© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome, everyone. I'm Andre Lofgren and I'm heading up Investor Relations at Skanska. We are about to kick off the presentation of our 3-month report for 2019. It's held here in Stockholm live at our headquarters, but there's also a bunch of participants on the web and you will all be able to ask questions after the presentation. And it will be held by our CEO, Anders Danielsson and also our CFO, Magnus Persson.
Thank you, Andre. Good morning. Before I start, I want you to look at the picture here. It's one of our large project in the U.K. We are having the contract to transform the old historical Waterloo station in London. If I start to summarize the first quarter or first 3 months is -- in 2019, start with Construction. We are seeing gradually improvement in the profitability and that is really important and also encouraging. We had a 1.1% margin in the first quarter and I expect it to gradually improve. We can see also continued Project Development that we performed. We performed good in the Residential Development. In the Commercial Development, it's lower activity and that's usual for the first quarter and we can also see that the transaction we have made in the first quarter is smaller compared to previous comparable quarters. Unrealized gain in Project Development portfolio is SEK 12.9 billion and that's also encouraging. If you look at the future that we over time have created a lot of value -- realized a lot of value in the Commercial Development at the same time as we build up the unrealized value for future profit. Return on capital employed in Project Development overall is 9.7%, very close to our target of 10%. We had a return on equity for the whole group 13.4%, that's below our target for -- of 18%. We have a strong -- maintaining a strong financial position in the company and we also see that the market's supportive -- it's very supportive for our operation both in the Nordics, Europe, and also in the U.S. Going into the different stream now starting with Construction. The revenue is SEK 35.3 billion in the quarter. We have order booking of SEK 27.3 billion. Here you should look more over time on the rolling 12-months basis instead of on single quarter. So the book-to-build rates in the rolling 12 months is 92% and it's also perfectly in line with our strategic action which we -- that we took more than a year ago. The operating income 331 -- SEK 371 million. We only have an operating margin of 1.1% in the quarter. One, the first quarter is always a slow quarter due to seasonality. We have low activity usually in the first quarter and this is no exception. And we also see that we gradually improving the profitability in the Construction stream and that is very encouraging for me that it's starting second quarter in a row that we see continuous improvement. The overall ambition here or target is of course to continue to restore the profitability and reduce risk in the Construction stream. Going into Residential Development, revenue here is SEK 2.1 billion. We have sold -- increased the sold homes to slightly to 740 in the quarter. We started less homes compared to previous comparable quarter, but we started 423 in the first 3 months. The operating income, SEK 198 million and we see operating margin for 9.2%, which is also very close to our target of 10% operating margin. Return on capital employed above our target of 10%, we delivered 11.3% in the quarter. We continue to see a slow residential market here in Sweden. The good thing about our position now is that we are diversified when it comes to geographies, we are also diversified when it comes to segments. So we can continue to see the trend that the low segment, the BoKlok concept we have been there -- here in Sweden start -- continue to increase their part of the business. So we are in a good position and the ambition here is to continue to strengthen our position and continue to grow it in the long term as the market allows us of course. Commercial Developed Property Development, operating income SEK 84 million. The gain on sale SEK 345 million. Here we have it's a slower quarter when it comes to activity. Our big divestment or big project we are -- have divested in the quarter, but we have good -- reasonably good margin in the quarter in the divestment and we also have lot of activities. You can see here, we have 52 ongoing projects. We have corresponding to the investment of SEK 41 billion upon completion and we also have good mix between the occupancy rate and the completion rate. They are both 51% versus 53%. So they should follow each other, which they are. And we have started 5 new projects in Q1. The leasing activities has increased in the quarter to 86,000 square meters and we can continue to see a high interest amongst both tenants and investors. And that in combination with how much unrealized value we have in the portfolio makes me confident that we will be able to continue to deliver good result from the Commercial Property Development stream going forward. The order situation in Construction. As I said, we had a book-to-build rate of 92%. That's in line with our strategic actions. We have order backlog of SEK 190 billion. So we have a healthy backlog. And if you look at where have we taken our order in the last 12 months and also in the quarter here, you can see that on a rolling 12-month basis you should look at, we have over 100% book-to build rate in the Nordics where we have performed well over time. And we also have lower book-to-build rates in Europe and U.S., which is natural and in line with our strategic action. It's profit before volume that's the strong messages and we are determined and focused to continue to gradually improve the profitability in Construction stream. With that, I'll leave it to Magnus to elaborate more about the financials.
