Skanska AB (publ)

Good morning and welcome to the presentation of Skanska's fourth quarter and year end report for 2022. I'm Antonija Jimnelind, Senior Vice President, Investor Relations. And here in our studio, I have our CEO Anders Danielsson and our CFO Magnus Persson, who will take you through some business, financial and market updates. After their initial presentation, we will open up for questions. And you can ask questions in one of three ways. You can use the conference phone number or the text field on the webcast page. Or if you are here in the room with us, you can of course ask your question in person. So with that short introduction, let's start with the presentation. I hand over to you, Anders.

Thank you, Antonia. And before I jump into the report, I want you to look at this picture to the right. It's one of the landmark office building in Stockholm developed by Skanska and also transferred to our new business stream investment properties in Stockholm 01. If I look into the fourth quarter overall, I can say we have a really strong performance. The construction stream, very good performance across the borders. The residential development had a good start of the year, but a weak Q3 and Q4. So we'll come back to that. Commercial property development, successful divestment during the year, and we also started two new projects during the quarter. Investment properties, good start, completely according to plan. So we have transferred three office buildings in Stockholm and Malmö during the year, two of them in the last quarter. Operating margin in construction, 5.4% in Q4. Very strong, of course. If you look at the full year, we had 3.7%, well above our target. So that is really strong performance. And return on capital employed in the project development, 8.1, below our target. But overall, considering the market situation on a good level. Return on equity, 15.8%. And we have maintained a really strong financial position for the company. Proposed dividend from the board is 7.5 crowns per share. to be decided by the AGM later on. And we managed to reduce the carbon emission with 55% compared to our baseline year 2015. So if I go into each stream, starting with construction, the revenue increased in the quarter. If I look at the local currencies, it's increased with 3%. Order booking was really strong, 51.6 billion. And we have a book to build of 104% for the full year of 2022. So we are in a really good position here. We have historically high order backlog as well, close to 230 billion. And the operating income, 2.3 billion in the quarter, which corresponds to an operating margin of 5.4%. So overall, strong performance and really good profitability. And our strategy that we have had the last few years really pays off now. We have been selective. We have been keeping our discipline. We're going for projects that we see that we have a competitive advantage and also that we have a history of profitable projects. So I'm really proud of the organization and the achievement here. So really good. The order backlog again, historically high, and also which is really encouraging that we do see solid performance across our geographies. And that's also the underlying explanation that we perform on such a good level. Moving on to residential development. Revenue is really low in the quarter, 155 homes sold in Q4 and we started 671 homes during the quarter. So really slow quarter and operating margin of 0.6% is of course on a very low side. If you look at the full year, as I said, we had a fairly good start of the year in 2022, so the return on the capital is 7%. But we do see a weak housing market, especially here in Sweden. I think a lot of hesitation amongst the buyers of homes due to high interest rates, high inflation, which leads to high energy costs and so on. And also that the secondary market is a lot of uncertainties. Buyers and sellers, they haven't met each other yet. So I think it needs to stabilize before we can see improvement here. But the good thing is that we do see an underlying need and underlying demand from homes in all our markets. which is good for the longer term, so it's a good place to be. We have low volumes, and we also saw during the quarter underperformance in one of the segments, in the more affordable segments, which is Boklok in our operations. Minor part of the total, of course, but we have launched a turnaround program that we launched here in the end of Q4. We also changed the management for that unit. Commercial property development, operating income, 1.3 billion, which our gain on sale is close to 1.5 billion, which gives us a return on capital employed of 8.6% for the full year. I think that's on a good level. We've been successful when divesting projects, so we can see that the investors, they are definitely interested and attracted by our offering, and we have high quality, very high environmental standard in our portfolio, in the right place, of course. And we do have 34 billion in total investment when we have completed these 36 ongoing projects. And the occupancy rate is today 31% compared to the 50% completion rate. This is something we follow very carefully because we don't want the gap to be too big. And we started two projects in Q4, that was two multifamily rental projects, started one in Copenhagen and one in the US. And we had two large internal transactions in the quarter transferring to our new business stream investment properties. And the leasing remains a priority for us, quite slow, has been slow during the pandemic and also during 2022. So we leased 42,000 square meters in Q4. We can see that the tenants are coming back. They are more interested right now. There are hesitation, of course, because the back to office has been quite slow after the pandemic, but we can see it's going in the right direction. We can see it's leading actually in Europe, Central Europe, the Nordics. More people are coming back to the office. Companies want to get their employees back to the office. And we can see a slower pace in the US. But it's also in US, it's going in the right direction. But they are lagging a bit compared to Europe. But there's also a big priority or polarization in the office market. So both potential tenants and investors, they are seeking for high quality, high environmental standard building, in a very good location with the public transportation and all of that. So that's exactly what we can offer because we are in the right places. So I'm confident for the future. And investment properties. New stream, as you know, from 2022. And we are targeting here high quality, sustainable office. And our ambition is to build up a portfolio of between 12 to 18 billion over a few years. It will give us a strong, stable cash flow. We can also see a big potential to take part of the value increase as we develop an area, for example, and also value increase over time in the office market. So I'm very Confident that this is the right thing to do and also satisfied with the delivery so far. We are running this according to plan. And I said two exercises during the fourth quarter, Aqua building in Malmö, Stockholm 01 here in Stockholm. So strong start in the first year. Going back to construction and looking more in detail on the order booking. Here you can see over the years the development of the order bookings. It's a blue bar here where you can see the order backlog. The order bookings is the gray line and you can see order bookings per quarter, orange line, and also the revenue, the green line here. So as I said earlier, record high order backlog. We can see that the revenue have trended upwards for the last two years. You can see the green line bottom up in early 2021. Quarter by quarter, we have seen increased revenue. and if you look into the different geographies here we have a good order intake overall especially strong in the us as you can see we have 113 percent book to build and slightly below 100 in the nordics but as you can see we have 14 per 14 months of production in the nordics 12 in in sweden 17 overall so that that's on a very good level so we are in a very good position we can be continue to be selective we can continue to keep our discipline and going for a project that we know we have been successful in the future and with the fantastic team we have i'm confident in that with that i hand over to magnus to continue

