Skanska ABB's (SKSBF) CEO Anders Danielsson on Q4 2018 Results - Earnings Call Transcript

Skanska ABB (OTCPK:SKSBF) Q4 2018 Earnings Conference Call February 8, 2019 4:00 AM ET

Company Participants

André Löfgren – Investor Relations

Anders Danielsson – Chief Executive Officer

Magnus Persson – Chief Financial Officer

Conference Call Participants

Niclas Hoglund – Nordea

Tobias Kaj – ABG

Stefan Andersson – SEB

Frederick Cyon – Carnegie

Miguel Borrego – UBS Investment Bank

Albin Sandberg – Kepler Cheuvreux

Marcin Wojtal – Bank of America Merrill Lynch

André Löfgren

Ladies and gentlemen, it's 10 a.m. in Stockholm. It's time to begin. And what we're about to start is the presentation of Skanska's Year-End Report for 2018. My name is André Löfgren, and I'm heading up Investor Relations at Skanska. The presentation will be held by our CEO, Anders Danielsson; also our CFO, Magnus Persson. And you'll all be able to ask questions after the presentation. So it's kind of the same procedure as in every quarter. And we will start then with the questions from the audience and then we will hand over to all the participants on the webcast as well.

So with that, I hand over to you, Anders.

Anders Danielsson

Thank you, André. Good morning. Before we go into the figures, let's look at the picture behind me, it's 121 Seaport in Boston, one of the very successful project we have completed, and also divested in the fourth quarter. You can see an even better picture here on the slide.

Comment on the year-end report, we have earnings per share of SEK 9.55, lower than last year as you can see. We have an operating margin in construction 0.7%, way too low, unacceptable level. And we have a return on capital employed in project development on 13%. And that's a good level because we have a 10% target on that one. And we have a return on equity of 14.1%, lower than our target – external target of 18%.

The positive thing, if we look at the construction stream, I will go into that later on as well, is that the strategic initiative we took more than a year ago in 2018, is gradually starting to pay off. And we can see improved – gradually improved profitability in the construction stream and in the fourth quarter we had 2% margin in the construction.

We have a strong financial position. We have the intention, our target is to continue to invest, and to increase our investment in Project Development, both Commercial Development and Residential Development. And we are eager to keep our financial strong position, so we can take advantage of opportunities that will show up in the market. And therefore, we have a proposal for a dividend on SEK 6 per share and that level of dividend is supporting that strategy of increased investment in Project Development.

If we go into revenue stream, revenue in construction increased somewhat, SEK 158 billion. The order bookings were SEK 152 billion and we have a book-to-build of 96%, which is on a healthy level. I will go into each of our markets later on here. But we have a healthy backlog of SEK 192 billion. The operating income in construction was a bit more than SEK 1 billion. As I said, operating margin, unacceptable level overall over the year, 0.7%, and that is due to, we have seen write-downs, we have seen restructuring charges that has impacted the profitability on the construction stream during 2018.

So we have the high priority, our main – one of our main focus is to restore – continue to restore the profitability in construction. And as I said, it is encouraging to see that our actions that we have taken is starting to work in the right direction. Residential Development, quite good, quite good results, despite tough slower market. We can see that the homes sold declined somewhat with 15% basically. But we also can see a big mix shift in the portfolio, especially in Sweden where we can see that our – part of our portfolio is much more affordable housing, i.e., BoKlok and also more rental apartment.

In fact, when we look at the full year 2018 in Sweden, 50% of that was BoKlok and another 30% was rental. So we have managed to change the mix in a very good way. As I said in previous quarter, we are not so vulnerable of a slower market because we have a good diversity both when it comes to product mix, but also when it comes to geographies.

So return on capital deployed, 11.4% higher than our target. And we don't expect a soon recovery in this Swedish market. We expect it to be slow for at least for the next 12 months.

And of course we have taken action to meet the market situation. I just described how we took action to change the product mix, and we will also look over cost.

Commercial development, another record year. This is really high performance, record year both when it comes to gain on sales, the operating income, and also when it comes to how much leasing we have managed to execute during the year. Over 500,000 square meters, that is record for Skanska Commercial Development. And as you can see, return on capital employed, we are above the 10% target. And we have 53 ongoing projects. So we are really creating a lot of value here. We have started 28 projects during the year, and as you can see, one important KPI is also the occupancy rate versus the completion rate. And now they are in balance, we have 50% on both, which is on a healthy level. They should be about the same. And we have historically high level of interest, both from our tenants and also from investors in our different markets.

Infrastructure Development, we have a portfolio as you know, we have closed down our project development. We have a asset management now to organization that will have the big focus on taking care of the value that we have in our portfolio. And we have, as you can see here, the value – net present value have increased to SEK 3.6 billion, and we have unrealized gains of SEK 1.1 billion. So the focus is to maintain and realize value in the current portfolio.

