Earnings Call: Q2 2021

Jul 23, 2021

Morning, morning, everyone. This is Andre Ljorgen, Head of Investor Relations at Skanske speaking. And I would like to welcome you to the presentation of Skanske's 6 month report for 2021. The presentation will be held by Anders Donisan, who is our CFO and also Magnus Persson, our CFO. And after the presentation, you will all be able to ask Questions? And with that, I hand it over to you, Anders. Thank you, Andre. Before we go into the figures, I want you to look at this picture. It's the new mine and train all in New York City, U. S. It's recently inaugurated and very Good for the city and the transport system there. So let's go into the 6 months report. Overall, we have a strategy that pays off. We can see construction steadily improving the profitability Quarter by quarter and also this quarter. Residential Development volumes and profitability on a high level And commercial development, divestments gains on attractive level. We'll go into that soon. And the operator margin in construction is 3.6% the 1st 6 months compared to 1.9% last year. And return on capital employed in Project Development well above our 10% target at 12.4% on a rolling twelve. Return on equity, 26.7 percent and a strong very strong financial position for the whole company. And we also managed to reduce carbon emission with 43% compared to the base Line 2015, and that includes the Scope 12. If we start with the different stream and construction, the revenue was SEK 61,700,000,000. We had order bookings, strong order bookings, SEK 84,700,000,000 for the 1st 6 months. Strong order bookings in U. S. We can see that the market is picking up. Projects are coming out in the market and clients, they are starting new projects. So overall, a book to bill of 120% on a rolling 12, so that's on a high level. And the order backlog It's slightly above SEK 200,000,000,000, also historically on a high level. Operating income, SEK 2.2 SEK 1,000,000,000, which correspond to operating margin of 3.6%. So profitability, we can see the profitability improving in all business units. And we also have a One off in the quarter, Magnus will go into that later on, our divestment of Infrastructure Services operation in the U. K. Impact in the quarter Positively. If going to the Residential Development, revenue SEK 8,700,000,000, very High increase on revenue. We can see also increase of the homes sold, 2,500,000 And also the start at home increased a lot to close 2,000 units. The operating income, SEK 1,200,000,000 Compared to SEK588,000,000 last year, very high operating margin. We have a 10% target, as you know, 14.3%. Also the return on capital employed 16.6 percent, rolling 12%. A very high activity and strong profitability. We have a solid land bank, but we can see that zoning process is slow in several of our markets. So the challenge for us is to work long term on this. And we have been successful because we have been able to start Increase the start of projects during the period. Longer term, higher unemployment levels is, of course, a concern If that materialize, but on the other hand, we have a shortage on homes in all markets, and that's Together with the low interest rate is mitigate that in a positive way. We can go into the Commercial Property Development. Operating income SEK 1.5 €1,000,000,000 Smaller quarter than comparable period, but strong Attractive margins. So we have a gain on sale of SEK 1,700,000,000 for this period. Return on capital employed Above our target of 10%, 10.6%. Today, we have 34 ongoing projects, Corresponding to close to SEK 23,000,000,000 in investment upon completion. And we also have a reasonable Alignment with the occupancy rate and completion rate, 35% versus 39%. And we started 11 new projects in the 1st 6 months. In the second quarter, we started The largest ever, the 8 in Seattle, outside Seattle in Bellevue, the largest ever, SEK 4,000,000,000 And that's very, very promising. It's in an area where vacancy rates are Very low, around 1%, and we have very large world company in that area. So I'm confident and we can start it. Leasing, however, was A bit slow in the quarter. We leased 94,000 square meters the 1st 6 months, But divestment at very attractive level during the quarter. So to conclude, the Commercial development, slowly is a market, but activity is picking up, and that's important. We can clearly see now in the second quarter that Activity is picking up. More potential tenants are looking for offices. We can see that the Visits and the view more have more views on our projects for potential Tenants, and that's encouraging. I believe that will continue in the future. And the property investor market is solid. We have very high interest amongst investors for our projects. Going to the construction again with the order bookings. Book to bill 120%. So we have a strong order intake In the quarter, again, order backlog 200,000,000,000 above 200,000,000,000. So that's Encouraging for the future. And if we go into each market and look at the order bookings, we can see that All areas, all regions have above 100% book to build. And You can see Sweden is slightly below 100%, but we do have a healthy backlog there, and we also had a strong quarter in Sweden and comes to order bookings. With that, I'll leave it to Magnus to go further into the details. Thank you, Anders. So we're going to the construction income statement. We had revenues for the 1st 6 months here, as you can see, we're down 14% if you compare it to the same period last