Skanska AB (publ)

Good morning and a warm welcome to the presentation of Skanska's fourth quarter report for 2024. I'm Antonija Ljubnerlind, I'm the senior vice president for Skanska's investor relations and here on stage in our studio in Stockholm today is our president and CEO Anders Danielsson and acting CFO responsible for the year-end report Pontus Winqvist. Shortly, they will take you through an update in relation to business performance, financials and the market outlook. And after the initial presentation, we will move over to your questions. If you're watching us online, then I encourage you to join our HD audio link and use the telephone conference number to ask questions. You can follow the instructions by the operator there. But we will get back to you when we're opening for a Q&A. So with that short introduction, I will hand over to you, Anders.

Thank you, Antonia. Before we go into the report, I want you to look at the picture here to the right. It's a project that we're building. It's a new railway connection between New Jersey and Manhattan. And you can see here the bridge arches that is actually prefabricated upstate New York and then taken down by the Hudson River to the site and assembled on site. Great project. If I summarize the fourth quarter, it's a strong, strong quarter. We had a strong performance in the construction stream. We have a record high order backlog, and we also see some gradual improvement in the project development, which is encouraging. Growing the investment property portfolio also in the fourth quarter. Operating margin in construction, 4.5% in the fourth quarter and compared to 4.4 last year. And if you look at the full year, we have a 3.5% operating margin, which is in line with our target. So strong performance. Return on capital employed in product development. That includes residential and commercial. It's 2.6% on a rolling 12. Not at our target level, but improving. Return on capital employed in investment properties, 4.6%. Here we have a target of 6%, so also there we are improving on a rolling 12. Return on equity, 10% on a rolling 12. And we maintain the robust financial position, which is extremely important. That's also a competitive advantage for us. The board has proposed a dividend of eight crowns per share. And we also are in line with our target of reducing carbon emission. And now we have reduced it with 61% compared to the baseline year 2015. So if I go into each stream, starting with construction, we increased the revenue in the quarter, and we have very strong order bookings. So we have a book to build 123% on a rolling 12, which is really strong and giving us a record high order backlog of 285 billion Swedish. Operating income over 2 billion, also a good increase here. Again, the operating margin 4.5. And we can see that it is a strong delivery in all markets. And overall, on a 12-month basis, we are in line with our target. Move over to residential development. Also here, we can see increased revenue since we are selling more apartments, more homes, and we also started more homes, which we have set a couple of quarters now that this is a priority for us to be able to gain profit in the future as well from this. and we are well positioned we have an operating income of just 200 million swedish giving us a rose of 1.6 percent in rolling 12. we continue to see a stable market in central europe that has been stable for for for some time now which is good but and we also see gradually improving in the Nordics, but from low levels, and we expect it to take some time before we're coming back to normal levels. We're starting projects in all home markets, also important, and we can see that we have an operating margin of 8%, a bit below our target of 10%, but encouraging to see that we're holding up the profitability here. Commercial property development, operating income over 300 million in the quarter. We have a gain on sale of 561 million. Return on capital employed of 3%, rolling 12. And we have 15 ongoing projects, which correspond to just over 20 billion in total investment upon completion. We have 24 completed projects corresponding to almost 13 billion in total investment. Of those, we have a 65% lease ratio. We're coming back to that. Five projects, we have divested five projects in the quarter, one internally to our investment property portfolio and the rest externally. And we're also starting, we have said that earlier, we prioritize starting projects. We've started three projects in Finland, Sweden and Hungary during the fourth quarter. Moving on to investment properties. Here we have a stable operating income of 74 million in the quarter and the leasing ratio in the current portfolio, 87%. We added one project property OAS in Malmö. So now we have seven projects all together in the portfolio with a value of 8.2 billion. I'm coming back now to construction, moving into order bookings. Here you can see the order bookings trends over five years. And as you can see, the blue bar is the order backlog, which is on record high level and really strong order intake here. You can see the grey line, the order bookings on the rolling 12 months basis that the last few years in upwards trend. So that's going on. We can go into the each geography as well. On the next slide, here you see overall 123% book-to-build, very strong. And also overall, 93% in the Nordics, just over 100 in Sweden. Also Europe has picked up. You can see we actually increased it somewhat compared to the year before. So overall, very good position. It's extremely high, of course, in the US, 152%, which gives us 24 months of production. But you should also remember that the US order backlog has a longer duration now than we have seen before, and also longer duration compared to the European one, the Nordic and Europe, but strong overall. With that I hand over to Pontus to give us some more.

