Skanska AB

STO:SKA B

Earnings Call Analysis

Strong Construction Performance Reflects Solid Market Position

In the recent earnings call, Skanska reported a remarkable performance in its construction segment. With an increase in revenue of 2%, adjusted for currency effects, the growth rate stands at 5%. This underpins an operating income that rose by 11%, reaching over SEK 1.5 billion, and an operating margin of 3.6%, slightly above last year's 3.3%. The company maintains a robust order intake, highlighted by a book-to-bill ratio of 124% on a rolling 12-month basis, which indicates a healthy level of new projects relative to completed work.

Record Order Backlog Enhances Future Revenue Potential

Skanska's order backlog has reached a staggering SEK 267 billion, indicating a strong pipeline for future revenue. The company is particularly confident about the quality of this backlog, emphasizing that it has been selective in choosing projects. Importantly, the U.S. market continues to be a standout performer, where strong demand bolstered order intake to SEK 51 billion, leading to a growing duration in the order backlog. Such positioning allows the company to pick projects that provide competitive advantages.

Residential Development Shows Signs of Recovery Amidst Challenges

The residential development segment reflects a gradual improvement despite facing a challenging market. Revenue for this segment increased to SEK 1.7 billion, largely due to higher home sales. Although operating income remains negative, affected by write-downs and an ongoing restructuring of the BoKlok operation, an underlying margin of 7.9% signals a potential for recovery as the market stabilizes. Additionally, Skanska is gearing up for more project starts, with 186 new units initiated in the quarter, suggesting an optimistic outlook.

Commercial Property Development and Leasing Activity Gains Momentum

Skanska's commercial property development is witnessing a positive trend, with leasing activities picking up across different geographies, particularly in the U.S. The company recorded a gain of SEK 185 million from the sale of a property, alongside a healthy leasing ratio of 75% for completed projects. Although there have been asset impairments and write-downs, the overall sentiment points towards an improving environment as demand for high-quality spaces strengthens.

Solid Financial Position Ensures Stability and Growth Opportunities

The financial landscape of Skanska remains robust, characterized by a strong liquidity situation with available funds nearing SEK 25 billion. The operating cash flow for the quarter is SEK 6.2 billion, largely attributed to strong working capital management. Although the current free working capital stands at 17.4% relative to revenue, there's cautious optimism regarding future project starts. The management remains firm on maintaining a stable capital base to support strategic project execution.

Market Outlook Reflects Cautious Optimism Amid External Challenges

Looking ahead, Skanska anticipates a mixed market environment. While the U.S. construction market, particularly for civil and infrastructure projects, is expected to remain strong due to increased government investment, challenges persist in Europe, especially within residential development. The outlook for the low-cost segment remains weak, and while there are signs of improvement in investor sentiment for commercial properties, it may take time to fully translate into substantial gains.

Earnings Call Transcript 2024-Q3

[Antonia Junelind, executive]

Good morning, and a warm welcome to the press conference for Skanska's Third Quarter Report 2024. My name is Antonia Junelind. I'm the Senior Vice President for Investor Relations here at Skanska.

And here in the studio on stage today, I have our President and CEO,  Anders Danielsson; and our acting Group CFO, Pontus Winqvist. Shortly, they will take you through an update based on our third quarter report. And after their initial presentation that will cover a business financial and market update, we will move over to questions.

[Operator Instructions] So with that short introduction, I will hand over to you, Anders, to start the presentation looking at one of our data center projects.

[Anders Danielsson, executive]

Yes. Thank you, Antonia. And as you can see on the picture here, it's data center, and that is a booming market now around our geographies, especially in the U.S. And we are well positioned. We have been well positioned for many years. So we have a lot of skilled people in the organization that can take on these opportunities. And as a fact, in Q3, isolated, we have won projects, data center projects for nearly SEK 10 million. So it's a great opportunity there.