Thank you, Anders. We go into the Construction business then and if you look at the volumes here, we're just north of SEK 35 billion in the quarter. If you translate this into the local currencies, which makes a lot more sense, we're actually coming down around 5% there in revenue quarter-over-quarter which is then also in this case in line with what we are doing in terms of order intake. You saw the book-to-build at 92% and now are decreasing the volumes in local currency somewhat. So we -- this is sort of the start of something that will continue little bit and is fully in line with the strict criteria -- criterias that we now have in place here. Operating margin at 1.1%. Obviously this is below what we would like it to be if you look at the full-year basis. As Andres already pointed out, Q1 is always a slow quarter for construction and also in this case we have the seasonality effects especially in Europe which I will show you in a minute here.Selling and admin is I will say at a reasonably good place at 4.5%. If you go into the different regions then, you can see here Nordics coming down in margin from around 3% Q1 '18 to around 2% now in 2019 and basically the whole of this movement is due to the performance in the Swedish Construction operations. It's not unusual that we have this level in the Swedish operations in the first quarter I think -- and the project type businesses should be a little bit careful in making extrapolate individual quarters into the future too much. In this case, we had some close-outs of very good projects in the Q1 in 2018 that gave a fairly high margin and we don't have that in this quarter now in 2019. And if we look at Europe, minus SEK 94 million. This is a large part due to the performance in Poland and the Czech Republic, which almost always have negative first quarters because the production is not up -- not up and running in these business units during the first quarter. So they are basically taken over a bit by the overhead cost structure and then the profit comes in Q2 to Q4 instead. In this case, not fully compensated then by the performance in U.K. here. U.S., SEK 195 million. Seems like a big step down from last year, but you have to recall that in 2018 we had a fairly large settlement of claims in the U.S. service business to the tune of SEK 200 million. So if you were to take that out from 2018, you can say that the performance here is basically in line with where we were last year. And if you look at the trend here now, as Anders pointed out, we see a continuous improvement of the performance in Construction. We had negative first quarter last year, we had 0.7% for 2018, and now we had a profitable Q4 and now we're 1.1% in Q1 '19 here. So we see this sort of gradual improvement and also better more solid performance -- underlying performance in the Construction business, which feels good. Residential Development, here we can see volumes going up from around SEK 1.9 billion to SEK 2.1 billion. Operating income around SEK 200 million here and I'll say decent operating margin at the stream level of around 9%. We don't have any significant effects as we've had in some other quarters due to the release of risk reserves in projects that are close to completion in this quarter. So this is much closer to sort of the underlying margin here. You can also note here the selling and admin expenses of close to 8%. Obviously, Q1 is a slow quarter volume wise for almost all of our businesses here and also in this case and that has a toll on the overall performance here. If we look at the various geographical regions, you can see the Nordics are coming down in margin from 12% to around 9%, also in this case mostly explained by the Swedish business. And the Residential margin or the margin in the Swedish Residential business at just below 5% is obviously something that we are not satisfied with. You can say performance in the southern part of Sweden is good and stable whilst we have a more sort of challenging situation on the Stockholm market here. If you take that and you add the S&A component to this that we have Q1 as a normal low volume quarter whilst S&A is evenly spread over the year, this is unfortunately the sort of outcome of the operating margin level here. We have for some time and are still driving actions here to adapt our overhead cost structure to the current market situation. The performance in Europe is good. I would say this is a smaller business unit, but very solid operating performance with 11% margin. The markets in the Central Europe here is flattening out a little bit, but we still have a very solid market and also good performance there. Homes started and sold, you can see that these lines in the chart is converging now going together with started being much closer to the number of sold homes and we have discussed this in these presentations before. So in Q1 now we started 400 units and we sold 750 units approximately here. So it's sort of moving a little bit the other way. The quarter was very active also in another sense where we completed around 1,500 units that have been in production, but now we're sort of done and are not in the production stock any longer. And you can clearly see this also on the bar chart behind me here where the number of units in production is coming down from close to 7,500 to 6,500 here. So we're reducing the number of units in production here as we have completed such a significant amount. Sales rate at 69%, still a level that we are comfortable with. Obviously, we've been a bit -- little bit lower in some previous quarters here. And then we add around 90 units to the number of completed unsold, but you need to put that in perspective of the walk to the 1,500 that we did complete during the quarter. So the number then that is added to this unsold completed is just shy of 6% you can say of the total number of completed units, which is sort of a normal level here. I think also what should be pointed out is what is most important is that we have a good churn of the units that we have completed, but still have not sold and we are on a quarterly basis selling around 1/3 of those units. So I would say we're not very alarmed by the situation, we have it well under control here. Commercial Property Development, as has already been pointed out, Q1 is normally a slower quarter and also -- so in this Q1 here a little bit in contrast to Q1 last year where we had a significant amount of divestments. So it looks like the Q1 '19 is a very slim quarter, but I would say it's more normal in that aspect. We're making a good divestment gain on the units that we are actually selling here now. So gain