Skanska AB (publ)

André Löfgren - Senior Vice President of Investor Relations Johan Karlström - President and Chief Executive Officer Peter Wallin - Executive Vice President and Chief Financial Officer

Niclas Höglund - Nordea Bank AB Albin Sandberg - Handelsbanken Capital Markets Fredric Cyon - Carnegie Investment Bank AB Tobias Kaj - ABG Sundal Collier Hjalmar Ahlberg - Kepler Cheuvreux Marcin Wojtal - Bank of America Merrill Lynch

All right, good morning, everyone. It's 10 o'clock.

Welcome to the presentation of Skanska's Nine Month Report for 2017. I am André Löfgren, heading up the Investor Relations at Skanska.

And luckily, for you, guys, I'm not the one doing the presentation. It's going to be our CEO, Johan Karlström; and our CFO, Peter Wallin.

The presentation is held here in Stockholm at our headquarters, but it will also have a lot of participants on the web and on the phone. You will all be able to ask questions after the presentation.

And with that, I hand over to you, Johan.

Thanks, André, and welcome, everybody, to the quarterly report that we're going to have today. First, I just want to mention and say some words about the slide you see behind me and that is from Sundtkvartalet, which is the first project that we started in Oslo in - within the CD operations.

And that project has now taken the full cycle, so we divested it during the third quarter, 83,000 square meters with a very good result, both for the CD operation, but also for the construction operations. So that is a sign that when we enter a new market we have delivered a full value creation and built up a portfolio of projects.

And this is the first one that we have taken the whole way through the cycle. And we are excited about the Oslo businesses and we think that we can continue to create more values in that market, but also in the other cities where we have CD operations throughout our organization.

So, with that as an intro, I'm switching over to the nine-month report. And you can see here that during the first three quarters, we have pocketed an operating income of basically the same level as the previous year of SEK 4.8 billion.

We have had a very strong performance in the Project Development and also in the Nordic Construction. But we have faced, during the third quarter here, further write-downs in two projects in the U.S.

operation. I will come to that in a minute.

If you look at the bottom line, the EPS, you can see that it's SEK 10.58, which is actually higher than the same period last year, and that is due to the lower tax rate that Peter will dwell upon later here in the presentation. And you can also see that the return on the combined Project Development operations that we measure is holding up on a very high level, over 16%, which is a very good level that we are satisfied with, and we definitely think that this is a level that we want to maintain and continue with going forward.

Very strong financial position, which opens up for opportunities. Maybe we'll see some weakening in some of the development markets, where we like to invest even more, if you talk about land bank I will come to that as well.

So, going over to one of the streams, Construction. You can see here that the revenue, the top-line slightly up even in local currencies compared to the same period last year.

Order book is though is lower compared to the same period. But I think that the right ratio to measure and to look at, that is the book-to-build ratio.

And that one we always measure on rolling 12-month basis, so the numbers you see here, the 107% that is not the year-to-date ratio, that is the rolling 12. So that gives you an overview and feeling for if we're building up the backlog or if you are eating out of the backlog, and 107% means that we are building it up.

In the isolated quarter, though, the book-to-build was somewhat lower than 100% and that goes also for the U.S. operation.

And in the U.S., we have a focus on profitability versus volume. So, we are more picky to select the right projects and also have higher margins expectations.

So that is the - it's actually a focus, that's something that we want to do to take the volume slightly down, to make sure that we have control over the businesses and that's part of the strategy we have in the U.S. operation.

The operating margin is, of course, disappointing at 1.3% for the year-to-date numbers. But it consists of like in a different numbers in that bag, the Nordic operations on the Construction side, especially Sweden, and I also want to mention Finland there has a very good and stable business and deliver results on a very healthy level.

And in the U.S., we have taken further write-downs in two projects, one new, which is on the way to reach completion, and another project that we have seen write-downs in previous quarters. One of the projects is in building and one is in civil.

And of course, it's very important now that - and that is what we are aiming towards, to focus on the profitability and working on project selections, risk management and also restoring the order backlog going forward in the U.S. Switching over to the resi side, you can see here the overall revenue for the three quarters, both on homes sold and also homes started that you can see that is basically holding up to the same level as same period last year.

If you look at though, in the isolated quarter, it was fewer starts in the third quarter and that is due to fewer projects that was ready to be started. Profitability-wise, it's maintaining - we are maintaining a very good level, especially on the gross margin on the project level.