Thank you Anders. Then, starting with construction, as you can see, we had a revenue in the fourth quarter of 47 billion compared to 41.6 the same quarter last year. That's an increase with 13%, and of those 13%, 1% is related to currency. For the full year, revenue increased by 5% in both local currencies and in Swedish kronor. Operating income then increased in the fourth quarter to 2.1 billion and increased by 15% compared to the fourth quarter last year. And as Anders said earlier, this results in an operating margin of 4.5% for the quarter and 3.5% for the full year, which is in line with our financial targets. Looking then into the different geographies, you can see that we in the fourth quarter actually had an operating margin that's well above 4%. And you can also see that the operating income in all geographies are increasing compared to the fourth quarter last year. So strong delivery from our construction business. Going then into residential development, here you can also see that there is quite an increase of the revenue. It's 30% compared to last year. And that we are increasing our sales, of course, is a result of that. You can also see that the S&A percentage has come down quite a lot. It's now on 5.7%, and that is, of course, a result of that. We have been working with adjusting the business to have a good level or a good organization, but that also is ready to ramp up when we are continuing to start more projects going forward. Regarding the result here, it's impacted of operational losses from Boklok of 60 million, but it also impacted of release of provisions of around the same amount, and those release are spread on the different geographies. So they take out each other, so the underlying 8% is quite representative for the business right now. And if you look into the different geographies, you can see that it is a small negative in Sweden, but that's impacted then of Boklok. Also then, both the Nordics and Europe has an impact of Boklok. And then, as I said, you have the release of provisions that spread around in the geographies. and a blended margin then of 8% for the residential business. Going into the homes started and sold, you can see that we are actually increasing both when it comes to started and sold. We have started projects in the fourth quarter in all geographies, And we sold 573 homes then in the fourth quarter. The market, it has improved, but it's still not good. It's slightly on an improving basis, but we are not where we would like to be long-term yet. Looking then into the number of homes in production, so you can see that we are on the same level as we were in the fourth quarter, but we have completed a number of homes, but also then, as I said earlier, started new projects in all our geographies. Regarding the sales rate, we have a sales rate of 52%, and also that is the same level as we had by the close of Q3. Going then into commercial development, or commercial property development, you can see here that we have a revenue of 3.5 billion, or 3.6 actually. We divested five projects, of which one was internal. Of the divestment value of 3.3 billion, we had 561 million in gains. A part of that gain is coming from release of provisions from older divested projects. So basically, it's risk that has disappeared from those projects and that we have released during the fourth quarter. So don't expect the 561 to be representative for what we have in the portfolio. Looking into the unrealized gains then of the existing portfolio, here you can see that the top of the bar there in Q4, which is represented the completed, has decreased somewhat, and that is since we have divested properties during the fourth quarter, then we have added on the light blue part, which is then the ongoing properties that has been added on here. Because we have started. This quite busy slide is then showing the completion profile of our unsold properties or unsold projects. And you can see in the fourth quarter where it has actually increased since the third quarter because we have then during the fourth quarter completed a couple of projects, which also has an impact of the the leasing ratio in those projects, which has gone down from 75 to 65%, because we have sold projects with higher leasing ratio compared to the new added project in the portfolio that has somewhat lower leasing ratio. Yes. looking then into the leasing ratio. So you can see that we have continued to have a stable leasing ratio. 50 or 64% is the leasing ratio. And you can also see that there is a decline in the completion ratio because we have than starting new projects, which then takes down the completion ratio in the portfolio. But we keep the occupancy rate higher than the completion rate. IP then, investment properties. stable delivery, but it is also, of course, a stable business. We have added on one project that was divested from CD into IP during the quarter, OAS, in Malmö. And we are delivering an operating income on the same level as we did in the fourth quarter of 74 billion. You can also see then that we have a good occupancy rate in this portfolio of 87%. So for the full group then, you see that we had an operating income of 2.7 billion. Just looking into the fourth quarter last year, it's worth to remember that that quarter was impacted of write-downs in the property portfolio and also the divestment of the LaGuardia project coming from asset management. Then we are delivering 2.7 billion in operating income. We have a tax of 647 million, which represents 22% in the quarter and 25% for the full year. You might remember that we had a little bit of a higher tax rate in the third quarter. But now I would say this is quite representative for the business that we have right now, which means less profits coming out from tax-free property divestment and a higher proportion of profits coming in from the US business, where we still, I would say still, have a higher tax rate than the other parts of the business. Cash flow. We had a strong cash flow in the fourth quarter, operating cash flow of 5.1 billion. This is then coming from continued strong cash delivery within the working capital from construction. Added to that, we have divested more than we have invested. So those two parts are continuing in the fourth quarter to deliver a strong cash situation. Going then into the free working capital, you can see here that we have 34.5 billion in free working capital. I would say that that is a record high level in absolute terms. It's an increase from 31 billion in the third quarter. We have the currency effect in this. You can say of that increase, around 1.3 is currencies, because a lot of the free working capital then is coming from the US business, and the development in the fourth quarter was weak, or the Swedish krona was weak. Also, the relative ratio here, 17.5% compared to 17.4% free working capital compared to the revenue, is strong. And I think I said in the third quarter that we had a lot of mobilization payments, etc., that was contributing to the strong cash flow in the third quarter. That's true. But in the fourth quarter, then, we have also had quite a lot of, you can say, to early payments from a number of clients, which boosted the cash flow here or the working capital in the fourth quarter. So I don't think we shall expect this amount of 34.5 billion to continue in the first and the second quarter. investments and divestments. And as I said earlier here, you can see that we have had a net divestment situation during the last quarter. And... Going forward, I think that we are starting more projects, both in CD and RD, so we shall expect that investment pace is increasing somewhat. And when it comes to the divestments, they tend to be a little bit bumpy, so it might differ between the different quarters when those are coming. Of course, this strong cash flow also impacts the liquidity situation. So we have an increase here since the third quarter of almost 5 billion in liquidity. We say that we have available funds of 28.6 billion and we also have quite a good maturity profile of our outstanding debt. So the liquidity seems to be in good shape. Going then into the financial position and of course this cash flow then has contributed to an improved and strong financial position where our net financial receivable has increased from 6.5 billion in the third quarter to 12 billion by the closing of the fourth quarter so you can see even if the if the assets has increased also the equity are increasing so we have a stable equity to asset ratio here of above 36 percent So by that, I leave it to you Anders to talk a little bit about the market. Yes.

