all the business streams, SEK 625 million. And then, we have a central item here of minus SEK 85 million. The biggest chunk of this is the overhead headquarter costs, which remains very stable and very well controlled, not a lot of changes there. Then we have 2 underlying movements that is good to know about. We recognize money consistently from our asset management portfolio of the old ID, infrastructure development projects that we have. And in this quarter, isolated, we have also had an asset impairment recorded centrally for the production facility that supports the Boklok operations. And the size of this asset impairment that is recognized here underneath the minus SEK 85 million is minus SEK 120 million.If we move further down, we have net financials, positive SEK 150 million. And of course, the interest rates are coming up. But what is happening here is that we are capitalizing the interest costs for the money that we are investing in residential and in our commercial projects. We're capitalizing the interest cost for that on to those projects to be recognized when we divest those projects. The remaining part is, of course, recognized immediately here on the P&L, which is a positive net then.Taxes, we taxed SEK 110 million in the isolated quarter, which is a tax rate of approximately 16%, somewhat down from the comparable quarter.If we look at cash flow, we had a sort of a very balanced cash flow in the quarter. From that point of view, the change to the same quarter last year is that last quarter -- the same quarter last year, we had a positive cash flow of around SEK 3 billion. So the main change to today is to be found in changes in working capital, where we, last year, had a fairly significant positive impact of that. This quarter, it's basically flat.And also changes to our net investment pace, which is mainly driven by us not divesting to the same extent, as we managed last year. At the same time, as we are still, of course, committed to complete the property development projects we have ongoing, and this constitutes the investments that we make. And the balance of that is sort of more negative on the cash position, this or less positive actually on the cash this quarter than what it was the same quarter last year.Working capital in Construction. We continue to develop good payment plans with the clients and the bids that we win. It takes a bit more effort today to do so. Everyone knows that money these days is attached to a cost, which it hasn't really been for quite some time. So it's a bit more effort required. We're still very successful in doing this, though. We recorded at the end of the third quarter, net working capital position [ over ] revenue to 18%, which is a solid level.Then you can see that the green line, which represents this KPI over some time, it's sliding a bit downwards. And we have a very good visibility into the future of this because we have payment plans for all the projects we are ongoing, of course. And it's -- this is not an item that will change very suddenly because we have a big portfolio of many projects in many different markets, and it simply takes a lot of time to have any changes in that. But the trend right now for some quarters has been a slight slope downwards, not only driven by the nominal position, but also by growth in revenue in Swedish krona, as I should add.Investments and divestments. The green line you see on this chart represents the net investments for the Group on a rolling 12-month basis. As you can see, we're fairly deep into net investment territory. And what we can also see in terms of these trends is that we are having a more advanced state of production in our project development portfolios, so the investment pace underlying this is slowing down -- starting to slow down a little bit. The reason we are still firmly placed on a net investment territory is because the selling market, the transaction markets are so much slower than before.We ended the quarter with SEK 64 billion in capital employed, up then SEK 10 billion from the same quarter last year. And it's driven by Commercial Development, as you can see, and is driven by Investment Properties. I think it's fair to point out that a lot of the capital growth we can see in the Commercial Development, this is capital that is tied into properties that now are completed and will be sold. So it's not us growing the actual development, ongoing development operations. This is due to sluggishness in the transaction market.If we look at our available liquidity, we could access SEK 16 billion in liquidity if we were so to need. Of that, around SEK 9 billion is to be found in undrawn credit commitments that we have from external parties and the balance is on our own balance sheet then. We have 2 maturities coming up in 2024, 1 in spring, 1 in fall. And then we have some maturities in '25, and then out in '27, as you can see here.And finally, financial position remains very strong. We have an equity of SEK 58 billion approximately and an adjusted net cash position of SEK 4.7 billion. So it's a very solid balance sheet we have. We always say this and stand by that very important in times like this, it's strong and we can own our own decisions despite being active in a pretty capital-intensive industry with project development. We don't need to ask someone sort of permission for liquidity in order to make the right decisions for the shareholders. We own these decisions and have them in our own hands. Also gives security and confidence to clients that entrust us with building large complex projects that are critical for their own production, et cetera. So I think it's a bit of an envious position for many other companies, strong balance sheet.

