Skanska AB (publ)

Good morning and welcome to the presentation of Skanska's First Quarter Report 2022. My name is Antonia Jimnelind, Senior Vice President, Investor Relations, and I joined the team this spring. As you can see, we've decided to change format for these presentations, so you can join us here at our headquarters in Stockholm, or you can watch the presentation online via webcast. We will, however, follow the traditional flow today. So first, our CEO Anders Danielsson will present the group and business performance and provide some business and market highlights. And our CFO, Magnus Persson, will take us through the financial highlights of the quarter. After that, we will open up for questions. And you can ask your questions either in person here in the room, on conference call, or you can text us via the web page, webcast web page. And we will answer as many questions as we can. So with that short introduction, let's get started.

I hand over to you, Anders. Thank you, Antonia. And welcome, everybody, to this Q1 Report 2022. If we start to look at the picture here to the right, it's fantastic projects in Malmö called Epic. It's developed by Skanska, constructed by Skanska, and also divested to our new investment property, our new business stream. But let's go into the figures. If we look at the first three months of the year, we have a solid performance in Q1. Construction, we can see continuously increased revenue, which is expected. We saw it last year as well in the Q4. Residential development, good performance overall, increasing the profitability above our targets there. Operating margin in construction, 2.3%. Q1 is usually a slower quarter in construction, so this year, due to some fixed costs in the first quarter compared to the revenue. But overall, a stable quarter here. Return on capital employed in the project development, above our target of 10% on a rolling 12-month basis. So is return on equity, 18.3%, where we, as you know, have an 18% target. Very strong financial position, that's important for us and we continue to have that. And we also managed to reduce the carbon emissions with 49% since our base year in 2015, in our own operations, I should say. Let's go into the different streams, starting with construction. Here we increased the revenue with 6% in local currencies. And the order bookings was slightly down compared to last year, but we have a solid order backlog on record level. And we also have a book to build above 100%, 109% on a rolling 12 months. But the order backlog, 208 billion Swedish, which is really solid. Operating income increased in absolute numbers, but the margin reduced somewhat compared to last year. And we can see that volume is returning. We can see improved activity. And I'm coming back to the outlook for the coming 12 months. Supply chain disruptions has been the case for quite some time during the pandemic, and also now we expect that to continue since the war broke out in Ukraine in the first quarter. But we have not seen any material impact of the war in Europe in the first quarter. We have been able to handle and mitigate the cost escalation that we have seen for quite many quarters right now. Residential development, slightly down on revenue, and we have reduced the number of homes sold and started. But we are on a historically high level when it comes to ongoing projects in production. We are close to 8,000 homes in production, which is a good number. And we have the capacity to start new projects. We have a good sales rate in the ongoing project, and we have also very few unsold completed. So we can start new projects, and that is also the ambition. Operating income, $570 million, and we are above our target on the operating margin of 10%. Return on capital employed also above our target of 10%, and we have good activity and strong profitability, and we have not seen any major effect so far. During the first quarter, we have a good pace in the market when it comes to sold homes. The focus is, of course, to start new homes and also focus on the zoning and permitting, which has been and we expect it to be a bottleneck going forward. But we are in a good position and we have a good pipeline. Commercial property development, also a bit slower quarter when it comes to number of divestments, but we have divestment in the quarter and the Those have been on a very attractive level, so that has continued to be good. And we managed to be just shy of 10% target on the return on capital employed. And that is a substantial amount we employ in these operations. 35 ongoing projects corresponding to 26 billion upon completion. And the occupancy rate, 28% versus 42% completion rate, those gaps should not be too wide. So the focus is definitely to continue to lease our projects, ongoing projects. We started one new project in the first quarter. And we also can see in the market now continue to be a very solid investment, investors' appetite for our high-quality buildings. And that remains, and we haven't seen any tendency that they sort of want to withdraw from any divestment, which is good. Soft least in market, 13,000 square meters least in Q1. We saw, as we reported in Q4, higher activity in the late 2021. But that sort of softened, slowed down really, really big when the Omicron hit us in early January. And we also saw when the war break out. So we still have good dialogue with the potential tenants, but they hesitate to take the final decision. So we just need to work hard with that. That's the first priority, definitely. And investment properties, new business stream since for this year. We announced it late last year. And we're targeting high-quality building offices, and the ambition is to have a portfolio between $12 billion to $18 billion in the next few years. And we have a strong, stable cash flow that will give us that, and we will get benefit from increased value, especially when we have a cluster of buildings where we develop new areas