Skanska AB (publ)

André Löfgren – Senior Vice President-Investor Relations Anders Danielsson – President and Chief Executive Officer Peter Wallin – Chief Financial Officer

Erik Granström – Carnegie

It's 10 o' clock. Welcome to the Presentation of Skanska's Year-End Results for 2017.

I am André Löfgren, and I'm heading up Investor Relations at Skanska. And the presentation is held here in Stockholm at our headquarters, but there's also lot of participants on the web and also over the phone.

And you will all be able to ask questions after the presentation. And the presentation will be held by our CEO, Anders Danielsson and our CFO, Pete Wallin.

And with that, I leave the stage to you, Anders.

Thank you, André. Hi everyone, and before I go into the figures, I want you to look at the picture here behind me, it's the Farley Post Office, middle of Manhattan, and we are renovating that into completely a new building, it's around the Penn Station area.

And this is actually our biggest win during 2017. It's a cooperation between U.S.

Building and U.S. Civil.

So it's a One Skanska project. Going into the year-end report, then.

Overall, we have an operating income of SEK5.5 billion, lower than last year and we are not satisfied with the parts of the Construction performance and the margin there. So we have decided to do a restructure to increase focus on profitability in Poland, Czech Republic, focus on the core business in U.K.

and also to leave some of the power segment in the U.S.A, in that market. But we have taken one-off costs for restructuring for SEK1.1 billion in Q4.

We also have seen project write-downs in Poland during the fourth quarter of SEK400 million. We have very strong performance in the Nordic construction units.

That has been for a while and that continues which is really important and good. We also have, since many years, very strong performance in product development.

Commercial development has outperformed many years now and we also have seen in the last few years, lot of the improvements in the residential development. And the infrastructure development has also had a good year last year.

Earnings per share, pretty much on the same level that we communicated two weeks ago, SEK12 per share. We have a very strong financial position.

So we are in a very good position and the Board has proposed a maintained dividend level of SEK8.25 per share. If I go a bit deeper into the restructuring overview, so we have decided to reduce the size of unprofitable units and also the units which we don't think it fit into our core operation and going forward.

So we will reduce the number of people and that's predominantly in Poland where we have announced that 3,000 people have to leave Skanska and which of about 2,500 in Poland. The rest of the layoffs is spread around the different actions that we have to take.

We will focus when it comes to infrastructure development on the U.S. market and that is due to that we see a very thin pipeline when it comes to PPP projects or OPS project in Europe, both here in the Nordic and in U.K.

We are also reviewing our governance structure. So we have created – chosen a new team, a smaller team on the Group level, the Group leadership team that will work much closer to the operating units, business units around our footprint.

So that is also – we're also reviewing the overall governance structure, so that work has been initiated and we will continue to work with it in a comprehensive and careful, responsible way during the spring. So we will come back to you during Q2 with that.

We also have, as I said, very strong performance when it comes to commercial and residential development. So we want to grow that business.

That's also been part of the strategic review during the fall. So we want to increase that operation and we are looking for opportunities for growth there.

Going into Construction, the revenue has increased by about 9% in local currencies. The order booking has reduced and that's due to the fact that we are more careful when we select projects that we go for, that we're bidding for.

But we still have a book-to-bill 101%. So we are in line with the revenue we've seen last year.

We have a strong order backlog. The operating income, SEK1.2 billion in the construction stream compared to SEK3.5 billion last year.

So the operating margin is 0.8%, overall operating margin is unacceptable. We do perform well in the Nordics, we do perform well in the majority of the U.S.

operation, but we have those isolated units that we need to improve profitability and we have the plan for that and we are executing it right now, hard focus on that. So we've seen write-downs in projects totaling SEK1.5 billion during the last year, of which the SEK400 million, which we communicated two weeks ago in the fourth quarter in Poland.

