Earnings Transcript for SKA-B.ST - Q4 Fiscal Year 2022

Antonia Junelind: Good morning, and welcome to the presentation of Skanska's Fourth Quarter and Year-end Report for 2022. I'm Antonia Junelind, Senior Vice President, Investor Relations. And here in our studio, I have our CEO, Anders Danielsson; and our CFO, Magnus Persson, who will take you through some business, financial, and market updates. [Operator Instructions] So, with that short introduction, let's start with the presentation. I hand over to you, Anders.

Anders Danielsson: Thank you, Antonia. And before I jump into the report, I want you to look at this picture to the right, it’s one of the landmark office building in Stockholm developed by Skanska and also transfer to our new business stream investment properties is Stockholm One. If I look into the fourth quarter, overall, I can say, we have a really strong performance, the construction stream, very good performance across the borders. The residential development had a good start of the year, but the weak Q3 and Q4. So, we'll come back to that. Commercial property development, successful divestment during the year, and we also started two new projects during the quarter. Investment properties, a good start. Completely according to plan. So, we have transferred three office buildings in Stockholm and Malmo during the year, two of them in the last quarter. Operating margin in construction, 5.4% in Q4, very strong, of course. If you look at the full-year, we had 3.7%, well above our target. So that is a really strong performance. Our return on capital employed in the project development, 8.1% below our target, but overall, considering the market situation on a good level. Return on equity, 15.8% and we have maintained the really strong financial position for the company. Proposed dividend from the board is SEK 7.5 per share to be decided by the AGM later on and we managed to reduce the carbon emission with 55%, compared to our baseline year 2015. So, if I go into each stream, starting with construction. The revenue increased in the quarter. If I look at the local currencies, it's increased with 3%. Order booking was really strong, SEK 51.6 billion, and we have a book-to-build of 104% for the full-year of 2022. So, we are in a really good position there. We have historically high order backlog as well, close to 230 billion. And the operating income, 2.3 billion in the quarter, which corresponds to an operating margin of 5.4%. So overall, strong performance and really good profitability. And our strategy that we have had the last few years really pays off now. We have been selective. We have been keeping our discipline. We're going for projects that we see that we have a competitive advantage and also that we have a history of profitable projects. So, I'm really proud of the organization and the achievement here. So, really good. The order backlog, again, historically high and also, which is really encouraging that we do see solid performance across our geographies. And that's also the underlying explanation that we perform on such a good level. Moving on to Residential Development. Revenue is really low in the quarter. 155 homes sold in Q4, and we have started 671 homes during the quarter. So, really slow quarter and operating margin of 0.6% is, of course, on a very low side. If I look at the full-year, as I said, we had a fairly good start of the year in 2022. So, the return on the capital is 7%, but we do see a weak housing market, especially here in Sweden, I think a lot of hesitation amongst the buyers of homes, due to high interest rates, high inflation, which leads to high energy costs and so on. And also that the secondary market is a lot of uncertainties. Buyers and sellers, they haven't met each other yet. So, I think it needs to stabilize before we can see improvement here. But the good thing is that we do see an underlying need and an underlying demand from homes in all our markets, which is good for the longer-term. So, it's a good place to be. We have low volumes. And we also saw during the quarter underperformance in one of the segments in the more affordable segments, which is BoKlok in our in our operations. Minor part of the total, of course, but we have launched a turnaround program that we launched here in the end of Q4. We also changed the management for that unit. Commercial Property Development, operating income, 1.3 billion, which a gain on sale is close to 1.5 billion, which gives us a return on capital employed of 8.6% for the full-year. I think that's on a good level. We've been successful when divesting projects. So both we can see that investors, they are definitely interested and attracted by our offering, and we have high quality, very high environmental standard in our portfolio in the right place, of course. And we do have 34 billion in total investments when we have completed this 36 ongoing projects. And the occupancy rate is today 31%, compared to the 50% completion rate. This is something we follow very carefully because we don't want the gap to be too big. And we started two projects in Q4 that was to multifamily rental projects, started one in Copenhagen and one in the U.S. And we had two large internal transactions in the quarter transferring to our new business stream investment properties. And the leasing remains a priority for us, quite slow, has been slow during the pandemic also during 2022. So, we leased 42,000 square meters in Q4. We can see that the tenants are coming back. They are more interested right now. There are hesitation, of course, because the back-to-office has been quite slow after the pandemic, but we can see it's going in the right direction. We can see it's leading actually in Europe, Central Europe, the Nordics, more people are coming back to the office. Companies want to get their employees back to the office, and we can see a slower pace in the U.S., but it's also in U.S., it's going in the right direction, but they are lagging a bit compared to Europe. But there's also a big priority or polarization in the office market. So, both tenants, potential tenants and investors, they are seeking for high-quality, high environmental standard building in a very good location with public transportation and all of that. So – and that's exactly what we can offer because we are in the right places. So, I'm confident for the future. And Investment Properties. New stream, as you know, from 2022, and we are targeting here high-quality, sustainable office, and ambition is to build up a portfolio of between 12 billion to 18 billion over a few years. It will give us a strong stable cash flow. We can also see a big potential to take part of the value increase as we develop an area, for example, and also value increase over time in the office market. So, I'm very confident that this is the right thing to do and also satisfied with the delivery so far. We are running this according to plan. And I said, two actualization during the fourth quarter, Aqua Building in Malmo, Stockholm One here in Stockholm. So, a strong start in the first year. Going back to construction and looking more in detail on the order booking. Here, you can see over the years, the development of the order bookings. It's a blue bar here where you can see the order backlog. The order bookings is the gray line, and you can see order bookings per quarter, orange line, and also the revenue, the green line here. So, as I said earlier, record high order backlog. We can see that the revenue have trended upwards for the last two years. You can see the green line bottom up in early 2021 and quarter-by-quarter we have seen increased revenue. And if we look into the different geographies here, we have good order intake overall, especially strong in the U.S., as you can see. We have 113% book-to-build and slightly below 100% in the Nordics, but as you can see, we have 14 months of production in the Nordics, 12 in Sweden, 17 overall. So, that's on a very good level. So, we are in a very good position. We can be – continue to be selective. We can continue to keep our discipline and going for a project that we know we have been successful in the future with a fantastic team we have, and I'm confident in that. With that, I hand over to Magnus to continue.