[Anders Danielsson, executive]

All right. We'll go into the market outlook and start with Construction. And it's very much in line with the last previous expectations. It's a mixed picture. We have a strong market outlook in the U.S. And that goes for both the civil operation, where we can see that the federal money floating out in the system and the different states. They're also matching this. And we consider a strong pipeline out in our market. So -- and we are well positioned there. And we also see a strong market on the buildings stream in the U.S., where we build more social infrastructure like schools, universities, hospitals, airports and so on. So that is also a strong market.More stable or weak in Europe. We can see a stable market outlook, especially in Sweden, Norway, Central Europe. We can see that the government, different government, they are sending out projects for bids out in the market. And in Central Europe, we can see that some EU money coming out -- coming into the market and for infrastructure investment.Weak market in the building sector. And here, we lowered the outlook also in Finland and Norway for more non-building market like residential, commercial and but also some social infrastructure. A bit hesitant there.Residential Development, low activity. We continue to see weak market outlook for the next 12 months, and that goes special for the Nordics and more positive signs in Central Europe, as we've been talking about. It's a stronger market we sell more homes there more request for that.And Commercial Property Development, low activity. We can see some gradual improving signs in Central -- especially in Central Europe when it comes to leasing. Hesitant investor market. But there was a good sign that we could sign the divest high-quality office building in Budapest during the quarter.And Investment Properties, stable market outlook. We have good -- very good location, high-quality building, and we know, we have a high occupancy rate in those. So that is stable.To summarize the Group now, the performance in the third quarter. Construction continued to deliver a strong result overall. Residential Development, low volumes, and also, we are impacted by a weak market with the impairment. Commercial Property development, divestment of the H2Offices, good sign, but still a weak market. Investment Properties, solid operational performance. We have really good asset there. So that's encouraging.Again, some impairment charges related to a weak property market, and we're maintaining a strong financial position, which we are determined to keep that. It's very important for us. And of course, we invite you to the Capital Markets Day in London on November 21st.With that, I hand over to Antonia again, to open up the Q&A.

[Antonia Junelind, executive]

Thank you. So yes, now we will open up for your questions. And as usual, you can call us by using the conference phone number or I would rather ask you to use the new audio link because that will offer better sound quality. You can also send us your question by using the text field on the webcast page. And if you are here in the room with us, you can, of course, ask your question in person. May I then please ask you to raise your hand and we can bring a microphone to you, and can I also ask you to start by stating your name and organization.We will start with questions from the room and then move to the phone conference, and lastly, pick up the questions on -- the texted questions. And I will ask you today to limit your first round of questions to 2, and then, we can come back if we have time for that. Okay. We'll start with Albin.

[Albin Sandberg, analyst]

Albin Sandberg, Kepler Cheuvreux. So then I go for the 2 questions on the Construction stream. There have been 2 order cancellations, I guess, this year, and I know you normally allude to very robust procedures for reporting order intake. Are these just 2 mishappenings -- or do you see a risk of more order cancellations coming?

[Anders Danielsson, executive]

No. It's very rare that we see cancellation. We have conservative then when we book our order, we should have a binding agreement and also that the project is financed by the client. But [ two ] exceptions this year, one in the second quarter in the U.S. and now one in Sweden in the third quarter. But I don't see any trend that this will be an issue for us. So I'm confident that we have a good quality in our backlog, and I'm confident in that.

[Albin Sandberg, analyst]

And then on the margins that I would say, again, then in the Construction streams are quite stable, I guess. A year ago, we spoke a lot about cost inflation, supply chain issues and so on. Where are we in that cycle right now and is all clear and you feel happy? Or are you still seeing challenges? And how do you mitigate that [ in so ]?

