Skanska AB (publ)

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

Thank you, Antonia. And before I go into the figures, I want to look at the picture here you can see on the screen to the right. That is an office building we have developed, constructed in Budapest, Hungary. And we also leased it out and managed to divest it in the third quarter. Very nice building. To summarise the quarter, before I go into each stream, we have continued to have a strong performance in the construction stream, and we have also been impacted by a weak property market. So that has resulted in asset and goodwill impairment of 900 million Swedish. On the construction side, we have an operating margin in the quarter of isolated over 3.3%. Return on capital employed in product development overall 0.7% on rolling 12. Return on equity 9.5% rolling 12. And we have maintained a strong financial position, which is extremely important for us in this market. We have managed to reduce the carbon emission since 2015, which is our base year, and the reduction has been 58% so far. So now I'm moving into each stream, starting with construction. Revenue is pretty much flat. Order bookings, 33 billion. And we have a rolling 12 book to build of 107%. And a historically high order backlog of close to 240 billion. The operating income close to 1.4 billion, which correspond again of 3.3%. We have a robust order intake for several consecutive quarters in the company, and the order backlog is on a high level. and the rolling 12 months operating margin is 3.8 percent and that's well above our target of for for the whole group so the solid performance continues which is really important of course i move on to the residential development stream And here we can see the reduced revenue, of course, since we have sold less home in the quarter, 277 homes sold. We hadn't started any homes in the quarter. And we had the operating income of minus 494 million, which is then we have taken charges for goodwill and the impairment test. on predominantly land. And we will come back to that. Operating margin negative, and the return on capital also negative, of course. And we can see that we have lower than normal sales volume in all markets, except for Central Europe, where we actually can see the strongest market right now, especially in Poland, but also some good signs in Czech Republic. And we continue to work on the turnaround program we have in our low-cost segment, Boklok. And as you also can see in the report, we took operating charges in Boklok, also in the quarter of 160 million Swedish. Commercial property development. Operating income is negative. We have a gain on sale of close to 200 million, which was made in the quarter. Return on capital employed, 2.3% on a rolling 12. And today we have 29 ongoing projects, which corresponds to 31 billion upon completion in total investment. The completion rate in the portfolio is 61%. We are lagging a bit with the occupancy rate, 36%. And if you exclude the rental residential we have in the commercial property development, it's 44%. And that's a relevant figure because in our rental residential project, the market works that way. rent it out very close to the completion of those assets and we have didn't start any new projects in q3 and again we divested h2o offices in budapest in the quarter And we do have a very, very nice portfolio of very high quality assets. And we will show you how much least the leasing activity and the leasing position we have in those. But the transaction market is very hesitant today. But when the transaction market start to work, normalize, we are in a very good position. And moving on to investment properties. Here, as you know, we're targeting high quality, sustainable office to build up an office portfolio between 12 to 18 billion, which will generate a stable and good cash flow. Today, we have a stable operational performance. The occupancy rate in our portfolio today is 91%. So we have continued to lease out in that. stream as well. Construction, again, looking at the order bookings. Here you can see the development during the last five years. So we are in a good position. We have a healthy, strong order backlog. We can allow ourselves to continue to be selective and go for projects where we see we have a competitive advantage, we have a good track record in the history, and we also have the right team in place. So that is critical for a successful construction operation. And here you can also see the development on a rolling 12 when it comes to order bookings. The light grey, the orange line, order booking per quarter, more volatile, of course. But you can see the revenue as well, which is today pretty much flat in local currencies. And the book to build in on a rolling 12 is also on a historically high level. 107%. And if you go into each geography and look at the order bookings, you have the quarter, you also have the rolling 12 months and the months of production. Strong overall in the Nordics, it's especially the Norwegian operation where we have one healthy good projects in the last 12 months, and we can also see a strong order intake in the US, where the market continues to be strong. So overall, 107%, and the months of production is also important to look at. We have 18 months today of production, which is also on a high level. So I'm confident in the size of the order backlog. I'm also confident in the quality of the backlog. So with that, I'll leave it to Magnus.

