Skanska AB (publ)

Good morning, and a warm welcome to the presentation of Skanska's second quarter report. My name is Antonia Junelind, I'm the Senior Vice President for Investor Relations here at Skanska.

And with me here today to take you through an update based on our second quarter is our President and CEO, Anders Danielsson; and our CFO, Jonas Rickberg. In a minute, they will cover an update on our business performance, financials and also a market outlook for the coming 12 months.

And after that initial presentation, we will open up for questions. So if you want to ask us anything here today, then just please join us by using the HD audio link provided in the press release for this press conference or the telephone conference number that has also been provided.

And then just follow the instructions by the operator. So with that brief introduction, I will now hand over to you, Anders, to kick off the presentation.

Thank you, Antonia. First, I would like to take a look at this picture, a classic view for those of you who have been in New York and especially Times Square.

In June, we celebrated that we have been a listed company for 60 years together with NASDAQ Stockholm. And for those of you that might remember, we actually constructed the building that you see here for NASDAQ as a part of a larger renovation of Times Square back in 1999.

We have been working in New York and U.S. for decades now.

We started early -- in the early '70s, long history. Now let's go into the second quarter.

It's a robust second quarter. Construction is in good shape.

We delivered a strong margin, and we have a good order intake and a solid project portfolio. Residential Development, we have strong sales and margin in Central Europe.

The Nordic market is, however, weak, continued to be weak. And Commercial Property Development, we have made one divestment in the quarter in Europe.

Investment Properties, stable performance, stable cash flow and also stable leasing ratio. Operating margin in Construction is 3.9% compared to 3.5% the year before.

And return on capital employed in Project Development, 1.4% on a rolling 12-month basis and lowered by the low volume and weak market. Return on capital employed in Investment Properties, 3.9%, rolling 12 and return on equity, 9.5%, also there on a rolling 12-month basis.

We continue to have a solid financial position, and we have reduced the carbon emission in our own operation with 62% since the baseline year in 2015. I'm going into each and every stream now, starting with Construction.

Revenue SEK 43.1 billion in the quarter. If you look at the local currencies, actually increasing.

Order bookings, SEK 56.7 billion, strong book-to-bill of 113% on a rolling 12-month basis. And the order backlog is -- continued to be on a very high level, historically high level, SEK 268 billion.

Operating income, close to SEK 1.7 billion in the quarter, representing a 3.9% operating margin. So strong result and high margin across all main geographies, which is really encouraging.

And if you look at the rolling 12 months, group operating margin was 3.7%. And also the strong order intake is also across the geographies that we work with operating.

Moving on to Residential Development. Revenue came in SEK 2 billion, and we sold 409 homes.

We started a little bit more, 420. And the operating income is SEK 226 million, driven by the strong performance in Central Europe and representing a return on capital employed of 3.6% on a rolling 12.

And in Central Europe, we recorded 2 big project starts and delivering more than half of the revenue. The Nordic housing market is still slow and due to macroeconomic uncertainties and also low consumer confidence, which has actually gone down the last 2 quarters in the Nordics.

But all in all, this gives us a strong operating margin of 11.3%. Going to Commercial Property Development.

Operating income here, SEK 86 million, and we had a gain on sale of SEK 215 million, including some release of provision. Return on capital employed, 0.7%.

So low volume here. We had one divestment in the quarter, Equilibrium 1 in Bucharest.

We have 12 ongoing projects, representing SEK 13.7 billion upon completion. And we have 23 completed projects, representing SEK 18 billion in total investment.

And of those, 74% is leased. We also had additional 4 previously sold projects that was handed over in the quarter.

And the leasing activity, we leased 22,000 square meters in the quarter. I move on to Investment Properties.

Operating income stable at SEK 80 million. We have an economic occupancy rate at 83%.

That was pretty much on the same level the last quarter, 84%. And the total property value is unchanged, SEK 8.2 billion.

Moving back to the Construction stream to look into the order bookings. Here, you can see the last 5 years, the development of the order backlog.

You can also see the rolling 12 trends when it comes to order bookings, revenue and book-to-bill ratio. So again, a record high level on the order backlog, very healthy backlog as well, if you look at the quality here.

