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

Good morning, and a warm welcome to the presentation of Skanska's second quarter report for 2026. And I'm Antonia Junelind and the Senior Vice President for Skanska Investor Relations. And here with me to present the second quarter report is our CEO and President, Anders Danielsson; and Group EVP and CFO, Pontus Winqvist. So shortly, they will take you through a business and performance update, look at the market outlook for the coming 12 months and provide an update on our financial position. And after that initial presentation, we will open up for questions. So if you have a question, please use the telephone conference provided in the invite telephone conference number that we have provided and then just follow the instructions by the operator and we will get back to you and answer your questions in a little while. But now I will hand over to you, Anders, to start the presentation.

Thank you, Antonia. And before I start, I wanted to look at the picture. You can see the Portage Bay Bridge in Seattle, where we are replacing the existing Portra Bay Bridge to meet higher standards when it comes to seismic resiliency standards. And we see a robust demand and good pipeline of projects for traditional infrastructure, and this is a good example of that and our capabilities and market position in the U.S. If I look at the second quarter, it's a solid performance. Construction, very strong operating margin and a record quarter when it comes to order intake. Residential Development, strong results in Central Europe, but Nordics are impacted by low volumes, provisions and restructuring costs. Commercial Property Development, 2 project divestments, and we also have U.S. asset impairment charges in the quarter. Investment Properties delivered stable results, and we also divested the PPP asset 4 in U.S. during the quarter. Operating margin in Construction, 4.3% also if you look at the rolling 12 months, 4.3%. And the return on capital employed in Project Development on a low 1.3%. Return on capital employed in Investment Properties, decent, 4.8% and a return on equity of just shy of 11%. We maintain a robust financial position, which is critical for us. And we have reduced the carbon emission with 64% since the baseline year 2015. So if I go into each and every stream here, start with Construction. revenue pretty much in line with last year. We have a record high order bookings of SEK 68 billion. which gives us a book-to-bill ratio of 114% on a rolling 12-month basis and a record high order backlog close to SEK 300 billion. Operating income, SEK 1.8 billion, again, representing an operating margin of 4.3%. So strong performance overall. I go into the Residential Development. Revenue was at SEK 1.7 billion, and we have a solid sales and strong profitability in Central Europe, weaker result in the Nordics due to weaker market. And the Nordic operations are impacted by low volumes, provisions and a restructuring cost. And we have started one project in Central Europe comprising 156 homes, and we started 2 small projects in the Nordics. Moving on to Commercial Property Development. Operating income is minus SEK 170 million in the quarter, and that's due to the asset impairment charges on a few U.S. properties that negatively impacted the results. But we have a gain on sale in the quarter of SEK 217 million. We have 17 ongoing projects, which representing SEK 12.8 billion in total investment upon completion. And we have 16 completed projects, which corresponds to SEK 18.5 billion in total investment. In these completed projects, we have a decent leasing ratio of 77%. So we have a positive cash flow from those assets. Two residential rental projects were started and divested in the quarter, and we also delivered -- handed over 4 previously sold properties to external buyers. Moving on to investment properties. Very stable operating income of SEK 85 million, and we have also a good economic occupancy rate of 83%. And the portfolio today consists of 7 high-quality office properties in Sweden with a total property value of SEK 8.3 billion and a solid performance in the second quarter. I move back to construction to look into the order bookings. Here, you can see order backlog, order bookings over time, over 5 years. And you can see on the blue bar here that -- which is the order backlog, which is on a historically record high level. And it's a good -- I would say it's a good quality in the backlog. And we have been successful in positioning ourselves and winning projects in position ourselves where the market is strong and good, and that goes for pretty much all the geographies. And you can see almost touching the SEK 300 billion mark here, which is good. And if I look into the different geographies when it comes to order bookings. So here, you can see very, very strong order intake in Sweden and U.S., which contributes to the SEK 68 billion for the single quarter. And here, you can also see the book-to-bill ratio rolling 12, ending up at 114%, which corresponds to 21 months of production. So it's unusually high also when we look at that. So with that, I hand over to Pontus to go into the details.