[Anders Danielsson, executive]

Yes. We continue to be very careful to mitigate any cost fluctuation because you never know, there is a lot of things going on in the world, and we can't take for granted that this will flatten out or so we are very careful to secure as much as possible before we even bid for a project. And as soon as we have bid for a project or won the project and right -- sign the contract, we do sign up everything we can and try to mitigate that. But the trend what we have seen in the last few quarters is that it has [ eased up ] with as the prices has flattened out, some material has actually gone down. And we also see much less bottlenecks in the supply chain. So it's easier to mitigate today than it was 1 year, 1.5 year ago.

[Albin Sandberg, analyst]

So a follow-up on the second question, I guess, it still counts as 2 questions. So does that help you in your margins that you see these costs flattening out? Or have you already secured that price?

[Anders Danielsson, executive]

It's -- it's -- of course, it helps us in a way that we -- it's easier to mitigate, and it's easier to -- for the suppliers to secure their prices, which is helpful for us. Yes, it helps.

[Stefan Erik Andersson, analyst]

Stefan Andersson, Danske Bank. Staying at the order intake there. If I look at the preannounced orders, they look rather good. The big orders that you announced, they looked rather strong. And then, of course, the effect of this is that the underlying flow was very weak in the quarter. Just trying to understand, how I should view this going forward. Is that just a temporary effect? You talked a lot about the 12-month rolling being on a good level, of course, and I fully understand that 1 quarter could be weak? Or is it just that the big orders, you work with them with a very long time, so there's a later impact on them coming down and the underlying flow is more as of now. So could you elaborate a little bit about how should we view this low level?

[Anders Danielsson, executive]

I can start. You should view it over time, not a single quarter because we -- today, the -- all the markets basically have a lot of these 2-stage contracts, which means that we're moving to first stage, we do the design together with the client. And finally, when the client push on the button to start a project, we sign the contract and then we book the order. So it could fluctuate quite a lot between quarters. So you should definitely look at the more over time, rolling 12 is a good measurement there.

[Stefan Erik Andersson, analyst]

Okay. And then on -- there's a twist towards the U.S. a little bit in order intake. Just curious to understand, is there any -- on your operation going forward, will there be an impact from reducing operations a little bit in Europe, Nordic versus staffing up in the U.S. and finding the correct people there. Is that something you think you can handle without costs? Or could that be an issue?

[Anders Danielsson, executive]

Yes. I'm confident. We bid for project, where we have the resources available. So I'm very confident that we can grow the amount of resource that we need to execute the project, where we have won now in the U.S. as one example, as the same for Norway. So we are very careful with that.

[Antonia Junelind, executive]

Okay. So we will now move to questions on the audio conference call. So operator, can I please ask you to introduce the first caller?

[Operator]

[Operator Instructions] The first question comes from Markus Henriksson from ABG Sundal Collier.

[Markus Henriksson, analyst]

2 questions from me. First, I see that a lot of projects in Commercial Development, which as of last quarter were scheduled to be completed in Q3, Q4 and Q1 2024, seems to have been pushed further into 2024. What has happened?Then secondly, write-downs in CD are mainly related to land values in the U.S., as you alluded to. I wonder what the implications could be for project margins in ongoing projects in CD, especially for the U.S.?

[Magnus Persson, executive]

Markus, this is Magnus. In terms of the completion profile, essentially, there are 2 things going on there. One is some slippage, and also, we have firmed up a bit on how we sort of report internally these things. So there's no major change. It's -- it sort of turns out like that on the slide. We have the same production pace, same portfolio moving in the same speed with. But I understand your question because it looks like that.The second one on write-downs in the U.S. and the consequences for project margins. Well, of course, we have our hurdle rates when we start projects, and these hurdle rates are, of course, meant to create profit and this profit is meant to sort of cover the risks and so on in these projects. Otherwise, we don't start them. So us writing down project values really doesn't mean necessarily -- sorry, land values really doesn't mean anything for the coming project value, so to speak. What it does mean is that the market values of projects in totality is uncertain. That's the basics for the whole impairment there.So I don't know if that's a very specific answer, but it is very difficult to draw that exact line. But of course, we cannot keep land in our books that we cannot transact at the value we have it in our books. And we cannot keep land that we can't make money on -- in our books to the margins we need to make in order for to start the project. So then we recognize impairments on that.