The overhead is spread in four quarters on an equal basis. So, when the lower - the level is - the volume is somewhat lower, then of course, the S&A percentage goes somewhat up.

Very healthy return on capital employed as you can see here, and overshooting the 10% target that we have on the business here, with a very good number. Let me comment the market situation somewhat because, especially here in Sweden, because there have been a lot of discussions, a lot of questions that we have got here.

And we can see signs, if I start with Sweden first here in general, signs of - that is moving to a more normalized level from an overheated situation and that goes especially for Stockholm. And in Stockholm, we see it in, I will say, in the premium segment.

And if you take a look at this slide here, you see the blue dots. And that's where we have our Residential Development operations.

So, it's spread out in a lot of different cities in the Nordics, and then on top of that, we have Warsaw and Prague. So, it's not only focused on the Stockholm market, even though the Stockholm region is important for us.

We also focus, if you look at our businesses in somewhat different dimension, we focus very much on the affordable segment, where we operate under the brand name of BoKlok. And then the core segment, which is you can call like kind of the middle segment in the market.

So, we have a very few projects or apartments in the premium segment there. So, I think it's important for you to understand that from that standpoint, our business is quite diversified, and I think it's a very good risk mitigator, if one of the cities or one of segments, it's going up and down.

So, with that, I want to switch over to Commercial Development, which continue to deliver very good result. And you see here that during the first three quarters, we pocketed a gain on sale of SEK 2 billion.

One of the divestments that we did in Q3 was a divestment of a joint ownership, a JV, in one of the projects. And that result shows up on a different line on the P&L, and Peter will explain it a little bit further here in the presentation.

And you can also see that we have a very healthy and good return on capital employed. The businesses that we have within Commercial Development is a business that we gradually build up quarter after quarter, year after year.

And if you go back in time and compare it and look at our historical number, you can see that we are actually building it up. And this is a strategic move for Skanska.

Five years down the road from now, I'm sure that is going to be an even bigger part of the pie. And I also expect that this will - we will see even more synergies between Project Development and the Construction going forward.

Today, we have 53 ongoing projects with a total investment value of over SEK 20 billion. And you can see the two key ratios here that we follow very closely, the preleasing and the completion ratio.

We try to keep them quite close to each other, because the leasing ratio is like a risk mitigator to take down the risk in the project, because then we have secured tenants and the future cash flow for those projects. Leasing is a very important and a future value creator for the businesses.

And you can see are that during the three quarters, we have increased it up to over 300,000 square meters, which is a very high number. So, we have a huge organization that's working really hard here.

Infrastructure Development, the last part of the Project Development operations that I want to present here. And you can see here that during the first three quarters, we had SEK 885 million in result that comes from, especially from one of the divestments here of the highway in Poland.

The project portfolio value, which is compared to previous years, has gone down and that comes, of course, that we have sold and divested several projects here. So, the majority of the portfolio today consists of ongoing projects that we have here in Stockholm, NKS and there - especially the projects in the U.S.

And I'm sure that you've also seen the return on capital employed here, which is very impressive. The graph here shows, it contains a lot of information, but I just want to draw the conclusion - or your attention to the rolling 12 book-to-build ratio, the 107%.

So, you can see here the blue - the dark blue line, which is the order-bookings on a rolling 12-month basis. And the light blue, which is the revenue.

The order bookings always fluctuate more, goes a little bit up and down, depending on the order income. And the revenue is more flat and you can see that we have had the period, where we have built up the backlog.

And we are maintaining a backlog of close to SEK 200 billion in total order back value here, which is an impressive number. And that means that we have a very good situation to continue to work from.

And here you see the distribution of the backlog and the order intake between the three major construction regions, where we have. And you can see that we - all of them are over 100%.

But it differs a lot between them if you talk about the size of the backlog, because if you look at the months of production, you can see that the U.S. one is the place where we have the longest duration, and that is due to the mega projects that the backlog consists of.

So, with that, Peter, some more details maybe?

Well, perhaps on news also, who knows. Hello, everyone.

So, coming into the income statement of Construction, we had a very good booking situations last year and that translates into a growing revenue now. So, we report 9% in local currencies growth in revenue to SEK 109 billion for the first nine months.

The operating income amounted to SEK 1.4 billion, and of course, the - in the third quarter, we have taken some further write-downs in the U.S. operations.

It seems like with deeper reviews and change of management, we take a different position sometime. So, the operating margin is 1.3%, far under where we would it like to be.

