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.

Yes, let's go into the market outlook. starting with the construction. COVID-19 still creates uncertainty, especially in the UK and the US. We do see some that have eased up somewhat in the third quarter, but it's still uncertainty how it will develop in the future, of course. We see lower demand from private clients. The public infrastructure investment to stimulate the economy. We expect that to come. We base that also on our experience from the past. But funding can be uncertain in this time. On the residential development, we have recovered. So we increase our market outlook here in the third quarter in the Nordics. So we have seen strong recovering consumer confidence in the Nordic countries. And there are also a limited number of new developments, so there's an opportunity for us to start projects. We can do that. And on a longer term, there's, of course, a balance here with rising unemployment and some uncertainty in the economic development. But we do have low interest rates, and we also have structural shortage of homes. On the commercial development, we keep our market outlook as a weak market going forward. The tenant are hesitant, and the investors, on the other hand, has a strong appetite for our projects. It's low interest rate and the stable credit markets, which is really helpful. So to summarize the group here before we go into the Q&A, overall solid performance, improvements. We have a very strong financial position. The market uncertainty is still present, but reduced in the third quarter. Long-term focus remains financially to improve the profitability in construction. We're doing that by being more selective. decrease risks in the portfolio and also cost, look at the cost, and improve the commercial management in the organization. We have taken great steps forward and all of this together make the profitability improve quarter by quarter. And we also want to long-term grow the product development. Our ambition is to be the leading residential developer in our home markets. And we're also looking at the responsible expansion of commercial property development. And you could recently see that we started our first project in the fifth city in the U.S., in Los Angeles. So that is promising. With that, I'll leave it back to André to start the Q&A.

Yes. Thank you very much, guys. Yes, let's open up for questions. So please follow the instructions from the operator.

Thank you. If you wish to ask an audio question, you may do so by pressing 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Once again, it's 01 on your telephone keypad if you wish to ask an audio question. There'll be a brief pause whilst we wait for questions to be registered. Our first question comes from from ABG. Please go ahead.

I would like to start to ask regarding your construction margin. After the Q2 call, you guided for continued negative impact from COVID into Q3, but now you report an improved margin year over year. Does that mean that you didn't see any negative impact, or can you give some more comment on that?

Yes, hi, Tobias. What we saw in the third quarter was that we were able to come back to our projects and keep them up and running. We were able to keep our people safe at the same time. So that's the main reason. And we also saw in the third quarter that the strategic action we took a couple of years back, they are paying off now. And we can see that, we have seen that before the pandemic, and we can also see it in Q3. And we also learned, I would say in Q3, to live, we are in the middle of a pandemic, but we have found ways to handle that, to keep the social distancing in our project, to use other protection if needed out in the project. And that's a real, really, well done by the organization and contributing a lot, of course, to this improved margin.

And the exception from improved margin is Europe or the rest of Europe, where the margin is clearly lower also in the third quarter compared to last year. Is that related to COVID or is it something else that limits the margin development there? Right.

It's both connected to COVID. Both Central Europe and UK has been impacted quite a lot from the COVID and that continues in Q3 as well. But we also saw that the reduced revenue due to market conditions and uncertainties in the UK due to both COVID and Brexit. So we see that the private clients are hesitating to start new projects.

And for Q4, do you expect an increased negative impact given that we see more new restrictions now?

We don't give any forecast for Q4, but you can look at our market outlook where we have... seen that we expect the market to be weak in the commercial building, non-residential building. We expect the civil market to be stable, more stable. So that's our outlook for the coming 12 months. But we are in a good position when it comes to the backlog, so I'm confident with that.

Okay, thank you. I have a couple of questions regarding your development streams as well. And regarding commercial development, I think you started nine projects year to date. Can you say something about the volume or the amount of volume to be invested in those projects and how that stands compared to the same period last year?

Hi, Tobias. This is Magnus here. No, I mean, there's nothing in those starts that sort of sticks out of what we would consider to be an ordinary type of mix of projects here. And you also, when we start projects, we release so you can look at that also. But there's nothing in particular that sort of sticks out there in terms of size or, for that matter, geographical distribution.

