Other information and appropriation of profit

Revenue recognition of Swedish tenant-owned housing projects

Peab has in quarterly reports 2018 and 2019 and in the Annual Report 2018 communicated that together with several other major housing developers Peab has received questions from Nasdaq Stockholm AB (Nasdaq) during 2018 regarding the application of IFRS 15 Revenue from contracts with customers as well as whether the tenant-​​owned housing association or the final home buyers are, in terms of accounting, Peab’s customers according to IFRS 15. The reconciliation between Nasdaq and ESMA (European Securities and Markets Authority) came to the conclusion that, in this case, the accounting review should be focused on the application of IFRS 10 Consolidated financial statements and to what extent tenant-​​owned housing associations should be included in Peab’s consolidated financial statements.

Regarding the matter of whether or not a company has controlling interest over a tenant-​​owned housing association, and thereby ought to consolidate the association, there is, taking into consideration all relevant facts and circumstances, room for companies within the framework of IFRS 10 Consolidated financial statements to arrive at different conclusions. After a review of several crucial factors our conclusion is that Peab cannot be considered to have controlling interest over tenant-​​owned housing associations from the time a tenant-​​owned housing association signs a contract for a land transfer and turnkey contract according to the stipulations in IFRS 10 Consolidated financial statements. This conclusion is shared by our accountants.

In the beginning of December 2018 Nasdaq sent a letter to Peab with the information that Nasdaq had decided to criticize Peab for a lack of clarity in the Annual Report for 2017 concerning the grounds for Peab’s assessment that controlling interest does not exist when revenue over time is applied to tenant-​​owned housing associations. Nasdaq required that clearer information should be presented in the Annual Report for 2018, which Peab has done. The letter also stated that Nasdaq considered the case closed and that Finansinspektionen had been notified, which took over the matter as of January 1, 2019. During the spring of 2019 Finansinspektionen continued to examine the matter and put further questions to Peab which the company has answered. On June 3, 2019 Peab received a reconciliation letter from Finansinspektionen containing observations and preliminary judgements from Finansinspektionen. Finansinspektionen’s preliminary judgement is that Peab should have consolidated the tenant-​​owned housing associations in 2017. Peab was given the opportunity to reply in the form of an opinion regarding Finansinspektionen’s reconciliation letter. Peab delivered its opinion on June 27, 2019 and contested Finansinspektionen’s preliminary conclusion. Peab believes it is wrong to consolidate the tenant-​​owned housing associations since the company does not have a controlling interest. In addition, in Peab’s opinion the current application best describes Peab’s housing business both in terms of internal steering and risk profile. This is also how the Board and the executive management follow operations. On November 26, 2019 Finansinspektionen notified Peab that the matter had been turned over to the Legal Unit.

On January 28, 2020 Peab received another reconciliation letter from Finansinspektionen maintaining that Peab should have consolidated the tenant-​​owned housing associations. Peab has concluded that Finansinspektionen does not share the company’s interpretation of IFRS 10 Consolidated financial statements regarding recognition of Swedish tenant-​owned housing associations and that the interpretations of Finansinspektionen and Peab differ greatly. Peab does not believe there is any point in continued polemics and it is not in the interest of Peab’s stakeholders.

Peab has therefore decided to change accounting principles as of January 1, 2020, regardless of the decision from Finansinspektionen, and consolidate Swedish tenant-owned housing associations as of the fiscal year 2020 and translate the comparable year 2019. This means that income and expenses for projects will be recognized first when homebuyers take possession of the condominiums and that the assets and liabilities of the tenant-owned housing associations will be consolidated until that time. In Group operative reporting, such as segment reporting, our own developed housing projects in Sweden, Norway and Finland will be reported as external customers while the construction projects are underway with revenue recognized over time as the projects are successively completed.

Peab’s risk situation and financial position are not altered by the change in accounting, nor does it affect Peab’s financing agreements.

Peab will present translated income and balance sheets as well as key ratios for 2019 in good time before the first quarterly report is presented. Even translated operative reports will be published.