that definitely will drive value for the company. And as I mentioned, we did our first acquisition here in the first quarter, epic building in Malmö, fully let multi-tenant building, highest quality when it comes to sustainability and health certification, cluster of Skanska developments. We are in that area and it's a coming area and very attractive part of the city. So it sort of hit all the criteria we set up for this stream, new stream. If I go back to construction and look at the order bookings, as I said, record level on the order backlog, you can see it in the bars, the blue bars. You can see in the yellow line here the book to build on a rolling 12, going slightly down in the first quarter, but still on a high level, above 100%. And you can also see here order bookings on a rolling 12 and also by the quarter, the orange line. And if I look into each and every region here on the order bookings, it's quite good order book to build in all geographies. Nordics slightly over 100%, Europe slightly below 100%, but that's expected. We can see some postponement of projects, especially in Central Europe due to the war in Ukraine. But as I said, we have not seen a major impact so far. In the U.S., very strong order intake. We have a book to build of 120%. I will come back to the market outlook, but it's an important market for us, over 40% of the revenue. So it is really encouraging. And the amount of production we have in the order backlog, 18%, that is also historically on a high level. So we are in a good position here, too. continue to be selective in the market, continue to focus on the project where we see competitive advantage and where we can make a good profit from them as well. With that, I leave it to Magnus to go deeper into the figures.

Thank you. So if we then, we start with the construction and the income statement. So on the shed, we grew revenues We grew revenues 14% actually, but the underlying volume was 6% up. So it's a big currency factor. And I think that the volume growth is – it comes on the back of something we have alluded to in a couple of quarters. We have booked quite a sort of solid amount of work in the latter part of 2021. And then it's been about – to sort of be able to start these projects. And we can clearly see now that these jobs, they're coming online, and we're starting to produce in them. Hence, we're stepping up a little bit in the volume here. And I think it's a very good signal because we have not let up in any way, shape, or form on the tight bid criterias that we have. So we know that this sort of backlog we have is of solid quality. So it's good growth we are seeing. We're experiencing here, so that is comforting and looks good for the future. Gross margin 6.8%, S&A of 4.5%, good control of the overhead costs here, because we have to recall... Anders already alluded to this, that the Q1 is seasonally a slow quarter for us, where we normally have a lower absorption of any overhead costs. Nevertheless, we managed to come down a bit in S&A here. And the 2.3% operating margin, you compare it to last year and say it's a bit lower, but you have actually to go a little bit further back in history. to get some solid reference points and 2.3% in the Q1 is actually pretty good, I say in construction. If we look at how our operation is faced over the different quarters of the year and so on and so forth. Then rolling 12 months, we are trading at 3.7% EBIT margin. And I think the rolling 12 months, that is the relevant measure to use. when you compare us against our own targets that we hold ourselves against. So a solid level of performance there. If we move to the next slide and we look at the different geographies, you can see Nordics keeping up profitability 2.8% in the isolated quarter. Sweden 2.3%. Then we have Europe. Now something is happening here. I'll move back. Europe is negative in the quarter. It was slightly positive then last year. See, there's two chief reasons to this. One is volume, and I already spoke about that on the last slide. It is a seasonal sort of low volume. low volume quarter Q1. On the back of that you saw bookings a bit slow in Central Europe and of course we have had the pandemic and so on. So a bit of a challenging volume then in Central Europe in particular. And then we have decided to sort of keep the overhead costs where they are because we think we're right sized as an organization. And then you have a lower absorption, essentially. On top of this, we have two businesses, if you will, two business units inside the European operating segment here. It's in UK and then it is in Central Europe. Both of these business units are right now changing the legacy ERP system. So that also adds some costs to the quarter. Underlying performance, if you sort of strip away all of this stuff, I would say it's basically at par with last year. For the U.S., 2.7%. We continue to improve the performance in the U.S. It's been a very solid run, I'd say, in the successive development of performance in U.S. construction operations. Move to residential development. We saw revenue decline here, 5% down, at a good margin of 16.3%, and S&A then at 4.3% take us down to around 12% in operating margin, which again is a good level here. The comparison quarter is very tough here. We were up to... 14.8%, so close to 15% in the first quarter in residential development. That is, of course, a stellar result there. So it's a good quarter here. And overall, the RD markets have been quite favorable during the first quarter. As Anders alluded to and we will come back to and also commenting in the quarterly report, outlook is – we see some uncertainties in the outlook, but the actual quarter have been quite okay here from a market perspective. If we look then at the different geographies, we can see slightly lower margins across all the different geographies, especially in Europe, as they're coming down from 21% to 14%. So how much should you read into this? Well, first of