Okay, and in CD you have a huge project in Seattle, which is more or less completed. I think tenants have had to move in, and I think it's more or less fully let. Can you say something about the divestment process of that building?

We don't comment on divestment processes, but when and if we sell that project, we will communicate them.

But is it likely that it will be in Q4 already?

We will have to wait until we communicate.

Okay, thank you. One final question regarding residential development. You had very high numbers both in terms of units started and units sold and we know it's very lumpy between the individual quarters. Does the high number in Q3 indicate that you will see a much lower volume in Q4, or do you think that the strong market enabled you to keep up a good volume also for the fourth quarter?

Yes, we saw a large increase, but we also communicated that we sold a package of rental apartment in the quarter of 1.5 billion. But even without that, we saw a large increase in Q3, definitely. We don't comment on Q4, but we can see our outlook. Market outlook is stable going forward. So we have increased the market outlook from weak to stable in the Nordics.

Okay. Thank you for taking my questions.

Thank you. Our next question comes from Stefan Anderson from SEB. Please go ahead.

Thank you. Yeah, I'll follow up on some of Tobias' questions. They're going to construction first. If you could maybe help out a little bit further there. I mean, you started the year with the first quarter being slightly up, but then the COVID came and you had a drop in sales and then COVID has disappeared slightly in Q3 and you have new issues with postponements, you mentioned, and sales are down slightly more year-on-year in the third quarter. I know you'll have to talk about nine months, but it's a little bit lumpy. I'm just trying to understand what's happening here. Could you maybe elaborate on the split of decline in the third quarter, roughly? How much is COVID and you not having access to sites and how much is postponements? And then completely Connected to that, on the postponements, what kind of delay are we talking about? Is it risk for reversed orders, that we'll see negative orders, or is it just between months when it comes to postponements?

Hi Stefan, this is Magnus. Thank you for your question. See if I catch them all, otherwise you will have to remind me. But if we start backwards here, why do we say that there are postponements? What type of postponements? Well, typically you can have a situation where a client has selected us to do work, what we call selection, and then you work with the client to define the project and set up a budget. But, of course, you need to agree on final terms before we are awarded the actual construction contract. In situations like that, due to either budgetary constraints or it can be sort of overall uncertainty, we see in some cases that these awards are slipping in time. We're still working with the project. We have the relationship with the client, but the client isn't sort of actually stepping into a binding construction contract. So that is a typical type of slippage that we can see. Then you asked about the, I'm not sure I got you completed, but the lumpiness of the construction performance over the first, second, and third quarter. Did I get that right?

I mean, yeah, I fully understand that COVID had a big impact in Q2 and just wondering, looking at Q3, the decline we see there is like, is it equally much from COVID and the postponement? That's really my question. Yeah, okay.

I think in terms of the dynamics, if you will, of these impacts, I think they were from sort of pure COVID. I think that was more in the beginning because there was a higher overall uncertainty. And as Anders also explained there, we were also working very, very hard to find new work methods to adapt to distancing requirements and workarounds on sites and so on to make sure that we can keep production up. So there you had one type of impact from COVID. Then, of course, a little bit later, it becomes less sort of that type of disturbances. I'd say we have adapted very well in our operations and are able to handle that in a very good way, both from a production perspective but also from a safety perspective now. So the further time goes, the more impact is more from, I'd say, postponements and certain delays there in terms of volume.

And then on the risk for reversed orders, I guess looking at, for instance, the hotel side could be a risk that people would like to try to get out of such discussions with you. Do you see anything like that in your order backlog?

We have not seen any cancellation in our order backlog. It's more that the Private client, commercial client, they are postponing the start of the project. If we are in a stage one, some of them postpone the start of the big contract.

I'm sorry for repeating myself. Would that be a postponement until a new decision coming, or is it like a month delay in the whole system generally?

I would say so far it's more a postponement of the start of the project.

Meaning then that you don't know the starting point, so to speak. Is that correctly understood for me?

Yes, in some projects we don't know when the clients choose to decide on the start. But on the other hand, we don't book them until they do take the decision.

