A new investment record in project development. Successful property divestments. Very good profitability in construction units in the United States, Poland and Sweden. New opportunities through company acquisitions and land purchases.
“The divestment of the Autopista Central highway in Chile, completed during 2011, shows our strength in public-private partnership (PPP) projects and the power of our business model – we take advantage of the strong cash flow to invest in project development, resulting in both construction assignments and development gains.
There were many sources of concern in 2011 – government budget deficits and turbulence in the euro zone formed a gloomy backdrop to all business activity. Naturally Skanska was also affected by this general uncertainty. Yet most of our operations showed good earnings. We increased our order backlog to SEK 156 billion, equivalent to 16 months of work. We have meanwhile taken important steps to fulfill our business plan for profitable growth in 2011–2015. We are focusing both on strengthening our profitability and growing in new and existing markets.
Early in the year, order bookings were relatively weak, but due to a strong second half we reached a good level for the year as a whole – without sacrificing our profitability requirements. In the United States, we secured both major hospital and infrastructure assignments, including rail system expansions in both the San Francisco and Los Angeles areas. Order bookings were also strong in Norway, Poland and Latin America.
However, good earnings in various Construction units was unfortunately reduced by provisions and expenses for necessary restructuring measures in our Finnish and Norwegian construction units, which also affected the margins in the business stream as a whole.
There is continued strong interest in our properties among investors seeking stable assets when financial markets are wobbly. In this flight to security, our properties are attractive investments. Our new, green premises are energy-efficient, lowering both operating and maintenance costs.
A well-functioning business model
We sold eleven properties, with a capital gain of SEK 1.4 billion during the year. Because of our aggressive focus on new, green office space in Central Europe, the Nordic countries and the U.S., we have a broad range of properties for future leasing and divestment.
In 2011 we also completed the sale of the Autopista Central highway in Chile. Our capital gain of SEK 4.5 billion after tax is very satisfying. It also confirms that we have a well-functioning business model for public-private partnerships and that our PPP projects enjoy market confidence.
The new A1 expressway in Poland is also a PPP project, and in October we opened its second phase ahead of schedule. Also underway is construction of about 120 km (75 mi.) of highway in Antofagasta, Chile and of the Sjisjka wind-power plant in Gällivare, Sweden, which will begin delivering green electricity this year.
We also took an important initial step into the U.S. market for PPP projects when we signed an agreement on the commercial conditions for Skanska’s participation as an investor and shareholder in the Midtown Tunnel in Virginia. Financial close is expected during 2012, which will result in a construction assignment in the SEK 4 billion range.
In our Residential Development operations, we sold somewhat more homes than in 2010. The new Iskristallen residential development in Stockholm, Sweden is largely sold out. We have nearly 4,000 people interested in buying an apartment in nearby Västermalmsterrassen, which will have 225 apartments.
Meanwhile we have noted a slowdown in the pace of sales, especially in Sweden and Finland. This is a natural reaction when the news flow is dominated by negative signals about the world economy. We have thus cut back on new housing starts, in response to slower demand. However, there is a large underlying demand in our markets and we are preparing new projects that will be ready for start-up when the market situation improves.
Accelerating our pace
Last year also marked the beginning of our new five-year business plan for profitable growth. We accelerated the pace of project development, and during the year our investments set a new all-time high: SEK 12 billion for investments in residential and office properties and in PPP projects. Thanks to Skanska’s financial strength, we can take advantage of good investment opportunities without being dependent on external financing.
We have leveraged this strength both in existing and new markets. We have opened the doors to the residential markets in the United Kingdom and Poland, carrying out the first land purchases in order to create attractive neighborhoods in Cambridge and Warsaw. Meanwhile we are also making sure that we have land in good locations for future projects in the Nordic countries and in the Czech Republic.
We are also increasing the investments in green office space. The big event in this area is, of course, that the first U.S. office building project developed for our own account is ready for occupancy. This project at 10th and G Streets, a few blocks from the White House in Washingon, D.C., is 83 percent pre-leased and we expect to be able to sell the property with a good result.
We have started additional projects in Washington, D.C. as well as in Boston and Houston. We also expect to start up a project in Seattle during 2012.
So far, we have invested about SEK 2 billion in U.S. property projects.
In Central Europe, our new green office buildings are very attractive to international companies. Altogether, we have nine ongoing property projects in Warsaw and Wrocław, Poland; Ostrava and Prague, Czech Republic; and Budapest, Hungary, of which six will be finished during 2012. In Helsinki, Finland, our new office buildings on Mannerheimintie are under construction. The pre-leasing rate in these ongoing projects is about 50 percent.
We are currently also working on plans for potential property development in Oslo, Norway as well as in the Romanian capital, Bucharest.
Skanska’s largest single property investment to date is Lustgården in Stockholm. We are investing more than SEK 2 billion to develop and construct the greenest office complex in the Swedish capital. Late in 2013 it will become our own new headquarters, unless Lustgården’s location and environmental quality attracts a large external tenant. In that case, we must naturally give the customer priority.
For those who are not so familiar with our operations, I would like to repeat the core of our strategy. We take advantage of the positive cash flow in our construction operations to invest in land and projects that lead to new, large construction assignments. The capital gain is then used for both reinvestment in new projects and dividends to our shareholders.
We develop and construct in order to sell – not to build up a property management portfolio. Financial synergies are the engine of our strategy. We focus on expanding the activity in the project development operations.
Strategic acquisitions
Our strategy also includes boosting the market share and strength of Skanska’s construction operations in our home markets. In 2011 we thus acquired companies in Finland, Poland and the U.S. Both Finnish-based Soraset and Poland’s PUDiZ Group are very good companies that will pay off in terms of expertise, growth and profitability.
Our U.S. acquisition, Industrial Contractors Inc., is large and stable.
It will give us a foothold in two new markets: strengthening our competitiveness in energy-related and industrial construction, and gaining a strong presence in the Midwest. This unit, which will now be called Industrial Contractors Skanska (ICS), is based in Indiana, but we will take advantage of its expertise in other markets as well. The acquisition boosts the revenue of Skanska USA Civil by one third. ICS will also contribute to our profitability.
Ensuring the health and safety of our work sites is one of our most important tasks. During 2011 we developed a new tool – the Skanska Safety Road Map. It is both a checklist and a to-do list for facilitating and supporting the efforts to achieve healthy and safe work sites.
Overall, in 2011 we laid a stable groundwork for continued profitable growth in keeping with the business plan. Based on construction volume and our financial strength, the aim is to enable the various business streams to interact and thereby lift each other to new heights. Last year demonstrated that this strategy is sound and works in practice. But the big payoff on the Company’s potential still lies in the future.
During 2012 we can celebrate the first 125 years of Skanska’s operations. During the first 75 years, we modernized Sweden. In the past 50 years we have gradually increased our international commitments, and today we are an important builder of communities in all our home markets.
We are also continuing to help improve our societies. The New Karolinska Solna University Hospital in Sweden will provide world-class healthcare. In Bristol, U.K., we have developed modern schools that stimulate learning and help reduce bullying. The new green properties we build require less energy and reduce greenhouse gas emissions. Our customers and tenants can trade up to modern office space while helping to improve the environment.
By being open to the needs of customers and communities, we will remain an important corporate citizen. With our highly proficient employees and strong values, we have a stable platform to continue to build on.
Solna, February 2012
Johan Karlström
President and CEO