We also have taken an impairment charge of SEK1 billion in the fourth quarter and that is write-down of goodwill and assets. And if you add them back, if you add the impairments back to the margin, we would have been ended up in 1.5% instead of 0.8%.

Residential development, revenue is pretty much on the same level. The sold apartment and started apartment is slightly down.

The operating income is a bit up due to the fact that we have increased our margins, our operating margins. And we have a strong performance in all markets.

We have a return on the capital employed of 15.4%, which is well above our target. We have a target, as you know, of 10% through EBIT and 10% through return on capital employed and we are beating both of them.

I think we, Skanska has a good product mix. We have a good diversified portfolio when it comes geographies.

We also have a diversified portfolio when it comes to segment, which segment we are operating in. So we see less impact of uncertain market in the lower segment – lower and core segments than we do in the high end.

So, overall stabilized markets, we have reduced somewhat the expectation going forward, coming back to that and we also see a slower sales pace, especially in Stockholm, Oslo. But I'm confident from our position, because we have a healthy, we have a good level of sales rate in the ongoing projects.

We also have a few, very few unsold completed in our portfolio. Commercial property development, it's a very good year, very good year.

It's on the record high level with the operating income of SEK2.7 billion; gain on sale, SEK3.5 billion including the joint venture we have; 46 ongoing projects, which represents almost SEK28 billion in the investment value upon completion. We have actually started as many as 24 projects during 2017, which explains so that we have a 44% pre-leasing rate versus 49% completion rates in those projects.

The leasing activities is also on a very high level during 2017. But we also have very good opportunity going forward.

We have around one million square meters in leasable areas in those ongoing projects. Infrastructure Development, good year.

We sold divestment of A1 in Poland for SEK1.4 billion in the first quarter. And the project portfolio net present value is SEK3 billion and the surplus value is SEK0.5 billion.

And that's of course that we have sold off a lot of assets. We sold M25 2016 and A1 2017.

And as I mentioned on this pipeline, it's quite thin here in Europe. So we will, going forward, focus on the pipeline in the U.S., which is encouraging.

We see a pipeline there, we'll see what the administration and the different states are deciding going forward. But the need is tremendous for infrastructure investment.

If I look at the book-to-build, you can see here that rolling order booking is somewhat sliding down, meeting up the revenue in a rolling 12, so it's again, 101%. So we are seeing – we have a healthy backlog.

So we can afford ourselves to be more selective going forward and focus on the projects that we can see that we have a competitive advantage and that we can perform on a higher level. So it's back – to focus on the core competence, because it's crucial to have the right team, being in the right geographies and having the right contractors to be successful.

If we look at the different regions on the order book, it's pretty much even if you compare to last year, we’re either slightly below or slightly above the order bookings compared to last year. We can also see that number of months, it's 15, it's on a good level.

The U.S. – the duration in U.S.

is duration in U.S. is 19, which also makes sense, because it's a larger project in U.S., so the months of production you have to produce is longer.

And with that, I will leave it to Peter to go through the details.

Thank you. So details, we mean profit and loss.

So let's start with Construction and the first and biggest stream then. We recorded SEK150 billion in revenue, which represents a 9% increase year-over-year, the same in SEK as in local currencies.

The operating income was SEK1.2 billion, then hit by the SEK1 billion in impairment charges made into the fourth quarter and SEK1.5 billion in project write-downs. As Anders has said, this is completely unacceptable and we are taking measures, which is now manifested itself in the impairment charges also made.

If we look into the various markets, we can take one market segment away, right away, and that's Nordic part. The Nordic businesses are doing great.

They are really reaping the benefits from the very good markets. And also the Finnish market is a market where we are seeing more and more positive signs from where we have a strong performance.

The European segments, representing Poland, Czech, and the U.K. is of course very much hit by the one-off of SEK1 billion made in the fourth quarter.