from divestments around SEK 200 million and also a small write-down in our European business of SEK 69 million. I should point out here that this is actually met on another line in a positive effect. So the total net effect here in the -- on the result is actually 0. If you look at the total portfolio, we have unrealized gains now over SEK 9 billion and we are successfully increasing this as you can see and the green line here represent then what of these gains that we are realizing as we move over time on a rolling 12-months basis. So we are realizing around SEK 3 billion on a rolling 12-month basis. It goes of course up and down a little here. This is a piece of new information that we have added here. And if we take the total portfolio that we have that is unsold, this is the completion profile of that portfolio. So you should read this chart as the bars represent the total investment in the projects when they are completed and the timescale represents when in time do we expect to have completed these projects. So here you can see sort of the decayed profile of the portfolio that we now have that is unsold here. And then you can see the green line, which represents the current as of today leasing as of end of Q1, the leasing status for each one of those properties. So the conclusion from this information is basically that we have a fairly large number of properties that are completed here over the course up until Q3 2020 and the ones that is closest -- that have the completion closest to today are fairly well leased. You also note in Q1 '19 here we have a leasing rate of that property -- those properties of 44% only. But I would like to add here that one of those properties is a multi-tenant property in the U.S. where we by design do not least anything until that is sold. So we sell it completely unleased. So it's not because of a slow leasing activity on the market or us, it's because of the business model here. So feel pretty good about this. A word of caution, I realized that it's a bit alluring to take this and project it into the sort of gains and when we will realize that, but it's not always so that we sell an entity exactly when it is completed. It may move several quarters depending on the specifics of that property area. If we take the leasing in total, we are fairly well in balance in terms of leasing and the completion rate of the properties here as you can see and this is something that we always strive to have. In a neutral market, they should be fairly aligned the leasing rate and the completion rate. In a very good market, they can deviate to one side. And in a slower market, we allow them to deviate to the other side there. We also had a good leasing start of the year with 86,000 leased square meters there. So it feels like we have a very good start of the year in Commercial Development. If we take the group then and we add everything together, we have total operating income from the business streams of SEK 650 million. And then we have central costs SEK 145 million. In that, we also have the former ID business now, which we call asset management, included by SEK 25 million. Then we had some eliminations and everything adds up to SEK 488 million in operating income. Then we have an increase in financial costs. Of that, the total increase from the financial costs due to IFRS 16 is SEK 70 million. So if we were to strip that out, we would actually have a positive financial net here if you want to do the comparisons there. Taxes are at a reasonable level and profit for the period at SEK 355 million. Cash flow, I would argue it's a fairly uneventful quarter from a cash flow perspective. It's a little bit lower than Q1 last year, but normally in Q1 we have some outflows from the business. So not anything spectacular in this sense there. You also note on the dividend line that we had not yet at the end of Q1 released the dividend in terms of cash from the company. Construction and free working capital then. This is something that we have been talking about quite a lot. And as you can see here, we are at the end of Q1 had a very strong free working capital position in Construction still. We have been indicating for a couple of quarters that this position is probably not sustainable and we still do not think it is fully sustainable here partly because we have what we call provisions for loss-making contracts that artificially inflate the net working capital, but also partly because we are taking down the volume by design in Construction. So the nominal value of net working capital will come down and the 15.2% that we have here now in the quarter is of course I would say one of the historical highs here. So we would not fully count on this is staying up so high. If we look at investments and divestments, you can see here that we are continuously decreasing the capital employed in Residential Development somewhat, which of course tracks the overall market development especially in Sweden and we are also increasing the capital employed in Commercial Development. And if you take the group as a whole, we are now in a net divestment territory where we are divesting more than what we are investing here. And we had a very strong Q4 in terms of divestments in Commercial Development and we also have had significant amount of handovers in the Residential Development stream here lately. So that explains the green line going above the 0 mark here up into the net divestment territory. Financial position, on the graph here you can now see the new KPI that we introduced at Capital Markets Day, which is the adjusted net debt. The position we had at the end of this quarter was SEK 0.9 billion adjusted net cash then, which is I'd say solid level of that. And we have indicated also that we have a target that we should not go below minus SEK 9 billion here. Then if you look at the non-adjusted net debt, that increases significant here, but the reason to that is the IFRS 16 lease liabilities that comes into the balance sheet by the 1st of January this year. Then equity to assets are coming down to around 22%, but this is an effect of having booked up the equity that is to be distributed to shareholders via dividend there. Finally, the PPP portfolio that runs under the asset management organization, not a lot has happened here actually. We have a slight improvement in the unrealized development gain from SEK 1.1 billion to SEK 1.3 billion totally driven by FX changes and also by the derisking in terms of time passing in the net present value calculations here. There's not a lot of underlying operational developments in any of these projects that explains this. Okay. Anders?