Thank you, Anders. So let's look at the income statement for construction. We had revenues of close to 41 billion in the quarter. In Swedish kronos, that's up a couple of percent. In local currencies, it's down a couple of percent in terms of business volume. Gross margins, 7.3%, slightly up from the last quarter, keeping a stable S&A, coming down to an operating margin of 3.3%, slightly lower than the comparable quarter last year. Rolling 12 months, we're still at 3.8%, so we continue to have this sort of long-term stable performance from the construction business. And there are no particular one-off items in the quarter that you should be aware of to take into account when you analyze the business. If we look on the different geographies, Nordics, 2.8% margin, somewhat down then from the same period last year. And the deviation there, you can see Sweden is the same, 3.5%. So you find the deviation in the other part of the Nordics, which then obviously is Norway and Finland. And I say that's within sort of what happens with normal swings between quarters there. Europe, decent profitability, 2.9%, and then a very strong quarter in the US. We have good performance there, operationally speaking, and the markets are strong in the US as well. in comparison to the other markets we're in. So what happens in the quarter is a bit stronger performance in the US, a bit weaker in the other parts of the Nordics, sort of compensate each other to total a solid quarter in the construction performance here. we look at residential development a slightly different story we recognized revenues of 911 million in the quarter which obviously is quite low and it is so that the residential development market is stays weak to very weak in almost all the geographies we are present and as Anders already alluded to We have a bit of a different market situation in the central European parts of the operation, especially in Poland, which is going very well. So good sales pace and prices are sort of moving in a favorable direction there. Gross income, we recorded a loss in the quarter at the gross level of minus 142 million. And in that number, we have recognized asset impairment charges to the tune of 320 million. Those charges are mainly related to land and the absolute majority of the charges are to be found in our operations that cover the affordable segment of the housing market under the brand book look. That's where we can find the majority of this. If we move down to the selling and admin, minus 352 million, also here a very high number, but included in that number, we have impaired a goodwill position in the Norwegian part of the residential development operations. The size of this impairment is 160 million. So if you take us down to the operating result of minus 494, adjusting for this one of impairments, which obviously not impacting our cash positions, we are roughly break even in the quarter, you can say. So backing out from the isolated quarter, it's fair to say that we are still suffering here by a lack of volume in the business. If we take away the impairments on the gross level, we have a decent profitability coming out of the projects, but S&A is sort of still too big in relation to the gross profits that we managed to make with the slow market that we can see today. If we move on to the different geographies, all geographies then recorded a loss during the third quarter. The biggest one is in the Nordics, it's also where we have the biggest part of the operation, obviously. And the Nordics also then, of course, at the operating level here, includes the goodwill charge that we have taken in the Norwegian operations. If we exclude the part of our business that addresses the affordable segment, both European and the Swedish part were actually making a profit in the quarter. The rest of the Nordics was not, but that is due to the goodwill impairment there that sort of charges that. And in addition to give you some more flavor on that, in addition to the fact that the affordable segment is making up the majority of the asset impairments, they are also recording a running operating loss of around 160 million in the isolated quarter. So it's a pretty big effect on the isolated quarter from that part of the operations. And in Europe, despite the minus 54, if we sort of make the same adjustment there, we do actually have a good profitability and a good drive in the central European part of the business. If we look at home started and sold, we started no new projects, no new units in the third quarter. And it is more difficult today to find and underwrite a solid business case because we have for quite some time, as you know, seen cost inflation and we also have a weakness in prices. And we do not want to start projects that we are not convinced ourselves about that this will be a good project for the group and create value. So it's a zero here on that line. We managed to sell 277 units though. But I think it's important to sort of send the message that we prioritize very hard and we activate only the parts of our land bank that are really good today in order not to get into problematic projects out into the future. If we look at the ongoing production, we had 5,100 homes around that in production, end of the third quarter, down then from 6,800 at the end of the comparable quarter last year. So we've handed over obviously a lot of units here to buyers then. Sales rate, 54%. This is what happens when the market slows down and we, of course, continue to produce. Sales rate falls. And despite a few starts, we have a good amount of inventory to sell from in this business, which is good, of course, if the market sort of comes back to us. And as expected, also the unsold completed units, they increase. I think we have been alluding to a very high likelihood that this will happen for some quarters. As the market slows down, our production machinery doesn't slow down. It continues to produce in the projects we have started already. So it's inevitable that this pot grows before we manage to sell it off to the external market. important thing to bear in mind here is that we need to have a good churn of these units so they do not grow old on our balance sheet which would constitute the risk but something we look very closely on and we do have a good churn and not like a big part of units being very old there so it's more a consequence of current market dynamics if I put it like that If we look at commercial development, the income statement here, we recorded revenues of 1.4 billion, and the majority of that came from one property divestment in Budapest, H2 Offices, as Anders showed you the picture about on the first page, very nice project. that we managed to sell at very decent yield levels, actually below our own underwritten business case. And I think this is a testament to that when there is a willing buyer, our properties are very attractive. The situation on the market is more about the willingness to close, but we have very attractive properties, which we can see when we do deals like this. We recorded a loss at the gross level here of 56 million, and due to the market uncertainties with rising interest rates and overall sort of opaque future for the transaction market, we have recorded asset impairments also in commercial development to the tune of 350 million in the isolated quarter. The absolute majority of this also here is land, and it is located to the US part of the business. And I have to say it remains very difficult to assess appropriate market values for commercial properties today due to the fact that there is very little comparable transactions going on. And even if there are a few, there's no real depth in the transaction market. So you have very little empirical data to rely on when you make your assessment of what would sort of a buyer except in terms of price and what could we sell this for. And that's a fact, that's where we are now with this. if we look at the surplus values in the portfolio see if we get it up there we go unrealized and realized gains for our own sold projects in the portfolio we had for 7.4 billion in the second quarter now we have taken that down to 6.1 billion there's two chief reasons to that One is that we have sold the property, as I just told you about, and obviously then that goes out of this. That's around 200 million. And in addition to that, we have reassessed the selling values of a few properties, mainly also here in the US operations. And it is, as already said, difficult to assess where we have the market values now. And historically, or maybe rather principally, we have always done it like this, that when we start a project, we have a conservative yield assumption when we go into the business case. the conservative yield and rent that we underwrite. Based on this conservative yield assumption, we report these surplus values here. Now, actual market rates at the point in time when we start a project has therefore almost always been below our own yield assumptions. As market yields are now coming up, we