Note 4 Operating segments

Group business is divided into operating segments based on how the company’s highest decision makers, i.e. executive management, follow the business.

The Group is reported into four business areas; Construction, Civil Engineering, Industry and Project Development. The business areas are also operating segments.

Segments are reported according to the percentage of completion in projects since that reflects the way executive management and the Board monitors operations. Peab applies IFRIC 15, Agreements for the construction of real estate, in legal accounting. IAS 18, Revenue, is applied for housing projects in Finland and Norway as well as our own home developments in Sweden. Revenue from these projects is first recognized when the home is handed over to the buyer. A bridge has therefore been created in segment reporting between operative reporting according to the percentage of completion method and legal reporting. For more information regarding principles for housing production, see note 1.

Business area Construction reports net sales and profit referring to the subcontractor part of our own housing, rental project developments and other property development projects to business area Project Development. Net sales and profit are reported according to the percentage of completion method. Net sales for both the general contractor part and the subcontractor part of our own housing developments are reported in business area Project Development. Reported profit is the profit in the developer part reported according to the percentage of completion method. The underlying sales value of property projects on our own balance sheet, reported as project and development property, that are sold in the form of a company via shares is recognized as net sales and the reported value on the balance sheet is recognized as an expense. When property projects reported as operations property or investment property are divested the net effect on profit/loss is recognized as other operating income or other operating cost. Internal net sales between business area Construction and business area Project Development regarding the construction cost of our own housing developments are eliminated in consolidated reporting. Net sales and profit referring to the subcontractor part of property development projects on our own balance sheets are eliminated on Group level. Internal profit is returned when the project is divested.

The Group’s internal reporting is constructed so that executive management follows every business area up to and including operating profit and operating margin. For business area Industry and Project Development executive management also follows the development of capital employed. The capital employed in the business areas consists of the business area’s total capital reduced by deferred tax recoverables and internal receivables from the internal bank Peab Finans with deductions for non-interest-bearing liabilities and deferred tax liabilities.

Internal pricing between Group segments is based on the “arm’s length principle”, in other words, by well informed parties who are independent of each other and have an interest in the realisation of the transactions.

Segments’ operating profit includes attributable items which can be reasonably and reliably allocated to the segments. Non-allocated items consist of financial income and expenses, and taxes.

Operating segments

The Group consists of the following business areas:

  • Construction: Business area Construction comprises Group resources in construction related services. Construction works for both external and internal customers, primarily business area Project Development. Operations are run through eleven regions in Sweden, three in Norway and two in Finland. There are three specialized housing production regions located in Stockholm, Gothenburg and the Öresund region respectively. Construction maintenance operations are run in a nationwide organization focused on the big city areas. The other regions perform all kinds of construction projects within their geographic area.
  • Civil Engineering: Business area Civil Engineering works with the construction of large infrastructure and civil engineering projects and smaller projects on the local market. Civil Engineering also operates and maintains roads and municipal facilities. As of 1 January 2017 product area Foundation was moved from business area Industry to Civil Engineering. The operations are run in geographical regions in Sweden, Norway and Finland. Customers are the Swedish Transport Administration, municipalities and local businesses.
  • Industry: Business area Industry is run in six product areas; Asphalt, Concrete, Gravel and Rock, Transportation and Machines, Rentals and Construction System. All of them work on the Nordic construction and civil engineering markets. Customers are mainly Nordic construction and civil engineering companies.
  • Project Development: Business area Project Development comprises Peab’s developments in housing and property in Sweden, Norway and Finland. The business is run in two segments, Housing Development and Property Development. Housing Development develops all kinds of housing such as apartment buildings in tenancy ownership, ownership and rental form as well as single homes. Operations in Property Development revolve around the acquisition, development, managment and divestiture of commercial properties. The business includes projects in wholly owned and partly owned companies. Included in partly owned companies are among others Peab’s holdings in Fastighets AB Centur (ownership and development of commercial property and homes), Tornet Bostadsproduktion AB (ownership of rentals), Fastighets AB ML4 (ownership and management of the research facility Max IV in Lund) and Point Hyllie Holding AB (ownership and development of the office building The Point as well as ownership and management of the hotel property Värdshuset 5). Wholly owned subsidiaries and projects consist of a number of holdings that include everything from land for development where zoning is being worked out to completed projects ready for sale. Net sales and operating profit from operations are derived from running our wholly owned property, shares in the profit from partly owned companies as well as capital gains from the divestiture of completed property and shares in partly owned companies.

