Good morning, everyone. I am André Löfgren, and I'm heading up Investor Relations at Skanska. I would like to welcome you to today's phone conference following the announcement about writedowns and impairment charges. I will very soon leave the word to our CEO, Anders Danielsson, who will summarize the situation, and after that, our CFO, Magnus Persson. He will explain and shortly comment on the preliminary results, and after that, we will open up for questions. Anders, please.
Good morning. Yesterday, we announced project writedowns of SEK 0.9 billion related to the construction phase of 2 ongoing so-called PPP projects in the United States. The project writedowns are caused by additional cost overruns due to low production rates and delays. The problems are isolated to these 2 design-build PPP projects. These projects are about 50% completed. Even though these are big projects, being halfway through means you have secured a majority of the cost, and we believe that we have a robust forecast for the remaining part of the projects. Worth mentioning is that the projects in the U.S. that the bid after 2015 are performing according to the plan. As announced earlier this year, we have performed a review of our operations. Today's announcement and today's press conference is a part of that.
We have now completed our review of the U.S. operation. Skanska also think that takes a goodwill impairment charge of SEK 0.4 billion in the third quarter, associated with the process of exiting the U.S. power sector. After the writedowns and the impairment charge, the operating income in the third quarter, 2018, will be about SEK 0.5 billion. As a consequence of this situation, we have decided on firm actions to restore profitability in the U.S. We will stop bidding for mega design-build PPP projects. We will stop bidding for engineering, procurement, and construction, so-called EPC projects. We will explore the possibility to divest our operation in the U.S. power sector. We have also decided to close down the project development function within our Infrastructure Development unit.
And we all have also decided to appoint a new business unit president for Skanska USA Civil with immediate effect. Despite these writedowns, Skanska Group remains financially strong. We also released some additional preliminary financial statements, and Magnus will now present them.
Thank you, Anders. So the numbers you have in the press release are preliminary Q3 numbers, and we will present the final actual numbers on the ordinary press conference on November 8. But I will go through these numbers here quickly and comment on them, and as you can see, revenues are up slightly in the quarter. On the construction side, you can see it comes up a bit. We have earlier guided that revenue over time will come down, given the actions we are undertaking, and that is still true. We are working off our order backlog now, which is what drives up the revenue here. You can also see an uptick in revenue for Commercial Property Development. We have a good market and are making good transactions there.
If you look at operating income then, for the construction stream, it's -SEK 300 million in the third quarter. And of course, this is charged by the SEK 1.3 billion here now in the third quarter, the project writedowns and the goodwill impairment. Year to date, we have a result in construction of SEK 231 million, and the total one-off charges then for Q1, Q2, and Q3 in that number is SEK 1.9 billion. I also want to comment on Residential Development. As you can see, we have a very strong result here in the third quarter of SEK 504 million. This result is significantly affected by land divestments and the release of provisions in the isolated quarter.
So if we adjust for that, the underlying margin in this business now is 10%, and it was approximately the same on, in the year-to-date number. For commercial development, we have an operating income in the quarter of SEK 456 million, and we are performing according to plan and Infrastructure Development. We have had some additional payments from earlier executed divestments in the quarter. You can also see that our net debt improved slightly, and also, the cash flow from operations comes up slightly to the comparable quarter. That was all the comments I had on these preliminary numbers. André?
Okay. Thank you very much, guys. And then we open up for questions. And we would like to keep to the announced writedowns and impairment charge. All other questions, I would like to direct to the announcement of the full and final report on November 8. So please follow the instructions from the operator.
Thank you very much, sir. Ladies and gentlemen, if you haven't already and you have a question, please press zero and then one on your phone keypad now in order to enter the queue. Then after I announce you, simply ask that question. If you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. We go to the first line, which is Niclas Höglund at Nordea. Please go ahead, Niclas. Your line is now open.
Yes, good morning, Niclas Höglund, Nordea. Okay, let's, could we hear some more on the timing and of these project writedowns in the U.S.? I mean, why did it take so long for you to sort of find this? Is it, is it, how much is more of a recurring, underlying, you can say, poor productivity related to the quarter? And how much is sort of reversals of profits which you have accounted previously? Also, on dead revenues, does this increase the sort of dead revenues, or are these projects already before sort of not contributing to the gross margins in the U.S. operations? Thank you.
Anders here, I can start comment on the causes of these write-downs. As I mentioned, we are about halfway through in these projects, and we have seen low productivity and due to delays, and we have also went through it. These are very large and complex projects, and it's also my experience when you are halfway through, you can project the productivity level you have had in the past and for the remaining of the project. That's what we have done. So we have taken the charges for today in the third quarter that we believe will be sufficient for the remaining of those projects.
About the dead revenue minus, will you comment on that?
Yeah, I will do that. Going into 2019 now, we have just above $800 million worth of, so to speak, dead revenue in the US business, which roughly makes up 12%-13% of that there. And of course, this is this. It will take some time to work off this sort of backlog. We think that we will be out of this gradually up until 2021.