Roughly SEK600 million of the SEK1billion it stems in the European area there and it's predominantly in the Polish business. If you look into the U.K.

business, for example, one business which I have overseen now, the profit and loss is actually improving quarter-by-quarter and we are at a decent level, we can do much better. Czech is also doing relatively good, but the market in Czech is very tough.

So here we are taking some measures in order to improve our competitiveness in that tough market. In the U.S., the remaining SEK400 million then of the one-off charge relates to the Civil business.

So that also means that the U.S.A. building business is doing quite okay.

So that's the way it looks across the Construction part. 0.8% is not a good margin at all.

3.5% remains the target for the Construction stream in operating margin all. But it’s all not all bad, you have some really good businesses as well.

Residential, our second stream is doing very well. SEK 13.2 billion in revenue, which represents a reduction by 7% compared to last year.

That's 0% compared to last year. That means 7% negative in volumes of sold units, but plus 7% in terms of price mix.

The operating income amounted to SEK1.7 billion and you can see the margins. Here it's easy math and it's quite fun math.

18 minus 5 is 13 and it’s quite a good operating margin we record in the RD segment. And if we look into the various markets, you're going to see the Nordics is doing well, Sweden is doing well.

And with the Swedish line, you can also see that the Norwegian and Finnish businesses are doing okay within the Nordic part. Europe is also doing well, so 13% is a good level.

And as you saw from the previous graph, they are coming down somewhat. That also represents somewhat of the slower market we see in Stockholm and in Oslo.

But the affordable segment, the affordable segment called BoKlok, is doing quite good. So that is offsetting some of the negative impact, which is then showing into stability then.

So we are hovering around 4,300 units sold and started, very much in line, and we have a volume of 7,200 units under production, homes under production. And as you can see, we are maintaining a very strong sales rate in our portfolio.

And I would like to also comment that the process we have for starting up projects, where we are really besting the design and costing to design, the micro market and also achieving presales rates before we start a project, is very good in the current market context. We really have good control of our RD business.

You can also see that the completed unsold is being lower compared to last year. Then CD, yet another record year, SEK11.4 billion in revenue from divestments, principally, SEK2.7 billion in operating income.

And in the income from associated companies, you can find SEK600 million positive and that is the joint ventures, where we have sold properties during the year. That is not recorded in the revenue line, that's only a one-liner in the operating income sense.

So it's a very good business. And in terms of the divestments only, then that's close to SEK11 billion and that means that we are doing close to 27% in margin from the sales, excluding the joint venture deals in 2017.

And you can see this growth then on a rolling 12- month basis behind me. And for 2018, we are set to continue to divest assets around the same level.

But the margins then, if the market's going to be as strong and also – we are also selling a newer part of the portfolio, which means we have a somewhat higher value of the land as well, which is also impacting the margins that we can get on it. Then on the portfolio, you can see we are realizing profit and we are taking somewhat from the balance in the portfolio, but we are gradually rebuilding it.

And a key component to that is the leasing. And the lines you can see represent completion rate and leasing rate and those are very much in line.

But you can also see the fantastic 477,000 square meters, which represent the equivalent of two Freedom Towers in one year. So it's a fantastic achievement, both of creating new value and also mitigating risk in this portfolio.

Last but not least, perhaps least, Infrastructure Development. Here we have sold the last parts of our wind power plant in the fourth quarter, which gave a little bit uptick on the operating income here.

The year started with the sale of A1 that Anders has talked about. If you look into next year, we will not have any pieces to sell.

We have four projects in the portfolio and they are not mature to be sold. And that means that the return from the recurring revenue from the four projects that we have in the portfolio and the cost of building projects now only in the U.S.

market, that's going to be even-steven more or less. So, don't expect a strong positive EBIT from Infrastructure Development for 2018.

The portfolio is shrinking as we are selling off so we realized SEK1 billion in value and it knocks down the value by 0.9 so you see it makes sense. So, we are continuing to de-risk the portfolio and work to enhance the values until we are going to sell it.

