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 2019 financial year.

NET SALES

Group net sales for 2019 amounted to SEK 54,008 million (52,233), which was an increase of three percent. Even after adjustments for acquired and divested units net sales increased by three percent.

Net sales in business area Construction grew by four percent and the increase was related to all three countries. Net sales includes a greater portion of other building construction. In business area Civil Engineering net sales decreased with three percent. Net sales grew in Local market but fell in Operation and maintenance and Infrastructure, which had several major projects in full production during 2018. Net sales in business area Industry were relatively unchanged. Net sales grew in all the product areas except Construction System where net sales were lower. In business area Project Development net sales decreased slightly which is attributable to Housing Development.

Of the year’s net sales SEK 9,888 million (10,297) were attributable to sales and production outside Sweden.

PROFIT/LOSS

Operating profit for 2019 was SEK 2,568 million (2,573) and the operating margin was 4.8 percent (4.9). The operating profit was affected positively by SEK 23 million through additional IFRS 16, Leases during the year.

The operating margin in business area Construction was 2.4 percent which was unchanged compared to 2018. Business area Civil Engineering reported lower earnings in 2019 and the operating margin was 2.8 percent (3.0). The level of profitability in Operation and maintenance was lower than in previous years. The operating margin in business area Industry was 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 the shares in AB Smidmek Eslöv for SEK 47 million in the fourth quarter. The operating margin in business area Project Development improved to 12.4 percent compared to 10.0 percent last year. 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.

Eliminations and reversal of internal profit in our own projects have affected operating profit net by SEK -142 million (0). As a result of more construction on property on our own balance sheet including housing projects in Norway and Finland, apartments for rent in Sweden, Peab’s own offices as well as other commercial property, a higher level of profit has been eliminated than in previous years. Elimination is reversed in connection with the external divestment of a project.

Depreciation and write-​downs for the year were SEK -1,260 million (-1,024). Depreciation was affected by SEK -166 million through additional IFRS 16, Leases during the year.

Net financial items amounted to SEK -58 million (-55), of which net interest amounted to SEK -99 million (-48). Net interest was affected by SEK -27 million through additional IFRS 16, Leases during the year. Net financial items included positive effects from, among other things, dividends and activated interest rates.

Pre-​tax profit was SEK 2,510 million (2,518). Tax for the year amounted to SEK -418 million (-418), which corresponds to 17 percent (17) in tax.

Profit for the year was SEK 2,092 million (2,100).

FINANCIAL POSITION

Ifrs 16 leases

IFRS 16, Leases replaced IAS 17, Leases as of January 1, 2019. When changing over Peab chose the changeover method in which comparable periods are not recalculated. Additional leases primarily comprise office and premise rents, leaseholds, land rentals and vehicles. Total assets and net debt were affected at changeover on January 1, 2019 by SEK 850 million. IFRS 16, Leases is also applied in segment reporting. For further information see note 2.

Financial position

The equity/assets ratio on December 31, 2019 was 31.7 percent compared to 30.4 percent at previous year-​end. Excluding additional IFRS 16, Leases the equity/asset ratio on December 31, 2019 was 32.3 percent. Interest-​bearing net debt amounted to SEK 7,507 million compared to SEK 3,551 million at the end of 2018. Excluding additional IFRS 16, Leases net debt on December 31, 2019 was SEK 6,743 million. The increase in net debt is explained by more construction on property on our own balance sheet and joint ventures, our own developed housing projects in Norway and Finland and investments in Industry. The average interest rate in the loan portfolio, including derivatives but excluding additional IFRS 16, Leases was 1.5 percent (1.4) on December 31, 2019.

Group liquid funds, including unutilized credit facilities, were SEK 5,013 million at the end of the year compared to SEK 5,846 million on December 31, 2018.

At the end of the year Group contingent liabilities, including joint and several liabilities in trading and limited partnerships, amounted to SEK 9,217 million compared to SEK 10,404 million on December 31, 2018. Of contingent liabilities surety given for credit lines for tenant-​owned housing associations under production was SEK 6,207 million compared to SEK 7,580 million on December 31, 2018.

INVESTMENTS AND DIVESTMENTS

During 2019 SEK 1,676 million (1,021) was net invested in tangible and intangible fixed assets and investment property and consisted like last year primarily of office building construction and investments in machinery. During the fourth quarter 2018 the property Ångkraftverket 2 in Västerås, containing a hotel and Kokpunkten Actionbad, was divested for around SEK 800 million.

Net investments in project and investment properties totaled SEK 1,549 million (2,103) during 2019. Most of the investments refer to ongoing housing projects in Finland and Norway and our own developed rental projects in Project Development in Sweden.

CASH FLOW

Cash flow from current operations was SEK 52 million (-250), of which cash flow from changes in working capital was SEK -3,100 million (-2,944). The change in working capital included, among other things, investments in project and development property, construction of own housing projects in Finland and Norway and our own rental projects in Sweden as well as lower operating debt.

Cash flow from investment activities was SEK -603 million (-771) and like last year is primarily explained by investments in machines and in operation properties. The amount also included sales of assets of SEK 1,181 million (1,327), which among others, included sales of investment properties and machines as well as repayment of loans from partly owned companies. Last year included, among others, the divesture of the property Ångkraftverket 2 in Västerås, containing a hotel and Kokpunkten Actionbad, for around SEK 800 million.

Cash flow before financing amounted to SEK -551 million (-1,021).

Cash flow from financing operations amounted to SEK -462 million (1,770), of which SEK -1,239 million (-1,180) consisted of paid dividends and changes in loans was SEK 776 million (2,950).