Skanska's (SKSBF) CEO Johan Karlström on Q1 2016 Results - Earnings Call Transcript

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Skanska AB (OTC:SKSBF) Q1 2016 Results Earnings Conference Call May 12, 2016 4:00 AM ET

Executives

André Löfgren - SVP, IR

Johan Karlström - CEO

Peter Wallin - CFO

Analysts

Niclas Höglund - Nordea

Jan Ihrfelt - Swedbank

Fredrik Cyon - ABG

Hjalmar Ahlberg - Kepler Cheuvreux

Erik Granstrom - Carnegie

André Löfgren

Welcome to the presentation on Skanska’s Three Months Report for 2016. My name is André Löfgren, heading up Investor Relations of Skanska. And today, as always, we’ll do this in a multiple way. We have the live audience but also participants on the web and on the phone. And you will all be able to ask questions after the presentation. And the presentation will be held by our CEO, Johan Karlström and our CFO, Peter Wallin. And they are ready to get going.

So, please, Johan?

Johan Karlström

Thanks, André. And I want to start talking about the slide that you see behind me here, because safety is very important for Skanska. We have a special attention to safety because this is important for us that everybody that is on our work sites coming home every day to their families and to their loved ones without getting hurt. And one week every year, we have a special attention to safety, which we call the safety week. And you can see a photo of one of the activities that we had on a project, downtown Stockholm at Sergels Torg. And it’s a stretch and flex in the morning that you can see here, very important for us.

So, with that, let’s have a look at the highlights for the first quarter this year. Increased revenue and significant increase of the operating income, SEK 2 billion the first quarter versus SEK 0.8 billion the first quarter last year.

There’s especially a strong performance from commercial development where we have sold one of the major properties. We have made several divestments in the quarter, but especially coming from one of the properties. I will go into more details in a second here. But we have also had a very strong performance in residential development, strong market especially in Sweden.

Decreased profitability in the construction sector in the first quarter, we can see higher seasonality impact in Central Europe but also in Sweden; lower activities in the first quarter versus the same quarter last year. And we also had some close-outs of some really big projects the first quarter 2015 that boosted the margin somewhat there.

You can see that the return on capital employed in the combined project development streams, 15.8%, well above the target that we have set up. You can also see that we have a lot of investment activities in development streams, and you can see that, we are continuing to deploy a lot of capital.

Strong financial position, which is good for the future, so we can continue to build up the activities on the development side. And we have a positive outlook in the market in general, more or less the same as we presented one quarter back. We just jacked up our view of the building market in Norway, otherwise it’s more or less the same as one quarter back.

So let’s start with commercial development here, and you can see that we targeted an operating income of well above SEK 1.3 billion. The divestment gain was around SEK 1.5 billion of that, and you saw the -- you can see here the total investment value of SEK 4.2 billion in the first quarter.

Return on capital employed, well above what we expect here ongoing. The activities that you see here now: we have 46 ongoing projects in commercial development and the total investment value is SEK 18 billion for the 46. Of the 46 we have started six new in the quarter. We will continue to start new projects, the next quarter and the quarter after that and so on, and we will continue to divest projects because this is an ongoing operation that we continue to build up and turn the capital around. If you look at the 46 projects, you take a snapshot of where we are in the projects, and we are at the pre-leasing of 43% versus a completion ratio in construction of 46%. And that’s a very good balance between these two things, we want them to be quite equal in percentage. It’s a very good measurement to mitigate the risks. The value creation in this stream that is the leasing. On a rolling 12-month basis, you can see that we have an all-time high leasing activity of over 400,000 square meters.

Let me go a little bit deeper now into the commercial development sector and let’s -- and I want to start with the project that we divested in Seaport in Boston. 41,000 square meter of offices plus 2,000 square meter of retail at ground floors, 17 stories high. Very important for us that all the projects that we build in commercial development are green. And here you can see that we have a LEED Platinum green certificate on this building. And that’s important for us. Because we know that it’s important for both the tenants, but also for the investors that are going to be the end owner of the buildings. You can see that the anchor tenant here is PwC.

When we build a project like this, we always look for some special features, to make sure that this is an attractive building for the tenants going forward. And here we have open space, very efficient floor plans. Tenants are moving very often from older buildings into something that they want to see modern and efficient. And there is also some features in the building that’s also important for the attractiveness and here it’s we have a fitness center. We have some terraces so you can look, see the overview of the surroundings and the harbor.