have enjoyed the benefit of having a buffer in the surplus values between the assumed yield that this is based on and the actual market yield. But as yields now are coming up, this buffer is more or less consumed for us. And the consequences of this is, of course, that we will see more direct link between changes in our assessment of what the market yields are going forward and the surplus values that we will report there, which is essentially our expectation of future profits to be recognized once we diverse these properties. If we look at the completion profile of the portfolio of projects here. It looks like this. You recognize this slide. And on the left-hand side, you have properties, projects essentially that are completed and unsold. We have just shy of 10 billion in investment value in those properties that are leased to 76%. So it's a good amount of leasing in these properties. And these are, of course, properties that to the largest extent are ready to be sold when we can sort of identify and agree with the buyer. Then we expect to complete the small property in the fourth quarter and some more properties in the first, second and third quarter of next year. And the green dots represent the leasing, average leasing in those properties that are expected to be completed in each respective quarter. So this is the way it looks. So you can say second and third quarter in 2024, we expect to complete projects for quite a lot of investment value. If we look at the leasing, we had average leasing in our portfolio of commercial buildings now excluding to Anders's earlier point, the rental residential properties that we have ongoing of an average of 44% in the portfolio and a percent of completion, physical completion of these properties to around 60%. We leased 30,000 square meters in the quarter, rolling 12 months. This is 190,000. And we can see the trend in leasing is shifting a bit. It was downward sloping for quite some time. We're starting to get a bit more foothold on the market, especially in the central European operations. where there is activity on the leasing market, and we actually continue to sign deals. After that, I would say we have the Nordic markets that are still slow, and the slowest market at present is the US market. The trends or the sort of situation hasn't changed very much. Tenants are still asking a lot about flexibility, both flexibility in terms of lease agreements, also flexibility in terms of the physical space that they rent, expansion, contractions, and these things. The demands that clients or tenants have on the level of fit-out in the buildings are high, and they've been increasing for quite some time. On the other hand, we have a positive rent development on the market. Obviously, the contracts are adjustable by CPI changes and so on, and we still have tenants that sort of accept these changes. So the development in the rent is good. Investment properties, we recorded an operating income of 31 million. Here, the portfolio is leased on the average to 91%. We haven't made any transactions into investment properties from commercial development during the third quarter. So the portfolio is essentially the same as in the second quarter here. We have not made in this quarter any changes to property values here. But of course, this is market to market, and this will move in conjunction with changes on the market. If you look at the group, the operating income from all the business streams, 625 million. And then we have a central item here of minus 85. The biggest chunk of this is the overhead headquarter costs, which remains very stable and very well controlled. Not a lot of changes there. Then we have two underlying movements that is good to know about. We recognize money consistently from our asset management portfolio of the old ID infrastructure development projects that we have. And in this quarter isolated, we've also had an asset impairment recorded centrally for the production facility that supports the Boklok operations. The size of this asset impairment that is recognized here underneath the minus 85 is minus 120 million. If we move further down, we have net financials, positive 150 million, and of course the interest rates are coming up. But what is happening here is that we are capitalising the interest costs for the money that we are investing in our residential and in our commercial projects. We're capitalising the interest costs for that onto those projects to be recognised when we divest those projects. The remaining part is of course recognized immediately here on the P&L, which is a positive net. Taxes, we taxed 110 million in the isolated quarter, which is a tax rate of approximately 16%, somewhat down from the comparable quarter. If we look at cash flow, we had a sort of very balanced cash flow in the quarter. From that point of view, the change to the same quarter last year is that the same quarter last year, we had a positive cash flow of around 3 billion. so the main change to today is to be found in changes in working capital where we last year had a fairly significant positive impact of that this quarter it's basically flat and also changes to our net investment pace which is mainly driven by us not divesting to the same extent as we managed last year at the same time as we are still of course committed to complete the property development projects we have ongoing and this constitutes the investments that we make and the balance of that is sort of more negative on the cash position this uh or less positive actually on the cash this quarter than what it was the same quarter last year Working capital in construction, we continue to develop good payment plans with the clients in the bids that we win. It takes a bit more effort today to do so. Everyone knows that money these days is attached to a cost, which it hasn't really been for quite some time. So it's a bit more effort required. We're still very successful in doing this, though. We recorded at the end of the third quarter a net working capital position over revenue to 18%, which is a solid level. Then you can see that the green line, which represents this KPI over some time, it's sliding a bit downwards. And we have a very good visibility into the future of this because we have payment plans for all the projects we are ongoing, of course. This is not an item that will change very suddenly, because we have a big portfolio of many projects in many different markets, and it simply takes a lot of time to have any changes in that. But the trend right now for some quarters has been to a slight slope downwards. Not only driven by the nominal position, but also by growth in revenue in Swedish krona, I should add. Investments and divestments. The green line you see on this chart represents the net investments for the group on a rolling 12-month basis. You can see we're fairly deep into net investment territory. And what we can also see in terms of these trends is that we are having a more advanced state of production in our project development portfolios. So the investment pace underlying this is slowing down, starting to slow down a little bit. The reason we are still firmly placed on a net investment territory is because the selling market, the transaction markets are so much slower than before. We ended the quarter with 64 billion in capital employed, up then 10 billion from the same quarter last year. And it's driven by commercial development, as you can see, and it's driven by investment properties. I think it's fair to point out that a lot of the capital growth we can see in the commercial development, this is capital that is tied into properties that now are completed and will be sold. So it's not us growing the actual development, ongoing development operations. This is due to sluggishness in the transaction market. If we look at our available liquidity, we could access 16 billion in liquidity if we were so to need. Of that, around 9 billion is to be found in undrawn credit commitments that we have from external parties and the balance is on our own balance sheet. We have two maturities coming up in 2024, one in spring, one in fall, and then we have some maturities in 2025 and then out in 2027, as you can see here. Finally, financial position remains very strong. We have an equity of 58 billion, approximately, and an adjusted net cash position of 4.7 billion. So it's a very solid balance sheet we have. We always say this and stand by it, that very important in times like this, It's strong and we can own our own decisions despite being active in a pretty capital-intensive industry with project development. We don't need to ask someone's sort of permission for liquidity in order to make the right decisions for the shareholders. We own these decisions and have them in our own hands. It also gives security and confidence to clients that entrust us with building large, complex projects that are critical for their own production, etc. So I think it's a bit of an envious position for many other companies. Strong balance sheet.

