Skanska AB (publ)

André Löfgren – Investor Relations Johan Karlström – President and Chief Executive Officer Peter Wallin – Executive Vice President, Chief Financial Officer

Niclas Hoglund – Nordea Erik Granström – Carnegie Tobias Loskamp – HSBC

And with that, Johan, I leave it to you.

Thanks, André, and welcome, everybody, to this report.

And strong balance sheet. And I think that the strong balance sheet that we have, that is a fundament so we can continue to grow the project development operation, which is the strategy that we have lined out in Skanska, and we have had it for several years.

And if you go back in time, you can see that we have expanded it, expanded, increased operation. And that is exactly what we plan for the future.

All the details. Thank you, Johan.

Going over to Residential Development. Continuous good and strong performance.

26% up in revenues. All of that due to price mix, where we are essentially at the same volume as last year.

Gross margin is close to 18% across the market, which is a very good gross margin. And we are maintaining the selling and admin at around 5%, thus, giving the 13.1% operating margin.

And that is only the development profit. Construction is reported in the construction stream.

Going over to Residential Development. Continuous good and strong performance.

26% up in revenues. All of that due to price mix, where we are essentially at the same volume as last year.

Gross margin is close to 18% across the market, which is a very good gross margin. And we are maintaining the selling and admin at around 5%, thus, giving the 13.1% operating margin.

And that is only the development profit. Construction is reported in the construction stream.

Going over to Residential Development. Continuous good and strong performance.

26% up in revenues. All of that due to price mix, where we are essentially at the same volume as last year.

Gross margin is close to 18% across the market, which is a very good gross margin. And we are maintaining the selling and admin at around 5%, thus, giving the 13.1% operating margin.

And that is only the development profit. Construction is reported in the construction stream.

If you look on the portfolio, now we are at SEK 3.2 billion in net present value, and I would say that we carried this at quite conservative valuations compared to what we are seeing sometimes out in the marketplace. Pulling it all together, knocking down with the central costs and elimination, we get the SEK 1.8 billion in operating income.

So 2 factors that gives an EPS improvement despite the fact that EBIT operating income is lower compared to last year is, number one, extraordinarily good cash management, I would like to say, from our units in our Skanska financial services. Great job.

So we end at the positive financial items.

And if we look at the development streams and on the investments, you can see that we are a bit lower compared to year-end. And if you look on the ID line, you can see that, that is the fact that we have gotten the proceeds from both A1 and M25 in the first quarter, so that knocks down the capital employed in the ID stream.

And you should expect this to continue to increase, the capital employed in the development streams because we are increasing the activity in this stream. You saw the strong movements of start of ongoing projects in the CD stream, for example.

And if we look at the development streams and on the investments, you can see that we are a bit lower compared to year-end. And if you look on the ID line, you can see that, that is the fact that we have gotten the proceeds from both A1 and M25 in the first quarter, so that knocks down the capital employed in the ID stream.

And you should expect this to continue to increase, the capital employed in the development streams because we are increasing the activity in this stream. You saw the strong movements of start of ongoing projects in the CD stream, for example.

So let’s wrap up here with some comments regarding the market conditions before we open up for Q&A. And you can see here that, overall, the market is very good and stable going forward, and there is no change since the last quarters.

We’ve continued to be a good market with basically the same conditions as we discussed last time we met here. Very strong situation in Sweden if you’re talking about the market here.

We see demand for residential, for infrastructure, for public buildings, and a lot of different things here. So it’s the whole sector.

And we can see also that there is also a stable situation in Finland and in Norway. Some comments maybe I should make regarding the U.K.

We have a Brexit coming. Nobody knows exactly what the rule is going to be, and that has hampered a little bit the activities on the private side for private investors.

But on the other hand, we can see that the politicians in the U.K. have bolstered the markets a little bit on the infrastructure side with more public spendings.

And that has, for us, been awash between the 2 sectors there. A lot of people ask me, what do you see in the U.S.?

