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 2020 financial year.

Translated comparative figures after changed accounting principles

As of the financial year 2020 Peab consolidates projects with Swedish tenant-owner associations at the time the final homebuyers take possession of their apartments. This means that Peab recognizes the projects on the balance sheet as work-in-progress under the asset item project and development properties, and as interest-​bearing liabilities (project financing). Revenue and costs for the projects will be recognized as homebuyers take possession of their apartments. In conjuncture with this change Peab now recognizes all our own housing development projects in Sweden, Norway and Finland according to the completion method. According to previous principles Peab did not consolidate projects with Swedish tenant-owner associations from the time land transfer and turnkey contracts were signed, and revenue and expenses were recognized over time as the projects were successively completed.

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 recognized at one point in time in segment reporting as well. Financial key ratios such as capital employed, the equity/assets ratio, net debt and the debt/equity ratio, cash flow before financing as well as earnings per share are presented in segment reporting taking into consideration the above prerequisites. Net debt in segment reporting includes the unsold portion of housing projects in ongoing production.

In conjuncture with changing segment reporting for housing projects Peab has also changed the segment reporting of additional leases according to IFRS 16 (previously operational leases). The change means that leasing fees are recognized in operating profit as a cost linearly over the leasing period in segment reporting for all business areas and IFRS 16 for additional leases is only applied as a total for the Group.

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 the following sections comments are based on segment reporting if not otherwise specified.

All comparative figures for 2019 are translated if not otherwise specified. For more information concerning changed accounting principles and differences between segment reporting and reporting according to IFRS see note 1, note 2 and note 5.

Distribution and listing of Annehem Fastigheter

In February 2020 Peab’s Board proposed, in addition to the ordinary dividend, an extra distribution of all the shares in a newly founded company, Annehem Fastigheter, containing all Peab’s wholly owned, fully developed commercial properties. As a result of the spread of the coronavirus, its effects on external circumstances and on financial markets, Peab’s Board decided to withdraw the proposal to the AGM. Based on market assessments as well as the developments presented in the second quarter report, Peab’s Board decided in August 2020 to propose a new date for the distribution of Annehem Fastigheter. An Extra General Meeting was held on November 12, 2020 where Peab’s shareholders adopted the proposal from the Board and the shares were distributed in December. December 11, 2020 was the first day of trading in Annehem Fastigheter’s B shares on ​Nasdaq Stockholm.

Annehem Fastigheter has been reported as a separate unit apart from segment reporting. Previously Annehem Fastigheter was included in business area Project Development and the unit Property Development. The change applies per January 1, 2020 and no comparative figures have been translated. For more information, see the section Annehem Fastigheter.

Acquisition of Nordic 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. Through the acquisition Peab expanded its presence in Sweden, Norway and Finland and was established in the paving business in Denmark. The operations are consolidated into the business area Industry as of April 1, 2020.

The transaction was a combination of an asset deal and a share purchase. The purchase price amounted to SEK 3,184 million for a debt-​free business and was fully financed. The acquired business had net sales of SEK 5,878 million with an adjusted EBITDA of SEK 282 million in 2019.

For more information see the sections Business area Industry, Other information and appropriation of profits and note 6.

Net sales

Group net sales according to IFRS for 2020 increased by six percent to SEK 59,852 million (56,303). After adjustments for acquired and divested units net sales decreased by four percent. More completed own housing development projects than production-started affected net sales according to IFRS by SEK 2,491 million (954).

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. Of the period’s net sales SEK 17,005 million (11,260) were attributable to sales and production outside Sweden. Most of the increase is related to the acquired paving and mineral aggregates operations in business area Industry.

Net sales in business area Construction contracted by eight percent and the decrease was related to Swedish operations while net sales increased in Norwegian and Finnish operations. In business area Civil Engineering net sales declined by four percent compared to last year. 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 reduction stems from Transportation and Machines, Rentals and Construction System. In business area Project Development net sales declined in both Property Development and Housing Development. The reduction in Housing Development stems from Swedish and Finnish operations.

Profit/loss

Operating profit for 2020 according to IFRS amounted to SEK 3,922 million (3,285). The operating margin was 6.6 percent (5.8). Adjustment to the completion method for own housing development projects affected operating income according to IFRS by SEK 331 million (652).

Operating profit for 2020 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. The revaluation effect of SEK 952 million was divided between business area Project Development by SEK 896 million and the reverse of previously eliminated construction contract profit by SEK 56 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.

