Skanska AB (publ)

Morning, morning, everyone. This is Andrea Lövgren, Head of Investor Relations at Skanska speaking. And I would like to welcome you to the presentation of Skanska's six-month report for 2021. The presentation will be held by Anders Dahlinsson, who is our CFO, and also Magnus Persson, our CFO. And after the presentation, you will all be able to ask questions. And with that, I hand it over to you, Anders.

Thank you, Andrea. Before we go into the figures, I want you to look at this picture. It's the new Moynihan train hall in New York City, US. It's recently inaugurated and very good for the city and the transport system there. So let's go into the six months report. Overall, we have a strategy that pays off. We can see construction steadily improving the profitability. a quarter by quarter and also this quarter residential development volumes and profitability on a high level and commercial development divestments gains on attractive level we'll go into that soon and the operating margin in construction is 3.6 percent the first six months compared to 1.9 percent last year and return on capital employee in product development well above our 10% target at 12.4% on a rolling 12. Return on equity 26.7% and a very strong financial position for the whole company. And we also managed to reduce carbon emission with 43% compared to the base line 2015 and that includes the scope 1 and 2. if we start with the different stream and construction the revenue was 61.7 billion we had order booking strong order bookings 84.7 billion for the first six months strong order bookings in US we can see that the market is picking up projects are coming out in the market and clients they're starting new projects so overall a book to build of 120 percent on a rolling 12 so that's on a high level and the order backlog is slightly above 200 billion also historically on a high level Operating income, 2.2 billion Swedish, which correspond to operating margin of 3.6%. So profitability, we can see the profitability improving in all business units. And we also have a one-off in the quarter, Magnus will go into that later on here, divestment of infrastructure services operation in the UK impacting the quarter positively. If we go into the residential development, revenue 8.7 billion, very high increase on revenue. We can see also increase of the home sold, 2,500 and also the started home increased a lot to close to 2,000 units. Operating income 1.2 billion compared to 588 million last year. Very high operating margin. We have a 10% target, as you know, 14.3%. Also, the return on capital employed 16.6%, rolling 12. A very high activity and strong profitability. We have a solid land bank, but we can see that zoning process is slow in several of our markets. The challenge for us is to work long term on this. And we have been successful because we have been able to increase the start of projects during the period. Longer term higher unemployment levels is of course a concern if that materialize but on the other hand we have a shortage on homes in all markets and that together with a low interest rate is mitigating that in a positive way. can go into the commercial property development operating income 1.5 billion smaller quarter than a comparable period but strong margins attractive margins so we have a gain on sale of 1.7 billion for this period return on capital employee above our target of 10 percent 10.6 and today we have 34 ongoing projects corresponding to close to 23 billion in investment upon completion and we also have a reasonable alignment with the occupancy rate and completion rate, 35% versus 39%. And we started 11 new projects in the first six months. And in the second quarter, we started the largest ever, the eighth in Seattle, outside Seattle in Bellevue. The largest ever, 4 billion Swedish. And that's very, very promising. It's in an area where vacancy rates are very low, around 1%, and we have very large large world company in that area so I'm confident and we can start it leasing however was a bit slow in the quarter we leased 94 000 square meters the first six months but the investment at very attractive level during the quarter so to conclude the commercial development slowly is a market but activities picking up and that's important we can clearly see now in the second quarter that activities picking up more 10 potential tenants are looking for offices we can see that the visits and the view with view more have more views on our projects for potential tenants and that's encouraging I believe that will continue in the future and the property investor market is solid the we have very high interest amongst investor for our projects go into the construction again with the order bookings book to build 120 percent so we have a strong order intake in the in the quarter again or the backlog 200 or above 200 billion So that's encouraging for the future. And if we go into each market and look at the order bookings, we can see that all areas, all regions have above 100% book to build. And you can see Sweden is slightly below 100%, but we do have a healthy backlog there. And we also had a strong quarter. in Sweden when it comes to order bookings. With that I leave it to Magnus to go further into the details.