And if we go into the various markets here, the Nordic is extraordinarily strong, strong from many perspectives. Good execution, good market.

You can see Sweden as being a very big and important part of the Nordics, doing very well. Europe is actually - it's very negative because of tough start in Poland and UK, and also because of the seasonality in these businesses.

So, you can see in the third quarter that we are back in black. And I would say that, for Poland, we are in early stages into a major restructuring program.

Czech is stable, and UK is stable. U.S.

is also in the black, but the margin is not where we would like it to see, even if the market is doing well as such. Coming into the Residential segment, we see a 16% growth in revenue, 2% of that is in volume of the nine months, 14% is price mix.

And the gross margin in percentage terms is continuing its sequential improvement. That is, of course, thanks to the good execution and the good market that we've seen.

And over the 9 months, we are keeping the selling and admin to around the 5% mark, so that creates an operating margin of 13%. We have a lower volume of both started and sold in the quarter, and that sort of impacts the operating margin.

As Johan stated, we have almost a fourth each quarter of selling and admin. So, if we don't do the volume on sales, that sort of impacts the operating margin.

And going into the various markets, Sweden strong, Nordic strong, and also, I would say Europe is trending more and more into pro-forma level. Now in the Warsaw, business is coming more and more into mature stage.

It takes some time to start up a project development business and I think we are starting to get there with the Warsaw business. We are trending around 5,000 units sold, and the sold, and they started are very much in line with each other.

And flipping quickly into the volume, you can see how we gradually increase the volume. We have 8,000 units under construction right now.

Of that, 81% is sold, 81% is sold; 90 unsold, completed. In other words, in order for us to drive sales, we will have to start new projects.

We will not start new projects just to start a project. We will only start a project where we know that we have the foundation in place.

The market is there, the pricing is there, and we have the design in place. We will not start projects otherwise.

CD on the other hand, really robust market, really robust performance. And as you can see, we are reporting our development gains in two lines here.

Firstly, the ones which we own 100% of, reflecting both sales and gain, and then on the income from associated companies, we report the gains on one line, where we sell our joint venture. This is predominantly residential projects, not condominiums, by rental units in where we hot markets, which we have developed with other financial partners, so a really impressive operating income of SEK 1.9 billion.

And you can see the rolling 12 there when it comes to the development gain, with a margin of 28%, the first nine months of the sold. In addition to that, we of course did the gain then on the projects we have in joint ventures.

We are at the SEK 7 billion mark here on a nine-month basis. And we stated early in this year, that we will be around SEK 10 billion mark, and that is still true.

We have a number of very good deals in the pipeline. And because of selling the whole time, starting up new projects, you can see a somewhat reduction then of the completed projects, where we harvest the gains.

And this is the growth machine, we're starting new projects and sell, so it's money in the bank. [Catching, catching] [ph].

Leasing is very important in order to drive the sales and drive the income. Johan has alluded to it.

And you're going to see sort of this line is really important, looking at the occupancy rate and the leasing rate - leasing rate and completion rate, sorry for that. Depending on the mix of projects, geographical and type of projects, these could sometimes diverge and sometimes converge.

So, with - I would say on a general note, the bigger projects and the bigger - higher projects we have, you're going to see a slight divergence, because you will need to get the tower out of the ground before you can start some good leasing to catch up. So, we have a number of tower projects right now in production and see one of them next to me here, the Stockholm new [ph] in Stockholm.

Almost 500,000 square meters on an annualized basis. That's the equivalent of two Freedom Towers on Manhattan.

That's pretty impressive. Last but not least, ID, very nice airport behind me, being completely converged.

Operating income reflects the sale of A1 that we did in the beginning of the year. As we have sold the mature projects, you can see in the third quarter that we are - have an under absorption of the costs, the bid costs, in this business, because we are not getting the revenues from the mature projects.

So, we really need to mature the projects we have, and we need to win new projects. That's the purpose of the business.

And as Johan alluded to, we have a shrinking capital base because the projects now are not fully mature yet. And so, you should not expect us to sell anything in this business until these are mature enough, which, sort of includes next year as well, 2018.

Combining everything into the group, you get SEK 5.5 billion. You now get down with Central, which we have trended down the cost.

In addition to that, you find a negative elimination. And those of you who really want to dig deep into the mechanics of accounting, you can pay attention to the following.

We have sold land between CD and RD. That's an internal profit until we have actually developed and sold the projects.