And starting from 2019, the Infrastructure Development will not be reported as a separate business stream.

The order situation, book-to-build, 96%, on a good level, you can see here also how the order backlog is developing, and the revenue, which is pretty much flat. Due to the actions we are taking, I would expect it to go down as we have guided before. We have the same status right now on that. And if you look at the different markets here, the order bookings, they are in the right place, I would say. We have a strong performance in the Nordics, and we also can see that we have the – we are above 100% book-to-build in the Nordic regions.

Europe, including Poland, lower, of course, and that's perfectly in line with the strategic actions that we reduced the scope in Skanska Poland, we are taking also actions in Czech Republic and Skanska U.K. So it's natural that we are on the lower level there. And also the same thing for United States, that we have taken strategic actions to being more selective, more better our risk analysis in the project, which means that we expect a lower order intake. So this makes sense when you look at what the strategic actions we have taken.

So with that, I'll leave to Magnus, who will go more into the details.

Magnus Persson

Thank you, Anders. So like this. In the normal fashion, we start with the construction business and the P&L there. As you can see for the full year, we had revenues of about SEK 158 billion. This is growth in Swedish krona so around 5%.

In local currencies, it's a bit lower. So at around 2% there. And if you take the quarter isolated, we actually grew revenue in construction in the quarter as well, slightly lower than around 4%. We've spoken for some time that we expect the revenue in construction to start to come down. You can see this in the bookings here, with the book-to-build to 96% but obviously, we haven't reached inflection point in terms of revenues here. But that will come.

Margin for the full year, 0.7%, of course, as Anders said highly disappointing to be compared to the last year of 0.8%. In the quarter isolated, we had a margin in construction of 2%. And that we do feel now that we have a sort of a more solid ground on our feets in the business and that, of course, it feels really good there.

The other thing that should be pointed out when you sort of look at the results here is on the S&A line you can say that S&A as a percent of revenue is coming down. We also have a goodwill impairment charge is baked into the S&A cost there. So if you take that out, for the full year 2018, it's about 4.2%.

Going into the different regions, in the Nordics, we had an operating margin of 3.8%, 4.2% in the comparison period so slightly lower.

If you look at the Swedish business, which is specified here, you can see it continued to perform at a very high level, 4.6%, virtually the same as last year, you can say. And in the quarter isolated here, we have a slightly lower profitability in Sweden, 4% versus 5% last year. But we always have this variability over the different quarters. So there's nothing really strange about that, if you look at the longer time period like 12 months there.

Europe had a negative result for the full year, and so has had the U.S. operations. Again in the fourth quarter, sort of emphasizing what I just said, all the different regions in which we are reporting had black numbers in the fourth quarter isolated. So that feels like clearly a step here in the right direction.

These sort of one-off effects. I've shown it to you before, and this is more like a service to you so you don't have to go through the papers every time you sort of want to have a look at the company. I'm glad to say that there is nothing changed in this picture since the third quarter. So it's the same here.

In total, we had negative one-offs of SEK 2.8 billion in 2018 then these were met by positive one-offs of around 500 – SEK 0.5 billion. And in 2017, we had negative one-offs of SEK 2.5 billion. So slightly lower negative one-offs at the net level this year than last year. But the same, nothing changed here in the fourth quarter. So it's the same.

If we move to Residential Development, obviously I think as everyone expected, the revenue is lower this year than last year. I mean, partly a consequence of the proceeding three quarters even before the fourth quarter here. Then we actually have the fourth quarter with pretty good sales, we had revenue of around SEK 4.1 billion in the fourth quarter isolated compared to SEK 3.1 billion the same quarter last year. So this comes up a bit there.

Margin for the business here for the full year 14%. In the third quarter, we also pointed out some of the, call it, extraordinary effects we have had in the results here which comes from the gains on the divestment of land, and also we have completed really successful projects, we have been able to release provisions to profit over the course of the year, so these two effects in total makeup around 4% of the margin. So if you look at the underlying margin here, for already for the full year is 10%. Underlying margin for the quarter isolated is a little bit above 9%. So we're sort of there here.

Look at the different regions. The Nordics, 14% is a little bit better than what we had in 2017. Now of this one-off effects, of which makes up SEK 0.5 billion in total, they are to be found in the Nordics and there is nothing strange in that sense, it's a big part of the operation there. And a little bit more than half of it is to be found in Sweden. So the Swedish result of – the Swedish margin of 15.5% is roughly the same as the last year here, but obviously, impacted by release of excess provisions, and the gains on the divestments of land there.

The quarter isolated, if you look at this, we can clearly see here also to the point Anders was making, that the shift in the mix of the units we are selling now have an impact on the revenue per unit that we get when we sell. So if you go back to 2017 on the average, we had around SEK 3 million per sold unit, now taking away all of this extraordinary effects on this.