Thank you Anders. So we go into the construction income statement. We had revenues for the first six months here so you can see we're down 14% if you compare it to the same period last year. and if we look at Q1 it was down 18%, Q2 was down 10% so we're sort of slowly catching up here a bit with revenue development and with the good bookings we've had now we think that that's a good sign of course also. In terms of profitability we can see that the measures we have taken continue to positively impact profitability levels. We had the gross margin in the first six months of 8.1% which of course is super strong then we need to adjust to get to the underlying margin here for the gain on sale of the divestment we made in the UK business and if you take out the gain on sale you will end up at the gross margin of seven and a half percent for the first six months. S&A costs falling nominally both year to date and in the second quarter S&A over revenue is going up somewhat but that's not really a concern for us. We're working with the cost structure in a good way here. EBIT margin 3.6%. year to date and a whopping 4.7% for the second quarter but that is a lot impacted by the divestment in UK. If you strip the gain on sale out of the isolated quarter you will end up with operating margin of 3.5% which is still a very good performance. we look at the different geographies then we can say all geographies and all business units improve the margin year to date and also in the second quarter. So the strong result we have is not a sort of a consequence of any single event or so but it's really a consequence of improving operations across the line which makes this sort of a quality result if you will. Sweden is improving as you can see 3.1% versus the 2.6% last year and here we have in the second quarter last year we commented on weaknesses in the Stockholm residential construction and also in the industrials business. These are not impacting negatively to that extent now so that's of course very good. Europe 6.1 percent margin this is where you will find the divestment gain so that's on the UK which is included in the Europe geography as we report there so if you adjust the 6.1 percent for the gain of sale you will end up with 2.5 percent also that's a significant step up compared to the same period last year. In the US 2.7%, here we have a very strong result and margin in US building and we continue to improve the profitability in US civil as well. So we continue to see a stable project portfolio here, which is of course exactly what we have been working with for quite some time. We go into residential development. We increased revenues by 3.9 billion compared to the same period last year of which 2.8 billion of that increase was in the second quarter isolated. Of course it is so that the comparison period was heavily impacted by the pandemic so that needs to be kept in mind. But the markets have been very strong across our different geographies throughout the quarter and also in the first quarter. Gross margin unchanged compared to the comparison period 18.4%, very good. Selling and admin was higher nominally speaking but of course the volume effect drives down the selling and admin over revenue here down to minus 4.1 percent and we end up the report period here 14 over 14 percent in operating margin which of course is a very very strong profitability and it's also a testament to the fact that we are able now to control costs in the projects in a very good way at the same time as we are able to make use of the strong market by working with pricing of our apartments when we sell them. If we look at the different geographies, also residential development, profits increased in all different geographies, highly encouraging. Margins are very strong both year to date and in the isolated quarter. The performance in Europe continues you can say from the first quarter to be delivered on the very hot market. We have 21% margin now. year to date it was even higher in the first quarter so this is a super good market and we have as I said in that market been able to use it to our advantage at the same time as we can control costs and then we end up with very strong results here. If we then move on to homes started and sold, both sold units and started units are up compared to the comparison period both year to date and in the isolated quarter here. We sold some rental units but not a lot, that is not what is the sort of explaining the difference here, it's the underlying business that are performing very well. and we do have a good pipeline but the zoning processes are unfortunately slow and that is limiting to some extent our ability to start in a pace that would satisfy market demand at the moment. But we're of course very happy to be able to increase starts here. If we then move to homes in production This is now the third quarter in row where we are able to increase the number of homes that we have under production and we have commented a few times that we would like a bit higher volume here so this is precisely what we have been aiming for, very strong and we are starting as fast as we can essentially. we have a sales rate that is at 80% that is from a commercial perspective perhaps a bit high even if it from a risk perspective is very good would perhaps be ideal to be a bit lower here so we have a good amount of units to sell but that is sort of the same point as we need to start projects at the same pace as the market demand allows us number one sold completed homes 132 at the end of the second quarter which is lower than the comparison period and lower than what we reported on in the first quarter this year. So we have absolutely no issue with that at all. It's overall a very strong performance in residential development. From the commercial development, the second quarter was a fairly sort of small quarter volume wise. We made a number of transactions but they were smaller ones. We had divestments for about 1 billion in the quarter isolated and 3.4 billion year to date. These divestments are done with very strong profitability. We have around 50%, 48 to 50% in divestment margin. So it's clearly a strong appetite here from the investor market on our properties here. So sum up, it's a small but a very good quarter for commercial property development. look at the unrealized and realized gains ending Q2 we had approximately 8.5 billion in unrealized gains in our portfolio which is then up a little bit more than 2 billion from what we had in the in the first quarter. We have 34 ongoing projects, started 11 projects in total during these six months here. And of course in addition to the increase in the unrealized gains we did realize 0.5 billion Swedish kronas in gains during the second quarter. so it's good with these starts and good that the unrealized gains are increasing of course then as Anders already pointed out we also started the biggest project ever in the CD stream right outside of Seattle in Bellevue a very very good project in a very very good location here So I think it's encouraging here to see that we are now able to start a lot of new projects. We have been talking about this for a while, our ambition to do that, that we have a strong pipeline and that we will start when the commercial circumstances are right. And now we sort of execute on what we have been talking about. If we move on to the next slide, here you can see the completion profile of our commercial development portfolio. The orange bar represents the total investment for the products that are completed but yet not sold for us. That bar is roughly unchanged from the first quarter at right above 8 billion Swedish kronas and in that the situation is sort of unchanged if you will. There are these couple of problematic assets that we have but the absolute majority of this is really nice properties with very good outlook but the leasing has of course been slower over the last year as everyone knows. If we look a bit forward here we completed in the second quarter about a billion worth of investment to 82 percent leasing and we expect to complete around two and a half billion worth of properties in the third quarter and these are now leased to 87 percent so we have sort of a good leasing situation in the properties that we expect to complete soon. In the fourth quarter we don't expect to complete anything and then we have smaller property in the first quarter 22 that is already leased to 83% and then you can from there you can see sort of the leasing rate in those properties go down successively which is absolutely natural I mean that's quite far out in time so to speak. If we go to the next slide you can see leasing here and the leasing has obviously been slow for quite some time but what started right at the end of the first quarter has continued through the second quarter here which are that we continue to see this increase in market activity. We have an increasing amount of dialogue with potential tenants they are specific and they are concrete these dialogues and that's very positive so it seems pretty clear to us that the underlying sort of the market is starting to improve even if this does not show in our leasing numbers any longer yet this is it takes some time before the before it starts to become actual signed contracts from that and if we look at the risk balance in the portfolio Anders already commented on this but you can see the yellow orange line and the green line here they are moving in tandem with the percent of completion and the occupancy rate in the portfolio so this is a very important sort of risk tool that we have and we have a good balance of these still today. So that makes us feel comfortable with the situation in the overall portfolio. If we then look at the group income statement operating income from the business streams in the first six months 4.9 billion. Central costs are coming down a bit taking us down to the operating income then around 4.7 billion which is roughly a billion higher than we had in the same period last year. Net financials coming down underlying reason to this is mainly we have lower interest rates and we also have a lower amount of outstanding loans so that explains the difference. We expect to tax out here on 16% in the first or we tax out at 16% in the first six months coming down to profit for the period of 3.8 billion. If we go and look at the cash flow, this is sort of a historical development of the cash flow. As you can see we've had quite a few cash rich quarters here in the group. We've been in a divestment situation, net divestment situation in RDNC for quite some time. Now we are, as already explained, we have started a lot of CD projects and we are trying to start more RD projects we are slowly moving into more territory that will become net investments the cash flow for that period we had in the operating cash flow a sizable tax payment that is important to be aware of and the reason to this is of course profits those profits that were made chiefly from the year sale of the Elizabeth river crossings and the two in you both of them located in the US which is a high tax environment for us and then we also paid out the dividend which of course influenced the cash flow in the second quarter If we look at the working capital situation in construction this continues to be very strong we now have a negative working capital in the tune of 20 percent of revenue which is the highest level it's been in sort of modern times here and in the quarter isolated we had that positive cash flow from changing working capital in construction of approximately one billion then the first quarter was negative to roughly the same extent so year to date we are more or less flat there. If we go to the next slide the chart here you can see that's the investments and divestments that I have already commented upon we do as we said expect this green line that shows net investments on a rolling 12 months basis to continue to to come down a bit there look at Captain employed we are roughly one and a half billion lower than we were in the end of the second quarter last year with the residential development increasing a bit and commercial property development decreasing a bit in in this year If we look at our funding situation, we have plenty of available funds, more than 16 billion at hand. All our external funding is green and during the quarter we have repaid a dollar denominated loan to the tune of 65 million US dollars. If we go to the next slide and sum up, we can say that we continue to have a very very strong balance sheet, equity position of 41 billion at the end of the quarter. and an adjusted net cash position of close to 14 billion Swedish kronor, which gives us a very solid investment capacity going into the rest of the year. Thank you, Anders.

