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. Peab believes segment reporting best describes Peab’s business both regarding internal steering and risk profile. The Group is reported in the four business areas Construction, Civil Engineering, Industry and Project Development. The business areas are also operating segments.

As of the financial year 2020 Peab consolidates according to IFRS projects with Swedish tenant-owner associations from the time the final homebuyers take over their apartments. The new accounting principles mean that projects are reported as work-in-progress in the asset item project and development property and as interest-bearing liabilities (project financing) until the time homebuyers take over. Revenue and costs for the projects will be recognized as homebuyers take over their homes. As of the change Peab recognizes all own housing development projects in Sweden, Norway and Finland according to the completion method.

To create clarity and enable the market to follow Peab’s development regarding our own housing development projects, in segment reporting revenue and expenses will continue to be recognized over time as the projects are successively completed. This applies to the business area Project Development and the unit Housing Development and refers to Swedish tenant-​owner associations and own single homes, Norwegian condominiums and share housing and Finnish residential limited companies. Revenue and expenses for our own housing development projects in Norway and Finland along with our own single homes in Sweden were previously also recognized at one point in time in segment reporting.

As of the financial year 2020 in segment reporting leasing fees for all business areas are recognized linearly over the leasing period for additional leasing contracts according to IFRS 16 (previously operational leasing contracts). IFRS 16, Leases is applied in the consolidated accounts according to IFRS only as a total for the Group.

Financial key ratios such as capital employed, balance sheet total, equity, equity/assets ratio, net debt, debt/equity ratio, cash flow before financing are reported in segment reporting taking into consideration the above prerequisites. Net debt according to segment reporting includes the unsold portion of housing projects in ongoing production. Segment reporting is the model Peab believes best describes Peab’s business regarding both internal steering and risk profile, and it is also how the Board and executive management monitor operations in the business areas and the entire Group.

In Peab’s construction contract operations Construction and Civil Engineering revenue and profit are recognized over time in both segment reporting and reporting according to IFRS. In business area Industry revenue and profit are both recognized over time and at one point in time and the accounting is the same in both segment reporting and reporting according to IFRS. In business area Project Development in the unit Property Development revenue and profit are recognized at one point in time in both segment reporting and reporting according to IFRS. For more information regarding accounting principles and 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 development projects, rental development projects and other property development projects to business area Project Development. Recognition takes place over time as the projects are completed. Net sales for both the developer part and the construction contract part of our own housing development projects are recognized in business area Project Development. The recognized profit/loss consists of the profit/loss in the developer part recognized over time. Internal net sales between business area Construction and business area Project Development regarding the construction cost of our own housing development projects are eliminated in consolidated reporting. Internal profit is returned when the project is divested.

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.

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 and return on 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 thirteen 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. 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, foundation works 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 and Norway. The business in Finland was transferred to business area Industry during the autumn 2020. Customers are the Swedish Transport Administration, municipalities and local businesses.
• Industry: Business area Industry offers everything from mineral aggregates, concrete, paving and temporary electricity to prefabricated concrete elements. Industry also assists with crane and machine rental, distribution of binder to the concrete industry, transportation as well as recycles production waste and rubble. The business is run in six product areas; Mineral aggregates, Paving, Concrete, 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 development of housing as well as commercial property and public property in Sweden, Norway and Finland. The business is run in two units, 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 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 (construction and ownership of rentals), Fastighets AB ML4 (ownership and management of the research facility Max IV in Lund) and Point Hyllie Holding AB (ownership of the office building The Point and hotel property Värdshuset 5). Projects in wholly owned subsidiaries consist of a large number of holdings that include everything from land for development where zoning is being worked out to completed projects ready for divestiture. 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 participations 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 according to segment reporting for 2020 increased by four percent to SEK 57,417 million (55,349), of which acquired operations within business area Industry were SEK 5,891 million. After adjustments for acquired and divested units net sales decreased by seven percent. Operating profit according to segment reporting amounted to SEK 3,541 million (2,610), of which the acquired operations net were SEK 250 million and the effect of the distribution of Annehem Fastigheter was SEK 952 million. Last year included an income contribution of SEK 170 million from the divestiture of property in the partially owned company Acturum. The operating margin was 6.2 percent (4.7). Without the effect of the distribution of Annehem Fastigheter the operating margin was 4.5 percent.

Net sales in business area Construction contracted by eight percent with stable operating margin of 2.5 percent (2.4). Net sales shrunk in Civil Engineering by four percent but operating margin improved to 3.0 percent (2.8). Net sales in business area Industry grew by 40 percent. Not including the acquired operations net sales in business area Industry contracted by four percent. The operating margin in business area Industry was 5.9 percent (7.0). Not including the acquired operations the operating margin was 6.7 percent. In business area Project Development net sales shrunk in both Property Development and Housing Development. Operating profit in Project Development increased to SEK 1,669 million (1,015), however, without the effect of the distribution of Annehem Fastigheter of SEK 896 million, operating profit contracted. Operating margin amounted to 22.3 percent (11.1). During the year some operations in Property Development were affected negatively by SEK -64 million due to the corona pandemic, where SEK -44 million was related to Ängelholm Helsingborg Airport, of which SEK -20 million refers to writing down goodwill. The operating profit in Housing Development decreased slightly during the year but the operating margin improved to 9.6 percent (8.6).

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.