Thank you. And we move to construction and income statement. You can see that on the slide here. As Anders already said, we grew revenues around 14% in the quarter, 3% in local currencies. So the scope growth of the actual organisation is considerably lower than what the values in Swedish kronos imply. sort of quite an important signal to understand how we move the company and how we expand the resources that are available for us for the full year the corresponding numbers then is 18 in the swedish corners and eight percent in in local currencies so you can see also that our growth rate is tapering off a bit towards the end of the year which in a sense is sort of nothing strange with that. You just looked at a slide and heard explanations about the strong bookings that we have here. So we go into this year with a very comfortable sort of booking position here and also quite high burn rate in terms of revenue in the construction business. If you look at gross income, we took in around 4.2 billion in gross profits in the quarter, up from 3.1 last year. Corresponding margins to this, 9.8%, compared then to 8.5%, is quite a big step up. And we have a very well-performing portfolio of construction projects in the group at the moment. So very sort of strong underlying performance. Now, in the isolated quarter, we have also had a couple of effects that sort of positively influenced the quarter. I will come back to them in a bit more detail in the next slide here. But in Sweden, we have essentially landed an agreement with the client that allows us to, in this quarter, recognize revenue that we have been earning for for more than one quarter, so to speak, a number of quarters prior to this. But since we had not agreed with the client on the compensation, we defer until this quarter to recognize it in the books, which is all in line, of course, with the strategy we have to work with recognition in a very cautious way. And this also points out importance here to not look specifically at individual quarters when you sort of assess the real performance of the construction business. You need to look at it as sort of a rolling 12 months or something like that. We also have a couple of very large construction projects in the US that are approaching completion. As we do so, and as we successfully manage the risk, we can of course increase the profit take-out from these projects as we can release reserves that we have held in them. Normally this doesn't show up very much, but it's a very standard part of how we do. Now we have this effect on a couple of projects in the same quarter, so the effects are sort of put on each other, and therefore it has somewhat of a big effect in the quarter. But the important here, this is not our view to be seen as something sort of extraordinary. It really comes out of our standard operation, even if there's a bit of a lumpiness. So I would only urge you to look at performance over a slightly longer time stretch here. S&A is well under control, takes us down to a very strong operating margin then of 5.4% in the quarter, significantly up from 4.2% last year, and as Anders already pointed out, 3.7% margin for the full year. Last year we were at 3.8%, but if you recall, This includes divestment gains from selling a business in the UK. This year, it's all about underlying strong performance in the real operations. So essentially marking the end of a very successful year in construction. look at the different geographies then nordics came in with a margin of 5.9 percent uh sweden isolated 6.7 percent and here you have some of the effects that we that i just discussed in the last uh in the last slide europe somewhat down from last year but 3.8 percent here is still a very strong number and as we have mentioned on i think a couple of earnings calls prior to this we are exchanging ERP systems in the European operation and this actually has an effect on the margin here so strong performance in this operation too and then in the US five and a half percent up from three and a half you heard explanations to this during on the last slide also so overall all geographies are performing really really well here We move to residential development. Slightly different story in the quarter. The quarter has been, if you look at the revenue, we essentially decreased them by 80%. And the market has been really weak in the quarter. Probably the weakest market is the Swedish one. And maybe the strongest we have, relatively speaking, is the European residential market then. When you read these numbers, I think you need to understand also a little bit about how we recognize profits in Skanska in our segment reporting, which is what you look at in our quarterly report. We recognize revenue at point of contract, and that means when we sign a sales agreement with the customer, we recognize the revenue from that sales, essentially. This means that when you look at our P&L, you have a very sort of here and now reading of how the market has been performing in the isolated quarter. There are no real lagging effects between how the market behaves and when this shows up in our P&L. So it's a very sort of accurate reading of where we've had the market during the fourth quarter. Selling and admin, obviously, 234 million to 30%. This seems a bit odd, but this is all due to the very low volume. So essentially, the profits here gets a bit eaten by the S&A charge, so very low volumes then. Operating margin, 0.6%. If we look at the different geographies, both the Nordics and Sweden isolated have done negative profits here. And if you read the quarterly report way back in it, you will see that we have had negative revenues, not a lot, but still negative in the Swedish part of the already operation. And the reason to this is, one, that the market has been weak, leading to very few new sales in the quarter. And in addition to this, we have had cancellations from customers in a few select projects in Sweden, in the affordable segment where we operate with the Boklok brand. It's a select few projects that this has happened in, and when it happens, due to the profit recognition we have, we have to reverse the revenue out of our books, and this, of course, contributes then to the weak result in the quarter. If we move to the European part, you can see 18.6% operating margin, which is sort of a very good margin, but the volume is low, as you can see, at 52 million compared to 120 approximately last year. Homes started and sold. We started almost 700 units, 671 in the quarter, which is then quite a lot lower than the same period last year. And obviously, and we have said this in a couple of quarters, when the market becomes weak, it is more difficult to find the business cases. It's also more difficult to assess the relevant sort of price on the right in the projects out in the future, which slows down the starts, essentially. On the sales side, we sold 155 units, which comes as no surprise given what I just told you about the weak market there. So quite a lot down then from last year. We remain at a high production pace in this business. 7,900 units are under production, of which we had sold 65%. Due to the slower sales, this comes down somewhat from the 73% that we had at the year end last year, but still within a very comfortable range here, 65% sold of the total amount that we have under production. under production and we have 130 units that are completed but not sold a fairly large part of these are so to speak show homes that we use in order to have customers come and look at the products that we that we market before we sell them then so and this is also a low number historically speaking and we still have a good churn of these apartments We moved to commercial development. You can see for the full year, we had revenue of 13.5 billion, approximately. Actually quite an active year. We made 19 outgoing transactions, divestments, essentially during the year. So quite a high amount of activity. booked then gains of approximately 3.6 billion, bit down since last year when we had 3.9, but still a very respectable number here for the business. In queue for isolators, Anders has already pointed out, we made three transactions, two internal to our own investment property stream, I'll come back to that, and one transaction where we disposed of the remaining 5% ownership stake in a project that we have developed in Seattle