Comments from the CEO
We started the year by continuing in a positive direction with growth in net sales, profit and orders received. The level of production-starts and sales of our own housing developments was high while we maintained a strong financial position. However, external events have made future prospects uncertain.
Group development
The first quarter entails lower activity for us due to the season and weather, primarily in the business areas Civil Engineering and Industry. Group net sales increased by twelve percent during the first quarter and amounted to SEK 12,544 million (11,216). Operating profit was SEK 10 million (-73) and the operating margin was 0.1 percent (-0.7). Cash flow before financing amounted to SEK -323 million (-108).
Business area development
Net sales in business area Construction increased by nine percent, primarily related to Swedish operations, and amounted to SEK 6,735 million (6,196). Housing continued to generate an increasing portion of net sales. The operating margin was unchanged at 2.4 percent (2.4). Both net sales and the operating margin were unchanged in business area Civil Engineering where the latter was 1.7 percent (1.7). The combined operating margin for both construction contract businesses in the first quarter added up to 2.2 percent (2.2).
Net sales in business area Industry increased by 17 percent amounting to SEK 2,571 million (2,204) and the operating margin was -15.4 percent (-18.0). The negative operating profit is largely due to the fact that the season for paving operations starts in the second quarter.
In Project Development net sales increased by 44 percent and is attributable to Housing Development where a higher number of ongoing housing developments benefits net sales. The operating margin in Housing Development was 10.6 percent (12.1).
Start-ups of our own housing developments during the first quarter amounted to 724 units (662), of which 147 (206) were converted from rental apartments. Production-starts are well spread geographically with Sweden in the majority while sales have continued to be good in all three countries.
Order situation
The level of orders received was strong during the first quarter as well, increasing to SEK 15,375 million (14,446), which is six percent growth. Housing continues to be a large portion of orders received. Order backlog yet to be produced at the end of the period was SEK 49,968 million (47,286). Of the total order backlog 42 percent (38) will be produced after 2022 (2021).
“We started the year by continuing in a positive direction with growth in net sales, profit and orders received.”
Outcome of targets after the first quarter
We monitor our business based on nine external targets – both financial and non-financial targets, that at the same time identify our sustainability aspects. We are reporting the outcome for three of them this quarter: serious accidents, operating margin and net debt/equity ratio.
After a contracting trend in serious accidents in 2021 the number of serious accidents at our workplaces has increased in the first quarter 2022 and were per a rolling twelve month period 34 on March 31, 2022 (32 on March 31, 2021). Of these, 14 referred to our own employees and 20 referred to subcontractors. It’s regrettable that the trend turned and it shows how important it is to continuously work on our safety culture so as not to loose focus on the risks in our work. Regarding our financial targets, the operating margin calculated on a rolling twelve month period remained at 5.2 percent compared to the entire year 2021. Our target is to over time surpass 6 percent. The net debt/equity ratio was also unchanged compared to the previous quarter, i.e. 0.2, which is lower than the target interval 0.3-0.7.
Market and prospects for the future
In the first quarter of the year our pandemic-dominated existence was replaced by a world where Russia at the end of February had invaded Ukraine.
In addition to the terrible tragedy the war is for the people of Ukraine, future prospects have become more uncertain since the start of 2022 with even more disturbances in the supply chain and higher prices for energy and input goods essential to Peab. Inflation has skyrocketed along with long-term interest rates. The Riksbank, Sweden’s central bank, has now begun a more stringent interest policy in order to achieve the inflation target of two percent. Another factor that can create a bumpy market is the uncertainty about long-term access to cement in Sweden.
During 2021 and the first part of 2022 Peab has been able to handle the rise in prices and material shortages well. We continually work to adjust and streamline our operations to curb rising construction costs. Now that the situation has escalated we have to, based on operational and contractual circumstances, systematically deal with delivery problems and prices hikes within existing contracts and in new bids we tender. We are doing this through a tight dialogue with our subcontractors, suppliers and customers. Regarding Cementa’s permit process for Slite we are following developments closely. We also continue to work on our own binder alternatives and securing the supply of cement by importing it ourselves.
What remains to be seen is how all of this will affect demand short-term. The unstable market situation is reflected in the various assessments made by market analysts where access to cement is one vital factor. Our market assessments are based on Navet’s Nordic market forecasts that predominantly indicate a horizontal development in 2022 and 2023 in housing investments and other building construction. Regarding investments in civil engineering the forecast indicates a decline from a high level in Sweden, sideways movement in Finland and an upturn in Norway.
I’m convinced that in the long run the need for our products and services on the markets where we are active is substantial. With our competent employees, solid business model with four collaborating business areas and extensive Nordic local presence we are well-equipped to face these uncertain times.
Jesper Göransson
President and CEO