On March 25, 2020 Finansinspektionen informed the company that the matter would be put to rest since Peab would, as of January 1, 2020, change accounting principles.

Peab’s sustainability work

As a community builder and a major employer Peab’s operations have an impact on society and those living and working in it, both long and short term. Therefore we put great effort into ensuring that what we plan and carry out is ethical and sustainable throughout an entire life cycle. Our aim is to run our company sustainability and responsibly encompassing Social (employees and society), Environmental and Economic aspects. Peab’s strategic sustainability work is primarily focused on preventing risks, systematic quality work and, in an inventive and responsible manner, enabling sustainable development. In accordance with the Annual Reports Act chapter 6 paragraph 11 Peab has chosen to present the statutory sustainable report outside of the Board of Directors’ Report. The required parts of a sustainable report can be found under sections Goals and strategies, Our take on sustainable business, Social, Environment, Economic, Risks and risk management and Corporate governance report.

Operations required to have permits or submit reports

Operations required to have permits and submit reports according to the environmental code are found in the Swedish sub-groups Swerock, Skandinaviska Byggelement, Peab Asfalt, Peab Anläggning and Peab Bostad. In Finland permit operations are run according to the Environmental Protection Act. Operations required to have permits in Sweden are land remediation, intermediate rubble storage, managing polluted water that can cause clouding of the recipient, gravel and rock quarries, transportation of waste and hazardous waste and asphalt plants. These operations primarily affect the environment through the extraction of finite resources, future land use and emissions. Operations required to have permits in Finland are mainly concrete manufacturing and ballast operations. Renewal and supplementation of permits is continuous.

Swerock’s concrete factories in Sweden and Skandinaviska Byggelement’s concrete product factories as well as Peab Asphalt’s permanent and mobile asphalt plants are operations that must submit reports.

Research and development

The purpose of Peab’s research and development is to provide society, our customers and ourselves with added value and sustainable development by using new discoveries to improve or to develop new products, services and production processes. Research and development is run close to operations in the different business areas in order for it to be steered by current needs. Therefore Peab does not have a central unit for research and development. Peab collaborates with universities, colleges and trade organizations and is an active participant in many trade organization projects.

Some examples of trade organization projects in business area Construction in 2019 were “Heat recycling from waste water in apartment buildings”, “Production automation in concrete construction”, “Paving systems for wooden parking decks”, “Energy use in climate control and dehumidification during construction”, “Digital construction establishment – Digitalized construction establishment”. Some in business area Civil Engineering: “Evaluation of mechanical properties in stabilized material”, “Packing embankments for high velocity railroads with varying foundation conditions”, “Productivity in the deep foundation acoustic method”, “Uncertainty models optimizing infrastructure projects”, “Methodology for stabilizing dredged masses” and “Nondestructive testing of concrete constructions with synthetic sensor groups”. Examples in business area Industry: “REWOFUEL – in collaboration with nine countries residual soft wood is converted into airplane fuel and one of the coproducts is a lignin assumed to be able to function as a  binder replacement in asphalt”, “Sustainable community building with resistant concrete”, “Evaluation method for adhesion of half-warm asphalt pavements”.

IMPORTANT EVENTS DURING THE YEAR

On July 4, 2019 Peab signed an agreement to acquire YIT’s Nordic paving and mineral aggregates business. Through the acquisition Peab will expand its presence in Sweden, Norway and Finland and become established in the paving business in Denmark and this will give Peab a unique and market leading position in this business in the Nordic region. The deal will also increase the importance of industrial operations for the Group as well as reduce sensitivity to fluctuations in the business cycle.

Peab is currently a leading actor in manufacturing and paving of asphalt as well as in mineral aggregates operations in Sweden and Norway. The acquisition entails taking over some 200 strategically located quarries along with 63 production asphalt plants in the Nordic region. The acquisition also entails taking over some 1,700 employees. Greater geographic proliferation in businesses that are normally less sensitive to the business cycle increases stability in the Group. It also provides conditions for further expansion and development in other operations such as Recycling and Concrete.

The transaction is a combination of an asset deal and a share purchase. The purchase price is expected to amount to SEK 2,966 million for a debt-​free business and is fully financed.

