Skanska AB (publ) (SKSBF) Q2 2023 Earnings Call Transcript

Skanska AB (publ) (OTCPK:SKSBF) Q2 2023 Earnings Call July 21, 2023 4:00 AM ET

Company Participants

Antonia Junelind - Senior Vice President, Investor Relations

Anders Danielsson - President and Chief Executive Officer

Magnus Persson - Executive Vice President and Chief Financial Officer

Conference Call Participants

Graham Hunt - Jefferies

Markus Henriksson - ABG Sundal Collier

Arnaud Lehrmann - Bank of America

Gregor Kuglitsch - UBS

Antonia Junelind

Good morning, and welcome to the presentation of Skanska’s Second Quarter Report for 2023.

I'm Antonia Junelind, Senior Vice President, Investor Relations. Shortly, we will listen to a business, market and financial update from our CEO, Anders Danielsson, and our CFO, Magnus Persson.

Having gone through the Q2 performance and results, we will then open up for questions. Today, you can ask your questions using either the telephone conference number, then just please follow the instructions by the operator. Or you can send us your question using the text field on the webcast page. Should there be a lot of questions we will have ever prioritized as usual the people calling in. But with that, let's start with Q2 update.

I will now hand over to you Anders.

Anders Danielsson

Thank you, Antonia. And, I want you to look at the picture here to the right. It’s a one of the completed projects on the West Coast in Norway, [Nudebeian] (ph) very successful and beautiful projects.

Let's start with the highlights of the second quarter. We have a record high order backlog in the quarter. If you go comment on the streams, Construction is delivering strong results. On the project development, both on Residential Development and Commercial Property Development, we have low sales volume due to the market condition. We'll go into that later on. On the other hand, on the Commercial Property Development, we have a solid leasing in the quarter, which of course creating value for the future. And in the investment properties, we have no acquisition in the second quarter.

Operating margin in Construction, 3.4% same level as last year, in the isolated quarter. Return on capital employed and Project Development overall, at low 2.3% a rolling 12, that's of course due to the low volume. Return on capital employed in Investment Properties, 5.5% on a rolling 12-month basis, slightly below our target of 6%. Return on equity down to 11.1% on a rolling 12-months. We continue to have a strong financial position and we have managed to reduce our carbon emission by 57% since the base year 2015.

I will move on to the Construction stream. There we have, revenue is pretty much flat. We have record high order bookings, more than SEK 63 billion in the quarter. So, we're ending up with a book-to-build ratio of 115% on a rolling 12. So, the order backlog is on record high level SEK 250 billion, and we have operating income in-line with last year in SEK and we have operating margin again of 3.4%. So, the record strong order intake is general, but also boosted by large civil contracts in Norway and in the USA. Order backlog is really strong. And on the rolling 12-months operating margin, we're ending up at 3.8%, so well above our long-term group target about 3.5%. So, the strong performance is continuing in Construction, which is really encouraging and important.

Moving on to Residential Development. The revenue here is down to SEK 1.6 billion. We also saw that the number of homes sold is also down with around 50% compared to last year, the same period. The homes started, is also down accordingly. Operating income is SEK 49 million and the operating margin is 2.9%. And, we have a low return on capital employed due to the low volume 0.2%. So, the sales volume is slightly up but remain low due to the market activity. The measures we are taking in BoKlok to adapt to the market situation also impacting the result in the quarter with SEK 128 million.

I’ll move on to Commercial Property Developments, the operating income is minus SEK 15 million we’ve gain on sale of SEK 171 million, so quite few transactions in the quarter. We have 33 ongoing projects, that corresponds to almost SEK 33 billion upon completion in total investments. And we have two projects pre-sold and started in Q2. The positive thing in Commercial Property Development is the leasing activity during the quarter. We have leased 78,000 square meters in the second quarter compared to 47,000 square meters last year, and that of course creates value for the future.

Transaction volume remains low overall in the market and we can see that the investors they are hesitant. Investment Properties, no transaction in the second quarter. Here, as you know, we're targeting high quality, sustainable office portfolio building up to between SEK 12 billion to SEK 18 billion over time to generate the stable cash flow. And we can see, we have a stable operational performance. We also have got the interest from potential tenants for the very few remaining vacant premises.

