Hi, and good morning. This is Andrea Löfgren, Head of IR speaking, and I would like to welcome you to the presentation of Skanska's six-month 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. With that, I hand it over to you, Anders.
Thank you, Andrea. If you 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. We go to the second slide on just an overall on the six-month 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. The Nordic countries is pretty much unchanged regarding COVID. Project development, we could see lower volumes. We are maintaining our profitability levels. We have a return on equity on 20.6%. That's on a rolling 12-month 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. 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-month 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 and U.S. We had these mega 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 six months, and we had an operating margin of 1.9% versus 2% the same period last year. If you look at the second quarter isolated, we had 2.2% of construction margin versus 2.9% last year. You should remember that last year we had a positive one-off effect in Norway, which boosted that margin with half of a percent. The underlying at that time last year was 2.4%. I can see that 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. 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 projects has decreased, which is a good sign. We do see that the productivity is decreasing due to social distancing and other reasons as well. The underlying, again, profitability is solid. The strategy remains selective bidding, improve commercial focus, increase cost efficiency, and continue to improve the profitability in construction. If you turn page to the residential development, slide four here, we had the same revenue for the six months as we had last year. We had a number of homes sold of 1,300 and pretty much the same level as the started units for the first six months. The operating margin is 12.2%, way above our target of 10%. We had a return on capital employed on a rolling 12-month basis, slightly below our target of 10%. 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 last part of the second quarter. Overall, we are able to maintain a good profitability level. It is also encouraging to see that the handovers during the quarters have gone according to plan, which is important. We are able to collect the cash here. We see early signs of improving market, but the uncertainty remains. It is also a 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 rate versus the completion rate. It is slightly above 60% for both of them. We have been able to start five projects year to date in the commercial property development. We have leased 120,000 sq m in the first half of the year, and that is 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 sq m 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 you go to page six, the construction order situation, as I said, we have a strong order backlog, and I am not concerned over that. We have a book-to-build of 104%. If you go to the next slide to the different geographies on page seven here, we have a rolling 12, as you can see there, on 104%. We also have good order backlog if you look into each geography. All in all, we have about 15 months of production, which is on a good level. With that, I will leave it to Magnus to go deeper into the financials.
Thank you, Anders. We look at the income statement for the construction stream to start with here. As you can see, we had revenues amounting to SEK 72 billion in the first six months. That is 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 is 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. 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.
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% for the quarter. As Anders has 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. If we take that out, we would be at 2.4%. We have tried to untangle the effects, the direct effects of the COVID-19 pandemic on the profitability. It has been very broad brushed, these effects. What we can see is that the underlying performance of the portfolio is improving. If we look at that, we would have a margin that is probably a bit higher than what we had last year.
Moving to the next page, the income statement by geography. Starting with the Nordics, there was an operating margin of 2.9% for the first six months versus 3.6% in the comparable period. Also here, if we are to exclude the Norwegian claims release in 2019, we are also at 2.9% in 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 six months compared to 3%. Here we have 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.
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 are not satisfied with. Here we have had a fairly big impact of the pandemic, both in the U.K., Poland, and the Czech business here. For the U.S., we had a 1.7% margin. Also in the U.S. business, we have had a big impact of the pandemic. It has been very well handled, and the impact has mainly been in the buildings business who are sort of into commercial building here.
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 here. 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 is a big shift between the first and the second quarter where we had very strong sales in the first quarter, and while sales in the second quarter here fell by 47%. That is, 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%. 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 contribute to this result here. We move to the next slide, which shows the different geographies. As you can note, all different geographies are over 10% in margin in the second half of the year.
In the quarter isolated, the Swedish residential operation is slightly below at 9.3%. We can also note that the European residential business with the 64% operating margin, that is obviously not the level at which we are trading. We have had a large impact here of positive impact from a good work with handling risks and projects. We have been able to release contingencies to profit. This in connection with the low volume in the quarter gives a very, very high margin here. 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 then.
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 here. This is more in terms of how the sales mix looks in our normal R&D business. We 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%. Unsold units are up somewhat compared to the end of 2019. We had 178 completed unsold units. Again, we have a good churn of these units, and we have no particular concentration of this to any geographical area. We are not at all concerned with this.
We think this is a very natural level to be at here, especially since we have seen a trend over the last perhaps one and a half or two years where consumers are buying a little bit later on in the development process. We move to commercial property development. In terms of the quarterly P&L, it is of course not so eventful. We have sold one small project in the quarter, and the EBIT in the quarter isolated is close to zero. For the first six months, driven by a very strong first quarter, we have booked an operating income of SEK 2.1 billion over the gain on sale of close to SEK 2.5 billion. Very strong first half of the year, but the second quarter was not very eventful here.