Yes, I will go into the market outlook and starting with the construction. We believe in a stable market unchanged from the last quarter. We do increase the outlook for non-residential building in Norway and Finland and also for the civil market in US. So the pandemic is still present. but we can see that the activity is increasing in our markets. And we can also see the public infrastructure investment to stimulate the economies, but the funding is still uncertain. What we can see, for example, in the US, that the activity on the state level is high. The tax revenue comes back to the different states. and they put money into infrastructure and start new projects so that's the reason why the outlook is a bit more positive than last quarter in the US for civil and we can see all over ambitious investment plans under development in many of our markets but the lead times are expected to be long as always when it comes to large construction contracts on the residential development overall continue to be stable Market we increase the outlook for Europe which is a very very strong Market and we expect that to remain strong in in the coming 12 months and we can see a strong demand currently especially in Sweden and Europe and the longer term the of course there is a balance between potential rising unemployment levels and economic uncertainties but on the other hand on the positive side low interest rates all over and structural shortage of home in all our markets commercial property development the investor market is solid we have a very high interest for our projects and our facilities when we put them out for divestments but the tenant situation is still hesitant the tenant is still hesitant but the activity is definitely picking up that's a clear trend we see now in the second quarter and I expect that to continue and to summarize the report here strong report we can see that the strategy is paying off. Construction is continuously improving the profitability and the product development solid performance. So we are well positioned. We have a strong financial position, we have a robust organization and we can see opportunities arising in a sustainable economic recovery and we are prepared to take advantage of them. Thank you. With that I leave it to André again with the Q&A.

