Ladies and gentlemen, welcome to the Skanska press conference. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session. Magnus Persson, SVP, Investor Relations at Skanska, please begin.
This conference call, where Skanska CEO Johan Karlström will briefly go through the situation in Skanska LA on the back of the profit warning that was released this morning. After Johan's presentation, there will be the opportunity to ask questions to both Johan and our CFO, Peter Wallin. Please note that everything on this conference call will concern only the situation in Skanska LA and this quarter. All other questions and information will have to wait for our regular earnings call next Friday, the 18th. With that, Johan, please.
Thank you, Magnus. And, as you have seen in the press release this morning, we in Skanska will take a charge of SEK 500 million in Latin America. And in Latin America, we will continue our strategy of finalizing the ongoing E&C contracts. In Latin America, we have one part is O&M, and another part is E&C, and now we are finalizing and completing the E&C contracts. And by doing that, the finalizing the contracts, the cost has been higher than expected in several of the projects. The remaining O&M business is about 50% of today's volume. So what has happened? Of the SEK 500 million that we are taking as a charge, SEK 380 million is related to project write-downs.
As a consequence of that, the operating income for the entire construction stream in Skanska is expected to be SEK 620 million, and for the group, SEK 920 million in the second quarter. And the project write-downs are all in the projects in the E&C sector, engineering and construction. There's two power plant projects in Brazil and one petrochemical plant in Argentina. And the remaining SEK 120 million of the charges relate to restructuring costs, as we will reduce the staff and the people once the projects are coming to an end. The work to turn around the Skanska operations in Latin America has been going on for more than a year.
What we have worked on is to significantly reduce the overhead costs, significantly restricting the bidding activities and also reductions in the invested capital. In three of the reviewed projects, several factors have contributed to the write-downs, and these include: lower than expected on-site productivity, there's a lot of man-hours in these projects, poor cost estimations and forecasting of the projects, difficult client relationships, and low quality of works from external design firms. Due to the current market conditions, clients' CapEx plans have generally been reduced, and their financials have weakened. These factors have directly affected their behavior and in contract negotiations. Of course, the write-downs are very disappointing, but necessary, given the performance that we have on these projects.
It's clear that it has been more difficult than expected to fully understand and evaluate the risks in our ongoing large E&C contracts during the turnaround process. Going forward, we expect zero profitability in the Latin American business unit until the backlog of the E&C contracts have been completed. What are we doing now about the situation? On top of all the things that we are still working on and continuing with the current strategy. We have now appointed a new business unit president for the business unit, Johan Henriksson. He is now the CFO of Skanska USA Civil, and he has also had several other positions in Skanska. He is a long-timer in Skanska, and he will take on the job immediately.
He has extensive experience from several large construction units within Skanska, on top of the USA Civil, where he's just now working, as well as knowledge from the Latin American market. The size of the Latin American operation will be significantly reduced, and focus will, of course, now be on the operation and maintenance business. I think it's important for everybody to know that the O&M business is a much, it's a less risky operation and we have a stronger historical performance in those projects and with clients and in several of the markets. The O&M business makes up roughly half of the Skanska LA business in the past, and going forward, it's gonna be the majority of the operation.
And once the E&C projects are completed, that's gonna be the remaining piece that we will have in Latin America. And we will, of course, finish the ongoing E&C projects that we now have in Argentina and Brazil, and we will not bid for any more in that sector, any more E&C projects. We will, of course, bid and continue to work with O&M. And we will also continue our intensive work with enhancing and strengthening the risk management in Skanska Latin America overall. So with that, I think that we can, Magnus, open up for Q&A.
Yes. Let's do that, and let's remind again that we keep questions to the situation in Skanska Latin America. I turn to operator, do we have any questions on the line?
Ladies and gentlemen, if you have a question for the speakers, please press zero-one on your telephone keypad. That is zero-one. Please hold until we have the first question. Thank you. The first question comes from Mr. Simen Mortensen from DNB Markets. Your question, please.
Yeah, hi, this is Simen with DNB Markets. I was just wondering, you're saying you want to downscale significantly. Could you put some figure on how much that is in percentage terms, like year and year, and what time frame we could see this downscaling taking place?