Okay, then just a question on the CB side there. If you could maybe, I fully understand you can't tell us when you close the deal. I mean, we'll have to wait to see that. But you haven't really sold anything in three quarters now or in the third quarter without any divestments from your backlog or portfolio. I mean, the deal is done. It's more stuff you're going to build. Okay. So what is the main resistance or the reason for not closing any deals in your view? Rates are good, there is a transaction market, at least unless it's hotels and retail space. So where do you see the slowness in discussions? What is the main reason?

We don't see any... slower interest from investors. You cannot look at the single quarter either. So we have a good portfolio going forward. But we will let you know as soon as we divest future projects, of course.

Thank you. That's all for me.

Thank you. Our next question comes from Simon Watson. Please go ahead with your question.

Hi, gentlemen. Congratulations on the results. I have a few questions. In terms of the sales in RD residential development, I noticed especially the sales of homes in Sweden to be extraordinary, 1116 homes in the quarter. I was just wondering also, does that number include the investor deals of 1.5 billion? And if so, how many of those units are part of that deal?

Hi, Simon. This is Magnus. Yes, it includes its 600 units.

Okay. Thank you for that clarification. Also, in construction, you highlighted that there is some delays and decisions by clients to postpone the ramp-up of new projects. Covering construction over time, I usually notice that the margins in construction projects are the lowest in the beginning of the projects. and thus having a lower margin. How has this affected or has this affected your margins in Q3? Because you don't have any that much projects in the early phase of construction, especially then in the U.S. and Europe. Has that been part of the effects which we see in the margin this quarter?

I see. This is Magnus again. I think you make a good question. And Of course, this is one of the things that we set out to make sure we have a well-valued portfolio of construction projects. And that means that in the beginning of the project, risks are higher because you have more risks to close out on over the lifetime of a project. And then at the latter part of a project's life, when you have passed more risks, then we extract sort of relatively speaking a higher margin from that project. And, of course, as volumes are decreasing, on the average we get a more mature portfolio. So that is very likely has some sort of upwards effect on that. I wouldn't say that it's a big one, but theoretically you're right.

Okay. Thank you. In terms of your working capital, you touched upon that being very high at the record level, 17.4. Just wondering if you can help with how fast might things actually change here, because we've seen the dip in the revenues already. And what will be the drivers for that to come perhaps a bit more, like you just stated, a normalized level between 13% and 15%?

This is Magnus again. That's a good question. As we have said on a number of occasions, we think it's hard to say what the normalized level is for this if you go sort of bottom up. But looking historically, we have been able to circle around 13%, and now we're at 17.4%. So, of course, we should be cautious in assuming that this 70% is sort of something we can achieve also in the future. But in terms of the dynamics, of course, there are a number of projects that are large and typical. It can be a fixed price project, for instance, certain types of projects that is very positive for the networking capital position. So it depends a little bit on what projects we win and what are the clients and so on. So we set ourselves up in the right way to get to this position. That volumes fall doesn't automatically mean that networking capital comes down because it depends on what type of volumes are running out of the portfolio and what type of projects are replacing these with also. But of course, if you make an average of the portfolio over time, lower volume will equate to a lower networking capital position.

Okay, and my last question comes in terms of commercial development. In construction development, you stated that likely the clients are more hesitant to start up new projects. You also talk about more uncertainty in the rental market. How is that impacting, especially perhaps divided into Euro, US, and Nordic, your ambitions and plans to start new developments going forward?

We definitely have ambition to start new projects and we do have a strong pipeline. We can see that the activity amongst the tenants have increased during the later part of Q3. Having said that, we also – so we can start on speculation if we think it's right. And we have seen some examples here during Q3 of that. And we're focusing – we're going to focus on our market definitely, the Nordic market, where we have a strong position and strong pipeline, Central Europe and also U.S. So it's encouraging – that we have been able to start a new city in the U.S. during the third quarter. We have been on ground for some time, and now we got a really good opportunity to start the first projects in Beverly Hills, Los Angeles.