The acquired business had net sales of SEK 6,005 million with an adjusted EBITDA of SEK 240 million in 2018.

The transaction was conditional on approval from competition authorities as well as the fulfillment of certain contractual conditions. At the end of March 2020 the transaction was approved by the competition authorities and the acquisition was finalized on April 1, 2020.

IMPORTANT EVENTS AFTER THE END OF THE YEAR

Extra distribution of a real estate property

In addition to the ordinary dividend, in February 2020 Peab’s Board proposed an extra distribution of all the shares in a newly formed company holding Peab’s wholly owned, fully developed commercial properties. As a result of the spread of the coronavirus and its effects on external circumstances and financial markets Peab’s Board decided on March 24, 2020 to withdraw the proposal to the Annual General Meeting concerning an extra distribution of all the shares in the newly formed real estate company. With the uncertain situation in the world this is not the right time to list the company. Peab continues to believe that a distribution of the properties is the solution that will over time provide shareholders with the greatest value. Therefore the operative work of building and structuring the real estate company is continuing as planned. The Board intends to summon an extraordinary General Meeting to decide on distribution of the real estate company when the situation has stabilized and conditions are more favorable.

Peab consists of four collaborating business areas – Construction, Civil Engineering, Industry and Project Development, each one of them an essential component of the Group. In recent years Peab has invested considerable resources in the capital intense business areas Industry and Project Development, a strategy that will continue in the future.

Project development operations comprise development of both housing and commercial projects and are run primarily in wholly owned form but in certain cases through partially owned companies as well. For appreciation purposes fully developed properties have mainly been kept in partially owned companies but they have also been on Peab’s balance sheet. In order to create the right conditions in the future for operative steering, tied up capital and income recognition in project development operations various alternatives have been analyzed. At the beginning of 2020 the Board and executive management therefore evaluated the future direction of wholly owned, fully developed commercial property.

With this in mind the Board has decided that for Peab’s shareholders the best alternative for long-​term value growth is to form a separate real estate company, Annehem Fastigheter, holding Peab’s wholly owned, fully developed commercial and housing properties that will be distributed to existing shareholders according to Lex Asea and listed. In this way Peab can focus on developing and building while Annehem Fastigheter can focus on owning and managing fully developed property.

Annehem Fastigheter manages and develops centrally located, high quality commercial, community and residential property with a clear environmental profile in the Nordic growth areas Stockholm, Skåne/Göteborg as well as Helsinki and Oslo. Annehem Fastigheter builds lasting relationships and value through management close to customers. Initially Annehem Fastigheter owns fully developed properties with a total market value of around SEK 3,000 million. In addition, 50 percent ownership in two joint venture companies – Nya Bara Utvecklings AB and Point Hyllie Holding AB – is included. Annehem Fastigheter has also signed a contract with Peab to acquire three properties located in Solna, Oslo and Helsingborg respectively, which will be taken over after they are completed.

After the distribution Peab’s project development operations will consist of wholly owned development rights for housing and commercial projects, projects under construction as well as ownership of the major joint ventures that contain fully developed property but also a large portion of future project developments. This consists primarily of Peab’s 50 percent in Fastighets AB Centur and 33 percent in Tornet Bostadsproduktion AB.

The board of Annehem Fastigheter consists of Göran Grosskopf, Pia Andersson, Jesper Göransson and Anders Hylén. Göran Grosskopf has been appointed chairman. Before it is listed further board members will be added to Annehem Fastigheter’s board. Jörgen Lundgren has been appointed CEO and Jan Egenäs will be CFO of Annehem Fastigheter. Jörgen Lundgren leaves his position as CEO of Solnaberg Property AB (publ). Jörgen has previously held positions as President and CEO of Fastighetsaktiebolaget Norrporten and is, among other things, currently a board member of Aros Bostäder and vice chairman of Mäklarhuset.

When the conditions are right the Board intends to summon an extraordinary General Meeting to propose an extra distribution of all the shares in Annehem Fastigheter to existing shareholders according to Lex Asea. Peab’s shareholders will then receive shares in Annehem Fastigheter in addition to their existing stake in Peab.