Thank you. Right. Let's continue into the market outlook for the coming -- starting with Construction here and it's still a good market. It's a bit of a mix in the Nordics. If we go to Sweden, we have a slower residential construction market, the commercial market we have -- sorry, if you read the report, we have downgraded this somewhat. It's still a strong market, but we go from very strong to strong market and that's mainly due to some more uncertainty where the Swedish economy is going if you look 12 months ahead. But overall a good market in Sweden, strong civil market. Stable building market and strong civil market continued in Norway and in Finland it's also a stable market. In Europe, Brexit -- the uncertainty due to Brexit is continuing in U.K. We can see it especially on the non-residential market in U.K., the commercial that the investors are hesitating due to the uncertainty with Brexit. The civil market though in U.K. has continued to be stable. Stable building market, but a weaker civil market in Czech Republic. Poland, stable. We can see continuous cost escalation in Poland and Czech Republic that's still a overheated market. In the U.S. continued to be good market, we can see the economy is growing, the infrastructure investments are basically a very good pipeline going forward. And we also in the segments of the market where we are operating; in the healthcare, we are in the school; and all of those investments are continuing, but it's the fierce competition. If we got to Residential Development, continuing slow market in Sweden. We don't expect it to recover soon. We don't expect it to recover in the next 12 month. And Norway and Finland is more stable, in Europe, Central Europe it's slowing down somewhat after a very strong period of growth. And if you go to Commercial Developed Property Development, historically high levels on the market and we don't see any signs of slowing down and we still see a high demand from tenants, high interest from the investors both -- in all our markets; the Nordics, Central Europe and also in U.S. So if I summarize the group, the main focus continues to restore the profitability in the Construction stream. We see the good signs of the last 2 quarters that we are improving and we have the ambition to long term continue to grow the Project Development in line with how the market allows us of course. And we are adapting to a bit more slower market here in Sweden when it comes to Residential Development, strong pipeline in Commercial Property Developments and it's a high market activity in many of our market and segments. So with that, I leave it to Andre to start up the Q&A.
Yes. Thank you, Andres, and thank you, Magnus. I think it was very crystal clear messages, but there might be some questions anyway. And I think we can start here in this room if there is anyone in this audience otherwise we will open up for participants on the webcast. As I suspected. So I think we can please start to open up questions on the webcast. Thank you.
[Operator Instructions] First question on the telephone lines are from Miguel Borrega from UBS.
The first one is on your order intake. I understand that this is quite volatile on a quarterly basis, but can you give us some color on the decline in the Nordics excluding Sweden? And then my second question is on Residential in Sweden, your margin in Q1 of 4.8% is quite weak. Is there anything in here that could justify this performance? Any one-off that we should be aware of and where do you see your margins going for the remainder of the year?
I just start with the RD question here of 4.8% in Sweden. Is there any specific one-off that can explain that? I mean this is a project business and we always have many one-offs you can say in every quarter here, but there's not like one single big thing that explains this. Unfortunately if you put it like that, we have a portfolio where we have this level of performance in the Q1 there and we have certain areas performing very well and then we have certain areas where we need to take measures and ensure that we have a better profitability. In terms of the order intake, I'm not sure I fully caught your question. Your question was regarding the development of the order intake for the parts of Nordic excluding Sweden, was that correct?