So, until we do that, we eliminate that internal profit on this line. So, come a few years that this line will be reversed, and the profit will come out through the P&L.

That's a really good way of developing and being able to take on large complex projects and move it between the streams. So actually, the eliminations can tell you more than what you actually think.

That's a very interesting explanation for a line you don't pay too much attention to otherwise. Operating income, SEK 4.8 billion.

Positive net financial income and then a net profit of SEK 4.4 billion. So, we have with the much better financial net and the lower tax rate reflecting lower profitability in the U.S.

operations, where we have the highest tax rates and more CD gains. It's trending down and it's around the 9%, 10% mark now.

So, earnings per share is going up and earnings per share is very important when looking at the dividend, for example. Cash flow, negative due to net investments into the first nine months, and as you have seen in the report, a lot of the deals we have reported segment-wise are not coming through as cash-wise yet.

So, SEK 7.5 billion of these made will come to our cash flow and balance sheet over the next year or so. SEK 4.5 billion of those would come in the fourth quarter.

And free working capital in Construction is maintained at the good level. You can see the sequential uptick of the bars, representing the absolute working capital, which is around the SEK 20 billion mark and that equates to around 13%, 14% of revenue.

So, the revenue line is flattening out somewhat, but we are having a good - this creates a very good and lean balance sheet. And this is despite the fact that we are growing our Development businesses.

We have a capital employed now in the three Development streams of SEK 38 billion, that is a slight SEK 1 billion increase compared to year-end. But if you look into year-end, we've sold M25 at that point in time, which meant that we've kept that market value.

So really, the underlying growth is around SEK 4 billion in Project Development. SEK 4 billion increase, as Johan stated, planned and something we do sequentially.

Despite that, we have a very good and strong financial position. So, the way we are measuring our financial position is looking at the ONFAL, which is SEK 6.2 billion at the end of the third quarter.

And as I stated, we will see SEK 4.5 billion in these already reported coming in the fourth quarter. In addition to that, of course, we will also execute some sales, which we have not reported profitable-wise yet, so continued strong balance sheet.

Johan?

Thank you, Peter. Some comments regarding the market before we open up here for Q&A.

So, starting with Construction, it's a very strong, I would say, market throughout the various operations and geographies where we see - where we have our businesses. We have seen, though, some hesitation from private investors in UK due to Brexit.

As you all know, there is no solution there from the political side of how the rule is going to look like. And the private investors, they don't like uncertainties.

So, there is a hesitation of new investments there and that, of course, will take down the private side of the construction market, especially on the building operations. On the other hand, though, in UK, we can see that the politicians try to push for more public investments, both in public buildings, but also in infrastructure.

So, to some extent, that has mitigated the slowdown on the private side. An interesting comment though is that part of the tenants and the big institutional and the financial - financial businesses that we have in London have started to move their businesses to other parts in Europe and we can see an increasing demand for offices, for example, in Poland and in Warsaw.

And of course, we want to take advantage of that, and which we are doing with our Commercial Development operation. We also see somewhat slower market on the civil side in Czech Republic.

Otherwise, here in the Nordics and especially Sweden, it's a very strong market. We see a lot of projects coming from the public side and a lot of civil projects coming to the market as well, so we can pick and choose the ones, which we think are right for us to go for.

In the U.S., a lot of discussions and questions regarding Trump, Trump administration and what's coming out there. I think it's going to be fewer extra projects coming from like the Trump administration there.

It doesn't really matter for us, because it's a very strong market from the local sales. So, there is enough pipeline of projects on infrastructure for us to pick and choose from.

Going to Residential Development, I think I comment on that previously here. Overall, we have taken down the view of the Swedish market from a very strong to strong, but then, of course, we see somewhat of a slowdown especially here in Stockholm, as I mentioned.

Norway. Norway is - the Norwegian market is a little bit more mixed though, but it's on the way to pick up on the West Coast, which is very oil dependent, that part.

Finland, stable. And Warsaw and Prague, we also see good opportunities for our businesses.

On the Commercial Development side, we operate in two different market, the tenant market and the investor market, which we go to when we divest our projects. We don't see any decrease in the demand on the tenant side.

There's a very high demand in, I would say, all the cities where we have operations especial - except for remote locations outside the Houston City, but otherwise there is a very strong tenant demand. And still very good interest and requests for bidding for our completed projects when we go out for divestment there throughout the whole geographies.

In the Infrastructure Development, we're focusing on the Norwegian projects that's now coming to the market, and also picking and choosing the right ones in the U.S. operation.