The distribution is conditional on the consent of Peab’s lenders and that Annehem Fastigheter receives financing on market terms. The level of equity and pledges in Annehem Fastigheter will be decided in consultation with the financing banks.

When Annehem Fastigheter is distributed the difference between market values and book values as well as eliminated construction contract profit will be taken up as income in Peab’s consolidated accounts. In February 2020 this amounted preliminarily to around SEK 1,200 million, which primarily corresponds to the reduction in equity in the Group caused by the extra distribution. The effect on profit will be updated in connection with the future distribution decision based on circumstances at the time.

Further information to Peab’s shareholders regarding the proposal for distribution of Annehem Fastigheter, in the form of an information brochure, will be published on Peab’s website in connection with publishing the summons to attend the extraordinary General Meeting.

Coronavirus

In the beginning of the year the coronavirus has spread to a large part of the world. Countries are putting different measures into effect on short notice to limit the spread of the infection, for example entry and quarantine regulations. Stock markets all over the world have plunged during March. Governments and central banks are introducing different forms of crisis packages to reduce the financial effects. This will affect the global economy but to what extent is difficult to say at this moment.

Peab is a major employer with many employees and many people at our workplaces. We are monitoring developments and follow recommendations by the authorities in respective countries concerning the spread of the coronavirus and we adapt accordingly. We are doing our utmost to prevent the spread of the infection while continuing to run our operations. How Peab will be affected and what the financial consequences will be during the year remains to be seen. For more information see section External circumstances and the market and Risks and risk management.

Acquisition of YIT’s paving and mineral aggregates operations

On July 4, 2019 Peab signed a con­tract to ac­quire YIT’s paving and min­er­al ag­gre­gates op­er­a­tions in the Nor­dic re­gion. The trans­ac­tio­n was con­di­tion­al on ap­proval from com­pe­ti­tion au­thor­i­ties as well as the ful­fill­ment of cer­tain con­trac­tu­al con­di­tions. At the end of March 2020 the transaction was approved by the competition authorities and the acquisition was finalized on April 1, 2020.

For fur­ther in­for­ma­tion see sec­tion Im­por­tant events dur­ing the year.

THE PEAB SHARE

At the end of 2019 Peab’s share capital amounted to SEK 1,583,866,056 divided among a total of 296,049,730 shares, resulting in a nominal value of SEK 5.35 per share. Of the shares, 34,319,957 are A shares with ten votes per share, and 261,729,773 are B shares with one vote per share. All shares carry equal rights to participation in the company’s assets, profits and dividends. There are no restrictions in the articles of association concerning transferring shares or the disposal of votes at the AGM. On December 31, 2019 there were approximately 46,000 shareholders in Peab. As part of the generation shift, in the spring of 2017 the Paulsson families merged the majority of their indirect holdings into a holding company, Ekhaga Utveckling AB, which is controlled by Mats Paulsson’s son Fredrik Paulsson. Ekhaga Utveckling AB has 48.2 percent of the votes. At the end of 2019 the collective ownership connected to the Paulsson families amounted to a total of 25.7 percent of the capital and 57.7 percent of the votes. The company has no knowledge of any agreements between shareholders that can result in restriction of the right to transfer shares.

Peab’s AGM decided on 9 May 2019 to authorize the Board to decide, during the period up to the next AGM, on new issues of B shares with rights for current shareholders to participate in the issue or without preferential rights for current shareholders to participate in the issue in connection with acquisitions. The authorization may be used on one or more occasions and correspond to, at the most, a total of 10 percent of the registered share capital at the time of the authorization. During the year the Board has not decided to issue any new shares.

In 2007 Peab established a profit-sharing foundation. According to the foundation’s placement policy its capital should be placed primarily in Peab shares. On December 31, 2019 the foundation owned 11,374,000 B shares in Peab, corresponding to 3,8 percent of the total number of shares.