Magnus Persson: Thank you. And we move to construction and income statement. You can see that on the slide here. As Anders already said, we grew revenues around 14% in the quarter, 3% in local currency. So, sort of the scope growth of the actual organization is considerably lower than what the values in Swedish kronas imply. And that's sort of quite an important signal to understand how we move the company and how we expand the resources that are available for us. For the full-year, the corresponding numbers then is [18] [ph] and 8% in local currency. So, you can see also that our growth rate is tapering off a bit towards the end of the year, which in a sense is, sort of nothing strange with that. You just looked at a slide and heard explanations about the strong bookings that we have here. So, we go into this year with a very comfortable, sort of booking position here and also quite high burn rate in terms of revenue in the construction business. If you look at gross income, we took in around 4.2 billion in gross profits in the quarter, up from 3.1 billion last year. Corresponding margins to this 9.8%, compared then to 8.5% is quite a big step-up. We have a very well performing portfolio of construction projects in the group at the moment. So, very sort of strong underlying performance. Now, in the isolated quarter, we have also had – we had a couple of effects that sort of positively influenced the quarter. I will come back to them in a bit more detail in the next year. But in Sweden, we have essentially landed an agreement with the client that allows us to, in this quarter, recognize revenue that we have been earning for more than one quarter, so to speak, a number of quarters prior to this. But since we had not agreed with the client on the compensation, we defer until this quarter to recognize it in the books, which is all-in-line, of course, with the strategy we have to work with recognition in a very cautious way. And this also points out importance here to not look specifical at individual quarters. So, when you sort of assess the real performance of the construction business, you need to look at it sort of a rolling 12 months or something like that. We also had a couple of – we have a couple of very large construction projects in the U.S. that are approaching completion as we do so. And as we are successfully manages the risk, we can, of course, increase the profit take out from these projects as we can release reserves that we have held in them. Normally, this doesn't show up very much, but it's a very standard part of how we do. Now, we had this effect on a couple of projects in the same quarter. So, the effect has sort of put on each other and therefore it has somewhat of a big effect in the quarter. But important here, this is not our view to be seen as something, sort of extraordinary. It really comes out of our standard operation even if there's a bit of a lumpiness. So, I would only urge you to look at performance over a slightly longer time stretch here. SG&A is well under control, takes us down to a very strong operating margin then of 5.4% in the quarter, significantly up from 4.2% last year. And as Anders already pointed out, a 3.7% margin for the full-year. Last year, we were at 3.8%. But if you recall, this includes divestment gains from selling a business in the U.K. This year, it's all about underlying strong performance in the real operations. So, essentially marking then of a very successful year in construction. If we look at the different geographies, then Nordics came in with a margin of 5.9%. Sweden isolated 6.7%. And here, you have some of the effects that we – that I just discussed in the last slide. Europe somewhat down from last year, but 3.8% here is still a very strong number. And as we have mentioned on, I think, a couple of earnings calls, prior to this, we are exchanging ERP systems in the European operation, and this actually has an effect on the margin here. So, strong performance in this operation, too. And then in the U.S., 5.5%, up from 3.5%. You heard explanations to this during – on the last slide also. So overall, all geographies are performing really, really well here. Moving to Residential Development, a slightly different story in the quarter. The quarter has been – if you look at the revenue, we essentially decreased them by 80%. And the market has been really weak in the quarter. Probably the weakest market is the Swedish one. And maybe the strongest we have, relatively speaking, is the European residential market then. Now, when you read these numbers, I think you need to understand as a little bit about how we recognize profits in Skanska in our segment reporting, which is what you look at in our quarterly report. We recognize revenue at point of contact. And that means when we sign a sales agreement with the customer, we recognize the revenue from that divestment, from that sales essentially. This means that when you look at our P&L, you have a very, sort of here and now reading of how the market has been performing in isolated quarter. There are no real lagging effects between how the market behaves and when this shows up in our P&L. So, it's a very, sort of accurate reading of where we've had the market during the fourth quarter. Selling and admin obviously 234 million to 30% this seems a bit odd, but this is all due to the very low volume. So essentially, the profits here gets a bit eaten by the S&A charge. So, very low volumes then. Operating margins 0.6%. If we look at the different geographies, both in Nordics and Sweden isolated have done negative profits here. And if you read the quarterly report, way back in it, you will see that we have had negative revenues, not a lot, but still negative in the Swedish part of the RD operation. And the reason to this is one that the market has been weak leading to very few new sales in the quarter. And in addition to this, we have had cancellations from customers in a few select projects in Sweden in the affordable segment where we operate with the BoKlok brand. It's a select few projects that this is happening. And when it happens, due to the profit recognition we have, we have to reverse the revenue out of our books, and this, of course, contributes then to the weak result in the quarter. If we move to the European part, you can see 18.6% operating margin, which is sort of a very good margin, but the volume is low, as you can see, at 52 million and compared to 120 million approximately last year. Homes started and sold, we started almost 700 units, 671 in the quarter, which is then quite a lot lower than same period last year. And obviously, and we have said this in a couple of quarters when the market becomes weak, it is more difficult to find the business cases. It's also more difficult to assess the relevant, sort of price to underwrite in the projects out in the future, which slows down the start substantially. On the sales side, we sold the 155 units come as no surprise given what I just told you about the weak market there. So, quite a lot down then from last year. We remain at the high production pace in this business. 7,900 units are under production, of which we had sold 65% due to slower sales, this comes down somewhat from the 73% that we had at the year-end last year, but still within a very comfortable range here, 65% sold of the total amount that we have under production. And we have 130 units that are completed but not sold. A fairly large part of these are so to speak, show homes that we use in order to have customers come and look at the products that we market before we sell them then. So – and this is also a low number, historically speaking, and we still have a good churn of these apartments. We move to Commercial Development. You can see for the full-year, we had revenue of 13.5 billion approximately, actually quite an active year. We made 19 outgoing transactions, divestments, during the year. So, quite a high amount of activity. Booked gains of approximately 3.6 billion, a bit down since last year when we had 3.9%, but still a very respectable number here for the business. In Q4 isolators, Anders has already pointed out, we made three transactions, two internal to our own investment property stream. I'll come back to that. And one transaction where we disposed of the remaining 5% ownership stake in the project that we have developed in Seattle some time back then. Unrealized and