Skanska AB (publ)

Good morning and welcome to the presentation of Skanska's fourth quarter and year-end report for 2023. I'm Antonija Junelind, Senior Vice President Investor Relations here at Skanska and on stage today I have President and CEO Anders Danielsson and Group CFO Magnus Persson. Shortly, they will take you through a business and financial and market update. And after their initial presentation, we will have time for questions. You can ask your questions either if you are here in the room with us by raising your hand, or if you're watching, you can join the telephone conference. So with that short introduction, let's begin the presentation, Anders.

Thank you, Antonia. Good to see you all. Before we jump into the figures, I want you to look at this picture. It's the George Washington Bridge in New York. And it's one of the bridges that we have been on and off working for decades. And right now we are renovating the cables on this beautiful bridge. So let's go into the fourth quarter in 2023. If I start with construction, it's solid performance. We had operating margin of 4.4% in the quarter. And so that is really, really strong. And the order backlog is also on a historical high level, close to 230 billion Swedish dollars. On the property asset values were impacted by weak market. And a few weeks back, we communicated impairment charges of the market values of 2 billion in the isolated quarter. And therefore the return in the project development is on the negative side due to that. And also the return on equity is down to 5.8%. But we have continued to have a robust financial position very strong financial position, and we also have a proposed dividend of 5.5 crowns per share to the agm. later this year. And we also managed to reduce the carbon emission further during the year. So right now we are at 60% reduction compared to the baseline year of 2015. I will go into each and every stream now. Overall, I'll start with construction. The revenues... Pretty much flat, down in local currencies with 3%. We have order bookings on a healthy level. I would say strong order bookings overall, 44 billion, which gives us an order book to build of 103%. So we are in a healthy place, 230 billion, as I mentioned. And I think the order backlog right now is healthy, good quality in the order backlog. We have been able to continue to be selective and go for projects that we have a competitive advantage and also a solid profitable performance in the past. So that's a good place to be, of course. Operating income, 1.8 billion, which gives us an operating margin of 4.4 in the quarter. Solid performance continue in the construction stream. We have a good order intake, and the backlog remains high, and that's supported by a very strong market in the US, both when it comes to building or building operation and the civil market. The full year operating margin is 3.5%, which is in line with our target, and there is also Good. We have been on that level over time now for some years, and that is really impressed by the organization and what they are doing and holding up the margin here. Residential development, the revenue is increasing to 1.9 billion. We also increased the number of homes sold, but it's still on a low level historically. And we started some projects also in the fourth quarter. little bit less than we actually sold operate the margin income is negative here also impairment charges in the residential stream of 500 million Swedish. There was also communicated a few weeks back, which gives us a return on capital employed, which is also negative. So it is, even though it has increased somewhat in the quarter, we have lower than normal sales and it will take some, we expect it to take some time to the market to recover. And we're also working with the turnaround, the book look, we have taken a lot of action during the year and we have a, Reduce costs where we drawn for some geographies that were not sustainable in the long term. And we also reduced the number of employees in this operation. Central Europe is the exception here. Here we can see strong sales and a good market. So that is very encouraging. Also a market that we will expect to continue to be stable. Commercial property development, we have a negative operating income due to the charges we took in the fourth quarter. We have a gain on sale of close to 600 million. So the divestment we have made in the fourth quarter, they are on a good level. So that gives us a good future for that we are in the right places. We have good high quality product to offer the market for the future as well. 23 ongoing projects, which gives us 29 billion in investment upon completion. And we have started three projects in Q4. We are in a position where we can start projects when we think it's right, where we see we have the right product in the right location, and we believe in the market going forward. There is a very good competitive advantage, of course, to have that financial strength, and we are determined to keep that position. We have completed 22 projects, and those represent 9.5 billion in total investment. Of those, we have a leasing ratio of 74%. Four properties were divested, two external and two internally, to investment properties, very high quality building. And as I said, the external divestment we have made, they are on good level, one in the US and one in Sweden. And we have leased 63,000 square meters in the single quarter. And that is... an increase compared to the same quarter the year before. And we also, as you know, announced the largest lease ever in value in January now in U.S. Seattle. So that is also a positive sign in this segment. And finally, investment properties. Two