And there we have a discussion with U.S. civil, because then - if it's a project we go further, then it has to be the right one both for the ID organization, but also for our builders, which is primarily the civil side.

So, we pick and choose the right one for our organization. So, with that, André, maybe we can open up for Q&A.

Thank you, Johan and Peter. Let's open up for questions and we'll start with the live audience we have here in Stockholm.

So please go ahead. We have - just state your name and the company you work for, Niclas.

Yes. Good morning.

Niclas Höglund, Nordea. A couple of questions, if I may.

If we start out with the Construction streams and the sort of unfortunate write-downs, continued write-downs in the U.S. operations.

Could you elaborate a little bit on the timing of these projects? You also mentioned that is - it's one of new projects.

Maybe you could elaborate a little bit on when it will be completed? And also, some more flavor on your selective approach to the U.S.

market. What should we expect when we look at backlogs?

Should we expect it - how much should we expect it to shrink?

The SEK 220 million in write-downs came from two different projects. One is new and the new one is not a new project for us, but it's new, if we talk about a major write-down.

That project is nearing completion. The other write-down that we showed in the quarter is a project that we have had previous write-downs here.

So that's the information I will - we'll give you regarding the two there. And then, if I comment a little bit more in general about the businesses and the strategy in the U.S., we are more selective now.

We focus very much on the contract's conditions. We focus very much on the location to make sure it is a location where we have, which we call choreography, where we have a strong organization and also a known client that we know that we have had good operations, and we know that we have a good dialogue to work with.

And then of course, it's very important to have an organization available with competent and experienced people before we go to the project. So, there is a lot of criteria that we go through.

And we are, I would say, very selective and picky when we go for the projects. And then, of course, on top of that, we have higher margin expectations there.

So - and we are not eager to fill up the backlog, because it's a long backlog, but I think that the project that's going to - we will take on will be the right one for us.

Okay. And a follow-up on profitability in the U.S.

business.

Sorry, the…

Profitability in the business stream in the U.S., adding back this SEK 220 million. Still see - now, actually it looks like a better underlying margin than I had expected.

Is there any support from you taking some large contract win in the quarter like your George Washington Bridge? Any success fees or any material positive?

There is nothing special that we have pocketed like settlement or anything like that. We have ongoing discussions in the project that we've talked before and in the quarters.

So, this - it's more like in a normal business. But on the other hand, we have now several projects with zero contribution of the gross profit as we have taken them down, so to speak.

And we have to work these projects out and continue with them. So that's what we call like a dead volume in the backlog.

And I guess, you don't want to quantify that now?

No, we don't want to quantify, but several of the projects will be completed next year, but some of them will also have a longer title [ph].

Okay. If I may move over to the Residential part, where we've been used to pretty volatile development, your profit account when you sell contrary to some of your peers, which has more percentage of completion?

Your sound pretty optimistic volumes will recover. What should we expect in, sort of, a rolling 12-month start?

Should it be more stable going forward? Or will you continue to grow?

I'm going to rest my voice here a little bit and hand it over to Peter.

Thank you very much, Johan. Thank you.

With regards to volatility, volatility is when it jumps up and down. I would say, it's been rather sort of trending upwards.

So, you could question volatility question in itself. But I would say, we would maintain to be at around the 5,000 mark and not making sort of large moves.

Because exactly as you say, Niclas, the - we would not like a big volatility in the business, sort of stopping projects and then starting projects, because we try to do that on sort of a very measured way. But what I also tried to emphasize on my bit was we will not start projects until it has very robust financials and that has been the way we've executed our projects since 2012 on purpose.

So not making any big moves. We don't see the numbers going up, but we don't see them going down very sharply.

We have our core segments and the affordable segments and that lends much more support than to some of the premium locations that you can find a lot of articles about it.

And on top of that, we have a risk mitigator of the different geographical places.

And a follow-up on that. Would you like to specify how much Stockholm is out of your total Residential Development, rolling 12-month sales, EBIT?

I can't give you that - I don't have that number at hand. But Stockholm is an important part of the business, of course.

Greater Stockholm, yes.

And then, my final question on Commercial Development, continue to be very strong contributor to earnings. And you're talking about SEK 7.5 billion in cash flow coming in from the stream of which SEK 4.5 billion will be in the end of this year.

Is this the gross cash flow? Or is it net after investments, when we look at the details?

