Ladies and gentlemen, welcome to the Skanska conference call. For the first part, all participants will be in a listen-only mode, and afterwards, there'll be a question and answer session. I will now hand over to André Löfgren, SVP Investor Relations at Skanska. Please begin your meeting.
Thank you for that, and once again, welcome to this conference, which we have invited to in relation to the announcement we made just one hour ago, regarding the write-downs in our construction stream, which is impacting the earnings in the second quarter. Our CEO, Johan Karlström, will briefly explain the situation, and after that, we'll open up for questions, which can be forwarded to both Johan and also our CFO, Peter Wallin. You just have to follow the instructions from the operator. And with that, I hand over to you, Johan, and you would like to start on another important matter.
Yeah. Thanks, André—thanks, thanks, André. I want to start with something else before we go into the actual announcement here. And I think that most of you that are located in Sweden have realized and heard that we had a serious accident that happened yesterday. And it was the construction of a bridge over a railway collapsed. There were no fatalities, but it was at least 10 people injured, and of the 10, it was at least four seriously injured. And this is—that is, of course, a very tragic and serious accident as we see it.
We will initiate a thorough investigation, of course, but here, firstly, we will put in all our efforts in to support the, our employees that were involved in the accident, and, and of course, the subcontractors, that were involved there on the site. This shows how important it is, with safety, and that we have to have it very high up on our agenda, and, we will continue to have it as a priority in Skanska. So let me now move over to talk a little bit about, the release, that went out, earlier today. In total, the charges in the second quarter, from write-downs amount to SEK 780 million. And if we split it between the two business, units in Skanska, you can see that the...
We had a charge in the U.S. of SEK 420 million, and that's related to the U.S.A. Civil operation. In U.K., the charges add up to SEK 360 million. In total, our construction operating income is slightly positive in the second quarter. Of course, we are not at all satisfied and are taking additional actions to restore the profitability in the business. The group is expected to report an operating income of about SEK 1.5 billion for the second quarter isolated, and that can be compared to 1.7, same period last year. In the last quarter, we identified cost overruns in a limited number of civil projects in U.K. and in U.S.
According to our review, the cost overruns are mainly due to not achieving estimated production rates, and we can also see project delays in a limited number of these projects. Of course, it's important for us to meet the clients' expectations and meet them according to the contract, and, of course, that has to be a priority. When we face delays and a subsequent lower production rates, that leads to higher costs to fulfill our contractual obligations. These projects will have a negative impact on the margins in the businesses going forward. Of course, it's our highest priority now to restore the profitability in the construction businesses within these two business units. We will continue to strengthen our risk and contract management, which helped us to detect the new issues on an earlier stage.
We will also strengthen our action plan further and focus on core geographies where we know we can handle businesses and core business lines and product, products we are familiar with. We will also review our overall cost structure within these businesses. I also want to say, before we open up for questions, that the earlier communicated negotiations with clients regarding cost of design changes are progressing and have no financial impact in the second quarter. With that, I hand over to you, André.
Yes, thank you, Johan, and I will hand it over to the audience, and they can ask questions. Just follow the instructions from the operator, please.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero-one on your telephone keypad. If you want to withdraw the question again, you can do so by pressing zero-two to cancel. We'll have a brief pause while questions are being registered. Once again, that's zero-one on your telephone keypad to register for a question. We have our first question from the line of Erik Granström from Carnegie. Please go ahead. Your line is now open.
Good morning. Thank you for taking the call. I had a few questions regarding if we start off with the U.S. then, could you say something about. From what I understand, these are civil projects in absolute terms, there are no building projects involved in these write-downs. Is that correct? Just to start off there.
That's correct.
Okay, and these civil projects, have they been sort of under scrutiny before? Are they projects that you have made cost adjustments to in Q1, for example?
We scrutinize all projects every quarter, and some of the outcome of that scrutiny is sometimes write up and write downs, and we always adjust the forecast. That we do every quarter, not only in Q1. All these projects, of course, have been scrutinized before, but now, when we have had a thorough investigation, we have found that there is more there.
Okay, but that investigation that you have done now in Q2 has nothing to do with the fact that Mr. Cavallaro is now back in charge of the civil operations?
What we have done now is that we have taken a further grip on the business and taken an even thorough look into the operations and the businesses. And that has caused the write-downs that you can see now.
Okay. And then when yofu say that you're looking into the overall... You're reviewing the overall cost structure of both the U.S. and the U.K., does that mean that we should expect, sort of, you to report further costs in relation to changing the, the structure of these units?
I think that you should expect lower overhead costs, as we will take a look at the overall overhead cost structure. As you know, in the U.S., the notice period is very short, so we don't expect a big charge for that.
Okay, and then in the UK then, perhaps a bit surprising that this has sort of come up now, because we haven't seen any indication of the UK being a tough market or that your projects previously have been performing sort of subpar. Has anything changed in Q2 versus Q1, or is it the fact that these projects are in late stages? And that's also something that I think are important. Are these projects that you're looking into now, will they be completed this year, or will they continue to run for next year?
I hand over that question to Peter, that is now responsible as the staff member for the UK operation.
Thank you, Johan. Hi, Erik. When it comes to your question on the projects in the UK, it is very clear that we have had specific events during the second quarter, which have forced us to take a number of adjustments to the projects. Some of these projects are close to its completion and handover, and some will run into 2018.