realized gains, we had unrealized gains in the portfolio of about 8.5 billion come end of the quarter down from 9.8 billion the quarter before that. And the difference then is 1.3 billion should come as no surprise then that in Q4, we booked gains of 1.5 billion essentially made a profit takeout from this surplus values that we have in the portfolio then. And the absolute majority of this is, of course, expected surplus values in the ongoing projects. And you can also note that we're successively sort of reducing the amount of properties that are completed but yet unsold, which then brings me to this slide, where you can see the completion profile of the portfolio. And you can notice that approximately 5.4 billion in invested properties are completed but not yet sold. And this is the investment value, not an assessment of the market value then. These were on the average lease to 66%. And then after that, we expect to complete properties for an investment value of around 4.5 billion in Q1 this year, and these properties are currently leased at 44%. So, the leasing profile here looks quite good, even if, of course, given the slowness over the last 1.5 years or 2, we would like to see it being a bit higher than. And in the isolated quarter, the fourth quarter here now, we've also completed one property, sort of ends up in the completed unsold one. Leasing. We leased 140,000 square meters approximately for the full-year and in the isolated quarter than 42,000 square meters. So, as already been said here today, we normally will like these lines, which represent the completion rate and the economic occupancy rate to go quite much hand in hand here. We are comfortable with letting and spread aside. But of course, we have to watch the risk tolerance here, which we do, obviously. So, now as we sell properties, we sell properties that are higher with a higher amount of leasing, obviously, and we start new properties with a lower amount of leasing, and that is why we get this effect. Investment properties, we made two acquisitions then in investment properties in the quarter, both of them from commercial development, obviously. We booked the revenue of SEK 20 million, which is very small, and an operating income of SEK 100 million. And then when you look at this, I think it warrants an explanation, not at least because we've only had this business stream for very few quarters there. So, it says that we have changed the property value here and by that created gains. In reality, there's been no change in property value at all from our side. What happens is the technicality because when we make these transactions, we make a customary adjustments to the purchase price based on the deferred tax that it is – that it carries along with it. And when this property ends up the receivers portfolio, you have to revalue to the right market value, so to speak, and then you get this effect through the way we report here. So, properties on [indiscernible] basis has no change in value in the quarter. Now in total, end of the year, we had 3.8 billion in the portfolio and a very good start to the buildup of the portfolio then. And all of the properties there are, of course, environmentally certified to a very high degree and total leasable space 52,000 square meters. If we add everything together, in the group income statement, we can look at the central line here. You can see the cost, central cost comes down somewhat. I would urge you not to read too much into that because the underlying cost structure is essentially the same, but you always have these different effects quarter to another, a bit with the legacy business sort of. So, it's very much the same. Takes us down to an operating income then of 3.5 billion. Then we have very positive net financials of 200 million. Reason for this, I think, should be no surprise. We have a very strong balance sheet, a lot of cash that we deposit in the most favorable way we can, given the restrictions that we have put in place on ourselves, with rising interest rates, then we get much better net interest, sort of net financial outcome for the different periods here. So, both for the isolated quarter and for the full-year, this is a very good outcome then. Taxes, we taxed 730 million in the isolated quarter, which is a tax rate of approximately 9.5% to be compared then to a tax rate of around 15.5%, which we had last year. Now, the difference here is twofold. First, last year, we were very successful in utilizing, sort of past losses in the group in Europe for tax deductibility reasons, which reduced the tax charge that we had to recognize last year. It's, of course, very positive. This year, given the transactions that were made between commercial development and investment properties, due to the accounting regulations, when we make these transactions, we have to account for a tax of 20% of the gain. And this tax is then in the accounting. We don't have to pay it, and it resides on our balance sheet as a deferred tax liability up until the future. And normally, when commercial development sells externally, we can package the properties and thereby make very tax-efficient, almost tax-exempt transactions. So, we will have this effect when we sell the properties between commercial development into investment properties. If you look at the cash flow, we had a negative cash flow of around 2 billion in the quarter. Main effect here is that we have a very high investment pace at the moment, which comes as no surprise. Last year, we started a tremendous amount of commercial development properties. We also started a lot of residentials that are now up and producing. So, we have a big net investment in the cash flow here. And the other part is also working capital, where we have some effects, and I'll come back to that. If you look at the working capital here, we are still at a very good level, around 90% of revenue. We have, what we call free working capital, which is substantially the, sort of advanced payments, if you will, from the clients that we can utilize, but still, it comes down a little bit in the quarter. You can see this represented by the bars on the chart here, and this is the effect we have then on the cash flow from net working capital in the isolated quarter. Investments and divestments. If you look at the green line on this slide, you can see the net investments of the group. And notice immediately that for quite a long period of time, this has been well above the zero line, basically placing the group in a net divestment territory. We have been able to, sort of harvest the proceeds from the buildup of the property development portfolio for quite a long period of time here. Since we have ramped up investments again, you can see this green line comes down. It creeps down below the zero, and we are now in a net investment territory essentially building up the size of this portfolio again. And on a rolling 12 months basis, we had net investments here of around 5 billion, which is one of the sort of fastest investment phases we have had over the last 10 years. So, we are really stepping on the gas here, which you can also see on the bottom part of this chart, where we show you the capital employed numbers, where we now are up to close to 59 billion comparable to 47 billion then if you back up a full-year. But we have a very stable financial position to deal with this. We had 3.7 billion in external financial loans and bonds at the end of the year here. We have available to us at any given point in time, 16 billion of cash here, of which then we have unutilized credit facilities of 6 billion. We will have two maturities during the year. That totals around 1 billion. And I would also like to point out that during the fall here, we secured a new revolving credit facility, also back up for any needs we have in the group. The intent of this is not to draw on it, but we should always have it to further secure our financial position. It's a 5-year structure involving seven banks, and it is sustainability linked. So this is very good to have this existing revolving facility will run out in 2024, which takes us to the group's financial position. We had an equity position end of the year of 55 billion, tremendously strong, obviously, with an equity-to-asset ratio of 36% and a very solid net cash position of 12 billion at our disposal to handle and make use of opportunities that come our way.

