Ladies and gentlemen, thank you for standing by. Welcome to the Skanska press conference call. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. I will now hand the conference over to Magnus Persson, SVP, Investor Relations at Skanska. Please begin your meeting, sir.
Good morning, everybody, and welcome to this press conference call. The reason we have this call is the press release that we issued this morning, for the reason that we have a profit warning, due to write-downs in the U.S. construction business. We wanted to get this information out to you as soon as possible to the financial markets, and this also means that we have not yet closed the books for the third quarter. This call will exclusively be about the situation in the U.S. construction business. We will do this as follows. First, Johan Karlström, CEO, will go through the situation in the U.S. and what has happened. After that, Peter Wallin, CFO, will go through the guidance for the third quarter and the full year. Finally, we will have a Q&A session.
With that, Johan, please go ahead.
Thank you, and welcome, everybody. As you have already seen today, we announced the total write-down for the two U.S. construction units of SEK 630 million. And the background to that is increased costs in a number of the large projects in the U.S. And the majority of the costs are from six major projects. And these projects has changed due to changes in the client's designs. But we have also seen a tougher market for quite some time, with tougher client and contract negotiations. We have not reached an agreement on how to be compensated for the changes, but have ongoing discussions with all the clients.
And the Skanska policy is to not account for the revenue until the client has signed off change orders and other cost escalations, but we are taking the full cost. We have also seen lower productivity than expected in several of the projects. And of course, that can be a consequence of the changes of the client's design, but also of our own performance in the projects. So, what have we done? We have strengthened our contract management to secure that we will be compensated for the cost, that these are contractual rights. And we will, of course focus on the bottom line of the company and the US operations to deliver the products we have in the backlog. But we will also be even more stringent in projects selection going forward.
So, Peter, can you explain and talk about the numbers?
Yes, Johan, I will do a brief explanation. Then we have the SEK 630 million in write-downs distributed between SEK 470 million in civil and SEK 160 million in building. All these numbers are the isolated impact into the third quarter, and all this will be visible in the construction stream. After the charges, we expect the operating income for the third quarter for the whole group to be around SEK 900 million . For the group, for the whole 2015, the full year estimated operating income will be in the range of SEK 5.5 billion-SEK 6 billion . The final outcome is depending upon planned divestment in our development operations. So, this is business as usual.
We have a few deals more to sign off, and that's why we have given a range for the third quarter of SEK 500 million, between SEK 550 million and SEK 600 million. As Johan has stated, all these costs incurred and taken into the third quarter are the estimated full cost to complete the project, including the perceived impact of the change orders and the cost escalations. We have, yet again, not taken any revenue for any sorts of commercial agreement, not yet agreed to the clients. Thereby, I turn over the word again to Magnus.
Okay. Let's move into questions and answers. Operator, do we have any questions on the call?
Thank you. Ladies and gentlemen, if you do wish to register for a question, please press zero, followed by the one on your telephone keypad. Once again, to register for a question, please press zero, followed by the one on your telephone keypad. There will be a brief pause while questions are being registered. Once again, to register for a question, please press zero, followed by the one. First question comes from Mattias Holmberg from DNB Carnegie. Please go ahead. Your line is now open.
... Mattias Holmberg from DNB. Just a quick question. The six projects mentioned, when will they be completed?
They're gonna be completed over the next years. It's gonna be like in a different completion times for all of them because they are like in a the completion time is like in a different there, but it's gonna be over the years, over the coming years.
Okay, so just a quick follow-up question. The accounting policy to account for total estimated cost, but not for any revenue changes, there might be some positive effects from this. Do you know when, if that happens?
We don't know when that will come. And it will probably not come in the same quarter as it is, like, in different projects. And it can also be a different type of negotiations, even in one single project. So it's gonna be spread out in time.
Okay, thank you.
But we will not, we will not account for anything until we have signed off, and we have it clear with the client.
Perfect. Thank you very much.
The next question-
Next question?
Next question comes from Niclas Höglund from Nordea. Please go ahead. Your line is now open.
Yes, good morning, Niclas Höglund here. Do you hear me?