properties were acquired in the fourth quarter. We had Stockholm 04 in April. close to Hammarby Sjöstad and also in conjunction with our previous project that we have transferred to investment properties. Very good location. And also Hyllje Terrass in Malmö. Very good location as well. And the future development area. And results were impacted by a reduction of fair market value here of 200 million. That was also part of the announcement we made a few weeks back. And the occupancy rate in the in the portfolio are at 91 percent, which is on a high level. So it's very high quality buildings, attractive for tenants, and it will create shareholder value for the future as well. So we're targeting high quality, sustainable office portfolio in the right location. And the target is to develop between 12 to 18 billion over some years. And we are on track and the strategy remains. I will jump back to construction and look into order bookings. Here you can see the order backlog over time, over some years. And you also can see the different lines. The yellow lines is the book to build on a rolling 12-month basis. We have the Green line is a revenue on a rolling 12, which is, you can see it's increasing over time, flattening out now in the last quarters. And you also can see the order bookings per quarter, which is, of course, varies a bit from quarter to quarter. But you can see the long-term trend there on the order bookings on a rolling 12, the gray line, a little bit hard to see. But again, the The order backlog, the blue bar here is on record level. You can also see that in the history. And if I go into each geography, it's a bit of variation here. We have overall in the Nordic 109%, mainly driven by a good civil market in Norway. So we have one very good order in the civil market. They are also performing on a very, very good level. We can see lower activity in Europe. I would say UK is quite one of the weaker market we have, and also Finland. Very strong market in the US, 110. percent of the book to build over rolling 1221 months of production in the backlog. So we are benefiting from our strong market there. So overall 103% and confident in that good quality. We have 18 months of production, which is on a healthy level if you look in the history as well. With that, I'll hand over to Magnus.

Thank you, Anders. So let's have a bit of a deeper look in the P&L for the different business streams. We start with construction. Revenues came in in the fourth quarter approximately 3% lower, both in local currencies and in Swedish kronos, than the same quarter last year. A good level of project profitability. We had a gross margin of 8.8%. It's a bit down from last year, but it has its sort of explanation. So we're at 8.8%. This is a good level. Maintain S&A, also here well under control, and with an operating margin of 4.4%. So this is a good quarter performance-wise, even if the comparable quarter looks higher than that. And as Anders already pointed out, if we take this, which we should always do and look over some longer time period, if we take a rolling 12 months measure, we are at 3.5%, which is what we have sort of guided for via our financial targets. So it's a solid performance from the construction business here. No meaningful one-offs in this results either in the quarter. This is sort of our base business that continues to produce and it's doing that in a really good way. If we look at the different geographies, we have the Nordics coming in at 4.5%. Same thing with Sweden then. And the comparable quarter here, we had some positive claims settlement in the fourth quarter last year, which explains some of the lower result in lower margin. in the Swedish operations compared to last year. But 4.5%, it's a good level, performing well. Europe, 1.2%. This is not what we would like to see. And essentially, we have two businesses folded in under the geographical segment that we call Europe here. One is the Central European operations that are performing really well. And then we have the UK operations. They've had a challenging quarter here, and the market is sort of weakening in the UK and this translates into a sort of lower margin in the quarter hitting the overall segment. US 5.5%, super strong, has been going at a very strong level for quite some time. Here we also have a good amount of order intake, margins are strong, performance looks really good, so it's a good mix and a good situation for the US part of the business. Residential development looks slightly different. Obviously, the quarter here is marked significantly by the asset impairments that we announced on the 10th of January then of 470 million. So that is taken straight into the quarter, leading us to recognize a loss for the quarter at the operating level of 502 million. And the main sort of part of the impairments is to be found in land assets and in Boklok. And if we sort of take out the impairments and say that these are land assets and we take out the Boklok operation and sort of isolate the other part, we still make a decent level of project profitability on the units we sell, which to us is really important. And it also shows that The issue we have now is more of a volume thing. We have an organization, have had on the average for the year, that is too big for the volumes that the market allow at the moment. And given that, and as was also highlighted in the quarterly report, we have taken quite a lot of measures to address the size of the organization here. So we have sort of an adequate organizational costume for what the market allows currently and for the near term future here. So we're taking actions on that. If we look at different geographies, obviously all geographies are