If I go back to the Construction stream, and here you can see the order backlog and the development over time for last few years. So, here you can see clearly that we are on the record high order backlog. You can also see that book-to-build ratio is up in the quarter, the same for order bookings, of course, and the revenue is flat. And, if we're going to look at the order bookings in the different geographies, strong order intake in the Nordics, large civil projects in Norway but overall healthy backlog here, slightly lower in the book-to-build in Europe which is due to the market conditions. So I'm not surprised over that, and very strong order intake in U.S. So overall, we have 18 months of production, which is on a high level and again book-to-build ratio of 115%.

With that, I hand over to Magnus.

Magnus Persson

Thank you, Anders. And we're going to the income statement for Construction, that's where we usually start. And also this time, as already been said, we grow revenues a couple of percent if you take out the FX effect from that, we are down a couple of percent, so roughly flat in terms of development there.

Gross margin goes up a little bit up to 7.5%. So, very much in-line with the comparable quarter. Same thing with S&A, ended the quarter then with an operating margin of 3.4%. So in a way, very stable performance. And we have, as we have said, I think many quarters by now, a very strong portfolio in Construction that we are working out though, which creates the possibility to have this stable performance. And so of course, the strong bookings that you can see is really sort of comfortable to have us good volume for the future here, as we know that we are still keeping to the strict bidding requirements, and the risk controls we have in the bidding.

If we look at the different geographies that we have, we have a stable delivery in all geographies. You can see Swedish margin is coming down a bit from 3.3% to 3.0% which characterizes a very normal sort of intra-quarter type of deviation in terms of performance. Europe 2.6%, a little bit lower than, and underlying to that, you can say that we had a really good second quarter last year in the center European operations, which is more normal this year. And in the U.K., it's a bit more sluggish this quarter actually. We've had sort of some issues with some commercial projects in London here that contributes to a bit weaker margin. The U.S. 3.5% very strong performance. So overall, all geographies are performing really well.

Going to Residential Development, here we have a continued weak market. Revenues were down about 45% down to SEK 1.6 billion, an isolated quarter. Sales remain slow. I mean, we still have the customer uncertainty that is lingering around. It's a bit unclear how the central banks will continue to act, and how inflation will develop, of course. And then we can see that banks are having tighter lending requirements in terms of issuing mortgages to clients, especially in Sweden, Finland and Norway, that is impacting sales [force here] (ph).

We had an EBIT of SEK 49 million, which obviously is not a stellar result. The main impact there is the volume impact, I can say. We've had a one-off cost in the U.K. affordable part of the BoKlok operation. If we take that out, you can say that the actual project performance is quite stable in the operation still, but as we said, we are hurt here by the low volumes where the volume really makes us unable to cover the organization, the costs that we have here at the time.

Looking at different geographies. Nordics are clearly performing sort of at the worst. And in the European part, we -- it's quite clear here that the central European part of the Residential Development operation is performing really well actually. It's perhaps a bit surprising, but that's the way it is. And then as I said in the U.K. The BoKlok operations have had to take one-off cost in the quarter, that have been recognized, and while are units because the volume is what it is right now when we foresee a continued weak Residential Development market there for the coming 12 months, while parts of the Residential Development business are undertaking cost adjustment activities here to adjust for a future sort of expected volumes in the business.

If we look at homes started and sold, we sold 340 units, down 50% approximately from last year. We’ve started 240 units done, and the situation is by and large the same as in the first quarter here. We have a lot of units to sell. So, we don't need to start at the moment, and it's also harder today to find an underwrite strong and sort of credible business cases due to the market and the difficulty in getting the right event horizon in terms of future sales prices. That's more of an issue today than the cost side is, let's say, which is stabilizing.

If we look at the homes in production, we had 6,400 units under production, slightly lower than the last quarter as you can see in the bar chart. Of this, we had sold end of the second quarter 58%, somewhat up from last quarter then, which was at 57%. This means that 2,700 units was unsold and potential to be sold and out into the future. In addition to this, we had 306 units that were unsold but completed up from 210 units done. And, as we have said also here many times this is not an issue as long as we can see that these units are churning and not getting old in our balance sheet. We are tracking this closely and we don't have an issue with this. And we do expect that this number will increase the coming quarters because the sales pace is slower than the pace at which we are completing units now. So that's the way it will look.