If we move to the next slide showing unrealized and realized gains, the unrealized gains are represented by the bars in this graph. Since we have not made any major divestment, there is not a big change to the bars either here. We remain at SEK 6.7 billion in unrealized gains. You can see the green line on this chart here represents the pace at which we are realizing these gains into profit. Naturally, this goes down in the second quarter due to the fact that we did not 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 of these 40 properties looked 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. 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. That is a very good balance. We expect for the third quarter here to complete approximately SEK 1 billion in total investment. Here we have a bit of a lower leasing with 30%. We reported on this also in the last quarter. This is a couple of properties that look very good. We are lagging a bit in leasing here. Of course, during the second quarter, we have not been helped by the market necessarily to address this either.
It is nothing that is of any major concern to us. Of course, we are working to get this up. The fourth quarter, we expect to complete properties in the SEK 2.3 billion, 70% approximate leasing rate also here. From there on, we have a sort of successively downward sloping leasing rate across the completion profile of the portfolio. We move to the next slide, which is leasing. Here you can see the orange line, which represents then the degree of completion for the ongoing projects we have, and 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. That is good from a risk balance perspective. You can also note that both of these lines have successfully drifted upwards in the graph.
We are now carrying a bit of a more mature portfolio than what we did a couple of years back. We leased 120,000 sq m, of which we had a little bit above 70,000 sq m in the second quarter isolated. Leasing in Q2 has been very weak, especially in April and May was weak. 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. The reason for this is, of course, social distancing, travel restrictions, and various lockdown measures and so on. Taken together, it has been a weak leasing in the second quarter here.
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 in 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. If you look at the line central, which contains both our headquarter costs and some costs from our legacy business here, we had SEK 242 million for the first six months of the year, in comparison to SEK 60 million last year. Here again, we have a major one-off effect, positive one-off effect in 2019 that needs to be adjusted for.
This is a Czech court settlement that gave us approximately SEK 200 million in the second quarter last year. If you add that back, we would be at approximately SEK 260 million last year. We are 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 six months compared to last year. The main reason for this is that we have a lower interest income as rates have gone down on our deposits. 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.
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. 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. We held up the cash flow very well in construction. We have also seen large handovers both in residential and commercial development here. Of course, a little bit slower investment pace than in the commercial development business all contributes to a 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. 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 the 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. As I said a couple of slides back, this contributes then very well to the cash flow for the business, obviously.
In terms of capital employed, we have come down a little bit in capital employed since the end of 2019 and the comparable period here, 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 the liquid funds, of which more than SEK 19 billion we can access within one week. Over the course of the second quarter, we have secured a couple of additional credit commitments and also extended the maturity profile somewhat of our debt portfolio. We move to the next slide on our financial position here. You 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.
Our net debt, adjusted net debt at SEK 6.8 billion positive here. That is SEK 6.8 billion adjusted net cash. We are very satisfied with this financial position. It is comfortable to be in such a good position, especially in situations of an uncertain market. It also gives us the opportunity to act when various business opportunities come our way. I think I will stop there, Anders.
Yes. I will go into the market outlook. If you turn to page 25 here, the market outlook is unchanged compared to last quarter. We can see a weak market. If I start with construction, 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. That is thanks to infrastructure investments and other public projects coming out 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. We can see that public infrastructure investment and the stimulation 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 developments overall in the markets that will impact the supply, of course. That can help out because we still have an underlying strong need for housing. There is a housing shortage, and that is supportive in more long term.
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. 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 is difficult today to really say how long this pandemic is going to last and also how it will impact the economies more long term. 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. We also take that into consideration when we bid for new projects, of course. 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 Andrei 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. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of Stefan Andersson of SEB. Please go ahead.
Thank you. Two questions from me.
First, with residential, I understand that on a 12-month rolling basis, of course, the release of provisions evens out. It is not a big thing. In the quarter, they were rather massive. Just to understand the underlying margin there, I guess you do not want to give us that. To see that I can adjust the European business myself. 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 of provisions, or is that a clean margin in that case?
Stefan, hi Stefan. This is Magnus. Thank you for your question.
We can say that from an already stream perspective, which I think is the level that we go into this matter at, we have a, if we adjust for all effects that are not pure trading, we would be at a margin that is just slightly below 10%.
I agree. Thank you. Another question was on the commercial development side. I just noticed, I mean, you started, I think, net you are up three projects from last quarter. The value of computer and the value at completion or investment at completion 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 am not fully sure I get your question. If you look at the development of, if you look at the total investment to complete the projects in the ongoing portfolio, it is SEK 24 billion approximately, then to the market value of close to SEK 30 billion there. 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. 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.
Yeah, just now the thing was that I think you had SEK 25 point something in the last quarter, and you started some projects, and now it is SEK 24.5.
It should have gone up, and it went down. On your answer, I guess it's the currencies affecting that line then.
Yeah, that's one. It also depends on what you complete. I mean, how big projects do you complete and how big projects do you start?
Yeah, yeah. I agree. You haven't sold much this quarter. Okay, thank you.
Okay, thank you.
Our next question comes from the line of Anastasia Solenitsina of UBS. Please go ahead.
