Skanska AB (publ)

Good morning and welcome to the presentation of Skanska's second quarter report for 2023. I'm Antonija Ljuvnerlind, Senior Vice President, Investor Relations. Shortly, we will listen to a business, market and financial update from our CEO Anders Danielsson and our CFO Magnus Persson. Having gone through the Q2 performance and results, we will then open up for questions. Today, you can ask your questions using either the telephone conference number, then just please follow the instructions by the operator, or you can send us your question using the text field on the webcast page. Should there be a lot of questions, we will, however, prioritize, as usual, the people calling in. But with that, let's start with a Q2 update. I will now hand over to you, Anders.

Thank you, Antonia. And I want you to look at the picture here to the right. It's one of the completed projects on the west coast in Norway, Nordöveien. Very successful and beautiful projects. Let's start with the highlights of the second quarter. We have a record high order backlog in the quarter. And if you go comment on the streams, construction is delivering strong results. On the project development, both on residential development and commercial property development, we have low sales volume due to the market condition. We'll go into that later on. On the other hand, on the commercial property development, we have a solid leasing in the quarter, which, of course, creating value for the future. And investment properties, we have no acquisition in the second quarter. Operating margin in construction, 3.4%, same level as last year. Isolated quarter. Return on capital employed in project development overall. at low 2.3% on a rolling 12. That's, of course, due to the low volume. Return on capital employed in the investment properties, 5.5% on a rolling 12-month basis, slightly below our target of 6%. Return on equity down to 11.1% on a rolling 12 months. We continue to have a strong financial position and we have managed to reduce our carbon emission by 57% since the base year 2015. uh i will move on to the construction stream where we have revenue is pretty much flat we have record high order bookings more than 63 billion in the quarter so we're ending up with a book to build ratio of 115% on a rolling 12. So the order backlog is on record high level, 250 billion Swedish, and we have an operating income in line with last year in SEC, and we have an operating margin again of 3.4%. So the record strong order intake is general, but also boosted by large civil contracts in Norway and in the USA. Order backlog is really strong. And on the rolling 12 months operating margin, we're ending up at 3.8%, well above our long-term group target of 3.5%. So the strong performance continue in construction, which is really encouraging and important. Moving on to residential development. The revenue here is down to 1.6 billion. We also saw that the number of homes sold is also down with around 50% compared to last year, the same period. and the home started is also down accordingly. Operating income is 49 million SEK and the operating margin 2.9%. And we have a low return on capital employed due to the low volume here of 0.2%. so the sales volume slightly up but remain low due to the market activity and the measures we have taking in book look to adapt to the market situation also impacting the result in the quarter with 100 128 million Move on to commercial property development. The operating income is minus 15 million. We have a gain on sale of 171 million, so quite a few transactions in the quarter. We have 33 ongoing projects. That corresponds to almost 33 billion upon completion in total investments. And we have two projects pre-sold and started in Q2. The positive thing in commercial property development is the leasing activity during the quarter. We have leased 78,000 square meters in the second quarter compared to 47,000 square meters last year. And that of course creates value for the future. Transaction volume remains low overall in the market and we can see that the investors are hesitant. And investment properties, no transaction in the second quarter. Here, as you know, we're targeting high quality, sustainable office portfolio, building up to between 12 to 18 billion over time. to generate the stable cash flow. And we can see we have a stable operational performance and we also have a good interest from potential tenants for the very few remaining vacant premises. If we go back to the construction stream and here you can see the order backlog and the development over time for the last few years. So here you can see clearly that we are on the record high order backlog. You can also see that the book to build ratio is up in the quarter. The same for order bookings, of course, and the revenue is flat. and if we go in to look at the order bookings in the different geographies strong order intake in the nordics large civil projects in in norway and but overall healthy healthy backlog here Slightly lower in the book to build in Europe, which is due to the market conditions. So I'm not surprised over that. And very, very strong order intake in US. So overall, we have 18 months of production, which is on a high level. And again, book to build of ratio of 115%. With that, I hand over to Magnus. Thank you, Anders.

