Comments from the CEO

Group development

Group net sales contracted by three percent during the first half-year 2023 and amounted to SEK 28,446 million (29,402). At the end of the quarter a decision in arbitration of the prolonged dispute over the contract Mall of Scandinavia (MoS) was handed down and entailed a positive effect on profit for Peab in the second quarter. Operating profit excluding the effect of MoS was SEK 534 million (895) and SEK 934 million including it. The operating margin excluding the effect of MoS was 1.9 percent (3.0) and 3.3 percent including it. The low level of activity in business area Project Development with diminished home sales and few production-starts of new housing projects affects both our ability to generate profits and our indebtedness. Net debt was SEK 11,717 million (6,333).

Business area development

Net sales in business area Construction and Civil Engineering increased by four respectively three percent during the first half-year. The portion of housing in net sales in business area Construction has contracted as a result of the weak demand for housing projects. All in all the operating margin for the construction contract businesses amounted to 2.3 percent (2.5).

Net sales in business area Industry contracted by six percent during the first half-year. The operating margin was -1.3 percent (-0.6) and the negative operating profit refers to Paving where the season did 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 23 percent as a result of the weak demand for homes throughout the entire Nordic region. Few sold homes and very few production-starts of our own housing developments contributed to the lower operating profit in Housing Development. The operating margin in Housing Development contracted to 6.5 percent (11.2).

The total number of our own housing development start-​​ups was 483 (1,552) during the first half-year, of which 81 (1,252) were tenant-​owner apartments/condominiums and 402 (300) were homes in rental apartment projects on our own balance sheet. The number of sold homes was 451 (1,245), of which 188 (1,245) were tenant-​​owner apartments/condominiums and 263 (–) were homes in rental apartment projects. The portion of sold tenant-​owner apartments/condominiums in ongoing production amounted to 67 percent (75) as of June 30, 2023.

Order situation

The level of orders received contracted in the first half-year and amounted to SEK 23.5 billion (29.7). The decrease is mainly due to the very low demand for housing projects, although the level of orders received in all business areas was down. We have also been more selective about the tenders Paving in Norway submitted. There has been a good level of orders received from the public sector in the period. Order backlog yet to be produced at the end of the period was SEK 43.6 billion (49.9).

Target outcome

We are reporting the outcome for four of our nine external targets this quarter: serious accidents, attractive employer (eNPS), operating margin and net debt/equity ratio. The number of serious accidents, calculated on rolling 12 months, amounted to 43 (48 per June 30, 2022) of which 27 referred to our own employees and 16 referred to subcontractors. We can discern a trend in the right direction but work on our safety culture will continue with full force. Our preventive work concerning the work environment and measures to prevent accidents reoccurring as well as continuous information are key to reducing the number of workplace accidents.

In the spring survey our eNPS score fell by two points to 27 (29). This is good result despite a tough market situation and well above the Nordic benchmark which is currently 21 (22). Our employees continue to be satisfied at work and the eNPS score is on the rise among skilled workers in almost all of the organization, with the most positive changes in Denmark. This is gratifying.

Our three financial targets are based over time and in a normal business cycle. One of them is to have an operating margin that surpasses six percent. Calculated on rolling 12 months, the operating margin excluding MoS at the end of the second quarter was 3.8 percent. It is clearly affected by the high cost of inflation and the deteriorated market situation, particularly the housing market. Our second financial target, the net debt/equity ratio, was 0.8 at the end of the second quarter, which is outside of the target interval 0.3-0.7. The increase in net debt is due to more capital tied up in unsold homes in ongoing production, a higher level of repurchased homes, investments in our own balance sheet and paid dividends.

New basic financing

Peab has entered agreements with four Nordic banks for new credit facilities divided into two contracts for a total of SEK 7.4 billion during the quarter. The credit agreements refinance existing credit facilities and make up Peab’s long-term basic financing, which gives us stability for three years with an option of two more years.

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, are trending downward in 2023. 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 come out ahead. Regarding housing, hardly any new projects are starting up on the market. This means that for us as major project developers and housing builders in Sweden, Norway and Finland we cannot 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 continue to manage 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 showing caution regarding investments.

Our broad offer to the market is a strength for us in the current market situation. Our solid business model with four collaborating business areas and extensive Nordic local presence and naturally our skilled employees make us less vulnerable when the market dips. In the long run the conditions for growth in the segments and markets where we are active are good.

Jesper Göransson
President and CEO