some time back then. Unrealized and realized gains. We had unrealized gains in the portfolio of about 8.5 billion come end of the quarter, down from 9.8 the quarter before that. And the difference then is 1.3. Should come as no surprise then that in Q4 we booked gains of 1.5 essentially made a profit take out from this surplus values that we have in the portfolio then. And the absolute majority of this is of course expected surplus values in the ongoing projects and you can also note that we're successively sort of reducing the amount of properties that are completed but yet unsold. Which then brings me to this slide, where you can see the completion profile of the portfolio. You can notice that approximately 5.4 billion in invested properties are completed, but not yet sold. This is the investment value, not an assessment of the market value. These were on the average leased to 66%. And then after that, we expect to complete properties for an investment value around 4.5 billion in Q1 this year, and these properties are currently leased at 44%. So the leasing profile here looks quite good, even if, of course, given the slowness of the leasing over the last year and a half or two, we would like to see it being a bit higher than. And in the isolated quarter, the fourth quarter here now, we've also completed one property, sort of ends up in the completed unsold one. Leasing, we leased 140,000 square meters approximately for the full year. And in the isolated quarter, then 42,000 square meters. So as already been said here today, we normally would like these lines, which represent the completion rate and the economic occupancy rate to go you know quite much hand in hand here we are comfortable with letting them spread aside but of course we have to watch the risk tolerances here which we do obviously so now as we sell properties we sell properties that are higher with a higher amount of leasing obviously and we start new properties with a lower amount of leasing and that is why we get this effect Investment properties. We made two acquisitions then in investment properties in the quarter, both of them from commercial development, obviously. We booked the revenue of 20 million Swedish kronor, which is very small, and an operating income of 100 million. And then when you look at this, I think it warrants an explanation, not at least because we only had this business stream for very few quarters there. So it says that we have changed the property value here and by that created gains. In reality, there's been no change in property value at all from our side. What happens is a technicality. Because when we make these transactions, we make customary adjustments to the purchase price based on the deferred tax that it carries along with it. And when this property ends up In the receiver's portfolio, you have to revalue to the right market value, so to speak, and then you get this effect through the way we report here. So properties on an assist basis has no change of value in the quarter. Now, in total, end of year, we had 3.9 billion in the... Sorry, 3.8 billion in the portfolio. Very good start to the build-up of this. and build up of the portfolio then. And all of the properties there are, of course, environmentally certified to a very high degree and total leasable space, 52,000 square meters. if we add everything together in the group income statement we can look at the central line here you can see the cost central cost comes down somewhat i would urge you not to read too much into that because the underlying cost structure is essentially the same but you always have these different effects quarter to another a bit with the legacy business sort of so it's very much the same takes us down to an operating income then of 3.5 Then we have very positive net financials of 200 million. Reason for this, I think, should be no surprise. We have a very strong balance sheet, a lot of cash that we deposit in the most favourable way we can, given the restrictions that we have put in place on ourselves. With rising interest rates, then we get a much better net financial outcome. for the different periods here. So both for the isolated quarter and for the full year, this is a very good outcome then. Taxes, we taxed 730 million in the isolated quarter, which is a tax rate of approximately 9.5%. to be compared then to a tax rate of around 15.5%, which we had last year. Now, the difference here is twofold. First, last year, we were very successful in utilizing sort of past losses in the group in Europe for tax deductibility reasons, which reduced the tax charge that we had to recognize last year. That's, of course, very positive. This year, given the transactions that were made between commercial development and investment properties, due to the accounting regulations, when we make these transactions, we have to account for a tax of 20% of the gain. And this tax is then in the accounting. We don't have to pay it. And it resides on our balance sheet as a deferred tax liability up until the future. And normally, when commercial development sells externally, we can package the properties and thereby make very tax efficient, almost tax exempt transactions. So we will have this effect when we sell the properties between commercial development into investment properties. look at the cash flow we had a negative cash flow around 2 billion in the quarter main effect here is that we have a very high investment pace at the moment which comes as no surprise last year we started a tremendous amount of commercial development properties we also started a lot of residentials that are now up and producing. So we have a big net investment in the cash flow here. And the other part is also working capital, where we have some effects, and I'll come back to that. Look at the working capital here. We're still at a very good level, around 90% of revenue. We have what we call free working capital, which is essentially the sort of advanced payments, if you will, from the clients that we can utilize. But still, it comes down a little bit in the quarter. You can see this represented by the bars on the chart here. And this is the effect we have then on the cash flow from networking capital in the isolated quarter. Investments and divestments. If you look at the green line on this slide, you can see the net investments of the group. And you notice immediately that for quite a long period of time, this has been well above the zero line, basically placing the group in a net divestment territory. We have been able to sort of harvest the proceeds from the buildup of the property development portfolio for quite a long period of time here. Since we have ramped up investments again, you can see this green line comes down, creeps down below the zero, and we are now in a net investment territory, essentially building up the size of this portfolio again. And we, on a rolling 12-month basis, we had net investments here of around 5 billion, which is one of the sort of fastest investment spaces we've had over the last 10 years. So we are really stepping on the gas here. which you can also see on the bottom part of this chart, where we show you the capital employed numbers, where we now are up to close to 59 billion, comparable to 47 billion than if you back up a full year. But we have a very stable financial position to deal with this. We had 3.7 billion in external financial loans and bonds at the end of the year here. We have available to us at any given point in time 16 billion of cash here, of which then we have unutilised credit facilities six billion. We will have two majorities during the year, that totals around one billion. I would also like to point out that during the fall here, we secured a new revolving credit facility as a backup for any needs we have in the group. The intent of this is not to draw on it, but we should always have it to further secure our financial position. It's a five-year structure involving seven banks and it is sustainability linked. So this is very good to have this as the existing revolving facility will run out in 2024. Which takes us to the group's financial position. We had an equity position end of the year of 55 billion, tremendously strong, obviously. with an equity to asset ratio of 36% and a very solid net cash position of 12 billion at our disposal to handle and make use of opportunities that come our way.

