Skanska AB (publ)

This is Andrea Lögren, Senior Vice President, Investor Relations, speaking. And I would like to welcome you to the presentation of Skanska's nine-month report for 2020. The presentation will be held by CEO Anders Danielsson and also CFO Magnus Persson. After the presentation, you will be able to ask questions and we will get back to that. So please, Anders, go ahead.

Thank you, Andrea. And before we go into the highlights of the report here. I want you to look at this picture. You can see one of our commercial development projects called City Gate. It's a high-rise building to the right, which is located in the city of Gothenburg. So let's go into the nine months report for 2020. This is a strong report. We have overall solid performance. We can see improvement also in the construction stream. We have picked up pretty good in the residential development. Volumes are strong and profitability is solid. And the commercial development transaction, even though we have a low volume in the quarters, isolated quarters, We have seen during the nine months good profitability levels. Having said that, we have also seen during the pandemic that the leasing is challenging. A lot of tenants are hesitating, even though we have seen some pickup in the activity in the later part of Q3. Return on equity is slightly below our target of 18% on a rolling 12 months basis. We have a very strong cash flow and a very continuing, very strong financial position. And as you recall, we distributed the dividend to the shareholder in October. So let's go into the construction stream. Revenue has decreased with 8% in local currencies for the first nine months. We could see that order bookings have increased compared to the same period last year, so we have a book to build of 107% on a rolling 12-month basis. The order backlog is on a good level, $183 billion. We saw also a construction income of $2.4 billion for nine months and an operating margin of $2.3 billion. the same percentage as last year for the same period. What we have seen, though, in Q3 is continuing improved profitability. So we have in Q3 isolated 3% compared to 2.8% last year. It is lower volumes, which has different causes. One of them is, of course, the COVID-19 disruption that we have seen now in Q2 and easing up somewhat in Q3. We can also see that clients are postponing ramp up of new projects. And we also see that we have as a result from our earlier strategic action to be more selective in order to improve profitability. But overall, I'm very proud of the organization and our ability to keep the projects up and running despite that we are in the middle of a pandemic. The strategy remains selected building, improved commercial focus, and increased cost efficiency. Let's go into residential development. Here we can see increased activity in Q3. We have seen increased number of sold homes, number of started homes has increased, You can see that the revenue increasing, and we have a healthy profitability. We had over $1 billion as an operating income for the first nine months, and operating margin has been above our target of 10%, 11.2%. The same for return on capital employed. We have a target of 10%. Now we can see on a rolling 12-month basis, 12.1%. So it's strong volumes, both of sold and started homes. We are maintaining good profitability levels above our targets. We can also see in the third quarter that the consumer confidence has improved significantly, which is encouraging, of course. And longer term, of course, we have some uncertainty now with the second wave of the pandemic and Higher unemployment levels is a worry. But structurally, the underlying need for new residentials is high, very high in our market. So there is definitely an underlying need. And we also have, as you know, low interest rates, which helps a lot. Commercial property development. For the first nine months, we have 2.2 in operating income and the gain of sale of 2.6 billion, including joint ventures. So the return on the capital employed is 10.6%, also above our targets of 10%. Today, we have 39 ongoing projects, which corresponds to 25% billion Swedish in investment upon completion. And the occupancy rate and completion rate are pretty much in line with each other. We follow that carefully over time. We have 57% occupancy rate in our ongoing project and 62% completion rate. So I think we are in a good position there. Nine projects have started year to date. We have leased 135,000 square meters and that's a lower than last year, and we can definitely see that the uncertainty in the leasing market remains. Having said that, we do see that activity picked up somewhat in the late part of Q3. But overall, a solid property investor appetite for high-quality buildings with very ambitious environmental standards as well. So sustainable high-quality developments in the right location remains very, very appetized amongst investors. So let's go into the order situation for construction. We have a book to build of 107%, and you can also see the development of the backlog here overall, the blue bars here. You can also see that the order bookings on a rolling 12-month basis are following the revenue, of course, on a rolling 12-month basis. We can see a slight decrease in revenue for the courses as just went through here earlier. But overall, healthy backlog. And if we go in to the different geographies, where it's distributed on the next page. There we go. We can see that we have a book to bill 107%. You can also see the split. If we have 100% in the Nordics, which is on a good level, even though we have slightly below 100% in Sweden, but I'm not concerned over that. We have a good pipeline, and we are in... sort of in the first stage in quite many projects that we will book later on here. Very strong, of course, in Europe, but you should remember that we booked 14 billion in the second quarter from HS2, the high-speed projects in the UK. But overall, I'm confident that we have a healthy backlog. We have 15 months of production overall, which historically is a good level. With that, I'll leave it to Magnus to go deeper into the figures, please.