The acquisition of the paving and mineral aggregates operations was finalized on April 1, 2020, which meant the acquisition occurred when the season started. The underlying operations in the acquired companies contributed to operating profit by SEK 494 million during the period April-​December. Depreciation on surplus values for, among other things, customer contracts in the order backlog taken over and fixed assets amounted during the same period to SEK -189 million. Depreciation on surplus values for customer contracts in the order backlog taken over have been high throughout 2020 and will also affect part of 2021. In addition, acquisition costs and transfer tax in Finland have charged profits in total by SEK -55 million. All in all operating profit for the year was positively affected by SEK 250 million related to the acquired operations. Because the acquired operations have a very clear seasonal pattern the first quarter is characterized by considerable deficits since the season starts in the second quarter. If the acquisition had taken place on January 1, 2020 profit in the first quarter would have been affected by SEK -297 million and the underlying operations would have had an accumulated operating profit for January-​December 2020 of SEK 197 million.

The operating margin in business area Construction was 2.5 percent (2.4) in 2020. In business area Civil Engineering the operating margin improved to 3.0 percent (2.8). 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. The lower operating margin in Industry is due to a lower margin in Rentals and Construction System. 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. Last year an income contribution of SEK 170 million from Acturum was included in Property Development. 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).

Eliminations and reversal of internal profit in our own projects have affected operating profit in segment reporting net by SEK 23 million (-142), of which the reversal of construction profits in connection with the distribution of Annehem Fastigheter was SEK 56 million. Last year several of our own major office projects were under construction. Elimination is reversed in connection with the external divestment of a project.

Depreciation and write-​downs according to IFRS were SEK -1,734 million (-1,260) for the year.

Depreciation and write-​downs according to segment reporting were SEK -1,412 million (-1,094) for the year, of which SEK -310 million is related to acquired operations in business area Industry.

Net financial items according to IFRS amounted to SEK -177 million (-58), of which net interest amounted to SEK -247 million (-262). A large part of the interest expenses refer to financing of own housing development projects, which are capitalized on the properties. Net interest included interest expenses attributable to Annehem Fastigheter of SEK -36 million.

Net financial items according to segment reporting amounted to SEK -108 million (-31), of which net interest amounted to SEK -56 million (-72). Net financial items from acquired operations amounted to SEK -27 million during the year. Net financial items included currency exchange rate differences of SEK -88 million (-2). Currency exchange rate differences have for the most part occurred on receivables in subsidiaries in Norway and Finland, and have no effect on cash flow.

Pre-​tax profit according to IFRS was SEK 3,745 million (3,227). Tax for the year was SEK -564 million (-571) corresponding to a tax rate of 15 percent (18).

Pre-​tax profit according to segment reporting was SEK 3,433 million (2,579). Tax for the year was SEK -485 million (-441) corresponding to a tax rate of 14 percent (17). The lower tax rate is due to non-​taxable income from, among others, the profit/loss effect of the distribution of Annehem Fastigheter.

Profit for the year according to IFRS was SEK 3,181 million (2,656).

Profit for the year according to segment reporting was SEK 2,948 million (2,138).

Financial position

Total assets according to IFRS per December 31, 2020 were SEK 42,164 million (43,688). The adjustment of differences in accounting principles in relation to segment reporting has affected total assets according to IFRS by SEK 5,560 million (5,326). IFRS 16, additional leases increased during the year, while the adjustment for own housing development projects decreased. Equity according to IFRS amounted to SEK 12,443 million (11,559) which means the equity/assets ratio was 29.5 percent (26.5). The distribution of Annehem Fastigheter has affected equity by SEK -2,087 million, including transaction costs. Interest-​bearing net debt according to IFRS amounted to SEK 9,682 million (13,174).

Total assets according to segment reporting per December 31, 2020 were SEK 36,604 million (38,362), of which approximately SEK 4,000 million is related to the acquired paving and mineral aggregates operations. Annehem Fastigheter was included by SEK 2,077 million at the same time last year. Equity amounted to SEK 13,251 million (12,479) which means the equity/assets ratio was 36.2 percent compared to 32.5 percent at the end of 2019. Interest-​bearing net debt decreased during the year and amounted to SEK 3,873 million compared to SEK 7,535 million at the same time last year. Net debt includes the unsold part of our own housing development projects in ongoing production. The unsold part decreased and was at the end of the year SEK 1,055 million (3,088). In addition, the positive effects of the distribution of Annehem Fastigheter have reduced net debt. The purchase price of the paving and mineral aggregates operations increased net debt by SEK 3,184 million on April 1, 2020. Since the acquisition took place at the start of the season positive cash flow effects have thereafter contributed to lowering net debt. The average interest rate in the loan portfolio, including derivatives, was 1.4 percent (1.5) on December 31, 2020.

