Skanska AB (publ)

Hey, everyone. This is Andre Lofgren, Senior Vice President, Investor Relations speaking, and I would like to welcome you to the presentation of Skanska's year-end report for 2020.

And the presentation will be held as usual by our CEO, Anders Danielsson; and also our CFO, Magnus Persson. And after the presentation, you will be able to ask questions.

And with that, I leave it to you, Anders.

Thank you, Andre. If you look at the first slide here, you can see the project in Seattle, 2+U, which we divested here in the fourth quarter with a very high profit.

So go on to the year-end report, next slide. Overall, Skanska delivered record high profit, the highest ever in our history.

And the earnings per share was SEK22.46 per share. And we also managed to increase the margin in Construction.

We'll go into that in detail later here. And return on capital employed, way above our target of 10% in Project Development.

That goes for both Residential Development and Commercial Development. And return on equity, 26%.

I think you should compare that to our target of 18%. So solid performance and also solid improvements.

And Construction steadily improving despite the COVID. So our employees have been able to, in a safe way, keep our projects up and running, and that's very impressive.

Residential Development came back really strong here after the summer, in the third and fourth quarter. So volumes are very strong and also profitability is solid.

Commercial Property Development, we have a record high divestment gain, the highest ever here as well. And we have a strong cash flow, very strong financial position.

And we have -- the Board has proposed a dividend of total SEK9.5 per share, and that includes SEK6.5 in ordinary dividend and extra dividend of SEK3 per share. In Construction, we have decreased revenue, 10%, if you look at the local currency.

And -- but we have been good in -- with the cost control here. So we have been able to keep up the margin and even improve them.

Order bookings, close to SEK150 billion for the year and a book-to-build of 107%. And actually, in the last quarter, we had 117% book-to-build.

So we have a healthy backlog. We'll come back to the detail later here.

And as I said, operating margin for Construction, 2.5%. The last quarter was 3.3%.

So improving despite the COVID and the pandemic that hit us last year. Solid performance overall.

Our U.S. operation continued to improve the profitability.

Here in the Construction stream, our strategy remains. We are selective in bidding.

We improved the commercial focus in our projects and also continue to have cost efficiency and strategic action remains, focusing in the U.K. operation, adapting to lower volumes in Central Europe due to the market.

And also additional measures have taken place here in parts of the Swedish operations to improve that going forward. If we go to Residential Development, revenue increased for the year.

We were also able to increase both the sold homes and also the started homes for the full year. And here, we could see that the rental homes increased the most.

Operating income SEK1.5 billion and we have operating margin of 11.8%. Here, we have a target of 10%, so it's above the target there.

And return on capital employed 12.8%. Also here, above our target.

And we managed to maintain good profitability and return levels. And we also started our first BoKlok project in the U.K., and our ambition here, as we talked about earlier, is to ramp up that business.

It has been well received, and we're starting to build land bank area and our ambition is to start more projects going forward. And overall, we have a strong land bank in our market.

So we have a good land bank at the right location and we have the financial strength to start new projects, which we will do. And in the longer term, of course, if we see higher unemployment level, that's a concern.

But the structural shortage of home, that goes for all our markets. Let's go into the Commercial Property Development.

Operating income SEK3.9 billion. And the gain on sale, again, record high, SEK4.75 billion.

And return on capital employed 11.9%, above our target. And today, we have 31 ongoing projects, which corresponds to SEK17.4 billion upon completion.

The occupancy rate and the completion rate is in a balanced way. You should always strive for having those in balance, which they are.

And they are also on a good level, so we can start new projects there. And in 2020, we started 10 new projects in the Commercial Property Development.

The leasing has been a challenge during the year. It has been slow or the market for leasing has been due to the -- has been slow due to the tenants -- potential tenants are hesitating before they sign the contract.

And it's also a challenge in some of the markets where they have been heavily locked down. It's a challenge to even show the potential tenants the facilities.

So that's a fact, and I think that will remain during the pandemic. But we still have a good dialogue with tenants.

