Skanska AB (publ)

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

Tobias Kaj - ABG Sundal Niclas Höglund - Nordea Jan Ihrfelt - Swedbank Tobias Loskamp - HSBC Hjalmar Ahlberg - Kepler Cheuvreux

Okay. Welcome everyone to the presentation of Skanska’s Nine Month Report for 2016.

I am André Löfgren, heading up Investor Relations at Skanska. And well, many of you know the drill.

We have a live audience in Stockholm but also have a lot of participants on the web and on the phone. You’re all very welcome and you will all be able to ask questions after the presentation.

The presentation will be held by our CEO, Johan Karlström, and our CFO, Peter Wallin. And from where I am standing, they are very eager to get going.

So I think we better get going. Johan, please.

Thanks André. Good start here.

I don't know if you realized on the picture behind me here, which is a residential project in Sweden at BoKlok. You can see that the sun is shining, and the sun is shining now on the residential market and also on our projects.

And I'm going to talk about the residential market, and we will have a deep dive into the residential development sector. We used to have a deep dive in one of the streams in the quarterly presentations, and this time I will go a little bit deeper into the business that you see here.

But before I do that, I will give you some highlights coming from the first nine months from Skanska here. And you can see that the revenue is basically flat, the top line if we look at the revenue in local currencies.

But the bottom line has increased quite a lot, as you can see it, to SEK 4.9 billion compared to the same period last year. And earnings per share have bumped up 60%, so it's quite a dramatic shift from the previous year.

And the big difference you can find on the development side, both on the residential but especially on the commercial development side that there has been a lot of gains coming from these two parts. The profitability in the construction is in many of the units very good, very stable, but we are of course disappointed about what happened in Poland.

And a little bit of the background to the situation in Poland is that we have seen that the EU funded several mid-sized and smaller projects has been dramatically downsized, if you talk about the number, being a downturn. So we have taken a restructuring of the organization.

We have right-sized it and we have taken down on the white-collar side around 25%, so 1,000 out of 4,000 people we have laid off during the third quarter. Order bookings.

Well, so it's coming up here and you can see that it's up to SEK 130 billion and 117% book-to-build on a rolling 12 basis. So we are building up a backlog for the future which indicates where the revenue will go in the years to come.

And you can also see that the return on capital employed in the combined project development streams is well above 15% close to 16%. So let's have a little bit closer look into the residential development operation.

So first you can ask, okay, so what do we really do in residential development? What is that we do here?

Well, we do all the things from like from the start to like the whole part of the change. So we invest in land, we develop the land and discussions with municipalities and different type of public entities, we design the product, we start to market the product to the buyers, and at the same time we start with the construction of course, which is then done by a separate unit within Skanska.

So we have two parts here but they work together. And then we sell and close out the project and we have to deal with off the market, so it's like whole chain.

We go like from investing in land to until we deliver the homes to the private families. And if you look at the geographical split of where we have the operations, it's basically in the Nordics where Sweden is a dominant part.

We have the operations in Finland and in Norway and then in Central Europe. And in Central Europe, we are talking about the two major cities; Warsaw and Prague.

So that's where we have our businesses. A typical project in residential development, we have around 40% pre-leased before we start a construction.

That can differ quite a lot between single projects. When we have a project in a very attractive area, we are pretty sure that it's going to be something that we see a big demand for, then sometimes we even go with just a zero pre-lease because we think that we can get a higher price if we go out to the market later on when we are coming close to finalizing the project.

But in other projects maybe we put up a little bit higher hurdle if we are little bit unsure about the market situation. So we fine-tune the pre-lease situation so really be close to the market and be sure that it's going to be a successful project.

And the typical time for a construction project, it's around - little bit more around one year to two, 2.5 years, depending of the size and also if it's consist of various phases. But that's basically the typical time for it.

And we have, on an annual basis, around 4,000 projects started and sold. So that's where we are right now.

And if you look at the pie chart here, you see that it's a distribution of the capital employed in the combined project development streams, and here you can see that roughly one-third SEK 10 billion we have planned down in residential development, and then the majority of the rest is that CD. So CD has more or less double the size if you talk about capital employed compared to RD.

And here we brand the business and have two different concepts. We are selling 3,000 out of the 4,000 on an annual basis under the Skanska brand, and then of course we have different type of products and they look a little bit different but they are branded on the Skanska.

And the rest, the 1,000 I will come to in a minute. And here we focus on attractive areas in the major cities, but we also focus on some of the regional cities especially in Sweden and a typical regional city could be one where you have university where we see a big demand.

The sustainability part has started be more attractive, have be more important. So we can see that the green and the sustainability agenda is like moving in now from commercial development where we have seen a big attraction for several years but we now see that is moving into the residential development market as well, and of course that’s something we are really interested in that to offer to our clients so to the buyers that, yes, this is something we can do here as well.

We are building both single-family homes but the majority of the business is multi-family homes, like a typical project you can see on the picture here. The other brand that we're working on with that is BoKlok, which means smart leaving.

That's the concept that we have developed with IKEA and it's focused on a little bit in a different target group. It is for the first-time buyers.

It's more like affordable homes. And that has really taken off during the last years in Skanska.

So now we are selling around 1,000 homes under the BoKlok umbrella, under BoKlok concept. We used to have just one product more just like in a one typical building but now we have developed, so we have multiple type of buildings here so we can build it up to several storeys that you can see on the picture here.