So, putting it all together into the Group and here I would like to talk about then the operating income of SEK5.5 billion includes the SEK 1.1 billion in charges. As I said, SEK 1 billion is pointed into the Construction part and SEK 100 million roughly into the central part.

We are operating with a very strong handle on the cash and cash management. And so, we are operating all of this with a growing product development portfolio with a positive financial items line.

Taxes is then 11% and if you look into the U.S. tax situation now, we have not incurred any special one-offs relating to the changes in the federal tax rate from 35% to 21%.

With the change, that will push down our tax rate in our U.S. operations from around 40% down to 24%.

On the Group level, it's going to go be roughly 16% rate. So, put that into your Excel sheet.

It's going to be a good tip of the day. But just represent then we talked more about the one negative one-off effect from the U.S.

tax rate impact, just think about the size of the U.S. businesses in Skanska and the benefit we will have from this tax change.

I would also like to touch base on the SEK600 million that we have talked about that we will incur during the course of 2018 on the back of the actions that we have seen. So the SEK600 million, you can plunk in SEK400 million of those into this – the European Construction part.

This is restructuring charges for laying off people principally and then the remaining SEK200 million is roughly SEK100 million in Infrastructure Development and SEK100 million on the central line. That is what you can expect.

But this is the actions that we have identified so far and it's principally layoff of people. The other part I would like to mention is what to expect from the revenue from a Group point of view with the strategic actions that we are now decided and that we are now executing.

That will roughly push down the revenue line top line by roughly 9% over two years, 9% and it's a mix of businesses to be exited and regions to be closed down and then, of course, we need to complete the project. So, this downward will be sort of gradual.

All clear, I hope. Another thing which is clear is the very strong cash flow we see in the fourth quarter.

And we have a very strong working capital in Construction continuously and then also on top of that, we have sort of a balanced divestment investments in our development streams. So, on the pre-working capital in Construction, you can see that we have a quite stable in terms of the revenue.

Anders talked about the order situation and the gradual decrease of the order bookings is also sort of giving somewhat of a – that deceleration is giving somewhat of an impact also if you look on the working capital over revenue, the green line there. And the investments is continuously as planned going to increase in the development streams and you can also see that in December we did sell the M25, which means that we handed over M25 in the beginning of 2017, but that inflated the number in ID as you can see from that line.

So, the increases in Residential and Commercial is quite substantial and quite according to plan. Now my friends, this is the last slide I have to present here.

It's the last slide of this presentation and it's the last slide of 28th quarterly presentation as the CFO of Skanska. I wish to thank you all and I had the privilege to work with all of you over my 18 years old in Skanska.

Thank you.

I will go into the market outlook, then we can go back if there's any questions of the other ones. The market outlook on the Construction stream.

Start with the Nordics, very strong non-residential and stable residential building market in Sweden. We see a stable building market in Norway and Finland, a very strong civil market in Sweden and also strong market in Norway, but with fierce competition.

We also see a lot of competition here in Sweden from other parts of Europe. Finland is slightly improving.

It's a stable market with a little encouraging outlook. Europe, we'll go to Europe.

Poland, the building market is stable. Brexit, we will – we are monitoring that very carefully how the impact will be on the UK non-residential.

We can see some implication, but not a big drop yet. Stable civil market in UK and Poland and a weaker market in Czech Republic where we need to adjust.

U.S.A. continues to be a very good market, but also here fierce competition.

Go to Residential Development, here we had lower For the Nordics, we have lowered the outlook with one notch. So, it's more uncertainty.

Sweden and Norway are stable, but it's a slower sales pace especially in Stockholm and Oslo. The other parts of our geographies are more stable and also the affordable segment is also pretty much in line with 2016, which was a record year when it comes to residential construction and residential development.

Europe, robust market in Central Europe so no change there. When it comes to Commercial Development, in general, the tenants and the investors there, we can see a strong demand and the vacancy rates where we operate are low.