That was part of my question. How willing are you to do speculation developments and how much will that actually be? And secondly, was like that in LA a speculative building or do you have an inter-rental agreement signed? And just to give us a coloring of where you are in the investment cycle of your risk you're taking on.

I mean, we are of course not at all opposed to starting projects on speculation now, but it's very, very important that we select the right projects. We do experience and see sort of a flight to quality, which we expect to continue. I have to recall that the properties we develop, I mean, they are brand new, they're environmentally certified to a very high degree, they're high efficiency. And if we can combine that with the right location, we're sort of on a selective basis, not afraid to take on that type of speculative risks here. Yeah.

Okay, thank you for taking my questions and congratulations on solid figures.

Thank you. Thank you. Our next question comes from Eric Dunstrom from Carnegie. Please go ahead.

Thank you very much. Good morning, everyone. I had a few questions as well. And if we could start perhaps with the construction operations. Sweden bounced back strongly in terms of profitability here in Q3 versus Q2. And in Q2, you talked a little bit about the issues that you had within residential Stockholm as well as industry. That doesn't seem to be the case anymore. Is that the way that I should read it? And is this sort of the level that we should expect you to be back on?

I... Yes, what we saw in the third quarter now, that those issues we had in the construction stream here in Sweden, those have stabilized. But it will impact us for some time because we have some dead revenue that we need to work out. And that was the same for Q3 as well. So it did impact us, but those units have stabilized.

Okay, good. And a similar question regarding the U.S. operations. You mentioned in Q2 that part of the reason why profitability improved was mainly within building construction. Is that the case in Q3 as well or do you see some improvement within civil as well?

We see improvements both in U.S. building and U.S. civil in the third quarter.

Okay. And Cash flow was, again, strong, and it has been strong throughout the year. But at the same time, you're obviously investing significantly less within CD. Should we expect this sort of trend of lower investment volumes to continue into next year or next year going to be lower versus 2020?

Hi, Eric. This is Magnus. Neither do I want to give you a forecast, and I don't want to portray that I sort of fully know either because we have market uncertainties and so on with that. But I can tell you clearly that we have a very good pipeline of CD projects and that our ambition is to continue to grow the commercial development business stream. We will do... what we can to make sure that that happens, but we will only start projects where we feel comfortable with the risks and that we can get the return that we should have given the market circumstances.

Okay. And on that, I believe you use the term to describe your balance sheet as super stable. I would probably describe it as super strong. And what are your intentions with this sort of balance sheet? Because you're You're going to adjust the net cash of 8 billion at the end of Q3. I assume Q4 is seasonally strong as well if we adjust for the dividend that is coming, that order that has already been paid. What are your sort of intentions of the balance sheet? Are you going to maintain this kind of strength on the balance sheet, or do you expect this to change over the next couple of years?

Well, two things. One is that... We don't think that the uncertainties are out of the room yet. We still have an ongoing pandemic, and it's the interest of everyone to make sure that Skanska is a strong or stable company, if you will. So that is one of the reasons to why we have this cash position now. Then the other one is, of course, that, as I already said, our intention is not to sit on sort of too much cash long term. Our intention is to invest this. So I think that sums up the answer and also the situation on that.

Okay, fair enough. And then I have two more questions, and they both relate to RD. The first question is, the deal that you made with Folsom, you mentioned that it was somewhat diluted in Q3. Could you perhaps say something about what the underlying margin in Q3 for Sweden would have been?

We don't comment that on a unit-by-unit basis, but you can say it's not a big effect, but it has somewhat of an effect.

Okay. Thank you. Fair enough. And then finally, my question on RD relates to your pace in terms of number of starts. It seems almost like you are anticipating... to ramp up production a little bit more. Is that correct?

Yes. If you look at the sales rate, it's pretty high right now. So we do have the ambition to – we have the ability to start more product as well. And we can see the trend that we talked about earlier, that our client, our customers – buy at the latest stage of the project means that we need to start project with a lower sales rate. And we will do that. And our position is really good to be able to do that as well.