Anders Danielsson: Yes. And I will address the market outlook that we have overall here, starting with construction. Overall, we have a stable outlook when it comes to construction. We have a strong market outlook in the U.S., continue to be strong in the civil sector. A lot of federal money coming out in the system. And you can see that the state – on the state level, they're really pushing out projects, so it's a strong market. And we also see that the nonresidential construction market, the building sector is also strong. We are in the right sectors in the U.S. We're building airports, university, hospitals, schools and so on. So, we can see a strong market there, which is really good for us. The Residential Development, low activity in the housing market. So, we expect the market to be slow during the next year. It's a cyclical market, as you know. And I believe it will stabilize over time. We have an underlying need for new homes in our market. Commercial Property Development, we can see that hesitant behavior from the investors, we don't see a lot of transactions now in the market. And we can also see that the leasing market slowly recovering from the pandemic now. And again, as I said earlier, we do see a polarization in the market where investors and lead tenants go for high-quality building. But overall, we have continued to have a slow market outlook for the commercial property development. To summarize before we open up for Q&A. Solid performance for the fourth quarter. Construction really strong across the border. Residential development, a weak market. And commercial property development, successful divestment both in the quarter and over the full-year as well. And we managed to start up the new business stream investment properties in a good way perfectly according to plan. And we do have, as you have heard, really robust financial position and the strategic direction remains for the company. We will keep our discipline. We will prioritize profitability and responsible growth in the construction stream. We're aiming for being the leader residential developer in our markets. And we have an ambition to grow the Commercial Property Development, and of course, continue to build up the investment property portfolio over time. We do have a good plan to do that. With that, I hand over to Antonia to open up the Q&A.

