Skanska AB (publ)

Hi and good morning. This is André Löfgren, Head of IR speaking.

And I would like to welcome you to the presentation of Skanska’s Six Months Report for 2020. The presentation will be held by our CEO, Anders Danielsson; and also CFO, Magnus Persson.

After the presentation, you will all be able to ask questions, we will open up for Q&A then. And with that, I'll hand it over to you Anders.

Thank you, André. If you look at the first page here, you can see our new project and launched high speed railway project in the UK that were booked in the second quarter.

If we go to the second slide on just an overall on a six month report for 2020, we have underlying solid performance. That's where the very strong first quarter, the second quarter was disrupted by the pandemic.

We can see that the construction or resilient that impacted and the impact is mainly in Europe and in the U.S. So, the Nordic countries is pretty much unchanged regarding COVID.

Product development, we could see lower volumes and we are maintaining our profitability levels. We have a return on equity on 20.6% that's on a rolling 12 months basis.

That has increased compared to last year. We still have uncertain market outlook for, and I will come back to that in different geographies.

We have a very strong financial position and our underlying strategy remains, that means improve profitability in the construction stream, keep our leading position on a residential development, and grow the commercial property development going forward. So, if we go into the next slide in construction stream, we could see the revenue SEK 71.9 billion.

We have an order booking book-to-build of 104% on a rolling 12 months basis. We have a strong order backlog.

We have close to SEK 190 billion in our order backlog. The second quarter were lower though, especially in Europe, U.S., but we had these major projects, high speed to contract in the UK that helped, of course.

The operating income was close to 1.4 billion for the six months, and we had an operating model of 1.9% versus 2%, the same period last year. And if you look at the second quarter isolated, we had 2.2% construction margin versus 2.9% last year, but then you should remember that last year we had the positive one-off effect in Norway, which in boosted that margin with half a percent.

So the underlying at that time last year was 2.4%. So I can see that the – since we are impacted in the second quarter by the pandemic this year the underlying profitability and construction continues to improve, which is in-line with our strategy, but we do – did have disruption due to the COVID-19 in the second quarter, and I expect that to continue during the pandemic during the fall.

The number of impacted product has decreased, which is a good sign, but we do see that the productivity is decreasing due to the social distancing and other resources as well, but the underlying again profitability is solid. The strategy remains, select the bidding, improved commercial focus, and increased cost efficiency, continued to improve the profitability in construction.

If you turn Page 2, the residential development, Slide 4 here, we had the same revenue for the six months as we had last year. We had the number of homes sold over 1,300, and pretty much the same level as the starter units for the first six months.

The operating margin is 12.2%, way above our target of 10%. The other return on capital employed are on a rolling 12 months basis, slightly below our target of 10%.

And we did see lower volumes in the second quarter due to the COVID-19. Having said that, we had a very slow start of the quarter, we saw that it improved somewhat in the second – in the last part of the second quarter.

But overall, we are able to maintain a good profitability level and also encouraging to see that the handovers during the quarters has gone according to plan, which is important, so we are able to collect the cash here. We see early signs of improving market, but the uncertainty remains and I, we are also – it is benefit for us to have a diversified portfolio, which brings flexibility in adapting to changes in demand.

Go to the next page, Commercial Property Development. We had a very strong first half of the year gain on sale of close to SEK 2.5 billion.

We have a return on capital employed above our target 12.6% versus target of 10%. We have 40 ongoing projects, which corresponds to 24.3 billion in investment upon completion of those projects.

We also have a good position when it comes to occupancy rates versus the completion rate. It's slightly about 60% for both of them.

And we've been able to start five projects year to date in the commercial property development. We have leased 120,000 square meters in the first half of the year, and that's lower than last year.

We also have a very slow second quarter, but we did see the record lease in the second quarter of 47,000 square meters in Warsaw, which was really good. We can also see that the property investors are more cautious, more hesitant.

We see uncertainty in the leasing market and it gives us even more importance of having high quality, sustainable projects to offer the markets going forward. If we go to Page 6, the construction or the situation, as I said, we have a strong order backlog.

So, I'm not concerned with that, we have a book to build over 104%. And if we go to the next slide to the different geographies, on Page 7 here, we have a rolling 12, as you can see there, 104%.

