Skanska AB (publ)

André Löfgren - SVP, IR Johan Karlström - CEO, President and Director Peter Wallin - CFO and EVP

Tobias Kaj - ABG Sundal Collier

Welcome to the presentation of Skanska's 6-Month Report for 2017. I am André Löfgren, heading up Investor Relations.

And as you probably have figured out, this is an audiocast, but you can follow the presentation on the web. The presentation will be held by our CEO, Johan Karlström; and our CFO, Peter Wallin.

And questions, you can ask them after the presentation. [Operator Instructions].

And with that, I think we just should get started. Johan, please?

Thanks, André. And I want to start with the very first slide, the nice photo over part of Kalmar that you can see there.

And it - but it's not only Kalmar, it's one of the major projects that we are executing in Sweden right now. And they - we are building for the local university and it includes both conception and the development part; and development part consists of 3 buildings already sold.

And I can assure you that it's going to be a fantastic project for both the local university and the Skanska shareholders. So with that, I want you to turn the page and take a look at the highlights for the 6 months report.

And you can see that the operating income came in at SEK3.3 billion, and that includes the write-downs that we announced last week in USA Civil and U.K. Construction.

We will comment that a little bit further down in the presentation. But, of course, this also includes a very strong performance in the Project Development businesses.

And earnings per share increased to SEK7.35 per share, which is an all-time high for the first 6 months year-to-date number in Skanska. Order bookings, slightly over SEK200 billion.

And you can also see that we have a very good return on capital employed in the Project Development operation and a strong financial position that Peter will dwell upon and talk a little bit more into later here. So turning to Construction.

And you can see that the revenue is slightly up and the order bookings for the first half of the year is close to SEK85 billion. Strong in all geographies.

And the book-to-build ratio is over 100%. And you can see this 118%, which means that we are building up the backlog.

The operating income is only SEK0.5 billion, and that - which means that the operating margin is down to 0.7% and that, of course, is due to the write-downs of SEK420 million in USA Civil and SEK360 million in U.K., which overshadows the very strong performance in the Nordics and especially in Sweden which is a very healthy unit in Skanska. And we will focus on restoring the profitability in USA Civil and in U.K., of course; that's the highest priority that we have now in the business.

We will be very selective in new bids going forward, and we will also take an even further look into risk management and the internal processes of cost follow-ups. Turning over to Residential Development, you can see that we are maintaining quite a high level of units, over 2,000 units, for the first half of the year, both on homes sold and started.

And the operating margin is climbing up, and so we can see that we have a very strong performance in all the markets but, of course, especially in the Swedish one. Return on capital employed, close to 20%, which is a very good and impressive number and the market conditions going forward looks promising.

Turning over to commercial development, you can see that we have - pocket a gain of - on sale of SEK1.6 billion, which means that the operating income comes up to SEK1.3 billion. And we have already sold some additional projects which we have announced, but they will come into the third quarter.

And we will come back to them, of course, when we present the third quarter number. When you look at the comparable number for the same period last year, I just want to remind you that it's a very hard number to beat, as we had a very good divestment in one of the properties that we sold in Boston in U.S.

last year. The return on capital employed, 12.2%.

And if we look at the ongoing projects, we have a record number of ongoing projects, 53, if you talk about the numbers; and SEK28.3 billion if you talk about the total investment value at completion of the 53 projects. That is also an all-time-high number for commercial development.

And it also shows the strategy in Skanska to build - gradually build the business up, which we are doing. All of the 53 projects that is ongoing, we have already sold 15, so it's - the big part of the ongoing ones is still there and are waiting to be divested.

The preleasing and the completion ratio is close to each other and which we follow these key ratios which is very important for us as a risk mitigator. And the leasing has also picked up during the first half of the year.

Turning over to Infrastructure Development, you can see that the profit for the first - for the 6 months is SEK910 million. And that, of course, is coming predominantly from the divestment of the highway A1 in Poland, which we announced in the first quarter.