And we had a good quarter as well in the order intake. We can look into the different geographies here on the next slide.

So you can see here that all geographies has over 100% book-to-bill, which is encouraging. And so it's driven by good performance and good selection of projects, and we have been successful.

So right now, all in all, 113% book-to-build representing 19 months of production. So we are really in a good position here.

With that, I hand over to Jonas to continue.

Thank you, Anders. And we are moving on then to the income statement in Construction.

And as you can see here in the top row in the table, revenue are flat in SEK, but is actually up 6% in local currency, which is a strength. Moving on to the gross margin.

We have a solid portfolio, delivered stable gross margin of 7.4% in the quarter and as the same then in rolling 12. Further down in the S&A line, you can see that it's 3.5% of the revenue.

And that is actually showing that we continue to have a good cost control in the quarter also for the units that is growing revenue. But as always, I recommend you to look here on the rolling 12 for the longer time perspective to normalized levels.

Moving on to the income statement by geographies. You can see here on the right-hand table that we have delivered strong margin across all main geographies.

And in total, operating income is coming up on 15% in local currencies totaled to SEK 1.7 billion. Summarizing the second quarter, construction performance by emphasis then the strong margin of 3.9%.

Stability in the result comes from a clear bidding strategy, targeting projects where we have a good competitive advantage. In other words, we bid on the projects where we had solid customer relationship, but also where we have the team in place with a good track record and also, of course, well- known contract models.

Turning to our Residential Development business. Overall, a strong quarter for the stream.

Performances in operating margin is mainly explained by 2 large projects started in Central Europe. This means that all presold units in the projects were recognized in the quarter.

More than half of the total revenue comes from Central Europe with this. We also see that Nordic is still facing difficulties in the market with low volumes as a result.

On SG&A line, you can see the cost reduction measures that we have taken over the past years that are now visible if you compare last year to -- compared to last year as well as with the rolling 12. Moving on, looking at the geographies, and you can see here in top right-hand table, we have a weak result in the Nordic with 1.1%.

And it's mainly explained then by fewer homes sold and selling also from projects with weaker margins. Further down, you see a strong underlying result in margin in Central Europe.

And this quarter, it was actually boosted a little bit extra with the release of provision of selling -- of provisions and selling nonstrategic land of SEK 44 million. In summary, a strong performance driven by favorable market mix.

And we have a total operating income for Residential Development that was SEK 226 million and corresponded then to a margin of 11.3%. Continue looking at started and sold homes.

We have 409 homes sold, fewer than last quarter, but the Nordic housing market is -- and the Nordic housing market is recovering and that is taking longer time. We have a good pipeline in the Nordic, but sales are slow, and we are prioritizing starting smaller phases to balance the risk.

We're also making the most of the Central European market and started 2 new projects, as I said, totaling of 311 homes, which is then 75% of all starts in the quarter. Looking at our inventory.

In total, we have approximately 2,500 homes in production, of which 52% are sold and around 500 that are complete and unsold. This means that we have a good stock to sell from going forward.

And to wrap up the residential development area, we have a solid pipeline of projects that are ready to be started. We also -- we will, however, remain selective when projects start, as I said.

Needless to say, all projects that we are starting are built on solid business cases. Yes.

Let's take a closer look here at the Commercial Property Development business stream. In the second quarter, we sold Equilibrium 1 in Bucharest and recorded a gain.

In the left column, you can see the second quarter gains from divestment total of SEK 215 million. This also includes then the release of provision from previously divested properties and sale of nonstrategic land, which together adds up to SEK 139 million.

As you are aware, this business is lumpy and sales can accumulate to individual quarters. And let me remind you then that the comparable quarter include the 5 property divestments.

Continuing with the portfolio overview. Unrealized gains pretty much stable since Q1 following that no projects started or completed in the quarter.

On average, unrealized gain in relation to market value stands at 9% in the portfolio, but there are big variations with more recently started projects showing strong margins and some older projects having very small expected gain. After Q2 -- closing Q2, we have announced that starting of second phase of Solna Link here in Stockholm after signing 15,000 square meter lease for that building, which is good.

Continuing with the completion profile, this slide illustrates then the amount of unsold completed projects that we have in our balance sheet and when in time our ongoing projects plan to be finalized. In total, we have 23 projects completed.