[Operator]

Our next question comes from Simen Mortensen from DNB.

[Simen Mortensen, analyst]

Simen here. Just 2 questions from my side. One element is also [ you ] haven't touched upon is the financial income line. There has been a lot of movement in this line over the past year from anything to interest rate income, interest expenses, financial -- other financial items and capitalized interest rates especially. Could you just give us some flavoring on the movements and your expectation of this going forward?

[Magnus Persson, executive]

Yes, of course. That's a good question. So we recognized this quarter then just for everyone's orientation in the P&L, SEK 150 million income on the net financial line. And the way this works is that we have a certain amount, even if it's a very small amount of loans in the company for that would pay an interest, obviously. And then, we have liquidity that we would place in the market. This creates a yield. Now as normal, there's a differential between these 2. So the loan cost is unfortunate, so to speak, higher than whatever yield we can get when we place things. So normal circumstances, if you do nothing else, it should be sort of been negative there.Now what we do with the capital is that we invested in project development projects. And these projects, they need to carry their own capital cost. So the way to ascertain that they do that is to capitalize the interest cost for the capital that goes into those projects on the balance sheet for that project. When that capitalization happens, of course, the cost is deferred until we sell that project. So that part of the cost doesn't show up in the P&L, but it's instead recognized when we divest the project. And then this is the whole dynamics essentially about that line in the P&L here and why this is positive. Does that make sense?

[Simen Mortensen, analyst]

Yes. It makes sort of sense. But the [ capital item ] is included in the EBIT, I assume, when you solve the Commercial Development.

[Magnus Persson, executive]

I'm sorry. Please come again.

[Simen Mortensen, analyst]

Is then the capitalized interest rates included as cost of goods sold in the Commercial Development?

[Magnus Persson, executive]

Correct. When the projects are divested, yes?

[Simen Mortensen, analyst]

Yes. My last question is on the surplus values, you typically update these in Q4. Are we done -- are these done externally or internally? And can you say something about like the movements or the elements you had in expectations at the last time you did that in Q4?

[Magnus Persson, executive]

Can you please repeat that question? I can't...

[Simen Mortensen, analyst]

The surplus value, which you report in Commercial Development...

[Magnus Persson, executive]

Yes.

[Simen Mortensen, analyst]

...typically [ updated in ] Q4. Number one, is that done externally or internally? And can you say something about the yield assumptions? How can you see in the past?

[Magnus Persson, executive]

Yes, that's a fair question. So the surplus values in Commercial Development, we assess that continuously, first of all. And the reason that some -- for sort of many time periods, you have seen no differences because the changes in the values in the underlying market has been swallowed by the yield buffer that I described to you during the conference call. Now this yield buffer is essentially in many cases, consumed, not in all cases because this is a portfolio and projects are a bit valued a bit differently across the different parts of the operations.And -- but it means that the changes in surplus values, as you will see them when we report will be more dynamic. They will be more directly connected to how we see changes on the actual market values of properties, for instance, changes in the yields. So you will see more action, if you will, in the surplus values going forward than what you have done historically. It is not so that we wait until the fourth quarter to assess these values. We do this currently or sort of continuously. But again, I do want to point out that it is today, very difficult to ascertain what are the correct market values for commercial properties.

[Operator]

The next question comes from Hunt Graham (sic) [ Graham Hunt ] from Jefferies.

[Graham Hunt, analyst]

Just 2. First on the impairments in the Commercial division, as you said, mainly land in the U.S. Just wondering why you're not seeing such big impairments in your European or Swedish portfolio. Do you just have smaller land banks there? Or is the market a bit stronger? I'll wait on the second question.

[Magnus Persson, executive]

Yes. Thank you for your question. So the main part of the impairments is in the U.S., we also have a small part of that in the European operations. But it is the slowest transaction market we can see is in the U.S., and the property market is most challenged in the U.S. and hence, the level of opacity going forward in that market is the greatest in the U.S. So this is essentially why this pops up in the U.S. It is also true that in terms of capital allocated, we have a very big chunk of the CD capital allocated to the U.S., but that in itself is not the reason to why the impairments pop up there.

