Outcome of Skanska’s strategic review: A focused Skanska to deliver predictable performance

Press Release

 

January 14, 2003

Outcome of Skanska's strategic review: A focused Skanska to deliver predictable performance

In September 2002, the new CEO and the Board of Skanska AB reiterated their commitment to the multinational strategy through identified country specific home market construction units; focused project development, and facilities management. This strategy is articulated as:

• Be no. 1 or no. 2 in every construction business unit home market - in size and profitability.
• Be a leading project developer in chosen countries and product lines.
• Have a value-enhancing Services business.

During the 4th quarter of 2002 an analysis was made of the Business Units against this strategic criteria to determine Skanska's ability to meet these objectives. These conclusions emerged:

1.  The rapid expansion in the past years has given Skanska a broad platform to operate from, positioned number 1 in Europe and number 2 in the US. Now we need to enable management to focus the attention on performance to increase the predictability of earnings for the Group. Therefore it will be necessary to consolidate and continue to integrate the expansion of the past several years.

2.  The business can be supported with less capital employed. Construction units should be operated asset light, while capital tied up in Project Development, especially completed properties, can be reduced.

3.  There is significant upside in earnings in our construction business units at current sales levels by improving operating efficiency and control.

4.  Stronger focus on the allocation of capital based on risk and return. Create greater visibility of the business and its components. Return on Capital Employed (RoCE) will be the key-determining factor for all businesses.

Actions to be implemented in 2003 and 2004

# Construction

- Focus on construction home markets
- Exit Business Unit Skanska International Projects, a project export business that is not in line with the Home Market strategy presented above. The nine on-going projects will be completed - but no new business will be entered.
- Exit certain peripheral markets like Hungary, Latvia, and Lithuania.
- Emphasize achieving optimum operating margins in each home market.
- No "capital at risk" project development in construction business units.
- Special attention to Business Unit Sweden and Norway, and the ongoing restructuring of the Polish and Danish Business Unit.
- Pursue growth in US, UK and Czech Republic.
- Limit the South American operations to specific sectors; power generation, energy transmission and oil and gas services while limiting capital employed.

# Residential Development

- Separate accounting for residential development in each Business Units (used to be reported in construction) to make visible the Return on Capital Employed (RoCE) in this business.
- Exit residential development in the US - Skanska is not and will not be a market leader.
- Exit residential development in Denmark.
- Reduce capital employed

# Commercial Project Development, BOT and PFI

- Limit the scope of office and retail project development to major cities in Sweden and in Copenhagen, Warsaw, Prague and Budapest.
- Dispose of commercially viable owned offices in construction business units.
- Reduce capital employed in commercial development from 13.4 BSEK (September 2002) to 8.0 BSEK by year-end 2004, half of which is targeted to be in on-going developments and land bank.
- Skanska continues to be committed to grow development of new projects when the market conditions permit, which is captured in the targeted capital employed.
- Continue to cautiously expand our BOT and PFI business focusing on countries where Skanska has a construction business unit. 

# Facilities Management

- More intense efforts to develop a value-enhancing business over the next 3 years.

Charges in the fourth quarter results
Purchase accounting impairment by 1.6 BSEK will be made in the fourth quarter. Group goodwill will amount to 5.6 BSEK after the write-downs, see table below.

Impairment purchase accounting

BSEK	Skanska Poland	Selmer Skanska	Gammon Skanska	Total	Group
Effect on capital employed	-0.6	-0.6	-0.4	-1.6	-1.6
Remaining goodwill	0	1.7	0.2	1.9	5.6

Restructuring costs of exiting businesses will amount to 0.5 BSEK, of which 0.1 BSEK is write-downs of assets and has no impact on cash flow. The remaining 0.4 BSEK is severances and people costs related to exiting businesses. 

Financial targets
(See Exhibit 1).
Group Capital Employed can be reduced from 36 BSEK to 30 BSEK, a reduction by approximately 20 percent, and still support existing business. Skanska is not providing sales growth targets for 2003 and 2004.

The Construction and Services business will be managed on both RoCE and operating margin.

Given a rating aspiration of BBB/BBB+ and given the current economic situation we are setting a net debt/equity target range of 0.1-0.3x. This is also based on the allocation of capital between the different business streams, displayed in Exhibit 1.

Reporting
We are increasing our reporting to include financial data on business streams as well as on individual home markets. The new reporting format will be in effect from the second quarter, 2003.
 
Primary levers for improved performance
· Risk management procedures
· Decentralized / integrated procedures and controls.
· Emphasis on management development and Code of Conduct.
· Overhead control
· Disciplined allocation of capital
· Reduction of net debt.

Continual Evaluation
We will continue to evaluate the organizational structure during 2003 for maximum efficiency and effectiveness.

_____________________________________________

For further information please contact:

Peter Wallin, Senior Vice President, Investor Relations, Skanska AB,
tel +46 8 753 88 86
Tor Krusell, Senior Vice President, Corporate Communications,
Skanska AB, tel +46 8 753 87 47
Peter Gimbe, Press Officer, Skanska AB, tel +46 8 753 88 38

Exhibit 1

Financial targets per business stream

Construction and services PDR PDC BOT 3) Group CE target, SEK bn 16.0 1) 3.0 8.0 3.0 30.0 RoCE target today, % - - 16 2) 16 16 2) RoCE target new, % 25 14 15 2) 16 16 2) Operating margin target today, % 2.5-3.0 - - - - Operating margin target new, % >2.5 - - - - Net debt/equity target today, x - - - - 0.4-0.6 Net debt/equity target new, x - - - - 0.1-0.3 RoE target today, % - - - - 16 2) RoE target new, % - - - - 16 2) 1) Includes SEK 1 bn in Services2) Includes annual change in market values in the property portfolio3) New RoCE target is really Return on Invested Capital. The 16 percent is an average of the lower return PFI projects and the higher return concessions