And as I said, one project was divested, reducing the purple bar slightly then in the quarter to SEK 18 billion. The average leasing in the completed portfolio has increased from 71% to 74%.

In general, we see good leasing activity in the U.S. portfolio of completed assets.

All in all, divestments are in focus for us, but the market remains shallow and how it will develop will impact the timing of our divestments going forward. Moving on to show the leasing activity in the commercial property portfolio in the quarter, 22,000 square meters let in total.

The average leasing ratio of 50% is matching the completion ratio of 54% in the portfolio, which is a good situation. To conclude then the Commercial property development, we see -- we have a good leasing traction in the portfolio.

And as you know, after closing the second quarter, we have press released 2 new leases of in total 45,000 square meters that will be recorded then in Q3. Lastly, the investment portfolio business -- property business continued to show a stable performance in the portfolio.

We increased the revenue to SEK 118 million and operating net is a result of a growing portfolio. Operating income of SEK 80 million is good.

Comparable quarter include one-off effects related to the acquisition of the Citygate property in Gothenburg last year. And as you can see in the column of rental values in the portfolio, it represents a good balance between the 3 geographies that we have chosen to operate in.

Concluding then the business streams performance and moving in then to the income statement for the group and summarizing the quarter, you can see that operating income for the business streams totaled SEK 2.1 billion. Central items are increasing with higher costs, and that is mainly driven then by IT and IT transformation and outsourcing of infrastructure.

At the same time, we're seeing the net contribution from our legacy business reducing, and these are now including costs for BoKlok U.K. Over time, the income from the infrastructure asset portfolio will also gradually reduce with fewer assets under management.

And as you know, costs vary between quarters, but first 6 months is representative for the cost level. Net financial items on par with last year and effective tax rate of 21%.

All in all, delivering a profit for the quarter of SEK 1.5 billion, which corresponds to an earnings per share of SEK 3.69. Looking at the cash flow, following the green line, the strong rolling 12- month cash flow is a result of a good cash flow from the business operations, increased negative working capital and being in the net divestment cycle in the project development, as you have seen.

In the second quarter, cash flow from operations were positive by SEK 1.3 billion. During the quarter, we distributed also the dividend that was approved by the Annual General Meeting earlier this spring to a total level of SEK 3.3 billion and SEK 8 per share.

Construction, looking into the free working capital in Construction, it has come down in the second quarter as expected following the strong inflow in the third and fourth quarter last year. Total reduction of SEK 2 billion, of which SEK 0.9 billion is currency effects.

The strong cash flow end of last year is impacting the rolling 12, free working capital in relation to revenue that currently stands on a high level of 18.2%. This doesn't mean that we have easier access to prepayments from our customer, but carries a quarterly effect from last year's Q3 and Q4, as I said.

Investments, this graph illustrates the investment and divestments. Following the green line, the net divestment cycle continues for the Projects development business.

During the quarter, we collected cash on 5 commercial development properties. One was sold in the quarter and the other had already been sold before and now completed and ready to be hand over to the buyers.

Net divestment for the group was SEK 1.6 billion. In the left column of the table, you can see that total capital employed in the property business was SEK 61.1 billion, continuing down from SEK 62.8 billion in quarter 1 and better than last year, which is a strength.

A brief note on the funding. We maintain a good liquidity position, as you can see, and have a loan portfolio that have a balanced maturity profile as well.

To sum up, our financial position remains very, very strong. Our equity is SEK 59 billion and equity ratio is almost 37%.

Adjusted net cash flow is SEK 9.7 billion coming out of Q2. And here, I would like to remind you that we have a limit that allows us to go into net debt territory of SEK 10 billion.

All in all, this leaves us with a good room to navigate uncertainty in the market and ensuring our customer that we will be around and also that we can use our strength to act on good opportunities when we see them here going forward. By that, I hand over to you, Anders.

Yes. And I will go into the market outlook, starting with construction.

And the U.S. civil market remains strong and well-funded through existing federal funding programs and the U.S.

building market continue to be stable. The civil market in Europe is mainly stable, and we can see an increased activity in the civil market in Sweden, mainly driven by investment in defense, energy, water treatment facilities, but also including some infrastructure there.