And that has also opened up other markets for us, so we can build a little bit closer to the city center in the various cities when we have a building that is a little bit higher. So that's very attractive.

The product is more or less built in a factory because this is modules that we built in a factory in a closed environment or controlled environment. We transport it to the building site and then we just erect them on top of each other and complete the building.

So it's very time-efficient and cost-efficient. And I see a great opportunity going forward now, especially in Sweden, where we see a big demand from people newly move to Sweden, newcomers to Sweden and also more the younger generation that needs to buy their first home.

And here we see a product that can really meet that demand that we see out in the market and we see a lot of request from the various municipalities regarding the concept here. It has been predominantly built in Sweden and we are now on the way to export that project into the other two Nordic markets in Finland and in Norway.

So we have started the first projects there. There combined - there we have it.

The combined business - and here you can see that it's an integrated part of Skanska. We work closely - we are working closely together between the developmental part of the organization and the construction, because we see a lot of synergies when we are working together.

We see synergies on the operation side to work with the design to really design to cost and be cost-efficient but we can also see financial synergies, synergies where we use the excess cash that we have in the construction stream and use that as a funding source for the development overall and of course that goes also for the residential development part. And here you can see on the pie chart also the distribution of the volume in the various geographies.

A little bit more than 50% is in Sweden and then the majority of the rest in the two other Nordic countries and a smaller piece in Prague and Warsaw. Let me give you an example how this model really works on a project.

So this is - here we have one project. Liljekonvaljen, a typical Stockholm project.

You can see it here on the picture. The total investment is SEK 387 million and the combined divestment price when we have sold all the apartments is SEK 481 million.

So you can easily calculate now what is the development profit before overhead, and then when we then deduct the overhead level, then it comes out the operating margin on purely the development side. And I'm sure you're going to run the calculation here.

You're going to see that the overhead here for these projects is a little bit high, and on the average basis in the business, it's hovering around 55% but it can differ depending on that where we are and what year we are talking about. But here it's a little bit higher.

You can run the calculation yourself. So the operating margin on the divestment side is 12.2%.

Then the development arm, they have a contract with the construction part of the business. And you can see there that the construction contract in this project is SEK 272 million.

So you can see that the difference between that total investment of SEK 387 million and the SEK 272 million that consist of land and other costs here. But the majority of the investments that we plank down is of course the building of the contract or of the project.

And on the construction side, we make around little bit more than 6% on a project that is here we came out with 6.7% after overhead. And when you then combine and look at what is the total profit coming out in a residential development project for Skanska.

Then you have to put the two pieces together. And then if you then compare it with the total investment that you see on the top there, then you have the real return on the project.

Unlike other players in the market, we distribute the profits in two boxes. You see the pure development part in residential development but the construction profit goes in the construction stream.

But if you want to see the real profit coming out, then you have to make the calculations. So this is - that's exactly how it works for us in Skanska.

But regardless if we distribute the profit in two boxes, we have a very close cooperation and work together between the two parts of the organization. And you can see that actually in this on the diagram here.

2012 we had a turnaround situation. They were completely separated but within Skanska.

Then we decided we can just have it like that. We move them together and this is two units and they have to work together with a common goal, still two separate businesses.

And now we have reached and actually surpassed the 10/10 target that we have actually preached as a mantra both internally but also externally. We should at least deliver 10% return on capital employed and 10% operating margin and you can see where we are right now.

So it has been the successful model for us in Skanska. So the ambition here for us going forward, what is that?

Well, of course to continue to deliver according to the target because they are still valid. We believe in them.

We have proven for ourselves and for the outside world that we can deliver profit according to what we expected. But we have also said that we will slightly increase the volume.

It won't be like in big leap but we see that there is opportunities in the market, and especially in the good markets like in Sweden that we will go for slightly higher volume. We will not go in to completely new geographies.

We will stay within geographical boundaries that we have for residential development. So you will not see that we are moving into new countries with the business.

We believe in the markets where we are. It could be that we maybe go to a new city but within the countries where we have the operations.

We will definitely continue to work with cooperation between the two units, building and construction, because we see that this is the future for us and we see that we can capture synergies on the operation side and we can use the free cash coming off from construction for the development. So it's going to be the model for us going forward here.

So with that, I just want to summarize the residential develop operation for the first nine months. And you can see here that more or less the same level as the year before if talk about both revenue and number of homes that we have sold and started.

But you can see that operating margin and the profit it's coming up compared to the same period. And the return on capital employed, you have already seen it on the chart before.

We get a lot of questions regarding what's going on in the market. Everybody is like interested and we know that all that data has been some new regulations here in Sweden.

We see no real visible impact from that in a market. One thing though that we have realized that is that the speculative buyers that are buying apartments and then they will just turn it around and then sell it to somebody else and pocket their own gain, they have left the market.

They are not there anymore. And we think that is healthy.

We think that's right because we want to sell our homes to the people that are actually going to live in the apartments there. So we think that is - it's a healthy development and trend in the market.

We’ll get some questions about more of the macro picture has that have an impact like Brexit if we take that as an example. We cannot see that has had an impact on the residential development.

I can come back and comment a little bit about the U.K. situation but that is more attributable to the construction sector.

But for residential development, we view the market that's favorable that it’s be stable especially in the Nordic, I would say especially in Sweden going forward. So with that, I leave residential development and move over to one of the other streams within project development, commercial development that you can see here.