Move over to Commercial Property Development, a very uneventful second quarter in terms of the P&L. We’ve recognized two divestments. During the isolated quarter, both were smaller public buildings in the southern parts of Sweden, and in total that would book a loss over SEK 15 million, also in the isolated quarter.

If we look at unrealized and realized gains, we had unrealized gains, which is represented by the bars on the slide you see here on the screen of SEK 7.4 billion at the end of the quarter. So, slight increase in value, mainly due to current effects and also that rents are developing in a positive way here. We have the completion profile of the Commercial Property Development portfolio and we now have SEK 10 billion invested capital in completed unsold projects. It's in total 20 properties that are completed and not sold. These are leased on the average turn to 73%, up slightly from the first quarter, which was at 71%, so it's developing the right direction.

We have for quite a few quarters said that we are not in the business or not in a situation where we have to put properties to the market that are not leased well enough, because it will inevitably force us into discussions around price with buyers. Where we are now, we have several properties that are leased in an adequate level to put them in the markets. So, we are in several transaction processes and working on this. But it is very clear that, it is still a very hesitant transaction market here. So, we have leads we are working on it, but it just takes time to get the deals to be signed.

If you look out into the future then you see the dark blue bars, we will complete properties for approximately another SEK 6 billion, during the third quarter according to plan and then another SEK 3.5 billion in the fourth quarter according to plan. And the green dots represents as we do every quarter, I show this slide, the average leasing rates for the properties that are to be completed in the respective quarters. So, the shape of the curve or the green dots are just fine, but we would of course ideally would have liked to parallel shift it upwards a bit to have a bit higher leasing overall, but that's where we are now.

If you look at leasing, we had a completion rate in the portfolio of 58% at the end of the quarter, and then a leasing rate of 43% and the leasing market continues to improve. As Anders said, we have leased 78,000 square meters in the isolated quarter. This is actually by all comparisons a very strong quarter in terms of leasing. 205,000 square meters in a rolling 12-months basis and you can see visual and now on the chart that the bars are starting to move in a trend in a better direction than what we have seen for quite some time.

The shift in the leasing market is most clear in Central Europe. We can also see improvements in the Nordics characterized by small leases and -- but they are moving here. There's a still a lot of requests from potential tenants in terms of flexibility arrangements in the lease agreement, and that can be resizing the size of the lease and various options in the lease agreements to give them flexibility to account for their own uncertainty about their commercial future, so to speak and we are working very productively in those negotiations to meet these requests and demands.

On a very positive notice that rents are developing in the right direction, of course part of this is CPI adjustments that are built into the agreements but also in terms of new leases, we can see it's moving in the right way. So, that is very positive for the value creation of the Commercial Property business for us.

If you look at Investment Properties, as already been said, we didn't make any transactions in the quarter. We have increased the average portfolio yield there by 15 basis points taking down or affecting the property value with SEK 130 million in a negative way. This is by and large compensated by higher rents in the portfolio. So, the net effect you can see in the P&L is a mere SEK 25 million negative way then, while properties are continuing to perform well and according to expectations.

Looking at the group, we had an operating income then from all the business streams of SEK 1.4 billion. Central costs stands out a little bit as being low, SEK 73 million compared to the SEK 155 million in the comparable quarter. In this, we have a positive one-off effect from the legacy businesses that we have and cater for at the central level here. So, this should not be accounted for out into the future, but the underlying costs here, are essentially stable in the quarter.

Net financial is SEK 133 million locked up then from the comparable quarter, and the main difference here is that interest rates have gone up, which also means that when we capitalize costs in our Product Development business, those capitalizations become higher. That's the main impact we have here. And then taxes, we taxed out at a decent tax rate of 16% quite a lot lower than at [21%] (ph) last year, due to business mix but also due to the possibility to use past tax losses in some of our legacy operations.

Cash flow, we had a negative cash flow in the quarter minus SEK 5 billion slightly down from the comparable quarter of SEK 4.8 billion. So, you can see the two items in here. Dividend was slightly lower this year than last year, paid out in April this year. And, then operating cash flow from operations of SEK 1.8 billion are the major shift to the comparable quarter is that we had lower cash flow and more negative cash flow from working capital this quarter than we had in the comparable quarter. I'll come back to that in another slide or two.