Yeah, the backlog on the E&C business, that's around SEK 2 billion. And we are all in all talking about around eight to 10 projects. And now we have write-downs in the three major ones of the business. Most, two of the three projects we have problems with now will be completed this year, and the third one will be completing in the beginning of the next year. And then it will take the whole 2015, and a little piece will, we will have a tail end that goes into 2016 in one or two other projects once they are completed.
So that is a little bit of a picture of the size of the total E&C business and the remaining part of the backlog that we have to finalize.
Okay. Will the margin in the rest of the development also be, is, is they also this low as the reason for the profit warnings, the remaining developments, which was not part of the write-downs?
The remaining part, Simen, this is Peter. The remaining part is related to O&M business, and as Johan alluded to, that is a profitable business.
Okay, thank you. No more questions from me.
Okay, let's move to the next question.
Okay, the next question comes from Mr. Jonas Andersson from Danske. Your question, please.
Yes, good morning. The question is, the historical profitability for the two segments, the construction and the service and operation segment, what's the difference if you look at the history?
Well, the history is patchy on the E&C, so we can only state that the O&M side is a profitable business. And we wouldn't like to give any forecast of the turnaround, but of going forward, it is a profitable business at reasonable margins.
Okay, thank you.
Thank you, Jonas. Next question, please.
The next question comes from Mr. Erik Granström from Carnegie. Your question, please.
Thank you, good morning. Just to follow up there on the O&M business, I was wondering, in terms of the profitability, would you say that that business right now is performing as expected, or are you pleased, with the profitability within O&M? Or would you, would you like to see profitability within that, area to improve as well?
We always want to improve the profitability, of course, but the O&M operation, the ones that we have today, is running and performing on the level that is acceptable. So that is like definitely something that we think that we should keep and continue with. But as I said, the entire business unit's profit will be zero until we have, including O&M, until we have worked the backlog of the E&C down to zero.
Okay, and with that in mind, just then a follow-up. Regarding the rest of the projects, excluding these three ones that you mentioned today, those projects then, do you feel that there's a risk that you will have to make further write-downs in those other projects, or are they already running at - obviously, seems like they will be running losses at this point until they're completed?
We have made a review of all the projects, as you know, thorough reviews, and, so we have, come up with, our absolute best estimation of what the remaining cost, will be, to complete all the 10 projects, including the three one I just mentioned, and the, the other ones as well. But of course, I have the biggest respect for, what, it will take to complete the project in, in, the situation down in Latin America. But, we have done an, the best estimate that, we can come up with, for the entire backlog in E&C.
Okay, and then just a final question, and this is regarding sort of the prioritization of revenues or profits. You're stating there should be a sort of a zero business from now on until E&C is gone. Does that mean that early on you expect it to be negative as E&C is a larger part, and then at the end positive, which means that you will have a net zero effect? Or is it, should we sort of expect a zero performance throughout the years coming forward now?
We, Erik, we've made a comment on the business unit, and we intend to keep that at a break even, at a zero cost, as a total, going forward, in order to be able to mitigate and manage the risk in a very responsible way going forward.
Okay. Thank you. That's it.
Thank you, Erik. Let's go to the next question, please.
There is a question coming in from Mr. Albin Sandberg from Handelsbanken. Your line is open now.
Yes, hi. All my questions have been answered, so thank you very much.
Okay. Thank you, Albin. Then we go to the next question.
The next one comes from Mrs. Envelo from Svenska Dagbladet. Your question, please.
Yes, hello. My question is, if you've had any problems with corruption in any of these projects in Brazil and Argentina?
No, the cost overruns here is not related to corruption. It is related to cost increases and low productivities and problems with design.
Thank you.
Thank you for your question. Do we have any more questions on the line now?
There are no further questions at this time. So as a reminder, if you wish to ask a question, please press zero-one on your telephone keypad. That is zero-one.
Okay, there are no more questions. Then, we would like to thank you all for listening in, and hope to see you again on next Friday, the 18th.