Do you see any projects coming out from the administration, from the White House? No, we have not seen any projects yet coming from – there’s a lot of talk, a lot of discussions.

And of course, there’s a lot of need here, especially on the infrastructure side. We expect, though, that it will be something coming out.

Exactly when and how it’s going to look like, nobody knows, but that is something that we follow very closely. But what they have said is that they will come out with something with – that’s going to be funded by federal money, and they also expect that’s going to be some sort of a public invest – sorry, private investments in the infrastructure projects will come to the market.

And we read that as it’s going to be an opening for even more PPP or P3 projects there. But this is a market that we follow.

On the other hand, we see a lot of activities on the local state levels, so there’s a strong pipeline of projects overall. I will say especially on the infrastructure.

There’s a lot of airports that need to be rebuilt and so on. Residential market, the Nordics, extremely strong.

And I will say Sweden is in the lead there. And we expect that, that will continue.

And on the commercial property side, we see huge demand for our assets once they are completed and filled with tenants due to the low interest rate in the market. The property that we come up with 4 divestment, there’s a lot of buyers out there, and we see opportunities now to continue to sell them with good profitable levels.

In the other markets we operate in, the leasing market, which is the base for value creation, is also quite a strong market in most of the places where we have operations. And the PPPs, that’s basically in the U.S., we see projects coming.

And that’s where we have the biggest focus. But where – if and when it’s going to come, projects for the market in Europe in the construction markets where we operate, that is of course the type of project that we are interested to take part in and try to see if we can get the contract for.

So with that, I think it’s, André, maybe time for some Q&A here.

Yes. Thank you, Johan and Peter.

Let’s open up for questions. And we’ll start with the live audience here, and then we will move over to the phone.

And I see already Mr. Hoglund is waving his arm, so let’s get him started.

Yes. Niclas Hoglund, Nordea.

If we can start – may start with the construction in the U.S. market, we are sort of – we don’t get as much details as we used to.

I was wondering if you could help us a little bit on the underlying profitability. Is Building also coming down year-over-year?

Is the sort of the slightly lower margins that we’re seeing right now, is it all linked to the Civil market? And also, if you could have a comment on the U.S.

on this sort of debt volume magnitude and also maybe profitability in the very strong backlog.

The 2 units that consists of – the U.S. operations that consists of the 2 units, you can see a little bit of the different performance there between the 2 U.S.

Building has performed according to the expectation. It’s in a very good shape.

And the increased costs and their lower profitability is on some of the infrastructure projects there. And commenting the debt volume, if we should call it like that, is that it takes time before all the megaprojects has been completed.

Long duration, several years. And the dialogue and discussions and claim discussions we declined take time, especially on this infrastructure project.

Because this is something that you should be aware regarding the infrastructure project. There are always public agency behind or an authority.

And when you talk about big numbers that needs to be settled, then it’s very often it has to go up to the political level. So that’s one of the reasons why it takes quite a long time to have those discussions.

So a follow-up on that. Now with your very strong backlog, when are you seeing that – assuming that the situation is not deteriorating, of course, when will you see less dilution from this megaprojects that are more or less breakeven?

And also, if you may comment on the sort of profitability in the backlog.

The dilution of those projects will, of course, decrease over time. I don’t have any numbers for specific years there.

Okay. And then if I may continue to Sweden, I mean, extremely strong profitability in the first quarter.

Could you help us out a little bit on how we should think for maybe as an underlying profitability for the Sweden operation? Are we seeing a very strong contribution from the New Karolinska project already in this quarter?

Hasn’t been extremely mild winter or it’s been mild. Not that mild, I guess.

Help us out there.

We don’t comment on any specific projects, but I think that I can give you some hint here, and that is the profitability from Skanska Sweden is coming across the board. We have hundreds of products.

It’s a very well-run well machine. And there is a good market, not only in the big cities, but also in all over Sweden.

So this is a contribution from, I will say, the whole business. Strong performance in the first quarter.

And the way you should think about is it is a good – it’s a well-run machine in a good market.