We also have good order backlog. If you look into each geographies and all-in-all we have about 15 months of production, which is on a good level.

With that I’ll leave it to Magnus to go deeper into the financials.

Thank you, Anders. So we look at the income statement for the construction stream to start with here, and as you can see, we had revenues amounting to 72 billion in the first six months.

So, that's lower than the comparable period by about 7% if you take into account currency effects. The full drop compared to last year is to be found in the second quarter, and it's primarily done within the European business, and in the U.S.

business that we have seen the decline in revenue. Selling and admin is slightly lower this year than last year.

And if you look, it has an 8%, over revenue 4.2% and in the isolated quarter 4.0%. We have been quite successful, I would say with adapting our cost structure to the – bit rapidly falling volumes in some of the business units here.

So that is positive and we have taken the actions needed to have the right cost structure therefore now. EBIT margin came in at 1.9% for the first six months and 2.2% then for the quarter, and as Anders have already pointed out this is to be compared to 2.9% in the isolated quarter last year, but that includes a significant one of effect from the Norwegian operations.

So, if we take that out we will be at 2.4%. We have tried to untangle the effects, the direct effects of COVID-19 pandemic on the profitability.

It has been very broad brushed, these effects. So, what we can see is that the underlying performance of the portfolio is improving, and if we look at that, we would have a margin that is probably a bit higher than what we had last year.

I’ll move to the next page. The income statement by geography, starting with the Nordics had an operating margin of 2.9% for the first six months versus 3.6% in the comparable period and also here if we are to exclude in the region claims release in 2019, we are also at 2.9% in the last year [indiscernible].

The mix is a bit different despite this. As you can see the Swedish operations are down 2.6% in margin for the first six months, compared to 3%.

And here we have then the issues that we have reported on previously with regards to the residential construction in Stockholm and also the industrial business in the Swedish operation that are weighing on the margin here and we have reported on this, and undertaken lot of actions on this, but it takes longer for us to fix than what we have originally anticipated. In the European part, we can see 0.2% margin, which we obviously is not satisfied with and here we’ve had a fairly big impact of the pandemic both in the UK, Poland, and the Czech business there.

For us, we had 1.7%. Margin, also in the U.S.

business, we've had a big impact of the pandemic. It's been very well handled.

And the impact has mainly been in the, in the buildings business who are sort of into commercial building. And the fact that we are now delivering a better operating margin is because we have the underlying improvements in the margin, especially in the in the service business in the U.S., which is completely according to the plan as we have laid out also before.

We move to the next slide, which is Residential Development. As Anders just already said, we had approximately the same revenue this year as we had last year, but it's a big shift between the first and the second quarter.

We had a very strong sales in the first quarter and while sales in the second quarter fell by 47%. So that's, of course quite a lot driven by the uncertainty from the pandemic that we have seen.

Gross margin comes down somewhat in the first half of the year, but still a very good gross margin in the second quarter of 23%. SG&A is down 6%.

Again in the second quarter, it's a bit of a special quarter, very high SG&A 9%, but that is due to the drop in volumes. A good EBIT margin which is approximately in-line with what we had last year done at 12.2%, and in the quarter isolated we had an EBIT margin of close to 14%.

We have managed our risks in the projects very, very well and we have been able to release continuances that contributes to this result. We move to the next slide, which shows the different geographies.

And as you can note, all different geographies are over 10%, and margin in the second half of the year, in the quarter isolate the Swedish residential operation is slightly below at 9.3%. And we can also note that the European residential business with a 64% operating margin that is obviously not the level at which we are trading.

We've had a large impact here or the positive impact from a good work with handling risks and projects and so we have been able to release contingences to profit and this in connection with a low volume in the quarter gives a very, very high margin. We move to the next slide, home started and sold.

As you can see here, we have started the 1,300 units and sold approximately the same level here at 1,311 units. Storage go up slightly, compared to last year while sales is going down.

And revenue, if you do the math there against the P&L, you can also see that the revenue per sold unit is going up. We have no material impact on that number from the mix between affordable homes and sort of the other segments of the market there, but this is more of in terms of how the sales mix looks in our normal RD business.

Move to the next slide, homes in production. As you can see, we have 6,300 units in production.