And as you know, and we have pointed out many times, we are having today a very high investment pace into the Product Development business, when we are working on and successfully completing the ongoing projects that we have started, I would say, the last two years or so.

Looking at the working capital, you can see the bars here represent the nominal value as we see them in the balance sheet. And there's essentially no change in the first quarter and we remain at around 18% of revenue in terms of negative working capital. So, position has changed a little bit and if you back up a full year as you can see since the second quarter and third quarter last year where it seems to be sort of topping out this level. But any changes to this balance will be very gradual and go very slow, as it is tied to the several thousands of projects that we have ongoing.

Looking at investments then, I alluded to this couple of slides back. The dark blue bars represent investments we make in each isolated quarter, and you can see that we are now averaging a quarterly investment pace around SEK 6 billion on the rolling 12-months basis, the net investments are quite significant at minus SEK 7.5 billion and that's represented by the green line in the chart there. And the reason to that is sort of the sluggish transaction market, where it takes more time today to monetize on the previous investments we have done by selling the Project Development units there. Total capital employed in RD, CD and IP end of the second quarter was close to SEK 66 billion.

If we look at funding, we continue to have a very robust financial position and low levels of external funding is needed, and we also have a significant amount of available liquidity should this be needed. During the quarter, we also secured actually two new credit facilities and took up a small unit loan, nominated in euros and dollars here, to further bolster the sort of liquid capacity of the company. But, very stable position here.

Financial position, we closed the quarter with SEK 57 billion in equity and adjusted net debt of SEK 4.4 billion in cash [then] (ph). So there's a lot of staying power in this balance sheet to make sure that we don't have to be sort of forced out on the racetrack and selling properties too early here, but we do have the staying power we need to manage the transition to a better transaction market in a very responsible way for our shareholders.

Anders, I'll hand back to you.

Anders Danielsson

Yes. So, I will go into the market outlook. Starting with Construction, and here you can see a mixed picture. We have a strong market outlook in the U.S. and also stable market in the civil -- most of the civil operation in the Europe.

Swedish building market is expected to weaken, if you look at the coming 12 months. And we have the active sector, civil infrastructure and social infrastructure is strong in the U.S. We can see a lot of large pipeline when it comes to civil infrastructure, but also in the other segment where we are operating building schools, university, hospitals, airports and so on. So that's positive. Material availability has improved. So we say, we can see less bottlenecks and we can also see that material prices have leveled out in the last few quarters.

Residential Development, low activity in the housing market will remain in the Nordics. We can see more stable outlook in Europe, driven by Central Europe, the increase in sales we have seen there. So the cost of living pressure including interest rates increases cost of living, that's remains and also impacting the market in a negative way, but the underlying need for homes is there definitely in the market where we are operating.

Commercial Property Development, low transaction volumes and hesitant investor market remains in our outlook, but we can see that the leasing market is gradually improving which is great in value. Investment Property is stable. We can see a polarization in both the tenant market and the investor market. So, we are confident that we have high quality, high sustainability standards in the good places. So, there's definitely stronger demand for that.

So, to summarize this presentation, we have a group performance in the second quarter with a strong delivery from Construction, Residential Development, low sales volume same as Commercial Property Development encouraging though with a solid leasing in the quarter. And the investment properties we haven't seen any acquisition in the second quarter. Record strong order intake and order backlog for the Construction stream and we continue to have a robust financial position.

So, the strategic direction remains. We will continue to focus on strong profitability and grow in a responsible way, the Construction stream. And we're definitely aiming for being a leading residential developer in the market where we operate. And we also are increasing our Commercial Property Development in-line with the markets allows us to do so. And we are determined to continue to build up the Investment Property portfolio as planned.

With that, I hand over to Antonia to start the Q&A.

Antonia Junelind

Yes. Thank you, Anders. So now we will open up for your questions. And as mentioned before, you can either use the conference phone number and call us and ask your question, or you can send us a text using the text field on the webcast page. If we have a lot of questions, we will have over prioritized people calling in.

So, with that, I will turn to the operator and ask you to please introduce the first caller.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Graham Hunt from Jefferies. Please go ahead.

Graham Hunt

Thanks very much. Just two questions from me. First one is on the BoKlok business. You recorded the SEK 128 million loss this quarter improvement from the SEK 331 million last quarter. Could you just -- is it possible to give any color on what drove that improvement? And then maybe just on your expectations for the rest of the year, are you expecting that business to be profitable again by 2024? Or could it be later than now? Or are you thinking earlier than that.