Then starting with Construction and the income statement. As you may remember, we had a somewhat weaker start of the revenue in Q1. You can see that we are now catching up by especially growing the Nordic business. U.S. revenue is still somewhat behind, but you have all seen that we have a strong order booking in the quarter, and you also saw that we released another order here during the day. So quite confident that we will gradually see an increase also with the U.S. revenue. Totally, the revenue increased with 1% if you adjust it for currencies. Selling and admin of SEK 1.7 billion is resulting in an operating income of SEK 1.8 billion for the quarter and a strong operating margin of 4.3%, both for the isolated quarter and for the rolling 12-month period. Looking -- so looking then into the income statement for the different units, you can see that it's a strong delivery overall, and I would say, especially in the Nordics and in the U.S. Operating income increased by 12% in local currencies and resulting then in a margin of 4.3% compared to 3.9% for the same quarter last year. Going into residential then, you see here that we have a lower revenue compared to last year. This is mainly because of fewer started and then consequently fewer sold units, resulting in an operating income of SEK 25 million and a weak operating margin, I would say, of 1.5%. For the different units then, we have had a low sales in Finland and Norway. It has been a better sales in Sweden, but still we are selling from a backlog with lower profitability. And added to that, we have taken costs for warranty provisions and restructuring for SEK 70 million in the Swedish business. Central Europe is continue to perform on a very strong level, started 156 units and sold 132 units in the quarter and came out then with SEK 122 million in operating income, which is then 23% in operating margin. If you look into the rolling 12 months margin, it's 18% for the Central European business. If you were excluding the restructuring and warranty provisions, the total RD margin would have been 5.6% -- in the Nordics, 2 minor projects were started. And as I said, one larger project with 156 units in the Central European business was started. If you look into the sold unit, the absolute majority of the sold came from either Sweden or Central Europe. I would say that we had stable levels of the homes in production, where more than half is within our Central European business. The sales ratio increased somewhat to 55% from 53% by the end of first quarter and the number of unsold completed is decreasing. from SEK 350 in Q1 to SEK 326 million. And here's worth to mention that Nordics is decreasing more actually. They are decreasing with 42 units and the Central European business is increasing somewhat with the completed unsold, increasing with 18. And that's basically good because we have a positive price momentum in the Central European business. Going then into our Commercial Property Development business. We sold 2 rent residential projects in the second quarter, and we had divestments divestment gains of SEK 217 million, and those includes also some provisions from previously sold projects. We have, as you heard, made impairments in a couple of our U.S. properties. Total amount of write-downs was SEK 464 million. And the reason for that is that we have seen increased long-term interest rates within U.S., which also is then resulting in uncertainty among U.S. property investors. And therefore, we have seen that there is a need to reduce the value of our U.S. portfolio somewhat. When it comes to the development gains in our portfolio, it's stable unrealized gains. We completed one project during the quarter. And therefore, you can see that it's a slight increase here of the completed properties and the unrealized gains. The completion profile of our unsold projects has increased. You can see here the bar far to the left increased from 71% to 77%. One project was completed. So generally, you can see that it's a good leasing activity in our completed portfolio. And there are some other, if you're tracking this, other increasing of leasing ratios if you compare to previous quarters. Yes, as I said, stable leasing in the portfolio. We leased out 54,000 square meters in the second quarter. And you can see that we steadily are keeping the occupancy rate above the completion rate of our ongoing projects. Investment Properties continues with a stable operating income similar to previous quarter of SEK 85 million and an occupancy rate of 83%. There are no changes in the market value, and we have an average valuation yield on the portfolio of 4.7%. So summing up the group, you see that we have an operating income from our businesses of SEK 71 million, and that includes then the write-downs in the CD business of SEK 464 million and the warranty and restructuring costs of R&D of SEK 70 million. On the central line, we have a positive contribution of SEK 334 million, and that includes then a net contribution from our business operation of SEK 559 million. This includes the profit from the PPP portfolio, including the divestment of 4 and also costs from legacy operations. Net financial items of SEK 241 million includes interest payments from dispute settlements. Tax rate is the same as we had in Q1 and ends on 24% Cash flow. We had a very strong operating cash flow during the quarter that was supported by payment and delivery of previously sold commercial properties as well as a positive development of working capital in construction. Also, the dividend was distributed out to the shareholders of SEK 5.9 billion during the quarter. And you can see also after that, we had a positive cash flow in the group. continued strong development of the working capital. And by the end of the quarter, it amounts to SEK 33.9 billion. We had SEK 31.6 billion by the end of Q1. And SEK 1.7 billion on that is based on improved working capital within the business. And especially, I would like to mention that there are milestone and mobilization payments in recently started projects in -- especially our U.S. business. It's also SEK 0.5 billion in a positive currency effect of the working capital. Investments and divestments, we had strong net divestments during the quarter, mainly then because the earlier mentioned delivery and payments of CD assets Also, RD contributed with net divestments during the quarter. This also then resulted in a reduced capital employed and sum up to SEK 63.4 billion. We had SEK 66.3 billion by the end of Q1. When it comes to available funds, it has went down somewhat from SEK 27.7 billion to SEK 23.1 billion, of which SEK 7 billion is unutilized credit facilities. And the reason for the decline here is that we have choose to reduce some of our unused credit facilities and also repaid some parts of our external debt in order to have a more efficient management of our financial position. Then we continue with a strong financial position with an adjusted net bearing interest net receivable of SEK 8.7 billion. You can say that the reason for the reduced adjusted net cash position, even with the strong operational cash flow that I mentioned is explained by a lot of the cash that has been coming in is coming into our joint ventures and then is treated as a restricted cash, and that is then deducted from our adjusted net cash position. So by that, I hand over to Anders and comment about the market outlook.