We had a good sales rate of 6% to 7% and unsold units is up somewhat compared to the end of 2019 with 178 completed unsold units, but again we have a good [churn] of these units and we have no particular concentration of this and geographical area. So, we are not at all concerned with us.

We think this is a very natural level to be out there, especially since we have seen a trend over the last perhaps one and a half or two years where the consumers are buying a little bit later on in the development process. We move to commercial property development.

Then in terms of the quarterly P&L it's of course not so eventful. We have sold one small projects in the quarter, and the EBIT in the quarter isolated is close to zero and for the first six months done driven by a very strong first quarter.

We have booked an operating income of 2.1 billion over the gain on sale of 2 – close to 2.5 billion. So, a very strong first half of the year, but the second quarter wasn't very eventful year.

So, if we move to the next slide showing unrealized and realized gains, the unrealized gains are represented by the bars in this graph and since we have not made any major divestment, there's not a big change to the bars either here. We remain at 6.7 billion in unrealized gains.

[I think you will see] the green line on this chart here represents the pace at which we are realizing these gains into profit. And so naturally, this goes down in the second quarter due to the fact that we didn't make any major transaction.

We move to the next slide, which shows the completion profile of the commercial property development business. We had 40 ongoing development projects at the end of the quarter and the completion profile over these 40 properties look like this.

The bars represent the total investment at completion for these properties. And they are allotted in time in this graph according to when we expect to complete them.

So, in the second quarter now, we completed properties to total investment at completion of around 7 billion. The average leasing rate for these properties is [close to 80%] as you can see.

So that's a very good balance. Then we expect for the third quarter here to complete approximately 1 billion in total investment and here we have a bit of a lower leasing with 30%.

We report on this also in the last quarter. This is a couple of properties that look very good.

We're lagging a bit in leasing here and of course, during the second quarter, we have not been helped by the market necessarily to address this either, but there's nothing that this have been a major concern to us, but of course, we are working to get this up. Fourth quarter we expect to complete properties in the tune of 3.3 billion, 70% approximate leasing rate also here.

And from there on we have a sort of successively downward sloping leasing rate for the – across the completion profile of the portfolio. We move to the next slide, which is leasing and here you can see the orange line, which represents the degree of completion for the ongoing projects we have and the green line that represents the occupancy rate.

Ideally, this should be fairly well in balance with each other which they are here in the end of the second quarter. So, that's good from a from a risk balance perspective.

You can also note that both of these lines have successfully drifted upwards in the graph. So, we are now carrying a bit of a more mature portfolio than what we did a couple of years back.

We leased 120,000 square meters of which we had a little bit above 70,000 square meters in the second quarter isolate that and – leasing in Q2 has been very weak, especially in April and May was weak. And of course, this is a mix of clients that are a bit uncertain about the sort of demand for their business and the overall impact of the pandemic on their surrounding economies, but also practical issues around how we can showcase our spaces and the tour different potential tenants in our spaces.

And the reason for this is, of course, social distancing, it’s travel restrictions, and various lockdown measures and so on. So taken together it's been a weak leasing in the second quarter.

In terms of discussions on rent concessions, we've had some of those, [so think many] property companies serve, but this has mainly been in the smaller retail spaces to our properties and it doesn't really had any relevant impact on us in the quarter. We move to the next slide, which is the group income statement.

I know we have already gone through the operating income from the business terms, but if you look at the line central, which contains both our headquarter costs and some costs from our legacy business here. We had 242 million for the first six months of the year, comparison to 60 million last year, but here again we have a major one-off effect, positive one-off effect in 2019 that needs to be adjusted for.

And this is a Czech court settlement that gave us approximately 200 million in the second quarter last year. So, if you add that back, we would be at approximately 260 million last year.

So, we are successively improving the central costs of the business here. In terms of the net financials, we have slightly higher net financial items here in the first six months compared to last year.

Main reason to this is that we have a lower interest income as rates have gone down on our deposits. And also the fact that we are capitalizing a little bit slower the interest costs as we have a bit smaller development portfolio then.

We had the tax rate of 17% for the first half of the year. We move to the next slide, which is the PPP portfolio.

And here I can say there's been no operational changes in this portfolio, and we have a very stable unrealized development gain in the portfolio of approximately 1.4 billion at the end of the second quarter. So, if we go to the next slide, you can see cash flow here.

