Skanska AB (publ) (SKAB) Earnings Call Transcript & Summary

Hi, and good morning. This is Andre Lofgren, Head of IR speaking. And I would like to welcome you to the presentation of Skanska's 6-months report for 2020. The presentation will be held by our CEO, Anders Danielsson; and also our CFO, Magnus Persson. After the presentation, you will be able to ask questions. We will open up for a Q&A then. And with that, I hand it over to you, Anders.

Thank you, Andre. If we look at the first page here, you can see our new project, the large high-speed railway project in the U.K. that were booked in the second quarter. But we go to the second slide on just an overall on a 6-months report for 2020. We have underlying solid performance. We had a very strong first quarter, and the second quarter was disrupted by the pandemic. We can see that the construction are resilient, but impacted. And the impact is mainly in Europe and in the U.S. So the Nordic countries is pretty much unchanged regarding COVID. Project Development, we could see lower volumes. We are maintaining our profitability levels. We have return on equity on 20.6%. That's on a rolling 12-months basis, and 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 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. And 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-2 contract in the U.K. that helped, of course. The operating income was close to SEK 1.4 billion for the 6 months. And we had an operating margin of 1.9% versus 2% the same period last year. And if you look at the second quarter isolated, we had 2.2% on construction margin versus 2.9% last year. But then you should remember that last year we had a positive one-off effect in Norway, which boosted that margin with 0.5%. 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 in Construction continues to improve, which is in line with our strategy. But we 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 project has decreased, which is a good sign. But we do see that the productivity is decreasing due to the social distancing and other reasons as well. But the underlying, again, profitability is solid. The strategy remain selective bidding, improved commercial focus and increase cost efficiency continue to improve the profitability in Construction. If you turn page to the Residential Development, Slide 4 here. We had the same revenue on the 6 month -- for the 6 months as we had last year. We had a number of homes sold over 1,300 and pretty much the same level as the started units for the first 6 months. The operating margin is 12.2%, way above our target of 10%. We had a return on capital employed 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 -- saw 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 quarter 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 also -- we are also benefit -- it's 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 a target of 10%. We have 40 ongoing projects, which corresponds to SEK 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 rates. It's slightly above 60% for both of them. And we've been able to start 5 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, and it's -- 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 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 market going forward. If we go to Page 6, the Construction order situation. As I said, we have a strong order backlog. And so I'm not concerned over that. We have a book-to-build of 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 a 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 leave it to Magnus to go deeper into the financials.