And they are a real moneymaker in Skanska. During the first nine months, they had delivered a little bit more than SEK 2 billion in profit coming from a lot of good divestments and project that we have sold during the period.

Somewhat - it can of course be a little bit lumpy between the quarters and the third quarter, if you just look at that one, being a little bit like low point to about number of divestments and I think that is temporary. We believe that we will continue to deliver project where we can show that we have nice gain coming out as a very healthy pipeline in the business.

You can also see that the return on capital employed is on a very high level here. 43 ongoing projects and close to SEK 19 billion in total investments, and the pre-lease and the completion ratio which we always compare with each other are in balance, and we want them to be more or less at the same level because that means that we have mitigated the risk there, so it's pre-let to some extent as it's actually constructed and we want to have it like that.

And you can see that the leasing activity is on the very high level and that's important because we are building up the portfolio going forward and this is the real value creator in the business because it’s when it leased we can go to the market and divest the product. Infrastructural development hasn't happened so much during the first three quarters.

You can see here that we have had SEK 343 million during the nine months, but we also released or told to market that we have reached an agreement of selling the M25 ring road around London. We have some things that we have to get - that has to be fulfilled in the contract.

It's going to take some time and it's according to plan and we target Q1 next year as the quarter when we are going to report the profit. And the project portfolio that we have, you can see that the value of it actually goes up during the quarter here as the project matures.

So moving over to the construction stream, you can see that the revenue here is slightly down but if you adjust for currencies, it is more or less flat. But in order bookings, it's up considerably.

And the best way to measure order bookings as we think that is we compare order bookings with how much revenue we burn, how much we can use from there with the order book. And when we have a book-to-build ratio over 100%, that means that we are building up the backlog going forward.

So here you can see that on a rolling 12 months basis, it's 117%. Quite a strong order intake and it has been - especially a lot of large order landed in the U.S.

But Nordics is good, and we see also that there is huge opportunities in U.K. and also going forward.

Operating income SEK 2,282 million. And here it has been an impact from the rightsizing of the organization and restructuring of the Polish part as I mentioned before.

The U.S. part is an healthy business.

We still have some challenges in the projects we have talked about earlier. Nothing new really to mention to you but I just want to come back and we have ongoing discussions with the owner regarding the claim resolutions there.

And in large product like this, there is always an ongoing negotiation and discussion regarding a lot of changes, so that’s like in a common in the market situation. All the other units, I will say they are in very stable and healthy situation, so I'm feeling very comfortable about the business in construction overall.

So with that, Peter maybe you can dig a little bit deeper into the numbers.

Thank you. So order bookings and the order status for construction.

As Johan said, order bookings is up quite considerably, so we see 4% to 5% increase in local currencies. And as you can see from the bars behind me representing the backlog, it's actually all-time high.

And with the back-bookings and the backlog, we have a very good foundation for the businesses, so you should expect revenues to pick up in the businesses where you have seen the biggest hike in order bookings. So 117% book-to-build is a strong number.

If you dig a little bit deeper into the various units, we have on average 17 months of production in our backlog. And all of our business, if you look on the column third from the left, the book-to-build rolling 12 months, you can see that all units apart from two units are over and above 100% indicating a future growth in revenue over the current level.

So the odd ones out here is Finland, where it is somewhat lumpy when you book and you don't book. We are not worried and concerned in Finland.

Actually we are seeing signs of improvement in the Finnish market. The Finnish market which has been in the doldrums for quite some time.

The other market is the U.K. market.

Then it is not the Brexit. It is a very strong pipeline of projects, and we do expect to book - continue to book projects in the U.K.

actually increasing this number going forward. So this 17 months on average, if you look on the column far on the right-hand side, you are going to see one - couple of units sticking up and that’s USA Civil with a very high number, very high visibility in the backlog, long projects.

And then you have Poland nine months. So that is one of the reasons why we have seen the impact in Poland so quickly because you have to book and you have to burn the revenue.

And when the booking is not coming and you're not burning, then you show the underlying costs quite quickly in the P&L. So with that part also is a little bit hazy visibility when you have this quick shift in market like we have seen in Poland.

Income statement, we are flat in local currency on the revenue line. And you can see that on the selling and admin is going up to 4.9%.

The selling and admin is impacted by a higher pursuit cost for new bids and also ERP implementations in both the Swedish business and in the USA Civil business. And on top of that you have the Polish.

So that puts the operating more than 2.3% in the comparative period as you recall. I recall it vividly we did a quite lot of write-downs in US businesses in the third quarter last year.

Looking into the various businesses. Stable performance across, I will comment Poland specifically, but we also see some good lights in the performance in the stability here.

And I know that there in the marketplace there is very high expectations on Sweden. They fulfilled our high expectations but they also incur costs for their ERP system which impacts the operating margin somewhat.

We think that the Swedish business performs very well on the 4.2% level. In USA Civil, we have the phenomena of debt revenue.

What is debt revenue sounds very bad. It is bad because you have taken a project down to zero, so you report the revenue and zero result on the project if you arrived on the money, which means that the dilution is coming from the selling and admin expense.

And the selling and admin expense is impacted of implementing a new in ERP system also in addition to high pursuit costs. So that in combination is a little bit like double whammy, if you like.

So that was the lesson on how the P&L works. Another lesson on the P&L is Poland.