Okay. And then my final question and then I’ll – maybe I’ll be back.

We’re seeing a new taxation coming in, in the market related to taxation of development gain, the sort of packaging. What’s your view on – has this had put a pressure on prices in commercial projects?

And maybe also, can you comment a little bit on your thoughts on U.S. taxes if that will sort of delay the divestment of your current projects, mainly – well the Boston, very profitable ones that still exists?

That was a lot of questions regarding tax, and that’s a tough area, as you all know. If we start with a property taxation, which is now going through a full – the full process, so we don’t know exactly where it’s going to end.

But it has, for sure, sort of been part of all the discussion that is ongoing right now of divestitures. And I’m sure it could have a limited impact of the transaction volume.

The money is still out there searching returns, and that could actually lead also to the market prices actually increasing because of limited supply. So we’ve – it’s early days.

We have seen some indications of – that it’s having an impact, but its far too early to say anything yet. When it comes to the U.S., we are reading the papers, we are looking at TV as same as you.

I think that there is a very long way before we even know the details of how this tax should be viewed, how it should be structured, et cetera. But of course, because of the big U.S.

proportion of Skanska business, it could be positive.

And a follow-up then. Looking at your 2 taxes in the quarter, of course, it’s held by the divestments.

You have 14% now, which is pretty low, but it also could be held by, well less U.S. both divestments and earnings.

Is that a good estimate for the full year? Or what are your thoughts on taxes?

I think it’s a good long term for 2017, yes.

All right. Continue then – Erik Granström with Carnegie.

I’ll try to continue with some questions that we haven’t gone through yet. If I look at CD then, you showed the very strong development of the number of projects on the production, obviously.

But it seems to me at least in the quarter that this sort of the leasing and the buildup of projects start to diverge a little bit. Basically, that leasing is in keeping up with the project starts.

Is that a quarterly thing that we’re seeing here? Or is it simply that you guys feel that the market is so strong and you might as well start a speculation without any anchor tenants?

I think it’s a little bit down the line. Reason is that the composition of the project that we have started during the quarter.

And we have started several big ones that takes maybe 3, maybe up to 3, 3.5 years until completion. And when you have big projects like that in a market that’s really good, we think it’s right not to go for an anchor tenant and have a pre-lease.

It’s very hard to find a pre-lease for a project that’s going to be complete in 3 years’ out. And several of those projects are high-rise buildings.

And in high-rise building, you have smaller footprint on every floor. And when you have a building like that, that’s going to be, very often, be multi-tenants.

And these multi – the smaller companies, they don’t sign up a lease 3 years’ out. They have a much shorter time frame when you think.

So composition of the various projects, that’s, I will say, one of the reasons why you can see that the numbers are diverging or something here. Nothing that we are worried about because this is – we have a strong focus.

We know exactly what we do. And that’s in the plan.

I also want to add here that, first, if you look at the leasing in the quarters and you go back in time, first quarter is always the slowest one, and the last quarter is always the strongest one. So you have a little bit a seasonal thing in the numbers as well.

Okay. Very good.

And then going back to construction. You mentioned in the report that in Civil, you had some higher costs related to some projects in the quarter.

Could you specify what that is? What has caused cost to increase?

Is it – are these costs related specifically to these projects? Or is it a sort of a general cost pressure situation within Civil?

No, I’d say more related to specific projects where we see increase costs, cost overrun on certain items, a certain part of the project. And when you have then, of course, we have just the profitability on those projects accordingly.

So it has been a little bit up and down and – but – in the project. But overall, the test bin like not as a big movements, which means that we have to disclose the number.

Okay. And then my final question is regarding Poland.

You mentioned that the backlog in Poland is basically running on a yearly basis. Does that mean that the projects that you took write-downs in, in Q1, will they be completed by the end of this year?

Most of them will.

And what is most – how many are then? And what are most of them?

Is it like 9 out of 10? Or is it 4%?