I would say that's the gross cash flow, but you will not find that too far away from the truth, because many of these projects are completed. So, what you essentially are talking about is the tenant improvement.

So, it's not the major part of the CapEx.

Okay. And just - and the final follow-up on CD guidance for the full year, you were mentioning that you still target a SEK 10 billion turnover from sold units.

In my book, it's likely more than SEK 2 billion more in sales coming in sort of the fourth quarter. But at the same time, your sales number doesn't include JVs.

Should we expect further divestments on JVs on top of that already this year or?

Could be.

Okay. Thank you very much.

All right. Next question?

Thank you. Albin Sandberg, Handelsbanken.

On the U.S. write-downs, previously you have argued that you have been very cautious and saying that you still think that you can recover some of the costs.

Is that the case also for the write-downs in Q3?

It's somewhat of that, we think, yeah. But it's going to take time, because it's a long discussions and big values there to be discussed.

So, the situation on that kind of the recovery story is basically unchanged in Q2?

It's very - well, as it is primarily on the Infrastructure side, the clients are the public sector. And when we're talking about the public sector and the big amounts, it's very often goes up to the political level, because it's over and above the decision level where you have the civil servants.

So, when it goes up to the politicians, it takes a very long time to have those discussions. And that's the nature of these discussions, especially on the public side.

Yeah. And as you said, the debt volume is going through 2018 and into 2019.

And then, I guess, the negotiations might continue even after that or could do?

Could do. Yeah, but I don't think it's going to be like a big major settlement on all the various discussions that we have.

It's going to come in during the entire time there.

And then on the Residential side, I just wonder if you could - based on the map you showed where you're present, you said you want the good fundamental in order to start new projects. Which areas or cities would be more interesting now?

You mean going forward?

Yeah.

Well, of course, it is like the major cities, where you see the big population. Stockholm is a very important one.

But if we talk about Sweden, that will continue to be that despite the slowdown in the market. But you should be aware that even Stockholm consists of different submarkets.

You have the city center, you have the premium segment, you have the core, which is little bit further outside and then you have the affordable segment, the BoKlok segment, that also consists - is also part of the Stockholm region, but a little bit further out. And we focus primarily on the two latter one of those.

Gothenburg is a very strong market. We don't see the same slowdown there, and we don't see it in Malmö either.

And one thing that - and then, of course, we have some regional cities, especially the ones with universities here in Sweden, where we see operations - good operations and good fundamental for Residential Development. But I think, the underlying demand and the underlying situation, if you look at this from a macro perspective here in Sweden, is that people are still moving in.

We see still population growth. We have a birth rate that is positive.

People continue to get married, and they split-up, and they get kids, they get to new work and all these things actually goes on, yes, even if you have all the media coverage about like it what's going on the Resi side. So, the underlying demand for residential and the apartments here will continue to be a strong driver in the market here.

Maybe it's going to be a short settlement here in the market, but long-term, I think, it's right. The settlement will open up also for players like Skanska for opportunities to buy land.

It has been a time when the land price had been very - sky high. And I think, and hope now that it will go down to like in a lower level, a more normalized level, and that will open up opportunities for us.

Thank you. And my final question on the tax.

I guess, as you said, you're paying low tax, because you have some write-downs in the U.S. But I guess, you wouldn't mind having the other way around.

So, I mean, if you assume that you reach your targets according to your financials, what would be a steady-state tax rate for Skanska?

Around 21%.

Thank you.

Thank you, Albin. Any more questions from the audience?

If not, we will open up for questions on the phone.

Good morning, Peter and Johan. A few questions from my side as well.

So, I would start off with taking a step back and asking about the key lessons learned from the U.S. expansion.

You mentioned that you're more selective. It's important to know your customer, and also have the right social group.

Is there anything else that we should take with us?

Well, I think that it's - on top of that, I just want to emphasize that even if we know the customers and the right contracts, and all the conditions are right from that standpoint, I also think it's important that - to focus that we have an experienced team available. Even if it's a project that is well known for us and we think that we can do it, but if the experienced people are tied up in other projects, then it's harder to be successful.

So that's like one thing. Another thing is also to monitor the cost escalation in the project - in the market, especially if you have projects with long duration, where we can't secure the cost, upfront or very early in the project.

And then my second question on the CD unit. Peter, you guided for around SEK 10 billion in sales that would correspond to some SEK 2.2 billion in the fourth quarter.

So, it's not only the fourth quarter is strong for CD, is your guidance cautious? Or is it so that you have fewer completions in the near-term and hence we shouldn't expect the same seasonality as we have used to?