So it's -- and that has been the case in the third and fourth quarter. So there is still demand for our facilities, that's clear.

And we can also see a solid appetite from investors and they look for high-quality, environmental-friendly facilities and offices. And one proof of that is, of course, the divestment we made in the fourth quarter in Seattle.

If I go into the order situation in Construction, you see here that we have, overall, a book-to-build of 107%. You can also see that the revenue is down 12%, 10% in local currencies.

And the order booking has actually increased during the year, and we have an order backlog of close to SEK180 billion, which is on a good level. We can go into the next slide and see the details of the order bookings.

The Nordics, overall, 106% book-to-build. We have 14 months of production there, good position.

Europe, very high order bookings for the year. We have a book-to-build 166% and 20 months of production, of course the high speed 2 project in the U.K.

earlier last year is part of this. And in the U.S., somewhat slower order bookings.

But on the other hand, if you look at the months of production 17, we are still in a good place there. So overall, I'm I think confident that we have a stable and solid order backlog.

And I also think that, today, the order backlog, we are in a better place. It's more stable.

It's not shaky in the project overall. And that's good for the future, of course.

With that, I'll leave it to Magnus to go through the details.

Thank you, Anders. If we move to the next slide, which is the income statement from Construction, you can see the revenues, as Anders pointed out, is down 12% year-over-year in Swedish krona, so slightly less down in local currencies.

Fourth quarter revenues were down 19% in Swedish krona. And of course, we started the year -- we came into the year of 2020 with a higher burn rate, and so then they're sort of lower and the average is then 12%.

We have a good order backlog and we booked good amount of work during the year, which is, of course, very positive, given that we're still in the middle of a pandemic and the market is a bit uncertain in that sense. Gross margin 6.7%.

I'm glad to see it's moving in the right direction. And of course, all the efforts we have taken is moving it over there.

Looking at the fourth quarter, isolated, we were at a stable 7.5%. So that's a -- very good to see that.

We managed to maintain our sales and administrative expenses, as you can see at 4.2% over the year. Same number also in the fourth quarter.

And we have been working very hard with the cost structure throughout the Construction operation. And I think this is also evident when you witness and you can see the revenue decline, and the fact that we're still maintaining the overhead in relation to revenue here at the same level.

Operating margin then comes up, 2.5% compared to 2.4% in the last year. And in the quarter isolated, 3.3%, which is the right level and we're moving slowly according to the profitability improvement plan we had.

I should also say here, when you look at the results and compare it with last year, we had a couple of fairly large one-off impacts, one in the Norwegian operations of around SEK200 million positive and then we had a goodwill write-down in the U.K. operations in the fourth quarter last year.

If we go to the next slide, we can look at the distribution of the operating income and the resulting margin over the different geographies then. Starting with the Nordics, we delivered 3.6% operating margin, down from 3.9%.

And of course, if you want to make a fair comparison here, you need to take into account the positive impact we had in 2019 from the one-off in the Norwegian operations then. Sweden, 3.2% versus 3.8%.

Obviously, this is not a profitability level that we are satisfied with. In quarter isolated, 3.3%.

It's still the same areas that we are working with, as we have reported on before, which is the Residential Construction business in the Stockholm area and our Industrial operations. We have taken a lot of actions to come to terms with these matters.

Unfortunately, the resulting profitability improvement have taken a longer time than our original ambition to materialize there. If we look at the European part of the business, we see 1.3% operating margin for the full year, 2.5% in the fourth quarter, isolated, which is better than the 0.2% last year.

And also here, you need to recall that last year we had a write-down of goodwill in the U.K., if you want to make comparisons here. You can look at the U.S.

operations, 2% operating margin versus 1.5%, and in the fourth quarter 2.7%. So very clear here that this operation is definitely moving in the right direction after all the measures that we have taken.

Part of it is sort of a solid underlying improvement of the works we are taking in and the risk profile of those jobs, and also the fact that we are successively reducing the amount of remaining debt revenue that is running through our books and diluting the margin there. So overall, a very positive development.