Here you can see the seaport area in Boston. It’s an old industrial area, close to CBD downtown. It’s on the way to be developed from something that was really on the outside, not really used, into something that is really hot, both for residential development, but also specially for commercial development. You see the three yellow buildings here; that is the Skanska buildings. That is ongoing projects. The one in the middle, you see maybe the red dot there that is the building that we have just divested. Then we have two other ongoing projects on each side of it in other blocks. Once they are completed, we have leased them fully, fully leased, then there’s going to be divestments there as well. And we are one of the major developers in this area, in Seaport, Boston. It’s a very vibrant part of the market there.

If we go take a little bit wider look at what do we do in commercial development in the US? We have four cities, four metropolitan areas that we have focused upon, where we have activities of commercial development.

In construction, though, we have a lot of activities in many different places. But in commercial development, we are focused on four metropolitan areas. Boston, I just showed you. We have more projects in Boston than in Seaport, but Boston is like an area driven by biotech and the Universities. We have DC, Washington DC. There we can see a big demand from the governmental sector, from law firms and so on. It’s a good market to be in. Houston, in Texas, used to be a good market, driven by the energy and the oil sector. For the time being that market is down now, because of the low oil price. And then you have up in Washington State in Seattle, the fourth city that we also have a lot of activities in. There we see a big demand from high-tech type of companies like Amazon, Microsoft. Boeing is another company that’s driving the economy in that area.

We are now evaluating and seeing should we go into some other cities? We have not made up our minds there, but we are looking at maybe to add some more cities. And once we do that, we will come back to the market and tell you about our plans going forward here.

Here on this chart you can see the development over the years. You can see that we started the business in 2009 and a very small capital employed there. It’s one of the first pieces of land that we acquired there; that’s the low bar in blue that you see there. Then we have gradually built up with more land, started projects. Today we have SEK 6 billion of capital employed in the U.S. market in commercial development.

The yellow, well, maybe it’s green line here, that is the return on capital employed. And you can see that it has been a very good profitability and outcome and return on the capital that we have deployed there. The model that we have implemented here is we have exported the model from the Nordics, which is the first in Central Europe some years before this. Here we took it to the US, the same model of building up commercial offices, fill it with tenants and then turn it around and sell it to the market. You can see that it has been a successful operation. And this is a very important part of our operation going forward.

If I summarize, where we are now with the commercial development in the US, you can see that we have around 300,000 square meters of ongoing offices, right now, as we speak in six projects. We have sold six projects since we started. You can see that the accumulated EBIT is around SEK 2.5 billion. And the return on capital employed, the last 12 months, is over 26%. So it has been a successful start.

If we put that into the big picture of the whole commercial development, and here you can see what operations we have. We have CDN, which is the Nordic operation. We have the European one, you see it down in Central Europe. That’s Poland, Czech Republic, it’s Hungary and Bucharest in Romania. You see the blue dot that is the cities where we have operations. And then we have the U.S. one. And you see the pie chart, that is the capital employed and the distribution. So one-third of the capital is in the U.S. 20% is in Central Europe and the remaining 40% is here in the Nordics.

We believe that that is a very good risk mitigator going forward, because if some of the market is going down, Houston right now, it’s not all markets going down at the same time. So it’s a lot of different cities, different markets and underlying economical drivers for the market. And we think that this is a good mitigator for us.

Okay. So let me talk about the other streams as well, not only commercial development. If I turn to residential development; a very good market, as you know, especially here in the Nordics and in Sweden. We have sold a little bit more than 1,000 homes and started nearly 1,000. So it’s a very balanced portfolio that we have there.

We pocketed an operating profit of nearly SEK 300 million. You can see that the operating margin and return on capital employed is now well above the 10:10 target that we have set up for the business, which is important for us. The number of unsold completed home has gradually gone down and Peter will show a slide about that so you can see the details here.

When you look at the infrastructure development, it’s -- maybe it looks like nothing is really happening here, because it’s not a big development on the numbers, but I can assure you there’s a lot of things and lot of activities behind the scene here. And what we are focusing on, that is to reach financial close on LaGuardia project, the big terminal project in New York.