impacted by the impairments. The biggest part is in the Nordics, but also in Europe, and a bit similar situation here actually as we had in the construction side. The central European residential development operations is actually performing really, really well. They have a good market, they're producing good profits, selling well and so on. You have a negative result here in the geographical segment for Europe in residential development. And all of that, you can say, and quite a lot more than only this 21 million, is attributed to impacts on the Boklok UK operation. Home started and sold. We're basically in balance, you can say, in the fourth quarter. Started 340 units, sold 384 units. So sort of a fairly good balance. They're selling a little bit more than what we start. And if we look on a slightly longer term, the situation is the same. We started this year 870 units, but sold approximately 1,100 units. So we're starting less than what we're selling. It's a very natural sort of development when the market weakens a bit. If you look on the chart, you see a green line and a blue line representing the rolling 12-month measures of starts and sold. And you can see on the rolling 12-month level, we are now selling then more than what we started. So this is us adjusting the portfolio, which we have been doing throughout the year to accommodate the new market circumstances. Homes in production, we had 4,300 units in production. And obviously, when you sort of start less than you sell and then you complete, this falls. And you can see the last few quarters, this has been dropping off quite quickly then. a sales rate of 52 percent obviously lower than what we would like it to be and when unsold completed now at the end of the year over 550 units approximately this is higher than what we would like but it's certainly within what we consider to be acceptable limits as the market is moving because when the market slows down and we are completing units still in a faster pace than what we can sell So we do expect this to come up some during the year and the important thing is of course to be in control of what units are being completed like this, how old are they getting and to make sure to put in enough sales supporting sort of measures so we don't have a problem there and that's not where we are today. We continue to have a big focus on this and we think it's sort of development of this follows a very natural development cycle of a business when the market moves like it does today. If we go into commercial property development, same thing here, obviously the impairments that were announced on January 10 of 1.4 billion completely marked the quarter result wise. We recognize a loss of 930 million. in the isolated quarter. Underlying that, we also sold, as Anders already said, four properties, here booking a gain of sale of 600 million in the quarter there. And the main, if you didn't read sort of the press release on Jan 10th, I think it's good to point out that the main impact of the impairments are to be found in the US part of the commercial development operation, because that is where the divestment market and also the leasing market is the weakest at the moment. Unrealized and realized gains. We closed 2023 with an assessment that we have around four and a half billion in unrealized gains in the CD portfolio down then from from the third quarter with around 1.6 billion. In this change of 1.6 billion, there are some puts and takes because we started some projects, we sold off some other projects, but we also made a fairly large change in these values in the sort of quarterly valuation exercise that you saw that we released on January 10th then again. So in total here, we come down and we exit the the fourth quarter with four and a half billion in expected unrealized gains. This is the completion profile of the portfolio. And just to remind you, we have at the end of the quarter 22 properties that are completed and unsold. We have invested 9.5 billion in these properties. And furthest to the left of the chart, you can also see with the green dot that they are leased to 74% on the average. It's a good level of leasing. in these properties and they are generating a good income but they are not sold yet then if you track to the right you can see all the properties that are not yet completed and each quarter shows the amount of expected completion in terms of total investment by quarter here So in the first quarter this year, 2024, we expect to complete properties for an investment value of around 2 billion, and then slightly less than that in the second quarter, and quite a lot in the third quarter this year. In that, we have a number of US projects that are expected to be completed, and these projects are normally larger. and which makes this bar be quite high. So it's around 11 billion of investment value that we expect to complete there. If you look at the leasing rates here, 48% for the properties that we think we will complete in Q1, then we have 70% for what we expect to complete in the second quarter, 18% for what we expect to complete in the third quarter. Now, Anders already brought it up, and a few days back we released or announced one of the largest, actually the largest lease ever in Skanska's history in nominal terms. which is in one of these properties in the northwestern part of the US, a city called Seattle, that will bring this up substantially, up to over 50%. So while leasing is slow, when you have sort of class A properties that are brand new with the highest level of amenities, customers are really interested in that. But it is a slow market, and we have to invest a lot more time today to find and sign the leases. And here we come