If we go on to the next slide, we have Residential Development. You can see the volume here was good, a little bit above SEK13 billion for the full year, slightly up from last year for the full year.

Then in the fourth quarter, we had lower revenues if we compare to 2019. A big part of that is relating to a significant amount of rental units that were sold in the fourth quarter of 2019.

Gross margin 16.7%, a very healthy level, also that's up from last year. And we're keeping the sales and administrative costs very well in check here, as you can see, at 4.9%, resulting then in an operating margin that is north of our target for this business.

We're coming in at close to 12%, up from last year. And in the quarter, isolated, a very, very strong quarter, 13.5%.

In these numbers, there are no major effects from any land sales or other types of things that would sort of disturb the way you should see the result. But this is actually where we have been trading this business now, both through the year and in the fourth quarter.

So again, a very solid performance from Residential Development. If we look at the different geographies, you can see that all parts, Nordics in total, the Swedish Residential Development Business isolated, and Europe are above the targets of 10%, which is, of course, very good there.

And the same goes for the fourth quarter isolated. We can jump to the next slide, which shows you the homes started and sold.

As you know, we have commented on this a couple of quarters that we have the ambition to increase our volumes of ongoing projects somewhat. So it's good to see here that we managed to start more projects now during the year 2020 that we did in 2019.

And then we should recall that especially during the spring, a few months during the spring this year, of course, any type of commitments into new projects were heavily scrutinized by us. So we think this is a good development.

Homes sold, also that a little bit better. And if you do the math and compare the number of sold units to the revenue, you will see that excluding the rental sales that we had, we are also increasing the revenue we get per sold unit a little bit.

We had SEK3.3 million per sold unit in 2020 compared to SEK3.2 million per sold unit in 2019. We can go to the next slide and look at the homes in production.

Here, you can see we have just north of 6,900 units under production, which is then a bit down from the end of 2019 where we had 7,100 units. But more importantly, if you look at the graph, a little bit above, you can see that the last 3 quarters, we have been successfully increasing the number of homes in production.

And that is what we would like to see obviously. We have an organization that is geared for a slightly higher volume than this.

We have sold 72% of the units that we have in production. This is a high number.

It's, I'd say, on the upper end of where we would like to have it. It is important that we don't have too much already sold of what we're producing because we need inventory to sell from also.

Number of unsold completed units still very low, 154, which is then roughly 2% on the total ongoing portfolio. So that's very solid.

If we move to Commercial Property Development, as Anders has pointed out, a record year. SEK4.8 billion in gain from divestments.

Very, very strong. And of course, very big contributors to this great result are the divestments of Solna United and then very late in the year 2+U in Seattle.

If you move further down in the P&L, you can see that we have also adjusted the value of a couple of properties and these are properties that we have sort of talked about before. It's 2 properties in the Houston Energy Corridor, just outside of Houston.

It's a very, very challenging submarket, and we have decided to adjust the value downwards of those 2 properties in the fourth quarter. If we move to the next slide, you can see that we have in the portfolio today unrealized gains of approximately SEK6.3 billion.

You can compare that to the previous quarter where we had SEK8 billion, so the difference there is SEK1.7 billion. And we have then, during the quarter, realized SEK2.1 billion in in gains.

So that is sort of a testament to underlying value creation that we have in the business there. So that's very good.

Then if we move to the next slide, you can see the completion profile of the ongoing unsold entities we have. We completed 9 projects in the fourth quarter that then moved from the blue bars to become orange, so to speak, on the far left side of the graph here.

And the total amount of ongoing unsold properties, total investment of those is approximately SEK13 billion. And we have completed unsold properties of approximately SEK7.2 billion then.

And of course, the reason that the orange bar is higher than usual is partly due to the fact that it has been a challenging year when it comes to leasing. And of course, we do not want to sell properties that aren't leased to the right level because that would mean that we would sort of forgo profit in those.