The Nordics, high interest from investors and low vacancy rates, especially in Sweden. Finland is improving also in this area.

Europe, strong demand in Poland and also improving in other parts of Central Europe. U.S.A., strong investor appetite and good tenant demand.

So, here we are also looking for new opportunities in new cities. Infrastructure Development, strong market for PPP projects in U.S., but the competition is considerable.

It's a lot of companies who want to go for those projects. A very thin – as I said earlier, very thin pipeline in all the markets where we operate.

Before we start the Q&A, I want to present the new Group leadership team and here are the people that lead the company going forward. I've stepped into my role here in the 1st of January and I will have direct reporting line to the European Construction units and also responsible for communication and operational efficiency.

As the new CFO, Magnus Persson, he used to be the CFO recently in Skanska Sweden; he will take on all the normal CFO sort of staff units, but also adding to him risk management and information technology and this is effective as of tomorrow. So, I want to thank Peter for all your years and all your contribution to the company, thank you.

On Legal Affairs, Caroline Fellenius-Omnell, she keep responsible for Legal also adding on the ethics and green and CCI to her responsibility. Richard Kennedy, previously the BUP, Business Unit President for USA Building is heading up this U.S.

Operational, the U.S. Construction Units and Infrastructure Development and also, he is taking on the Safety responsibility for the whole Group.

Claes Larsson, Executive Vice President for the Commercial Development Units we have in Nordics, Central Europe and U.S. He is also adding on the BoKlok Housing, which has been very successful during the last few years.

And Kirsi Mettala, stepping in as EVP for Human Resources, she used to be the HR Director for Skanska Finland for many years. So, this is, we have created a smaller team than before.

We are going to work more closely through the operating unit, the business unit and we are pushing out responsibility and having them more accountable and responsible for performing the business and also improving the business. So, this is – and that's also why we are reviewing the governance structure on each level.

With that I'll leave over to André.

Thank you. All right, and I will leave it over to you guys.

Time for questions and thoughtful answers as well. Let's start with the audience here in Stockholm, then we will have it over to the web and the phone conference.

So, please state your name and the company you represent and ask your question. And we have microphones running around in the room as well.

So just raise your hands please. Shy audience today?

Right, then in that case, we will leave it to the phone conference and see if there are any questions online.

Thank you very much, gentlemen. I had a few questions.

My first question was basically to Peter and your comment on the expected drop in volumes. You were talking about 9% over two years.

Could you clarify that, is that Construction volumes or is that Group volumes that you were talking about?

Hi, Erik, it was Group volume I was talking about.

But I assume that the majority of that will be within Construction because that's where you're doing the most of the restructure in general?

Correct.

All right, thank you. And then – and also sort of a detailed question on ID, is it – given the fact that you're not expecting to divest anything for next year, should we expect the fact that ID could do simply a negative result next year, or is it also the fact that you do have some sort of revenue running through the business stream that means it should at least breakeven?

I think it should be expected to breakeven but on quarter-by-quarter basis, it could fluctuate around zero depending on the level of bid costs and recurring revenue from the projects.

Okay, thank you. And my final question then is regarding – when you were talking about the – your expansion plans or plans for growth within the development operation excluding ID then, both RD and CD, could you sort of – could you explain a little bit where do you see the growth opportunities within RD and where do you see the growth opportunities within CD?

Thank you.

I can comment on that. When it comes to RD, we are mainly focusing on our parental geographies.

Of course, we can also consider that when we have Construction footprint, but mainly in the shorter-term, a few years ahead, we are focusing on the core the current year footprint. When it comes to Commercial Development, we can see the biggest opportunities for growth are in U.S.

So we are looking at a few cities on the West Coast. So we will come back but no decision has been taken yet.

So we will come back to that.

Okay, thank you. Those were my questions.

All right. It was very clear and crisp then, the messages.

With that, we thank you all for listening and for your attention and see you at the – in May, sometime in May for the first quarter report of 2018. Thank you.