Antonia Junelind: Thank you. Yes. So, let's open up for your questions. [Operator Instructions] But we will start with questions from the conference call. Operator, do we have someone calling in?

Operator: [Operator Instructions] First question comes from the line of Graham Hunt from Jefferies. Please go ahead.

Graham Hunt: Good morning and thanks for the questions. Just two for me. I wondered if you could help a little bit more quantifying the impact of those contingencies released in the construction division this quarter and maybe your thoughts on what the, sort of underlying profitability run rate is here going forward? And then second question, you touched on, sort of why you're seeing an improvement in the outlook for the U.S. market? But I just wondered if you could add a little color on the U.K. civil side of things, which I see is worsening in your view? Thanks very much.

Anders Danielsson: Okay, I can answer that. Regarding the contingencies in the fourth quarter, I would say you should not look into a single quarter, you should look on a more rolling 12-month basis. That's more accurate when you judge the construction margin. And if you look over time, as you have seen, we have 3.7% operating margin. And that represents the underlying performance for the business. We have been able to successfully winning new projects that we have successfully executed, and we have avoided loss makers that we have seen. And we also managed to work out that revenue that we have a few years back. And when it comes to the improvement in the U.S. the market outlook, I think that's really encouraging to see that the federal money coming out in the system the different states are really investing a lot. And we also see encouraging signs that the inflation might go down in the U.S. When it comes to the U.K., we as you saw we turned down the outlook for infrastructure, the civil market. And that's due to the fact that it's a lot of uncertainty where will U.K. the economy go? Will we see a recession? Will it flatten out? So, that's a lot of uncertainty in that market, which gives us a slower market outlook.

Graham Hunt: Thanks very much.

Operator: The next question comes from the line of Fredric Cyon from Carnegie. Please go ahead.

Fredric Cyon: Good morning. Congratulations to a very strong ending to 2022. On the positive one-offs in the construction stream, in the U.S., you're mentioning that they are related to the reserves, might there be more potential there as we move into 2023?

Magnus Persson: Hi Fredric, this is Magnus. Thank you for your question. You ask if there are more potential here. I mean, I'd say the potential is that we continue to perform in the projects that we have then we will, over time, sort of continue to have a strong profitability. I would think – and we said this also during the presentation that in the Q4 isolated, we have had a couple of these effects put on each other. So, the Q4 isolator is not something that you should take as an isolated quarter, and then shoot for. What you need to look at like rolling 12 months longer time perspectives, but we expect to continue to deliver at a very high performance level in the U.S., yes.

Fredric Cyon: And why – typically, when you have write-downs, you quantify the effect since there seems to be a number of positive one-offs here in the quarter. Why are you not giving us for on what those may be improving?

Magnus Persson: I hear you a bit, but I think that you're asking why are we not giving you more guidance on how much we have, sort of how much is one-off effects in the quarter. Did I get that right?

Fredric Cyon: Absolutely.