In April, we did commercial close and now we are negotiating the final part of the financing package. The plan is, and we are following the plan, that we will reach financial close mid-year 2016, this year. And it’s going according to the plan. When we do that, when we will reach financial close, it’s going to be a big order bookings for the construction units and it will be around -- it’s going to be at least $2.5 billion for the construction part, for Skanska. We have 70% of the entire contract there. And then it’s equally distributed between USA Building and USA Civil, because it’s an internal joint venture with a third partner that we work on that project.

Construction revenue is more or less the same; it’s flat compared to the first quarter last year. And order bookings more or less the same, as you can see here, SEK 30 billion. Very strong order intake. It’s a little bit uneven though, if you go into the various business units, Sweden, Poland and USA Building has been strong. I don’t know if you remember when we talked here and we discussed the order intake for USA Building in the fourth quarter last year. We said that we could see that it was postponement on a lot of projects that we were working on, they were pushed into 2016. Now we can see that several of those projects are now coming back and you can see an increased order intake versus the first quarter last year.

Book-to-build, 87%, and a good and a strong pipeline of projects; so we have a positive view of order intake for the entire stream here, going forward this year. Not only in the U.S. but also in all the other of the business units. We still have a challenging situation in the U.S. in one of the big infrastructure projects. We are gradually taking more costs on that project. We are negotiating with the client. We have not reached a commercial agreement with the client, which means that it’s going to take a longer time before we actually put in some income there, which means that we take 100% of the cost but not any income. We also see some seasonal impact that I talked about and some -- in the comparative period we had some big projects that were closed. So we have some extra profit coming in, in the comparable period.

So with that, Peter, maybe you can help us and go through the details here.

Peter Wallin

I will try. Thank you, Johan. Good morning, everyone. Okay, let’s talk about construction and order situation here; as Johan said, it’s been a fairly good order bookings quarter. We are up 2% in local currencies to SEK 30.3 billion which means we will equal the revenue in the first quarter.

However the most interesting part, just looking at the book-to-build on the rolling 12-month basis, and there we are at 87%, which happens to be the same number as we reported for the full year 2015. If we look into the details and to the various business units here, you can see a quite huge difference than between Nordics and Europe and if you look on the third column from the left, the book-to-build rolling 12-months, you can see that all in the Nordics and in the Europe is over and above 100%, which means that we have booked more than we’ve built over the past 12 months. That is not the case in UK and the U.S. businesses. Now the pipeline being strong is especially true for UK and the U.S. businesses, so we are not at all concerned about this. LaGuardia has been mentioned many times, probably will be mentioned a few times more on this morning exercise. But it will have a very huge impact when we book that project.

Looking into the construction income statement a bit more. First quarter is always a weak quarter compared to the full year and we report an operating margin of 1.5%. For the full year 2015 we were at 2.8%, so you can see the difference in terms of the seasonal impact.

Going into the various businesses, starting with Skanska Sweden, you can see quite a lower margin of 2% compared to 2.8%. 2015 in the comparable quarter we booked a large project that we completed. That is not the case this year, and that had a huge impact on the numbers in the first quarter last year.

There is no issues in Sweden. This is a seasonable impact on the very big asphalts and concrete business, which is actually operating with huge costs during the first quarter of a year. So the Swedish business is performing very well.

Norway, stable performance. Finland, stable performance, very good. And if you notice that I am not making comment on the seasonable impact in Finland and Norway because they have winter as well, as you know, surprise, surprise. That is that they do not have any asphalt and aggregates business, as do Sweden, so that’s one of the reasons of the differences between the three markets here.

Poland and Czech, we’ve commented before. It is business as usual when there is no business during the first quarter in the civil business. You can also notice if you look on those two businesses that the sales level is much lower compared to last year, so here we’re burning through in terms of backlog. In Poland also, I would like to draw the attention that we completed a very profitable project into 2015 numbers, which also distorts the comparison. The performance is, however, according to plan.

UK operates well and here we have a number of big projects being started. We have a certain delay here which impacts the margin.

We’re back to normal in USA Building as you can see from the margin. And in USA Civil, as Johan commented upon, we’ve had further new design changes in some of the projects, which has meant that we have taken the hit in terms of the full cost and not taken any revenue to the income statement. That has impacted the margin.

We are also making a comment in the report because as you know the projects impact the gross margin. What we’re doing to improve our control in the business is also that we are investing in a new ERP system in the civil business and this is having a huge impact on the S&A in this business over the next coming years. So we just make the notice that you will -- keeping the gross margin and selling and admin percentage as an explanation here. This will have an impact on the operating margin in the coming years.