In 2018, this is SEK 2.8 million. So these things obviously, go very much in line with each other, and as we are changing the mix of course, the average selling price is coming down there. Home started and sold. As you can see on this slide, we are continuing to start more projects than what we are selling.

I think a couple of points here is important to connect to this information. One is again the mix, 80% of all the units that were started or sold in Sweden in 2018 was either rental apartments or they were in a more affordable segment of a Boklok here. So only 20% you can say is the more pure housing Association units in this. The other thing is of course that when we continue to start more than what we sell, it looks like the total number of units under production would swell quite a lot, but since we recognize sales upon contract signing. This is not the case because we are also simultaneously handing over a lot of units. So the number of units on the production is fairly stable, and you will see that also on the next picture here.

If you look at the bars here, it's a number of units on the production, you see the blue parts and then you have the orange part, which are the number of units and that are completed, but yet not sold. So you can pretty clearly see that we are keeping a fairly stable line here in terms of sort of the size of the portfolio on the production here. Neither does it go up very much, nor down very much.

In fact, it is more or less precisely the same number of units as we had in the third quarter. We added 200, 300 units compared to the same period last year here. What instead happens when we continue to start more units than what we sell is of course that the sales rate in the portfolio under production goes down, and that you can keep track of very easily with the green line that you see behind me here. We are now at 68%. We have tracked this at every quarterly presentation now during the year. And we are well in control of sort of the market risk in this. So we don't – we think we are in a comfortable position here with 68% still.

The other thing that is interesting to look at this completed unsold units, we had around 260 units, last quarter, now we have 314. It's primarily Sweden and Finland that makes up the big balances in this. And the important thing with the completed unsold units is, of course, they are not being aging, they should not be old units. As long as we have a churn on these units, we're quite comfortable with that.

If you take the Swedish part of the completed unsold, around half of that is actually a rental project, where we haven't yet signed the sales agreement with an investor. So I think you know the rental market is fairly a hot market right now. So we're not at all worried about that. And a good chunk of the Finnish unsold completed units are in fact brand-new because they are related to a few projects that were completed just before Christmas here. So these are fairly sort of new units that are in the completed unsold. So that makes us feel a lot more comfortable about that number.

If we move to Commercial Property Development, the big news has already been delivered, it's another record year for this business stream. Divested properties to total value around SEK 16 billion, sorry for that. Very high number obviously. Capital gains, SEK 4 billion for the full year here. So that's a tremendously large sort of value that is both created and realized out of this business, very, very strong year. We also leased 0.5 million square meters over the total course of 2018. So very, very strong year here.

The observant reader or spectator would notice SEK 107 million write-down for the full year here. The sort of explanation behind that is, one very old project we have had, it's been leased very well. We have been unable to sell at the price we want, now we decided to do a retrofit with this project. And then we had one small land plot where the zoning plans needs to be changed and hence we have to impair some of the development costs there. So there's nothing spectacular about that. But I think, the number warranted an explanation nevertheless.

What you can see here is the divestment over time, very high levels on the blue bars. As you note, you can also see the gain on the – gain on sale here in the green line here. So approaching again around SEK 4 billion, which is, we have been there once before and now we are coming up there again. So very strong. And if you look at what we have down now during the year, you can take the capital gain, you put it in relation to the total divestments sum, you have development margin of around 25%. We are still keeping a very good level of the development margin here.

In terms of unrealized gains, which is what these bars represent, our assessment is that we have now around SEK 8.6 billion in unrealized gains in the CD portfolio. And you can see, if you compare the bar furthest to your right to the bar that represents the fourth quarter of 2017, you can actually see that the assessment of the underlying unrealized value in the portfolios is increasing despite the fact that we just realized SEK 4 billion of value from this portfolio over the last year. And that gives you sort of a feeling of the value creation potential that we have in this business. So it's a very strong performance here.

Leasing and percent of completion. Those of you who have followed us for sometime, know that we keep track of the relationship here between the occupancy rate and the percent of completion and the portfolio. And we track that very closely. These two represent sort of a risk mitigate in how they relate to each other. You can see right now that the percent of completion, which is the orange line here is coming down quite sharply. Of course, we have handed off properties that are completed, some very big ones and also started new properties.

So the average POC in the portfolio comes down a bit. And you can also see that leasing is coming up. We have made some very good leases in the latter part of the year and as already said, we have SEK 0.5 million leased square meters over the course of '18, that line is supposed to come up.

Infrastructure Development, it hasn't really happened a lot in terms of the financial performance in this business stream over 2018. A short recap is that we had some restructuring costs of around SEK 120 million in the first quarter, then we have had some gain on divestment in the second quarter and also an additional purchase payment that came in, in the third quarter. And that is more or less it from a P&L perspective here.