Magnus Persson: Yes. This is because this is our standard business. I mean we have the projects we have. This has not been like a claims release or anything like this in the U.S. This is the valuation of our projects. And we have many times communicated that we go into projects, sort of with a cautious profit recognition. And if we manage to handle the risks, we will successfully take out more and more profit. And this is the effect you see now. And we've also said that you shouldn't look too much when you assess profitability on isolated quarters here. I think that's the most important thing to bring with you when you look at this because this money is not coming from, sort of from non-project business. This is real underlying performance, but it happens to be a bit agglomerated in the quarter.

Fredric Cyon: Got it. Moving over to Residential Development. Obviously, it's a challenging market, and you're not selling as many units as prior to the 2022. But on the other hand, we're also witnessing that your SG&A costs are growing year-over-year, are there any plans to look at overall headcount or cost reduction program?

Anders Danielsson: Of course, we look at the cost level all the time, and we're doing that continuously. And so, that's definitely something we do all the time. But we also need to look ahead, of course, we do have – we are well-positioned when it comes to Residential Development operation. We have 65% sales rate in the ongoing project, very few unsold completed, and we have a really good land bank. We have worked long term with the land banking strategically for many years right now. So, we are well-positioned that day that the buyers come back and take the decision to buy apartments. So, I'm confident and strongly believe in the market – residential market in the long-term.

Fredric Cyon: And then two more questions from my side. Moving over to Commercial Development. Have you made any adjustment in your asset market value of the overall portfolio during the fourth quarter?

Magnus Persson: I think you are referring to the ongoing development projects we have and the market value that we are communicating, but that we have not booked, am I correct?

Fredric Cyon: Absolutely.

Magnus Persson: Okay. We continuously assess these, of course. Normally, what we do or what we always do is that when we underwrite the project and started, we are quite cautious in the assessments of that business case because the expectation is that we need to obviously develop the project and build it and then put it on the market. And this whole process means that the excess is always often three years or more out into the future. So, it's very warranted to be very cautious with the exit yield that we assume because there is a big uncertainty when you look that far out into the future. So, we have not made like a structural total portfolio change to that. We look at this on a project-by-project basis, obviously.

Fredric Cyon: My final question relates to the dividend, the proposal from the Board. It corresponds to a payout ratio really in the lower end of your range. How did you – what was the rationale behind being on the cautious side?

Anders Danielsson: I think it's a balanced proposal from the Board of Directors to the AGM. We are – have a very strong financial position, but we also do need a lot of capital to execute our strategy. We will – we want to increase the investments in commercial development, residential development when the market allows us to do that. We also determine to continue to build up the investment property portfolio for the future. So that requires capital. And we're also very determined to keep our financially strong position. That's a very good place to be when the market worsen, and there is a lot of opportunity that will show up in a market that we can take advantage of.

Fredric Cyon: Thank you. Those were all my questions.

Operator: The next question comes from the line of Markus Henriksson from ABG. Please go ahead.

Markus Henriksson: Thank you very much. A few questions from me. Starting off with the Commercial Development one. You've been starting quite a lot of projects in 2021 and 2022, and the occupancy rate, as you state, is now 31% versus a completion rate of [60%] [ph]. At what gap would you become hesitant, should we interpret that you are already a bit more hesitant towards office since you started several projects in other property segments?

Magnus Persson: Hi, Markus. This is Magnus answering your question. We don't have like a specific gap here that that we look at or a specific level of this gap that would make us react because we need to assess project by project. And the viability of this portfolio is essentially consisting of the viability of a number of ongoing and completed projects. So that is the level we have to make that assessment, what we're comfortable with. So, yes, I think that answers your question. Am I right?

Markus Henriksson: Yes, you are right. Then on RD construction cost inflation up and co-op prices down, where do you see the best possibility for housing starts in 2023 given over value in the land bank and also dependent on market conditions currently? And do you think that Q4 production start here of [670 units] [ph], is that a good average or bad figure in your view?

Anders Danielsson: I think if I start with the Q4, I think it's a reasonable figure considering the market development, we will always look carefully on the sales rate in the ongoing portfolio. Now, we are in a good place between real 65%. So, I'm comfortable to be in that range between 60% and 70% in a normalized market. We can allow ourselves to go a bit lower as well, if we feel that we are in the right places. So, we have the financial strength to start new projects, and we will do that in the right location. Because even though we have a weak market outlook for the coming 12 months, it takes much more longer to complete Residential Development. projects. And I'm confident that the market will come back at some point. And I'm confident that we will position ourselves in a good way here, both when it comes to starting project, but also when it comes to buying land in the right location, but we do have a really good land bank for when the market picks up here.

Markus Henriksson: And a follow-up also on the – where you see the best possibility for housing starts in 2023 given different geographies?

