Skanska AB (publ)

Good morning and welcome to the presentation of Skanska's second quarter report 2022. My name is Antonia Junelind, Senior Vice President, Investor Relations, and here with me today to present our second quarter results are our CEO Anders Danielsson and our CFO Magnus Persson. We will start the presentation today with an overview of the group and business stream performance and provide you with some business and market outlooks together with the second quarter financials. After that, we will move over to the Q&A session, and you can ask your questions either by using the text field on our webcast page, or you can dial in on the phone conference. Just follow the instructions by the operator. So with no further ado, I will hand over to you, Anders, to take us through the second quarter result.

Thank you, Antonia. And before we dig into the figures, I want you to look at the picture here on the first slide. It's Noworynek in Poznań, a commercial development project in Poland. Fantastic office building with very high standards when it comes to environmental and well-being certifications. And it has been developed, constructed and divested by Skanska. Very successful project. If you look at the overview of the second quarter, we have a good performance in the second quarter. Construction continues to deliver strong results, residential development maintaining the profitability level, commercial property development, high level of activity and also good margins on the divestment that we have done in the second quarter. And on the investment properties, we have establishing that business and the pipeline looks good. Operating margin in construction, 3.4% versus 4.7% in the last year. We'll come back to that. Return on capital employed in product development above our target of 10% on a rolling 12-month basis. Return on equity slightly shy of our target of 18%. And we continue to have a very strong financial position. We have 11 billion Swedish in net cash. and we have managed to reduce the carbon emission further and we are now at 51% reduction compared to our baseline year 2015. If I go into each stream, starting with construction, we increased the revenue to close to 40 billion Swedish in the quarter. We have order bookings of 37 billion. That is below our last year, but last year was also where the exceptional order intake in the US. So this is more on a normal five year average. Book-to-bill 95% on a rolling 12-month basis and we have a record high order backlog of 215 billion Swedish. Operating income 1.4 billion and gives us an operating margin of 3.4%. percent and if you compare to last year you should remember that we had the the one-off divestment gain in uk we divested infrastructure services which was a gain of 370 million swedish and if you take that out we had a margin of three and three point five percent last year same quarter So we are growing value revenue and we have a solid order backlog and we have been able to managing the supply chain disruptions and the cost increases in a good way. So we have been able to keep the margin of 3.4% the same as we have on a rolling 12 months basis. So overall strong performance. If we go into residential development, The revenue were down to 3 billion in the quarter. And you can see that the home sold was also reduced. Last year in the second quarter was an extremely good year for residential development. So we sold a lot of homes in the second quarter. And the slowdown that you usually see in the summertime didn't happen last year. So that was exceptionally good. we also had a rental residential divestment last year of 114 homes if you take those out the reduction is 30 percent we have been able to start more homes compared to last year so we started 957 homes in the quarter And the operating income 358 million, which corresponds to 12.1% operating margin, which is above our target. And we also are above our target when it comes to return on capital employed of 11%. So we have been able to bring new projects to the market. And since we have a very strong financial position, good pipeline, good land bank, we can start projects when we feel it's right. We are not dependent on the credit market in that sense. So we have been able to deliver in good profitability. Commercial property development, operating income of 800 million. which of gain of sale from divestment is slightly above 1 billion Swedish. And in those divestments, we have two large projects in Sweden that are sold before construction start. So it's of course natural for us to be a bit conservative when we recognize the profit in this quarter. Return on capital employed above the target 10.8% on a rolling 12. And we have 37 ongoing projects, which corresponds to 30 billion in investments upon completion. And we have an estimated market value of close to 38 billion. 33% occupancy rate versus 45% completion rate. That is a gap that we follow very carefully. The gap should not be too big. But right now we can see some higher activity in the leasing markets, especially here in the Nordic operation. But that is something we follow very carefully. Seven projects started in Q2 and we have continued to see a solid appetite from investors. So there's a lot of capital out there in the market and our portfolio, our projects, they are really attractive, high quality, high standards when it comes to environmental and other matters. Leasing market remains relatively slow. We have leased 47,000 square meters in the quarter. As I said, we saw some higher activity in Q2. So that's something we work hard with. And finally, the last dream here, investment properties is a new business dream this year, and we're targeting high quality, sustainable office and to build up a portfolio over the years coming years to 12 to 18 billion Swedish. and that will give us a strong stable cash flow and we also see potential to increase the value even further compared to when we divested the projects upon completion and the first project is transferred epic building in malmo that was transferred in q1 and we are preparing for more transactions into investment properties we have a good pipeline for that so i look forward to that If I go back to construction and looking more deeper into the order bookings, here you can see over the years, over the last five years, the development on the order backlog, as I said, record high right now. And you can see on a rolling 12-month basis, the development on the order bookings. You can also see the orange line order bookings per quarter and also revenue and book-to-build ratio. As I mentioned, record high and the order bookings in the quarter as you can see is on an average level if you look five years back. And if I go into each geography when it comes to order bookings, Strong overall, strong backlog. And we have 17 months of production. You can see Sweden slightly above 101% book to build. Overall, we have 95% book to build ratio. Somewhat lower in Europe. That is not a surprise for me since we have, especially in Central Europe, we have been more impacted by the war in Ukraine. So we have been very careful and selective when we bid for new projects there. But overall, a good position. You can see US 96% book to build, but a very healthy backlog, 19 months of production. So this is something I'm quite comfortable with. With that, I'll leave it to Magnus to go deeper into the figures.