Yes. If I look at the market outlook stream by stream, start with construction. So the construction market outlook is mostly stable. We have a demand in the civil segment generally robust and in all our geographies. And the building market is somewhat weaker, but improving, supported by investment in tech industry and defense sector and also other social infrastructure. U.S. market is stronger than Europe, but we do see increased activity in the Nordics. So we have raised our outlook for the building market in Sweden and Finland based on demand in our important segments like social infrastructure, industry, data center and so on. Residential development market, a good level of activity in Central Europe with stable increasing prices. In the Nordics, slowly improving activity in Sweden, but it will take some time before full recovery of the market will take place. And the Norwegian and the Finnish market for new build remain muted. Commercial Property Development. In the U.S., the occupier market remains broadly stable, but the transaction market activity is constrained by elevated long-term interest rates and macroeconomic uncertainty. Good access to financing and generally stable yields support transaction activity in the Nordics and Central Europe. And for the investment properties, it's a polarized market, but we do see a strong demand for high-quality space versus the older stock, and we can offer that, of course, high quality. It's a competitive market, but the rents are expected to remain mostly stable. So if I summarize this report, strong performance in Construction. It's a mixed picture in project development. So Construction operating margin, very good and record high order intake. Residential Development, strong result in Central Europe and Nordic, they are impacted by low volumes, provision and cost for some restructuring. Commercial Property Development, 2 project divestment and U.S. asset impairment charges in the quarter. Investment Properties delivered stable results, and we divested the PPP asset 4 in the quarter. And cash flow from business operation was high, and we maintain a very robust financial position. So with that, I hand over to Antonia to open up the Q&A.

Thank you very much. Thank you for presentation of the second quarter performance. And as Anders mentioned, we're now going to open up for questions. [Operator Instructions] So I will start with -- now open up for the first caller. And I will ask you to present stating your name and organization. So Maruna, please introduce the first caller for us.

[Operator Instructions] The first question from the phone comes from Julia Sundvall with ABG.

Julia Sandvall from ABG Collier. Just a couple of questions from my side. Starting on the residential, you are rebalancing the Nordic portfolio. Can you give us some more flavor how long will it take? When are you happy with it? What's the strategy and target?

Yes, I can answer that, Julian. Our target is 10% return on the capital employed in project development. That goes for AD as well, of course. So we are not starting projects if they doesn't support that target. And what we have seen now in the quarter with the increased sales in Sweden, most of them are from the older stock with low profitability, but we can see that projects that we recently started, they are performing as expected and supporting the 10%. And we also have sort of refocused our portfolio or strategy in the Nordics. We are focusing on fewer cities, and we are focusing in Sweden of the large 3 cities with the surrounding area and the same focus in Norway and Finland as well. So -- and that because we see that we need to come back to the 10% return on capital employed in a reasonable time.

Yes. Perfect. Sounds reasonable. And the restructuring provision cost you're taking. Is that the end of it? Or should we expect more in the future? .

We have done some changes in the organization, and we've taken charges for that in the quarter. But I cannot out rule any further action going forward. It depends on how the market will develop. But right now, we we see we have the right organizational structure in place to meet the current market. .

Yes. Perfect. And then another question on the commercial development. You take write-downs in the U.S. Can you give us some more flavor? Is it in a large project? Is it smaller projects, which regions?

The flavor I can give you is that there are in a couple of projects in our U.S. completed portfolio.

Okay. clear. And then on the construction, the margin is overall super. Europe is a little bit weak. Can you give us some more on that.

Yes, it's weaker than others. It's very strong in the Nordics and U.S., but I would say it's not something I'm concerned about. They have a good position, and I expect them to continue to perform on a decent level. .