HOLDINGS OF OWN SHARES

At the beginning of 2019 Peab’s own B shareholding was 1,086,984 which corresponds to 0.4 percent of the total number of shares. Peab’s AGM on 9 May 2019 resolved to authorize the Board to, during the period until the next AGM, acquire shares so that the company would have at most 10 percent of the total shares in Peab. No own shares were purchased nor divested during 2019 which means that Peab’s own shareholding was 1,086,984 B shares at the end of 2019. For more information see note 28.

CORPORATE GOVERNANCE

For a detailed description of the work of the Board of Directors, corporate governance and systems for internal control see here, Corporate governance report.

REMUNERATION POLICY FOR EXECUTIVE MANAGEMENT

The proposal for the Remuneration Policy has been revised according to changed legal requirements in the Companies Act, valid as of June 10, 2019 and the Swedish Code of Corporate Governance valid as of January 1, 2020.  The Board hereby proposes that the AGM adopts the following Remuneration Policy. The Remuneration Policy will be reviewed if material changes occur, however no later than in four years.

Scope

The Remuneration Policy comprises the CEO and the other members of executive management. Included also are members of the Board whose remuneration is established at some other point in time than the AGM.

This Remuneration Policy is applied to new contracts, or changes in existing contracts, with the CEO and the other members of executive management after Peab’s AGM has adopted the policy.

Basic principles

The Remuneration Policy will contribute to the company’s business strategy, long-term value growth and sustainability. This is ensured through the basic principles by:

• offering remuneration based on market terms so that Peab can attract and retain competent executive management. Remuneration levels are regularly compared with other companies active in the same markets to ensure that remuneration is on market terms,
• offering long-term incentive programs and bonus programs focused on the company’s business strategy, long-term goals and sustainability,
• annually reviewing individual performances and goal achievement in regards to the company’s financial results.

The basic principles ensure that the company has the right competence in executive management through remuneration on market terms as well as incentive programs and bonus programs focused on (result measurement) business strategies, a long-term perspective and sustainability.

Remuneration components

The total remuneration is made up of basic pay, annual short-term incentives on an individual basis (STI), long-term incentive programs (LTI), defined contribution pensions as well as a company car and other non-monetary benefits.

Basic pay

Basic pay is reviewed annually and takes into consideration the senior officer’s area of responsibility, qualifications and market terms for the salary.

Short-term incentives (STI)

From time to time executive management may be offered STIs. A STI may not exceed 60 percent of basic pay and is based primarily on the Peab Group’s profitability and, at each time, other material Group goals. In the current program result measurements are connected to the company’s strategy in the form of profitability, customer focus and sustainability.

STIs are determined for each fiscal year and are settled the year after being earned. They may either be paid out as salary or be invested as a pension savings in a financial instrument connected to the Peab share.

Long-term incentive programs (LTI)

Every year the Board of Directors must consider whether or not to propose a share-based incentive scheme to the AGM. From time to time the CEO, other members of executive management and key personnel may be offered participation in a LTI program. The maximum annual amount in a LTI program (including social security costs) may not exceed 40 percent of annual basic pay. The programs are performance-based and only deliver an outcome if predefined goals are met. The outcome of a LTI program is invested as a pension savings in a financial instrument connected to the Peab share.

Pension

Members of executive management are entitled to pension according to collective bargaining agreements and contracts with Peab. All pension obligations are defined contribution pensions. The maximum pension contribution is 47 percent of annual basic pay and retirement age is 62. The level corresponds to previous market practice. Current practice is maximum 35 percent and retirement at 65. Salary waives may be used to increase pension provisions through one-off pension contributions in the form of salary or bonus exchanges.

Company cars

The CEO and other members of executive management have the right to a company car according to the gross salary deduction model.

Non-monetary benefits

Members of executive management are entitled to extra health and health care insurance up to 30 basic amounts as well as those benefits otherwise enjoyed by other Peab employees. On average the benefits amount to five percent of base pay.

Period of notice and severance pay

The period of notice from Peab is, at the most, 24 months and the period of notice from members of executive management is, at the most, 6 months.  If severance pay is paid the total remuneration for salary during the period of notice and severance pay may not exceed 24 months salary. Severance pay is calculated on base pay and is not pensionable.