all, you have to look at the volume of the business here in the first quarter. So you have essentially a little bit similar effect here as you had in the construction business, a bit of a volume effect there. And again, overall, across the geography, it's been quite an okay quarter from a market perspective. Home started and sold. If you look at the green line, that's the ammunition, if you will, that we have. It's the new started projects that we need to start projects in order to develop them and sell them further on. This has increased since the middle of 2020, very much in line with what we have communicated in terms of our ambitions to continue to grow the product development portfolio here. On a rolling 12-month basis, we started here around 4,100 units to be compared to 3,800 that we sold. So it's hard to compare individual quarters because suddenly you get the permitting You get permit for an individual project, and they come out, and you can't really plan that quarter by quarter. But when you look on a longer-term perspective here, it's clear that we are continuing to drive for sort of a very responsible growth in residential development. Homes in production. And here you can actually see, I think by playing figures, what I just spoke about. The growth, of course, in number of starts oversold and handed over will be displayed in a growing volume of units under development. And now we have 7,900. It's a solid number, slightly down then from the fourth quarter because we've handed over a lot of units, of which we have sold 75%. So a very strong, maybe a tad on the high side, the sales rate on the portfolio. And basically no issue at all with unsold completed units. What we develop is in high demand, so we don't have any issue with that. To move to commercial development, we had an active quarter, made several divestments. Here, a strong gain, so close to one billion Swedish kronos. We sold projects in Central Europe. We sold projects in Sweden. We did the first divestment to the new business stream, Epic. Very interesting and a very good start of the life of this new business stream, and I will come back to that. And we also managed to divest two challenging properties that we have alluded to on a couple of occasions over the last two years, which are the West Memorial properties in the energy corridor in Houston. Tough market situation in that very specific micro location, and we are now completely out of that. And, of course, if you look at the numbers and you do the analysis, you have to recall that these entities are diluting the development margin a bit, if you will. Look at the realized and unrealized gains. We have 35 ongoing development projects in commercial development. These have an estimated surplus value or unrealized gain, if you will, of around $6 billion. Then on top of that, we have around $2.5 billion in surplus values or unrealized gains in projects that are completed. And then we have another one and a half approximately of surplus in land and development properties, those where we have not yet started a project. So in total, approximately 10 billion in coming gains that we will realize. And we have been at this level now for three quarters, and you can clearly see a big step up since before. Again, demonstrating evidence that we are growing the product development business stream significantly. And we can also note then, which you have on the orange line here on the presentation on the slide, which are the level of realized gains that we sort of recognize in the profit and loss statement on a rolling 12-month basis. So despite the fact that we keep the unrealized gains very solid, around 10 billion, we are managing to recognize approximately 4 billion of gains on a rolling 12-month basis. So it's a very strong development of a very good portfolio. Thank you. If we look a little bit deeper in the portfolio then, this is the completion profile that we have. A bit complicated slide, but I think by now most of you have learned how to interpret it. On the left-hand side, the light blue bar, you have the completed unsold project, and it is the total investment that we have made into those projects that makes up the height of the bar. So projects for an investment value of approximately 5.9 billion have been completed that are not yet sold. These are leased to 75%, so a very solid level of leasing in them. If you back up one quarter, the bar was around 8 billion, and if you back up another quarter, it was up to cross 11 billion. And then you can say it's difficult to sell these properties, but I would argue not at all. It's a very commercial decision to not sell properties too early because value comes when we lease. And we have both the balance sheet and the sort of risk appetite to see these projects through to their commercial ends. We'd much rather complete the property, get the right leases, and then we'll invest them so we don't compromise on the value created for our shareholders there. If you look forward, the dark blue bars, that represents those projects that are not yet completed but under development. And here you can see then the completion profile that – We have fairly few completions expected in the second and third quarter this year, but more in the fourth quarter and then through the next year also. The green line represents the average leasing rate for those properties. Leasing is slow. This comes as no news. As Anders said, leasing came back. We had a decent leasing number in the fourth quarter. Especially November, I would say, it shows that when the restrictions were taken away, potential tenants turned into signed tenants suddenly. So that gave us some confidence that when there is really an underlying demand, as soon as the uncertainties that are plaguing the market at the moment, when they go away a bit, we get more ink on the paper and we can recognize more leases. We have solid discussions in all our different markets. And do we note a super big