And we go into the income statement for construction. That's where we usually start. Also this time, it's already been said we grow revenues a couple of percent. If you take out the FX effect from that, we are down a couple of percent. So roughly flat in terms of development there. Gross margin goes up a little bit. up to 7.5%, so very much in line with the comparable quarter. Same thing with S&A, ended the quarter then with an operating margin of 3.4%. So in a way, very stable performance and we have, as we have said many quarter by now, a very strong portfolio in construction that we are working out of. which creates the possibility to have this stable performance and so of course the strong bookings that you can see is really sort of comfortable to have as a good volume for the future here as we know that we are still keeping to the strict bidding requirements and the risk controls we have in the bidding. If we look at the different geographies that we have, we have a stable delivery in all geographies. You can see Swedish margin is coming down a bit from 3.3 to 3.0%, which characterizes a very normal sort of intra-quarter type of deviation in terms of performance. Europe, 2.6%, a little bit lower than, and underlying to that, you can say that we had a really good the second quarter last year in the central European operations, which is more normal this year. And in the UK, it's a bit more sluggish this quarter actually. We've had sort of some issues with some commercial projects in London here that contributes to a bit weaker margin. Then US, 3.5%, very strong performance. So overall, all geographies are performing really well. Go to residential development. Here we have a continued weak market. Revenues were down about 45%, down to 1.6 billion in the isolated quarter. Sales remain slow. I mean, we still have the customer uncertainty that is lingering around. It's a bit unclear how how the central banks will continue to act and how inflation will develop of course and then we can see that banks are having tighter lending requirements in terms of issuing mortgages to clients especially in Sweden, Finland and Norway that is impacting sales also here. We had an EBIT of 49 million Swedish kronor, which obviously is not a stellar result. The main impact there is volume impact, you can say. We've had a one-off cost in the UK affordable part of the Boklok operation. If we take that out, you can say that the actual project performance is quite stable in the operation still. But as we said, we are hurt here by the low volumes where the volume really makes us unable to cover the organizational costs that we have here at the time. If we look at different geographies. Nordics are clearly performing sort of at the worst and in the European part it's quite clear here that the central European part of the residential development operation is performing really well actually. Perhaps a bit surprising, but that's the way it is. And as I said, in the UK, the book-look operations have had to take one-off cost in the quarter that have been recognized. And all our units, because the volume is what it is right now, and we foresee a continued weak residential development market here for the coming 12 months, All parts of the residential development business are undertaking cost adjustment activities here to adjust for the future sort of expected volumes in the business. If we look at home started and sold, we sold 340 units, down 50% approximately from last year. We started 240 units then, and the situation is by and large the same as in the first quarter here. We have a lot of units to sell, so we don't need to start at the moment, and it's also harder today to find and underwrite strong and sort of credible business cases due to the market and the difficulty in getting the right event horizon in terms of future sales prices. That's more of an issue today than the cost side is, which is stabilizing. If we look at the homes in production, we had 6,400 units under production, slightly lower than the last quarter, as you can see in the bar chart. Of this, we had sold end of the second quarter 58%, somewhat up from last quarter then, which was at 57%. This means that 2,700 units was unsold and potential to be sold out into the future. In addition to this, we had 306 units that were unsold but completed, up from 210 units then. And as we have said also here many times, this is not an issue as long as we can see that these units are churning and not getting old in our balance sheet. We are tracking this closely and we don't have an issue with this and we do expect that this number will increase the coming quarters because the sales pace is slower than the pace at which we are completing units now. So that's the way it will look. Move over to commercial property development. A very uneventful second quarter in terms of the P&L. We recognized two divestments during the isolated quarter. Both were smaller public buildings in the southern parts of Sweden and in total then we booked a loss of 15 million Swedish kronor in the isolated quarter. If we look at the unrealized and realized gains, we had unrealized gains, which is represented by the bars on the slide you see here on the screen, of 7.4 billion at the end of the quarter. It's a slight increase in value mainly due to currency effects and also that rents are developing in a positive way here. We completed four projects which were sort of moved from ongoing to completed in the bar chart here during the second quarter. Then you have the completion profile of the commercial property development portfolio, and we now have 10 billion invested capital in completed unsold projects. It's in total 20 properties that are completed and not sold. These are leased on the average then to 73%, up slightly from the first quarter, which was at 71%, so it's developing in the right direction. We have for quite a few quarters said that we are not in the business or not in a situation where we have to put properties to the market that are not leased well enough because it will inevitably force us into discussions around price with buyers. Where we are now, we have several properties that are leased to an adequate level to put them on the market. So we are in several transaction processes and working on this. But it is very clear that it is still a very hesitant transaction market here. So we have leads, we are working on it, but it just takes time to get the deals to be signed. If we look out into the future, then you see the dark blue bars. We will complete properties for approximately another six billion during the third quarter, according to plan, and then another three and a half billion in the fourth quarter, according to plan. And the green dots represents, as they do every quarter, I show this slide, the average leasing rates for the properties that are to be completed in the respective quarter. So the shape of the curve of the green dots are just fine. But we would, of course, Ideally, we would have liked to parallel shift it upwards a bit to have a bit higher leasing overall, but that's where we are now. If we look at leasing, we had a completion rate in the portfolio of 58% at the end of the quarter and then a leasing rate of 43%. The leasing market continues to improve. As Anders said, we have leased 78,000 square meters in the isolated quarter. This is actually by all comparisons a very strong quarter in terms of leasing. 