Going forward, as Anders already pointed out, we will not continue to report infrastructure development as an own business stream at Skanska. And the underlying reason for this is that, of course, we have stopped the project development activities in the business streams. We're not filling up with new projects. We have an asset management organization that is taking care of the assets that we already have under development and are tasked with insuring, securing and realizing the value of these properties. So this is a reason to why we're going to stop to report this as an ongoing business stream. We will report it as a part of the central stream at Skanska.

So you will still find the numbers but it won't be its own business stream here. And following that, I should also point out that we have an external target of return on capital employed in the project development business. And of course, when we make this shift we're also going to change the definition of that measure to exclude Infrastructure Development.

Project portfolio, we increased the net present value from the portfolio with around SEK 600 million from – over the course of 2018, around two-third of that is simple time value and around one-third of that is positive impact of the tax reform in the U.S. Apart from that, there's very little impact here on the portfolio. So the total effect we have on unrealized equities is around SEK 1.5 billion, SEK 1.4 billion in the ID portfolio as of December 31.

If we take everything here together, we have an operating income from the business of around SEK 5.7 billion for 2018. We have central costs amounting to a little bit above SEK 800 million. And you can also notice year the central costs are coming down. Those of you who recall that we had a restructuring provision that we took centrally of SEK 100 million in the first quarter. So we are coming down here in the central costs, which is a good thing.

Total operating income then for the group for the full year, SEK 4,827 million, not a lot of exciting things have happened in the net financial items. Texas, 19% for the full year. This represents more of a normal level of taxation for the group than the 11% we had last year, that was heavily influenced by the tax-exempt divestments from Infrastructure Development, and also from certain geographical areas in the Commercial Development business stream. So a more normal taxation this year.

Cash flow, if you look at the bars in the graph here, you can see that virtually all the cash flow that comes our way this year happened in the fourth quarter, very strong fourth quarter on the net level. Then, we had SEK 3.5 billion in terms of dividends that went out last spring. So cash flow for the year round SEK 4 billion for the group here.

Free working capital in construction continues to be at a very high level here. But I think, when we read this measure we need to be a little bit sort of cautious about it because in our construction portfolio today, as you are all aware, we have had a number of challenging projects. And even if we had taken the accounting loss, which we always do for these projects, all the cash flow that is associated with completing these projects, have not run out of Skanska yet. So that is part of this, and this is harbored in the loss provisions. So provisions for loss making contracts in the working capital.

And in addition to that, as we have said repeatedly, we do expect the volume of construction to come down going forward. And this is just a consequence of us being very prudent in the bid situation, and to be sort of very clear on what risks we are – we want to take in this business. So of course, when these two factors – when the portfolios is normalizing in terms of quality, as we win better work here, and also the volume is coming down, that will affect the net working capital position. It will affect the KPI, the greenline you see, and it will also have an effect of course on the nominal value of the free working capital that we have.

And those of you who know very well our financial model, with the financial synergies, also of course know that we have financed a lot of the build-up of the project development business stream over a number of years with the growth in the net working capital in construction here.

Look at investments, divestments. We have a capital employed in Residential Development of SEK 13.6 billion. It’s a bit higher than last year. If you compare it to the third quarter, it’s actually a bit lower. And I think there is nothing strange about that. This is reflected of course by the market situation we have now.

In commercial development, it also comes up year-over-year, it’s virtually in line, I would say, with the third quarter here. So in total, in Project Development, we had around SEK 42.5 billion tied up in capital employed there at the end of the year. So up around SEK 3.5 billion, you can say, from 2018.

Financial position of the group. The line on the graph you see behind me is operating net financial assets and liabilities. Total assets, SEK 116 billion, at the end of the year. We had net debt position, which was actually here in net cash position of SEK 3.2 billion. And ONFAL target measure was SEK 14 billion, equity to asset ratio 25% or a little bit above that.

And I think, this is a good time also to have a little bit of a look on the impact of IFRS 16, which of course ties in very nicely to the financial position of the company and how the balance sheet will look here. Total impact of IFRS 16 implementation on our asset base is plus SEK 7.3 billion, and we will increase the interest-bearing liabilities by SEK 7.5 billion, and then we have a negative impact of equity of around SEK 100 million, and we also have a decrease in the non-interest-bearing liabilities of SEK 100 million. So the total of that is SEK 7.3 billion here.

And of course, that impacts some of the key ratios here. Around SEK 3 billion of these SEK 7.3 billion is related to ground leases in commercial development. So we do expect this to have a sort of an impact on the return on capital employed in Commercial Development. And if we look at the impact here for 2018, this impact would be 0.5% for that. And also of course it impacts our equity-to-asset ratio since the asset base is increasing here.