Residential, we’ve had a very good development, continued good development and you can see revenue going down 11%. If you look on the number of sold units, they go up 4% so you have a price mix of negative 15%. This is selling more affordable housing compared to the previous comparable period. However, the gross margin is increasing quite dramatically, meaning that we have very good control of the cost level here and we are also having a very conservative profit take in this business.

We’re keeping selling and admin under control, which means operating margin is at 11.2%. That is only the development margin and nothing in addition to the construction, which is reported in the construction stream.

If we look on the various markets, the Swedish market is working excellent, red hot, and we have good execution here meaning that we can capitalize and keep the impact to the bottom line.

Norway, we have come a bit further on the developments of projects here and we are selling more, increasing the margin.

Finland, improving the margin in a very tough market. I would like to draw the attention to the previous year. We were selling a lot of units to end investors with a certain discount, which distorted the numbers somewhat here. The Finnish organization is doing a great job.

Central Europe, as you can see from the footnote, that is Poland and Czech, it’s really Prague and Warsaw, and it also states UK. It’s because we have one piece of remaining land that is out of the books now.

And this business operates quite well. Mind you that the Polish business is still in a start-up level. The Czech is working good on a pro forma level, i.e., working at a good stable volume. As you can see, we started 988 units during the first quarter. So in total now we are in balance with the sold. As soon as we put something on the shelf it’s almost sold directly in the markets, which you can see in the next slide, describing the sales level in the projects. 77% out of the stock of 5,878 units under production.

Unsold completed is continuing to be reduced and we are now down to 200 units. So you can see over the past five years we have never had this many units under production which is sold, which I will come back to. So we need to start up more projects in RD.

Commercial development, Johan has talked a lot about and there is much to talk about because there is so much profit. So we are at SEK 1.4 billion here in EBIT terms, and if you look on the divestments, the divestment gain compared to the sales value is at a record 34%. If you would take a seven-year history and would do the same comparison, you would find that the margin has been on average 22%.

So what is that? Well, there is a huge demand for our types of projects in the current market. Investors are seeking returns, so that means that the rent levels are fairly stable, but the return requirement is going down, yield compression. So that increases the values. You can see how the gain is going up. We are continuing to sell projects, of course, in the current market, so don’t be mad at us if we continue to be higher in margins on the CD.

Another interesting thing to look at the bars on this graph represent the unrealized profit, and as you can see the line is the reported profit. If you then compare the Q4 graph compared to the Q1 graph, it only goes down a little bit, but the reported profit is going up quite a bit. Why is that? Well, we are selling much higher than what we internally assessed the value to be.

When we start up new projects, which is also the part here, six projects being started in the first quarter, we are quite conservative in our profit estimate and our value estimate of those projects. So this bodes well for having a good risk mitigation when we start up new projects, because we can’t account for that the current yield compression will continue for eternity.

Leasing is another risk mitigator and value creator and here we are continuing to increase leasing, and we exceeded 400,000 square meters on a rolling 12-month basis. Coming in to infrastructure development, here we report a lower operating income. We have increased the project development costs and you also remember that we sold the Bart’s and Royal Hospital last year; that was in the books Q1 2015, which means that we got return 2015, but if you sell something you don’t get a return anymore, but we have pocketed the profit in Q4 last year. So that’s one of the reasons why the EBIT goes down compared to previous years.

As Johan said, much is happening despite the fact that the EBIT number doesn’t move that much and we built up the value quite a bit in the portfolio. And we had a 15% return on capital employed. If you bake it all together in the Group, from all the streams, you knock down the central costs and the central costs did not include any costs relating to the closedown of Latin America. Zero. And you end up at the close to SEK 2 billion in EBIT for the first quarter for the Group.

Net financial, this is also improving. As we have talked about, having low interest rate or negative interest rates in some jurisdictions and then, of course, also selling Latin America has meant that we are decreasing financial net quite considerably now. There is some one-offs in these because you do mark-to-market in these numbers, so the actual financial items is actually much less than what is reported, if you look on our pro forma level. So that -- with 21% in taxes, that’s a profit for the period of SEK 1.5 billion or SEK 3.69 earnings per share.

