CEO letter: A good first half of 2014, with improving opportunities

In his quarterly letter, Johan Karlstrom, Skanska AB president and CEO, overviews the first half of the year, with our largely positive financial performance and improving economies in most of the countries where we operate providing more opportunities. He emphasizes the need for us to deliver well-executed projects in a reliable manner, and previews a new long-term forecasting system that will help us make better decisions about our company.

Dear colleagues,

Halfway through 2014, we can see good signs – the underlying economies in several of our home markets continue to improve, thereby providing us with opportunities to grow in terms of both construction contracts and project development investments.

Order bookings were strong in the U.S. Civil, UK, Polish, Swedish and Finnish construction operations. After several years of very difficult market conditions, order bookings also grew in the Czech construction operations. Both the Swedish and the Finnish construction units noted strong profitability in the quarter. The restructuring efforts of the Latin American operations have been enhanced.

Profitability continued to improve for the Residential Development business stream, with all units contributing to an improved operating margin.

In Commercial Property Development, six new projects were started and we sold one major project for SEK 1 billion (about $146.2 million) in the second quarter. Strong market conditions in all of our geographies offer us continued favorable opportunities for this business stream.

The P3 market in the U.S. continues to perform favorably. We are expecting the financial close of the I-4 highway project in Florida during this year. In the third quarter, we were also selected as preferred bidder for the New Papworth Hospital project in the UK.

Overall, it was a positive first half of the year with good results in all markets with one exception – Latin America. In Latin America, several major engineering and construction contracts were affected by higher than expected costs. The necessary project write-downs and restructuring provisions totaled SEK 500 M (about $73.8 million), which negatively affected our second-quarter result. Going forward, we will not submit bids for new engineering and construction projects in the Latin American market; instead we will focus on operations and maintenance work for international oil and gas companies. This is an area where we see lower risk and have a long successful track record.

We have a strong brand, we live our values, we can see upward trends in our major markets and our performance is improving in all other units.

The valuation of our company should reflect this, but unfortunately write-downs are impeding our share price. The market reacts strongly to surprises – particularly negative ones – and it doesn’t like uncertainty about our future. It wants predictability! There is only one way of fixing this:  we need to be reliable and deliver solid results time after time, quarter by quarter.  Essentially, it’s about performing; delivering well-managed and well-executed projects. But we also need to utilize the other tools at our disposal, such as controlling, risk and opportunity management and long-term forecasting.

And it is thanks to our long-term forecasting that we will be able to look ahead and systematically map the future. We will know where we are heading in the next four quarters and we can always be one full year ahead on an annual basis. This represents a major step forward compared with the earlier system, which basically gave us one quarter’s notice at the end of the year.

Through long-term forecasting, we will have a better overview of the progress of the Group, the business units and our projects. By experience, we know that we can see if a project is failing to deliver at an early stage. We will know where the business units and the local markets are heading.

Based on reliable facts, we can make the right decisions for Skanska. We will have a better understanding of what resources we will need and how much capital we have at our disposal. From this platform, we can leverage the business.

We have the method, now we need to have the mindset. It is the responsibility of us all to do our utmost to deliver the best possible long-term forecast.

The more we know, the better we get. And the more we can report a stable, predictable and strong performance to market analysts and investors, the higher they will value us. You will soon receive more information about this initiative and workshops will be arranged in the BUs. Check OneSkanska for further details.

Long-term forecasting is one of the necessary steps to ensure long-term prosperity! So let’s make it happen. It starts with me!

Johan Karlström, president and CEO, Skanska AB

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