Hello. A few questions from me, please. Firstly, on commercial side, at what stage of negotiations you are with potential investors? Do you see investors engaged in the process or not really? Also, what do you see hold investors back now? Is it pricing or just general cautiousness about the economic situation?
Also, can you give us a little bit more color on how yields are developing across regions? This is my first question. Thank you.
I can comment on the investors and how they are. We can see that the investors are more hesitant during the second quarter and that is due to COVID-19. I can see that we still see a lot of interest for our offices and our development projects. They are more hesitant, and it takes definitely a longer time here. I expect that to continue. They are still there, and there is still a lot of money out in the market. Do you think the source of this cautiousness is pricing or just because they are concerned about their demand on their side? No, we have not 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. There is a lot of uncertainties overall in the society, and that impacts the investors as well.
Okay. 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 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 the U.S. and in the Nordics. There is not too much differences there.
Okay, thank you. Can I ask this 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 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 quarters continues to improve. We have not any exact figures, but if you look on quarter by quarter, we continue to improve the underlying performance. We do have impact from the pandemic, and we expect it to continue for a while.
Okay, thank you. My last question on working capital unwind over do you still expect working capital unwind in construction over this year and next from previously booked provisions? Where do you see it as a percentage of sales? Is your range still about 12%-15%? 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. It depends a lot on how the volumes develop there. We do not see any particular reason why we should have sort of a structural shift in the networking capital position. As we have 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, which is why we sort of always are a bit cautious to assume that we would remain at these very beneficial levels we are now.
Thank you, [audio distortion]
Our next question comes from the line of Eric Granstrom of Carnegie. Please go ahead.
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, Eric. I understand. There were no particular provisions or something like that. Just underperforming projects in parts of the businesses. We are taking the cost we think is necessary to complete those projects, and we are suffering from so-called dead revenue until we complete those projects.
When do you expect those projects to be completed?
I mean, normally, it's difficult to say because it's a gradual completion of those projects. It will take some time, but it's not any mega projects in those portfolio.
I do not expect it to take too many quarters.
Okay. The next question is regarding the U.S. You mentioned that it was mainly buildings that had been affected by the pandemic in Q2, whereas civil, at least to your words, seems to be improving according to plan. Could you give us some sort of information as to how the improvement in civil is running versus last year, and were there any extraordinary situations in Q2 in terms of civil?
Hi, Eric. 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, of course, of the entire COVID-19 impact there. You are referring to the civil business and the improvement pace we have there.
It very much follows the plan as we successively are completing the projects 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. It has a lot to do with generally improving the underlying business. This is now such a big thing, so it sort of shows through in the results, despite the negative impact of the COVID-19.
Do you still expect sort of the dead revenue situation in the U.S. to tail off this year and then more or less disappear as of 2021?
Yeah, we have followed the plan of burning that revenue, the plan that we showed quite clearly at the Capital Markets Day. We are more or less exactly on that.
It is the same situation.
Okay. Thank you. I also had a few questions on commercial development. 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.
Sorry, Eric, can you repeat that question? I am not sure I got it 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 SEK 12 million, divestment gains of SEK 43 million, and turnover of - 2.
Yeah, okay. Now I get your question. No, there is no particular effect there. I mean, what happens when we do not divest something is, of course, that we have some rental income, and then we have overhead costs.
Occasionally, we can release provisions if we've held that, either most release provisions or other type of provisions. There's been no particular impact there.
Okay. Also, on the outlook going forward, you mentioned that there seems to, 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. The fact that we haven't started them has been because if you back up a year or so, you recall we had heavily increased construction costs in many places, many markets across the world.
We decided ourselves, for commercial reasons, to sort of be a bit cautious here. There is not a lack of opportunities there. You are referring to specific opportunities from the COVID-19 situation. I would say they are starting to emerge a little bit, but it is a bit too early to sort of say anything with certainty around that. We can see some cases.
Okay. My final question was that you mentioned that you are preparing for a new normal, whatever that might mean, because I guess we are all guessing. 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 sort of a new normal situation as that pertains to the construction stream?
I do not think we should do that.
We still have the same target for construction. We adapt ourselves to the new normal, that is by reducing cost and adapting ourselves to market situations. We have reduced costs already in the second quarter, and we will continue to adjust ourselves according to the market development in the different geographies. When it comes to social distancing, that is, of course, one thing we had to consider when we estimate the projects, and that has already started. I mean, we're not taking any cost for that when we estimate the projects. That is sort of included in the estimation. This is more the impact we see now in the second quarter and in the ongoing project. There is more we can consider one-off effects.
Okay. Good. Thank you very much. Those were my questions.
Just to remind everyone, if you would like to ask a question, please press zero one on your telephone keypads. There will now be a further pause while any questions are being registered. We have no further questions at this time. Please go ahead, speakers.
All right. Seems that we have emptied out all the outstanding questions. By that, we are done for this quarter. We wish you a great summer, everyone. Thank you.