We have a very strong cash flow for the first half of the year both the first and the second quarter, had a good cash flow and we held up the cash flow very well in construction and we've also seen large handovers both in residential and commercial development there, and then of course a little bit slower investment based and in the commercial development business, all contributes to strong cash flow for the first six months. We move to the next slide, which is working capital in construction.

You can see the green line here continues to move upwards and now we had a net working capital position over revenue with 16.5%, which is very high from all historical measures here. In nominal terms, our net [working capital] position was slightly down to 25 billion.

The second quarter is normally sort of a seasonal low point in net working capital, but we maintain the various only working capital position. Move to next slide, which shows investments and divestments in the chart and then capital employed at the bottom.

If you see the green line in the chart, you can clearly see that we are in a net divestment territory here for the development businesses and as I said, a couple of slides back this contributes down very well to the cash for the business obviously. And in terms of capital employed, we have come down a little bit in capital employed since the end of 2019, and the comparable period they are approximately 1 billion.

Move to the next slide, you can see the liquidity position in the group. We had access to 21 billion in liquid funds, which more than 19 billion we can access within one week.

And over the course of the second quarter, we have secured a couple of additional credit commitments and also extended the maturity profile somewhat over that portfolio. And then we'll move to the next slide on our financial position here, and can just note that we have a very solid financial position, a capital base of 36 billion at the end of the quarter and an equity to assets ratio of 28%.

So, which is very, very strong, and our net debt – adjusted net debt at 6.8 billion positive there. So that 6.8 billion adjusted net cash and we are very satisfied with this financial position.

And it's comfortable to be in such a good position, especially in situations of an uncertain market and it also gives us the opportunity to act when various business opportunities comes our way. I think, I’ll stop there Anders.

Yes. I’ll be going through the market outlook.

So, if you turn Page 25 here. The market outlook is unchanged compared to last quarter.

So, we can see weak market, if I start with construction, is, we believe a weak market, both in the non-residential and the residential market for the next 12 months. We can see that the civil market is more stable looking forward, and that’s thanks to infrastructure investments and other public projects coming up in the market.

We can see that the lockdowns easing, somewhat in Europe and U.S., which is good. The social distancing impacts the productivity negatively and I expect it to continue to do that.

Lower demand from private clients, and we can see that public infrastructure investment and the stimulus packages is helping out, but the funding is still uncertain. Residential development, early signs of improving the – in the secondary market in Sweden, we can see rising unemployment and economic uncertainty that impacts the consumer confidence negatively, even though we have seen some positive signs of that, in the last few weeks.

We have a few new development overall in the markets that will impact the supply of course, so that can help out because we still have an underlying strong need for housing. There is a housing shortage, and that's supportive in more long-term and also of course, the low interest rate in our markets.

On commercial property development, investors are more hesitant due to the market uncertainties. We can though see that the credit markets are recovering and working better today, which is helping for a more long-term, but [the tenants] they are still uncertain and hesitating to sign up for new leases.

If we turn page to the group summary, overall, underlying solid performance. We see disruption in construction and has certain product development markets due to the COVID-19.

We can have overall uncertain market outlook. It's difficult today to really say how long this pandemic is going to last and also how it will impact the economies more long-term, but we have a good position.

We have a strong financial position and we are adapting ourselves to the new normal after the pandemic and that includes cost reduction that includes new ways of working and running the project with the implementing the social distancing. And we also take that into consideration when we bid for new projects of course, but the long term ambition remains that is improve the profitability and construction, continue to be leading residential development developer in our home markets and to continue to grow the commercial property development.

With that I leave it back to André to start the Q&A.

Great. Thank you, guys.

Yes, let's move into the Q&A and follow the instructions from the operator please.

Thank you. Two questions from me.

First with residential, I understand that on a 12-month rolling basis, of course, the release of provision evens out. So, it's not a big thing, but in the quarter, they were rather massive.

So, just understand the underlying margin there. I guess you don't want to give us that, but to see that – I can adjust that the European business myself, but looking at the Nordic, given the low volumes in the Nordic looks like that margin is a bit high as well.

Is that also supported by some releases, operations or is that a clean margin [indication]?