All right, we'll go into the market outlook and start with the construction. And it's very much in line with the last previous expectations. It's a mixed picture. We have a strong market outlook in the US that goes for both the civil operation where we can see that the federal money floating out in the system and the different states are also matching this, and we can see a strong pipeline out in our market. So we are well positioned there. And we also see a strong market on the building stream in the US, where we build more social infrastructure like schools, universities, hospitals, airports and so on. So that is also a strong market. More stable or weak in Europe. We can see a stable market outlook, especially in Sweden or very central Europe. We can see that the government, different government, they are sending out projects for bids out in the market. And in Central Europe, we can see that some EU money coming into the market for infrastructure investment. Weak market in the building sector, and here we lower the outlook also in Finland and Norway for more non-building market, like residential, commercial, but also some social infrastructure. A bit hesitant there. Residential development, low activity. We continue to see weak market outlook go for the next 12 months, and that goes especially for the Nordics. More positive signs in Central Europe, as we've been talking about. It's a stronger market. We sell more homes there and more requests for that. And commercial property development, low activity. We can see some gradual improving signs, especially in Central Europe when it comes to leasing. Hesitant investor market, but it was a good sign that we could sign and divest a high-quality office building in Budapest during the quarter. And investment properties, stable market outlook. We have good... Very good location, high quality building, and we know we have a high occupancy rate in those, so that is stable. To summarize the group now, the performance in the third quarter, construction continued to deliver a strong result overall. Residential development, low volumes, and also we impacted by a weak market with the impairment. Commercial property development, divestment of the H2 office, good sign, but still a weak market. Investment properties, solid operational performance. We have really good asset there, so that's encouraging. Again, some impairment charges related to weak property market. And we're maintaining a strong financial position, which we are determined to keep that. It's very important for us. And of course, we invite you to the Capital Markets Day in London on November 21st. With that, I hand over to Antonia again to open up the Q&A.

