CEO Comment from Annual Report 2016
Skanska delivered very strong earnings growth and maintained a solid financial position in 2016. Our Project Development business streams were the engines of our performance. In 2017, we will continue to deliver on the Profit with Purpose Business Plan, backed by favorable outlooks in our home markets.
In 2016, Skanska began the journey of our Profit with Purpose Business Plan, which will guide us until 2020. Under this plan, it is about doing more of what Skanska has long done, and doing it better.
With both Profit and Purpose, Skanska demonstrated strong performance in 2016.
Earnings per share increased by 33 percent to SEK 15.89.Our performance was driven by all-time high earnings in the Residential Development and Commercial Property Development business streams, together with divestment of an Infrastructure Development project. Our Construction stream did not meet its operating margin target. Still, we ended the year with a robust financial position. Based on these results, the Board of Directors is proposing to increase the dividend to SEK 8.25 (7.50) per share.
The Skanska share delivered a total shareholder return of 36.4 percent in 2016, compared with 9.6 percent for the Swedish stock market. Furthermore, in December 2016 Skanska’s share reached a new high point of SEK 218.70.
Leveraging synergies to improve competitiveness
Skanska’s success is increasingly a result of the operational and financial synergies that come from different parts of our business working together. We are very focused on boosting these collaborations.
Operational synergies include using local, specialized expertise on a global scale to strengthen customer offerings, expand our opportunities and improve how projects are delivered. For example, for the recent pursuit of a major hospital in Norway, we leveraged expertise from the UK, Sweden and the U.S. – the bid was successful. Also, the successful expansion of Commercial Property Development to the U.S. was built on knowledge shared from that stream’s operations in the Nordics and Europe.
Financial synergies result from harnessing the free working capital from Construction to invest in development projects – this cycle is the heart of our business model. Skanska benefits in two key ways: we generate our own construction contracts, and we achieve significant returns from the money we invest in Project Development.
Project Development’s major contributions
Project Development’s significance has increased within Skanska, which is an aspiration of the Business Plan. In 2016, the three Project Development business streams – Residential Development, Commercial Property Development and Infrastructure Development – produced 62 percent of Skanska’s operating income.
Other Project Development highlights from last year include:
- Residential Development surpassed our 10 percent target for both return on capital employed and operating margin. BoKlok, our affordable homes business, did especially well.
- 47 Commercial Property Development projects were underway, and we made one of our most successful divestments ever: the sale of the 101 Seaport office building in Boston for about SEK 3.8 billion.
- Financial close was reached for the redevelopment of LaGuardia s Central Terminal in New York, our third U.S. publicprivate partnership (PPP). This project involves our largest-ever and it draws upon Group-wide expertise.
- Divestment of our share in the M25 motorway PPP in London for about SEK 3.1 billion.
We see great demand for all three Project Development streams. In 2017, we plan to start even more development projects and further grow this part of our business.
Construction backlog at all-time high
Most of our Construction Business Units were stable and profitable in 2016. Performance was particularly strong with Skanska Sweden, Skanska Finland and Skanska USA Building. Furthermore, we ended the year with a construction backlog of SEK 196.3 billion – our highest ever.
Still, we are not satisfied, as we did not achieve the 3.5 percent target for Construction operating margin. Both Skanska Poland and Skanska USA Civil had weak performances, and they are taking steps to improve. Reaching or exceeding our Construction operating margin target is a top priority that we are working hard to achieve.
To increase margins in all Construction Business Units, one key way is enhancing how we manage risks and opportunities. We have added an additional layer of scrutiny within the Business Units to bolster our tender review process, implemented a system to better monitor large project performance and are continuously improving our financial steering of projects. A stricter bid strategy is another important action: in order to bid we have to identify the right team to execute the project. Furthermore, we are strengthening our people with the right training for their area of responsibility.
Values provide business benefits
We want our strong Skanska values to guide everything we do. I am convinced that our values make us more profitable and successful, and they are essential to contributing to society. Increasingly, employees want to work for companies with clear values. And I am seeing more customers and partners choose Skanska in part because of our values.
For instance, in Östersund in northern Sweden, Skanska secured the Remonthagen housing project because of our skills and desire for the really innovative part of this assignment: joining a pilot effort with the local public housing company to provide construction skills and language training to newly arrived refugees. And in Poland, our Osiedle Mickiewicza Residential Development project is the first housing development in that country certified by the BREEAM environmental system – more than 40 percent of homebuyers said that green label had an important influence on their decision.
Through what we do and how we work, we help ensure sustainable futures for our people, customers and communities. We focus on the sustainability areas in which we can make the most significant positive contributions: Safety, Ethics, Green, Corporate Community Investment, and Diversity and Inclusion. All of these areas relate to our core business and expertise, and are interconnected. These areas support the sustainable development goals defined by the United Nations Global Compact, which Skanska has actively supported for the last 16 years. Safety is an area in which we particularly need to improve, as four people lost their lives on Skanska projects in 2016.
The need for Skanska’s contributions is becoming greater. Society faces intensifying challenges – and opportunities – from a changing climate, increasing urbanization, integrating migrants and more.
We view 2017 with confidence, backed by positive outlooks for all our markets and business streams.
But we also know that 2017 will likely be a year of great change. Brexit in the UK and Donald Trump as U.S. President are expected to lead to big shifts for those countries – two of Skanska’s top home markets – that impact the rest of the world. For now, those impacts remain unclear, but the UK government and President Trump have both signaled plans to increase infrastructure investment. Whatever changes may occur, we are confident in our ability to adapt in line with our values. We have successfully adapted many times in our 130-year history.
Focused on delivering our strategy
Based on Skanska’s 2016 performance, we are on track to deliver the second year of the Profit with Purpose Business Plan, while positioning our business for success in the years to come.
Continued achievement with the Business Plan depends on having and developing great people; finding new and better ways to contribute to the success of customers; and achieving excellence in our operations and support functions. We are committed to strengthening the performance of the Construction units while maximizing the ongoing success of Project Development.
With ongoing support by our strong values and committed people, we will create further benefits for our shareholders, customers and communities. I am proud to be part of this journey, and am optimistic for what is ahead.
Stockholm, February 2017
President and CEO