Those of you who are interested in digging deeper into the effects of this, I have a read that is very worthwhile for you at the back end of the report. We have a very comprehensive, I'll say, overview of the impacts in some detail. We will also have a separate sheet on our external website. If you have nothing else to read, I recommend that dig into one.

To summarize a little bit, we have some changes that are coming up. We have already stated that we will report Infrastructure Development, or the PPP projects we've had in Infrastructure Development as a business stream. We will going forward, report centrally in the group. So that is a change. And the following change from that is that we will take away ID as a part of the return on capital employed in project development.

We will also make one more change to that measure, which is that those of you who have followed us for some time, know that we have used an adjusted return on capital employed measure for Commercial Development. We will now move into using a traditional return on capital employed measure instead in that. I think, that will make life perhaps a little bit easier for those that are reading our external reported figures and tries to reconcile this with their own models and so on.

And finally, IFRS 16 leasing, we just went through that. All of this will be explained in a little bit more detail and also we will give you the historical comparison figures for these changes at the Capital Markets Day, that will come up on March 21. And at that point in time, we will also dig a little bit deeper into the capital structure of the company to make sure that we sort of explain how we are looking at the capital structure of the group going forward, and the need for capital in the company.

So we will have a session on that at the Capital Markets Day.

Anders Danielsson

All right. Let's look into the market outlook. Starting with construction. Nothing has really changed here. We had a high activity in general, but we expect it to level out somewhat in some of our markets. If we go to the Nordics, it's a mixed picture when it comes to building. We have a slower residential construction, but we still see very high strong demand on the civil market in Sweden.

And the same for the civil market in Norway, very strong, stable in Finland. If you go to Europe, the Brexit impacts the UK continue to impact the nonresidential market. And the civil market is continuing to be stable. Now, we're getting closer to the Brexit on 29 of March, so we are carefully looking this and have mitigation plan in place to mitigate any outcome of the Brexit. But of course, the preferable solution is a deal Brexit. I think that a no-deal Brexit will be disruptive for the construction in industry in the UK.

Poland, stable market, not so – already we see trends that it is stabilizing, and that's healthy because it has been overheated for some time. And it's also, we are more confident since we have reduced the scope to being a city builder that we are more confident that we can handle that both in internally and externally with the subcontractors and so on.

Stable market in Czech Republic, but still a weaker civil market. And we also can see cost continue to cost escalation in Poland and Czech Republic. The U.S. continues to be a good market, fierce competition though.

Residential Development. Here we have changed the outlook now for the Nordic, especially the Swedish market. So we don't expect the market to recover in the near future. And we also have seen during the fourth quarter that the consumer confidence has decreased, and that is the main reason why we have lowered the outlook for the next 12 months.

Norway and Finland is more stable market going forward. Europe, Central Europe is slowing down, somewhat after a period of very strong growth, so now it's more leveling out on a – continue to be a good market.

Commercial development is continued to be strong in all our three main markets here, Nordics, Europe, U.S. Historically at high level, you should remember that, but we still see that our products or projects they are very attractive both from tenants, and also from our investors.

If we summarize this before we go into the Q&A here, so the main focus going forward is to continue to restoring profitability in the construction stream. We have a strong performance in Project Development, our intention is to increase the investments even further in the Project Development. We have the high market activity in many of our geographies and segment. And we believe that it's starting to leveling out.

And we are determined to building an even stronger Skanska to be able to seize opportunities that we believe will show up in the market.

So by that, I'll leave it to André to leave open up the Q&A.

Question-and-Answer Session

André Löfgren

Thank you, Anders and Magnus. Q&A time. And let's start with the audience year in Stockholm. So please raise your hands, state your name and company you work for, and then we do question one by one. So question and answer, question and answer. Thank you.

Niclas Hoglund

Niclas Hoglund, Nordea. Couple of questions if I may. Could you spend a little bit time on the discussion on the dividend. How discussion went within the board? And how your sort of, you talked about this as a good level going forward, what do you mean by that? Should we expect lower a payout ratio, or a lower underlying earnings? Could you talk a little bit more on the dividend?

Anders Danielsson

What I said is that our ambition, our target is to continue to increase the investments within the project development. And we're also determined to continue to keep our financially strong position to be able to take advantage and grab the opportunities that show up in the market.

And we can see that the proposed dividend level for this year it's supporting that strategy. And I will not give any forecast of future dividend level, but we have a long-term plan, how we will increase the investment within the Project Development.

Magnus Persson

Anders, I can add to that a bit. I mean, when we're onto that when we looked at the slide with the networking capital for the group here. It's pretty evident that we have had a fairly long period here of growing project development. We've done so at very attractive return levels, especially if we look at the development of commercial development, now with the gains we had this year. So it's a bit obvious that we would like to continue to grow this part. At the same time, this growth has been financed by the growth of the net working capital position in construction.