So we'll go over the market outlook, starting with construction. We can see a continuous strong market in the US, both when it comes to civil and our building operation. We are located in the right geographies and in the right segments. So we believe it will continue to be strong. We see a stable market in civil in Europe, most of the countries. And we changed a couple of indicators here. We improved the outlook for Finland somewhat. We can see more projects coming out now in the coming year. And also somewhat fewer projects in Norway, which has been a strong civil market for some time, but it's still stable. So overall a stable civil market. somewhat will continue to be unchanged week for the rest of Europe when it comes to building. And residential development, also the overall weak market outlook in the Nordics. Having said that, we have seen some improvements, but we believe it will take some time before we are back on normal levels here in Europe. Of course, the interest rates cut helps the market, and we do see an underlying need for apartments in the Nordics. The central European market, the resi market, is continuing to be stable, and we are operating mainly in Poland and Czech Republic, and it's good places for us to be in. Commercial property development, we see transaction market is coming back somewhat in Europe. You could see our divestment here lagging a bit in the US due to the interest rate situation there. But the occupier market, the leasing market is stable in Europe and also improving in the US. So that's encouraging. More and more large companies requiring their employees to come back to office five days a week, and that also helps us. But it is a polarized market. And flight to quality is really clear. And that's exactly the type of product we can offer the market. So that's beneficial for us. Investment properties, we believe it will be a stable market. Also here, a polarized occupier market. Our contracts goes to where we have a really high quality in the good locations, which we have. And rents are expected to be stable in investment properties. To sum up this presentation, there is a strong performance for the group. Construction have a really good quarter this time as well and record high order backlog and gradual improvement of the transaction market for product development. and we continue to grow the investment properties as planned we will continue to do that and we're maintaining a robust financial position and the board again has proposed a dividend of eight crowns per share so with that i hand over to antonia to open up the q a