Yes, and I will address the market outlook that we have overall here, starting with construction. Overall, we have a stable outlook when it comes to construction. We have strong market outlook in the U.S., continue to be strong in the civil sector. A lot of federal money coming out in the system. We can see that the states on the state level, they're really pushing out projects. So it's a strong market. And we also see that the non-residential construction market, the building sector, is also strong. We are in the right sectors in the US. We are building airports, universities, hospitals, schools, and so on. So we can see a strong market there, which is really good for us. The residential development, low activity in the housing market, so we expect the market to be slow during the next year. It's a cyclical market, as you know, and I believe it will stabilize over time. We have an underlying need for new homes in our market. commercial property development we can see that hesitant behavior from the investors and we don't see a lot of transactions now in the market and we can also see that the leasing market slowly recovering from after the pandemic now and again as i said earlier we do see a polarization in the market where investors and tenants go for high quality building but overall we have continued to have a slow market outlook for the commercial property development To summarize before we open up for Q&A, solid performance for the fourth quarter, construction really strong across the border, residential development, weak market, commercial property development, successful divestment both in the quarter and over the full year as well. And we managed to start up the new business stream investment properties in a good way perfectly according to plan and we do have as you have heard really robust financial position and the strategic direction remains for the company we will keep our discipline we will prioritize profitability and responsible growth in in the construction stream we aiming for being the leader residential developer in our markets and we have an ambition to grow the commercial property development and of course continue to build up the investment property portfolio over time and we we do have a good plan to do that with that i hand over to antonia to open up the q a