Other operations are reported under “Group functions” and consist of central companies and group functions.

Group 2017, MSEK Construction Civil Engineering Industry Project Development Group functions Elimination Total operative for the Group 1) Adjustment for housing reporting 2) Group
External sales 22,073 10,319 9,206 8,568 101 0 50,267 -177 50,090
Internal sales 4,653 1,506 3,555 61 892 -10,667
Total income 26,726 11,825 12,761 8,629 993 -10,667 50,267 -177 50,090
Operating costs -26,138 -11,488 -11,943 -7,985 -1,230 10,662 -48,122 157 -47,965
Other operating income 15 42 68 167 9 4 305 305
Other operating costs -1 -5 -19 0 0 -25 -25
Operating profit 602 374 867 811 -228 -1 2,425 -20 2,405
Operating margin, % 2.3 3.2 6.8 9.4 4.8 4.8
Financial income 191
Financial expenses -151
Pre-tax profit 2,445
Tax -388
Profit for the year 2,057
Depreciation -19 -66 -754 -54 -13 2 -904
Write-downs in operating profit -1 -8 -33 -11 -53
Capital gains/losses 11 15 43 145 4 218
Other significant non-cash items 104 -7 5 -98 8 12
Capital employed on 31 December -856 200 5,781 10,024 -1,045 3) 14,104

 

Group 2016, MSEK Construction Civil Engineering Industry Project Development Group functions Elimination Total operative for the Group 1) Adjustment for housing reporting 2) Group
External sales 20,459 9,461 8,876 7,589 104 0 46,489 -152 46,337
Internal sales 3,662 1,279 3,285 50 793 -9,069
Total income 24,121 10,740 12,161 7,639 897 -9,069 46,489 -152 46,337
Operating costs -23,585 -10,396 -11,478 -7,068 -1,018 8,994 -44,551 175 -44,376
Other operating income 8 15 74 52 149 149
Other operating costs -2 -4 -4 -1 -1 -12 -12
Operating profit 542 355 753 622 -122 -75 2,075 23 2,098
Operating margin, % 2.2 3.3 6.2 8.1 4.5 4.5
Financial income 195
Financial expenses -243
Pre-tax profit 2,050
Tax -323
Profit for the year 1,727
Depreciation -17 -36 -699 -18 -14 -784
Write-downs in operating profit -18 -60 -78
Capital gains/losses 3 4 44 136 -1 186
Other significant non-cash items -19 -3 -2 30 44 50
Capital employed on 31 December -949 -302 5,416 10,281 -44 3) 14,402

1) According to the percentage of completion method (IAS 11).
2) Adjustment in accounting principle for own single homes in Sweden as well as housing in Finland and Norway according to the completed contract method (IAS 18).
3) Non-allocated capital employed.

Comments on the tables

A strong housing market has contributed to a favorable development for the business areas in both 2017 and 2016. Contract construction in business areas Construction and Civil Engineering reported increases in net sales with stable profit levels in 2017. Both net sales and profit grew in business area Industry compared to 2016 and the margin improved. Development has also been positive in business area Project Development during 2017. The strong demand on the housing market has, in particular, had a positive effect on both net sales and operating profit in Housing Development. Included in Property Development in 2017 were capital gains of SEK 75 million from the divestiture of Peab’s holdings in joint venture companies to Catena. In December 2016 Peab and Fabege agreed that during January 2017 Peab would divest a number of assets in Arenastaden and Ulriksdal in Solna. The divestitures in Ulriksdal impacted net sales in 2017 by SEK 577 million. The transactions had no net effect on profit/loss since the sales in Ulriksdal affected operating profit positively by SEK 180 million while the sales of assets in Arenastaden had a negative effect on operating profit by SEK 180 million. In 2016 partial sales of property in Hyllie, Malmö was included for an underlying property value of SEK 777 million, affecting profit by SEK 104 million.

Geographic areas

Income from external customers is related to the countries customers are located in. The information concerning intangible and tangible fixed assets is divided into the countries the assets are located in.

Sweden Norway Finland Other markets Total
Group, MSEK 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
External sales 41,001 38,607 5,743 5,157 3,331 2,538 15 35 50,090 46,337
Intangible and tangible fixed assets and investment property 7,334 5,324 586 633 626 356 8,546 6,313

 

Sweden Norway Finland Total 1)
Parent company, MSEK 2017 2016 2017 2016 2017 2016 2017 2016
Net sales 239 224 16 13 7 5 262 242

1) Included in Group functions.