On the residential development, good level of activity in Central Europe. The housing market is strong there.

So we increased the market outlook for that. In the Nordic, it's a slow market and the consumer confidence is low and the pace of recovery in the economy, overall economy is also slow, so that negatively impact the Nordic market.

Commercial Property Development, we can see that the transaction market activity returning to in Europe but lagging in the U.S. due to the high interest rates situation.

Occupier market, stable in Europe and improving in U.S. for top quality Grade A spaces.

And there is a clear trend to flight to quality. Investment properties, polarized occupier market, stronger demand for high-quality spaces compared to older stock.

And we have a competitive market, but rents is expected to remain mostly stable. To summarize this quarter, robust second quarter.

Construction is in good shape. We have good order intake, strong margin generated by a healthy project portfolio.

Residential Development, strong in Central Europe, performing very well. Weak market continued in the Nordics.

Commercial Property Development. We have divested one project in the quarter and investment properties stable performance.

So -- and overall, we are maintaining a solid financial position. So with that, I hand over to Antonia to open up the Q&A.

Thank you, Anders. So yes, let's do that.

We are now opening up the questions section, and we welcome your questions. As I mentioned before, you can either use the HD audio link that provides better sound quality both for us here and for you.

So we encourage you to do that. But there is also a telephone conference number that you can use if you prefer too.

And then just please follow the instructions by the operator. And I will now ask you to introduce the first caller.

I have 2 questions. And the first is on the construction margin, which looks very strong.

And maybe if you could provide some details on the drivers here. Is there, for instance, any type of temporary effects here?

And how much could this be extrapolated given that the EBIT margin was down by 70 basis points in Q1, but now up by 40 in Q2? So that's my first question.

Okay. I can take the first question then.

We have no one-off effect in the second quarter. So this represents a very strong performance, and we have a healthy backlog and the organization is doing great work to execute the successful project, profitable projects.

So that's encouraging. And in Q1 is always a slow quarter due to -- we have winter effect on the more industrial part of our business.

We have that mainly in Europe and in the Nordics as well concrete manufacturing and so on. So there is mainly no revenue from those operations in the first quarter, but we do have the cost, obviously for the facilities.

And it can also be a bit lumpy since it's a low volume. So you should more look at the trend when it comes to rolling 12 months.

And here, last quarter, we had 3.7% rolling 12. We are at the same level to this quarter.

So it's overall stable.

Okay. Good.

But have there been, for instance, any type of major project completions that have impacted margins?

No big completion that has -- so you could consider as a sort of one-off. It's more very good performance overall.

Okay. And the second question I have is on CD.

So you have revenue divestments SEK 700 million in the first half of the year, which is down from SEK 3.5 billion if we exclude the internal divestments. And maybe if you can say anything about your expectations for the second half of the year, if you have any discussions ongoing?

And maybe something on the U.S. business, given that you haven't divested anything over there materially in over 3 years now.

Yes. Yes.

As you know, we don't give any forecast for divestment, but we do have discussions with investors and main we can see higher activity in Europe. And so we are working with that.

And we have a good portfolio, good asset, and we have 74% leasing ratio. So definitely, some of those are ready to divest, and we are working with that.

In the U.S., you're correct, we haven't divested in a few years anything. And there are -- it's a very hesitant investor market in U.S.

And we haven't seen a lot of transactions overall in the market, if you look the whole market. And we have a good position since -- we have a healthy leasing ratio in those assets, and it's good assets.

So we want to get the full value out of it when we divest. And so we are not in a hurry to divest.

They are ready to be transferred, but we have to see that the transaction market returns. And the long interest, the 10 years rate needs to come down a bit before I expect investors to take some action.

Right now, it's more opportunistic investors, and we don't want to leave a lot of money on the table.

But you haven't noticed any type of changes in discussions throughout the year in the U.S.

We have discussions, and we have investors that we have worked done business with before. So they are definitely interested in our asset.

And they know we are a reliable partner. We have good assets in good location with good tenants, but it's not the right timing for them right now.

So they're more in a wait-and-see mode where the market goes or interest rates goes, and that's where we are today.

Just checking, can you hear me clearly?

We can hear you.