Thank you. Yes, so let's open up for your questions. And as mentioned before, you can ask your question by calling in using the conference phone number, or you can send us a text on the webcast page, use the text field on that page. Or if you are here in the room, you may of course ask a question in person. And may I then please ask you to raise your hand so that we can bring a microphone so that the online audience can hear your question as well. But we will start with questions from the conference call. Operator, do we have someone calling in?

We will now begin the question and answer session. Anyone who wishes to ask a question may press start and 1 on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star one at this time. The first question comes from the line of Graham Hunt from Jefferies. Please go ahead.

Good morning and thanks for the questions. Just two from me. I wondered if you could help a little bit more quantifying the impact of those contingencies released in the construction division this quarter and maybe your thoughts on what the sort of underlying profitability run rate is here going forward. And then second question, you touched on sort of why you're seeing an improvement in the outlook for the US market, but I just wondered if you could add a little colour on the UK civil side of things, which I see is worsening in your view. So thanks very much.

Okay, I can answer that. Regarding the continuosities in the fourth quarter, I would say you should not look into a single quarter. You should look on a more rolling 12-month basis. That's more accurate when you judge the construction margin. And if you look over time, as you have seen, we have 3.7% operating margin. And that represents the underlying performance for the business. We have been able to successfully winning new projects that we have successfully executed. And we have avoided loss makers that we have seen. And we also managed to work out the dead revenue that we had a few years back. And when it comes to the improvement in the US, the market outlook, I think that's really encouraging to see that the federal money coming out in the system, the different states are really investing a lot. And we also see encouraging signs that the inflation might go down in the US. When it comes to the UK, as you saw, we turned down the outlook for infrastructure, the civil market. And that's due to the fact that it's a lot of uncertainty where we will be uk economy go will we see a recession will it flatten out so that's a lot of uncertainty in that market which gives us a slower market outlook thanks very much the next question comes from the line of frederick sayon from carnegie please go ahead

Good morning. Congratulations to a very strong ending to 2022. On the hosted one-offs in the construction stream, in the U.S. you're mentioning that there are related to the reserves. Might there be more potential there as we move into 2022?