[Graham Hunt, analyst]

And just secondly, on resi. So I think you have about SEK 22 billion of carrying value in that business, and as you say, about half of unsold homes are in the Boklok business. How much of that SEK 22 billion is reflected in Boklok? And do you think there's still risk to that carrying them out? And then just splitting out the impairments versus the running losses in Boklok, are these losses coming from just low volumes? Or were there some exceptional charges related to your restructuring there in this quarter?

[Magnus Persson, executive]

I will start with your first question, and then I will ask you to repeat your second one because the reception is somewhat patchy over here. But you're asking about the carrying values in the Residential Development and how much of that is tied to Boklok and if we see any further risk in those carrying values. We don't report the sort of capital distribution in between the different parts of the business. But it is a smaller part of it, but still -- still some money sort of above SEK 1 billion plus.And are there any risks remaining in this? I mean, there's always risks in that because we can never say that with certainty what the future will look like, and we need to reassess and assess these values, as the development of the market continues. But of course, right now, we have taken every sort of reassessment of asset values that we feel is necessary in order to have sort of a clean balance sheet and appropriate values in that, as we stand now. But what happens in the future, we can't say.

[Anders Danielsson, executive]

I can jump in and take the last part of your question. If I understood it right, you're asking about the SEK 160 million charges we took for operational charges we took in Boklok, and that is mainly due to low volume, yes.

[Operator]

The next question comes from Arnaud Lehmann from Bank of America.

[Arnaud Lehmann, analyst]

So I'll have 2 questions, please. My first question is just coming back on Construction orders, and I appreciate your comment about the fact that it can be volatile quarter-to-quarter, and we should look at it on a 12-month basis. But I guess, on your side, when you look at the amount of bidding, the amount of projects that are coming your way, do you see any indication that the number of potential new project is slowing down in some markets or some segments? Or do you still see a steady flow of potential project you could be bidding on? That's my first question, please.

[Anders Danielsson, executive]

Yes. I see a good market outlook and a good pipeline in the U.S., and that goes for both the civil market and the building market. I can see continued stable market outlook in the civil sector, both in the vast majority of the Nordics and also in Central Europe, and that's government-funded project that will come out in the market. I see less activity in the other building stream, so to speak, with the Commercial, Residential, but also some funded -- public-funded projects on the building sector. More hesitant there. So that's what I see. And it's, again, a mixed picture.

[Arnaud Lehmann, analyst]

That's helpful. My second question is on your net investments. They were quite a bit lower in the third quarter compared to the first part of the year. I think you mentioned in your comments that it was partly because some of the projects were getting closer to completion. Are you proactively slowing down the pace of investment? Are you moving to like cash preservation to some extent? Or is it just a timing effect?

[Magnus Persson, executive]

Well, you can say you're correct in that the net investments. There's a lot of movement in that, if you will. And the dynamics is that once we have started the project in Project Development, Residential Development or Commercial Development, we would very much like to sort of see that project through all the way to the end because if you stop in the middle, it's a certain way to destroy value. So in a sense, once you start, you're committed to that outflow.And what is happening now is that we have these committed outflows, committed investments, but the counter position in the cash flow, which is the divestment, the actual level of divestments has fallen. So we sort of end up in a net investment territory despite the fact that the investment pace per se is slowing down, as projects -- or the portfolios in Residential and Commercial Development are becoming more and more complete for every quarter, and hence, the overall investment pace is slowing down a bit.

[Arnaud Lehmann, analyst]

Right. So and in the meantime, you're not starting significant amount of new project. I think you mentioned there was 0 in Residential in the quarter.

[Magnus Persson, executive]

Yes. No, you're right. And I mean -- and that's primarily, we need to find the right business cases. If we find the right business cases, we have a strong financial capacity, and we will make the decisions that are right for the shareholders then. But with the market the way they are now, it is hard to assess and sort of develop really strong business cases. We do it in some cases. But it's more difficult to do it at the same scale as before, and hence, the [ starch ] becomes lower.