Then quick shift in the market in our sweet spot on the small and medium size projects. And revenue is down 20% both year-over-year in the quarter and year-to-date.

That is exposing costs. From September 1, we are taking out 25% of the white-collar.

So we - in the isolate quarter, we dropped down the restructuring charge for that. In addition to that, you have the unabsorbed costs for all the people that don't have anything to do if I’m a little bit blunt.

So that also creates a high level of unabsorbed costs. To put it very frankly, the result you find in the isolated third quarter of negative 153.

If you add back all sort of the unabsorbed costs and the restructuring charge the business is more or less right now working on a breakeven level. The Polish long-term situation is still very favorable.

The EU funds exist and this has been an issue with procuring agencies in Poland. So we believe in Poland long-term but we will need to work through this very carefully.

And how quickly it will go all depends predominantly about the market in our sweet spot. Resi.

Johan has gone over resi. You know everything about residential.

If you look on revenue, top line is down for first nine months of 4%. 2% of that comes from a lower volume, 2% comes from price mix.

We have much more affordability especially in the Swedish context, the BoKlok concept, great concept. It's a great concept because profits is actually increasing which is supposed to be the major point, and it increases in both the third quarter and sequentially and here it is especially important to look at the gross margin because product development - S&A level can sort of fluctuate percentage-wise as sort of you have high revenue and low revenue.

So if you look on the various markets, the Swedish market is very good and very stable and we are able to execute on a good market. Norway, the volume has been going up.

We have more economies of scale and we have a pretty stable market I would say in Norway in the regions we are starting new projects. Finland, stable.

We don't have as many investor packages we are developing in our own books. And as I said, the market is showing some sign of improvement.

Central Europe, it's still in startup situation in the Polish business whereas the Czech business included in there is mature and operating well. Last year, we had the land sale with the last part of the U.K.

bids that we continue not to start. So that shows you that we have a growing operating margin.

On the levels here seen, we are trailing around 4,000. We are prepared to step-up that a little bit gradually, and we only do with if we have the projects ready to launch.

And perhaps you saw the press release out this morning about the major projects in Stockholm being launched. So we are quite bullish on the prospects for residential since we have a very good pipeline of projects relatively launched on the market.

And we need to do that, because if you look on this graph, it shows you how much of the production which is already sold, 7% to 9%. So in order to drive sales, we have to start new projects, but we only start new projects if they are ready to be launched.

The light part of the graph shows you the sold part. The dark blue shows you the unsold part in ongoing production, the 21%.

The small little orange thing at the top that’s the completed unsold, and we believe that that's a very low volume of unsold completed given the total size of the business. CD, commercial development have had, what we call, a soft quarter in terms of number of sales.

If you look into the type of sales we have done in the quarter, we have sold one project in Stockholm, one hotel, and we have sold two specific projects for geriatric care and one school, which is then pre-leased and pre-exit when you start the construction, which means that profitability is lower than compared to the full-fledged CD projects that we normally do. So I think that we have spoiled the market somewhat with the margins seen in the first half of the year.

We are operating at the 31% margin if we look on the divestments now. Very good market conditions and sort of with the combination of looking for investment alternatives, long leases and good tenant structures and good products, we have much more coming I would say.

And if you look on the divestments specifically, you can see that we are now trailing at the SEK 12 billion divestment level on an annualized basis. Fourth quarter 2015 last year was very active and you can see that the gain level is nearing on SEK 4 billion.

So the first nine months this year is almost the same size of the full 2015, which was a record year. You will understand what this leads to that we will beat last year's level of capital gains.

We are still working with more deals to come and more press releases to print, if you like to print them. You can also see that from this graph where you have the completed part and the level will not be in sort of the same magnitude as you saw Q4 last year, but we have more to come this year.

One of the fundamentals for making good divestments and making good projects is the leasing activities and it is maintained at the high-level, both creating value as well as mitigating risks. ID, last stream.

Stable performance and I reacted on what Johan said, nothing has happened over the first nine months. And I think I need to call the ID organization here, they have done a great job in the first nine months and you will see that for some time going forward.

M25, we have commented upon. The process is going according to plan and we have a stable performance in the project portfolio.

We landed LaGuardia, something perhaps Johan forgotten also, which is also something that has happened. And one thing I would like to say about ID is the underlying unrealized value development in the portfolio.

As with commercial development and residential development, the current context of one thing to look for investment opportunities is of course benefiting ID as well. This is now a very quickly maturing investment alternative for long-dated pension money, and we are clearly seeing that in the type of pricing that goes on in the market but that will of course benefit our portfolio as well.

The way we depict the portfolio now is at more or less the values that we expected at the former yearend, so there is a bit of conservatism in these numbers. You bake all the four streams together, you get SEK 5.6 billion.

You deduct central, SEK 700 million. The central item last year included some Latin America.

It does not contain any Latin America whatsoever in this year. Get you at the operating income of SEK 4.9 billion.

As we have alluded to, very strong balance sheet, and the fact that we winded off the Latin American operations means that we can work with a much different reality when it comes to keeping the net interest down. So we have mere negative SEK 58 million, of which the pension is half of it.

We have an EBT before tax of SEK 4.8 billion and our average tax rate of 21% putting the profit for the period to SEK 3.8 billion and EPS is SEK 9.30, that’s 60% up compared to the previous period. Cash flow, we are a net investments in the project development.