Hi, Fredrik. This is Magnus. Thank you for your question. You asked if there are more potential here. I'd say the potential is that we continue to perform in the projects that we have. then we will over time sort of continue to have a strong profitability. I would think, and we said this also during the presentation, that in the Q4 isolated, we have had a couple of these effects sort of put on each other. So the Q4 isolated is not something that you should take as an isolated quarter and then...

sort of shoot forward you need to look at like rolling 12 months longer time perspectives but we expect to continue to deliver at a very high performance level in the u.s yes and why typically when you have right sounds you quantify the effects since there seems to be a number of possible one of here in the quarter why are you not giving us more and on what votes may be in total

I hear you a bit, but I think that you're asking why are we not giving you more guidance on how much is one-off effects in the quarter? Did I get that right?

Absolutely.

This is because this is our standard business. I mean, we have the projects. This has not been like a claims release or anything like this in the US. This is the valuation of our projects. And we have many times communicated that we go into projects sort of with a cautious profit recognition. and if we manage to handle the risks we will success successively take out more and more profit and this is the effect you see now and we've also said that you shouldn't look too much when you assess profitability on isolated quarters here i think that's the most important thing to bring with you when you look at this because this money is not coming from as a sort of from non-project business this is real underlying performance but it happens to be a bit agglomerated in a quarter

Got it. Moving over to residential development. Obviously, it's a challenging market and you're not selling as many units as prior to 2022. But on the other hand, we're also witnessing that J&A costs are growing year over year. Are there any plans to look at overall headcount or high cost reduction program?

Of course, we look at the cost level all the time, and we're doing that continuously. So that's definitely something we do all the time. But we also need to look ahead, of course. We are well positioned when it comes to residential development operation. We have 65% sales rate in the ongoing project, very few unsold completed. And we have a really good land bank. We have worked long term with the land banking strategically for many years right now. So we are well positioned that day that the buyers come back and take the decision to buy apartments. So I'm confident and strongly believe in the residential market in the long term.

And then two more questions from my side, commercial development. Have you made any adjustments in your assessed market value of the overall portfolio during the quarter?

I think you are referring to the ongoing development projects we have and the market value that we are communicating, but that we have not booked, am I correct? Absolutely. Okay. We continuously assess these, of course. Normally what we do or what we always do is that when we underwrite a project and start it, we are quite cautious in the assessments of that business case because the expectation is that we need to obviously develop the project and build it and then put it on the market. This whole process means that exits is always often three years or more out into the future. So it's very warranted to be very cautious with the exit yield that we assume because there is a big uncertainty when you look that far out into the future. So we have not made like a structural total portfolio change to that. We look at this on a project by project basis, obviously.

My final question relates to the dividend proposal from the board. It corresponds to a payout ratio really in the lower end of your range. What was the rationale behind being on the cautious side?

I think it's a balanced proposal from the board of directors to the AGM. We have a very strong financial position, but we also do need a lot of capital to execute our strategy. We want to increase the investments in commercial development, residential development, when the market allows us to do that. We're also determined to continue to build up the investment property portfolio for the future. So that requires capital. And we're also very determined to keep our financially strong position. That's a very good place to be when the market worsens and there's a lot of opportunity that will show up in the market that we can take advantage of.

Thank you. Those were all my questions.

The next question comes from the line of Marcus Hendrickson from ABG. Please go ahead.

Thank you very much. A few questions from me, starting off with the commercial development one. You've been starting quite a lot of projects in 21 and 22, and the occupancy rate, as you state, is now 31 versus a completion rate of 50%. At what gap would you become more hesitant or should we interpret that you are already a bit more hesitant towards office since you started several projects in other property segments?

Hi, Marcus. This is Magnus answering your question. We don't have a specific gap here that we look at or a specific level of this gap that would make us react because we need to assess project by project and the viability of this portfolio is essentially consisting of the viability of a number of ongoing and completed projects. So that is the level we have to make that assessment. What are we comfortable with? Yeah, I think that answers your question. Am I right?

Yes, you are right. Then on RD, construction cost inflation up and co-op prices down. Where do you see the best possibility for housing starts in 2023, given overvalue in the land bank and also dependent on market conditions currently? And do you think that the Q4 production start here of 670 units is that a good average or bad figure in your view?