Okay. So, is that also the case for the U.S.? Are we talking about the majority of these projects being completed this year, or are they running into 2018 as well? You know, usually they're fairly long.
They are, they are fairly long.
Okay.
But some, some of them will be completed this year.
Okay. All right, thank you.
The next question comes from the line of Tobias Kaj from ABG Sundal Collier. Please go ahead. Your line is now open.
Yes, thank you. I wonder if you can give some more information about in which geographies the projects in U.S. are related to?
We don't want to go into any further discussion about the various geographies and name the specific projects there. But the focus going forward would be, for the entire operation, the focus on the core geographies where we know that we have knowledge and clear strength around the large projects.
Are the projects related to geographies where you have, that you have entered in, in maybe the last five, six years? Or is it in, in geographies where you have a very long track record?
It is in several different places.
Oh, okay. And your statement that you will focus on core geographies, but will that mean that you will leave any states where you operate now, or how should we interpret it?
We have that under investigation, and we will come back to that.
And also regarding the projects, is it only external projects, or are there any projects that you do for commercial development or infrastructure development, where you have problems as well?
We don't go into the ownership structure of the clients and who the clients are, because we want to keep it confidential.
Okay, thank you. And, and finally, maybe you already answered it, but, since you argue that you will—you need to take down your cost level in, in U.S., will you come back with, you know, cost for, for that in coming quarters, or, or will that not be specified since it's very small amounts, or?
I think that you should expect such a small amount, so I don't think it's gonna be a significant number, but we will come back with more information about the cost structure going forward and the cost reductions into the coming years, 2018 and onward.
Okay, thank you. That was all of my questions.
Next question comes the line of Simen Mortensen from DNB Markets. Please go ahead. Your line is now open.
Thank you. Most of my question has been asked, but one question could, of course, be: How big is the size to those orders now being written down by roughly SEK 700 million here? What is the underlying order value, and for how long will these projects respectively have left in terms of revenue and running at service going forward?
So we don't want to go into the details about the size of the projects, but some of them will be completed this year, and but several will run into 2018 and some few of them into 2019.
So you can't comment on how big the underlying volume was in terms of revenue size for these projects initially?
No, we don't. We don't do that.
Okay, thanks.
The next question comes from the line of Alvin Sandberg from Handelsbanken. Please go ahead. Your line is now open.
Yeah, hi there. I'll make a try, even though sometimes when we have these calls, you say it's only about the write-downs. But, could you just ask about the residential development? It looks quite strong. Were there any capital gains in that number?
Thanks for that comment, Alvin, and we will have a phone call late next week as well, and we will gladly answer all the questions regarding the residential businesses and commercial businesses and all the others that are before me very well at that phone call.
Okay, thank you.
The next question comes from the line of Niclas Höglund from Nordea. Please go ahead. Your line is now open.
Yes, yes, good morning, Niclas Höglund here. Well, most of my questions have, of course, been asked, and when you look at the portfolio in the US market right now, you've built a very strong backlog, and you have taken charges over the last couple of years. You've talked about a higher competition, and you're now talking about a reduction of overhead costs. Will this imply that you will not grow your current market position in the US? And should we expect further review on the backlog, or is it more on an ongoing basis in the US, or should we expect more of a thorough review on the backlog?
The backlog has been built up, primarily in the geographies where we have a very strong operation. I'm sure that you are aware, fully aware of the LaGuardia project. It's in New York. We have the big Farley Building that we just booked. It's also in New York, actually in Manhattan. So that is a core, definitely a part of our core geography in the US. So, but another statement I also want to give, and that is profit goes before volume here, and that is, of course, very important to have.
Okay, so but, with regard to the general growth outlook for the U.S. market and reducing the overhead, does that imply that you won't grow as much as you've done previously?
I think that you should expect that the growth will go down, and we will focus on the businesses that we have. We have a very, very strong backlog and a long, long products, and we view them as good in the backlog. Now, we have to take a charge on these products that we announced today. And what we do now is we take down the overhead structure so that it actually fits into the current volume that we have.
Yeah.
So what we will see is, going forward, not this year, but the next year, a lower overhead cost compared to today.
Yeah, and going over to the UK, you stopped reporting the sort of underlying margin for the UK operations, although that's, of course, a big part of the European operations. Would you say that the write-downs you're taking right now, although it seems to be fairly linked to this, to the second quarter event, will that have a continued dilution on the underlying margins also related to the UK market? And could you give us a better feel for also the very healthy backlog you built in the UK market, how we should think about that? Thank you.
Hi, Nicholas. Well, as I commented upon, some of the projects are under construction, which means it will carry into 2018, and which means that you will have some dilutive effect on the operating margin.
Okay, and then going into the areas which and probably not that much linked to the write-downs today, but we've previously seen very, very strong development in the Swedish construction operations. Could you share some words with us on the underlying performance in construction Sweden? Thank you.
We will come back and talk about the other businesses and the strong performance we have in those next week when we have the other phone call, and I hope that you will be able to join.
Thank you very much.
As a reminder, if you wish to ask a question, please press zero one on your telephone keypad. If you find that your question has been answered, you can cancel by pressing zero two. We'll have a further pause while questions are being registered.
All right. In that case, we just say thank you, and, for those who are interested, you can chat with us in less than a week when we are releasing the full and final six-month report. Thank you.
This now concludes our conference call. Thank you all for attending. You may now disconnect your line.