Thank you, Anders. Yes, so now we will open up for your questions. And as I mentioned before, if you're watching us online, then please use the HD audio link or the provided telephone conference number and the operator will provide you with detailed instructions and put you through to us here in the studio. And if you are joining us here in Stockholm, then I will ask you to just please raise your hand and we will bring a microphone so that we can hear your question very well. And I will start by asking you to then state your name and organization. And we have a question here in the front.

Stefan Andersson, Danske Bank. First a question on the order intake. Looking at what you've announced already in Q1, I think it's 12.5 billion. Looking back, the average is 1.2, 1.5, so it's 10 times the size. Is that just a coincidence temporarily, or has it been that strong entering 2025?

If you look at 2024, the majority of the order intake is in the US. We have larger projects in the US. I would say the market continues to be strong, definitely.

And then on construction as well, looking at the margins, just taking it year on year, the U.S. is down a little bit and Sweden is up a little bit. And looking at what PEAB said, they said they see a little bit of pressure in Sweden. So one question is, Do you see pressure in the Nordics on the tendering? And then secondly, in the US, is there an effect of you ramping up projects and being cautious in profit-taking in the beginning? Or is that a misunderstanding from my side?

If I start with Sweden, I would say the infrastructure is a stable market, so we don't see any changes in the pressure really in Sweden. If you go to the US, if you look at the profit takeout that we have, so of course, when we are starting up projects, large projects, we are a bit conservative in the early days of the project. That's how we work, and you can see it also in the trend.

I know you want us to keep it short with maximum three, so I'll take the last one as well. Capacity wise, I mean, you have had a phenomenal order intake in the US. You have 24 months of production there. Could you maybe elaborate on your ability to take on more in that market?

We are very careful before we even bid for a project that we should have the right team in place and we should have also the right suppliers and securing that and we do have that but as I said earlier it's a long duration of the 24 months so we still have We still have capacity and we're going for a project, but we are selective. I can say that. We are selective. We're going for a project where we see that we have a competitive advantage. We have the right team in place so we can secure a good margin.

Thank you. Very good. So then we'll move over to the online audience. Operator, can you please introduce the next caller?

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the queue, you press star and two. Anyone with a question may press star and one at this time. The first question comes from the line of Srivantur Kivam from SEB. Please go ahead.

Yes, thank you and good morning. I have a couple of questions. First of all, this provisions that you have in RD, first of all, would you say that these types of provisions are something that could be reoccurring or is it just a specific item for Q4?

Hi. Yes, I would say that those are not reoccurring. So there have been some release of provision because we were forecasting or were afraid of a somewhat poorer market than it actually was. So then it was possibility to release those in the fourth quarter. But don't expect that to continue to happen.

Yes, and also a follow-up question on that, because you mentioned that the underlying margin, which is representative is about 8% for But could you maybe give some type of outlook on the boklok, which continues to incur losses this quarter?

Yeah, when it comes to those losses, it's mostly related to that the boklok business will be transferred into the Swedish business. And of course, there are costs connected to that transfer. then we won't run a business that is not contributing to the result long term so but from this year it will be embedded in the swedish rd business so we won't see book look anymore from a report perspective okay good

I also have another question on these provisions, because in CED you have these gains, which is 561 million in the quarter. What is the adjusted divestment gain if you exclude these provisions?

