Board of Directors’ Report

The Board of Directors and the Chief Executive Officer of Peab AB (publ), Corporate ID Number: 556061-4330, hereby submit the following annual report and consolidated accounts for the 2016 financial year.

NET SALES ¹⁾

Group operative net sales for 2016 amounted to SEK 46,489 million (44,252), which was an increase of five percent. Excluding the write-down of SEK -800 million for the project Mall of Scandinavia during 2015 the operative net sales amounted to SEK 45,052 million.

After adjustments for acquired and divested units net sales increased by five percent compared to the last year. Adjustments in housing reporting affected net sales by SEK -152 million (124). Group net sales for the entire year of 2016 increased to SEK 46,337 million (44,376).

Net sales in business area Construction contracted by two percent excluding the write-down of the project Mall of Scandinavia. Net sales in business area Civil Engineering increased by three percent and in Industry by 13 percent. Net sales in Project Development were the same as last year.

Of the year’s net sales SEK 7,729 million (7,596) were attributable to sales and production outside Sweden.

RESULT ¹⁾

Operative operating profit for 2016 amounted to SEK 2,075 million (1,052) and the operative operating margin improved to 4.5 percent (2.4). Excluding the write-down of the project Mall of Scandinavia with SEK -800 million during the fourth quarter 2015, operative operating profit amounted to SEK 1,852 million and the operative operating margin to 4.1 percent for the entire year of 2015. The Mall of Scandinavia in Solna, Peab’s largest project ever with a contract sum of SEK 3.5 billion, was a challenge from the beginning, in part because of the size of the project and in part because of the alterations made during the project. This has made it difficult to assess the final result of the project. After the inauguration of the mall in November 2015, the project was revised and a write-down of SEK -800 million was made in the fourth quarter of 2015.

The margin in business area Construction was 2.2 percent (2.3 excluding the write-down of the project Mall of Scandinavia). In Civil Engineering the operating margin decreased to 3.3 percent (3.6). Business area Industry reported greater profit than last year and the operating margin improved to 6.2 percent (6.0). Project Development reported improved operating profit and operating margin as a result of the still strong housing market as well as the partial divestment of a hotel property and the development rights for offices at Hyllie Station Square in Malmö, generating a positive effect on profit of SEK 104 million.

Eliminations and reversal of internal profit in our own projects has affected the result by net SEK -75 million (-50). Elimination is reversed in connection with the external divestment of a project. Adjustments in housing reporting affected operating profit by SEK 23 million (-43). Operating profit for 2016 improved to SEK 2,098 million (1,009) and the operating margin to 4.5 percent (2.3).

Depreciation and write-downs for the year were SEK 862 million (842). Net financial items amounted to SEK -48 million (-103). Net interest improved to SEK -71 million (-99), as a result of lower net debt during the year. Pre-tax profit was SEK 2,050 million (906). Tax for the year amounted to SEK -323 million (-108), equal to 16 percent (12) tax. Profit for the year improved to SEK 1,727 million (798).

FINANCIAL POSITION

The equity/assets ratio on 31 December 2016 was 29.7 percent compared to 28.8 percent at the of 2015. Interest-bearing net debt amounted to SEK 1,862 million compared to SEK 3,118 million at the end of last year. The average interest rate in the loan portfolio, including derivatives, was 2.6 percent (2.4) on 31 December 2016.

Group liquid funds, including unutilized credit facilities, were SEK 6,062 million at the end of the year compared to SEK 4,953 million on 31 December 2015.

At the end of the year Group contingent liabilities amounted to SEK 6,975 million compared to SEK 6,140 million on 31 December 2015. SEK 4,498 million (3,778) of contingent liabilities was surety given for credit lines for tenant-owned apartments under production.

INVESTMENTS AND DIVESTMENTS

During 2016 SEK 1,449 million (515) was net invested in tangible and intangible fixed assets. The investments are primarily attributable to investments in machinery and acquisition of operations in the business areas Industry and Civil Engineering. The comparable year contained the disposal of operations as well as operations property.