Yes.
Great. I had some problem with the technical issues. But firstly, could you please... You talked about the costs related to lower productivity. Could you maybe split out of the SEK 630 million, how much is related to cost, of the productivity issue? Or, will we see that in the more of the underlying earnings in the construction earnings in the U.S.? Thank you.
No, you cannot see that, but like the lower productivity is depending on both of the change orders and also the change of the client's design in various products, but it's also coming from a lower productivity from our own people.
Okay, but will you then expect to be compensated also on the lower productivity side, or is that more of a caution related to the total product earnings?
Well, what we expect to be compensated for, that is for the changes that the client is responsible for. And, of course, that has an impact both on the productivity, but it also have ripple effect into other parts of the product, when the whole product have been delayed. So it's
Okay
... it's a big discussion that has to take place with the clients.
Okay, but you don't want to split out the productivity part and the total write -down or?
No, we will not.
Yeah. Okay, and then just to follow up on the guidance for the full year related, well, to the range of SEK 500 million and to the commercial activities. In the top end of the range, SEK 6 billion, is there any amendment to the previous guidance of SEK 1.5 billion-SEK 1.6 billion in gains related to commercial development?
No, it's not.
So that's, so that should be including SEK 1.6 billion, then, in the, the commercial side, just to confirm?
Correct.
Okay, thank you. That's all for me. Thank you.
Thank you, Niclas. Next question.
Next question comes from Bo Selling from Alecta. Please go ahead.
Hello there, this is Bo Selling from Alecta. You hear me?
Yes. Yes. Hi, Bo.
Hi there. I just wondered, since I assume you will get compensated for these changes later, so could one say that this is a pure accounting profit warning? So, from a cash flow perspective, you will get the money, but later, and then you're just being conservative. So maybe you answered this in the first question. I missed that in that case.
Well, you can say that it's the write-downs. It's coming basically, like, from two reasons here, and that is, like, in a lower productivity, as we-
Mm-hmm
... we talked about on the product.
Yeah.
And also from changes from the client. So it's a mix of, things that we are responsible for-
Mm
... and the other part that, the client are responsible for. That is what the negotiations now in these contracts and clients will, that's gonna be a discussion.
But you said that-
It's actually, it is a discussion, I should say.
Yeah. But you wrote, you wrote that the majority of the, of the costs were related to client changes.
We said that the majority of the costs is in six projects.
Yeah.
We didn't talk about, like, you know, how much is, like, in a depending on what.
Mm. But to me, it seems like a sort of accounting issue rather than a loss of cash flow. Is that correct?
I think that it's like it's both responsible for... It's both coming from the way we view it as both a responsibility for the client, but it also lower productivity on the project that we are doing.
Mm.
But we are, that we also are responsible for.
Every time a client changes a product, you will incur a cost, and then later on, you will get it back. Is that correct?
Yeah, we never put it into the revenue until we have a signed change order or an agreement with the client. But we always have to eat the cost up to the... Well, we always eat the cost, so to speak-
Yeah
... and then we don't account for the revenue until we have a change order.
Yeah.
And in large projects, complicated one-
Mm
... that takes a long time to discuss, especially if it's a lot of changes.
Yeah, I understand. But you assume you will get the go-ahead for the changes from the client, I guess?
We will fight back for our contracted rights, and we are doing that with full force.
Okay, thank you.
... Thank you. Next question, please.
Next question comes from Tobias Kaj from Carnegie. Please go ahead.
Yes, thank you. When I listen to you when you describe this, there's write-downs and changes in design and so on. It seems like similar description as you gave when the first big write-downs came in Latin America, and you said that you had seen change orders, and you were hoping for being compensated for this from the client. But later on, the losses just increased in size. Why should we believe now that you will get some money back, and that losses will not just increase going forward?
What we do is, like, we make an estimate of the product at every time, and take the full cost of what we see. On top of that, we also have discussions with the client of how to be compensated for the changes that they are responsible for.
Okay. And, I mean, I covered Skanska for some 15 years, and from the top of my head, like, I cannot remember one single time when you have some a positive profit warning, saying that you have been compensated for previous revisions. I might not remember all the times, but have you ever done that in the past?