Going into the third quarter report, starting overall, some highlights here. I think it's a good performance overall, stable quarter, especially in Construction, very good performance. We're hitting our targets of 3.5% in isolated quarter, 3.6%. So strong order intake and a solid margin delivery. So that is good. Residential Development sales are improving from a low level, though, but it's definitely see some improvement signs, but I expect it to take some time. And we also, in the quarter, taking restructuring costs for BoKlok, our low-cost segment, restructuring due to a very tough market in that segment. And we've also taken some impairment charges for, say, predominantly land in that operation.

Commercial Property Development, leasing, we can see improved leasing in our different geographies, and we can also see improved leasing in U.S., which is a good sign for us going forward. So that's -- we'll come back to that. Investment Properties, solid operational and financial performance. We are very high on the leasing ratio. We are very well received by our tenants. So we're in a good place there. Operating margin in Construction, as I said, 3.6% compared to 3.3% last year. Return on capital employed in Project Development, this is on a rolling 12-month basis. So that is on the negative side due to the fact we had the impairment -- large impairment charges in the fourth quarter last year. And that is also somewhat impacting the Investment Properties as well. Here, we have a return on capital employed of 1.8%. And the same with the return on equity on a rolling 12-month basis, of course, 7.9%.

We have managed to maintain a very robust financial position, which is extremely important. So that is something we highly prioritize. And we have reduced the carbon emission in our own operation with 57% compared to the base year in 2015.

I'll now go into each and every screen, starting with Construction. Here, we can see increasing revenue which is perfectly in line with my expectations since we have had a good order intake for many quarters now. This quarter is not an exception. Very strong order intake, over SEK 50 billion. And the good thing here, we'll see the details later on, but we increase the order intake in all geographies and very high compared to last year, over 60% increase here. Book-to-bill low 124% on a rolling 12-month basis, and we maintain a record-high order backlog, healthy backlog of SEK 267 billion. Operating income SEK 1.5 billion, increase from last year, which gives us the margin again on 3.6%. So solid margin delivery. And if you look at a rolling 12 months basis, the margin is slightly shy of our target, 3.4%. Strong order intake in the U.S., both on Building and Civil operations.

Moving to the Residential Development. Revenue up due to the increase of homes sold, SEK 1.7 billion. We started projects, 186 in the quarter, and we are in a position now, I would say that we can start more projects, and we will do so, and I think it's right. Operating income, again, on negative territory due to the write-downs we had, impairment charges, save return on capital employed. So we can see increased volumes in the Nordics, good level -- continuing good level of activity, sales activity in Central Europe, and that has been the trend for some time now, and we can see it continues. The total BoKlok losses is minus SEK 241 million. And the underlying margin, operating margin exclude the BoKlok operation and the property asset impairment charges is 7.9%, not bad in the tough market, I would say.

Commercial Property Development. The quarter that we have sold 1 asset. We sold 1 office building in Norway during the quarter. But here, you should look at more over time. We can see that if you add the 3 first quarter in this year, we have divested 6 assets. So we can definitely see signs of improvement, both on the investor side, but also on the leasing, as I said earlier. We had a gain on sale of SEK 185 million in the quarter. Return on capital employed 0.5%. So today, we have 17 ongoing projects, which corresponds to almost SEK 23 billion in total investment upon completion. And we have 23 completed projects, SEK 12 billion in total investment, healthy leasing ratio in those 75%. So quality asset, and we are well positioned when investors comes back, and we can see signs of that.

Property asset impairment charges in the property, Commercial Property Development is SEK 121 million, predominantly land and majority in U.S. Good leasing in the U.S. portfolio. The total leasing is 34,000 square meters, which also increased compared to previous quarters.

Investment Properties, operate stable, operating income of SEK 79 million. We have a high occupancy rate of 89%, so very stable there. And we are today is just shy of the SEK 8 billion in asset values. So we are on a good way to reach our ambition here to between SEK 12 billion to SEK 18 billion in -- to generate a stable cash flow going forward. We already see that today.