You see a very impressive return on capital employed here as well. And majority of the projects that we have in the portfolio is under construction.

So with that, we - I want you to take a look at the order bookings in Construction. And we are maintaining a very good - high level, if you talk about the book-to-build ratio on a rolling 12 months basis, 118%, which you can see there on the very first slide.

And if you turn the page again, you can see the breakdown into the three main areas of Construction operation, the Nordics, Europe and in the U.S. And you can see also what Sweden has there.

In all these areas, we are above 100%, which means that in all parts here, we are building up the backlog. And we are maintaining quite a good backlog for - which is a good platform going forward.

So with that, I'll turn over to Peter to talk about the income statement and income in Construction.

Thank you, Johan. So the income statement on Construction.

The revenue amounted to close to SEK71 billion, which represent a 10% increase in SEK, 7% in local currencies. And as you can see, we are really turning a growth in revenue from the very good order backlog that we have.

Gross income, SEK3.9 billion; and operating, SEK0.5 billion. So the period - 6 months' period, has been impacted by write-downs in the tune of SEK880 million, representing close 1.2% of the revenue.

So turning in to the various markets. As you can see, the Nordics and predominantly then Sweden is representing a really good performance, and that is also with a very good growth in the revenue line.

Europe, where U.K. is embedded, is then, of course, impacted by the write-downs in U.K.

The ongoing turnaround in Poland is going according to plan. And the Czech business is turning out a good result in the second quarter.

U.S. is, of course, then overshadowed by the write-downs in USA Civil.

The building business in U.S. is doing quite well, so I would say that the other businesses that we have, represents either growing margins or stable margins with a growing revenue line.

Turning to Residential Development. Revenue increased by a whopping 31%.

Volume increase was 9%, and price mix 22%. So we have continued the sequential improvement in gross margin, which are - is 17.7% for the first 6 months.

As Johan said, the return on capital employed is 19.3%, and that is, of course, thanks to the very high churn of the portfolio, 1.3x capital employed. Turning into the income statement per geography; you can see we almost are doubling the profit year-over-year and we are continuing to reap the benefits of good markets in Northern Finland and Sweden.

And we have no extraordinary in the period, so it's a clean, good performance. And turning in to the homes started and sold; you can see that we are hovering around 5,000 units on a rolling 12-month basis.

We will only start projects that are ready to be sold, which means that they will have to go through the serious vesting and testing before we are launching the projects. So the volumes will be dependent on how many projects we will be able to start in the second half of the year.

We are still continuously developing our affordability segment BoKlok, which is a very good, resilient part of the market. Turning into the homes in production, you can see that we are close to 8,000 units under production; and of which sold is higher than it's ever been, 80%.

And then you can understand that we have very little stock to sell from, and we must be able to start new projects. Turning over to our Commercial Property Development business.

You can see a steady stream of deals taking us up to close to SEK7 billion in revenue; somewhat higher compared to last year. But since the second quarter was closed, we have already announced sales of SEK1.7 billion, which will be reported in the third quarter.

The gain, as Johan said, is SEK1.6 billion. It's a tough comparison compared to last year, when we sold the Seaport project in Boston in the first quarter of 2016.

Turning into the divestments; you can see that we are trading around a divestment volume of SEK10 billion. And on general - in general, in the first 6 months, we had a mark-up of 25%, which is somewhat lower than compared to last year, but it's still on a very good level.

And we gave a guidance of around SEK10 billion as of the first quarter. And we will clearly be in that range - we can - which you can understand, given the already announced Q3 deals.

Turning into the unrealized and realized gains. This is from a segment point of view, so you can see that the green curve is heading up, representing the closed deals from a contract point of view.

And we have also moved the bars correspondingly. If you look on an IFRIC point of view, we have never had as much investment in ongoing projects.

So they represent SEK28 billion at completion and a market value of SEK36 billion. And then going over to leasing, which is a key component of managing risks and opportunities for the CD part.