Anders Danielsson: I can see definitely the Nordic, we are strong. We have a good position in the three largest cities here in Sweden. We also have a good position in Oslo, Helsinki. We are in Prague and Warsaw and Krakow and those cities are really – have been resilient for this. So, we can see that Central Europe has been resilient. There's not too many new projects out in the market. So, the prices on the secondary market is stable. So, I see opportunities in the capital cities in the market we have chosen to be, but more resilient actually in Central Europe right now.

Markus Henriksson: Thank you. Last question. Could you give a bit more color on the development for BoKlok? And also, I didn't catch if you [took any] [ph] restructuring costs here during the quarter in that division?

Magnus Persson: Yes. So the development in BoKlok, well, you can say it's – BoKlok has been challenged during the quarter with a weak market. And I say the impact has been toughest on the market in that segment, and that is where we have the BoKlok. And so they are suffering from lower volumes, and of course, an overhang of overhead. And so, we need to get this whole, sort of production and marketing and design and essentially the development machine working under the market conditions that we have now then. And which is why also that we had this turnaround that we referred to in the – turnaround initiative that we refer to in the quarterly report.

Markus Henriksson: Thank you. Does the turnaround imply that you will take restructuring costs in 2023 then?

Magnus Persson: That is too early to say because we have initiated that now. And we do not have any material turnaround costs in the numbers for 2022.

Markus Henriksson: Thank you. Those were all my questions.

Operator: The next question comes from the line of Arnaud Lehmann from Bank of America. Please go ahead.

Arnaud Lehmann: Thank you very much. I have three, if that's okay. Firstly, on Commercial Development, you've done quite well with internal sales to investment properties, but you haven't done many external disposals. I'm assuming there's an effect from higher interest rates in the commercial real estate sector, do you expect to be able to do a few transactions in the coming months? I guess that's my first question.

Magnus Persson: Yes. I can start with that. Thank you for the question. So, during the year, we actually made 19 divestments, sort of outgoing transactions in commercial – from Commercial Development. And of these, three were to investment properties. I would say there has been a good amount of transaction activity there. Obviously, the external transactions we have done has due to various circumstances been smaller than, but I think that answers your question. So, obviously, the transaction market, it is slower. There's no doubt about that. We have – the amount of, sort of reference transactions that we call it on the market are lower today, but we still feel that there's a good amount of interest from investors for properties that are very sustainable, they're cost efficient during the right locations and they're, sort of economically well performing as well. So that's where we are with that.

Arnaud Lehmann: Thank you for that. My second question is on the cash flow generation. I mean, in Q4, you mentioned the increase in investments putting a bit of pressure on your cash flow. Can you give us a comment on the outlook there? Is it fair to say that you'll have more investments in the coming quarters?

Magnus Persson: Yes. I mean when we start, sort of property development project, that's often a multiyear, at least sort of a two-year venture. And throughout that whole project, you will continue to invest, obviously. So, I think we will – without giving any forecast, the pure logic and dynamic of this business implies that when you are investing at the pace we are now, and we have, sort of ceased to increase the net investments, that will probably stay for a while because you need to finish the ongoing projects, so to speak.

Arnaud Lehmann: That's clear. Thank you for that. And lastly, construction order intake, quite strong in the U.S., I guess, a bit more stable in Europe. Would you mind commenting on the competitive environment in construction in Europe? I mean the macro environment is a little bit more uncertain. And I assume there may be a bit fewer projects coming to the market. Can you confirm that? And what do you see in terms of your competitors doing? Are you confident you can still take good orders at good margin? Thank you.

Anders Danielsson: Yes. We have seen strong order intake across the Board, I would say. We are slightly below 100% book-to-build in Europe and in Nordic over 100% in the U.S. So that's definitely a strong market. When it comes to the amount of competitors, we have not seen any big changes there. The civil market, for example, has always been really competitive in Europe. We don't see any sign that, that will increase or decrease. That's the way it is. So, all players are chasing the projects right now, but having said that, we do see a stable market in most of the countries in Europe. So, we downturn now in the U.K., but we do have a very strong order backlog there. So, I'm confident that we can be competitive going forward as well.

Arnaud Lehmann: Thank you very much.

Operator: The next question comes from the line of Gregor Kuglitsch from UBS. Please go ahead.

Gregor Kuglitsch: Hi. Good morning. Thanks for taking my questions. I was looking at Slide 19 and you helpfully give, sort of the rental value and obviously, the carrying value that carry investment properties at. And I kind of, okay, very simplistically look at, I think it sort of implies a 5% yield, is that the right way to look at this? Is the 100%, for example, in Stockholm in 2022, is that the lease or the rental income on the 80% leased or if it were 100% is just so we understand what the, sort of implied yield is that you're carrying, please? That would be helpful. Maybe I’ll let you answer that before the next question.