Thank you, Anders. I go to the next page, which is the overview income statement for the construction business stream. Starting from the top with revenue, we are down year-to-date 9% in revenue, and we have approximately 1% currency effect. If we measure this in local currencies, we're down 8%. In the third quarter isolated, we had in Swedish kronos a bigger drop, 16%, 11% approximate in local currencies. So the diff is considerably smaller than year-to-date to the third quarter if measured in local currencies there. But the foreign exchange effect is significant. Fairly large, I would say. And as Anders has already gone through, the drop in revenues here is a combination of earlier production disruptions, clients being more hesitant, and of course us having been selective now in biddings to make sure we only take on the right projects for a period of a couple of years. And this sort of comes through in the revenue after a while here. So these are the effects that we're seeing. Very gladdening, we can see the gross margin increasing year to date, 6.4%. And if you look at the quarter isolated, we're at 6.9%. And I think this is sort of a sign of strength that we managed to increase the gross margin during these times as well. So that's really good. And if we look then underlying the performance of the project portfolio, we can see that that is continuing to stabilize. And we witnessed that by less swings in performance across the portfolio here. So that's very positive. We see S&A is coming up somewhat to 4.1%, but still this is a very good and competitive level of S&A. And if we go all the way down operating margin, 2.3%, the same as the comparable period, but we have to remember that in the comparable period we had a positive effect from Norway amounting to 200 million Swedish krona. So if we take that out, the comparable period would be at approximately 2.1 percent. And then, of course, these 2.3 percent are delivered during times of a pandemic. So we sort of think this is a good performance year to date for us. If we go to the next slide, you see the income statement over the different geographies. You can see that the Nordics are lower in the margin here, 3.4% compared to the 3.7. But again, if we adjust for the one-off effect that we had last year, the comparable period would be a 3.2% margin instead. So also here we continue to improve a bit. Sweden, 3.1% year-to-date. We have been... explaining some of the challenge we had in isolated places in the Swedish construction business before. And in the quarter, then we can now see that the Swedish construction operation is delivering 4.4 percent, which is which is a good level here and also above the comparable quarter. So that is positive. Europe is down 0.9% year to date. And here we've had, say, fairly large negative impacts from the COVID-19 situation, both in the Central European business and in the UK business that impact our costs and also impact the revenue. So these are sort of the main reasons to why you see a drop in the margin here. Mortgages from the U.S. improving, probably according to expectations, 1.8 percent compared to 1.3 percent. And in the quarter isolated, we're 2.2 percent. A result of a lot of hard work, of course, in addressing the challenges we've had there. And we're also on our plan to take care of the debt revenue that we have in the U.S. We're following that plan and the reduction of that debt. dilutive effect is going according to plan. If we move to residential development, then we had a significant step up in volumes. As you can see, we had 33% increase in volume up to 9.6 billion the first nine months. Then virtually all of the nominal increase compared to the year-to-date numbers last year. was to be seen in the third quarter this year, which was extremely strong. Overall, it was a strong quarter across all geographies sales-wise. We should also add then what's already been said, that we had a major divestment of rental units, multifamily rental units in Sweden, that gave us revenues of approximately 1.5 billion. So, of course, that's That's not a size of rental deal that we do all the time, and I think that's good to point out if you want to understand sort of the underlying movements also. Compared to 2019, we can also see that we have a slightly higher sales price per unit now. Also, if we were to adjust for the divestment of the large rental package, that they do attain a slightly lower price per unit than the house and co-ops. A good margin, 11.2%. No major one-offs year-to-date here. We have an underlying margin that we sometimes comment on that is very close to the reported margin here. So that's, of course, positive. And a very low S&A level, which, of course, is positively impacted then also by the large rental deal. If we move to the different geographies in residential development, we can see, again, here a good performance in development in... in all geographies, both in Nordics and Europe, and Sweden isolated is above 10% year to date, which is, we think, the right level. This is where we should be at the stream level, then 11.2%. Quarter isolated, we're also or just above 10 percent. The exception would be Sweden then. But again, the rental deal is somewhat diluted in terms of margin here, but of course gives us a hefty profit, nominally speaking. So that's very positive. And also, if you go into the details here and the quarterly result, you should be aware of that in this third quarter 2019, we had a major one-off effect in the residential development Europe business, where we released a large provision that we did not have to use against risks, which distorts the comparison a little bit. But overall, a strong performance here across the geographies