Yes.
Okay. I mean we don't give any forecasts for order intake nor for anything else here. I'd say we are booking at the anticipated level given the measures that we've undertaken with our selection criterias.
And just a follow-up. Do you expect the 4.8% in Sweden to recover for the remainder of the year?
We are not happy with this level of performance and we will of course work to improve that so we can get to our -- the targets that we have, which is 10% return on capital employed and 10% operating margin here, which we -- is what we think this business should deliver long term. But given the market situation we are in and the market where we come from, this will of course take a little bit time.
Next question is from Erik Granstrom from Carnegie.
I have few questions and I -- perhaps we can start off with Construction Sweden. You stated that the low volumes in Q1 usually means that it's also a slow quarter in terms of profitability. How do you view this market area for the full year? Do you still think that Sweden is a construction unit that should deliver somewhere north of 4% or does this change the picture of what we've seen so far in Q1?
I can start it. If you look at the first quarter in Sweden, you're right, it is a slow quarter seasonally if you look at season affected. We don't see any big changes in the performance in Sweden. If we compare to last year, we had some one-off completed project that's boosted the margin in the first quarter. We don't give any forecast for going forward, but I don't see any big changes in the performance. It's still good performance in Skanska Sweden Construction.
And then moving on to the U.S. operations. What could you tell us about the civil operations versus the building operations in terms of profitability in Q1? Are you -- is there a big difference? Is civil still reporting somewhere in sort of red territory or are they back at at least breakeven?
We don't break it up in that sense. But I can say -- comment on the general performance in U.S. civil and U.S. building. We -- I'm encouraged to see that the action we took over one year ago in the U.S. civil operations started to pay off and we're starting -- we start to see gradually stabilizing the performance and the operations. So that's encouraging. Then we have those large project there with that revenue that we have to work ourself through. That's going according to plan and we -- so overall, I'm encouraged to see that we've continued to follow the plan we have.
And then I have 2 more questions. One is related to Residential Development Sweden, just to follow up on that. You mentioned that you're not happy with sort of the cost structure perhaps given where you're at. Does that mean that we should expect you to announce sort of any sort of cost situation for the coming quarters or are you at this point running the operations as is?
I'll try to answer your question, Eric. I'm not sure I fully understood it. Do you -- shall you expect us to announce something regarding the cost situation in the coming quarters? I mean changing the cost structure in a business, that is something that you always need to be very attentive to when the market moves. So we are always looking at this. And I'm -- I'd say I can't see that we would sort of go out and announce something about that, but it's a work that happens in the background but is extremely important in order to keep the right -- the right sort of scope of the organization and size of the organization to deliver in the market that we have here. This is a work that have been ongoing for a while and it's still ongoing.
And then finally was sort of a little bit of a detail question on CD. Magnus, you mentioned that the write-down was somewhat -- had a positive effect as well and I'm not sure I completely follow. Does that mean that without the write-down, you would still report SEK 84 million in EBIT?
That's correct.
[Operator Instructions] We have a question from Marcin Wojtal from Bank of America Merrill Lynch.
So firstly on Residential in the Nordics outside of Sweden, I think if my calculation is correct, the margin was very strong something like 13%. So was it like a clean margin or you had some positive one-offs perhaps in that business? And number two, regarding the implementation of IFRS 16. Did it have any impact on your operating profit? Could you quantify it perhaps?
I think those 2 questions leans towards me as the respondent. If we start with IFRS 16, I would like to guide you, Marcin, to the release we had in the fourth quarter where you can see the total breakdown of the impact of IFRS 16. That was not updated with the specific Q1 numbers, but you can still see the marginal impact that actually has on the operating income. In terms of RD, was that a clean quarter? I'd say it's a fairly clean quarter. I mean we always have and we have discussed this during last fall, some positive effects when we release risk reserves but there's always some negative effects when we also take risk reserves there. So I'd say it's a fairly clean quarter outside of Sweden.
And there are currently no further questions registered on the telephone line. So I'll hand the call back to the speakers. Please go ahead.
All right. Thank you for that and thank you for your attention and we will be back in Q2. All right. Thank you very much.