We're growing project development and other than that the cash flow is as typical for the seasonability for the first nine months. One thing which we always allude to is the free working capital on the construction stream.

As we grow the volumes, we also grow working capital as you can see here from the bars in absolute terms. But we also grow this in proportion to the sales, and to some affect, it has a mixed impact.

A mixed impact coming from a lot of design and build projects, some on the PPP side and also a combination of this portfolio being very early on in its stage. You remember what we said when the number went the other way, that it was a maturing portfolio than winding off the cash.

Now it's built-up the cash with a conservative profit take and prepayments from clients. So this is a good situation to have.

It's a good situation to have also to continue to increase the investments in our project development operations, which now equates to SEK 31 billion. On the RD slide that Johan showed you on operating margin and return on capital employed, you saw return on capital employed is beating the 10% by far.

To some effect that will continue to eat up because we have already sold the project but now we would have to complete them. So capital employed in RD will go up before it goes down asset size, but it will continue to go out as CapEx is being put down into work.

Strong financial position. We have an ONFAL of SEK 9.2 billion, and so we have plenty of investment capacity.

We have received a lot of question on Brexit. If you look up the financial position, you have predominantly two impacts of Brexit.

Number one, that's the strengthening of the dollar vis-à-vis the pound. That dollar is much more important for us than the pound, so that's strengthening the balance sheet.

Number two, the fall of interest rates in the U.K. post-Brexit has caused us to increase our defined benefit obligations on the U.K.

plans quite predominantly. So we took a hit on the pension debt by SEK 2.4 billion in the quarter and SEK 2.1 billion on the equity side.

This fluctuates with the market rates and this is the liability which is far ahead into the future if it realizes. So strong financial position.

Johan?

So let me wrap up here and say some words about the markets before we open up for Q&A. And starting with construction, you can see that overall it is a very stable situation in the various markets where we have businesses.

Especially strong in the Nordics and I would mention like in Sweden here. Little bit more of a mixed picture in Finland but Norway is also stable market for us.

In Central Europe, we talked about especially the EU funded civil projects where we see a downturn, especially in Poland but also to some extent in Czech Republic, otherwise the markets in Europe is stable. In U.K., I get a lot of questions regarding construction market coming after Brexit here on the referendum.

And what we could see that there is a little bit of shift here. We can see a slight slowdown in the private development market for residential and for commercial offices, especially in London.

But on the other hand, the public sector and the government has started to push for more public-funded civil project and other public facilities. So for us, it has been a little bit on the total stable view on the market, but it has shifted somewhat from one sector over to the civil part.

In North America, in the U.S., there is a lot of projects both on the building side and also on the civil side. Also get a lot of questions regarding the presidential election.

What will come out of that for us? And it's interesting to see that both candidates actually saying that they are going to - they need to spend - we have to spend more on infrastructure in the U.S.

So regardless where we end up here, I think there is a safe bet to say that is going to be president that want to invest in infrastructure because they said both and there is a huge need and we also see a lot of projects with P3 delivery method coming into the market there. Strong market to our residential development in Sweden and also in Norway.

Mostly strong and a slowdown on the West Coast more oil-dependent areas in Norway. And I think we reached the bottom end in the Finnish market than we can see how it starts to pick up.

Central Europe, the two cities there; Prague, Warsaw looks good. And here in commercial development, I can say that just generally that this is a stable market, strong demand especially from investor to buy our products.

Yes, just like in a standing in line and like in a way, are you coming out when you think but we don't want to come out like it's too early, we want to maximize the profit here from the projects when it's time for divestment. And we can see that throughout the various markets the vacancy rates are going down.

Strong U.S. fire hub pipeline [ph] but outside the U.S.

it's not that much to talk about if we talk about new project, something in U.K., some early political discussions in the Nordics and we'll see where it's going. So with that, André, maybe time for some questions.

Yes, let's open up for questions. And we will start with the live audience here in Stockholm.

And Tobias, you’re the first one. And please state your full name and what company you work for please.

Thanks you. Tobias Kaj from ABG.

First of all, I would like to ask regarding the construction operation and the margin in specific. It seems like you're quite satisfied with the quarter or with the period except for the development in Poland.

But if we look for the third quarter, even if we take away the loss in Poland, the margin is only 3.1%. And I would guess that in the third quarter you need around 4% to reach 3.5% for full year.

So can you give some comments on that, and in which area should we see the big improvements to reach the target?

I don't think that you should look at an individual quarter. I think it's better to look at like in a longer period.

That is something that we try to explain to the market here. So just like in just one comment I want to make.

Of course we are not satisfied with Poland and we also think that we are behind if we talk about any impacted negatively on the extra cost that we could see that we had to take in US Civil and also because of the ERP system and the debt volume, and also to some extent also in Sweden. We still maintain the target of 3.5% for the overall sector, the overall stream.

But so that's a little bit of like a background to the situation.

Okay, thank you. And regarding the order intake, I mean, it was very strong overall and that was not - unexpected given what you have announced ahead of this report.

But if I would look at Poland, I'm sort of bit surprised that you talk about the very big change in the market from the areas you’ve been focusing on before and you have taken down the number of staffs by some 25% and still you have a book-to-build of above 100%. So is it the risk that you’ve been kind of aggressive in the order processes in Poland and that the profitability in those projects will be very low, or have you kind maintained your margin requirements?