And we have very good properties, and we feel confident with not rushing to the sales exit, so to speak, but instead make sure that we extract the full value out of these properties. And in addition to that, there are also commercial reasons to why we sort of not sell immediately when they are completed.

If projects are multi-phased, for instance, and they are heavily integrated between phases, so there's a good reason to sort of not go and sell it even if it's 2 different properties there. So this has nothing to do with the -- that there would be the hesitance among investors.

There's very good demand from investors. And the yield that we obtain and what we witness in the market, they are still very low and very strong here.

So -- and overall, we have a good surplus value in the ongoing projects. If you go to the next slide and look at leasing.

Of course, the year has been characterized by a challenging leasing environment. So there's no surprise on that.

Then I think towards the latter part of the year, we did lease 98,000 square meters in the fourth quarter isolated, which is a good quarter by sort of any standard. That's a testament to that -- the properties that we are developing are very much in demand there.

And of course, it's a little bit difficult to separate the year-end effects of closing these leasing transactions from an improvement in the underlying market, and we will get a bit wiser in the first quarter on this end. And I would also like to add that we do not -- I mean, we are in a lot of discussions and a lot of negotiations with potential tenants, of course.

So we know their intentions very well. And we do not experience any clear consensus in the tenant collective, so to speak, on what will the future office demand look like.

There's no clear change in the tenant preferences on the back of the pandemic here. If we move to the next slide, we have the group income statement, and operating income from the business streams SEK9 billion, and then we have the Central line plus SEK2.8 billion.

That's a number you're not used to seeing on that line. And of course, in this, we have the gains from the divestment of Elizabeth River Crossings in Virginia.

That divestment gave us a gain of SEK4.1 billion that are accounted for here in the Central stream. Then you know that we have central costs in here.

And in addition to that, we have -- which we do every year, the reassessment of the risks and costs associated with closing out our legacy portfolio and the asset management business. And against this, we have decided to take provisions to the size of SEK700 million in the fourth quarter.

That takes us down to the operating income of SEK11.9 billion and net financial items that are a bit higher than the last year. There's 2 reasons to that.

One is that we are having a slightly smaller portfolio of ongoing development projects. And that means that we're capitalizing a lower amount of our interest costs into those projects.

And then the other reason is that on the back of falling interest rates, we, of course, have a longer maturity on the average in our loan portfolio than we have in our financial deposits. So we're more negatively impacted -- we're quicker negatively impacted by -- on the income side and on the -- then we're positively impacted on the loan side by falling interest rates there.

Taxes, minus SEK2.350 billion, makes up 20% tax rate and a 22% tax rate in the quarter isolated. Quite a lot higher also here than what you're used to seeing.

But this is on the back of the divestment of 2+U and the Elizabeth River Crossings. Both of these were obviously in the U.S.

fiscal jurisdiction, and that is a high tax environment for us. It's the market -- a single market that has the highest nominal tax that we are operating in.

So that's the reason to the higher tax amount there. If we move on to the next slide, you can see our PPP portfolio.

And obviously, this -- the movement here is driven by the sale of the Elizabeth River Crossings. What we have communicated, we sold this for SEK5.5 billion.

And if you look at the top line here, you can see that the present value of cash flow from the projects moves from SEK4.9 billion down to SEK2.2 billion. So it's a bit obvious that we had a very cautious valuation of Elizabeth River Crossings in our valuation here and also, of course, in the carrying amount.

So given the small size of this portfolio now, we have a carrying amount of SEK700 million approximately at the end of 2020. This will be the last time we have this slide in the quarterly results presentations, but you will find the information going forward, of course, in the quarterly reports.

If you move to the next slide, you can see our cash flow development. And here, I think it's important to point out, on the back of the super strong cash flow development we had both in the fourth quarter and the strong development we had through 2019 up until today, that we have been in a very strong divestment cycle from our Property Development Operations here.

And that is, of course, what is giving us this strong cash flow. We are -- we have an organization and we have ambitions in the Project Development sort of grow this.