year. And if we look at Q1, it was down 18%. Q2 was down 10%. So we're sort of slowly catching up here a bit with revenue development. And with the good bookings we've had now, we think that that's a good sign, of course, also. In terms of profitability, we can see that the measures we have taken continue to positively Impact profitability levels. We had the gross margin in the 1st 6 months of 8.1%, Which of course is super strong. Then we need to adjust to get to the underlying margin here for the gain on sale of The divestment we made in the U. K. Business. And if you take out the gain on sale, you will end up at a gross margin of 7.5% for the first 6 months. S and A costs falling nominally both year to date and in the second quarter. S and A over revenue is going up somewhat, but that's not really a concern for us. We're working with the cost structure in a good way here. EBIT margin 3.6% year to date and a whopping 4.7% for the Q2, but that is So a lot impacted by the divestment in U. K. If you strip the gain on sale out of the isolated quarter, you will end up with Operating margin of 3.5%, which is still a very good performance. If we look at the different geographies then, All geographies and all business units improved the margin year to date and also in the Q2. So the strong result we have is not sort of a consequence of any single event Or so, but this it's really a consequence of improving operations across the line, which makes this sort of a quality result, if you will. Sweden is improving as you can see 3.1% versus the 2.6% last year. And here we have In the Q2 last year, we commented on weaknesses in the Stockholm residential construction and also in the industrials business. These are not impacting negatively to that extent now. So that's, of course, very good. Europe, 6.1 percent margin. This is where you will find the divestment gain. So that's on the U. K, which is included in the Europe geography as we report there. So if you adjust the 6.1% for For the gain on sale, you will end up with 2.5%. Also that's a significant step up compared to the same period last year. In the U. S, 2.7%. Here, we have a very strong result in margin in U. S. Building, and we continue to improve the profitability in U. S. Civil as well. So we continue to see a stable project portfolio here, which is, of course, exactly what we have been working with For quite some time. We'll go into residential development. We increased revenues by SEK3.9 billion Compared to the same period last year, of which SEK 2,800,000,000 of that increase was in the 2nd quarter isolated. Of course, it is so that the comparison period was heavily impacted by the pandemic. So that needs to be kept in mind. But The markets have been very strong across our different geographies throughout the quarter and also in the Q1. Gross margin, unchanged compared to the comparison period, 18.4%, Very good. Selling and admin was higher, nominally speaking, but of course, the volume effect Drives down the selling and admin over revenue are down to minus 4.1%. And we end up The report period here, over 14% in operating margin, which of course is a very, very strong Profitability. And it's also a testament to the fact that we are able now to control costs in the projects in a very good way at the same time as we are able To make use of the strong market by working with pricing of our apartments when we sell them. If we look at the different geographies, also in Residential Development, profits increased in all different geographies, Highly encouraging. Margins are very strong both year to date and in the isolated quarter. The performance in Europe From continues, you can say, from the Q1 to be delivered on a very hot market. We have 21% margin now Year to date, it was even higher in the Q1. So this is a super good market. And we have, as I said, in that market been able to use it to our advantage At the same time as we can control costs and then we end up with very strong results here. If we then move on to homes started and sold, both sold units and started units are up compared to the Comparison period both year to date and in the isolated quarter here. We sold some rental units, but not a lot. That is not What is sort of explaining the difference here? It's the underlying business that are performing very well. We do have a good pipeline, but the zoning processes are unfortunately slow and that is limiting to some extent our ability to start In a pace that would satisfy market demand at the moment. But we're, of course, very happy to be able to increase starts here. If we then move to homes in production, this is now the Q3 in a row where we are able to increase the number of homes We have commented a few times that we would like a bit higher volume here. So this is precisely what we have been aiming for, Very strong. And we are starting as fast as we can essentially. We have a sales rate that is at 80%. That is From a commercial perspective, perhaps a bit high, even if it from a risk perspective is very good, would perhaps Ideal to be a bit lower here, so we have a good amount of units to sell, but that is sort of the same point as we need to start projects At the same pace as the market demand allows us. Number 1 sold completed homes 132 At the end of the second quarter, which is lower than the comparison period and lower than what we reported on in the Q1 this year. So we have absolutely No issue with that at all. It's overall a very strong performance in Residential Development. If we move to Commercial