I think it's a little bit of another explanation here of - it can look maybe strange when you see it from that side there. But first the downturn in the market has been dramatic just in that niche that we have focused upon, smaller, mid-sized EU funded civil projects.

So that has gone very fast down. Then the order bookings, now we are like on the way to shift here slightly over to another mix of the portfolio.

So the order bookings in Poland is not purely like in the smaller and mid-sized projects, where you have a fast turnaround. It's a more mix of longer projects.

So the duration of it is like of the actual projects, when you look at it, it’s going over a longer period. So that means that for the volume to produce is still on a low level.

One of the reasons - there is several reasons why you take down like in an overcapacity. One of the reason of course you have to take down the cost, but there is another reason, that is if we keep too many people just waiting, it puts too much pressure for the local management to get the new volume and that is very easy that you make a mistake there exactly what you’re not going to thinking about.

So taking down the volume of and the number of people like this, take down the pressure on the organization on getting and being desperate to get the word. So I think it's a very important thing to do for several reasons here.

And with the measurements that you've been taking in this quarter, do you expect Polish profitability to be kind of running at old profitability level of maybe 4%, 5% or should we see a lower level for a longer period?

We have - when I talk to politicians - or well I've not personally done it, and when our people meeting and discussion the situation there in the market, they tell us it’s going to be a temporary drop in the market if they would talk about the EU funds. I think it could be a little bit of a longer period.

Will the market come back eventually? Yes, we definite need to believe that, but I think it's going to take some quarters before we really see it.

Then so we have a new situation there and I think that we have to be a little bit cautious and wait and see where we are coming out.

And regarding residential development, since you’ve focused a bit more on that in the presentation, I have three questions. First of all, your plans for number of started units in ‘17.

Do you expect to be able to increase the number of starts if the market is stable? Secondly, in the starts you’ve had in this year, do you see an upward trend on prices or do you see prices flattening out?

And finally, is it possible to break out the big improvement in the profitability? How much is kind of internal better cost efficiency and how much is strong price development in the market?

Let's see if I remember all the three questions now. So starting with the volume question there, I think as I said here earlier in the presentation is that if we see opportunities in the market and we have projects that are ready for it, we will slightly go up with the volume.

We will not see a dramatic increase because you have to have an organization. We also have to have the project designed already.

That's the most dangerous thing is to start a project too early if the design is not complete. Then we end up with problem with when we construct it.

So slightly up if we see opportunities in the market. And it will actually be the market that tells us, because we will have pre-lease.

And when we are reaching those hurdles, then the project will go. So it's a little bit like depending on the micro location and the local demand that's going to tell us here.

And then if you talk about the profitability and the businesses, yes, it's coming from, I would say, from those reasons here. First, there is a component of healthy market and increased prices.

We have seen some increases in prices, but I think that the increase has slowed down, and I think that's healthy here and there is a difference a little between the various markets. But a big majority - if you go back to 2012 when we were really down if you talk about profitability has come from internal work to make sure that we have an efficient organization and efficient product and we run it in a good way.

And you say that prices has - they increased slower now than in the past and if we look at in the third quarter isolated the margin also bit lower than in the first half. Is that a result of slower price increases, or it is just more like fluctuations between the quarters?

It is fluctuations between projects which we have sales in. Different projects have different profitabilities depending on like where it is located in the market.

And then in the various quarter, the composition of the projects and the apartments that we have sold differs between the various quarters. So it's more of - I don't think that you cannot read the trends and say, okay, now it's start to go down.

It's more the composition of the projects.

Thank you.

All right.

Yes, Niclas Höglund, Nordea. Couple of more questions, if I may.

Firstly, if we start out with the construction, you're talking about ERP system costs in Sweden. Would you like to quantify that to help us to understand the underlying margin trend?

Thank you.

I’m looking at my CFO now.

Yes, I can feel that. I rather not quantify because it is a multiple impact because you have to run two systems at the same time, which means you're doubling the organizations.

So it's hard to count what is going to sort of missed when you are finally there. And I think we could expect the S&A to be a bit higher due to ERP in Sweden for the coming quarters.

That's normal in that type of - when you do a new system for a business which consists of more than SEK 30 billion in revenue and a not multiple business models that you need to take into consideration. The other part into the S&A of Sweden is actually pursuit costs, pursuit for new projects.

So if you look on the gross margin, it's a positive development.

Okay. Previously you have been talking about, if I'm not misremember incorrectly, to 50 basis point on the civil margin to ERP system.

Is it the same kind of magnitude for the Swedish operation?

No, not at all.

So it’s substantially lower? And is it fair to say that margins would not have been in line with last year’s 6.8 than the quarter anyway close to those kind of numbers?

Well, they are more than 6.2 compared to 6.8. And the - when we look at the gross margins, it is going in the right direction.

Then you have to - as we have repeated also that last year we completed a very big project which was more or less only profit coming up, so that’s sort of impacts the comparison.

And going on to the civil part, a lot of moving factors including ERP and then that volumes. Would you care to quantify the sort of magnitude those items maybe on an aggregated level?

You have so many moving parts, so it's hard to deconstruct the margin because you have pursuit costs, ERP costs and that revenue in combination. We are sort of gradually covering some of the issues we have in specific projects in civil and we are happy with that.

Is it fair to say that you have now been through - well slightly more than a year in these problem projects although they accelerated in the third quarter that the debt money dilution would fade out when we move into the fourth quarter, or do you see the same kind of high-level impact also in the next coming quarters?