Cash flow, first quarter also negative because of the working capital. Working capital outgoings is much less compared to last year, but we are in the net investment mode. Some of the reasons is, of course, growing the CD business, as we talked about, and investing in our RD business. So we are in a very good position from a cash flow point of view.

This is another graph which we normally discuss to a great deal with you. That is the free working capital in construction. As you can see, we are at a very good level, given that it is a weak first quarter. So the fourth quarter we have a lot of incomings and settlements on the construction side and then the cash leaves early into the New Year. But we have maintained cash flow quite good here now and so cash flow compared to revenue in construction is going up in percentage terms, not only in absolute terms. So that is due to the fact that we are focusing a lot of this, not only in the actual business, but also before we bid for projects. Cash flow and profit goes hand in hand.

On the investment side, we were at SEK 29 billion in capital employed in our development streams. You can notice that the SEK 9.3 billion in residential will increase because of the sold percentage of projects in our current stock. Now we will start to complete that stock and that means that the capital employed will increase before we actually hand over the completed units. Also, as you understand from what we are talking about, we will continue to start up new projects in commercial development. And then also infrastructure development will book something when it comes to closing LaGuardia.

My last slide is showing a very strong financial position. We had full our review of looking at our investment capacity of SEK 10.3 billion compared to SEK 5.9 billion the year before, which is a very strong number.

The Seaport deal: This is my last comment on the Seaport deal. The SEK 3.8 billion in sales price came in, in April and the dividend went out a few days afterwards. And we had a few hundred million over and above the dividend. So we are continuing to be at a very good level from a balance sheet point of view. Johan?

Johan Karlström

Some few comments regarding the market before we open up for questions here. You can see here that it is very much the same view of the market as one quarter back. Strong situation in Sweden, especially on the building side; there’s a lot of activities.

On the civil side, yes, we see a lot of activities, but on the other hand it’s a much tougher market situation from a competitive standpoint; a lot of the international players are here. We see them in Norway as well. Somewhat weaker though the market in Finland, but our situation is Finland is in very good shape.

UK strong, we don’t see any real impact from a potential Brexit. Public sector completely untouched; there will definitely continue on the private sector some questions, but no real impact. We follow it very closely and then we’ll see the outcome of the referendum and then, of course, something -- will it be something that’s going to impact us, hard to say now.

Polish market also strong and all the other Central European countries as well continue to improve. In the U.S., we see a lot of projects; PVC projects, we see infrastructure projects, we see the aviation sector on the building side also picking up. So there’s definitely a lot of projects that’s in the market.

I’ve got questions regarding the presidential election in the U.S. and our view is that regardless of who’s going to be the next president, we don’t think it’s going to have an impact on the business environment in the US. The need for infrastructure and the need for social infrastructure is there, so it’s going to be built in the U.S. market.

Strong market in Sweden in RD, residential development; strong as well in Oslo. The market is divided in Norway. The regions which is depending on the oil is down, but otherwise it’s a very strong market in Oslo. Finland somewhat weaker, but we view the market there that they have reached rock bottom and we haven’t really seen an uptick, but we see that it’s more or less flat now. And, good market in Central Europe in Warsaw and Prague where we have operations.

We talked about commercial development. As long as we have the low interest rate environment, we expect that the deals with continue to be on a low level, which means that the demand from the capital -- from the pension capital will still be there and ask for and are really interested to divest in our assets. The leasing sector is also good across the board except for Houston.

On the infrastructure development side, good in the US; some movements and discussions in Norway; and there may be some openings of a door here for a PPP project on the eastern link in Stockholm. We’ll see where the politicians will go with that one.

So with that I think that we should open up here for Q&A. André?

André Löfgren

Yes, let’s do that. And let’s start with the guys here in the room. Please state your name and the company you work for and Niclas is hungry.

Question-and-Answer Session

Q - Niclas Höglund

Yes, good morning. Niclas Höglund, Nordea. Just a couple of questions. Maybe go directly into the USA Civil part. Could you discuss a little bit on the difference between the fourth quarter, the accelerated costs? Could you elaborate a little bit on the magnitude on a running rate losses here in the operations?

And then on the ERP. Covering a lot of companies implementing ERP assistance tend to be rather costly. Maybe if you have some experiences in other region that you want to share with us and shed some light on this increase in S&A?