Okay, thank you very much.
We're now over to the line of Fredrik Svan at Carnegie. Please go ahead. Your line is open.
Good morning. A few questions from my side as well. First of all, these two projects, have they been affected by write-downs in the past?
Well, one of them has been problematic for quite some time, and the other one has been under extensive review as a part of our strategic review of all major projects we announced earlier this year. The review of the U.S. operation is now completed.
And then on the dead volume minus that you mentioned, $800 million, is that on sales, or are we speaking backlog?
That is the revenue that we expect to create from, so to speak, dead in 2019.
Okay, basically, so that's the sales for 2019. And how much of that is related to these two projects then?
The absolute majority of it.
Then my final question. In the press release, you're stating that you will stop bidding for large PPP projects, but also stating that you will close down the project development of the ID unit. Does that mean that you won't bid for smaller PPPs as well, or how should we interpret that?
It means exactly as we stated. It means that we won't go for the mega design-build PPP projects because we think they are too, the risk is, not, risk reward is not attractive for us. We closed down the project development function of Infrastructure Development because we don't think we have enough, you know, that sort of project to defend having a permanent organization. We still have the competence in our pro- in the company.
Okay, thank you.
Okay, our next question is over the line of Tobias Gudbjerg at ABG Sundal Collier. Your line is now open.
Yes, thank you. I actually only have one question left, and that is if the projects which you haven't take write-downs in before, is that LaGuardia project?
We don't comment on individual projects, and that's with respect to clients and partners, so that's our position.
Okay, thank you.
Okay, before going to Miguel Borrega at UBS Investment Bank, if anyone has any further questions at this stage, please do press zero and then one now. Miguel, over to you.
Hi, good morning, everyone. I've got a couple of questions, please. The first one is on construction. Can you maybe quantify the size of the power business today? Maybe break it down by revenues, and maybe what kind of margin would you make on a normal day? And also, with these provisions in the quarter, can you tell us the exact phasing of the cash outflow? Are we looking through separate quarters, or will it be all booked in a single quarter? The second is on residential. Can you maybe quantify by how much were these land divestments, maybe break it down by how much were homes sold in the quarter? Thank you.
In terms of the size of the power business in the U.S., it's not a huge part of that business. But we're still carrying out measures that we are announcing here with that. In terms of the land divestments and the provisions, what we will communicate now is that the total sum of the total impact of the land divestments and the provision release is takes us down to a 10% underlying margin in the quarter and year to date.
And the cash outflow?
Can you repeat that question, please? I didn't understand what you were after.
Yeah, I was just wondering, with the provisions booked in the quarter, the phasing of the cash outflow of these measures?
Okay.
The timing.
Yeah. I mean, these are related to ongoing construction contracts, so that cash flow comes sort of linearly speaking to the completion of the projects going forward.
Okay, thank you very much.
We are now over to the line of Albin Sandberg at Kepler Cheuvreux. Please go ahead. Your line is now open.
Thank you. One question. You refer now to that your review of the U.S. operations are kind of complete, as I understand it. Should we also take it that the total review for the group is completed, or is there something else to review for Q4, so to speak?
Our review and our actions we have taken earlier this year to restore profitability within the construction stream has mainly been addressing the Polish operation and the US operation. And both of them are. We have the review is completed. We have an action plan in place that we are executing on. The rest of the CS operation are performing as expected.
Great, thank you.
We have a follow-up question. Back to the line of Niclas Höglund at Nordea. Please go ahead. Your line is now open.
Yes, thank you. I just have a follow-up. Since these two projects are ongoing PPP projects, could you comment anything on the sort of equity or impact on the equity stakes you have in these holdings? Have the consortium taken action to... I mean, will costs also increase on the sort of ownership part, and then the sort of surplus related to the ID, then have a significant impact on the group, for the group? Thank you.
Thank you, Niclas. That's a good question. Obviously, I can't comment on the individual projects there, but there is no sort of spillover effect from the causes of the writedowns we are communicating now to the Skanska's investment in these projects.
But is it fair to assume that if you would have claims reversals in these projects, you would have the opposite effect on the sort of equity stakes in these ownerships then?
I didn't understand your question, Niclas. Can you please repeat it?
Yeah, yeah, sorry for me not being that clear. I mean, if you were able to get compensation from the sort of equity or the ownerships in these PPP projects, is it fair to assume that, of course, the costs then would increase, and you would have a more negative effect on your sort of equity stake in these companies?
No, as I said, the investments, the equity investments we have in these projects is unaffected by the problems we are communicating now.
Okay, yeah. Okay, thank you.
As there are no further questions currently in the queue, can I please pass it back to you for any final comments?
All right. Thank you very much for your attention. As we stated, we will release our final and full report on November 8. We will be back with more information then. Thank you very much!