If I move back to the Construction and look at the order bookings. Here, you can see the last 5 years, the development of the blue bars is the order backlog. You can see the book-to-build rates here, the yellow line, revenue; the green, rolling 12 as well. So you can see that it's gradually building up a healthy backlog. And the backlog today is high quality. So I'm very confident in that, that we have -- I'm proud of the organization. They kept the discipline, they go for project where we have the competitive advantage, where we have the team in place, where we have a profitable history. So that is good. So as you can see, the blue bars is on record high levels.

If I go into geographies when it comes to order bookings, good. As you can see, we increased the order intake in all geographies, but the majority of the increase is in U.S., of course, you can see that we have increased SEK 20 billion to SEK 32 billion, adding up to almost SEK 51 billion. So 124% book-to-build, which is on a very high level. And U.S. is the strongest, of course. And we can also see that the duration in the order backlog has increased, which is also good that we have -- we are in a position where we can continue to be selective and go for project where we have a competitive advantage where the market is good. So I will come back to the market. But first, I will hand over to Pontus to go through the details.

[Pontus Winqvist, executive]

Thank you, Anders. So then going in a little bit more in detail to the numbers and starting with construction. And as Anders said, I mean, I also wanted to point out, I mean, it's a strong performance within construction. You see that the revenue inclines by 2%. If we adjust that for currency effects, it actually increases by 5%. We also see that we continue to deliver a healthy gross margin of 7.3%. Operating income actually increased by 11%. And if we adjust that for currency effect, it increased by 15%. So we are ending up there of a little bit more than SEK 1.5 billion in operating income and a strong, I would say, operating margin of 3.6%. And also if we look into the rolling 12-month operating margin, we are, as Anders said, I mean, very close to our target of 3.5%.

Going then into the different geographical areas. You can see that it is overall quite a good performance. The Nordics are delivering 3.2%, where Sweden is delivering 3.5%. In Europe, you can see that we are increasing with 1 percentage units from 2.9% to 3.9%. And in the U.S., we are on a continued good level of 3.8% and also with an increasing operating margin -- operating income in absolute terms. So 3.6% in total for the quarter compared with 3.3% for the same quarter last year.

Then going into the Residential Development. And here, I mean, you can see that the revenue is increasing quite a lot, I mean, if we compare to how it looked 1 year ago. So we are now at SEK 1.7 billion in revenue. This is, of course, I mean, from a normalized point of view, quite low. But anyway, it's a good increase. So it's a better market, even though it's not good yet, but I think here that the change is really good. You can also look into the S&A here. And we have, I mean, S&A of SEK 166 million compared to SEK 352 million the same period last year. And also on a rolling 12, we see that there is a real decline in the S&A cost. So I mean, this really shows that we have worked with adapting the organization to the current market conditions. And I think that this S&A level is probably the right level, but it also gives us room to increase the volumes with the current S&A base, and then we can see that the actual relative S&A, the S&A percentage will come down somewhat.

Then there is, of course, a negative operating income. SEK 154 million negative. And the major thing here that is happening, Anders mentioned it in the beginning is the BoKlok, where we have a loss within BoKlok of SEK 241 million in the isolated quarter. Then there are some minor, I would say, write-downs also within Residential Development. But if we take out both the write-downs and the BoKlok performance here, we are actually on the underlying margin of 7.9%. So it's not where we want to be, but it's on the way to where we want to be.

Looking then into the different geographies in Residential Development. Here, you can see that BoKlok again, is impacting both, I mean, the Nordics and the European business. So the major impact here, I mean is, again, I mean, is the BoKlok here that since we have that business, both in Sweden and in U.K. And again, the underlying margin, if you exclude BoKlok and write-downs is 7.9%.

Going then into start and sold units. And here, you can see that, first, we have started two projects within the quarter. The majority started within Central Europe, and this is a small Norwegian project started as well. So we started 186 units. The sales rate is coming up quite a lot, and we are selling 458 units here during the quarter.