It’s more like a 9 of 10 that’s going to be completed. And I’m not talking about the whole backlog there.

It’s a very short duration of the backlog in Poland.

All right. Any more questions?

No? No more questions from the audience, then we will move over to the telephone conference.

I just have a short questions please. First one is if you comment on whether you expect a strong financial management in the quarter.

Is it something that you would expect to continue? Or will you move back to, let’s say, a higher, say, cash financial costs outflow again?

Second question is on the infrastructure development. If you look at your portfolio of PPP project that is currently under construction, which would be the next assets or next bigger assets that could be ready to be sold?

And when do you expect completion of construction here? And then 2 questions on the U.S.

One is if you could disclose what kind of tax rate you’re currently paying in the U.S., particularly for your construction activities and whether you are already benefiting from tax deductibility outside, let’s say, the regular tax rate. So let’s say this is more in line – maybe more in line with group level or whether this is really at a 35%, 40% level in the U.S.

for the construction activities. And finally, we’re hearing that more activity is returning to shoes market.

Can you comment – can you give us an update on your – whether you are seeing that in your commercial development activities elsewhere?

This is definitely a bunch of question for the CFO.

It’s good where you can complement each other, yes. Tobias, it’s Peter here.

I at least picked up – I picked up 4 questions, but I didn’t get the last one. So let me start with the ones I actually got.

The first question was relating to very good cash management into the first quarter. Do I expect my teams to be lazy in the second part of the year?

No. I do continue to see very good cash management.

Given where we are in the cycle of investments, though, we will sort of run down the cash that we have and invested. So of course, that should come at some kind of financial expense.

But I continue – I expect to continue to be very efficient on that matter. Then you asked on sales of when will the next ID product be sold.

And as we alluded to in the presentation, we have a very immature portfolio of projects, a lot of them under construction. And one of the things you should bear in mind that when you achieve global completion, when you have completed the project, in most cases, you’re prohibited as an investor to sell until 2 years after global completion, so that in itself creates stickiness.

So it will not be anything more this year. And your third question was relating to tax rate in construction.

And right now, we have an average U.S. tax rate for all the businesses in the U.S.

of around 40%, 4-0. President Trump has alluded to knocking debt down to 15%, 1-5.

But the way going there have been alluded to could go in various shapes and forms of restricting deductibility of interest rates and of foreign acquired goods. How that will pan out, it’s still a mystery for us.

So we will continue to inform you as we understand the implications ourselves. Then you had a fourth question, which I didn’t get.

I think I heard it.

You heard it.

It was about level of divestments in commercial developments going forward.

I think that we are on a good streak and could continue to be over and above SEK 10 billion in divestment volume.

Actually, the question was more about the Houston market.

The Houston market.

Commercial Development because [Indiscernible] in the. What I heard now is that the market is reviving again.

Can you give us an update?

Yes. Okay.

Houston market. Houston market, you have to differentiate between the CBD in Houston, where we started a project now with the pre-lease of – so – and the Houston CBD market is – has much more stability to it.

We still see that the market outside in the energy corridor, where all the oil and gas companies and all the consultants and everything is working, is still very volatile and weak.

Okay. And then just one follow-up question on the ID.

I mean, it’s clear that it takes time after completion to get the project – to potentially sell a project. But can you remind us the Midtown tunnel?

I think the next bigger project that will – completed at some point of time, and then theoretically, could also come up for sale. When is the construction of that one completed?

I think the global completion of Midtown tunnel is back end of this year, beginning of ‘18. And I get a nodding approval from my head of controlling, so I’m very happy we’re getting that right.

And one note you should also make that when you have availability-based project, where you are providing a service, it’s easier to go after that 2-year rule. Midtown tunnel is a traffic-risk project, so you must also safeguard that you’re hitting the optimal tax revenues for traffic and cost of managing the road as well, and that could take more than 2 years.

Alright, thanks a lot.

All right. No more questions?

Thought so. All right.

Thank you very much for your attention, and enjoy this Friday and the weekend.

Thank you.