Development, The Q2 was a fairly sort of small quarter volume wise. We made a number of transactions, but they were smaller ones. We had divestments for about SEK1 1,000,000,000 in the quarter isolated and SEK3.4 billion year to date. But These divestments are done with very strong profitability. We have around 50% 40% to 50% in divestment margin. So It's clearly a strong appetite here from the investor market on our properties here. So to sum up, it's a small, but a very good quarter for Commercial and Proper Development. If we look at unrealized and realized gains, ending Q2, we had Approximately SEK8.5 billion in unrealized gains in our portfolio, which is then up a little bit more than SEK2 billion from What we had in the Q1. And we have 34 ongoing projects started 11 projects in total During these 6 months here. And of course, in addition to the increase in the unrealized gains, we did realize SEK0.5 billion in gains during the Q2. So it's good with this starts and good that unrealized Gains are increasing, of course. Then as Anders already pointed out, we also started the biggest project ever in the CD stream right Outside of Seattle in Bellevue, very, very good project and a very, very good location here. So I think it's encouraging here to see that we are now able to start a lot of new projects. We have been talking about this for a while, our ambition to do that, that we have a strong pipeline and that we will start when the commercial circumstances are right. And now we sort of execute on what we have been talking about. If we move on to the next slide, here you can see then the completion profile of our commercial development portfolio. And the orange bar represent the total investment for the produce that are completed, but yet not sold unsold for us. That bar is roughly unchanged from the Q1 at Right above SEK 8,000,000,000. And in that, the situation is sort of unchanged, if you There are these couple of problematic assets that we have, but the absolute majority of this is really nice properties with very good outlook. The leasing has, of course, been slower over the last year as everyone knows. If we look a bit forward here, we completed in the second quarter about SEK 1,000,000,000 worth of investment to 82 percent leasing. And we expect to complete around SEK 2,500,000,000 worth of properties in the Q3. And these are now leased to 8% 7%. So we have sort of a good leasing situation in the properties that we expect to complete sooner. In the Q4, we don't expect to complete anything. And then we have smaller property in the Q1 2022 that is already leased to 83%. And then you can from there you can see sort of the leasing rate In those properties go down successively, which is absolutely natural. I mean, that's quite far out in time, so to speak. If we go to the next slide, you can see leasing here. And leasing has obviously been slow for quite some time. But what started at right at the end of the Q1 has continued through the Q2 here, which are that we continue to see this Increase in market activity. We have an increasing amount of dialogue with potential tenants. They are specific and they are concrete, these dialogues. And that's very positive. So it seems pretty clear to us that underlying sort of the market is starting to improve even if this does not Going in our leasing numbers any longer yet. So this is it takes some time before the before it starts to become actual Signed contracts from that. And if we look at the risk balance in the portfolio, Anders already commented on this, but you can see the yellow Orange line and the green line here. They are moving in tandem with the percent of completion and occupancy rate in the portfolio. So this is a very important sort of risk Tool that we have and we have a good balance of this still today. So that makes us feel comfortable with the situation in the overall portfolio. If we then look at the group income statement, operating income from the business streams in the first 6 months SEK 4,900,000,000 Central costs are coming down a bit, taking us down to the operating income then of Around SEK4.7 billion, which is roughly SEK1 billion higher than we had in the same period last year. Net financials Coming down, underlying reason to this is mainly we have lower interest rates and we also have a lower amount of outstanding loans. So that explains the difference. We expect to tax out here on 16% in the First, we taxed out at 16% in the 1st 6 months coming down to profit for the period of SEK3.8 billion. If we go and look at the cash flow, this is sort of a historical development of the cash flow. As you can see, we've had quite a few cash rich quarters here in the group. We've been in a divestment Situation net divestment situation in RD and CD for quite some time. Now we are as already explained, we have started a lot of CD Projects and we are trying to start more RD projects. We are slowly moving into more territory that will become net investments. The cash flow for the period, we had in the operating cash flow a sizable Payment that is important to be aware of. And the reason to this is, of course, profits. Those profits that were made Chiefly from the EOR sale of the Elizabeth River crossings and the 2 in you, both of them located in the U. S, which is a high tax environment for us. And then we also paid out the dividend, which of course influenced the cash flow in the Q2. If we look at the working capital situation in construction, this continues to be very strong. We now have Negative working