Group liquid funds according to IFRS, including unutilized credit facilities, were SEK 8,822 million at the end of the year compared to SEK 5,013 million on December 31, 2019.

As a consequence of Peab consolidating Swedish tenant-​​owner associations per January 1, 2020 according to IFRS, surety for tenant-​​owner associations under production is not reported. When homebuyers take possession of their apartments and the tenant-​​owner association is no longer consolidated in Peab’s accounts, Peab then reports the part of surety for unsold homes. Peab has a guarantee obligation to acquire unsold homes six months after completion. Comparative figures for 2019 have been translated. Group contingent liabilities, including joint and several liabilities in trading and limited partnerships, amounted to SEK 3,500 million at the end of the year compared to SEK 3,443 million on December 31, 2019. Surety for credit lines in tenant-​​owner associations regarding the unsold part after deconsolidation made up SEK 238 million of contingent liabilities compared to SEK 433 million on December 31, 2019.

Investments and divestments

Net investments have been adjusted for the acquisition of paving and mineral aggregates operations in business area Industry and the distribution of Annehem Fastigheter.

During the year tangible and intangible fixed assets and investment property according to IFRS were net invested for SEK 1,109 million (1,676).

During the year tangible and intangible fixed assets and investment property according to segment reporting were net invested for SEK 732 million (1,554). The investments refer primarily to investments in machines. In the comparable year a large part of the investments referred to building up properties on our own balance sheet and these have been transferred to Annehem Fastigheter during 2020.

Net divestitures in project and development properties according to IFRS totaled SEK 2,842 million (net divestitures SEK 444 million) during the year 2020. During the year more own housing development projects were completed than started up.

Net divestitures in project and development properties according to segment reporting totaled SEK 1,917 million (net divestitures SEK 434 million) during the year 2020. Project and development properties include the unsold part of ongoing own housing development projects. During the year this portion has contracted due to more homes sold than started up.

Cash flow

Cash flow from current operations according to IFRS amounted to SEK 7,693 million (4,013), of which cash flow from changes in working capital was SEK 3,106 million (144). Having more of our own housing developments completed and sold than production-started had a positive effect on cashflow.

Cash flow from current operations according to segment reporting was strong during the year and amounted to SEK 6,749 million (1,628), of which cash flow from changes in working capital was SEK 2,886 million (-1,427). All business areas reported improved cash flows from changes in working capital except Construction where cash flow was slightly lower compared to 2019. A large part of the positive cash flows from changes in working capital comes from having sold more of our own housing developments than started production on during the year.

Cash flow from investment activities according to IFRS was SEK -3,940 million (-787).

Cash flow from investment activities according to segment reporting was SEK -3,970 million (-603) of which the acquisition price of the paving and mineral aggregates operations was included with SEK -3,184 million. Most of the other investments during the year consisted of machine investments in business area Industry.

Cash flow before financing according to IFRS amounted to SEK 3,753 million (3,226).

Cash flow before financing according to segment reporting improved during the year and amounted to SEK 2,779 million (1,025).

Order situation

The order situation is based on segment reporting which means that tenant-owner associations and housing companies are considered external customers regarding our own housing development projects.

Orders received in 2020 increased by 13 percent and amounted to SEK 49,735 million compared to SEK 44,130 million last year. The acquired paving and mineral aggregates operations contributed by SEK 4,357 million in orders received. Orders received increased in Construction, Industry and Project Development. Without the acquired operations orders received contracted in business area Industry. Group orders received are well spread geographically and there is good product diversity.

Order backlog yet to be produced at the end of the year was SEK 42,709 million compared to SEK 42,494 million at the end of 2019. The order backlog includes order backlog of SEK 1,531 million from the acquired paving and mineral aggregates operations. Of the total order backlog, 32 percent (31) is expected to be produced after 2021 (2020). Swedish operations accounted for 78 percent (80) of the order backlog.