Thank you Anders. We start with the construction business stream. We had revenues of close to 40 billion in the isolated quarter, which is then up from the comparable quarter last year. If you look at this in local currencies, it's up 14%. It's quite a large impact here of FX in particular the dollar exchange rate that has moved a lot and given that we have just shy of around 45% of the revenues in construction comes from the US market that has a pretty big impact on the revenue as we report in Swedish Kronos. Slightly lower gross margin, 7.4% compared to 8.9%. But again, as Anders has already pointed out, we divested the infrastructure services business in the UK in the comparison quarter. So if you strip that out, we're at 7.7% last year. Good S&A control. Nominally, we went up a couple of hundred million, but if you look on the S&A margin, 4% flat. I think that's a very respectable number here. Takes us down then to an EBIT of 1.4 billion, 3.4%. percent margin which is also where we're trading on a rolling 12 months sort of long term we are now up and basically performing at our target level shy on the basis point or so no material non-recurring items of any materiality that you should be aware of in the second quarter If we move to the geographies, in the Nordics, we basically delivered the same level of profit, 549 million compared to last year. In Sweden, 310 million compared to 308 last year. Slightly lower margins though, which I'd say it falls within sort of normal quarter variation here. And in Europe, profits were lower. But again, if you take out infrastructure services, we were actually growing profits in Europe. And margins are, of course, in the comparable quarter also heavily affected by this divestment. US continues to improve 3.3% margin in the quarter compared to 2.8%. So really sort of a strong performance here from the US construction businesses. If we move then into residential development, we had revenue in the quarter isolated 3 billion, down 30% approximately. Market really started to slow down, I would say mid-May and then into June. So this has an impact on sales levels, of course. And it's already been pointed out, we had an unusually active sales actually the second quarter last year. No rental divestments in the numbers here. We had one rental divestment in the second quarter of the last year. Strong margins, close to 20% on a gross level. Very good. Of course, S&A margin is a bit on the high side there, 7.7%, completely due to the fact that volumes are coming down then. Leaving us with a very respectable 12.1% margin, EBIT margin for the quarter, which is basically where we are trading also long term if you look at the rolling 12 months of 12.5%. So very strong performance from the residential development business. Looking at the different geographies, all geographies essentially performed well. Market has perhaps softened the quickest in Sweden here, but profitability has definitely kept up very well. In Europe, if you look at the margins, they are coming down, but this is also a very good performance in this business here. The margins here are in fact starting to get impacted by the newly established Boklok business in the UK, which we are ramping up. And of course, when you establish a business in a new market, you need to invest both in organization and you need to invest in a land bank and so on. And that is often before you really start to get sort of the positive benefits of a profit. So we have somewhat of a margin dilution due to that. But that's for a positive reason then, I should add. Home started and sold, we started roughly the same amount as we did last year, slightly up 957 units. Sales 680 units, then 140 units were a rental residential divestment in the comparison quarter. And overall, we continue to start around 4,000 units here on a rolling 12 months basis. It has increased a little bit up from say 3,500 up to now just north of 4,000 units on a rolling 12-month basis, which you can see in the graphics here if you look at the green line. So continue to build up the residential development portfolio. Homes in production, we have around 8,200 units in ongoing production, a very solid sales rate of 72% and basically no issue at all with unsold completed homes. So super stable position in this portfolio, which Essentially means that we can continue to start projects that are attractive to us and we are not in a position today where the level of risk in our residential portfolio is really a limiting factor for us starting new projects. So if we find commercially attractive projects, we definitely have the capacity to start them. If we go into commercial property development gains, one billion. We made sort of two larger divestments, I would say, in the quarter, one in Stockholm and one in Poland. And on top of that, a number of smaller transactions. I think it's important, as Anders pointed out earlier also, that in this quarter, it was a little bit special because we divested a couple of properties where we still sit with a full construction risk. And of course, in that situation, especially when you take into account the market context with the sort of cost escalations and commodity pricing we are being quite cautious in the profit recognition to make sure that with adequate reserves and provisions to cover those risks for the future which is the explanation to why the development margin looks a bit lower here If we look at the unrealized and realized gains, if you take the total investment value of the portfolio when all the ongoing projects are completed and you include land and you include all the completed properties, that's approximately 50 billion Swedish krona so it's a very large portfolio we have here then. Out of this we have sold but not yet handed over properties for 7 billion approximately so the remaining 43 billion that's what you sort of look at on this chart