Great, thank you very much guys. And as Anders said it's time for the Q&A. So please follow the instructions from the operator.

Thank you. If you wish to ask a question please dial 01 on your telephone keypads now to enter the queue. Once your name is announced you can ask your question. If you find it answered before it's your turn to speak, you can dial 02 to cancel. There'll be a brief pause now whilst you register your questions. And we have one question for you so far. That's from the line of Stefan Anderson of SCB. Please go ahead, your line is open.

Thank you. A couple of questions from me then. Starting with the construction division and the margin there, I know that you should always look at the 12 months rolling and the longer-term perspective just to give a little bit more flavour on the very good margin uptick year-on-year there, also excluding the divestment profits. If I remember correctly, entering COVID, Margie, we were a little bit on the soft side last year. Is there an element here of cautious profit-taking last year and that the beat, so to speak, is a little bit extraordinarily strong in this quarter?

No, I would not say so. The one-off we had is the divestment of the infrastructure so the underlying performance here is around three and a half percent in the quarter. So I would say last year we were hit by Covid. We saw that the revenue went down and it took some time to reduce the cost at the same pace. We have been successful doing that the last part of 2020. So we're in good shape and I can say this is more the reason is more that the strategy works the pay is paying off that we have been selected now for some time we are going for project where we can see we have a competitive advantage and also been successful in the history and we all um that we also have the right people in place the right team that's crucial for us so the our approach is the definitely no team no bid

approach and we have been successful on that great thank you and then on the cd sorry on the cd side i mean you have a very strong balance sheet i know that and historically if i go back many years if you haven't received top dollar for the houses, you always kept it and waited until the market is stronger. If you look at your portfolio right now, the leasing is a little bit on the weak side, but the investor appetite is super high. So what I'm trying to ask about is, would you at this point consider to divest even if you have not reached the level of lease rate that you would like to have to get the top pay given the very strong end market? Or do you keep with that strategy to lift the properties to its top before you sell? What's your thinking about that judgment that you could do?