And I would say that the sales pace is generally improving in all our markets. Yes, as you also can see, I mean, looking into the rolling 12 number, I mean, we are increasing here. Going then into the homes in production, obviously, since we haven't started very much project during the last years. I mean, the number of total homes in production is coming down. We are, for the first time below 3,000 homes in production. We are increasing our sales rate. And -- I mean, which also means that the unsold completed is coming down. So we are now at 454 homes, and that's compared to 671 that we want by the end of Q2, so an improved situation on the stock. The important thing here is, of course, now that we get the opportunity to start projects. And I think you will see more starts coming on going forward.

Then going into commercial development. Here, we have a revenue of around SEK 1 billion. And also here, we unfortunately see a negative operating income of SEK 113 million. We have also here had a couple of write-downs. It's small write-downs, and it's coming because we have done a very thorough valuation process during this quarter. So I mean, we have gone through everything, and there are -- have been in a couple of projects small write-downs that we have seen. So we have here a negative income of SEK 113 million. If you look into the gains coming from the divestments, we have sold one property during the quarter, but the majority of these gains are not coming from that divestment. It's actually coming from previous divestment, where we have released some provision because of reduced remaining risks in those.

Unrealized gain within the Commercial Property Development is on stable levels. You can see that there is no major change here coming from Q2, but also here, I mean, this is also, I mean, a result of the real thorough process that we have had when we have looked into the value within our property portfolio.

If we look into the completion profile, you can see here that in Q3, we have completed projects for around SEK 12 billion. It is 2 projects that had come into this during the quarter, and it's 2 projects that has went out that we actually have been sold and delivered to the purchaser of this project. So it's a small increase, but we are keeping -- if we compare to Q2, the occupancy rate on 75%. Then looking into the rest of the completion profile here, you can say that we are continuously leasing in all the projects -- not all, but in many of the projects, I would say.

Talking about leasing. If we look into the leasing here, we have been leasing 34,000 square meters during the quarter. What you also can see is that the completion rate and occupancy rate now are on the same level, actually on 64%. And this is, of course, I mean, a good sign to see that we are able to lease out in the same proportion as we are completing our properties. I would also say that the majority of the leases is coming from our U.S. business here.

Investment Properties. I would say here, I mean, we have a stable portfolio that you can see has reached almost 90% in occupancy rate. It's also starting to deliver a reasonable profit to the group. And in the quarter here, we see it's delivering SEK 79 million.

So then going into the total group number here, where we have an operating income of SEK 1.3 billion compared to SEK 625 million last year. Then we shall remember that in this income, we have write-downs of around SEK 300 million. We had also write-downs in the same quarter last year of around SEK 900 million. And then we also have this negative impact of BoKlok in the quarter.

One thing to mention here, I would say, is if you look into the taxes that we have quite a high proportion of tax in this quarter coming in at SEK 430 million and gives us a tax rate in the quarter of 30%. And this depends on -- first, I mean, there are some prioritization impacts in the tax calculation, but there is also a mix effect where we are seeing that a bigger proportion of the income is generated from our U.S. business, while smaller than income is generated from property divestments, which normally is tax free, especially here in the Nordics. But I mean, if you should look into your expected future tax rate, 30% is not relevant to look at. It's more relevant to look into the rolling 12 months tax rate, I would say.

As you heard in the beginning, this quarter is very strong from a cash perspective. The operating cash flow is SEK 6.2 billion in the isolated quarter. And I mean this is, of course, a combination of strong working capital development within Construction, but also that we are doing more divestments than investments in the business. You will see that soon on the coming slides. So free working capital within Construction is by the end of Q3, reaching SEK 31 billion in absolute terms. It gives a relative number compared to the revenue on a rolling 12-month basis of 17.4%. So -- I mean it is at least, I would say, if you look into the absolute number, I mean, the best absolute level that we have had during this period. But it's also that I think that we cannot really rely on that this number will stay on for the coming quarter because there have been a number of mobilization payments coming in and some of that cash would most likely be used even though the Q4 fourth quarter normally is quite strong from a cash perspective.