And then second question on commercial property. I just wondered if you could give a bit more color on your interest in increasing exposure to the life sciences. Properties you've made an investment in Boston this quarter. How much of the portfolio are these projects today? And where would you like it to get to? And historically, I think you've primarily developed office space, particularly in the U.S. How do you feel that compares to the skill set required for these life sciences projects. Is it similar or do you have to bring in new skills? Thanks.

Anders Danielsson

Okay. Thank you, Graham, for a question. I will start with BoKlok question. You're right, we're taking a [charge here] (ph) SEK 128 million in the quarter. And that is driven by volume, mainly volume, low volume and we are working here in the segment with more low cost affordable housing. And that is the segment that has been most hit by the increased cost of living, increased interest rates. So, it's definitely impacting that segment more than other segments. But we also have seen cost increases in some of the very few projects in the UK for BoKlok that is also impacting the quarter. And of course, we don't give any forecast how long it will take. I can say that we have a plan and we're following the plan and we are taking measures in all markets and in [indiscernible] reduce cost and make sure that we're starting new fresh projects in a profitable way. But the market is not helping out.

The commercial development, Magnus?

Magnus Persson

Hi, Graham, Magnus here. In terms of the CD question to life sciences, you're absolutely correct. Traditionally, we have developed mainly offices. We have the last few years started to develop a bit more multifamily residential as well. And we've always had a little bit of the life sciences over the last few years, but we are looking more and more at that sector. We have secured some very interesting pieces of land in very good sort of the right places, especially in Boston to cater for this market.

And we see there's a strong demand in the market and it is sort of outlook also in that space that seems very attractive for us to position ourselves in for a long run there. So we are doing some of it today, but we -- our intentions is to explore this market segment more out in the future.

In terms of skill sets, I say we have all the development skill sets to go after this. Of course, there can be certain specialty type contractors in terms of design when it comes to installations in such buildings that differs a little bit from a traditional office building but that is more on in terms of what subs that we are buying in there. I’ll stop there.

Graham Hunt

That's very helpful.

Operator

The next question comes from the line of Markus Henriksson from ABG. Please go ahead.

Markus Henriksson

Thank you very much. Good morning, everyone. Three questions from me. First off, looking at rest of Europe, RD, you have started zero it's now two quarters in a row. This is also the market where you manage to sell. You are at 65% solely production and the outlook was also raised somewhat here? How should we view the outlook for housing starts going forward? Should we just look at the market outlook? Or could you help us a bit on the potential bottlenecks on land, etcetera?

Magnus Persson

Hi Markus. This is Magnus. I take your first question and then you will have to come back with the second and third. In terms of order Europe, it's correct. We have a very good market down there at the moment. It's been strong for quite some time and it is not followed the sort of development in the Nordics in terms of demand trailing off. But the demand is still there, we get good prices.

Now as you know, we haven't started anything there in the first or second quarter, but this is always a mix of what you have available to start and when you want to do it, right. So, we don't have any ambition to not start things there. We have things to sell but we need, of course, to balance our exposure against the need to increase our inventory to sell from so to speak. So our ambition is continue to ensure that we have a good inventory to sell from in that market.

Markus Henriksson

Thank you. And then could you also describe the difference in consumer behaviour between Poland that you highlighted in the Nordics in RD and also if you get anything signals of distress sellers in your markets and if so where? And do you see more opportunities in RD or CD?

Magnus Persson

No. I will go after this one as well. In terms of the difference in consumer behaviour, I can't say we see any major difference in consumer behaviour except that it's a lot easier – it’s much bigger demand to actually sign sort of the sales agreements in Europe and the price development there is something completely different. So, it's very clear that consumers in Poland is stronger here than Czech Republic, but the consumers here, they have a financial situation that makes it possible for them to buy and banks are not as restrictive there as they are here also for whatever reason that is done.

Then other things you can point out is that in the Nordics, when you develop and sell residential units, you fit them out to 100% I mean, you sell them with the bathroom, with the kitchen and so on. The traditional Residential Development in Northern and Central Europe is not to do with that, but you sell either Shell or Core, which means essentially that this is shifting a little bit, but it's still a very dominant part of it. But apart from that, there's no major difference I would say in terms of consumer behaviour.