Thanks, Fredric. It seems to be a tough line from city center of Stockholm.

But if I - so when we've guided around the SEK 10 billion mark, it could be a little more - a little bit more and a little bit less, but around SEK 10 billion mark. The SEK 4.5 billion I talked about is already closed deals from a contract term.

So that is just a settlement, that is just a cash implication. In addition to that, if we settle any of the deals, we will report in the fourth quarter that comes in addition to the SEK 4.5 billion cash wise.

Okay, yeah. Is it better now?

Yes, Fredric. Now you can expand and ask tough questions.

Yes, finally. So, what I was talking about as well was - is there - I think, it sounds quite cautious given the seasonality in CD sales that is usually strong in the fourth quarter…

Yeah.

…that's also due to that you have a low completion rate at the moment and hence can't divest as much as you would normally do.

We sell projects, when we are optimizing the returns and the profitability. We do not sort of just simply sell just to record a sale and some cash.

We want to really make a good deal. So, what you have seen previous years, especially when it comes to the central eastern operations, CDE, they have been very focused on New Year's sales.

That is not the case this year, because they have sold things throughout the year and that goes for all of the businesses. So, if you step back and look on the very planned growth we have done in the CD stream over many, many years, that has meant that we have a number of markets functioning and working, which means that you will see a more evenly spread out sales during the year.

Given, of course, that they are mature and given that we do the right deal.

Excellent. My final question on orders.

You've had a strong year in sales and EBIT-wise, production is up quite significantly year-over-year. Despite that, volumes were down in the third quarter.

Is that due to few projects being completed? Or is it a negative price mix effect?

You refer to the segment reporting now and the sales volume in the third quarter, I'm just trying to see if I get you right. No, it's actually - it's - we have been at very high levels of presold in Construction and low number of unsold completed, which means that we will need to start up new projects in order to trigger sales.

As you know, we are at a default sales rate around 30%, 40% in most of the projects. So, when we start up a project, you essentially book those 30%, 40% of sales directly in that quarter.

So, we have actually started up less projects in the third quarter. As Johan alluded to the third quarter is the weakest one in terms of start-ups on sales.

And that was more of how it would sort of pan through. Apart from the demand in the marketplace, something which we are also depending upon is actually getting the building permit.

If we don't get the building permits, we can't start the projects regardless of the - if they have hit the presold hurdles. So that is another sort of thing, which we can mean that some projects - if project started in one quarter when it was planned to be in the third quarter, it moves into the fourth quarter, for example, just to highlight some of the mechanics in the business.

And just to be absolutely clear here, we have several projects that everything is in place and we're just trying for the building permits and that has been taking a longer time from some of the municipalities. And these projects are just ready to go into the market and just waiting for the permit.

So, it's more of a timing issue than a market driven, I would say, the lower sales that you've seen in the third quarter.

And if only building further upon what Johan was stating, so Fredric, when you look at our numbers, as you know, the - we report the segment numbers, some of your question was alluding to IFRS, i.e., the cash. So, sort of just make sure we are having the right assumptions.

Absolutely. Thanks a lot.

Sounds promising for Q4. That was all my questions.

Thank you.

Thank you. I have a few questions, so starting with one question regarding Construction.

What you refer to as a step volume, do you see any significant change in that in 2018 compared to this year? And is it then up or down?

Up or down compared to today, it's going to go down, because projects are being completed. As Johan stated, we have some projects, which we'll be continuing into 2018 and even into 2019.

But the volume will sort of be reduced over time.

And is it a significant part of total volume or?

Not a significant part, but it impacts the margin. That's for sure.

Okay. Thank you.

Then regarding Residential Development, did I understand it's correct that you expect to start roughly 5,000 units this year?

We're going to be around the 5,000 mark, yeah.

Okay, because you've started 2,800 year-to-date so that implies that Q4 will be a very big part of the total year.

Correct. So, in the fourth quarter, on average, you have around 35% to 40% of the plan - of the starts due to the seasonability over the year.

And to some - and some of these starts is depending on getting the building permits and a little bit outside of our control.

And just to continue to build on, then again starting projects where we have the fundamentals in place. So, we are not bound by the 5,000 mark exactly.

We're going to start the project, when it's the right time to start a project.

Yeah. And what kind of presold ratio do you require?

Depending on where the project is situated. So, as I said, it could be ranging from 0% up to 40%.

