CEO Comment from Annual Report 2019
Skanska continued its path of improving Construction performance and generating strong value from Project Development. During the year, Construction profitability improved, Commercial Development profits reached a record high, with the expansion to Los Angeles in the USA and BoKlok expanded into the UK. The Group’s guiding principles – our values and purpose – provides a considerable competitive advantage for the years ahead.
In 2019, our performance improved as we continued to execute our strategic plan. Within our Construction business stream, this involves prioritizing profit ahead of revenue and improving project execution. With Project Development, we are con- centrating on creating and realizing value, now and in the coming years.
Overall for the year, operating income was SEK 7.8 billion (4.8). In our Construc- tion stream, we raised the operating mar- gin to 2.4 percent, still below our target of at least 3.5 percent. Return on capital employed in Project Development was 10.3 percent, above our target of at least 10 percent. Also, our return on equity was 21.4 percent (14.1), above our target of at least 18 percent. Our shareholders experi- enced a price return of 50 percent for the year. Based on our robust financial posi- tion, Skanska’s Board of Directors pro- poses a dividend of SEK 6.25 (6.00).
Focused on Construction “sweet spots”
In Construction, our underlying profit- ability has improved. A significant recov- ery in Europe and the US and a continued high level of activity in the Nordics were the main drivers. This is a result of our strategy that includes improving the per- formance of current projects through more proactive risk management, a stron- ger commercial focus, increased cost effi- ciency and more discipline in the projects we pursue. Central to this is only targeting projects within our “sweet spots” – the sectors, geographies and contract types in which we have a track record of success and see the most future potential. We con- tinually review the performance of all our operations and we take action where needed. With this, Construction profit- ability should continue to rise.
Controlled expansion of Project Development
In Residential Development, Skanska is benefitting from our broad offering span- ning countries and housing segments. This enables us to shift investments to maxi- mize opportunities. Most notably during the year, we expanded BoKlok – the low- cost homes concept owned by Skanska and IKEA – into the UK, a country in which we foresee good opportunities for BoKlok.
This expansion is representative of how we grow our Project Development oper- ations in controlled, thoroughly planned ways. Furthermore, with Skanska’s robust balance sheet we are well-positioned as Swedish homebuyers shift to making their purchases closer to the move-in date.
During the year, Residential Development’s operating margin was 9.6 (14.0).
Commercial Property Development recorded yet another excellent year, with favorable demand from tenants and inves- tors. In this positive environment, we utilized Skanska’s financial strength to step up investments across all regions:
Nordics, Europe and the USA and we and realized about SEK 4 billion in value during the year. In 2019, we expanded this business stream to a fifth US city: Los Angeles, a dynamic global gateway with much potential for Skanska’s property developments.
Benefitting from a strong foundation
Skanska’s performance is built on the solid foundation we have in our clear values, strong balance sheet, integrated business model and trusted brand. Furthermore, our purpose of building for a better society inspires our great people and attracts other talented individuals to join Skanska. This is a strong competitive advantage, as for what companies stand for matters more than ever.
In 2019, we made significant progress in implementing an updated Group gover- nance framework that reduces risk and increases effectivity. This framework pro- vides business units with more flexibility to serve customers while ensuring proper oversight over critical business processes. The governance framework connects well with Skanska’s values and Code of Con- duct to provide the basis for delivering stable long-term value to shareholders.
Supporting the Sustainable Development Goals
Skanska is committed to ensuring a sustain- able future for our business and society. Our sustainability work links with the United Nations (UN) Sustainable Develop- ment Goals, which helps us continuously maintain our support for the universal sustainability principles defined by the UN Global Compact.
In 2019, Skanska set a target of achiev- ing net-zero carbon emissions by 2045, including our value chain. This is essential for supporting the Paris Agreement and for innovating climate-smart customer solutions.
Tragically, three fatalities occurred on Skanska project sites in 2019. Our aim is an injury-free environment and no fatal- ity should be acceptable. We must – and we will – close the gap between actions and truly living our Care for Life value. Increasing our focus on Health and Safety is a top priority for Skanska. Working safely requires operational discipline, which is also essential to achieving high performance overall on our projects.
Ready for the future
For 2020, Skanska will advance even further through our strategic actions to become more effective and better per- forming. We will continue to focus on raising Construction profitability and enhancing value creation through Project Development.
We expect high activity to continue in many of our markets. However, we will closely watch conditions, particularly given ongoing political and macroeconomic uncertainties. We are well prepared for future conditions, as we have strengthened risk management processes and continu- ally protect our balance sheet.
By the end of 2020, Skanska will publicly share the next business plan that will take effect on January 1, 2021. This plan will build on Skanska’s strengths, our values and purpose to build for a better society, with the ambition to deliver an industry leading total shareholder return.
Skanska has many accomplishments to be proud of and many opportunities ahead of us. I thank our customers, business partners, shareholders and employees for enabling Skanska’s success.
Stockholm, February 2020
President and CEO