Other employees

The basic principles for salaries and other remuneration to other employees is reflected and considered in the Remuneration Policy. Corresponding remuneration components are included. Remuneration in the form of short-term incentives on an individual basis (STI), long-term incentive programs (LTI) as well as company cars are only provided to certain categories of employees based on their positions or needs.

Other employees’ total remuneration is based on market terms so that Peab can attract, develop and retain personnel with the right skills. Remuneration levels are compared regularly.

Pensions follow the ITP plan as well as SAF-LO. Defined contribution plans are applied up to a maximum of 30 percent of the pensionable salary. Either traditional plans or premium ladders are applied to defined benefit plans for personnel with basic pay over ten income basic amounts.

Decision-making process

The Board of Directors has appointed a committee responsible for preparing the guidelines for remuneration to members of executive management that are decided on by the AGM and making proposals to the Board regarding the salary and employment terms of the CEO. The Board decides on matters concerning the salary and employment terms of the CEO based on proposals from the Remuneration Committee. The Board’s Remuneration Committee decides on salaries and employment terms of members of executive management that report directly to the CEO. The Remuneration Committee reports regularly to the Board. The CEO and other members of executive management are not present when their respective remuneration terms are adopted.

Exceptions

Deviations may be made from the Remuneration Policy in cases where there are special circumstances. Only if it is necessary to fulfill the company’s long-term interests, sustainability or financial viability may the Board deviate from the Remuneration Policy adopted by the AGM. Deviations must be reported and motivated in a subsequent remuneration report.

Previous guidelines

The Remuneration Policy has been revised and supplemented with texts to meet changed legal requirements in chapter 8, 51-53 § § in the Companies Act regarding the content of the company’s Remuneration Policy. Even changes in the Swedish Code of Corporate Governance valid as of January 1, 2020 have been taken into consideration in the revision.

EXPECTATIONS CONCERNING FUTURE DEVELOPMENT

New construction of housing declined in Sweden in 2019 and is expected to continue downward in 2020. The weakening economy is expected to have a negative effect on new construction of other private building construction while public building construction is expected to increase in 2020. A growing and aging population is keeping the demand for new construction of public premises up. Added to that is the need to modernize in primarily schools and healthcare, which promotes renovation investments. All in all building construction investments are expected to remain on the same level as 2019 in 2020. Civil engineering investments are expected to grow over the next two years.

Housing construction contracted in Norway in 2019 and is expected to level out in 2020. The public sector is expected to drive development in 2020, especially considering the drastic change in circumstances at the beginning of 2020. Civil engineering investments are expected to grow at a good rate during 2020.

Housing construction in Finland is expected to decline in 2020 but the market for housing renovations looks better. Weaker growth in the economy is reflected in the forecasts for other building construction with a certain amount of growth expected in 2020. The forecast of total building construction indicates a reduction in 2020 but the effects of the coronavirus contribute to uncertainty. The forecasts for civil engineering investments signal a leveling out in 2020.

PARENT COMPANY

The parent company’s business consists of executive management and Group functions. Net sales in 2019 were SEK 348 million (299) and consisted primarily of internal Group services. Operating profit for the year was SEK -160 million (-171). Profit after net financial items amounted to SEK -98 million (1,128). Net financial items included dividends from subsidiaries of SEK 200 million (1,509). Of the appropriations, Group contributions were SEK 2,130 million (2,698). Profit for the year amounted to SEK 1,263 million (2,809).

PROPOSED DIVIDEND

In February 2020, Peab’s Board proposed an ordinary dividend of SEK 4.20 per share as well as extra distribution of all the shares in Annehem Fastigheter holding Peab’s wholly owned, fully developed commercial properties. As a result of the spread of the coronavirus and its effects on external circumstances and financial markets Peab’s Board decided to withdraw the proposals to the Annual General Meeting. The Board’s ambition is to regularly evaluate dividend capacity and depending on developments be able to make a decision on both the ordinary dividend and the right time to distribute Annehem Fastigheter.