We have not taken any impact in this quarter of any design costs, so we had really sort of dealing with the issues. What I think is important is to frame this because it sounds like one big piece going negotiations we have with [indiscernible] or something like that.

And when we are successful in the negotiations about design changes in their various projects since we have a number of years in some of the projects to complete, it’s not that you're going to see the profit go up like that. In conjunction to that, you have new big projects coming in, LaGuardia for example, where you're going to be very cautious on the profit take in the earlier stages of that projects.

So you have a combination there.

And over to Poland, you're talking about SEK 150 million in restructuring costs and under-absorption. Would you care to split out the sort of under-absorption points and talk to...

It's considerable because in the quarter you essentially have two big organizations for two months out of three, so it's very substantial part.

So it's more like a two-thirds of that is under-absorption and one-third…

Could be, yes.

Okay. Then moving over to the infrastructure development, you’ve now sold the M25 project.

Could you elaborate a little bit on the cash flow impact going into next year, and if we should expect the board to look a little bit more favorable on the sort of extra dividends like we saw in Autopistas [ph]. Well, maybe this is not the Autopistas [ph] but it's still substantial.

It’s still a road because Autopista [ph] means road and its benefits. Yes, so number one, the dividend is a board issue.

I would say as we are ramping up the investments overall continuously in product development with a very good return, as you saw, as you have seen from the return on capital employed in the combined PD streams, that kind of return is hard to get anywhere else. So I think that if you combine and balance it in the way we can find investment opportunities that also is part of the consideration that the board needs to do.

I think that the company can use that money and actually give nice and attractive investment in project development going forward.

Okay. And the cash flow, should we see this sort of sales number as the full impact or because you have these hedges, cash flow hedges?

Yes, I mean the SEK 2.9 billion represent the cash flow, yes.

Super. And then just a final question, if I may.

The underlying development costs in CD when we exclude the gains are coming up again. There was more than SEK 140 million in this quarter.

Is there any exceptionals there and could you shed some light on the sort of run rates on an annual basis at the moment with the costs?

We have a growing organization and a growing business and what you see there is a combination of number of heads but also project development costs for projects being expensed that we have still not put into fruition. So when you see us continuing to start up new projects, that is related to or taken costs that we have expensed.

So it's a growing business, that's the underlying sort of reason for the increase. There is no sort of extraordinary cost like that impacts the comparison.

It's a growing organization.

So this is a fair run rate?

I would say so, yes.

Thank you.

Any more questions? Jan?

Jan Ihrfelt, Swedbank. Three questions actually.

The first one in Poland the SEK 150 million you were talking about the extra costs. Are they out on the business in the fourth quarter, or how should we interpret that?

Yes, we have taken down the cost with SEK 150 million. And as we alluded to, part of that is restructuring charge which only relates to redundancy packages for these 1,000 people leaving the business that will not happen again.

So yes, that cost has left, but we are managing the cost level in the Polish organization to adapt to a very quickly shifting market conditions on the sweet spot projects.

So could it become more sort of this - I mean, reducing the personnel later on or?

Well, if we reduce the personnel, then of course - on top of what we have done, then of course it's going to cost but that's not the plan. We think that the current level of taking it down by 25% that that is enough.

Okay. And the second question relates to residential and states levels and volumes.

You were talking about slightly increasing in volumes and at the same time you said that BoKlok will become a larger part of it and should we interpret also increased sales volumes in residentials?

Sorry, that we could…

If we could expect increased sales levels in the residentials? You were talking about volume increase and talking about...

Yes, for me like sales and volume is - well, when I’m talking about the number of apartments and then of course like in other revenue goes a little bit up and down depending on the price of the apartments. On the other hand, I think that’s a most important thing is that we can see that the profitability level goes up, and the BoKlok is a very good product if you talk about from that standpoint.

If we look at the rolling 12 curve, now after the third quarter that is trending down a little bit, don’t read anything special into that. This fluctuates a little bit like between the various quarters.

Okay. I’m going to put it in another way.

Will be BoKlok be a larger part of the sales volumes in…

Hard to say because I think that the overall volume or the overall number of apartment could slightly go up and it's going to consist of both BoKlok and the other brand, Skanska brand.

Okay. And then last question is regarding CD and exit gains there you were talking about.

Should we interpret that more than SEK 4 billion for this year?

I won't give you a number but you showed expect more to come in the fourth quarter.

Okay. Thanks.

Thank you. [indiscernible] Asset Management.

A question on the U.S. both on volumes and then margins.

If I start off with volumes. Even if the one of the presidential candidates wins and they do not expand the infrastructure investments, will the federal states themselves, are they now in a position that they will themselves equally spending regardless of whether the highway program etcetera on a federal level goes ahead that the states themselves will increase spending?

Secondly on the margins. You’ve been saying for a while now that it’s very, very competitive but the U.S.

market must be heating up, it must be - unemployment is coming down so sooner or later the number on the projects are going to get fewer and fewer. If we look at the tenders outstanding right now, are margins slightly better there than they have been in the last 12 to 24 months?

If I start with the margin questions and I'll come back to the other questions here. And I think that it's a very tough market because - yes, you are right, there is plenty of projects.

The pipeline is strong to talk about projects coming to the market and bid for. And we are not only one seeing that.