I would say that you could calculate on that. The underlying gain or divestment gain is Low double-digit percentage.

Okay. And also a question on the central eliminations, which seem to be quite low on both revenue and then you also have some type of 89 million positive impact also. Could you clarify what types of one of items there might be in the central eliminations? What can we say about going forward?

Now, I guess you are referring to the 89 million. It's not a one-off effect. It is a one-off effect this quarter, but it could happen other quarter. And that's related to... It's complicated. It's when we have higher... higher cap from the beginning capitalized more interest than we have costs of interest then we have to take that over capitalization to reduce that and that happened last year and book a depth on that and then one year later we have to release that so you can say in the case that we were capitalizing more from the beginning than we had in in interest rate costs then that will happen i can say that this is not likely to happen during this year so it it needs to be certain circumstances before that is happening and We don't see it will happen during this year, so treat it as a one-off in eliminations.

Just one final question here, because you state that you will have 3.1 billion in cash flows in H1 from handovers in CD. Could you say anything about investments? Should we expect net divestment cash flow in H1, or do you plan to increase investments?

As I said earlier, we are planning to increase investments both in RD and CD. When it comes to divestments, it's harder to predict when they will come. So therefore, it can be quarters with net investments, but it can be other quarters with net divestments. But the investment pace will increase.

Okay, good. Thank you. Those were my questions.

The next question comes from the line of Graham Hunt from Jefferies. Please go ahead.

Thank you very much. I'll go one by one. I just have three questions. Firstly, could I ask about how you're thinking about investment from here in terms of the types of assets you're looking to develop over your next investment cycle? Our commercial office space is still an area you want to invest in. What would be the alternatives that you're considering or that we could see go into the portfolio over the next few years?

Yeah, Graham, I can take that. In the commercial development operation, we continue to believe in the office market long term, and we have seen that we have made good divestment of those, especially in Europe and Nordics. But we also have said that we will try to diversify the portfolio somewhat. We are looking into life science, for example, in parts of the US. We also have started some multi-houses for residential for rental use, and that's also a good market. So I expect the market to be somewhat more diversified going forward.

Thanks. And then second question, just on data centers, we've heard a lot about this topic in the market of late, and we did see in your order intake data center orders pick up into the end of 2024. Could you just remind us what your backlog exposure is there and how you see yourself positioned, particularly in the U.S., for this market going forward?

We are well positioned when it comes to that segment in the market, especially in the US, where we see the strongest activity. And we have a good organization. We have multiple clients, repeat clients that want to build out. We see a strong pipeline. But also, we are strong in other segments as well. We are in more traditional infrastructure, for example, roads and railways and so on. We're also strong when it comes to schools, hospitals, university airports and so on. So we are in the right places, but it's a very attractive segment, the data centers, and we expect it to continue over time.

Got it. And last question, just on your outlook. I know that the UK is in your biggest market, but Interested to hear what your take is there and to see that you still see it as weak despite, I mean, we hear a lot of positive noises from the UK government. So just trying to understand a little bit about your caution there.

Yes, of course. It's for us an important market, one of our important home markets, and we believe in the market more long term. But we have seen some lack of pipeline for some time. It's really encouraging to hear the government wants to invest more in infrastructure. And we are strong. We have a strong organization. But we believe it will take some time before we see those projects materialize. So our outlook is 12 months ahead. And it takes, in my experience, it takes some more time before we really can start those projects.

Got it. Understood. Thank you very much.

The next question comes from the line of Simon Mortensen from DMB Markets. Please go ahead.

Hi, thank you. And congratulations with a great result. I think I'll follow up on the previous questions. And the market outlook, you have residential development and commercial development with a negative arrow unchanged from last quarter. But at the same time, you're saying you want to increase the investments in both commercial development and residential development. with some footnotes on the weak rental markets, etc. But could you please give us the rationale for why you want to ramp things up, given that you have this market outlook, and what kind of exposures and geographies you then will be most active in, given the current market outlook you just presented?