in residential development. We move to the next page, which shows started and sold units. You can see we started approximately 2,500 units over the period here, which is a good step up from the number of starts in the comparable period where we had a little bit above 1,700 units. And also in terms of homes sold, we were up to close to 2,900 units here. So both the starts and sales are increasing. And, of course, that's a positive sign. We've said on a couple of occasions that we have an organization that, should have a little bit higher volume of ongoing projects than what we've had for a while. So this is very positive. And also the fact that we, even in a market that has been characterized to some extent by uncertainty over the last six months, we have the strength and we have the balance sheet to still start units, which is definitely something that benefits a large and stable company such as Skanska. If we move to the next slide, you can see homes in production. We had approximately 6,600 units in production end of third quarter, which is then down from the year end, but up from the second quarter to the point I made on the last slide here about the importance of starting a little bit more here. We had 173 units that was unsold and completed. Also, this is down somewhat, only a little, but still somewhat since the second quarter. So we remain very stable here, which is good. And we remain with not seeing any issues with handovers of sold units to clients. We are getting paid, and they are accessing their apartments precisely according to plan. So that is, of course, very, very positive here. Then you note a very high sales rate here of 74%. If we do the adjustment for the rental package that we sold, we are at 68%, which means that we're very well balanced in terms of how much we have ongoing and of that, how much we have sold. So we are able to have units out for sale, which is of course very positive for the possibility to sell. If we move to commercial property development, The year-to-date numbers are, of course, completely dominated by the achievements we made in the first quarter when we sold Sona United. In Q3 isolated, we made three smaller transactions, all of them in Sweden. Nominally not that big, but good profitability levels. With the gain on sale then of approximately 200 million Swedish kronors and an EBIT of 100 million. If we move to the next slide, which shows then unrealized and realized gains in the portfolio, we have unrealized gains in the commercial development portfolio of around 8 billion end of quarter, which is then up from 6.7 in the last quarter. So we have managed to sort of increase the potential profits in the portfolio at the same time as we realized then the 200 million during the quarter here. The green line is the realized gains on the rolling 12-month basis. And you can see that is sloping down then. Not so surprising given that this is the second quarter in a row where we don't have any major CD transactions. So that's sort of a mathematical consequence of that. Go to the next slide, shows you the completion profile across the commercial development portfolio. First, to the left, you can see the completed unsold projects where we have approximately five and a half billion. And then this quarter, we completed the projects with a total investment value of around two billion. And we have three properties here. I've commented on this for the last three quarters. These are properties where we are lagging a bit in leasing. And of course, the COVID situation and the uncertainties around the tenant demand has not alleviated this. So they're still lagging here. It's fine properties. We're not concerned about them. But of course, it is taking a bit more time. Look at the fourth quarter here. We expect to complete ongoing projects with a total investment of close to $9 billion, with a very good occupancy rate in those, 82%. So that's That's good. And then we come to the first quarter next year when we expect to complete properties for a little bit above $2 billion, also here with a good occupancy rate. I think the obvious thing when you look at this and compare it to how it looked a year back or so is that we are a bit thinner in the portfolio of unsold projects than we have been. We have this year now started nine projects, and we have a very good pipeline of new projects to start in commercial development. We just need to get to the position where we feel it's the right time to start them. And in some cases, it's a bit lag in permitting. We need to find the right construction costs, and we also need to be ready ourselves, so to speak, before we can do that. But as I said, we have a good pipeline here. If we go to the next slide, which shows you leasing... You can see the orange line is the degree of completion of the ongoing projects, and the green line is the occupancy rate in those projects measured in terms of rent. And as Anders already pointed out, we're at 62 percent completion, 57 percent occupancy rate. So these lines are still sort of – they should be fairly close to each other. They still are. Obviously, the last quarter we saw a bit of a fall in terms of occupancy rate there. It's nothing surprising with that. We all know that leasing is slow at the moment. Tenants are somewhat hesitating, but we are seeing, and this is positive, at the end of the third quarter, a slight pickup in activity from tenants. It's about discussions that were ongoing pre-pandemic that is now coming alive again, and it's also about some new leads in terms of discussions with tenants. So I would say this market is not dead, but it's been dormant for a few months here during the pandemic. If you look at the blue bars, you can see the