Then going into the investments and divestments, you can see here on the green line that we are continuing to deliver net divestments. It was 2.7 on a rolling 12-month basis, which also means that we are taking down the capital employed within the business. We are closing this quarter on SEK 64.3 billion, a little bit more than SEK 2 billion less than we closed the second quarter on. But of course, I mean, as we said, especially when it comes to Residential Development, we have an ambition to start more projects. So we should not expect that -- I mean, we continue to have huge net divestments.

The good cash flow. Also, of course, I mean, it's being seen when we look to our liquidity situation, where we have now available funds of almost SEK 25 billion. I also think that we have quite a good maturity profile on our loans and outstanding bonds. So I mean, the balance sheet is stable, but it's also a stable liquidity situation that we have.

Then looking into the financial position, you can see here that our adjusted net interest-bearing receivable has went up to SEK 6.5 billion in the second -- or in the -- sorry, in the third quarter. And it gives us a stable equity-to-asset ratio of 35.9%. So by that, I leave it over to you, Anders.

[Anders Danielsson, executive]

Sure. So I will address the market, start with Construction. And here, we can see a strong market in U.S., both for Civil and Building. We are in the right positions. We expect infrastructure investment to continue, big time on the West and East Coast where we are strong. We also see the social infrastructure, schools, hospitals, universities, airports, has also strong market and also, again, the data centers, of course. The Civil market is mostly stable in Europe, but more -- the building more market in the Nordics and Europe is more slower. Residential Development, we can see gradually improving in the Nordics, but returning to normal levels will take some time. So that's why we continue to have a weak market outlook the coming 12 months. And also the market condition for a low price segment is continuing to be challenging.

Central Europe, however, continues to be a stable market. Commercial Property Development, slowly improving investor market, leasing market, leasing activity is improving. And there is a clear trend that the companies want to sit in a high-quality building. So its flight qualities continue to be clear. Investment Properties, strong demand for high-quality spaces. But it is a polarized market, but we can offer high-quality Class A building in the right location. So we are attractive here. And rents are expected to be stable going forward.

To summarize the group, Construction, strong order intake, very healthy margin, Residential Development sales are improving. We have an underlying healthy business. Commercial Property Development, leasing activity picks up and solid performance in Investment Properties. And of course, we maintain a solid, strong financial position. So now I will hand over to Antonia to open up the Q&A.

[Antonia Junelind, executive]

Thank you. Yes. So now it's time for your questions. And if you're watching online, as I mentioned before, you can join us here in the studio by using the HD audio link provided in the invites to the press conference or the telephone conference number. And then just follow the instructions by the operator, and you will get through to us here in a few minutes. And then if we have any questions here in the audience, just please raise your hand. We will bring a microphone. And may I ask you to start by stating your name and organization.

[Stefan Erik Andersson, analyst]

Stefan Andersson, Danske Bank. A couple of questions. First on Construction. We're seeing very high demand in some markets, recovery in some others. And material coming down a little bit. Could you maybe elaborate on the margin in the order backlog, it might differ between the U.S. and Europe, of course. But if you see any difference in that margin versus what you're actually performing on?

[Anders Danielsson, executive]

Stefan, I can say that the quality in the backlog is good. I'm confident that our gross margin is on a healthy level, and that is also -- we managed to see -- mitigate the risk we go into. We understand the risk, we mitigate the risks. So we see very few margin trade in our project. And that's -- so in most cases, we can deliver on our bid margin. And then we don't go into the differences between different markets, but it is a healthy margin. And of course, in a good market, we try to push it upwards. That's what we're working with.

[Stefan Erik Andersson, analyst]

And then on RD, you have the one-off write-downs here again. We've seen those for a year almost now. Are we done with that? And when it comes to the BoKlok business, if I understand this correctly, it's running at SEK 40 million, SEK 50 million loss maybe. I didn't -- I haven't calculated it totally, but is that the level for BoKlok going forward?