Stefan - hi, Stefan, this is Magnus. Thank you for your question.

We can say that from an RD stream perspective, which I think is the level that we go into this matter at, we have, if we adjust for all effects that aren't pure trading we would be at the margin this, just slightly below 10%.

Great. Thank you.

And then another question was on the commercial development side. Just noticed, I mean you started, I think net you’re up three projects from last quarter complete – the value of completed and the value at completion or investment that's completions are down from last quarter.

When looking at these – what I had, is that only currencies affecting or have you done any adjustments to your ongoing projects, downsizing them in any way?

No, not fully sure I get your question, but if you look at the development of – if you look at the total investment to complete the projects in the ongoing portfolios 24 billion approximately to the market value of close to 30 billion there. And of course, if you compare that to the to the unrealized and realized gains here that have been dropping off a little bit this is a consequence of us, we have started a bit fewer projects than in 2019.

So, it has nothing to do with us taking down the value of any project. It is more effect that we have handed over and completed more than what we have started for some time.

Yeah, I just, know the thing was – I think you had 25 point something in the last quarter and you started some projects, and now it's 24.5. So, it's just a – it should go up and it went down and – but on your answer, I guess it's the currencies affecting that side.

Yeah, that's one, but it also depends on what you complete. I mean, how big projects do you complete and how big projects do we start?

Yeah. I agree.

And you haven't sold much this quarter. Okay.

Thank you.

Okay, thank you.

Hello. A few questions from me please.

Firstly on commercial site, at what stage of negotiations you are with potential investors, and do you see investors engaged in the process or not really? And also, what do you see hold investors back now?

Is it pricing or just general cautiousness about the economic situation? And also, can you give us a little bit more color on how you're developing across regions?

This is my first question. Thank you.

I can comment on the investors on how they are. We can see that the investors are more hesitant during the second quarter and that due to COVID-19.

So, I can see that we still see a lot of interest for our offices or development projects, but they are more hesitant and it takes definitely longer time here. So, I expect that to continue, but they are still there.

And there's still a lot of money out in the market.

But do you think of a source of this cautiousness is pricing or just because we're concerned about the demands of [their sector]?

We haven't seen that they are concerned over the pricing. They're more concerned over the COVID impact of the economy going forward, and how long it will last, how it will impact the market that's – there's a lot of uncertainties overall in the society and that impacts the investors as well.

Okay, and how does – you also developing in markets of your presence, understand that there is not a lot of transactions happening, but maybe you have now more brand [indiscernible] compared to like a few months ago.

I cannot see any differences really in the different market. We are in the good places for the future, definitely.

In Central Europe, we are in U.S. and in the Nordics, so there's not too much differences there.

Okay, thank you. And can I ask, there’s a question on construction?

How do you see margin impact from, as you mentioned, loss of productivity related to COVID-19, how meaningful it can be and like, how you see it even out this year or next?

I can comment on that. What we have said now is that the underlying profitability in the quarter is – continues to improve.

We haven't done exact figures, but if you look on a quarter-by-quarter, we continue to improve the underlying performance, but we do have the impact from the pandemic and we expect it to continue for a while.

Okay, thank you. And my last question on working capital [and over], like, do you still expect working capital underwriting construction now over this year and next, from previously booked provisions and reduce it as a percentage of sales?

Is your range still about, like 12% to 15%? And how fast you can achieve it?

Hi, this is Magnus answering your question. Thanks for asking.

In terms of the networking capital that is heavily connected with the volume of the business. So it depends a lot on how the volumes develop here.

And we don't see any particular reason to why we should have sort of a structural shift in the networking capital position, but so we've said repeatedly, we sort of have had a long-term average of around 13%. And we are quite a lot above that now when we compare networking capital to revenue.

So, which is why we're sort of, always sort of bit cautious to assume that we would remain at this very, very beneficial levels. We all know.

Thank you.

Thank you very much. Good morning.

I had some questions as well. I would like to start off with construction.

You mentioned that. In Sweden, the profitability had been impacted by housing construction in Stockholm, as well as industry and this is something that you've talked about previously.

Was there any sort of reasoning why you mentioned it, particularly in Q2, was there extraordinary costs in work to turn that business around or was it something else that impacted Q2 isolated?