capital in the tune of 20% of revenue, which is the highest level It's been in sort of modern times here. And in the quarter isolated, we had the positive cash flow from change in working capital and construction of approximately SEK1 billion. Then the Q1 was negative to roughly the same extent. So year to date, we are more or less flat there. If we go to the next slide, the chart here you can see that's the investments and divestments that I have already commented Upon, we do, as we said, expect this green line that shows net investments on a rolling 12 month basis To continue to come down a bit there. If you look at capital employed, we are roughly SEK 1,500,000,000 Lower than we were in the end of Q2 last year, with the residential development increasing a bit And Commercial Property Development decreasing a bit in this year. If we look at our funding situation, we have plenty of available funds more than SEK16,000,000,000 at hand. While our external funding is green and during the quarter, we have repaid a dollar denominated loan to the tune of 65,000,000 Dollars. If we go to the next slide and sum up, we can say that we continue to have a very, very strong balance sheet Equity position of SEK41 1,000,000,000 at the end of the quarter and an adjusted net cash position of close to SEK14 1,000,000,000, Which gives us a very solid investment capacity going into the rest of the year. Thank you, Anders. Yes. I will go into the market outlook. And starting with the construction, we believe in a stable market, Unchanged from the last quarter, we do increase the outlook for nonresidential building in Norway and Finland And also for the civil market in U. S. So the pandemic is still present, But we can see that activity is increasing in our markets. And we can also see the public infrastructure investment To stimulate the economies, but the funding is still uncertain. What we can see, for example, in the U. S, That activity in on the state level is high. The tax revenue comes back to the different states, And they put money into infrastructure and start new projects. So that's the reason why the outlook is a bit more positive than last quarter In the U. S. Foreseeable. And we can say all over ambitious investment plans under development in many of our markets, But the lead times are expected to be long as always when it comes to large construction contracts. On the residential development, overall, continued to be stable market. We increased the outlook for Europe, which is a very, Very strong market. We expect that to remain strong in the coming 12 months. I mean, we can see a strong demand currently, especially in Sweden and Europe. And longer term, of course, there is a balance between Potential rising unemployment levels and economic uncertainties. But on the other hand, on the positive side, low interest rates All over and structural shortage of home in all our markets. Commercial Property Development. The investor market is solid. We have very high interest for our projects and our Facilities, when we put them out for divestments. But the tenant situation is still hesitant. The tenant is still hesitant, but The activity is definitely picking up. That's a clear trend we see now in the second quarter, And I expect that to continue. And to summarize the report here, strong report. We can see that the strategy is paying off. Construction is continuously improving the profitability and the project development, Solid performance. So we are well positioned for we have a strong financial position. We have a robust organization, And we can see opportunities arising in a sustainable economic recovery, and we are prepared to take advantage of them. Thank you. With that, I'll leave it to Andre again with the Q and A. Great. Thank you very much, guys. And as Anders said, it's time for the Q and A. So please follow the instructions from the operator. Thank you. And we have one question for you so far. That's from the line of Stefan Andersen of SEB. Thank you. A couple of questions from me then. Starting with the Construction division and the margin there, I know that you should always look at the 12 months rolling and a longer term perspective. Just to give a little bit more flavor on the very good Margin uptick year on year there, also excluding the divestment profit. If I Correctly, with entering COVID, while you were a little bit on the soft side last year, is there an element here of Cautious profit taking last year and that the beat, so to speak, is delivered extraordinarily strong in this quarter. No, Anders here. Hello, Stefan. No, I would not say so. The one off we have is The underlying performance here is around 3.5% in the quarter. So I would say last year, we were hit by COVID. We were We saw that the revenue went down and it took some time to reduce the cost at the same pace. We have been successful doing that The last part of 2020. So we're in good shape. And I can say this is more The reason is more that the strategy works. The pay is paying off, that we have been selective Now for some time, we are going for a project where we can see we have a competitive advantage and also been successful in the history. And we all that we also have the right people in place, the right team, that's crucial for us. So our approach is definitely no team, no bid approach. And we have been successful on that. Great. Thank you. And then on the CV side, I mean, you have a very strong balance sheet, I know that. And historically, if I go back many years, if you haven't Received