And on Civil also, final question, we’ve previously talked about an underlying margin trend of around 6% to 7%. Should we expect, given these circumstances, that you will be well below that level? Is it more reasonable to expect 5% to 6% until you recover or potentially recover these losses? Those were the questions on Civil. Thank you.

Johan Karlström

So if I start to answer part of the question, talk about the projects here, and then I’m going to hand over to Peter who is the expert in ERP system. So talking about the problem. One of the projects -- if we go back to the end of Q3, we had a profit warning of six projects. One of the projects we continue to have problems with and cost is showing up, the additional costs for new design changes and design problems that causes more costs on that project.

We believe that a big part of that is something that the client should be responsible for because it’s not a design build product we’re talking about. The design is on the client. It’s a big project. It takes several years to complete and we have ongoing negotiations. We believe that’s going to take a long time before we reach a global settlement there with the client.

And as long as we don’t have a global settlement, we take the full cost and we don’t take any income on the other side there for that additional cost. On the other hand, in USA Civil, it has also been a balance with some write-ups and some good numbers in other projects, so a little bit in a balance situation there as well. So that’s what we can say about that project.

ERP system, Peter?

Peter Wallin

ERP system and being the expert. I share your experiences, Niclas, on the ERP implementations that I have seen and been responsible for. Right now we are doing a huge change of ERP system in the Swedish business as well and that has been going on for quite some time. This is a constant need to do this and you represent a bank and I guess that on a bank, that that’s one of the most difficult decisions to be taken. So we have experiences within the business. Thus far, this has been executed very professionally and a process which has going on for quite some time. Why we make the comment now is because now it’s implementation time and now is when it really hits the S&A to a large degree in the next coming years. We are very much focused on making sure that it is successful. Given how we work together on a national level in U.S. Civil, we find this as a very good example of improving our transparency and our view into products. So we think it will benefit us in the long run.

Niclas Höglund

Just to follow up, I have no numbers here. Could we get a comment on the underlying margins in the operations; 6% to 7% seems to be a little bit high at the moment, especially given the pressure on S&A. Could we say anything on the dilutive effect from these projects? You take the costs, you’ve taken down your gross income from these projects but it has a dilutive effect on the total civil. What’s the sensitivity compared with last year on a rolling 12, or something?

Peter Wallin

We understand the need for you to ask questions on the numbers but because we are -- it’s also a question of negotiations and discussions with clients, we will not be able to give you any numbers right now.

Jan Ihrfelt

Jan Ihrfelt, Swedbank. Actually, four questions. I take the first one right now. LaGuardia project, $2.5 billion; is that the total number or will it be more later on? And the timeline for it is -- how many years will it last?

Johan Karlström

Just to be clear, it is the Skanska portion of the total number. And we -- so that is, the $2.5 billion that I mention here, that is going to be at least $2.5 billion. And that is 70% of the total value, the construction value. So I hope that is clear.

And then it’s evenly distributed between USA Building and USA Civil, because it’s a joint operation between the two there. Because it’s both civil construction and building construction in a project like that. Then we have a third party there. The timing is that we expect it to be financial close at mid-year this year. If there’s going to be an adjust before we close Q2, or if it’s going to slip into Q3, nobody can say.

Jan Ihrfelt

And construction time?

Johan Karlström

Yes, construction time; it’s going to take several years to build. We actually already started construction there, because we have already some advance contracts with the client, because they want to get going there. So if you are there you can already see some Skanska yellow equipment there, driving piles and so on. And then it’s going to be some years ahead. I don’t have exactly the complete -- maybe you know…

Peter Wallin

Close to six years.

Jan Ihrfelt

And going to residential, Central Europe had a very good margin in the first quarter. Was there anything extraordinary in that profit?

Peter Wallin

All markets reported good margins. The specially high percentage normally is because of a very low sales value base. And we have the certain movement in the UK, but it wasn’t that big. The important thing which we stress on Central Europe is that the Czech business is operating on the long-term volume basis, whereas the Polish is building up, but the S&A is undermining the market compared to what they will do, if they perform on a pro forma level.

Jan Ihrfelt

Okay. Thanks. You had a very good profit in CD, which everyone could see. You’re talking about yield compression, etc., which is favorable for your business. Could you comment anything on the land prices and how the market for land has developed and your prospect for the future?

Johan Karlström

The land price, it [indiscernible] which I think is applicable both for RD and CD. And we can see that the asking price for land is absolutely going up now with the divestment prices that we see, both on residential and for apartments and for the commercial buildings on CD side.