So this will likely be -- we will not see these high level sort of going into the next year as well. If you move to the next slide, you can see the free working capital in Construction.

We ended the year with an 18% working capital over revenue in Construction. That is the highest number we have ever seen.

And of course, that gives us access to approximately SEK25 billion in capital to employ elsewhere. Given where we are, both in the sort of the business cycle and the very strong performance in this KPI, we are very hesitant in sort of extrapolating the situation into the future.

You can go to the next slide and look at investments and divestments. And circling back a bit to what I said on the cash flow, here you have maybe an even better illustration of our net divestment part where we have been in the cycle then since, say, late 2018 up until today.

And we have geared ourselves with the organization and the ambitions to increase investments again here, so -- to it. And we have a very good pipeline to do so of investment opportunities.

But of course, every project has to be -- has to meet the commercial criteria on its own before we decide to start them. But it's clear, our ambitions are to backfill the Project Development portfolio.

If we look at the bottom here, you can see the capital employed, SEK44.5 billion at the end of 2020, which is then slightly lower than what we had the year before. All of that is driven by Commercial Property Development.

If you go to the next slide, you can see the funding situation of the group. We have access to SEK27 billion, of which unutilized credit commitment stands for SEK7.5 billion.

And here, you also see the maturity profile of our loan portfolio. And we have a smaller maturity coming up this year.

And after that, we have nothing like that up until 2023, as you can see here. So very comfortable situation here.

If you move to the next slide, we have the financial position for the group. We closed the year with total assets amounting to SEK125 billion and an equity position of close to SEK39 billion, which then gives us an equity-to-asset ratio of 31%, which is a very strong balance sheet here.

We have plenty of capital and a good -- very good amount of financial capacity to put into play. Adjusted net debt, or if I should call it adjusted net cash now, came in at a SEK16 billion at the end of the year, up from SEK3.2 billion at the end of 2019.

Anders?

Thank you. So let's go into the market outlook for the next 12 months.

So starting with the Construction. We can see a bit of a mixed picture when it comes to the building, the commercial building, the residential construction.

We still believe in a slow market going forward. We could see -- we can see in the commercial side that our clients, they are postponing projects due to the uncertainty in the market and also because the leasing activities is slower.

And in the residential construction, we can also see that they have fewer starts over residential construction. We believe that for the next 12 months, a weak market.

On the other hand, we believe in a continuous stable civil market, we can see that in the Nordics and in Europe. We actually believe that the uncertainty in the U.K.

has reduced significantly after Brexit. So we can see that projects in pipeline there actually started, which is encouraging.

In the U.S., civil market in the U.S. on the other hand, we believe in the more short-term 12 months, they have a slower market.

Of course we noticed all the infrastructure announcement there for investments in infrastructure with the new administration. But it will take some time before that hits the market and we can bid for them.

And in the Residential Development, we believe in a continued stable market. It's picked up really good here in the second half of 2020 and we believe that to continue during 2021.

In Commercial Development, on the other hand, we believe in a weak market due to the tenant are still hesitant. On the other hand, as we have talked about here, the investor appetite are still solid.

It's a low interest rate and stable credit market, and we expect that to continue. So if I summarize the group here, record profit and a solid performance in all business stream.

We have a very strong cash flow and a very strong financial position. The market uncertainty is still present, but has reduced somewhat after Brexit.

We have a new administration in place in the U.S. and we also have a vaccine coming in from all over the markets.

Long-term focus remains. We're focusing on improving the profitability in Construction and we also want to grow the Project Development.

Our ambition is to be the leading developer -- residential developer in our home markets and also to expand in a responsible way, of course, the Commercial Property Development. Main focus on health and safety.

That's crucial for us. We're working very hard with that.

And also strong focus on reducing the carbon emission, which we had been very successful. Last year, we had summarized it, more than 30% reduction from the base year in 2015.

With that, I leave it to Andre for -- to open up for Q&A.

All right. Thank you very much, Anders and Magnus.

Yes, Q&A time. So please follow the instructions from the operator, and also please state your name and the company that you work for.