there the surplus value of the remaining 43 billion is approximately 10 billion and you can see the distribution here of course the majority of the surplus is in the ongoing projects 6.3 billion then. roughly unchanged since the first quarter despite the fact that we realized gains of one billion in the isolated quarter and as usually you can look at the orange line there rolling 12 months we're still realizing approximately four billion in gains on an annual basis out of this portfolio so we continue to generate strong values underlying here If you look at the completion profile, we have completed but yet unsold properties to a value of 6.2 billion end of the second quarter. These were leased to 73%. That's roughly the same number as we had in the last quarter, even if there is a sort of a churn of the properties We sell some and then we add some that are completed of course. If you then look at the blue bars, that represents the 24 ongoing budget unsold projects that we have in the portfolio. The bar shows the total investment value at completion for those properties in the quarter we expect them to be completed. green dots represent the current leasing rate of the different properties so what you can see here is that we expect very little completions in the third quarter this year and then towards the end of the year in the fourth quarter quite a lot more and overall we have sort of a forward heavy if you will completion profile of this portfolio as it looks now Leasing remains quite slow. We leased 47,000 square meters in the quarter isolated and clients are still a bit unclear about sort of their business need in terms of space here and flexibility remains key which It can be break options, expansion options, contraction options, all sorts of different parameters that you can introduce to give flexibility for tenants. In awaiting that clarity, we see more clients rolling existing leases or renegotiating them for shorter maturities in a way that makes them keep their flexibility but at the same time wait a little bit with making sort of a real decision to move into a new space. That's basically the market dynamics here now. We go into investment properties. We had an operating net of 8 million Swedish kronas in the quarter. Obviously the comparison quarter, we had nothing. Very slim organization. So the S&A costs are rounded here to zero. We have made no change in the value of the only property we have in the portfolio so far. Takes us down to an operating income here of 8 million kronas in the isolated quarter. If we look at the group, central items minus 1.55 looks a bit higher than last year. but in reality the underlying running costs are virtually unchanged and the changes you see here in the accounting is due to legacy and some accounting items. We have net financial items with the changes that we see in the financial markets and the rates going up we're of course coming in a better situation in terms of how we can handle our net cash position and we're starting to be able to make more money out of deposits and short-term placements that we have here so that's of course very positive taxes we taxed out the 21% which is higher than sort of what we're used to the reason for that is that we have a lesser degree of the profits in the quarter came from tax exempt property divestments and then we end up closer to our nominal tax rate of course In comparison quarter 16% tax we were successful in utilizing past losses for tax deductions in 2021 which contributes to the low tax rate we had in the last year. If we look at the cash flow, we had a small negative cash flow in the isolated quarter, 0.5 billion. On top of that, of course, the dividend distribution that took place during the second quarter takes us down to the total cash flow then of minus 4.8. So this essentially means that we are reinvesting all our cash profits into new land and new development projects, building up the portfolio for the future here. Free working capital in construction by and large unchanged compared to what we reported in the first quarter. We have approximately 29 billion in net working capital representing 19% of the revenue here. Cash flow from working capital in construction was slightly negative, minus 0.9. So there is somewhat of a currency effect in play here in the balance sheet items. If we look at investments, we are continuing to move deeper into net investment territory and building up portfolios for future divestments. This is true both for residential and commercial development and very much in line with what we have communicated as our ambitions for quite some time here now. You can see capital employed is growing in both business streams, RD and CD. And I think for investment properties, obviously it grows 800 million due to the single property we have in that portfolio yet as well. terms of funding we have 3.6 billion in external funding no maturities coming up this year next year we have one loan and one bond that will mature 16.4 billion of available funds so plenty of ammunition for us and very low level of reliance on the credit market in order to execute on our strategy and continue to build up our portfolio for creating the profits in the future quarters there Financial position, super strong. We had an equity position end of the quarter, 48 billion, adjusted net cash of 11 billion. And of course, as already said, with the balance sheet like this, low reliance on the credit markets puts us in a position where we can act on opportunities when they come. We don't have to sort of wait for others to agree on that opportunity, if you will, and we can start projects when we want to start projects. We can judge whatever comes our way purely on its commercial benefit for Skanska and then we have the ability to act on it. So I think given where we are in the market, we are in a very strong position to make the best out of that.