Note 5 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 in the four business areas Construction, Civil Engineering, Industry and Project Development. The business areas are also operating segments.

IFRS 15 Revenue from contracts with customers, has as of 2018 replaced previous standards related to revenue recognition such as IAS 18 Revenue, IAS 11 Construction contracts and IFRIC 15 Agreements for the construction of real estate. No material effects have been identified. IFRS 15 has not entailed any material change in when, or for what amount, revenue is recognized regarding Peab’s construction contracts in business areas Construction and Civil Engineering. Business area Industry recognizes revenue according to both IFRS 15 and IAS 17 but the changeover to IFRS 15 has not entailed any material change in the way revenue is recognized. Business area Project Development recognizes most of its revenue as revenue over time. Swedish tenant-​owned housing projects will continue to be recognized as previously through revenue over time while our own home developments in Sweden are now recognized according to revenue over time due to the implementation of IFRS 15. IFRS 15 has not led to any changes in recognition regarding housing projects in Finland and Norway since revenue is first recognized when the home is turned over to the buyer. After implementation of IFRS 15 segment reporting mirrors legal reporting. For more information regarding accounting principles as well as important estimates and assessments, see note 1 and note 3.

Business area Construction recognizes net sales and profit referring to the construction contract part of our own housing developments, rental project developments and other property development projects to business area Project Development. Recognition take place over time as the projects are completed. Net sales for both the developer part and the construction contract part of our own housing developments are recognized in business area Project Development. The recognized profit/loss consists of the profit/loss in the developer part recognized over time. The underlying sales value of property projects on our own balance sheet, recognized as project and development property, that are sold in the form of a company via shares is recognized as net sales and the recognized value on the balance sheet is recognized as an expense. When property projects recognized 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/loss referring to the construction contract 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 assets 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 realization of the transactions.

Segments’ operating profit includes directly attributable items and items that can be reasonably and reliably allocated to a segment. Non-allocated items consist of financial income and expenses, and taxes.

Operating segments

The Group consists of the following operating segments:

• 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 specialized housing production units in Stockholm, Gothenburg and the Öresund region. Construction maintenance operations are run in a nationwide organization in Sweden 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. 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, management 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, management 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). Projects in wholly owned subsidiaries 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.

Comments on the tables

Group net sales for 2019 increased by three percent to SEK 54,008 million (52,233). Even after adjustments for acquired and divested units net sales increased by three percent. Net sales in business area Construction grew by four percent with a stable operating margin of 2.4 percent which was unchanged compared to 2018. Net sales in business area Civil Engineering were slightly lower with lower reported earnings in 2019. The operating margin was 2.8 percent (3.0) due primarily to a lower level of profitability in Operation and maintenance than in previous years. Net sales in business area Industry were on the level of 2018 with an operating margin of 7.0 percent (7.4). The lower operating margin in part stems from higher costs in Rentals as a result of supplementary establishments to increase local presence that do not yet generate their full potential income. In addition, the business area has been charged by acquisition costs of SEK 40 million for YIT’s paving and mineral aggregates operations in the third quarter and the acquisition of the remaining 40 percent of shares in AB Smidmek Eslöv for SEK 47 million in the fourth quarter. In business area Project Development net sales decreased slightly which is attributable to Housing Development while the operating margin improved to 12.4 percent (10.0). There was a slight increase in operating profit in Housing Development during the year where the somewhat lower operating profit in Sweden was countered by several projects that were turned over in Norway and Finland. The operating margin in Housing Development was 9.4 percent (8.7). In Property Development Peab’s partially owned company Acturum divested a number of properties in the second quarter. The divestitures had a positive effect of SEK 170 million in profit contributions from partially owned companies. Apart from this no major property transactions have taken place during the year.

Geographic areas

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