205,000 square meters on a rolling 12-month basis and you can see visually now on the chart that the bars are starting to move in a trend in a better direction than what we have seen for quite some time. the shift in the leasing market is most clear in central europe we can also see improvements in in the nordics characterized by small leases and but they are moving here there's still a lot of requests from potential tenants in terms of flexibility arrangements in the lease agreements and that can be resizing the size of the lease and various options in the lease agreements to give them flexibility to account for their own uncertainty about their commercial future, so to speak. We are working very productively in those negotiations to meet these requests and demands. On a very positive note is that rents are developing in the right direction. Of course, part of this is CPI adjustments that are built into the agreements, but also in terms of new leases, we can see it's moving in the right way. So that is very positive for the value creation of the commercial property business for us. If you look at investment properties, it's already been said we didn't make any transactions in the quarter. We have increased the average portfolio yield there by 15 basis points, taking down or affecting the property value with around 130 million Swedish kronas in a negative way. This is by and large compensated by higher rents in the portfolio. So the net effect you can see in the P&L is a mere 25 million Swedish kronas negative way then. All properties are continuing to perform well and according to expectations. If we look at the group, we had an operating income from all the business streams of 1.4 billion. Central Coast stands out a little bit as being low, 73 million compared to the 155 in the comparable quarter. In this, we have a positive one-off effect from the legacy businesses that we have and cater for at the central level here. This should not be accounted for out into the future, but the underlying costs here are essentially stable in the quarter. Net financials, 133 million, a lot up then from the comparable quarter. And the main difference here is that interest rates have gone up, which also means that when we capitalize costs in our product development business, those capitalizations become higher. That's the main impact we have here. And then taxes, we taxed out at a decent tax rate of 16%, quite a lot lower than at 21% last year due to business mix, but also due to the possibility to use past tax losses in some of our legacy operations. Cash flow. We had a negative cash flow in the quarter of minus 5 billion, slightly down from the comparable quarter of 4.8. You can see the two items in here. Dividend was slightly lower this year than last year, paid out in April this year. And then the operating cash flow from operations of 1.8 billion. And the major shift to the comparable quarter is that we had a lower cash flow or a more negative cash flow from working capital this quarter than we had in the comparable quarter. I'll come back to that in a slide or two. And as you know, and we have pointed out many times, we are having today a very high investment pace into the product development business when we are working on and successfully completing the ongoing projects that we have started over say the last two years or so. We looked in at the working capital you can see the bars here represent the nominal values as we see them in the balance sheet and there's essentially no change to the first quarter and we remain at around 18% of revenue in terms of negative working capital. The position has changed a little bit than if you back up a full year as you can see since the second quarter and third quarter last year where it seems to be sort of topping out this level. But any changes to this balance will be very gradual and go very slow as it is tied to the several thousands of projects that we have ongoing. Look at investments then. I alluded to this a couple of slides back. The dark blue bars represent investments we make in each isolated quarter. And you can see that we are now averaging a quarterly investment base around 6 billion. On a rolling 12-month basis, the net investments are quite significant at minus 7.5 billion. That's represented by the green line in the chart there. And the reason to that is sort of the sluggish transaction market where it takes more time today to monetize on the previous investments we have done by selling the project development units here. Total capital employed in RD, CD and IP end of the second quarter was close to 66 billion. If we look at funding, we continue to have a very robust financial position and low levels of external funding is needed and we also have a significant amount of available liquidity should this be needed. During the quarter, we also secured actually two new credit facilities and took up a small loan, nominated in euros and dollars here to further bolster the sort of liquid capacity of the company, but a very stable position here. Financial position, we closed the quarter with 57 billion in equity and adjusted net debt of 4.4 billion in cash. So there's a lot of staying power in this balance sheet to make sure that we don't have to be sort of forced out on the racetrack and selling properties too early here. But we do have the staying power we need to manage the transition to a better transaction market in a very responsible way for our shareholders. Anders, I'll hand back to you.