And then you had a follow-up question on CD, but I'm sorry, can you repeat that, please?

Markus Henriksson

Yes, if you see anything as of distressed sellers in your markets and if so where in your markets and if you see any opportunities in RD or CD where they pop up if any?

Magnus Persson

Yes, that's a good question. I think we don't see yet any strong signals of like pure distressed sellers. We see some structures of course that are in need to sell, but there's a difference to want to sell and need to sell versus actually selling in distress, which means that you need to secure cash flow very immediately or something very bad will happen. We don't really see that acceptance some very few select cases. But of course, there is sort of more available on the sell side then it would have been like two years back. Yes.

Markus Henriksson

Thank you. Those were my questions.

Operator

The next question comes from Arnaud Lehrmann from Bank of America. Please go ahead.

Arnaud Lehrmann

Thank you very much. I have three questions, if I may. Starting with Construction, as you mentioned you had very large orders in the second quarter in particular in the U.S. and Norway. Could you maybe elaborate on the margin outlook for these large orders. I appreciate that's not easy to forecast, but how do you balance this step up in others with your, let's say, traditionally selective strategy. That's my first question.

My second question is just coming back on Residential Development. More generally, we see a bit of a sequential improvement in sales. I think in the second quarter compared to the first quarter. Do you think we have, let's say, turned the corner or seen the low point in residential sales? And things could be improving a little bit from here. Is Q2 the new normal heading into the third quarter? That's my second question.

And lastly on commercial development, if I remember well in the first quarter you did markdown your portfolio by 4%. I don't believe you have done any markdown this quarter. Is it because you are more confident that you have the right variation in the books or the right gains coming up?

And related to that you mentioned in your introduction that you’re many leads for potential transaction. What are the sticking points? Is it valuation? Is it issues with the financing for the buyer or anything else? Thank you.

Anders Danielsson

Okay. Thank you. I will start with Construction order intake as you noted, we have seen a large orders in the U.S. -- civil projects in the U.S. and Norway. But we overall have a high order intake of over SEK 60 billion in the quarter. And of course, I will not comment margin on single projects, but we're definitely sticking. We have the discipline to be selective in the market. We're going for a project where we can see that we have a competitive advantage. We're going for project in the core geographies. We're going for project where we can see that we have the team in place. The right to execute the project in a profitable way. And I don't see any other target for these products that were won during this quarter. So, Magnus if you can continue with the RD and CD.

Magnus Persson

We'll do that. Your question in RD is how we sort of turned past the bottom yet of the RD development market. That's a very difficult question to answer because each market is a little bit different in timing here. And we can see some very, very early signs of a slight improvement in Sweden, for instance, on the second end market and also in price development. Say Norway and Finland is a bit after in terms of this. And of course, then in Central Europe, we have a very good market still. So, it varies a lot. It's hard to say, but we think that we are not through the period of a weaker market in the sense that we can now expect these transaction volumes going out into the future. We think that this market will bounce back to some extent. But that it will take some time before we understand what is actually the true underlying demand for new developments here. So that we believe it would come up. It would take some time then.

In terms of question for commercial development is true. In the first quarter, we adjusted communicated assessed market value for the on-going development projects that are not completed yet in the commercial development portfolio. And here it's important to be a little bit precise that for those projects, we are not keeping to their market value in our balance sheet. This is only a communication we make.

What do we think these properties will be worth once they are completed and sold out into the future, which means that this is our assessment of what will the rent levels be, what will the transaction yields be say 1.5 years to 3 years out in time. And that is the assessment that we changed in the first quarter. And of course, since this is a very forward looking thing, it's associated with fairly large uncertainties.

And we made a step change to that. And in the first quarter, and we have not made any changes to communicated assessed market values at the time of transaction for the on-going produce in this quarter. We have only made changes to the current market values of our investment properties, which follows then a different valuation logic obviously. I hope that was an answer to your question.

Arnaud Lehrmann

Yes. I just had a follow-up. Thank you very much. I just had a follow-up on the potential upcoming transactions you said you had many leads and I was after the sticking points, is it discussion around the valuation or was it issues with the financing for the buyer?