number of leased square meters on a rolling 12-month basis, which you can see is coming down. But you also have to recall that since our development portfolio in CD is a bit smaller now than, say, two years back, the number of square meters that we have out for lease to the market is also smaller, which also have an effect on this. Then we go to the group income statement, operating income from the business streams, 5.6 billion, 5.7 billion. Central costs, 340 million compared to 141 in the same period last year. But here again, we have a fairly large one-off effect in the comparable period. We had a court case ongoing in Czech Republic against which we had a provision taken. We solved the court case, settled that, and could release those provisions in the second quarter of 2019. The sum in question was 200 million. So if you adjust back for that, you can say central costs are essentially the same this year as it was last year. And underlying this, we can also see that costs for a headquarters organization is slightly coming down. Operating income, 5,272,000,000. The first nine months, net financial items, minus 177 compared to minus 69. Here, the biggest changes here is that it is harder now than what it was a year back to sort of get a decent return on dollar deposits. And also the fact that due to a slightly smaller development portfolio ongoing, we are capitalizing a lower amount. of our financial costs against these projects here. So those two things explain the vast majority of the difference in the net financials here. Taxes, 18% compared to 70% in the comparable period. Main reason to this difference is the mix of geographies from which we are extracting profit here. These different geographies carry different nominal tax rates. We move on to the PPP portfolio. And as you know, this is a runoff portfolio. We have a number of projects that we're working on completing. And after they are completed, we will divest them. But nothing has really happened in this portfolio in the third quarter. The changes you see in the value here is either based on time value and foreign exchange rates. So those two things explain the changes in values. In total, we have an expected effect in the unrealized equity of 1.7 billion from this portfolio end of third quarter. We look at the cash flow. As Anders have pointed out, we have a very, very strong cash flow in the group. If you look at the chart on top of this slide, you can see that both the first, second and third quarter were positive in terms of cash flow. And of course, on an accumulated basis, you see the green line here showing the rolling 12 months very strong cash flow here. And we have during the early days of the pandemic, we were very cautious with investments, of course, to make sure that we took the uncertainty seriously. And on top of that, during the spring, we did not distribute any dividend. We have done so now during the fourth quarter. So these things together makes up for a very good cash flow. And I say this goes from all business streams. Both are the commercial development and from the construction business. If we go to the next slide, it shows free working capital in the construction business. We have a historically high number here. If we look at the KPI that we use to track this, 17.4% of working capital over revenue. Very high number. If we look forward a little bit and we see the volume development that we have now had over the first nine months, of course, that can potentially impact the nominal values of the net working capital position. Not at least since we are, as I said, at a historically high here. Very important for this is large civil jobs. It's a very important type of work that we have to get to this position. And we also have a strong pipeline of civil works across the different business units in the group here. And our assessment, as Anders has already mentioned, is that what we see now is that the impact from COVID is more uncertain in the private sector than what it is so far with the public sector. If we move on to investments and divestments, if you look at the green line in the chart, you can see that we are now and have been for a while fairly deep into divestment, net divestment territory in the group. And year to date, we have investments that is approximately 17% lower than what they were last year, at the same time as divestments are over 20% higher than what they were last year. So, of course, this contributes quite a lot to the positive cash flow in the group there. And then if we look at capital employed, no major shifts here. We are by and large at the same level as we were at year end of 2019, then somewhat lower than the third quarter of 2019. If we move to the next slide, we have... Total external loan portfolio of 4.4 billion. All of them are green. It's a mix of green bonds and green bilateral loans. You can see the maturity profile on the right-hand side there. In total, our available funds, 22.7 billion end of third quarter. And of this, we can access 16.6 billion within one week. So we are very well stacked when it comes to liquidity there. If we move to the next slide, which shows our financial position, total assets 128 billion and equity close to 36 billion. Equity to assets ratio almost 28%. So we have a super stable balance sheet here, which we are very happy to have in times like this when an adjusted interest-bearing net debt of plus eight billion. So maybe it should be better called than net cash. So very, very stable. And this should be compared to then our limit in this metric, which is minus nine billion. So we have a very sort of ample space for investments to go if we feel that we can find the right assets to go for. With that, Anders.