And given where we are now in construction, we're both saying that the specific number you seen the quarter is influenced by loss provisions in that, but overall, we are taking down the volume in construction. That is the sort of way forward, we look. So if we want to be able to continue to grow project development, and maintain a solid financial position we have, this is a very sort of natural step.

Niclas Hoglund

Okay, if I may continue, two other questions. Firstly on commercial development. You're sort of downgrading your outlook on the Swedish operation from very strong to strong. And talk about slightly, while not weak, but at least not as a strong market. Should we expect you to sort of take – the turnover in the portfolio, should that decrease? What's your thoughts on the sort of the pipeline for 2019 given the very high unrealized gains in the – well not in the balance sheet, but at least in the portfolio?

Anders Danielsson

I can answer that. As you can see, we have a lot of ongoing projects now, 53 ongoing projects and we have started a lot of projects during the last year. So I'm confident that we are continuing to create value for the shareholders. And what we can see in the market is still very high demand, and very high interest for our products and our projects both from tenants and investors, but what we can see that there are fewer investors that show up and are shortlisted when we divest projects. But it is still on a good level. And that is the reason why we reduced the outlook somewhat.

Niclas Hoglund

And the sort of turnover in the portfolio and the sort of outlook for 2019?

Anders Danielsson

We don't give any forecast for 2019.

Niclas Hoglund

And then moving on to construction. Maybe I think, it's worth talking a little bit more on the Swedish operations. It's – The margins are down from 5% to 4%, a touch below last year. Is this a worrying sign to you? And what's your thought of the Swedish operations?

Anders Danielsson

I can start and then, Magnus. No I’m not concerned at all on the Swedish operations. We have a strong performance, we have a very good healthy pipeline. We have a healthy backlog. So you shouldn’t look into each quarter. We have had overall a very high performance and a good margin, healthy margin on the Swedish business.

Tobias Kaj

Tobias Kaj from ABG. I would also like to start with a question regarding your dividend or proposal to reduce your dividend. If you look at the past five years, you’ve doubled your investments in your development streams, and still you kept a net cash position. And now you say, you aim to continue to increase your investments and therefore, you need to lower your dividend. Should we read that in that case that your other profitability will go down? Or your profitability in the development streams will come down significantly, given that the trend obviously should be much weaker compared to what we have seen in the past five years?

Magnus Persson

That is a very relevant question, but you should read this as we have done a very comprehensive review of this matter, and we have also have a plan on how we see project development growing going forward. And given this, this is the right decision for the company now and we will dive a little bit more into this when we have full space to do it at the Capital Markets Day. But the underlining reasons are exactly the ones that we have said now. Because in order to continue to grow this, we cannot, we don’t want to put ourselves in a situation where we end up with a weaker balance sheet. We want to maintain the strength we have now. Therefore, they need to go together.

Tobias Kaj

I’m not really sure if it’s official financial targets, but in the past at least, you talked about that you’re able to increase your investments as long as your kind of adjusted net cash position is positive, adjusted for potential liabilities and for debts and coops. Is that no longer a relevant target? Do you want that to be at much higher level compared to above zero, which you talked about in the past?

Magnus Persson

You mean the ONFAL target we have, which is then at SEK 14 billion and what we have said external is that the investment capacity would be go down to zero. The answer would be the same as in the last question, we have looked at this from many angles and this is sort of the right step to take now given what we see ahead of us. Then of course, this SEK 14 billion, they are now in one specific quarter at the end of the year. If you invest in something, you need to carry the strength over every quarter over years as well.

Tobias Kaj

Okay, and then I have a couple of questions regarding your development streams. Let’s start with commercial development. You have continued to increase capital employed in that unit, should we expect that profits also can continue to increase? Or should we expect a significantly lower return on capital employed going forward?

Magnus Persson

In commercial development you’re referring to? We don’t give profitability forecast from here, but I mean, I think you should assume a decent level of profitability in that stream going forward as well.

Anders Danielsson

I mean, we still have our target and that’s valid for the future as well, our 10% return on capital employed.

Tobias Kaj

And in Residential Development, in my opinion, the starts and the units sold were higher than I expected. And we saw a very strong positive effect on revenues, but especially, in the Nordics outside of Sweden, the margin was quite low in the fourth quarter. Is that an indication that you are now willing to start projects of margins way below the target of 10%?

Anders Danielsson

No. No, I wouldn’t say so. Our 10%/10% target, our 10% operating margin and 10% return on capital employed is valid in all markets. So, I think again, you shouldn’t look at one individual quarter on the Residential Development. But over time, we are on a healthy level. And I’m very satisfied that we have managed to remix, refocus the mix of the portfolio especially in Sweden to have a more affordable homes and also rental homes.