[Anders Danielsson, executive]

I can start and you can fill in. Are we done? We take everything we see in this quarter. That's for sure. And we have, as Pontus alluded to earlier, we have done a thorough analysis of all the assets we have in the portfolio. And we also -- and taking the necessary charges for that. And we also are taking -- the consequences now to restructure the BoKlok business. So we will merge the Swedish BoKlok operation into Skanska, Sweden, and that will happen after new year. And we're also taking charges for that restructuring because we need to get the S&A level down. So that's for sure. And then the more -- you're alluding to the operating operator. Of course, with this action, we will try to minimize the losses going forward, that's what we -- that's our job.

[Pontus Winqvist, executive]

But you are correct. I mean, to assume that there will, of course, be a cost, I mean, running this business even if it's within Skanska Sweden. But I mean, hopefully, it will also generate income going forward. That's the plan.

[Stefan Erik Andersson, analyst]

And then on CD, normally, fourth quarter is a very active quarter in -- when it comes to transactions. We see interest rates coming down. We see some of the real estate names adding capital or bond market is super-hot. What do you see in your -- I mean, you're negotiating stuff now. So I'm sure you know what's happening that you might not want to tell us. But -- is there activity? Could we expect some divestments coming through in Q4? Or do we have to wait until 2025?

[Pontus Winqvist, executive]

I won't say that you can expect something to happen. But I can say that, I mean, there are a number of negotiations ongoing. If those will happen, if those will happen during this year or during the beginning of next year, very difficult to say right now. But there is -- I mean, yes, there is activity.

[Stefan Erik Andersson, analyst]

And then the final question. You have a very strong balance sheet. You have a net cash position. You have IP is unleveraged. You have all the CD assets, land bank and RD. I know it's a board question, of course. But from your perspective, managing the business, now when you see a little bit of light in the tunnel in many of your divisions, do you need all the capital you're having allocated at the moment?

[Anders Danielsson, executive]

Yes. Yes, we do. It's -- we are very -- I'm very comfortable with our financial strong position. That gives us competitive advantage. We can start -- we want to start projects, both in the residential and commercial development side. And we can do that with our own decision, which is a really good place to be. And that's our priority to continue to stay financially strong, take advantage of that and start project where we think it's right.

[Antonia Junelind, executive]

Okay. So we will then move over to questions from our online audience. And operator, could you please introduce the first caller?

[Operator]

[Operator Instructions] Our first question comes from Simen Mortensen from DNB Markets.

[Simen Mortensen, analyst]

A few questions from my side. The order backlog has grown very much, and it's at very impressive levels, but many of the projects we have seen is for several years. Could you just give us some coloring on how much of the order book is maturing 2025? And some comments on the duration of the books and when it will translate into revenues in Construction?

[Anders Danielsson, executive]

I can start with that. The order backlog, as you say, is on a very high level. You can see the months of production is also increasing, especially in the U.S. and the duration has increased. So of course, we -- as I said earlier, we are in a good position. We don't need to chase work. We can continue to be selective and go for project because we have the capacity to go for new projects, but we can be selective, and we will stay selective.

[Simen Mortensen, analyst]

Yes. But how much of the BoKlok percentage-wise versus a normal order backlog level matures in 2025?

[Anders Danielsson, executive]

So I mean we're in a good place. We don't give forecast number or how much we have in hand, so to speak, for next year's revenue. But we are in a good place.

[Simen Mortensen, analyst]

Residential starts has been low in the quarter, as you mentioned, but we see also that the number of completed unsold apartments continue to drop. How much priority is it reduce though the unsold inventory versus starting new homes? And how do you assess the potential recovery and the speed of that when can we expect Skanska to start producing and start selling and starting homes again?

[Anders Danielsson, executive]

I think, I mean, as you had seen in Simen, it's -- I mean the number of unsold has gone down quite much. So I would say, I mean, that the focus will turn, I mean, from divestment out of the portfolio to actually start. Then of course, I mean, it needs to be solid projects, I mean, where we can expect, I mean, nice and reasonable profit from those projects. But we think that, that will happen. And you will probably see more projects, some need to be started within the RD business.