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

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

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

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

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

So I followed up on the second question, I guess it still counts as two questions. So does that help you in your margins that you see this cost flattening out or have you already secured that price?

Of course, it helps us in a way that it's easier to mitigate and it's easier for the suppliers to secure their prices, which is helpful for us. So yes, it helps.

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

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

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

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

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

For questions over the phone, please press star followed by one. The first question comes from Marcus Henriksson from ABG Sandal Collier. Please go ahead.

Thank you very much. Good morning, everyone. Two questions from me. First, I see that a lot of projects in commercial development, which as of last quarter was scheduled to be completed in Q3, Q4 and Q1 2024, seems to have been pushed further into 2024. What has happened? Then secondly, write-downs in CD are mainly related to land values in the US, as you alluded to. I wonder what the implications could be for project margins in ongoing projects in CD, especially for the US. Thank you.

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

Thank you. I go back to the Q&A.

My next question comes from Simon Mortensen from D&B. Please go ahead.

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

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

Yeah, it makes sort of sense, but the capitalized then is included in the EBIT, I assume, when you sell the commercial development. I'm sorry, please come again. Is then the capitalized interest rates included as cost of goods sold in the commercial developments? Correct.

When the projects are divested, yes.

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

Can you please repeat that question?

The surplus value, which you report in commercial development, typically updated in Q4. Number one, is that done externally or internally? And can you say something about the yield assumptions?

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

Thank you. I'll go back to my line.

Thank you.

The next question comes from Hunter Graham from Jefferies. Please go ahead.

Hi. Thanks very much for the questions. Just two. First on the impairments in the commercial division. As you said, mainly land in the U.S. Just wondering why you're not seeing such big impairments in your European or Swedish portfolio. Do you just have smaller land banks there or is the market a bit stronger? I'll wait on the second question.

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

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

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

I can jump in and take the last part of your question. If I understood it right, you asked about the 160 million charges we took for operational charges we took in Book Look. And that is mainly due to low volume. Yes.

Got it. Thank you very much. Thank you.

The next question comes from Arnold Lehman from Bank of America. Please go ahead.

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

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

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

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

Right. And in the meantime, you're not starting a significant amount of new projects. I think you mentioned there was zero in residential water.

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

Thank you very much. Thank you.

The next question comes from Gregor Koglic from UBS. Please go ahead.

Hi, good morning. I've got a few questions and maybe I can kind of focus a little bit on the outlook for cash flow. So if you could just give us sort of a sense of the puts and takes for cash.

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

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

Yeah, regarding the dividend, we don't give any forecast, as you know, on that. And we will come back to you, all of you, after Q4. Thank you.

Thank you.

So gentlemen, there are no more questions from the phone.

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