A few questions from me then. Starting off with the provision of SEK700 million, could you possibly just mention what it's relating to?

Stefan, this is Magnus. As I said, this is related to the legacy portfolio we have in the business, including also then the asset management.

And these are run-off businesses that we're working to close. And in doing that, we continuously sort of assess the costs and the risks associated with that.

I mean it's no -- I think it's no news than one that we had a bit difficulty to controlling some of the costs and some of the PPP -- projects in the PPP portfolio, for instance. And so these are the reasons to that.

I'm not going to sort of point out any particular country or project there.

Just to understand, this is relating to your PPP? Or is it relating to the Construction division?

No, the Construction business is not part of the legacy operation. The Construction has its own stream.

This is only sort of past remains from Skanska's old history we're talking about. And part of this provision does relate to the PPP portfolio.

Okay. Good.

Then just a question on your balance sheet. You're in a fantastic position financially.

Just what is your thinking about that? Are we in a new situation, a new world, where the historical net debt situation, so to speak, should be disregarded and you want to be -- have more capital hang around?

Or are you looking at maybe starting more projects? You were a little bit slower on that last few years, may catch up speed there.

I mean in that case, are you willing to do it on speculation? Just your tenant situation and renting out is a bit slow.

I mean what is your thinking about that? I know it's a difficult question and it's -- the Board's discussion as well, of course.

But if you could give more flavor on your thinking regarding having such a strong balance sheet.

Yes. I'd be happy to share some of that.

Of course, in our business, it's absolutely crucial to have a strong balance sheet and a solid financial position. And so I think has been evident throughout 2020, we have decreased the development portfolio somewhat.

That is not in our long-term strategy. So in part, we need this balance sheet because we are coming -- or aiming to come into net investment cycle again.

And that, of course, consumes capital. And it's important also to be able to sort of show with confidence to negotiation partners, whether it is on the investment or the divestment side, that if we go into an agreement we will have the financial means to close that deal.

And that is definitely a competitive advantage for us. Then, of course, it is also so that in the Construction business, we are in the middle of a pandemic still.

This business is late cyclical, irrespective of the reason to why the overall sort of growth or market situation is moving up and down. So we need to have some caution also on that then, talking then mainly about working capital.

So these are main reasons that we think it makes a lot of sense to have this balance sheet there for all the right commercial reasons.

Then add on to that, a follow-up question on that. To invest more than you divest, I guess, one would be to stop projects, that would be to not sell anything.

So how do you see that going into next year? Is the -- are you seeing -- I know there's interest to buy the properties, but if they're fully leased, I guess, you would rather hold on to them so you get the full price for them.

Are you expecting to ramp up from 10 to 15, 20 starts? Or are you expecting to hold on to some properties this year?

I can comment on that, Anders here. We have a very strong -- very good pipeline to start projects, both in the Commercial Development and Residential Development, and our ambition is definitely to increase the start project.

And we have the pipeline. We have definitely the financial strength to do that.

And of course, when it comes to -- we don't give any forecast when we want to sell -- divest projects. But we have a principle that we want to take out the full value of the offices and facilities, and that means we need to rent them out.

So we don't leave any money on the table unnecessary.

Okay. Good.

And my final question was actually relating to the Construction business in Sweden. If I understood you correctly, you explained the drop there with the turnaround taking longer.

My question would be then, are we through the worst and it should be improvements from here on? Or have new challenges arise, so we also have to wait longer into next year before we see the turnaround?

I think it's the same units that we have been talking about for some quarters now. It has taken some longer time than we expected earlier.

But I -- my view is we are through the worst part out of it. We still have to close some of the project or complete some of the projects that don't really contribute to the margin.

But I expect it to improve going forward, the margin in Sweden.

Congratulations on the solid results. I have a few questions.

You also come back to the very strong balance sheet. But you also have a very high level of the working capital this quarter, one of the highest levels we've ever seen, 18.4% of revenues.

