CEO Comment from Annual Report 2018
Skanska’s financial position remains strong, powered by continued high performance in Project Development in 2018. Strategic actions to improve profitability and Construction execution are underway, while our values and sustainability expertise provide competitive advantages. In 2019, we will further ensure a strengthened company for the years ahead.
During 2018, my first year as Skanska’s CEO, I, along with the entire Group Leadership Team, have focused on three priorities:
- Restoring profitability in the Construction business stream
- Maximizing the potential of our successful Commercial Property Development and Residential Development streams
- Overall, making Skanska more efficient and effective
I am confident these priorities, and the firm actions driving them, are right for Skanska. These will strengthen Skanska and provide greater shareholder value for many years to come, building off the foundation we have in our clear values, solid balance sheet, integrated business model, excellent people and trusted brand. They will enable us to advance further with our Profit with Purpose Business Plan, through which we leverage our business to build for a better society.
Proud of our progress
We have done much work toward these priorities in 2018, and I am proud of the progress we have made. Within Construction, for instance, we are much more disciplined at bidding for projects, sticking to core project types and geographies and placing profit ahead of volume. By being more selective, our order bookings and backlog are trending downward to a healthier base. Also, we are implementing better ways of controlling projects and managing risks. We are on our way to gradually returning to stable profitability in Construction.
Overall in 2018, operating income was SEK 4.8 billion (5.5). Return on equity was 14.1 percent (18.6), below our target of at least 18 percent. We achieved strong performances in Commercial Property Development, Residential Development and several Construction units, particularly Skanska Sweden and Skanska Finland. However, those positives were negatively impacted by weak performances on two US projects and a major restructuring in Poland. The Construction stream operating margin of 0.7 percent (0.8) is well below our target of at least 3.5 percent – we aim to achieve that target through our strategic actions.
Project Development’s strength
Project Development continued to perform at a high level, with return on capital employed of 13.0 percent (14.5), topping our target of at least 10 percent. Commercial Property Development had another record year in 2018 with an all-time high in gains from divestments, surpassing SEK 4 billion. With continued strong demand from tenants and investors, the 53 ongoing projects – another high point – represent a robust portfolio with significant value to be realized in future years. We see the biggest potential for growth in the USA. In Residential Development, we remain well-positioned, despite reduced sales due to a slowdown in our largest market, Sweden. Shifting the mix of housing types in our diversified portfolio, combined with good project risk management, contributed substantially to the maintained profitability. We expect the Swedish housing market to have a longer recovery so we are taking actions to address this condition. Our Residential Development markets have long-term housing needs, and with the strength of our balance sheet we are pursuing opportunities. With Infrastructure Development, during 2018 we narrowed the focus to securing and developing the value of our existing public-private partnership (PPP) assets, mainly owing to market conditions. Over time, we will realize those development gains.
Bolstering our organization
In 2018, we created a new Group governance framework to reduce risks and increase effectiveness. This framework – to be fully implemented throughout 2019 – bolsters our decentralized organization, providing business units with more flexibility to serve markets and customers while ensuring proper oversight over critical business processes. This governance framework joins with Skanska’s values and Code of Conduct to provide the basis for delivering stable value to shareholders. Also, we further strengthened our organization by streamlining Skanska’s headquarters and bringing it and the Group Leadership Team closer to operations.
We continued to integrate sustainability into our business, enabling us to deliver better solutions for customers, drive operational efficiencies, manage risks and support our people and society in key ways. Our sustainability focus areas encompass Health and Safety, Ethics, Green, Community Investment and Diversity and Inclusion. These are closely linked to the United Nations’ (UN) Sustainable Development Goals, and they help us continuously uphold the universal sustainability principles defined by the UN Global Compact. During the UN’s General Assembly in September, I had the honor of sharing Skanska’s views of the business opportunities of sustainability at a symposium at the UN headquarters. I spoke of the rapidly growing market for green buildings, which provides Skanska with excellent ways to leverage our green expertise. Such discussions help us appreciate how much we have achieved within sustainability, and remind us how much more we can do. During 2018, five fatalities occurred on our projects. No fatality, and no injury, is 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. We see a close parallel between safety and profitability. Working safely requires operational discipline, which is also essential to achieving high performance overall on our projects. Our safest projects are our most profitable projects.
For 2019, we see sustainability, particularly relating to climate impacts, becoming even more important because of both regulations and voluntary corporate commitments. We actively promote such high demands. With this, we continue to see many opportunities across our markets, especially within Commercial Property Development. However, in many of our home geographies and segments, the markets are leveling out and it is difficult to tell how long this relatively favorable situation will last. Also, political and macroeconomic uncertainties appear to be increasing even further. We are well prepared for future conditions, as we have strengthened risk management processes and continually protect our balance sheet. To continue to grow Project Development and at the same time keep our financially strong position, the Board of Directors proposes a dividend of SEK 6.00.
Continuing to execute
The strategic actions we initiated in 2018 began to demonstrate positive results last year. We will continue to execute those activities in 2019 to build up to consistent, appropriate returns for shareholders. I and the entire Group Leadership Team, together with all of Skanska’s great people, look forward to continuing to earn the trust of our shareholders, customers and communities in the years ahead.
Stockholm, February 2019
President and CEO