difference? It's not real. I mean, flexibility is important for tenants today. You can have expansions, options, break options, et cetera. But overall, no super big difference, I would say. And we have a lot of good discussions and a long sort of list of leads and list of potential tenants here. The two lines you see, the green line and the orange line, that's the average occupancy rate and then the completion rate. The completion rate of the property is the green line. Occupancy rate is the other. Normally, we would say that in sort of normal market conditions, we would like to have these two moving in tandem. Now leasing is very slow, obviously. We are big. We have a solid financial position, and we close the monetary risk appetite. So we allow there to be a gap between these two. But, of course, we would also like to see more leasing. So we're working on that. Then we come to investment properties. Not large numbers here to talk about, but nevertheless, it's the first time. So we have now made our first investment in this stream. We bought, as already said, the property Epic from commercial development. The property is located in a cluster in Malmö in Sweden, the southern parts of Sweden. It's a very nice property, well-certificated, LEED platinum, multi-tenant building, very high quality and very nice finish on this one. Property value 766 million. The transaction was made for a value of 748 million. And then what is the difference here? Because this is the first time we do a transaction, I think it makes sense to say a little bit about it. The main difference is here the fact that we are trying to resemble a market transaction as far as possible when we sell the properties. And that means that any deferred tax will come with a discount of 5.15%. That is the chief difference between the transaction value and the property value or the market value here, which, of course, then comes up as part, a very small part, but nevertheless a part of the P&L in the first quarter. We move on. And then we come to the group. If we add up the operating income from all the different business streams, we end up with a number of 2,083,000. Million in the first quarter. Central stream minus 135. This always goes up and down a bit, but underlying, it's essentially no change to the quarter last year. Eliminations, 95 million, a bit higher, and that essentially is a reflection of the fact that we are now producing on bigger project development portfolios, both in residential development and in commercial development, which means that the eliminations becomes a bit higher now. Net financial items plus eight, which is also a reflection of a big, strong liquidity position. And thanks to the changes on the financial market, we can finally see that placements and deposits are starting to yield some sort of return for us. And then together with a higher level of capitalized interest, this sort of ends up in a net financial position of plus eight for the quarter. Taxes, uneventful, we taxed out at 19.6%. If we look at cash flow then, the main change to the cash flow this quarter compared to the same quarter last year is net working capital and construction, where we had an outflow approximately one billion. This is quite normal because also here you have the same type of seasonality as you do on the P&L, where it's not unusual that especially public customers sort of pay a little bit in advance towards the end of the year. And then in the first quarter, we have to sort of earn back that money by producing with a little bit less invoicing. So it's quite normal that you have some sort of outflow in the first quarter. And the other one is that, again, we are investing, net investing to a higher extent now in residential development and in commercial development. So these are the two main changes. And also please note that the dividend of 10 Swedish kronors per share were not distributed during the first quarter. From a cash perspective, it will flow out during the second quarter, even if we have already separated it from the equity position, which I will come back to. Here you have the working capital position, and it's still very strong. We have around 29 billion in net working capital, 20% of revenue. So it's a very solid position to be in here. And as we are now starting to grow the construction portfolio somewhat, that also means that more projects are in the early phases. In the early phases of a project, that's the the time in a project's life where you normally have the bigger part of the advances. So that will give some underlying support also to this position. Investments and divestments, we continue to run into a net investment territory, illustrated by the green line being sub-zero, so to speak. And we have a capital employed at end of the quarter in project development and investment properties of 50.4 billion, essentially growing this part by 3 billion cents year-end. Liquidity position, we have 19 billion in available funds. Of that, we have facilities with banks, et cetera, of 6.7 billion that we can make use of. Only 3.4 billion in external debt, and we have no maturities this year. So we have a very solid financial position, which takes me then to this slide. Equity, end of the quarter, 44 billion. And here again, the dividend is already separated away from this equity position. Equity to assets 31%, overall super solid financial position, adjusted net cash of plus 15 billion. And of course, this is very reassuring for clients. With a balance sheet like this, clients can trust that we will stand there and we will deliver on the contracts that we have signed with them. And that is very important for us. It's a commercial advantage. And the other thing is that it gives us the opportunity to act on market opportunities should they arise, perhaps when others can't in some cases. So we don't have to chase volume, but we can focus on making the right sort of commercial decisions. So we'll stop there. Over to you, Anders.