to Lisa Stan. You recognize this short since before we leased just above 60,000 square meters in the quarter. And we are now on a rolling 12 months basis around just shy of 200,000. square meters leased. So leasing is starting to turn up a little bit. And if we look on the different markets, very little has, in a sense, changed comparatively speaking, because the best leasing market today is the Central European one. Following that, the Nordics and the sort of slowest market remains to be the US market. investment properties we made changes in the fair value assessment of these properties of 165 million in the isolated quarter obviously then impacting the result to minus 129 million the operating net though remains at a good level of 42 million in the isolated quarter In Q4 we also transacted two new properties, one in the Stockholm area and one in Malmö in the southern parts of Sweden from the commercial development business stream into investment properties to an approximate value of one and a half billion. Properties are well leased. And of course, with a 91% leasing, there's not a whole lot of square meters to offer the market. But what we offer is, of course, of high interest there. So good start still of this business dream, and we continue to build it up in the coming years. If you look on the group on a consolidated level, we just went through the business streams and then we have what we call the central stream containing legacy operations and the headquarter organization. Normally this is we record a cost here. This quarter we record a fairly significant profit of 607 million. The reason for that is that we late in Q4 divested our ownership share in the joint venture that owns LaGuardia Airport. and booked from that a gain on divestment of close to 800 million that is recorded in the central stream here. All the other items that you will find in the central stream is essentially at same levels as before, so nothing you need to sort of bring with you to understand the development of the group here. Operating income, 957. Net financials, fairly uneventful in a sense. Not a lot has happened there. Taxes, 110 million at 10%, seems quite low. And the reason for that are sort of the mix effects over different tax jurisdictions with different nominal tax rates and how that mix is impacted when we have significant impairments in the US, which is a high tax environment for us. So then we have this effect there. There's nothing else that sort of structural nature that you need to recall and bring with you when you assess the company. So it's a one-off impact like that. Taking us down then to a profit for the period at the bottom line of a billion and 2.48 Swedish kronors per share. Cash flow, we had a very strong cash flow in the fourth quarter of 4.8 billion, driven to a large extent by us net divesting in the properties, and also good cash inflow from networking capital, which is quite usual in the fourth quarter, as many public clients sort of settle early in the fourth quarter. So there was a positive impact there, and you can see that the cash flow curve was so with the blue bar furthest to your right shows a sort of a very good cash flow in the fourth quarter. And if we look at the working capital in construction, here you can see the effect I was just talking to you about. The dark blue bars represent the fourth quarter, and they are normally sort of a bit of an uptick from the previous three quarters, as we have this effect there. In a slightly longer perspective, you can track our key KPI here, which is working capital over revenue, marked by the green line in the chart. And you can see that it has sort of slowly been decreasing to some extent. following in a sense that the change in the external environment that money is starting to be associated with the cost. So even our clients, we need to negotiate a little bit more with them to achieve the front-loaded payment plans that we prefer. Investments and divestments, we had a good divestment quarter, as you can see in the chart, and capital employed in the property operations, both the investment properties and the product development parts, totaled around 60 billion at the end of quarter. We had a very significant liquidity position at our disposal going out of 2023 close to 28 billion of which around 10 billion then is connected to undrawn or unused credit facilities so very well positioned in terms of liquidity and of the central funding that we have taken up around half of that is from the credit markets half of it are in form of bank loans you can see on the on the slide here also the maturity structure that we have over the drawn down funds which is a well-balanced maturity structure over the years to come here So we feel very confident about our liquidity situation in that sense, which is very important. We are a big property developer becoming a big property owner, and we have a bit weakish sort of divestment markets here. So this is important to us. And if we look at the overall financial position, we closed the year with 56 billion in equity, 56.3 to be exact, and a net cash position of 9 billion, and just a net cash stand of 10.4 billion. So we remain with a very solid financial position taking us into 2024. Something that gives comfort to clients that we discuss with. They know that we will be around. We will not be forced to make sort of rash decisions for any financial reason. And it also gives us the nice position to be and to own our own decisions at any given point in time. We can really make the decisions based on what is best for the company from a commercial point of view, instead of having to cover for sort of a financial position. So very good position to be in.