I think if I start with Q4, I think it's a reasonable figure considering the market development. We will always look carefully on the sales rate in the ongoing portfolio. Now we are in a good place between 65%. I'm comfortable to be in that range between 60 and 70 in a normalized market. We can allow ourselves to go a bit lower as well if we feel that we are in the right places. So we have the financial strength to start new projects, and we will do that in the right location. Because even though we have a weak market outlook for the coming 12 months, it takes much longer to complete residential development. projects, and I'm confident that the market will come back at some point, and I'm confident that we will position ourselves in a good way here, both when it comes to starting projects, but also when it comes to buying land in the right location. But we do have a really good land bank for when the market picks up here. a follow-up also on the where you see the best possibility for housing starts in 2023 given different geographies i i can see definitely the nordic we are strong we have a good position in the three largest cities here in sweden we also have a good position in oslo helsinki We are in Prague and Warsaw and Krakow, and those cities have been resilient for this. So we can see that Central Europe has been resilient. There's not too many new projects out in the market, so the prices on the secondary market is stable, I would say. I see opportunities in the capital cities in the market we have chosen to be. But more resilient actually in Central Europe right now.

Thank you. Last question. Could you give a bit more color on the development for Boklok? And also, I didn't catch if you took any restructuring costs here during the quarter in that division?

Yeah, so the development in Boklok here, well, you can say Boklok has been challenged during the quarter with the weak market. And I say the impact has been toughest on the market in that segment, and that is where we have the Boklok then. And so they are suffering from low volumes and, of course, an overhang of overhead. And so we need to get this whole sort of production and marketing and design and essentially the development machine working under these market conditions that we have now then. And which is why also that we've had this turnaround that we refer to in the turnaround initiative that we refer to in the quarterly report. thank you does the turnaround imply that you will take restructuring costs in 2023 then that we that is too early to say because we have initiated that now and we we do not have any material turnaround costs in the numbers for 2022. thank you those were my questions thank you

The next question comes from the line of Arnold Lemon from Bank of America. Please go ahead.

Thank you very much. I have three, if that's okay. Firstly, on commercial developments, you've done quite well with internal sales to investment properties, but you haven't done many external disposals. I'm assuming there's an effect from higher interest rates in the commercial real estate sector. Do you expect to be able to do a few transactions in the coming months? I guess that's my first question.

Yeah, I can start with that. Thank you for the question. So during the year, we actually made 19 divestments, sort of outgoing transactions from commercial development. And of these, three were to investment properties. I would say there has been a good amount of transaction activity. Obviously, the external transactions we have done has, due to various circumstances, been smaller then. But I think that answers your question. So obviously, the transaction market, it is slower. There's no doubt about that. We have the amount of sort of reference transactions that we call it on the market are lower today. But we still feel that there's a good amount of interest from investors for properties that are very sustainable, they're cost efficient, they're in the right locations, and they're sort of economically well performing as well. So that's where we are with that.

Thank you for that. My second question is on the cash flow generation. I mean, before you mentioned the increase in investments, putting a bit of pressure on your cash flow. Can you give us a comment on the outlook there? Is it fair to say that you'll have more investments in the coming quarters?

Yeah, I mean, when we start sort of a property development project, that's often a multi-year, at least sort of a two-year venture. And throughout that whole project, you will continue to invest, obviously. So I think we will, without giving any forecast, the pure logic and dynamic of this business implies that when you are investing at the pace we are now, and we have sort of just sort of ceased to increase the net investments, that will probably stay for a while, because you need to finish the ongoing project, so to speak.

Thank you for that. And lastly on construction order intake, quite strong in the U.S., I guess a bit more stable in Europe. Would you mind commenting on the competitive environment in construction in Europe? I mean, the macro environment is a little bit more uncertain. I assume there may be a bit fewer projects coming to the market. Can you confirm that? And what do you see in terms of your competitors doing? Are you confident you can still take good orders at good margins? Thank you.

Yeah, we have seen strong order intake across the border, I would say. We are slightly below 100% book-to-build in Europe and in Nordic, over 100% in the US, so that's definitely a strong market. When it comes to the amount of competitors, we have not seen any big changes there. The civil market, for example, has always been really competitive in Europe. We don't see any sign that it will increase or decrease. That's the way it is. So all players are chasing the projects right now. But having said that, we do see a stable market in most of the countries in Europe. So we're downturn now in the UK, but we do have a very strong order backlog there. So I'm confident that we can be competitive going forward as well.

Thank you very much.

The next question comes from the line of Gregor Kublish from UBS. Please go ahead.

Oh, hi. Good morning. Thanks for taking my questions. I was looking at slide 19 and it helpfully gives sort of the rental value and obviously the carrying value that, you know, carry investment properties at. And I kind of, okay, very simplistically look at, I think it sort of implies a 5% yield. Is that the right way to look at this? Is the 100, for example, in Stockholm, the 122, is that a, Is that the lease or the rental income on the 80% lease, or if it were 100% lease, just so we understand what the sort of implied yield is that you're carrying? Please, that would be helpful. Maybe I'll let you answer that before the next question.