Yeah, of course. I can take it stream by stream and start with residential. What we have seen now, the central European market has been stable. So we have good sales in the European, good profit, profitability as well, good return. So there, of course, we focus on starting projects in that market, and we have done so. But we also see an uptick in the sales in the Nordic market. And if you look at a couple of years back, we haven't started so much projects. So we have started less projects than we have been able to sell. So now it's natural for us to pick up that so we can be... Our ambition is to be in balance there, how much we sell and how much we start. So that's why we're saying we're going to prioritize to be selective in our stocks. On the commercial property development, we have started three new projects in the quarter, but that is in Europe and in the Nordics. And there we can see the transaction market has improved. We have been able to divest projects. We are focusing on lowering the sort of the land back somewhat and prioritizing which market we are in. But in the prioritized market, we want to start projects so we can gain from it in the future as well. So that is the rationale of that.

And just to add on that, that we are not starting any project where we don't have the right financial fundamentals. So, I mean, that's always a must in order to start, that the financials are the right, that they are delivering according to our targets.

Okay, thank you. And that was kind of my biggest concern. You don't start if you started because you needed the work, but you clearly don't in the backlog. But another question in commercial development, we see the letting degrees complete the letting ratio dropping a bit back. And we see a negative net letting actually in your investment properties division as a small division, but given what we read about the market locally, could you please give us a bit of flavoring on the net letting situation as you experience it, especially also in the Nordics?

If we start with the IP, yes, you are right that there is a small decrease in the occupancy rate there. But that is because there have been a number of small tenants that are under renegotiation. We don't know exactly what will happen with those. And then we have added one property with slightly lower leasing ratio. So I don't think it's any drama at all when it comes to IP. When you take the entire CD portfolio, we have leased 55 000 square meter during the quarter so i think there we are continuing to to delivering but if you look into the completed portfolio within the the cd portfolio there was of course a couple of divestments of high leased properties while while a couple of not as high leased properties went into the completed part

Okay, thank you. My question is for this time.

Okay, very good. So operator, can you just update me here? I had one more person in the queue and that disappeared. Do we have anyone queuing to ask questions now?

Yes, we have a question from Lehman Arnold from Bank of America. Please go ahead. Good.

Thank you very much. Good morning, everybody. A couple of questions on my side. Coming back on the construction business in particular in the U.S. We've heard a lot of noise with the new administration and also sometimes disruption to payment of subcontractors. So I guess the first question is, have you seen any disruption on your side in terms of the public federal projects in terms of the way you are paid or the way the contracts are made? And do you see a risk that in the future, future contracts might be maybe less favorable for private companies working with the federal government? That's my first question, please.

No, we haven't seen any of that. We have a very stable operation. We have good contracts with the repeat clients in the US on the public side. We don't see any trend downwards when it comes to the pipeline either. It continues to be strong and stable.

Okay, thank you for that. And my second question is on commercial development. You highlighted that there was a few provisions in Q4. What would be the, let's say, normalized development margins for future projects that you might be selling? Are you saying that, let's say, low double digit is a new normal for commercial development or at least for 2025 in terms of what you might be able to sell?

I can start with that one. We have a target of the return. The return should be at least 10% on the capital we employed. We haven't changed that target. So coming back to a previous question, we will start projects selectively where we see we have the business case in place. So we haven't changed our target here. But we don't give any forecast either.

Fair enough. Thank you very much.

Ladies and gentlemen, there are no more questions at this time. I would now like to turn the conference back over to Antonia Drouinin for any closing remarks.

Fantastic. Thank you very much. So this means that we've answered all of your questions. Then I want to take the opportunity to say thank you Anders and Pontus for your presentations and your answers here today. And thank you to all of you that joined us here in the studio for this live event. And lastly, thanks to those of you that have been watching. A recorded version of this broadcast will be available on our webpage later today. And we will be back with more comments after the release of our Q1 report in May. Thank you. Have a lovely day.