[Operator]

The next question comes from Gregor Kuglitsch from UBS.

[Gregor Kuglitsch, analyst]

I've got a few questions, and maybe I can kind of focus a little bit on the outlook for cash flow. So if you could just give us sort of a sense of the puts and takes for cash. I mean, I'm looking here on Commercial, I don't know if this is the right way to look at it. But obviously, you tell us the completion rate. And therefore, I guess, we can conclude how much is left to do. And in terms of cash out, and I think there's some commentary in the statement also on sort of committed cash in on already divested commercial properties. So I guess, what I'm trying to figure out is whether, let's say, in the next few quarters, you expect to burn more cash, i.e., maybe going to net debt or whether you think you can hold the current level? I mean, a sort of directional sense, please?And then related to that, I wanted to get and maybe this is not exactly the right time to talk about this, but what [ your ] thinking is on shareholder distribution, so basically the dividend into next year, considering, obviously, you've drawn down quite a bit of the net cash balance in the last year or so?And then just finally, could you confirm that you're actually not starting any new commercial properties? Sorry, maybe I missed that bit. Is that what you're doing? You just basically pressed pause for the time being, and you're just building out what you've already committed to?

[Magnus Persson, executive]

Thank you, Greg. I will start and then maybe Anders will comment on the dividend distribution thing. Your last point, if we can confirm that we don't start in CD projects, that is not correct. We will start CD projects once we find the right project and the financials of that project is right, then we are willing to start. But we need to find and decide on these projects, which is we have plenty of project opportunities, obviously, but we need to be very careful, where we start and how we do it at the moment.Then your question about cash flow outlook. Essentially, you'll get the same answer, as Arnaud got in the last question. The biggest thing to understand with our cash flow is that we have a sort of a strong, stable underlying cash flow generation from Construction. That goes a little bit up and down depending on the development of the net working capital. But the net working capital in itself is also quite stable because it depends on thousands and thousands of projects over many geographies, and each project has its own payment plan, and we have a pretty good visibility into that. But that's from the Construction side.Then on the Project Development side, the big puts and takes there is the investments that are committed. We will continue to see those projects through. You can find information about that in our quarterly report. If you look in Commercial Development, you can find how much we have remaining to invest. And you will also be able to find with some simple strokes of a pen approximately how quick those investments are going.So -- and the same thing with Residential Development. So then you have a good grip of the committed capital outflow. So whether it comes down to a lot, [ your -- the ] answer to your question is the status of the divestment market. If we are able to sell Commercial Development properties and collect on them, you will have a very different outlook than if we are not able to do that. It's in a sense, easier in Residential Development, where we have a lot more transactions and a lot more units to hand over and collect on.But that's taken -- I mean, when we plan the liquidity position that we have with the SEK 16 billion we have available at hand, this is, of course, exactly so that, that position is designed in order to cover us for any sort of weaknesses in the divestment market. So we don't expose ourselves to financial risks here because that's not a -- that's not a good thing. So these things are very interlinked, the liquidity planning and investment commitments.

[Anders Danielsson, executive]

Yes. Regarding the dividend, we don't give any forecast, as you know, on that, and we will come back to you, all of you after Q4.

[Antonia Junelind, executive]

So...

[Operator]

Ladies and gentlemen, there are no more questions from the phone.

[Antonia Junelind, executive]

And there are a few questions that has been texted to us. I think that many of them have been answered from the conference calls. But should there be any questions left unanswered, please reach out to the IR function or myself, and we will pick up on those during the day because this was all the questions we had time for today. So now I want to thank you, Anders and Magnus for your presentation here today. And I want to thank you for joining us here in our studio in Stockholm. And lastly, thank you for watching.A recorded version of this broadcast will be available on our webpage shortly. And I would like to take the last minute to remind you of what Anders mentioned, we are pleased to invite you to our Capital Markets Day on the 21st of November. So looking forward to seeing you then. Thank you.