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CEO Comment 2015

2015 was a very good year in terms of performance, with increasing revenue, improved profitability and a very strong financial position. Our strength moving forward was also demonstrated by a substantial increase in project development investments.

We provided several signs of strength during the year: earnings per share increased by 20 percent to SEK 11.96; cash flow from operations more than doubled to SEK 7.7 billion; and we concluded the year with a net cash position of SEK 6.3 billion. Based on these good results the Board of Directors is proposing a dividend increase to SEK 7.50 (6.75) per share.

Most operations within the Construction business stream saw improved profitability. The performance was particularly strong in Sweden, Finland and Poland, while the U.S. was negatively affected by cost increases in a few projects. We are now in negotiation with clients in the U.S. on receiving compensation for the work involved in implementing the changes they requested.

New record for divestment gains

The Residential Development business stream saw improvements in both profitability and capital efficiency. In Commercial Property Development we can announce the highest divestment gains ever – a total of SEK 2.6 billion. Leased space of 375,000 sq m also represents a new record.

The Infrastructure Development business stream demonstrated its competitiveness in the U.S. public private partnership (PPP) market when we were selected for the expansion of LaGuardia Airport. In the UK, which has been a leader in PPP for a long time, we have sold two completed hospital projects and been contracted for one new one.

Good profitability throughout the five-year period

2015 was also the final year of our Profitable Growth 2011–2015 business plan. We established the plan with the assurance that the effects of the 2008 financial crisis had played out and a turnaround in the global economy was close at hand.

However, the economic recovery did not materialize until 2013 and the economy was then promptly affected by armed conflicts, a downturn in China, and the euro and refugee crises.

Despite uncertainty and unrest in the world, we maintained good profitability throughout the five-year period. Skanska’s share delivered stable dividends and a total shareholder return of 10 percent per year on average during the period, which is in line with what we promised.

Also during this five-year period, we laid the foundations to ensure greater value creation in the future.

We have expanded the three business streams within project development. Our investments increased by 70 percent to SEK 14 billion a year during the period 2011–2015, compared to SEK 8 billion in 2004–2010. During the five-year period these business streams generated an average return on capital employed of 10.6 percent a year.

44 ongoing commercial property projects

Commercial Property Development stands on three pillars of equal strength – Nordics, Europe and the U.S. We are now completing a total of 44 commercial property projects which we are leasing and will divest.

We are also firmly established on the fast-growing PPP market in the U.S. In mid-2016 we expect to sign contracts for the expansion of LaGuardia Airport – our third PPP project in the U.S. The construction contract alone will amount to more than SEK 20 billion, making it Skanska’s largest construction contract ever.

The Residential business stream is now reaching the established profitability targets thanks to efficiency improvements and restructuring of operations. We now have the right co-operation model where residential development is integrated into construction operations.

The Construction business stream has increased its presence on the U.S. West Coast and in regional markets in Poland. We have concluded our construction operations in Latin America and divested the maintenance operations there.

Continued focus on sustainable development

In recent years we have seen increased interest in private sector companies like us being engaged in developing the wider community. Our efforts are naturally based on a continued focus on driving development towards a better occupational health, ethics, green, diversity and inclusion, as well as a greater contribution to society – areas that are linked to our core business and affect the world around us.

What we do and how we do it are based on our values, which are shared by our employees through a true commitment to the environment, occupational health, ethics and openness, constant
improvement and cooperation with clients in the best interests of society. This is also entirely in line with the UN Global Compact – the world’s most substantial sustainability initiative – to which we remain actively committed.

Internships for the unemployed

More and more often we are helping the community through initiatives that go beyond traditional construction services. For example, we offer internship/apprentice programs and employment within our projects to people who for various reasons find themselves outside the labor market.

More and more clients are also requiring us to include social initiatives in our projects. We welcome sustainable procurement processes that demand more from us. I am proud that we are helping to improve our communities.

For positive development in society

But we also want to and can do even more; we are encouraging both our clients and our partners to join us in being more committed to positive development in society.

This is an important starting point for the new business plan which we call Profit with Purpose 2020. Our aim over the next five years is to deliver an industry-leading total shareholder return while building for a better society.

We will increase our profitability and grow in Construction, and in our project development operations in particular. We are aiming for a better balance in value creation between our Construction and project development operations.

Controlled growth in our home markets

We can do more of what we are doing today in Construction, that is reaching a profitabe growth in our existing home markets.

We will increase value creation in project development by investing more, particularly in Commercial Property Development and Infrastructure Development. Residential Development continues to grow with an emphasis on profitability and with a stronger presence in Warsaw and Prague.

Exploit new investment opportunities

We are shifting our business model – which has been a recipe for success for many years – into a higher gear. We are going to exploit attractive investment opportunities and we may therefore need to increase our borrowing to accommodate increased investment.

We are well aware that growth comes with risk. To mitigate this risk we are strengthening and escalating our units’ risk management processes by, for example, intensifying the ongoing monitoring of projects throughout the implementation phase.

Focus on constant improvement

To ensure that we can deliver on our targets, we also need to constantly improve. We have three main focus areas: improving how we work with our clients to generate business; raising and broadening the expertise and skills of our people; and becoming more efficient in the way we execute projects.

We operate in a world that by all accounts will continue to experience a degree of uncertainty. But we still believe that the outlook in our home markets are favorable. Development will continue to be driven by population growth, urbanization and migration. This, of course, means that there will be a need for new, modernized transit solutions, homes and workplaces, as well as infrastructure for energy, water and water treatment.

Increasing demands provide new opportunities

Strained public finances and an increased focus on costs in a lifecycle perspective are indications that more and more projects will be implemented in the form of public private partnerships. Procurements not merely based on the lowest price will become more common. Increasingly, our clients want us to participate in the early stages. This kind of collaboration demands more of us, but also gives us new opportunities to offer even more of our expert input.

Listening to our clients and communities

We are sensitive to the needs of our clients and communities and we are equipped to meet increasing demands.

Our achievements in recent years show that we have the potential to increase value for our shareholders and contribute even more to the development of communities in our home markets. To assist us, we have our proven business model, our strong brand, our values and our committed employees.

We will continue to deliver good results in 2016 while also paving the way for further value creation for our shareholders, clients and society in the years to come.

 

Stockholm, February 2016

Johan Karlström

President and CEO

Last updated: 4/6/2016

About CEO Johan Karlström

Johan Karlström CV