Magnus Persson

It varies across the different discussions. Obviously, it's hard to find one common theme, but of course, the status of the financial markets is part of that in the background for the buyers then in terms of how that translates into our discussions, it varies definitely. I think in many cases, it's a bit uncertainty and it's a bit of a waiting game involved here.

Arnaud Lehrmann

Understood. Thank you very much.

Operator

Our last question over the phone comes from Gregor Kuglitsch from UBS. Please go ahead.

Gregor Kuglitsch

Hi, good morning. Got a few questions as well, please. I wanted to go back to the slide where you talked about the net investment and divestment. And I guess I want to sort of explore in effect if you can't sell anything let's say -- let's assume no disposals. What would that continue to look like? In other words, will you continue kind of burn cash and if so at what pace? Because I'm guessing you still have continued Construction on the on-going projects? First question.

The second question is, it sounded I don't know, maybe I'm misinterpreting, but it sounded like you're a little bit more optimistic, let's say, on putting stuff on CD in the market as you're onto the market because your pre sale rates are now meeting your thresholds.

So, is that the right interpretation that there's more properties that meet the criteria to be disposed? In other words, I think it's like 70% or 75% pre sale rate? And if so should we be expecting a bit more activity?

And then maybe a small question on RD that loss in BoKlok, is that a restructuring charge or is it sort of a markdown or is it just sort of the lack of overhead absorption that means you're making an overhead loss?

I guess I want to understand how much of is potentially just a one off or how much sort of recurring, I guess? Thank you.

Magnus Persson

Thank you, Greg. I will take the first two questions and Anders can deal with the BoKlok question. Your question is sort of a bit speculative, but I think it's fair what happens if the transaction market continues to struggle and we are then theoretical unable to sell anything and what will happen with our cash flow. And it is true that in this line of business where you start large development projects. When you do that, you commit to complete the Construction contract because if you stop in the middle, you will have essentially destroy the lot of value.

So, we are fully committed, of course, to see these Constructions to the end, which also is a key component in all of our capital planning and it's a key component in why our balance sheet looks the way it looks. So, we continuously all the time make sure that we have the financial means and capacity to complete the on-going development projects without having to fire sell anything or what we have in the balance sheet because that would put us in a very awkward situation if the market becomes a bit weaker on the transaction side as it is now.

So yes, we have a lot of capital committed to complete these projects and you can actually find that number the commercial development section in the Q2 report. If you flip over to that, you will see a table in the left bottom side where you can see these numbers as well.

And you should relate those numbers then to our available liquidity and the limits we have in terms of net debt where we have now an additional SEK 14 billion available capacity before we would hit our communicated limit.

Your second question then, is it correct to say that we are a bit more positive in the sense that we have more to sell in CD now than what we had. And that is correct because we are continuing to lease these projects as we complete them.

For more and more projects, we are reaching a leasing level. It's not a pre-sale level. It's a leasing level that are adequate for us to take them to the market without risking having the wrong type of discussions with buyers. And with these [property analyst] (ph) said, we have many on-going divestment dialogues and are actively working to complete these transactions. But we are from financial position, so to speak, not in any rush.

So, we don't need to secure the cash inflow from these properties, which means -- because we have the staying power that our balance sheet allows us. Hope this will answer for the two first questions and Anders, you can.

Anders Danielsson

Yes. On the order of BoKlok charge we take in the quarter here, it's mainly due to the low volume we can see in that segment. And that's the low volume giving us income that we cannot cover our cost completely. And we are taking measures. We are reducing the cost in all markets when it comes to BoKlok. And we're also adjusting ourselves to few -- our judgment of the future volume. But the quarter is also impacted by cost increases in a few very few projects in the UK that is on-going and coming close to completion now.

Gregor Kuglitsch

Thank you. Maybe a small follow-up on the cash flow. How much cash is due to come in on assets or CD properties that you've already agreed to sell in the past? I don't know. I think you disclosed this number somewhere, but could you just remind me how much cash is due effectively from assets that you still need to complete them, but you have signed the contract and you should receive the cash at that point.

Magnus Persson

But you're looking for SEK 7.9 billion?

Gregor Kuglitsch

The cash in.

Magnus Persson

Secured cash in, yes.

Gregor Kuglitsch

Thank you.

Magnus Persson

And that is then from the CD transactions I mentioning.