Hi Stefan, this is Magnus here. Thank you for your question. We consider the properties we have to be absolutely top class and we don't see any reason to sort of de-risk our portfolio and compromise on the profit we will get from selling them. We have the capacity to stick with these properties, we are good at leasing so we think it's in the best interest of the company and our shareholders to wait until We are waiting a little bit longer to sell them. I mean, that's the commercial reason to why we act as we do.

Okay, good. And then going to the material side, you touched on it. I mean, we don't see any effects right now, but two questions there. If the prices are where they are now in material, what are the risks for you? How much do you think you can pass on And also connected to that, this issue with the cement manufacturing in Sweden, you're in international operations, you source from many countries. In worst case, would you be able to offset this or would you also be hit by that impact?

Okay, I'll start with the material price increase. We have seen that a couple of quarters now at least, high increases on certain material like steel, timber, and so on. We have been able to mitigate that. So we have a very limited impact on the last two quarters when it comes to material prices. And we've also seen quite a big volatility on different material. Our way to handle this in the past and also for the future is of course to secure that we have suppliers that can deliver. and that there's number one and also to secure prices before we bid for projects and as far as possible and if we can't secure everything every prices we do we buy it as soon as possible after we win the project so in that case we price projects today with the prices we have in the market and we secure them. We don't want to take risk in that because the market is too volatile and I think uncertain. I think that will continue for some time. When it comes to supply of cement in Sweden, we're talking about the Swedish market now, that of course if the main supplier of cement in Sweden with a short notice of three months cannot continue to produce cement, that will have a severe impact on the Swedish construction industry. I expect that to be solved. There's ongoing dialogue between the Swedish construction industry stakeholders with the government of Sweden and I expect it to solve in a short time. Having said that, of course, we are preparing for all scenarios in this, as we always do when it is uncertainties in the market. So as we speak, we have groups that are preparing for all scenarios.

Okay, thank you. Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. And we have a third question come through. That's from the line of Eric Granstrom of Carnegie. Please go ahead. Your line is open.

Thank you. Good morning. I have one question, and it's regarding commercial development. You mentioned that you've seen the leasing market pick up throughout Q1 and into Q2. Could you be a little bit specific as to where you are seeing activity? In what markets are you seeing leasing activity picking up?

Hi Erik, this is Magnus. Thank you for your question. Absolutely, I'll say we see this increased activity in all markets. Maybe it's most clear in the CDE business we have, but it is across all these markets and it is about the type of and the number of discussions that we have with potential tenants. I mean these have been ongoing for some time but when you see an activity increasing and it's also about the quality of discussions you know how specific are you and are you discussing sort of terms or are you generally just looking at a sort of a leasing situation so we definitely feel that the market is underlying improving here but as we say it will take time before it will show in the numbers so but it's a we see this improvement across all markets.

Okay, and a follow-up on C.D. then. Can you say something about your ambitions to increase your activity in the Los Angeles area in the U.S.? How far have you come there, and are there any opportunities opening up sort of post-pandemic areas?

Yes, we see there's quite a lot of opportunities in the LA market but the strategy with that remains as before that we want to be cautious when we start something to sort of find our way forward in a market. The commercial development market city by city they are quite specific so you really need to understand the business dynamics in each city the locations, the tenants and so on. So we are there now, we made a couple of investments and we see our ambition is to do it long term and there is plenty of opportunities out there in this market but we need to start small and sort of prove to ourselves that we know how to do this business there before we go with bigger things, bigger investments.

Okay, thank you. Those were my questions.

Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. Okay, there seems to be no further questions from the phones at this time, so I'll hand the floor back to our speakers.

All right, everything seems to be crystal clear. And what remains then is just for us to wish you all a great summer. Thank you very much.