Hi Erik. Anders here.

There were no particular, you know, provisions or something like that. Just underperforming projects in part of the businesses, and we're taking the cost we think is necessary to complete those projects.

We are suffering from so-called dead revenue until we complete those projects.

And when do you expect those projects to be completed?

It's – I mean normally, it's difficult to say because it's gradual completion of those projects, but it will take some time, but it's not the mega projects in those portfolio. So, I don't expect it to take too many quarters.

Okay, and the next question is regarding the U.S., you mentioned that it was mainly building that had been affected by the pandemic in Q2, whereas civil, at least to your word seems to be improving according to plan. Could you give us some sort of information as to what, how the improvement in civil is running versus last year and were there any extraordinary situations in Q2 in terms of service?

Hi, Erik. This is Magnus.

Thanks for the question. We have had no particular sort of one-off effects in the U.S.

business at all with the exception and of course of the entire COVID-19 impact there, you're referring to the service business and the improvement pace we have there, it very much follows the plan, I guess we're successively or completing the projects that we, that we need to complete to get rid of the dead revenue. And also to sort of advance the healthy portfolio that we have been building up here now, and being able to take profit from a healthier portfolio.

So, it has a lot to do with general improving down the line business. And then this, this is now such a big thing.

So, it sort of shows through in the result despite the negative impact of the COVID-19.

And do you still expect sort of the debt revenue situation in the U.S. to tail off this year and then more or less disappear as of 2021?

Yeah, we have no, we have followed the plan of burning that revenue. The plan that we showed quite clearly to capital markets, we’re more or less exactly on that.

So, that's the same situation.

Okay. Thank you.

And I also had a few questions on commercial development. It seems – could you say if there were any sort of extraordinary situations in terms of Q2 because it seemed like for example in Europe, you had rather strong EBIT in relation to your turnover there?

Erik, can you repeat that question? I'm not sure I got that completely.

In commercial development…

Yes, commercial development, were there any sort of extraordinary effects in Q2 that you would like to mention, particularly in Europe, because it seems like Europe reported an EBIT of 12 million divestment gains of 43 million and turnover of negative two?

Okay, now I get your question. No, there's no particular effect there.

It isn't. I mean, we have – what happens when we don't divest something is of course that we have some rental income and then we have overhead costs.

And occasionally, we can release the provisions if we've held that, either [mostly lease provisions] or other type of provisions. So there's been no particular impact there.

Okay. And also, on the outlook going forward.

You mentioned that in – there seems, I mean, obviously, there's increased uncertainty, but have you seen any opportunities for you to invest in commercial development arising from the overall uncertainty at this point, or is that still too early?

I think that's a really, really good question. We have a solid pipeline in commercial development.

I want to emphasize that. We have quite a few projects that are sort of ready to start.

And the fact that we haven't started them has been because if you back up a year or so, you recall we had sort of heavily increased construction cost in many places, many markets across the world. We decided ourselves for commercial reasons to, sort of, be a bit cautious there.

So, there's not a lack of opportunities there. Now, you're referring to specific opportunities from the COVID-19 situation.

I'll say they're starting to merge a little bit, but it's a bit too early to sort of say anything with certainty around that, but we can see some cases.

Okay, and then my final question was that you mentioned that you're preparing for a new normal, whatever that might mean, because I guess we're all guessing, but that seems to entail the fact that there will be more social distancing on construction sites and so on. Do you feel any need to change your margin target within construction due to a sort of a new normal situation as that pertains to the construction stream?

No, no, I don't think we should do that way. We still have the same target for construction.

And what we adapt ourselves to the new normal that is by reducing cost and adapting ourselves to market situation. So we have reduced cost already in the second quarter.

And we will continue to adjust ourself according to the market development in the different geographies, and then when it comes to social distancing, that is, of course, one thing we had to consider when we estimate the projects that has already started. So, I say it's not, I mean, we’re not taking any cost for that when we estimate the project.

So, that sort of included in the estimation. So this is more the impact we see now in the second quarter, in the ongoing project, there is more we can consider one-off the effects.

Okay, good. Thank you very much.

Those were my questions.

All right, since we have emptied out all the outstanding questions and by that we are done for this quarter. We wish you a great summer everyone.

Thank you.