But I would say that the default project is hovering around 30% to 40%.

Okay. Thank you.

For coming years, do you plan for unchanged volumes? Or do you plan to reduce your total S&A expense?

Are talking about Resi now or…

Yeah.

Okay. We think that we have a level of - the size of the business that we can maintain throughout the business cycle.

Well, of course, it will go slightly up and down depending on where we are, but we have to plan long-term.

Okay. And then I have a couple of questions regarding CD.

I noticed that the return on capital employed fell slightly in the first nine months this year compared to last year given a bigger capital employed. Do you expect the returns to continue to come down given that the capital employed probably will continue to increase also next year?

I would say it's a fair assumption that returns go down as you plunk down more and more money, and as you're getting a higher book value of the land into the equation. We're still making very good deals.

And I think, you're talking about the situation, where we are head and shoulders above the 10%, which is the hurdle rate for the development stream. So, it will come down somewhat.

Okay. Thank you.

And one final question, given that volumes are increasing, do you think you will be selling more in 2018 than in 2017 within Commercial Development?

I think that it depends on the maturity of the projects. We have quite a big proportion of the projects, which is larger and more complex, again coming back to the fact that we want to sell projects, when we are optimizing the gains.

So, I would say that - we could see a bit lower volumes next year, if you look on the mix of the portfolio into larger, more complex projects.

But with that said, the overall strategy is to be able to continue to build the Commercial Development up. And that, of course, means that the volume of divestment also will gradually go up.

Absolutely, which also means then that the value of the business, which still is to be realized will continue to grow.

And as this - the operations for Commercial Development in U.S. is picking up, we should know that the divestment in the U.S.

is very large and that means that it can be lumped between the quarters and the years depending on how we plan and divest the U.S. projects.

Okay. Thank you.

That was all my questions.

Thank you. Just a question on U.S.

Construction. You said that you've looked over some projects and this resulted in write-downs.

Are you still looking over projects? Or have you gone through the whole portfolio and scrutinized the potential write-down risks?

We continue to scrutinize projects throughout the year, and we do it every quarter, so that is in part of the ongoing operation that we have. So, we never stop scrutinizing.

Okay. And I mean, if you look now compared to few years ago, have you been become more careful on booking profits with the write-downs in mind?

Or are you still doing it in the same way now versus historically?

We are, of course, cautious when we put up - when you put the forecast on each project in the U.S., and then that's the thing that we do across-the-board.

Okay. And the question on Residential on pricing on your projects.

Are you increasing prices? Or are you holding prices?

Or what's the price level, when you start projects now compared to the last year?

It actually depends on the location there. And I think when I talk about location, I talk about the micro location, because when we start a project, we need to exactly the competition.

And I'm talking about the competition just in the same area, the same part of the city, what other project is coming up especially there. And depending on the competition in that - exactly in that local area, we price our project in a very sensitive way.

So yes, we still see opportunities, where we can increase the prices. But overall, if I generalize it a little bit more, we see in Sweden that the prices are more stable now.

But we have not started to give any discounts or lower the prices on projects that we have already launched in the market.

Okay. Thank you.

That's all for me.

Yes, good morning. Thank you for taking my question.

Firstly, on Commercial Development, can you explain a little bit the reasons for the high capital gains as a percentage of sales of the divestment process in Q3? What was so special about those properties?

And then, more broadly, thinking about Q4 next year, do you think you can keep the historical run rate of, let's say, 25% to 30% development gains, defined as - yeah, capital gain as a percentage of process?

Okay. The first question is the margin of 28% of the sales that we report in, excluding the gains in joint ventures.

Because of the really hot market, because of us executing profits that has been in high demand and continues to be in high demand, we have been hovering around the - close to the 30% mark for some years. If that is to be maintained coming to your second question, that is of course going to be very dependent on the continuous growth of the market.

But if the market continues to stay at the current strong level, eventually than the price of land, which follows the price in the marketplace will grow. And as such, you will see a certain decline in the margin.

Still being very profitable and still being a very good deal to be started.

All right. Thank you.

And I think, sort of, coming in, I think, over the past seven years, and now I'm looking at André, I think, we're looking in around - we have been hovering around 22%, 23% mark, when it comes to gains over the divestment proceeds.

All right. It's 11'o clock sharp.

So, let's call it a day, or continuation of the day. See you back in this format in February, actually.

So happy holidays and everything.

Thank you, guys.

Thank you. Bye.

Merry Christmas.