Gregor Kuglitsch

That’s CD, yes. Okay. Thanks.

Operator

Ladies and gentlemen, this was the last question.

Antonia Junelind

Okay. Very good. Thank you. We will now then turn to the questions that we've received by text. So, I will read them out loud. And the first question comes from Peter at One Investment. He asked, can you please explain how the incentive terms are changing in your letting off commercial property comparing this period to last year. That's the first question.

Magnus Persson

It's a little bit hard to understand Peter's question, I have to meet into the incentive terms.

Antonia Junelind

Perhaps he is referring to rent free periods or things like that. Just clarifying the question.

Magnus Persson

Okay. Good clarification. Thank you, Antonio. I'd say since one year back this hasn't changed materially, but if you compare it over a three year period, I would say that there's been an increase maybe in particular in Central Europe in terms of rent fees and cash contributions for fit out and what have you not all of these incentives to sign the lease agreements.

And which also means that you sort of have to sign a lease agreement on a headline price, but underneath that you have to toss in certain incentives. So, that has definitely increased. But that has been an on-going thing since the start of the pandemic. It hasn't been a material significant change over the last year, I would argue.

Antonia Junelind

Second question from Peter refers to the rental yield in our portfolio of completed properties. Since we do not communicate that, I will skip that question and move to third question, which is with the strong Construction order intake, would you expect that the working capital of the Construction division become more favourable in the coming quarters positive for cash flow?

Magnus Persson

I'll take that question. I think order bookings that we see now will not impact the net working capital in the coming quarters because it will take time to get this new bookings up into production and that is when we have the impact on the working capital.

Antonia Junelind

Thank you. So that was all questions from Peter. And then I will move over to questions from Nicholas Mora at Morgan Stanley. So, two questions. First being the trend in – sorry, the question just moved here on the iPad. Sorry. The first is the trend in Swedish Construction margin, considering weakening building outlook, is there a risk of continued softer margins?

Anders Danielsson

No, I don't think so. We have the margin itself is somewhat impacted by a settlement were made in Sweden, but the underlying margin, I don't expect anything else that they should be on the normal level going forward.

Antonia Junelind

Then we have the second question, refers to U.S. Construction. Order inflow has been impressive in Q2 in mid and large sized orders, but we also saw an order cancellation on failure to secure credit. Is this point something that you're monitoring particularly in the U.S. non-residential market?

Anders Danielsson

I would say that there is not trend we can see as a problem for us. We are very conservative before we book any orders we should have a binding agreement, binding contract with the client. And this is very unusual that we see cancellation. And in this specific case, the client couldn't get the financing in place. So, the order was cancelled. But again, it's very few examples of that in the large portfolio that we have.

Antonia Junelind

So that was all questions from Nicolas and we will then move over to questions from Keivan Shirvanpour at SEB. His first question refers to Commercial Property Development and he asked, in terms of on-going discussions, generally what is the current discrepancies between Skanska and buyers in terms of pricing expectations?

Magnus Persson

I can take that. We -- this will come sort of a very boring answer, but not going to answer that question. But of course, specifically because it's a part of the negotiations that we have. But of course, any negotiation between the buyer and the seller will always start with a more bigger or smaller deviation in price expectations. And then over time and depending on how long that takes, you reach an agreement. So that's where we are. It's no change in that sense now compared to otherwise.

Antonia Junelind

So next question here from Keivan is due to the weak residential markets, some more diversified builders are allocating resources towards for instance public segments. Have you noticed any form of pricing undercutting due to increased number of bidders. And do you see this as something that can impact margins?

Anders Danielsson

I can take that question. No, we do not see that.

Antonia Junelind

Yes, okay. And that was actually the final question for today. So that means that we have now answered all the questions that you've had. Should there be anything left unattended at this stage or any questions come to mind afterwards, please do not hesitate to reach out to either myself or the IR function. So now I would just want to thank you Anders and Magnus for your presentation and answers here today.

We will be back with comments on our Q3 report on the 1st of November. And then we're also pleased to invite you to our Capital Markets Day on the 21st of November that we will be hosting in one of the buildings that we built in the city of London. So, looking forward to seeing you at those upcoming events in the fall.

And now, I will just conclude this press conference. A recorded version of this audiocast will be available on our webpage shortly. And with that, thank you very much for listening and enjoy the rest of the summer.