We had a strong second quarter leasing. And as you can see from the chart, we have rarely seen such a strong growth in leasing in the second quarter.

And we need to be here, given the size of the development portfolio and given where we are heading as well in terms of growth in this segment. Going over to Infrastructure Development.

Not much has happened in the second quarter, given that we sold A1 in Q1. And as we are selling a lot of mature projects, we will see less of income from these projects in share of income from participations.

And we can clearly see that some of the estimates in the marketplace right now are a little bit on the high side, given that we have a lot of immature projects in the portfolio. The project portfolio then, on the next slide, is sort of knocked on - knocked down, of course, by the sale of A1, but then we are also gradually growing and de-risking the ongoing portfolio.

And then for the group income statement, summing it all up to the operating income of SEK3.3 billion. We have a good cash management and we have a positive interest net, so we have a higher income after financial items.

Taxes is 9%, given the low contribution for the high-tax U.S. and also our high component of capital gains from CD which then lowers the visible tax rate.

And that gives us an earnings per share which is growing by 7%. As Johan said, that's the strongest number, despite the write-downs, for 5 years.

Cash flow. Cash flow from operations amounted to negative SEK0.3 billion, which is impacted, of course, by the continuous net investments in our development streams.

We are better on working capital, principally as we have received the M25 proceeds in the beginning of the year but also our better working capital development in Construction. Then, of course, we have also to our benefit to our shareholders dividend about SEK3.5 billion, then creating the SEK3.8 billion in cash outflows for the first six months.

Going over to the free working capital in Construction. Despite the strong growth in revenue, we are maintaining the ratio of free working capital.

And the second quarter working capital, in absolute terms, is record high. So it's good cash management in the Construction part.

Going over to the capital employed in Project Development which was close to SEK36 billion. And if you compare that to year beginning, that number were, of course, inflated in Infrastructure Development, given that we carried the M25 at market value which was then realized in the beginning of the year as we got the proceeds.

So you can see that we are growing CD and RD. And the sales in RD is going quite quickly, so that means that we will continue to build up now capital employed in ongoing projects in RD to a big - a large extent.

Financial position. Skanska's financial positions continues to be really strong, despite the fact that we have increased the defined benefit obligations in the second quarter due to the low interest rates.

And in addition to this, we also have close to SEK7 billion of already-closed CD deals to be captured over the next 12 months, of which SEK4.3 billion will be captured during 2017, so we are in a very good place. If we look to the changes of the financial position; as we can see, the cash flow and the pension liability, as Johan loves to dwell upon, is knocking down the interest-bearing debt.

But the operating net financial assets/liabilities continued to be in a very strong position. And going over to the change in equity, the same is true here.

We have a profit for the period benefiting dividend to shareholders; and then the pensions which is creating the differences compared to the opening balance. So Johan, over to you.

Yes, some words about the market before we open up for Q&As. Very strong and good overall market conditions across the board.

Extremely strong in - on the building market in Sweden and stable in Norway and Finland. Also a very good market for the civil side in Sweden.

And we have - we can see that Finland also - it's on the way up on the civil side, and the market is improving. Some uncertainties due to the Brexit and the long-winding discussions regarding that part and after - and also as an outcome of the election in U.K.

But on the other hand, we can see in the Central European markets that the civil market has started to improve. In the U.S.

there is a strong pipeline of projects. And we have not seen any impact from the new administration, from the Trump effect, so to speak.

But despite that, there is enough projects coming from the various states. And so all in all, the market in U.S.

is very strong. And Residential Development markets; also very good across the board.

Sweden's strong, and Norway is a little bit mixed, and Finland stable. And on the Commercial Development side; no changes since the last quarter.

Overall a very good picture for both leasing and especially for divestment side. And Infrastructure Development, we see the major pipeline of projects in the U.S.

and also, to some extent, in Norway and in U.K. So over to André.

Thank you, Johan and Peter. And now let's open up for questions.

[Operator Instructions].

I would like to ask a question regarding your U.S. Construction operation.

