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 2017 financial year.

NET SALES 1)

Group operative net sales for 2017 amounted to SEK 50,267 million (46,489), which was an increase of eight percent. After adjustments for acquired and divested units net sales increased by seven percent. Adjustments in housing reporting affected net sales by SEK -177 million (-152). Group net sales for 2017 increased to SEK 50,090 million (46,337).

Net sales have increased in every business area largely due to the favorable construction and civil engineering market. Net sales grew by eleven percent in business area Construction and have increased in all the business area’s regions. Net sales increased by ten percent in business area Civil Engineering generated by greater activity in Local market and Infrastructure. Business area Industry showed an increase in net sales of five percent, with increases in all product areas except Transportation and Machines, which had unchanged sales. Net sales in business area Project Development increased by 13 percent, with an increase in Housing Development by 22 percent while Property Development had lower net sales. During the first quarter 2017 Property Development divested a number of assets in Arenastaden and Ulriksdal in Solna to Fabege, which affected net sales by SEK 577 million. During 2016 partial sales of property in Hyllie, Malmö were carried out, worth SEK 777 million.

Of the year’s net sales SEK 9,089 million (7,729) were attributable to sales and production outside Sweden.

PROFIT/LOSS 1)

Operative operating profit for 2017 amounted to SEK 2,425 million (2,075) and the operative operating margin improved to 4.8 percent (4.5).

The operating margin in business area Construction was 2.3 percent compared to 2.2 percent for the last year. The operating margin in business area Civil Engineering was 3.2 percent (3.3). Business area Industry showed a higher operating margin of 6.8 percent (6.2). Operating profit in business area Project Development improved during the year, both in Housing Development and Property Development. The operating margin in Housing Development improved to 9.4 percent (8.5). Profit in Property Development included capital gains of SEK 75 million from the divestiture of joint venture companies with development properties in Skåne. The transactions regarding Arenastaden and Ulriksdal, which were carried out during the first quarter 2017, had no net effect on profit since the divestitures in Ulriksdal had a positive effect on operating profit by SEK 180 million and the sales of assets in Arenastaden had a negative effect of SEK 180 million. 2016 included an effect on operating profit of SEK 104 million from the partial sales of property in Hyllie.

Eliminations and reversal of internal profit in our own projects has affected operating profit net by SEK -1 million (-75). Elimination is reversed in connection with the external divestment of a project. Adjustments in housing reporting affected operating profit by SEK -20 million (23). Operating profit for 2017 was SEK 2,405 million (2,098) and the operating margin improved to 4.8 percent (4.5).

Depreciation and write-downs for the year were SEK -957 million (-862).

Net financial items amounted to SEK 40 million (-48) of which net interest improved to SEK -44 million (-71). Net financial items include dividends from Lemminkäinen Oyj of SEK 16 million (-) and capital gains of SEK 93 million from the divestiture of 2,458,447 shares in Lemminkäinen Oyj.

Pre-tax profit was SEK 2,445 million (2,050). Tax for the year amounted to SEK -388 million (-323), which corresponds to 16 percent (16) in tax. The lower tax amount is mainly due to non-taxable profit from the sale of shares.

Profit for the year improved to SEK 2,057 million (1,727).

RECLASSIFICATION OF PROPERTY

After a revision of Peab´s property portfolio it was decided that some property previously reported as project and development property, i.e. inventory properties, will instead be classified as operations property or investment property, in the case where there is no plan to divest the property and it is expected to remain in the Group for the foreseeable future. For this reason, as of 1 January 2017 properties for a total recorded value of SEK 619 million have been reclassified as operations property and properties for a total value of SEK 629 million have been reclassified as investment property. The reclassification of these properties is forward-looking and therefore no comparable figures have been recalculated.

FINANCIAL POSITION

The equity/assets ratio on 31 December 2017 was 32.1 percent compared to 29.7 percent at the previous year-end. Interest-bearing net debt amounted to SEK 1,216 million compared to SEK 1,862 million at the end of 2016. The average interest rate in the loan portfolio, including interest derivatives, was 2.6 percent (2.6) on 31 December 2017.

Group liquid funds, including unutilized credit facilities, were SEK 5,145 million at the end of the year compared to SEK 6,062 million on 31 December 2016.

At the end of the year Group contingent liabilities, including joint and several liabilities in trading and limited partnerships, amounted to SEK 10,502 million (6,975). SEK 7,750 million (4,498) of contingent liabilities was surety given for credit lines for tenant-owned apartments under production.

INVESTMENTS AND DIVESTMENTS

During 2017 SEK 1,912 million (1,449) was net invested in tangible and intangible fixed assets and investment property. Included in this amount was SEK 154 million (310) in net investments from acquisitions in business areas Industry and Civil Engineering. Like last year most investments refer to investments in machines. Major investments have been made in business area Industry during the year, both to increase capacity and for replacements.

Net investments in project and development properties totaled SEK 702 million (324) during 2017, of which the acquisition of development rights at Kvarnholmen in Nacka amounted to around SEK 600 million. During 2017 property in Ulriksdal, Solna was divested. The partial sales of property in Hyllie was carried out in 2016.