Net divestments in project and development properties, which are recognized as inventory items, totaled SEK 324 million (291) during 2016. During the year a hotel property and building development rights for offices in Hyllie were divested to a company partially owned by Peab. During the 2015 housing development rights corresponding to around 700 apartments were acquired on the old Råsunda property in Solna. In 2015 a cold storage was divested in Bjuv.

CASH FLOW

Cash flow from current operations was SEK 3,455 million (2,825), of which the partial divestment of property in Hyllie was SEK 508 million. The comparable year included the sale of cold storage space in Bjuv for SEK 590 million.

Cash flow from investment activities was SEK -804 million compared to SEK -1,038 million for the comparable year. The cash flow includes investements in machines, acquisitions of business in business area Civil Engineering and Industry as well as repayment of loans from partially owned companies. Last year included investments in machines, loans to partially owned companies as well as sales of Peab´s shares in the partially owned company S:t Eriks. Cash flow before financing amounted to SEK 2,651 million compared to SEK 1,787 million last year.

Cash flow from financing operations amounted to SEK -2,613 million (-1,663) and is due to repayment of loans along with paid dividends of SEK 767 million (664).

ORDERS RECEIVED AND ORDER BACKLOG

Orders received for 2016 amounted to SEK 41,445 million compared to SEK 37,812 million for the last year. The level of orders received has risen in Construction, Civil Engineering and Project Development. No orders received or order backlog is given for the business area Industry.

There continues to be a broad spread geographically of housing projects in orders received for 2016. Two major highway projects are included in the orders received in business area Civil Engineering, E6 Trondheim in Norway and reconstruction of E45 outside Gothenburg, each worth around SEK 1 billion.

Order backlog yet to be produced at the end of the year amounted to SEK 33,572 million compared to SEK 26,991 million at the end of last year. Of the total order backlog, 34 percent (30) is expected to be produced after 2017 (2016). Swedish operations accounted for 84 percent (84) of the order backlog.

BUSINESS AREA AND GROUP FUNCTIONS PRESENTATIONS

The Peab Group is presented in four different business areas: Construction, Civil Engineering, Industry and Project Development. The business areas are also operating segments.

Recognition of internal projects between business areas Construction and Project Development

Business area Construction reports net sales and result referring to the contract construction in our own housing projects, in rental projects and other projects for business area Project Development according to the percentage of completion method. Business area Project Development reports net sales for both contract construction and the developer part of our own housing projects. The booked result consists of the result in the developer part according to the percentage of completion method.

Presentation of property projects on our own balance sheet

The underlying sales value of property projects on our own balance sheet that are sold in the form of a company via shares is recognized as net sales and the booked value on the balance sheet is recognized as an expense.

Group functions

In addition to the business areas, central companies, certain subsidiaries and other holdings are presented as Group functions. The central companies primarily consist of the parent company Peab AB, Peab Finans AB and Peab Support (Shared service center). Peab AB’s operations consist of executive management and shared group functions. The internal bank, Peab Finans, handles the Group’s liquidity and debt management as well as financial risk exposure. The company is also a service function for the subsidiaries and works out solutions for loans and investments, project-related financing and hedging. Peab Support delivers services within the process-oriented personnel and systems intensive operational areas Accounting, Payroll/Systems and IT to all Group entities.

Operating profit for the year for Group functions was SEK -122 million (-100).

Read more about Peab’s business areas here.

¹⁾ Peab applies IFRIC 15, Agreements for the Construction of Real Estate, in legal reporting. IAS 18, Revenue, is applied on Peab’s housing projects in Finland and Norway as well as Peab’s own single homes in Sweden. Revenue from these projects is first recognized when the home is handed over to the buyer. Segment reporting is based on the percentage of completion method for all our projects since this mirrors how executive management and the Board monitor the business. There is a bridge in segment reporting between operative reporting according to the percentage of completion method and legal reporting. Operative net sales and operative operating profit are reported according to the percentage of completion method. Net sales and operating profit refer to legal reporting.

Two major highway projects are included in the orders received in business area Civil Engineering, E6 Trondheim in Norway and reconstruction of E45 outside Gothenburg, each worth around SEK 1 billion.