Thank you, Anders. So we looked at the income statement for the Construction stream to start with here. And as you can see, we had revenues amounting to SEK 72 billion in the first 6 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 then 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 at S&A percent 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 there for now. EBIT margin came in at 1.9% for the first 6 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-off effect from the Norwegian operations. So if we take that out, we would 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 move to the next page, the income statement by geography. And starting with the Nordics then had an operating margin of 2.9% for the first 6 months versus 3.6% in the comparable period. And also here, if we are to exclude the Norwegian claims release in the -- in 2019, we are also at 2.9% in the last year's margin here. The mix is a bit different despite this. As you can see, the Swedish operations are down 2.6% in margin for the first 6 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 a 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 a 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 U.K., Poland and the Czech business here. For U.S., 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 buildings business who are sort of into commercial building here. 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 civils 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 has 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 where 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 here. 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%. S&A is down 6%. Again, in the second quarter, it's a bit of a special quarter, very high S&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 then 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 contingencies 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% in margin in the second half of the year. In the quarter isolated, 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 of positive impact from a good work with handling risks and projects. And so we have been able to release contingencies to profit. And this, in connection with the low volume in the quarter, gives a very, very high margin. We move to the next slide. Homes 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. Starts go up slightly compared to last year, while sales is going down. And revenue, if you do the math here 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 in terms of the -- 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 67% and unsold units is up somewhat compared to the end of 2019. We had 178 completed unsold units. But again, we have a good churn of these units, and we have no particular concentration of this to any geographical area. So we are not at all concerned with this. We think this is a very natural level to be at there, especially since we have seen a trend over the last perhaps 1.5 or 2 years where consumers are buying a little bit later on in the development process. We move to Commercial Property Development. And 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 0% and for the first 6 months then driven by a very strong first quarter. We have booked an operating income of SEK 2.1 billion over the gain on sale of 2 -- close to SEK 2.5 billion. So very strong first half of the year, but the second quarter wasn't very eventful here. 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 SEK 6.7 billion in unrealized gains. Then you can see the green line on this chart here represents then 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 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 of 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 a total investment at completion of around SEK 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 in -- we expect for the third quarter here to complete approximately SEK 1 billion in total investment. And here we have a bit of lower leasing with 30%. We reported 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 is of any major concern to us. But of course, we are working to get this up. The fourth quarter, we expect to complete properties in the tune of SEK 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 then the degree of completion for the ongoing projects. We have in the green line that represents the occupancy rate. Ideally, these 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 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 isolated. 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 the surrounding economies, but also practical issues around how we can showcase our spaces and 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 and concessions, we've had some of those as I think many property companies have, but this has mainly been in the smaller retail spaces of our properties, and it hasn't really had any relevant impact on us during the quarter. We move to the next slide, which is the group income statement. We have already gone through the operating income from the business streams. But if you look at line Central, which contains both our headquarter costs and some costs from our legacy business here, we had SEK 242 million for the first 6 months of the year in comparison to SEK 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 SEK 200 million in the second quarter last year. So if you add that back, we would be at approximately SEK 260 million last year. So we're successfully 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 6 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 a 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 SEK 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 had 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 have also seen large handovers both in residential and commercial development here. And then, of course, a little bit slower investment base than in the commercial development business all contributes to a strong cash flow for the first 6 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 of 16.5%, which is very high from all historical measures here. In nominal terms, our net working capital position was slightly down to SEK 25 billion. The second quarter is normally sort of a seasonal low point in net working capital, but we maintain a very solid working capital position here. Move to next slide, which shows investments and divestments in the chart and then capital employed at the bottom. And 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 then very well to the cash flow 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 there approximately SEK 1 billion. Move to the next slide. You can see the liquidity position in the group. We had access to SEK 21 billion in liquid funds, of which more than SEK 19 billion we can access within 1 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 move to the next slide on our financial position here. We can just note that we have a very solid financial position, a capital base of SEK 36 billion at the end of the quarter and an equity-to-assets ratio of 28%, which is very, very strong. And our net debt -- adjusted net debt at SEK 6.8 billion positive here. So that's SEK 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 will go into 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, it's we believe a weak market, both in the nonresidential 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 out in the market. We can see that the lockdown is 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 stimulate packages is helping out. But the funding is still uncertain. Residential Development, early signs of improving 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, and that will impact the supply, of course. So that can help up 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 rates 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 more long term. And -- 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 hesitant project 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. That includes cost reduction, that includes new ways of working and running the project with 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 in 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 Andre 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.

[Operator Instructions] Our first question comes from the line of Stefan Andersson of SEB.

Two questions from me. First, with residential. I understand that on a 12-months rolling basis, of course, the release of provisions evens out. So it's not a big thing. But in the quarter, they were rather massive. So just to understand the underlying margin there, I guess you don't want to give us that, but to see -- I can adjust the European business myself, but looking at the Nordic, given the low volumes in the Nordic, it looks like that margin is a little bit high as well. Is that also supported by some releases, operations? Or is that a clean margin in that [ case ]?

Stefan, this is Magnus. 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 just slightly below 10%.

Great. And then another question was on the commercial development side. I just noticed, I mean, you started 3 -- I think net you are up 3 projects from last quarter complete -- the value of completed and the value at completion or investments at that completions are down from last quarter when looking at least what I had. Is that only currencies affecting? Or have you done any adjustments to your ongoing projects downsizing them in any way?

No. I'm 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 portfolio is SEK 24 billion approximately then to the market value of close to SEK 30 billion there. And of course, if you compare that 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 a fact that we have handed over and completed more than what we have started for some time.

Yes. I just -- no, the thing was that I think you had SEK 25-point-something billion in the last quarter, and you started some projects, and now it's SEK 24.5 billion. So it's just -- it should have go up and it went down. And -- but on your answer, I guess it's the currencies affecting that line.

Yes. That's one, but it also depends on what you complete, I mean how big projects do you complete and how big projects do you start, so.

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

Our next question comes from the line of Anastasia Solonitsyna of UBS.

A few questions for me please. Firstly, on commercial side. 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 yield is developing across regions? This is my first question.

I can comment on the investors out there. 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 and our 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 the source of this cautiousness pricing or just because they are concerned about --

No.

Their demand of their [ center ]?

No. We haven't seen that they are concerned over the pricing. They are 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 do you see yields developing in markets of your presence? I understand that there is not a lot of transactions happening, but maybe you have now more better understanding compared to like a few months ago?

I cannot see any differences really in the different market. We are in 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. And can I ask, please, 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. We -- what we have said now is that the underlying profitability in the quarters continues to improve. We haven't any exact figures, but if you look on quarter-by-quarter, we continue to improve the underlying performance. But we do have impact from the pandemic, and we expect it to continue for a while.