Tobias Kaj

And one final question. If you would adjust your selling rates and exclude your rentals, would the selling rates would be higher or lower then?

Magnus Persson

Would it be higher or lower? It would be...

Anders Danielsson

It would be higher. It would be higher, because as Magnus just explained, half of the unsold completed in Sweden is rental project, fully leased, but not divested.

Tobias Kaj

Thank you.

Stefan Andersson

Stefan from SEB. Going back to your comment about looking at opportunities in the market, maybe if you could expand a little bit on what you mean by opportunities? Is it finding land primarily? Or would you also consider any acquisitions or would it be anything else that you would mean by that?

Anders Danielsson

The main opportunities that I refer to is to increase investment in project development, but that is mainly land. That’s the key for increasing successfully, to grab the opportunity that shows up in the market. So that’s the main focus.

Stefan Andersson

And then when you said fewer participants when you were announcing a sale in CD, is it to the point that it affects the prices you think and yields or so?

Anders Danielsson

We haven’t seen that yet. So, we haven’t – the yield compression that we’ve seen in the last few years, it’s still on that level. So we haven’t seen any tendency for increased yields or cap rates in U.S.

Stefan Andersson

And the final question there.

Magnus Persson

Stefan, if I could just add to that. I mean as long as you have a good product and you have it sort of in the right locations, this is – we don’t see any impact, nor the sort of impact in places where – with lower quality so to speak. I think that is where we noticed it earlier.

Stefan Andersson

And then a final question there when we look at the margin that you achieved, is there something we should be aware of when it comes to the land that you have been utilizing? Because I imagine that you’ve been buying land on good prices, and prices have been going up. So you could face headwind, and it’s of course, difficult for us to always see that. Is there something we should be aware as we go into 2019 in that matter?

A – Anders Danielsson

Are you referring to Residential Development?

Stefan Andersson

No, I was referring to commercial.

Anders Danielsson

Commercial development. We have a good – we have a good pipeline. Some, I'm not concerned over that. I believe, we can continue to create value. We have a good – we have ongoing projects, and we have good mix also when it comes to how much we have leased compared to the completion rate.

André Löfgren

All right, any more questions from the audience? No. Alright, then let's open up the questions over the phone.

Operator

[Operator Instructions]. So the first question is of the line of Frederick Cyon at Carnegie, please go ahead your line is now open.

Frederick Cyon

Good morning. One more question on the dividend. You have an ONFAL of SEK 14 billion at the year-end and the dividend that represents about SEK 1 billion, that seems to me that you have a very strong financial position even if you were not to lower your dividends. Is this mainly related to the working capital forecast that you expect working capital to sales to decline? Or is it really that you think that the financial positions need to strengthen up?

Anders Danielsson

I think I heard your question correctly. I think you're asking, is the working capital sort of the main reason to the dividend proposal here given that we have an ONFAL of SEK 14 billion. And no, the answer is essentially the same as what you heard before. First of all, the ONFAL position, this is one isolated quarter at the end of the year. We need to bear that in mind.

Second, yes, we do think that if the volumes in construction comes down this will obviously have an impact on the net working capital and hence, there is a possibility to support the further growth in project development with that. So those are the reasons.

Frederick Cyon

And then two questions on the – one question related to the cash flow development in 2019. First of all, you have announced a number of divestments that will have a positive impact on cash flow obviously. Can you elaborate on that effect during 2019? And also with regards to the free working capital to sales, it's very high as you alluded to earlier. What level should we expect two years from now?

Magnus Persson

I'll do my best to answer your questions. I think I got the first one. I think you're alluding to the SEK 5.5 billion income and cash flow that we have contracted already, but we haven't seen yet in commercial development. Is that correct?

Frederick Cyon

That's right.

Magnus Persson

And this is completely true. I mean, we have, as long as we complete the properties as we have promised and can hand them over, we are looking at an inflow of SEK 5.5 billion over the coming two years.

Frederick Cyon

And then my final question is relating to the U.S. construction division. The two problem projects that you took one-off charges in Q3, are they now running at 0% margin in the fourth quarter?

Anders Danielsson

Yes, we have that revenue it's on the same level as we talked about in the third quarter. So it hasn't changed.

Frederick Cyon

Okay, thank you.

Operator

We are in now over the line of Miguel Borrego at UBS Investment Bank, please go ahead your line is now open.

Miguel Borrego

Hi, good morning everyone. I have got a couple of questions, if I may. I just wanted to understand a little bit this dividend cut. Can you remind us what your dividend policy is in terms of earnings per share? Is it also the reason for the cuts for this year? And just following up on the previous questions, are you still expecting to go or trend over to a cash neutral position over the next one, two years? If you can elaborate on that, please.