Yes. And then just 1 last question for me. On the U.S. sales in construction. It's same reason. I think [indiscernible] understand it? Or is it some other reason behind it? .

You mean a U.S. -- what you're referring to? .

Yes, the construction in USA.

Yes. Were your question on top line or revenue?

Yes. Yes. exactly.

And just please repeat the question. It was regarding when the top line will increase or what -- sorry.

Yes, exactly. So it was a little bit weak in the Q1, and it's a little bit weak now with a decline year-over-year. .

Yes, yes. I mean it's lumpy. There are especially some projects related, you can say, to data centers where you have a quite quick burn rate in the project. So it depends a little bit when you are starting new projects and they are, so to say, burning into the revenue. But as I said in the presentation here earlier, you also see that we have quite a strong order intake in our U.S. operations. So I think you would gradually see an improvement during the year.

So we're going to move on to the next caller.

The next question from the phone comes from Han Graham with Jefferies.

I will ask 2 questions, and then I might jump back in the queue. And both on U.S. construction, actually. First of all, margins here, I think, exceptionally strong in the quarter. Just trying to understand if there's anything one-off in the print. We've seen some other companies booking tariff refunds as a positive. So just checking if there's any impact from that in the U.S. in your numbers in Q2 or anything else that you'd call out that drove that strong margin? And then second question on U.S. construction. We've seen order intake in this market be very strong in Q2, particularly in some of these large civil projects. Has there been anything that's really driven this acceleration? We've been going through a period of quite a slightly softer demand, I suppose, so we've really seen that pick up in the first half of this year. So just trying to understand what you're seeing on the ground for order intake and what you're thinking or how the -- just outside of the order book is looking into the second half? .

Yes. Graham, if I start with the U.S. margin, we have some movements underneath this overall margin, which is very strong. And -- but it's more of a normal positive effect and also some right negative effects. So overall, and we don't have any impact from recovering from tariffs. That's not included in the U.S. operation. So that's -- but it's a strong performance. And of course, it can be a bit lumpy when you look at the single quarter. But it's overall very strong. We have a very strong on a rolling 12-month basis, which supports the second quarter as well. So it's a strong performance. Order intake has been great, and we have been very successful. It is a strong market and have been a strong market over time. So we have a very good book-to-build of 126% in U.S. And that also supports the operation and the revenue going forward. So I'm optimistic we can see that the current infrastructure investment program is holding up, and we see that very good pipeline going forward. And we can also see that house representatives in the Congress, they are discussing new funding program for the future. But the current one will support the market for a few years ahead, definitely.

I might squeeze just one more in, sorry. Just on the buildings outlook upgrade for those Nordic markets. I think I can see that those have been weak for the past 3 years. And so just looking -- trying to understand what you're seeing there that's really driven that upgrade and outlook. Particularly, you mentioned around the data centers. Is that some where we could hope for a little bit more activity from Skanska in the Nordics region going forward? .

Yes. We see higher activity from clients, and we have a good experience from U.S. and U.K. from previous years. So we are coordinating and transfer knowledge and also the client relationships to the Nordics, and I would expect us to be part of that development positively. And as also said in the presentation that we see higher activity in other segments as well, social infrastructure presence in Sweden, very high strong demand and for sure investment in defense that is strong in the whole Europe. .

Very good. So we're going to move on to, I think, Bank of America.

Correct. The next question comes from Arnaud Lehmann with Bank of America.

Thank you very much, and good morning to everybody. Just a couple of follow-ups on commercial development. If I remember well, I think in the U.S., you have 7 completed projects. So I'm just trying to understand why considering interest rates have gone higher, why you think it makes sense to do some write-downs on only 2 projects. And why not the other 5, I guess, is the question. And the second question in terms of the strategy in commercial development, you've been talking in the past about expanding in new categories, including life science, but it feels like maybe this is on pause at the moment, waiting maybe for more disposals in the office assets. Is that the case? Or are you already exploring opportunities in new product categories? And in a way, your balance sheet is strong. So you don't really need to sell projects to start the one.

If I start with the write-downs there. You said -- sorry, you misheard me, I would say, it's a few projects. So a couple of progress that we have written down. Regarding the other questions, when it comes to other kinds of investments in U.S. segments. I would say right now, we are not starting any new projects. We are focusing on the existing portfolio. Then what happens later on, it's very difficult to say anything about right now. Then it was maybe somewhat more question.