top dollar for the houses. You always said to it and waited until the market is stronger. If we look at your portfolio right now, the leasing is a little bit on the weak side, but the investor appetite is super high. So my what I'm trying to ask about is, would you at this point consider to Divest even if you have not reached the level of lease rate That you would like to have to get the top pay, given the very strong end market? Or do you keep with that strategy To lift the properties to its top before you sell, what's your thinking about that Just want to that you could do. Stefan, this is Magnus here. Thank you for your question. I mean, we consider the properties we have To be absolutely top class. And we don't see any reason to sort of derisk our portfolio and compromise On the profit we will get from selling them, we have the capacity to stick with these properties. We argued that leasing, so We think it's in the best interest of the company and our shareholders to wait until we are wait a little bit longer to sell them. I mean, that's the commercial reason to why we act as we do. Okay, good. And then going to the Materials side, you touched on it. I mean, we don't see any effects right now, but two questions there. If we If the prices are where they are now and material, what are the risks for you? How much do you think you can pass on? And also connected to that this issue with the cement manufacturing in Flite, you're in international Operations, you source from many countries. Are you would you in worst case, would you be able to offset So would you also be hit by that impact? Okay. I'll start with the material price increase that We have seen that a couple of quarters now at least, high increases on certain material like steel, timber and so on. We have been able to mitigate that. So we have a very limited impact on the last two quarters when it comes to material prices. And we've also seen quite a big volatility on different material. Our way to handle this In the past and also for the future is, of course, to secure that we have suppliers that can deliver. And that's number 1. And also to secure prices before we bid for projects And as far as possible, if we can't secure everything, every prices, we do we buy it As soon as possible after we win the project. So in that case, we so we price projects today With the prices we have in the market and we secure that. We don't take we don't want to take risk in that because The market is too volatile. And I think uncertain. I think that will continue for some time. When it comes to supply of cement in Sweden, we're talking about the Swedish Market now. That of course, if the main supplier of cement in Sweden With a short notice of 3 months cannot continue to produce cement, that will have a severe impact on the Swedish Construction Industry. I expect that to be solved. There's ongoing dialogue between the Swedish construction industry Stakeholders with the government of Sweden, and I expect it to solve in a short time. Having said that, of course, we are preparing for all scenarios in this as we always do when it It's uncertainties in the market. So as we speak, we have groups that are preparing for all scenarios. Okay. Thank you. Thank you. And we have a third question come through. That's from the line of Edith I have one question, and it's regarding commercial development. You mentioned that you've seen the leasing market pick up throughout Q1 and into Q2. Could you be a little bit specific As to where you are seeing activity, in what markets are you seeing leasing activity picking up? Hey, Erik. This is Magnus. Thank you for your question. Absolutely. I'd say we see this increased activity in all markets. Maybe it's most clear in the CD business we have, but it is across all these markets. And it is about the type of and the number of discussions that we have with potential tenants. I mean, these have been ongoing for Some time, but when you see an activity increasing and it's also about the quality of discussions, how specific are you and are you discussing Terms or are you generally just looking at sort of a leasing situation? So we definitely feel that the market is underlying improving here. But as So it will take time before it will show in the numbers. So but it's a we see this improvement across all markets. Okay. And a follow-up on CD then. Can you say something about your ambitions To increase your activity in the Los Angeles area in the U. S, how far have you come there? And Are there any opportunities opening up sort of post pandemic? Yes. Yes, we see there's Quite a lot of opportunities in the LA market, but the strategy with that remains as before that we want to be cautious When we start something to sort of find our way forward in a market. The commercial development market city by city, they are quite Specifics, you really need to understand the business dynamics in each city, the locations, the tenants and so on. So We are there now. We made a couple of investments and we see our ambition is to do it long term and there is plenty of opportunities out there in this market. But We need to start small and sort of prove to ourselves that we know how to do this business there before we go In their big with bigger things, bigger investments. Okay. Thank you. Those were my questions. Thank you. Okay. There seems to be no further questions from the phones at All right. Everything seems to be crystal clear. And what remains then is just for us to wish you all a great summer. Thank you very much.