So there is a lot of international player, a lot of domestic players coming from Europe and so on. So yes, there is enough players to really be there and compete with each other.

I think that the biggest opportunity that is - for us that is in this big complex projects and the specialty PPP projects, because on these projects we even if it's 10 that want to compete, the customer have a pre-selection and prequalification so you end up with three maybe sometimes for bidding teams. And then when you're coming down to that and you are one of the selected parties there, then you go all in and really work hard on that bid.

Then of course there is some opportunities and especially on the complex project. And what I mean with the complex project could be a project where there is huge building component and a huge civil component that we see - LaGuardia is one, but we see other projects in New York and in Manhattan where it's really complex and I think that we have a great opportunity because we have a special situation where we can combine the two elements and the two part of the organization, which gives us an opportunity to use the building part of the organization that’s used to work on the construction management in a very high-low margin business, the lower risk though so its low margin, it goes together.

But if we can use part of that in combination, we’d use the several in this complex projects will give a boost on the civil - sorry, on the building side. So that's an opportunity for us to work more in the one Skanska concept in the market and that is the strategy going forward.

We cannot go fast to do than we have people to do that because it's a slightly different skill set that you have on the building side. Coming back to your question regarding the federal and the overall investment.

Well, if the - let's say that, yes, we had to spend something. We had to do something with the infrastructure.

I believe that they are going to do what they say during the presidential campaign. And so we expect it's going to happen something from the federal side.

But on the other side, there is may be even more important for us what's going on the state level and even on the big city levels. If I just give you one example, Los Angeles city, they will have, at the same time when they have the presidential election, a referendum, if they are going to increase the sales tax in Los Angeles and that's the increase in sales tax will go 100% to infrastructure.

They’re also tired about sitting in their cars on roads and on the highways and they can't move. So now they are building out the mass transit system in Los Angeles considerably and they need to fund that.

And that is what's going on right now that state and cities, they are taking action themselves. They can't wait.

And we see that that is happening. So that’s an interesting change and a shift that has now started to happen in the U.S.

market.

Excellent. Thank you so much.

Okay. Any more questions from the audience?

Well, in that case we will move over to the telephone conference.

Yes, good morning gentlemen. Two questions please.

First one is on the disposal fee M25 PPP project in the U.K. Can you give us an idea of what is the booking that you will be booking on that sale?

And secondly, the commercial development process is now on a good track on a nine month basis but also if we look at the 12 month base comparison in 2015, do you feel comfortable meanwhile to guide us for, let's say, a significant increase in profitability and sales for this segment for the full-year, or is there anything basically weighing on the pipeline in the fourth quarter for the segment?

It was hard to pick on that up in the second question. M25, I won't give you the gain in absolute numbers, but I think we are very open when it comes to reporting.

So when we report - when we are making the investments, you can compare that to the SEK 2.9 million. What you need to remember then also that during our ownership of this investments, we have taken gains which we increase our book value since we are sort of accruing profits, so that increases the book value.

But it's a good price when closed. The other questions actually didn't pick up anything at all.

Yes, handover risk [ph]. So in commercial development you had an excellent first nine months significantly up year-over-year and I think you currently - in the last quarter you’ve guided for, let's say more or less flattish development for the full-year, and I was wondering after Q3 do you feel comfortable now to guide us a significant increase in sales and profits for the commercial development business for the year, or is there anything in the pipeline in Q4 that's weighing the prospects down?

No, I think we will continue the high activity. As I alluded to during my piece of the presentation, Q4 last year we sold properties worth of SEK 5.4 billion and we will not repeat that this fourth quarter but we will stay at the high level and we, I'm sure, will be able to stand higher and talk about a new all-time high level of gains in the CD stream when we have closed the books for 2016.

All right, very clear. Thank you.

Thank you. Just one question on the residential development.

You said that the speculative buyers have disappeared after the [indiscernible]. Can you say anything how big this project was so you were saying [indiscernible] comment?

If I interpret what we picked up here is, can you give us a split what the speculative buyer was before on the Swedish business post and pre the amortizations? And it was not a dominant part of the buyers at all but we saw some instances in certain projects.

So it's just more of - we are continuing to see that market continues to be good even after the amortizations, and as a sort of marginal observation, the speculative buyer is no longer existing in the market.

Okay. And in Poland, you have taken down, I believe it’s 25% work stream.

Could we expect on sales level in the next few years. Will it come down with 10% or 20%?

Can you give any comment on that?

No, we will closely follow the market development since things are going so quickly now. So we sort of can't give you a sort of guidance on the sales level but as we commented upon during the meeting now we have taken down 25% and we believe that is where we are seeing the market right now but the market development dictates where we can go on the sales.

Okay, thanks. And just on the commercial development, can you say anything on what kind of - longer term 2017, 2018, 2019, what kind of level will be at?

Will you keep growing the business at the same level or will you be flattening out at this level for the capital employed, the number of projects are really keeping continue to increase.

That’s a good question. The question is very short, I can say that depending on the mix of portfolio you can have sort of a certain sort of slowdown in terms of volumes because your big - we are starting to come into bigger more complex project which takes longer time to both build and lease.

But overall the divestment levels should increase as we are increasing the portfolio. But certain individual financial years sort of you can have slowdowns and then increases.

But overall if you take the trend line, it should continue to increase.

Okay, great. Thanks.

Then we close for the day. And thank you very much for attending.

Thank you very much.

Thank you.

Thank you.