Magnus Persson: Thank you for your question, Gregor. It's quite detailed and your yield number – your calculation ends up somewhat in the wrong place. So, I would suggest that [indiscernible] with our Investor Relations department afterwards.

Gregor Kuglitsch: Okay. And then in terms of, sort of the construction margin, I mean, you kind of mentioned it, but just to be clear, you think the, sort of 3.7% you printed for the year as a whole is a reasonable reference point to think about what the business is performing at. There's no reason to believe it's either that number particularly – I mean, obviously, it's above your target of 3.5%. But is that the right interpretation? I appreciate you're not specifically guiding, but sort of directionally. Is that what you're saying?

Magnus Persson: Yes, it's – the underlying performance is on a very high level. And thanks to that we have been successful executing projects, avoiding loss makers, and been selective. We have kept the discipline. So, it is a very good performance.

Gregor Kuglitsch: Okay. And then remind me, so this is the first quarter, I think, in a very long time, we've seen sort of a free working capital reduction, at least towards the year-end. So, I guess my question is, do you think there's a trend here or is it too early to call? I mean I'm thinking interest rates are higher, people make money on their cash, so maybe they don't prepay you as generously as you have done in the last few years, or maybe I'm misinterpreting, I just want to understand what you think whether there's a trend here and what you think is a sustainable number, I guess? I know this has come up in the past, but if you could just remind us.

Magnus Persson: Yes, I think it's an excellent question. This working capital position we have is, sort of important for us because the alternative is to go to the funding market and source money from there. So, we watch this very carefully and of course, do a sort of thorough questioning and investigations into this all the time to make sure that we are on top of any development in the market on a structural level that we need to be aware of to plan our capital sourcing, our balance sheet, et cetera, et cetera, right. The effects in this quarter is actually quite – it's very sort of isolated. We have a very good understanding of what it is. And when we look at the overall portfolio and how we manage to negotiate with clients, and the clients, sort of openness to these negotiations, we see no change really. So, I would say this is something that happens when you have a very high net working capital balance then of course, sort of, it's hard to keep it growing like that. You will have some setbacks at some point in time with that. But we are not concerned about the stability of that position. And just to remind everyone also that sort of the – it's hard to say what is normal and not normal here. But currently, we are at approximately 19% of revenue in our, sort of free working capital. But historically speaking, this has been creeping up for many, many, many years due to strong negotiation skills and due to us being able to assert a favorable payment plans also in projects.

Gregor Kuglitsch: Okay. And then coming back to Slide 17, which is, sort of the completion profile and okay, yes, there's 66% on the stuff that's done, but from memory, you only try to sell when you're sort of, let's say, north of 80%, correct me if I'm wrong. So, is that still your approach that you prefer to wait? In other words, you'd rather just not sell if lease rates are lower? Because obviously, it begs the question whether you're going to be selling actually realizing anything it's up to you, obviously, whether you decide to sell or not, right? But I just want to understand where you cut off, right, in terms of trying to actually get stuff in front of the market.

Magnus Persson: Yes. Good question. And you will get another one of this maybe slightly boring answers, but this is, of course, an assessment we make on a project-by-project basis because for every investment we have made, we try to, sort of find the most lucrative way of monetizing that investment for shareholders. And that we assess continuously, sort of every quarter for every project that is sort of possible to sell. We have sort of an assessment of this, you can say, right. So, we also talked about the 80%, that's because the market in general historically have responded in such a way that when you cross approximately 80%, you don't end up in discussions around that would, sort of lead to you having to compromise on the price due to lack of leasing, but the market is a moving thing, right? So, this moves all the time. So that's not to say that it will be exactly the same in the future. But this is also why we have implemented the strict transaction guidelines we have when we buy properties into investment properties, where we say, 80% leasing, right? But in commercial development, on a case-by-case basis for every project, we analyze what is the best way to monetize the investment. And we don't stick really to any specific rule in terms of an exact percent on when we can divest it or not.

Gregor Kuglitsch: Thank you.

Magnus Persson: Thank you.

Antonia Junelind: Okay. So thank you very much. That was all the questions that we had time for today. We've now run slightly over time. If there are any remaining questions, then please don't hesitate to reach out to either myself or the IR function, and we will ensure that you will be getting your answers. So, with that, it's time to wrap up this presentation. First of all, thank you Anders and Magnus for your presentation here today. And then, of course, thank you for showing up here at our studio in Stockholm. And lastly, thank you for watching. A recorded version of this broadcast will be available on our web page shortly. And we will be back in the setting to present the first quarter report on May 4. Thank you.