Okay. And a follow-up on that then. Should we expect that as you increase production and your ongoing production portfolio increases that you have better cost absorption in general due to that and that profitability increases? should trend upwards rather than anything else? Or are you at sort of a capacity level where you can increase production without affecting costs at all?

Yes, definitely. Of course, we prioritize our own development projects. That goes for both commercial development and residential development because it's better for the whole company. So we do have resources for that, definitely. And our margin targets remains. On the residential development, it's 10% operating margin, 10% return on capital employed. So that remains going forward.

Okay, but the fact that if you increase production and actually get the units sold, that shouldn't have a negative impact, at least on your profitability.

Oh, no, I don't see that. I don't see that.

Okay. Thank you very much. Those were my questions.

Thank you. Our next question comes from Anastasia Solomina. Please go ahead.

Hello. Thank you for your presentation. I've got a few questions, please. Firstly, on commercial, can you give us some more regional color on how healthcare development across regions and maybe some adjacent markets And do you think you're ready to reconsider prices, sacrifice some margins in case you don't see a turnaround in commercial activity in near term? This is the first question. And the second question on residential, you mentioned previously that capacity of units you can deliver is about 4,000 units per annum. With the current development of the market, when do you think you can get to this level? Over what time? uh yeah so that's really it and one more question on the revenues in u.s what amount left to walk through and what the remaining impact on margins could be if you can quantify it will it now be fully settled next year thank you hi uh it was a little bit difficult to catch your questions from over here maybe if you can repeat and start with your questions on commercial development So on commercial development, a question on yield in regions.

We don't see a major yield impact from the COVID-19 pandemic here in the market uncertainties. So it's a very different impact, I would say, on the tenant market versus the leasing market versus the investor market. We see a solid interest for our properties across the geographies where we are active and the transactions that we see do not differ materially yield wise now compared to say nine months back pre-covered and that's of course very positive and yeah so so we take a bit confident that it's good to see that we still have that investor interest And then you had the question on residential development. Also here it was a bit difficult to catch you.

Sure, I will repeat. So you mentioned previously the capacity you have of around 4,000 units per year. With the current market developments, when do you think you can get to this level? Over what period of time?

Yeah, I mean, we can't guide in that, obviously. We don't provide any guidance, but as Anders have already outlined, we have an organizational capacity that can take higher volumes than what we now have under production. And that is really the organizational constraint we have, so to speak. That is how many units can we have under production at any given point in time. And here we think we should be a bit higher than what we are now. Then when that lead to what numbers in terms of sales, I'm not going to give you a forecast for that.

Okay, fine. And on debt revenues in the U.S., if you can somehow give us how to quantify it, then we will fully be settled next year, I think.

So are you referring to the construction operations in the U.S.?

Yes.

Our revenue... revenue, dead revenue development in the U.S.? Well, essentially, we are following our plan as we laid it out in the capital markets day that we had in 2019, more or less to the letter. So I think the best way for you to get the insight into the profile of the the sort of burn of that dead revenue is to go into that presentation. We also have some more details on that, but we will not be done next year. We still have some some left after that also.

Okay, thank you.

Thank you. Our next question comes from Marcin Wolster from Bank of America. Please go ahead.

Yes, good morning. Thank you for taking my question. And it's actually on your dividends. So when you declare a dividend for financial year 2020, should it be with a payout ratio of between 40 and 70%, which which has been the dividend policy in previous years?

As you know, it is a board decision, and the board usually takes that decision after the year-end report. But we haven't changed our dividend policy. That remains between 40% and 70%.

Okay, very good. And one question on commercial development, if I may. So you mentioned that unrealized capital gains in the quarter, they increased to $8 billion. And is it just because of you starting new projects? Or have you actually adjusted valuations of some of the completed or ongoing projects up or down in the quarter?

Hi, Martin. This is Magnus. No, there's no such adjustments. It's because of new starts.

Okay. Well, thank you very much. Thank you. There appears to be no further questions, so I'll hand back to the speakers for any other remarks.

Great. Thank you. And thanks for listening in and good discussions. Well, I guess we have to wish you a good rest of the day and stay safe out there. Thank you.