[Simen Mortensen, analyst]

We also noticed that you have SEK 12 billion of completed assets in commercial development, one of the highest levels we've seen there Stefan asked divestments here. But can you please give us some coloring in which markets are these SEK 12 billion assets located and the potential for divesting those?

[Pontus Winqvist, executive]

I mean, some coloring is that, I mean, the majority of those or, I would say, a large number of those are in the U.S. So you will likely, I mean, see divestments coming out both from that market and from other markets as well going forward.

[Simen Mortensen, analyst]

And final question, in terms of the impairments in the quarter not the organizational cost, how have those? What has been driving those impairments? Has it been higher interest rates? Has it been delayed and expected starts? Or is it selling prices? What has been the main driver for reducing the asset values on the balance sheet?

[Pontus Winqvist, executive]

I mean it's quite easy, actually, of course, I mean we have went through all the assets basically that we have within the entire group, and value the property for property. And then in some cases, there have been small adjustments. So based on that and according to our policies, how we are treating the valuations within our balance sheet. This has resulted in those, I would say, minor adjustment on a few properties.

[Simen Mortensen, analyst]

Yes. Maybe a last question. Trump seemed to win the election and has promised a lot of in U.S. Civil, have you made any assessments on what that can impact the U.S. markets given that he seems now to be the President?

[Anders Danielsson, executive]

We don't expect any change in the market. The infrastructure program that runs have been -- went through the Congress back in 2021. That was aligned -- the Republicans and Democrats were aligned with that. They are aligned and continue to invest in infrastructure. So we don't expect any change in the market. We believe it's going to be a strong market for the next 12 months at least.

[Antonia Junelind, executive]

Thank you, Simen. And we have a few more callers that are waiting in queue. [Operator Instructions] Operator, may you please introduce the next caller.

[Operator]

The next question comes from Graham Hunt from Jefferies.

[Graham Hunt, analyst]

I'll focus my question is actually on the U.K. I appreciate it, relatively small, but a little troublesome on the BoKlok side still. Are you able to help us understand how big that business is now? You've taken a lot of impairments. You've downsized the business, but can you help us try and put a small -- I appreciate you've taken all of what you can see in this quarter, but how big is the exposure now? What's the maximum envelope of risk? And then second question on the U.K. again. We've now seen the autumn budget. You left your outlook for the region, the same on Civils and Buildings. But are you seeing any kind of improvement on the back of that budget, which I think did commit a little bit more investment in infrastructure and spend and support?

[Anders Danielsson, executive]

I can start. The BoKlok operation in the U.K. is very limited. It's just a couple of ongoing projects, so limited exposure I would say. About the government, about the -- of course, it's positive to see that the government is -- wants to invest in infrastructure. It remains to be seen when it's coming out to the market. My experience is this takes some time before it is -- decisions are taken for specific projects, they have to be designed and then procured out in the market. But it is encouraging to see those signs anyway.

[Operator]

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

[Arnaud Lehmann, analyst]

I have two questions, please. Firstly, on commercial development. I think in your introduction, you mentioned that the -- the gains came from reversal of provisions rather than the disposal. I think you did -- you saw the one office building in Norway in the quarter. Are you implying that you didn't make a significant profit on this disposal? That's my first question. And my second question is on the positive effect from working capital in the quarter that is clearly helping cash flow generation. Can you give us a little bit of color on this movement?

[Pontus Winqvist, executive]

To start with regarding the profit on divestments within CD, I think your assumptions are relatively correct. It was not a big profit coming out from that disposal that we made during the quarter. So the majority of the gain there is coming from, you can say, older divestments. And then regarding the working capital in construction, as I said earlier, I think, I mean, it was a very strong quarter. We have seen on a couple of projects that there had been mobilization payments, which means actually that the clients are paying us, I mean, to start up the projects. And then when we are starting up the projects, we are starting to use that money in order to buy equipment, et cetera. And that will then consume a part of that positive development of the working capital. Having said that, I mean, normally, the fourth quarter is also quite strong seasonally when it comes to working capital development.