Are the reason you're holding back on dividends in anyway associated with this level of the negative working capital?

I can begin answering that question, if you would like, Simen. As I said, I mean, we think this balance sheet is very well motivated by the fact that we have the ambition to ramp-up investments.

And the situation we have with an uncertain market in Construction, coupled with the fact that we have an extremely high net working capital position. And we do not want to extrapolate that into the future when we plan our financial structure.

And in terms of the development completion pipeline, you showed it at -- it was Page 17. There's a lot of developments which are completed, but not many which is coming up on the rentals, et cetera.

But my question also comes to the Houston write-downs here. Are those -- where are those in that pipeline?

And for instance, when you sell those and have done a write-down, are we going to assume these will be zero profit developments? Or how -- what can you communicate around those?

Yes, they are completed. So they are on the far left side of the slide I showed you.

And when we sell them, you should not expect a big profit from that.

Can you mention a bit of the size of fees in terms of your U.S. exposure, assuming they are in the Energy Corridor as well?

Yes, they are in the Energy Corridor in Houston.

Yes. And the size of the value of the investment?

No, we don't go into individual projects.

My first question is regarding revenues and the building streams which declined in 2020. However, the book-to-build reached above 100%.

Should we expect the decline to continue? Or do you think that revenues have dropped within Construction?

I can comment on that. It's different reasons why we see a drop.

It's 10% in local currency, so it's not dramatic. But we do see the order -- encouraging to see that the order intake has been even higher, as you said, 107%.

So that's I'm confident for the future, but it's still -- the strategy remains. It's profit before volume and we are going to be selective going forward as well.

So that's also one of the reasons. It's not only the pandemic that has reduced the revenue, it's more strategic decisions as well.

And that strategy remains.

Okay. And regarding the margin, you said in previous quarters that you had some negative impact related to COVID actions.

Did you have that in Q4 as well? And can you specify how large those impacts were for the full year?

We had limited impact. We were impacted in the second quarter when the pandemic hit us and everyone else in the society.

But during the Q3, Q4, we sort of learned how to deal with it. We have been able, in an impressive way, to keep up the operation, keep the projects up and running in a safe way.

So we are applying social distancing. All our projects are deemed essential for -- in our different markets.

So that means that we -- even though it's a heavy lockdown now in different cities in U.K., U.S., we are still allowed to get our people into the site in a safe way. They are confident.

They feel safe where they come to that. And so it hasn't really hit us much in the fourth quarter.

Okay. And you have a target of 3.5% building margin, which you haven't reached for several years.

Do you still feel that's relevant? And if so, how long do you think it will take to reach that margin?

Yes, it's definitely a relevant target, and I'm confident that we will reach it eventually. What we need to do, of course, is to continue to improve margin in U.S., for example, there.

And we can see good signs. It's definitely going in the right direction.

We need to improve margins in Central -- in Europe, Central Europe. And also need to continue to -- we need to improve the margins in Sweden, as we talked about.

So the answer is yes, it's definitely relevant.

And a similar question for Commercial Development, where you have a target of 10% return on capital employed, and the offices is an important part of your operation and it's an uncertain market. Do you still think that the 10% target is relevant also for 2021?

Tobias, this is Magnus. Yes, this target is still relevant.

And as you can see, we have delivered just north of 12% now in 2020. So that is a relevant target.

Okay. And one final question regarding your interest expenses.

They increased year-over-year in the fourth quarter despite the very strong improvement of the balance sheet. Why is that?

And should we expect that to continue for 2021?

You can expect the same ratio in 2021 as we had in 2020. It has -- the movements in the net financials is driven, to a large extent, by how much we can capitalize in ongoing development projects.

And then as I said, it was the fact that rates has come down, we're more quickly impacted negatively by falling rates on our deposits than we're gaining by lower interest costs on the loans because they are longer maturities. It takes a longer time for that effect to hit the P&L, so to speak.

So these are the main affects you see there.

All right. Thank you very much, and we're done for today.

So we will close, and looking forward to 2021. Thank you all.