Perfect. Just 2 questions from me.

First, you updated your outlook for Swedish civils and European resi. Just wondered if there was anything specific in both those end markets that you saw through the quarter that really drove the decision to improve the outlook?

And then second question, specifically on resi in Europe. Can you speak to the capacity or sustainability of that pace of investment and revenue generation?

You mentioned half of the revenue came from those projects in Europe in Q2. Do you see an ability to continue investing and generating revenue from that business while the Nordics remains at a very low level?

Yes. Thank you for that.

If I start with the market outlook, the Swedish civil market, we increased the outlook to strong. And that is driven by -- we can see that the government and other authorities, they are really pushing out projects now, and we expect the coming 12 months to be a strong market.

We can see it's within defense, energy, infrastructure, water treatment and a lot of things. So there's definitely more in the pipeline than we have seen before.

And in Central Europe -- is a great market. It has been stable for quite some time, but now we can see that the trend is even stronger going forward.

So it's strong market, and we expect at least the coming 12 months to be a strong market. That's how long our outlook looks.

It's definitely something we are prepared to take advantage of coming forward.

Can I -- if I could just follow up briefly on that resi. So on the profitability that you achieved, if we were to assume a similar revenue cadence, is that also fair to assume a similar margin cadence?

We don't -- I don't comment forecasted, but we are definitely starting projects on a very healthy business case. And we have our 10-10 target, 10% operating margin, 10% return on capital employed.

And we don't compromise with that. And of course, we always try to get as much as possible out from the market.

Just a couple from me, please. First one on your U.S.

business, well, mostly U.S. business.

So the cadence of revenues and orders in the data center, which has been a bit of a debate of late with investors. You booked new orders in Q2 after quite a long, let's say, a long lull in the order intake.

What should we expect in the market, which seems to be picking up pace again, especially on the U.S. side?

Do you have capacity to keep adding on the data center side? Or are you -- basically are you full on and need basically to wait for '26, '27 to get more orders in?

So that would be the first question. And second, last quarter, so you cut the outlook for U.S.

building. Is there anything new there?

What are you seeing on the ground? I mean the latest data from the Census Bureau were a little bit weak in starts of projects.

So was just interested to hear if anything has changed on the ground from last quarter.

Okay. Thank you for that, Nicolas.

The U.S. business -- U.S.

building business, data center is -- we see a good pipeline. So it's a stable market, and we have definitely strong capacity here with specialized units, and we have a very close cooperation with our clients.

So we are definitely ready to continue that development, and we do see a good pipeline there. When it comes to the U.S.

building market outlook is continued to be stable. And we can see that there's some -- takes some a little bit more time for a company or a client to push the start button.

There's still some uncertainties in the market. We haven't seen any cancellation or -- but we do see it take a little bit longer time before the project materialize.

So it's Board decisions and so on. So that's remained the same as the last quarter.

But I'm cautiously optimistic about the U.S. building market.

And if I may, just a follow up on looking now at the margins, you're getting close to the 4% range. The U.S., which historically has been a higher-margin business is also doing well.

I mean the mix is getting better for you in terms of more civil, more data centers. Is there an opportunity at one point to move the target from 3.5% to 4%, which seems to be in reach?

We have our target 3.5% or more. So it's a relevant target.

And we do see increasing margin in U.S., as you say. And the civil operation is -- it's a good margin business.

It's a different business model in U.S. So we have our construction management operation, which is also performing well.

And then we have the civil market that have a different business model with higher margin. So the mix is really good right now, good performance.

Just checking in with our operator here. Do we have anyone else in line?

Okay. Very good.

So that means that we have answered all the questions that you had for us today. And with that, we are getting ready to close this press conference then.

So I want to say thank you, Anders and Jonas, for your presentations here today. And of course, to all of you that have tuned in, thank you for doing that.

And a broadcasted version of this presentation will be on our web page later today. And at the end of the Q&A session here, we got a few questions in relation to our U.S.

business. So I want to remind you that this fall, we are arranging our Capital Markets Day in Seattle in Washington State.

So please join us then, and you will be able to meet with the local management and get to visit some of our projects. More information on that will be available beginning of September.

So with that, I would just say thank you and have a lovely day.