[Operator]

The next question comes from Markus Henriksson from ABG Sundal.

[Markus Henriksson, analyst]

Two questions from me as well. I'll start off with U.S. Construction and Civil. If we view into '25 and '26, and given your available resources at manpower, et cetera, how long can you keep up this high activity in order intake without endangering project margins getting into poorer project management? And the second one is a follow-up on housing starts. I think you're very clear that you intend to increase starts going forward. You're currently at around 1,000 starts on a rolling 12-month basis. Does that imply that you're aiming at a clear increase for '25 versus where we are on a rolling 12-month basis?

[Anders Danielsson, executive]

Third question regarding U.S. Civil. We are very selective on the market. We only go for projects where we see that we have the right team in place, that we have the right resources and also the right subcontractors. So we are not compromising with that. But it's also -- this has been extremely inflation in the market. So a lot of this increase we can see has been cost increases, not necessarily requiring more resources on site. So that's -- so I'm confident that we have this under control. It's something we always discussed before. We bid for any project in U.S. or elsewhere we go through, do you have the resources in place, and do you have the team in place? Others, there's no bid. No team, no bid. We don't compromise with that. So I don't expect the -- we will go into the wrong project for that. We don't chasing volume. There's not -- it's still profitability or profit before volume. That's my main message. And can you take the other one?

[Pontus Winqvist, executive]

Yes. Regarding the housing starts, yes, as we said, we are looking in to start more projects within Residential Development. We don't like to give any forecast on the actual volume. And also here, I think every project will be tried and tested from its specifics. But we will see that we are having, I mean, projects in the pipeline that is likely to be start during the coming quarters. Then, of course, I mean it can be a little bit bumpy exactly when they come and where they come.

[Operator]

The next question comes from Gregor Kuglitsch from UBS.

[Gregor Kuglitsch, analyst]

So I've got two questions. On working capital, sorry to come back to that. I don't know if you have an updated view. I appreciate Q3 you sort of had a strong inflow, but what sort of your best estimate is of a normalized ratio of that free working capital, I think, was sort of 17% or something like that today? And then coming sort of back to new projects, it sounds a bit like you're looking at residential. You just answered a bit of ramp-up again. I'm not sure really about commercial, but can you just remind us what the sort of margin and return on capital criteria are for you to start new projects so we can sort of think about perhaps a medium-term recovery of earnings in those segments?

[Pontus Winqvist, executive]

Yes. Starting with the working capital development, I mean, it's -- I mean, you say 17%. We are at 17.4% right now. I mean, of course, it's also here depending long-term on what is the cost of capital. How will the working capital development and how will our customers view the cost of capital? But I mean, we are on high levels right now, but we are not giving any forecast. But I mean, you can look into the history, and I mean, you see that there is some kind of fluctuation, and that's likely to be that also going forward. Regarding the RD business, I mean, yes, you can say that we are expecting to -- RD to deliver a 10% return on capital employed and a 10% on operating margin. So that, I mean, what we would like to have when we are starting new projects.

[Gregor Kuglitsch, analyst]

Similarly for CD.

[Anders Danielsson, executive]

Yes. Yes. Same target. Same return on capital. I mean we don't have an EBIT margin on CD, but the return on capital employed is the same.

[Antonia Junelind, executive]

And I will turn one last time to the operator. From my point of view, it looks like we've gotten to the end of the queue of questions. Have you got any other inputs for us?

[Operator]

There are no further questions at this time.

[Antonia Junelind, executive]

Thank you. So that means that we've answered all the questions that you had for us here today. So I will then thank Anders and Pontus for your participation here. And I will thank you that. Have joined us here in the studio in Stockholm. And lastly, I would say thank you to those of you that have been watching online. A recorded version of this broadcast will be available on our web page shortly after this. So thank you and see you back here in the studio in February for our fourth quarter report. Have a good day.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.