CASH FLOW

Cash flow from current operations amounted to SEK 2,839 million (3,455), of which paid tax was SEK -651 million (-19). Cash flow from changes in working capital was SEK 57 million (552). Working capital included the acquisition of development rights at Kvarnholmen in Nacka for around SEK -600 million.

Cash flow from investment activities was SEK -544 million (-804). Cash flow from investment activities included the sales of fixed assets of SEK 1,577 million (865) which consisted of amortization of loan receivables from partially owned companies, the sales of shares in Lemminkäinen Oyj and the sales of shares in partially owned companies. The cash flow was primarily used for investments in machines.

Cash flow before financing amounted to SEK 2,295 million compared to SEK 2,651 million for the last year. During the first quarter the transactions carried out regarding Arenastaden, Solna had a positive effect of around SEK 835 million. In 2016 partial sales of property in Hyllie of SEK 508 million was included.

Cash flow from financing operations amounted to SEK -2,750 million (-2,613) of which SEK -1,062 million (-767) was paid dividends and SEK -1,688 million (-1,846) was amortization of loans.

ORDERS RECEIVED AND ORDER BACKLOG

Orders received for 2017 amounted to SEK 45,247 million compared to SEK 41,445 million for the last year. The level of orders received has risen in all business areas. No orders received or order backlog is given for the business area Industry.

There is still a large portion of housing projects spread well geographically in orders received in 2017. Two major road projects, worth around SEK 1 billion each, were included in the comparable year in business area Civil Engineering.

Order backlog yet to be produced at the end of the year increased to SEK 38,491 million compared to SEK 33,572 million at the end of the last year. Of the total order backlog, 34 percent (34) is expected to be produced after 2018 (2017). There is a good balance between small, middle-sized and large projects in the order backlog. Swedish operations accounted for 86 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 profit/loss referring to the contract construction in our own housing projects, in rental projects and other property projects to 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 reported profit/loss consists of the profit/loss in the developer part recognized 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, 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.

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 AB, 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 -228 million (-122).

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.

Operative net sales
Operative net sales per customer type, 2017
Operative operating profit and margin
Net debt and debt/equity ratio
Net investments 1)

1) Including project and development properties, shares and participations.

Cash flow before financing
Project allocation of order backlog, 31 December 2017
Order backlog allocated over time

Peab has in 2017 been commissioned by developer Västfastigheter to rebuild and extend sections of Södra Älvsborg Hospital. In total the contract is worth SEK 1,025 million and the entire project is expected to be completed in 2021.

Orders received

MSEK 2017 2016 2015
Construction  29,280 27,883 25,999
Civil Engineering 14,191 12,089 10,433
Project Development 8,496 8,245 6,498
Eliminations -6,720 -6,772 -5,118
Group 45,247 41,445 37,812

Order backlog

MSEK 31 Dec 2017 31 Dec 2016 31 Dec 2015
Construction 26,805 24,160 19,529
Civil Engineering 10,832 8,679 7,292
Project Development 8,198 6,853 4,357
Eliminations -7,344 -6,120 -4,187
Group 38,491 33,572 26,991

Net sales and operating profit per business area

Net sales Operating profit Operating margin
MSEK 2017 2016 2015 2017 2016 2015 2017 2016 2015
Construction 26,726 24,121 24,645 602 542 575 2.3% 2.2% 2.3%
Civil Engineering 11,825 10,740 10,448 374 355 381 3.2% 3.3% 3.6%
Industry 12,761 12,161 10,800 867 753 648 6.8% 6.2% 6.0%
Project Development 8,629 7,639 7,605 811 622 398 9.4% 8.1% 5.2%
   of which Property Development 1,013 1,385 1,634 98 89 10 9.7% 6.4% 0.6%
   of which Housing Development 7,616 6,254 5,971 713 533 388 9.4% 8.5% 6.5%
Group functions 993 897 836 -228 -122 -100
Eliminations -10,667 -9,069 -9,282 -1 -75 -50
Operative excluding write-down 1) 50,267 46,489 45,052 2,425 2,075 1,852 4.8% 4.5% 4.1%
Construction – write-down of project
Mall of Scandinavia
-800 -800
Operative 1) 50,267 46,489 44,252 2,425 2,075 1,052 4.8% 4.5% 2.4%
Adjustment for housing reporting 2) -177 -152 124 -20 23 -43
Legal 50,090 46,337 44,376 2,405 2,098 1,009 4.8% 4.5% 2.3%

1) According to percentage of completion method (IAS 11)
2) Adjustment of the accounting for own homes in Sweden and housing in Finland and Norway to the completion method (IAS 18).

Number of employees per business area

31 Dec 2017 31 Dec 2016 31 Dec 2015
Construction 6,685 47% 6,600 48% 6,320 48%
Civil Engineering 3,344 23% 3,080 22% 3,019 23%
Industry 3,452 24% 3,385 24% 3,204 24%
Project Development 361 3% 321 2% 285 2%
Group functions 502 3% 483 4% 472 3%
Group 14,344 100% 13,869 100% 13,300 100%