Comments from the CEO

Group development

Group net sales increased somewhat during the first quarter 2023 and amounted to SEK 12,690 million (12,544). Operating profit was SEK -156 million (10) and the operating margin was -1.2 percent (0.1). The first quarter is clearly affected by the season, particularly in business area Industry, where the beginning of the year is characterized by substantial deficits since the paving season does not begin until the second quarter. In addition, there was less activity during the quarter in Project Development with fewer sold homes and production-starts of new housing projects. Cash flow before financing was affected by strategic investments and more working capital and amounted to SEK -908 million (-323). Net debt increased to SEK 7,984 million (2,991).

Business area development

Net sales in business area Construction and Civil Engineering increased by ten respectively eight percent during the first quarter. A large part of the increase in net sales is due to the continued high cost of material and energy. All in all the operating margin for the construction contract businesses amounted to 2.1 percent (2.2) where we continue to experience dilution of the operating margin as a result of the high cost of material and energy in contracts received before the war broke out in Ukraine.

Net sales in business area Industry increased by eight percent during the first quarter. The increase was most pronounced in Paving and Construction System. The operating margin was -15.7 percent (-15.4) and the negative operating profit refers to Paving where the season does not begin until the second quarter. Operations in Industry have continued to handle the high energy and fuel prices through prices to customers as well as adapting and streamlining operations.

In business area Project Development net sales contracted by 25 percent mainly as a result of the weak demand for homes throughout the Nordic area. Fewer sold homes and production starts of our own housing development projects contributed to the lower operating profit in Housing Development. The operating margin in Housing Development decreased to 7.3 percent (10.6). The market continues to be cautious regarding all kinds of housing as a result of rising interest rates and uncertain economies, which has a negative effects on conditions for production starts going forward.

In total, the number of start-​​ups of our own developed homes amounted to 298 (724) during the first quarter, of which 217 (–) were homes in rental apartments projects on our own balance sheet and 81 (724) were tenant-​owner apartments/condominiums. The portion of sold tenant-​owner apartments/condominiums in ongoing production amounted to 68 percent (77) as of March 31, 2023.

“The level of orders received was lower than the first quarter last year but the level of order backlog continues to be good”

Order situation

The level of orders received decreased in the first quarter 2023 and amounted to SEK 11.0 billion (15.4). The decrease is mainly due to the weak demand for housing projects. We have also been more selective about the tenders paving operations in Norway submitted. In the orders received for the first quarter, there is a large proportion of projects for the public sector. Order backlog yet to be produced at the end of the period was SEK 44.6 billion (50.0), and thereby remains on a good level.

Target outcome

We are reporting the outcome for three of our nine external targets this quarter: serious accidents, operating margin and net debt/equity ratio. Unfortunately the level of serious accidents is still far too high and amounted to 54 (34) calculated on a rolling 12-month period per March 31, 2023. Of these, 33 referred to our own employees and 21 referred to subcontractors. It is imperative to continue to work on our safety culture and preventative work environment measures to turn the tide. We do this through a number of measures such as in-​depth investigations with resulting remedies and by providing information to all our employees.

One of our financial targets is to over time and in a normal business cycle have an operating margin that surpasses 6 percent. Calculated on rolling 12 months, the operating margin for the first quarter was 4.1 percent. The lower operating margin is clearly the result of high cost inflation and the deteriorated market situation. We continue to streamline and adapt the organization to the demand on the market in different segments and geographies as well as reduce overhead and work on units where profitability is too low.

Our second financial target, the net debt/equity ratio, was 0.5 at the end of the first quarter, which is within the target interval 0.3-0.7. During the year we have continued to invest in, above all, our capital intense operations in Industry and Project Development.

Market and prospects for the future

According to external analysists market prospects for the Nordic region in construction and civil engineering, with the exception of Norway, have during 2023 been further adjusted downward. However, in areas like public building construction, civil engineering and investments connected to green transition demand is expected to continue to be more stable. Higher interest rates and high inflation make it harder to make calculations that come out ahead. Regarding housing, there are fewer projects being started up for any kind of home. This means that for us as major project developers and housing builders in Sweden, Norway and Finland we cannot fully compensate the reduced demand on the housing market with other kinds of projects. Considering the underlying need for housing in the Nordic region, drastically reducing the number of homes being built is not a good development. This raises the question once again about the solution to long-term management of supplying housing, particularly in Sweden. As far as Peab is concerned we have a well-dimensioned development rights portfolio in attractive locations and while we wait for the market to recover we are further developing and preparing projects for the future.

We are now handling the remaining parts of cost increases resulting from Russia invading Ukraine. Considering the tough price pressure on the market it is vital that there is balance between prices and risks in projects we undertake. While waiting for the housing market and other private construction to scale up again we are adapting our business through continued intense focus on costs and caution regarding investments. However, we are still making strategic investments. We have started a number of rental apartment projects on our own balance sheet in Project Development and we have doubled our production capacity of concrete elements in Industry, where we have invested in climate-improved ECO-Prefab in the extensions of the plants in Ucklum and Hallstahammar.

In the long run the conditions for growth in the segments and markets where we are active are good. With our competent employees, solid business model with four collaborating business areas and extensive Nordic local presence we are well-​equipped to face even difficult times.

 

Jesper Göransson
President and CEO