It usually comes in smaller portions over a longer period of time.
Oh, okay. If we look at the rolling twelve months trend for your aggregated U.S. operation in the past two years, you have seen a quite strong growth in revenues. But if we look from an EBIT perspective, already before this write-down, the rolling twelve months EBIT was almost 25% lower than the peak some two years ago, if you look in local currencies. Do you see any reason to change your focus on growth in U.S. due to the significant decline in profitability that this has resulted in?
The focus now is gonna be on securing what we have right to get from the clients on the ongoing projects and these write-downs and changes from, from the design. Then also to produce and build what we have in the backlog. The focus going forward will be to, it's gonna be on the bottom line.
Okay, so the
Bottom line and the profitability is more important than the top-line growth. So I guess-
So you mean the-
That's really, like, the focus going forward.
Okay, so you abandon your growth strategy in U.S. now?
It will be a focus on the bottom line.
Okay, thank you.
Thank you, Tobias. Next question, please.
Next question comes from Stefan Andersson from SEB. Please go ahead.
Thank you. So I was taken off the call by the operator in the first question, so if you already answered this, please just say so. But my first question is, if you look at the potential recovery that you could get in the negotiations, of course, you can't say a number, but just to see the spread, I guess we can start at zero. What is the maximum amount that you might be looking at?
We don't disclose the maximum amount that we are talking with the owners because of commercial reasons, but we are talking about big numbers.
Okay, and the second question, or last question there is, you mentioned that you're now trying to avoid the more complicated or bad projects, so to speak. Could you give an indication on what kind of portion of your order intake or what, or of your sales in U.S. that that has been, just to get a feeling of what you're trying... Yeah, what portion of the market that you are, so to speak, avoiding going forward?
No, it's more that it's gonna be more focused on projects that we have a core competency in and people available, and when we talk about, like, available people, it's about senior managers to run those projects. So it's more like in a matching between a project in the market and the competencies and available senior people. So that's more like a match between these two things, like internal capabilities and what's available out there in the market.
Okay, thank you.
Thank you. Next question, please.
Next question comes from Simen Mortensen, from DNB Markets. Please go ahead.
Yes, hello, gentlemen, hope you hear me. One question. You have stated that part of the writedown is to productivity, and I was just wondering, what kind of, what have you all done and what will you done so we don't see ripple effects? What kind of ripple effects are we expected could be seen in the margins in the U.S. in 2016 and 2017, based on what you say is lower productivity and six, obviously, large developments?
Well, lower productivity is like means that it takes longer time to do a certain thing and cost more. And that can depend on like different reasons why, and one of the reasons that we see here that is like a change of design, and that it's actually gonna be built in a different way. But if elaborate a little bit more around it, what we see now in the market that is like it's a tougher market, and it's more competitive and more competitors, and it's a tighter schedule and a tighter budget from the owner.
from the clients, which means that there is a much tougher client climate out there now, if you compare it with the, well, some years back.
Just a follow-up on that also. These are fixed contracts, as you stated in the press release. So changes, is this based on in building cost inflation in the U.S., or what, is it just your own activities?
Sorry, I missed what you asked now.
Do you see any building cost inflation? You're seeing increased competition, but you have a fixed contract, according to the press release, on, in several of these projects. How come you now see the write-down and profitability in these developments? Is it-
Well, that's right, that is like a fixed price. We talk about fixed price contracts. There is increased cost in the project, and that depends, and it's coming from different reasons, lower productivity and change of design, and increased costs from subcontractors, and so on.
Okay.
And also to point out that the design changes itself gives impact to the productivity. That, so it's a cause and consequence.
Okay, thank you.
Okay, thank you. Let's have one final question, operator.
Thank you, sir. There appear to be no further questions. I'll return the conference back to you.
Okay, excellent. So thank you all for joining us, and we hope to see you again when we release the third quarter result on October 28. Thank you.
Thank you, ladies and gentlemen, this does conclude today's conference call. Thank you very much for attending. You may now disconnect your lines.