So that is something to really watch, because when we buy a piece of land now, then it’s a project that’s going to start maybe three, up to seven years from now, and then sold two years after that. So we have to base it on -- not like the sky-high prices that you see in the market now, and low yields. We have to base it more on a normal situation.

So when we make our own calculation for investments of land, we put in you can say a more conservative yield compared to what we see in the market now. If we then reach the requirements that we have internally for profit, development profit, then we go for it. We still see that there is possibilities to buy land with that type of calculation, but of course it’s tougher.

Jan Ihrfelt

Will it hurt your margins going forward, this rising land prices.

Johan Karlström

You can say an extra boost on the margin, given the lower interest rate environment and the low yields. But if the market is going down, long term, the interest rates are going up, and the yields are also going up. Then of course it’s going to be somewhat lower development profit. But I think that we can definitely run the business according to the targets that we have on return on capital employed, which we have shown in the past, when it has been other interest rate levels in the market.

Jan Ihrfelt

Okay. And a final one, and this is one for Peter. It’s a tax question. Do you have any guidance for 2016?

Peter Wallin

What we guided on stands the same, we are reporting 21%. And give and take, it will be around that number.

André Löfgren

Any more questions from the audience, no? Let’s move over to the phone conference, then.

Operator

Thank you. [Operator Instructions] The first question comes from the line of Fredrik Cyon from ABG. Please go ahead.

Fredrik Cyon

A few questions from my side. Starting off with USA Civil, going back there, you didn’t want to quantify the effect of these ERP costs, but can you tell us when you believe you will be able to reach the margin target you have guided for?

Peter Wallin

We don’t have a guidance for USA Civil.

Fredrik Cyon

But in the past you have indicated where the long-term ambitions should be, and given that you take extraordinary costs now in the short term, will that make it more difficult in the coming years to reach that target or…

Peter Wallin

Of course it’s going to be like in a tougher to reach the margin expectations that we have in USA Civil due to the ERP system. We have taken some of the costs already in 2015, we have it 2016, and it will continue two more years after that.

Fredrik Cyon

But you said that some of those costs were already taken in 2015. Are you saying that it’s going to be even a harsher impact on 2016, 2017?

Peter Wallin

When it comes to ERP system, then from the expert here, Fredrik, before implementation you cost the development to some extent. When you have implemented the system, you do a depreciation amortization of what you have capitalized in terms of cost. And it’s the latter part which give a greater impact in the next coming years.

Fredrik Cyon

Okay. Then moving over to Poland, you said that you had a very profitable project that was completed last year. When was it completed? Did it have a positive impact throughout 2015?

Johan Karlström

Well, we had a positive outcome in the very first quarter last year from that project; it was the end part of a bonus that came from the client. There is also another strategic shift that we’re down in Poland and to some extent also in Czech Republic that I think it’s important to be aware of, and that is we’re shifted over to more mid-sized and smaller projects, more bread and butter type of project. And which is a risk mitigator. In the public sector, which is a big client there, they have a tendency to budget it on an annual basis, these projects, so they hand them out in the first quarter. There is bid activities there; very low activity, very low activity in the first quarter.

Then the market gets those projects, build them in a closed amount, I’m talking about the smaller and middle sized projects now, during the year. So there is higher activity in the second, third and the fourth quarter. And then the cycle starts all over again. So that’s -- because of a somewhat strategic shift, we see the seasonality impact being even higher than it used to be in Poland.

Peter Wallin

And on that impact, Fredrik, if you look into the order bookings, you also see the number of months in production. And when it comes to Poland, it’s the lowest number, it’s around eight months which just shows Johan’s statement that it’s a high churn rate within the year of the backlog in Poland compared to the other business units.

Fredrik Cyon

That’s very clear, and then moving over to RD, two questions on RD. Just to clarify, in Central Europe margin was obviously very strong. There was no positive impact from land divestments, is that correct?

Johan Karlström

Land divestment, in what area?

Fredrik Cyon

In Central Europe.

Johan Karlström

In Central Europe? Well, Central Europe then includes part of UK, and we had the release, a certain release of a previously sold land bit there, but that was the impact, nothing else. The land we are -- the only land we are doing is land investments otherwise in Prague and Warsaw to build up the businesses.