And I mean you've had a focus of growth which you presented on your Capital Markets Day some 6 years ago, and since then you have had very strong growth in revenues but very weak trend for EBIT. And I am very pleased that you've changed your focus to more focus on profitability and less on growth in U.S.

However, when you - when we look at the book-to-build, both for last year, for the full year figure, but also now in the quarter with a book-to-build of 145% in U.S., it seems like - you've said that you changed your focus away from growth and with more focus on profitability, but it seems like that it's still very high growth. And how can we be confident that we will not continue to see the repeated write-downs in your U.S.

operation when you continue to see the very high growth, or the very strong figures, in order intake?

Thanks, Tobias. It's a good question and which leads me to dwell upon the situation and clarify it so everybody understands here.

It's absolutely so the profit goes before volume. That is the mantra that we are hammering in, and it's a leading part of the strategy for USA Civil.

And by the way, if we have a turnaround case and if we have to restore profitability, that's always the medicine that has to be put in. If - you are right.

When you look at the numbers, it looks like we are growing the business, but I can assure you that the projects that we are signing, the deals that are coming in, have been scrutinized a lot. And we are focusing on our core geographies, our core competencies, and selecting the projects very carefully.

And one of the major projects in order book for USA Civil is - has been a project in Manhattan, which is a core - definitely the core geography and a core competency. And so I'm confident that these are the right projects for us going forward.

Okay. And also, if I can ask regarding your European operation.

You did have the write-down in U.K. which, of course, had a big negative impact on your EBIT.

But in Poland and Czech Republic, can you say something about the profitability there? Do you have some other losses, let's say, in the quarter or...

In Czech Republic, we delivered profit according to expectation. And it's a small unit, but it seems that we have it up and running on the right level, where it should be.

And as you know, Poland is a turnaround case and we have some seasonal impact, but also we have taken down some additional - we have also taken some additional costs in Poland. But I think it's also good to know that the order backlog is very short in Poland.

And so at the end of the year, most of the projects have to be - will be finished, and we will be able to start up new ones. And the new ones is taken with a new regime and with another type of risk management profile and also on a better profitability level.

Okay, but is Poland still running at red figures also in Q2? Or is it at least a positive?

No, it's still running with a small negative.

All right, thank you for that. Since there were a few questions on the phone I have actually one on the web, from, let's see, Simen Mortensen at DNB.

He is asking the following. How much of the Q2 order backlog was impacted by the Q2 write-downs?

And are these orders running with 0 or - yes, 0 margin until completed?

Okay, thank you, Simen. The question is regarding dead revenue, as we say, i.e.

products that are running with a 0% gross margin. And Simen, there is a number of projects which is going to be completed very - during part of this year.

So it's a very small percentage of the backlog.

Great. And then there's another question from Simen as well regarding the Residential Development market.

The new rules for mortgages in Norway, how do you see that impact the performance in Q2? And then also, the new legislation in Sweden that's being discussed, how do you see that impact the market in 2018?

Well, if you look at the new legislation and the new rules. If I start with the Swedish side, I think it's on healthy discussion.

We can see that the speculative buyers have disappeared from the market. So that's maybe the comments we should make regarding that one.

I don't know, Peter, if you want to add something regarding the Norwegian situation.

Well, number one, when it comes to Sweden, these regulations in Sweden has been enforced for quite some time, so it's not a change per se. And exactly as Johan said, I think it's a good housekeeping.

When it comes to Norway, we - the question was, have we seen an impact in the second quarter? The performance from the Norwegian RD is absolutely fantastic.

So if - we haven't seen sort of any tails of negative things. Now it was then, as we stated during the call, is we can only launch projects once we have found them being sort of well stated to the market and also designed to costs.

So we will not launch any projects if we feel that there are sort of uncertainty lingering. However, we do not expect to see any major impacts in the projects that we are ready to launch now in the second half of the year.

All right, great. With that, we close this conference.

And we wish you all a great summer. And see you, hopefully, in late October.