Magnus Persson

It’s a little bit tricky to hear you from over here but I’ll do my best. In terms of the dividend policy, we have a dividend policy that says that we can distribute between 40 to 70% of the segment EPS. And the second part of your question, I didn’t catch that, did you Anders?

Anders Danielsson

Yes, it was more about forecasting our cash position going forward.

Magnus Persson

Okay, well then that’s a fairly easy answer. We do not provide forecasts on that.

Miguel Borrego

Okay, and then my second question is on Commercial. Can you comment on the margin for the disposals in Q4? In the Nordics, your margin was 12%, which is significantly lower than last few quarters. In the Europe, it was 17%. Were these very specific projects with lower margin? Or is that related to the impairment that you mentioned before? And how does that relate to your comments being a bit more cautious on the outlook for commercial development?

Magnus Persson

I can say that the development margin in the fourth quarter, we had a number of divestments there. But some of the units that we divested, we sold very early on in construction. And that means that in order to ensure that we can deliver on this, we are keeping provisions internally to handle the risks that are associated with actually building and completing the property.

So the profit take-out from some of these projects reflect the remaining risks of course. So that is diluting the margin in comparison to when we sell a project that is completed already because then you have already passed the majority of the development and construction risks in that.

Miguel Borrego

Okay, and then the last question on Residential. I just wanted to make sure, the Q4 margin of 9% was clean. There was no reversal of provisions or land sales in Q4. And now that you’re targeting more affordable end of the market, can we take this 9% exit margin as the new normalized margin? Or should this recover a little bit? Thank you.

Anders Danielsson

Okay. The fourth quarter when it comes to Residential Development, it’s not including any land divestment or release of provisions. So it’s pretty clean. And we – I would expect, we have the same target on the lower cost – more affordable homes, and Bokloka will have the same target on the residential development. And as we said, the vast majority in the fourth quarter was actually from those segments.

Miguel Borrego

Thank you very much.

Operator

We are now over to the line of Albin Sandberg, Kepler Cheuvreux.

Albin Sandberg

I have two questions. The first one relates on the IFRS 16, I appreciate the bridge you’re providing there. I just wonder also when you look at it from an ONFAL perspective, do you think that will be an adjusted line as you do with the co-ops and the pension liability? And also whether the IFRS 16 implementation had anything to do with the dividend cut also?

Magnus Persson

To answer your first question, Alban, is that we will return to that matter at the capital markets day. And the answer to the second question is no.

Albin Sandberg

Okay, great. And then the second question is on the – you referred to the residential margins and the target you have there is still valid? I wonder if we look at the construction EBIT target margin now with the two years left of the current strategy period, and what we know about that volumes and so on. Do you still view the 3.5% target as relevant and reachable through the – this 2020 period?

Anders Danielsson

I still believe that it’s possible to reach the 3.5% on a more long term. I don’t think it is possible within the 2020 plan we have. And that’s because we have debt revenue, especially in the U.S. operations that will dilute the margin, up until 2021.

Albin Sandberg

Okay. Thank you very much.

Operator

Our final question from the phones is over the line of Marcin Wojtal of Bank of America Merrill Lynch. Please go ahead. Your line is now open.

Marcin Wojtal

Good morning, everyone. So my first question is on construction revenue from 2019. Obviously, you talked about a possible reduction. I don’t know if you perhaps at once are able to quantify it? I mean your book-to-build was 96%. I don’t know if that’s a good proxy for Construction Division’s revenue in 2019?

Anders Danielsson

If I had it right here, so 96% book-to-build is on a healthy level, on a good level, I would say, and corresponds to the strategic action we have taken last year. When it comes to the margin, we have the same position as we had last quarter, about 800 in 2019 – SEK 800 million is that revenue for next year for 2019.

Marcin Wojtal

Okay. And sorry, one more, if you can hear me well, hopefully you can. So just going back on our write-downs in construction, which I think it’s about SEK 3 billion for the last two years in total, so how much of the SEK 3 billion has already come out in the cash flow statement? And how much we will see still coming out in the cash flows in 2019 and onwards?

Anders Danielsson

Can you repeat the question?

Magnus Persson

Yes, please do.

André Löfgren

He’s asking how much have been realized through cash flow when it comes to the write downs?

Magnus Persson

I don’t have the specific number. But we have of course – some of these projects are quite long as we have indicated before. And therefore, there is also quite a lot of work left to be done on those projects. So there is a sizable chunk of cash that is associated with completing these projects.

Marcin Wojtal

All right, thank you.

Operator

And I’ll pass it back to you for any final questions in the room or to closing comments.

André Löfgren

All right, thank you very much. Thank you very much guys and thank you very much for your attention, audience and listeners. And I just want to remind you that we have the Capital Markets Day coming up, March 21, and I highly recommend that event if you want to learn more about Skanska and asset allocations and capital structure, and our strategy going forward. So please sign up. Thank you.