Thank you for your question, Gregor. It's quite detailed, and your calculation ends up somewhat in the wrong place. So I would suggest that you liaise with our investor relations department afterwards.

Okay. Um, okay. And then, uh, in, in, in terms of sort of the, uh, construction margin, I mean, you kind of mentioned it, but just to be clear, um, you think this is a 3.7 you printed for the year as a whole is a reasonable reference point to think about what the business is performing at. There's no reason to believe it's either that number is particularly, I mean, obviously it's above your target. of three and a half, but is that the right interpretation? I appreciate you not specifically guiding, but sort of directionally. Is that what you're saying?

Yes, the underlying performance is on a very high level, and thanks to that, we have been successful executing projects, avoiding loss makers, and been selective. We have kept the discipline, so it is a very good performance. Okay.

And then remind me, so you, this is the first quarter, I think in a very long time, we've seen sort of a free working capital reduction, uh, at least towards the year end. So I guess my question is, do you think there's a trend here or is it too early to call? I mean, I'm thinking, you know, interest rates are higher, you know, people make money on their cash, so maybe they don't prepay you as generously as they have done in the last few years. Uh, or maybe I'm misinterpreting. I just want to understand what you think. whether there's a trend here and what you think is a sustainable number, I guess. I know this has come up in the past, but if you just remind us.

Yeah, I think it's an excellent question. This working capital position we have is sort of important for us because the alternative is to go to the funding market and source money from there. So we watch this very carefully and of course do sort of thorough questioning and investigations into this all the time make sure that we are on top of any development in the market on a structural level that we need to be aware of to plan our capital sourcing our balance sheet etc etc right the effects in this quarter is actually quite uh it's very sort of isolated we have a very good understanding of what it is and when we look at the overall portfolio and how we manage to negotiate with clients and the client's sort of openness to these negotiations, we see no change, really. So I would say this is something that happens when you have a very high net working capital balance. Then, of course, it's hard to keep it growing like that. You will have some setbacks at some point in time with that, but we are not concerned about the stability of that position. And just to remind everyone also that It's hard to say what is normal and not normal here, but currently we are at approximately 19% of revenue in our free working capital. But historically speaking, this has been creeping up for many years due to strong negotiation skills and due to us being able to assert favorable payment plans also in projects.

Okay. And then coming back to slide 17, which is sort of the completion profile and okay, yes, there's 66% on the stuff that's done, but from memory, you only try to sell when you're sort of, let's say north of 80, uh, correct me if I'm wrong. Um, is that still your approach that you prefer to wait? In other words, you'd rather just not sell if, if, if lease rates are low, because obviously it begs the question whether you're going to be selling actually realizing anything, it's up to you, obviously, whether you decide to sell or not, right? But just want to understand where you cut off, right, in terms of trying to actually get stuff onto the market.

Yeah, good question. And you will get another one of these maybe slightly boring answers. But this is, of course, an assessment we make on a project by project basis, because for every investment we have made, we try to sort of find the most lucrative way of monetizing that investment for shareholders. And that we assess continuously, sort of every quarter for every project that is possible to sell. We have sort of an assessment of this, you can say, right? So when we have talked about 80%, that's because the market in general historically have responded in such a way that when you cross approximately 80%, you don't end up in discussions around that that would sort of lead to you having to compromise on the price due to lack of leasing but the market is a moving thing right so this moves all the time so that's not to say that it will be exactly the same in the future but but this is also why we have implemented the strict transaction guidelines we have when we buy properties into investment properties where we say 80 percent leasing right but in commercial development on a case-by-case basis for every project we analyze what is the best way to monetize the investment and we don't stick really to any specific rule in terms of an exact percent there and when we can divest it or not thank you thank you

Okay, so thank you very much. That was all the questions that we had time for today. We've now run slightly over time. If there are any remaining questions, then please don't hesitate to reach out to either myself or the IR function and we will ensure that you will be getting your answers. So with that, it's time to wrap up this presentation. First of all, thank you, Anders and Magnus, for your presentation here today. And then, of course, thank you for showing up here at our studio in Stockholm. And lastly, thank you for watching. A recorded version of this broadcast will be available on our webpage shortly. And we will be back in the setting to present the first quarter report on May 4th. Thank you.