Fredrik Cyon

Then on started units, you had a very strong year in terms of start-ups in RD last year, but you have very few unsold units and it sounded as though you’re in growth trajectory still. Is that a correct statement?

Johan Karlström

Yes, well we have sorted out more, and we -- as long as we can start up projects which are completed to be put to the market, and that is just reinforced again. We do not start up projects which are not ready to go to the market where we have done a prudent assign to cost, and are fully prepared to sell the units. Now the market is very receptive, and we are trying to get a lot of projects going to the market. But only the projects that are ready to go to the market.

Fredrik Cyon

And then my final question is CD, obviously a very strong Q1. Can you tell anything about your view on CD gains for 2016? You have indicated in the past and given us some guidance on that.

Johan Karlström

We will continue to sell projects and they will come in each quarter. We have an increased activity overall in CD. So gradually it over time, it will be a bigger part of the pie, and you can -- you have also seen it if you go back in time some years.

Peter Wallin

We will continue to sell projects, we are ready to sell in the market, and we have a very favorable market development right now in terms of prices. So this will continue to give more and more bottom line.

Fredrik Cyon

But if you look at the selling list today versus one year ago, I guess selling list is partly a function of the completion rates; how does that look today compared to a year ago?

Peter Wallin

It’s stronger.

Johan Karlström

There is a lot of projects that are ready for divestment.

Operator

The next question comes from the line of Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead.

Hjalmar Ahlberg

[Audio gap] you talked about increasing land prices and possible change in yield compression. When you look at the target return on capital employed, is that the 10% we should look at? You’re now 15%, but 10% is the longer-term target still?

Johan Karlström

The 10%; that is a target that we have combined for the project development operation, all the three streams there. Now we have a good momentum in the market and we believe that we can definitely reach the 10%, and then we’ll see how it’s going to turn out in the long run.

Hjalmar Ahlberg

And you have now 46 projects in the pipeline; can you say anything about the size of this? Is it fairly even? This quarter Boston was quite big I guess, but how does it look on the other 46 projects?

Johan Karlström

I think it’s very easy to understand; if you go back to my presentation where you can see I did the three parts, CDN, CDE, and CDUS. And you can look at the capital employed that we have there and how it’s distributed between the three units. In CDN and in CDE, they are somewhat, I shouldn’t say smaller but it’s not mega-projects there. In the US, there is a tendency that the average size of the project is larger, everything is big in the US, even their residential development there, the projects -- sorry commercial development projects, sorry. And then, if you remember on the slide I showed regarding the Seaport project, you could see there were two other projects on the site there. Two very interesting ones that will come to the market once we reach the completion, and also reach the leasing ratio, which is going to be close to 100% before we go to the market with that.

Operator

The next question comes from the line of Erik Granstrom from Carnegie. Program go ahead.

Erik Granstrom

I had three questions that I just wanted to go over with you guys. The first one is one CD and you, ahead of the report, you press-released obviously the Boston divestment, but you also mentioned now, in the presentation, that you had reported some gains within CD in Q1 related to other projects. Obviously Boston is by all means probably the biggest one, but could you give us some indication of how many projects did you report in Q1 as well, just so that we know the balance there?

Johan Karlström

We are going to keep your Excel sheet updated, Erik; it’s three smaller projects recorded in the CDN business.

Erik Granstrom

And actually I hate to be redundant here but, Peter, once again going back to the ERP and something that I reacted to when you stated that there was going to be a huge impact on SG&A in civil; to me huge is fairly big. Could you give us some guidance in terms of the percentage of SG&A that you are at the level right now and what we could expect in the coming two years?

Peter Wallin

I perhaps misspoke then, because I was referring to huge being the difference between what we incurred so far and what we will incur going forward, because that was another question we had from the audience here; so my bad. When it comes to the impact on the S&A, it could be as much a 0.9% per year in the next coming two years.

Erik Granstrom

Okay, thank you very much; perfectly clear there. And then finally, and I know that all of us have probably touched upon it, and I’ll try once again. In the UK, you stated that you had released some land divestments in Q1 that affected the numbers. Were these in the tens of millions or are these so small that it’s more or less the underlying profitability that we are seeing in Central Europe in RD in Q1?

Peter Wallin

They are below 10.

Operator

[Operator Instructions]

André Löfgren

Okay. I believe we are done. Thank you very much for your attention. And see you next quarter, actually it’s just two months away.

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