Solwers Oyj (SOLWERS) Earnings Call Transcript & Summary

Welcome to Solwers' Half Year Report webcast. My name is Jasmine Jussila, I'm the Head of Group Communications, and we are here today with Solwers' CEO, Stefan Nyström and CFO, Teemu Kraus. Warmly welcome, everyone behind the screen. So, today, you will hear more about Solwers' January-June performance in brief and also the M&As and recent projects. Then Teemu will walk you through the financial review, and Stefan continues with events after the review period, M&As, outlook and strategic targets and financial calendar. In the end, we will have some time for your questions so, during the webcast, you may write your questions in the webcast chat. So, before we start, a little recap on Solwers, how we are today. So, we are altogether, 29 companies across Finland and Sweden and employ around 700 employees in the fields of design, engineering and project management in the built environment consulting industry. So, let's kick off. Stefan, go ahead.

Okay. Thank you. So, the market is still quite challenging. It has not, as it was predicted in the beginning of year, I know interest rate is still quite high, and it has come down slowly. And, of course, the interest rates have an impact on the investment activity, and it's still, let's say, in a waiting mode. We had a 20% growth, mainly from acquisitions, but we also have a positive organic growth. It's not big, but about up 1%. The M&As, we have made actually 3, totally 2 in Sweden, 1 in Finland, and then we have 1 where we are only. It's a strategic partnership, and we have a 1/3 of that company. The order backlog and billing rates, they have remained actually quite stable. But our profitability is lower, and it's partly due to, of course, the market situation, but partly also due to some costs that we have, could say, additional cost, one is that we are preparing for a possible transfer to the main list. That is one. And the other thing is a recently acquired group company. They are performing excellent this year, which result in a higher contingent consideration and decrease the reported profitability. So, Teemu will explain more about this if there are questions. Our performance, however, improved during the second quarter of the year. And the growth is actually bigger in Finland because the low Swedish krone has soon impact, of course, on our numbers when we are reporting in euro and the krone is decreasing. But we think that actually, the business climate is more positive in Sweden. Then we have also been strengthening our ownership in 2 subsidiaries. One is Dreem Arkitekter in Gothenburg and the other one is KAM Redovisning in Stockholm. And we are having a new Board member, Johanna Grönroos, joined the Board of Directors; and Mari Pantsar is not anymore available for this position. And we have also established this Board committees. Nordea has started to analyze our numbers, which is, of course, good, and all Solwers numbers. And then as said, we are ongoing investigation on the possibility to transfer to the main list market, Nasdaq Helsinki. And here is what has happened from the beginning of the year, started with WiseGate Consulting and DEMAB, they are actually in South Sweden, about 50 persons, and they are consulting in engineering for energy and process industry. Then this strategic cooperation with Kari & Pantsar, they are specialized in environmental consulting. Then we have Relitor in Luleå, North Sweden, and they are mainly doing plant engineering calculations and things like that. And then we have a small company that's actually only kind of supporting our Kalliotekniikka with certain products, for rock excavation and products for the mining industry. And then some interesting projects, this first to the left is 130-kilowatt transformer station. The company that is making the engineering for us is ELE Engineering in Västerås. And this is, of course, a project which enable transmission of more electricity, and these kinds of projects, there will be a lot of them because the green transition need a lot of electricity, and the electricity need to be transferred to the right place. Then we have a sustainable project in Gothenburg. It's made of reused bricks. And it's a big building for 20,000 people. And actually, the CO2 emission that is saved is actually 2,200 tonnes of less CO2. And then we have established sharing our management consulting company in Stockholm, specialized in logistics. They are doing this GANT warehouse relocation and interesting project. And then we have a long-lasting hospital project, and here is one of them in City of Oulu, Finland, and it's a huge complex. And it's divided in A, B, C, D parts. And we are involved there through Lukkaroinen Architects in Oulu. And then I give the word to Teemu who will then tell about the figures.

Thank you, Stefan. And let's start from KPIs. So, the revenue ended in H1 2024 in EUR 39.9 million. Compared to last year, EUR 31.1 million gives us growth of 20.2%. Furthermore, revenue growth in Q2 compared to Q1 this year-ended up to 7.6%. Drivers for the growth lies on acquisitions, which were WiseGate Relator and Finesco, were of the 2 first ones were in Sweden and the other one in Finland. Organic growth was marginal, but anyhow positive. H1 EBITDA was EUR 3.8 billion and 9.4% compared to H1 last year, EUR 4 million and 12.1%. EBITDA percent increased Q2 slightly. H1 included $293,000 on one-off costs and excluding these costs, we would have exceeded last year absolute EBITDA. This cost was EUR 78,000 due to the listing cost and EUR 215,000 due to the increased content generation related to acquisitions as our subsidiaries have performed better than expected, and this has also an effect to profit and loss. Anyhow good performance is good news for us. H1 EBITDA was EUR 3.3 million and 8.2% while H1 last year was EUR 3.5 billion and 10.7%. EBIT in H1 was EUR 1.9 million and 4.9%, while H1 last year was $2.5 million and 7.5%. Here, between, we had some IFRS 16 related depreciation increased by 300,000 alongside acquisitions. Net result on the first-year half was 750,000, while a year ago, the first half, it was EUR 1.5 million. Financial income reduced by EUR 895,000 from H1 2023. And respectively, financial expenses fell by EUR 594,000. EPS ended up to EUR 0.07. Still continuing with key figures. Turnover per employee grew to EUR 57,000 compared to last year, EUR 55,000. Billing rate stayed quite stable in 81.5% compared to last year, 81.7%. Equity ended up to EUR 40.2 million. Net debt increased by EUR 6.3 million from last year H1 when it was EUR 17.3 million. This increase was driven by MA-related financial institutional loan of EUR 2.3 million increase in IFRS leasing debt of EUR 1.5 million and acquisition debt by EUR 0.9 million and then a decrease in cash of EUR 0.8 billion. Leasing debt was EUR 6.2 million. Personal at the end of the period increased by 79% from H1 in August 2023 being EUR 690 million. Average was EUR 699 million. There has been some adjustment of capacity and thus, the number has followed from Q1 figures. Then moving to profit and loss. As already mentioned, turnover in H1 was EUR 39.9 million, while in 2023, H1, it was EUR 33.2 million, growth of EUR 6.7 million and 20.2%. The drivers for the growth were mainly acquisitions but also organic growth was positive despite being marginal. Currency effect was marginally defective, negative. Other operating income in H1 were EUR 104,000. Materials & Services increased by EUR 1.6 million and in proportion to turnover, they were 13.6% in H1 '24 and 11.6% in H1 '23. External subcontracting increased by EUR 1 million. Personal expenses increased by EUR 4.3 million and calculated by the average number of employees, the group salary inflation was 3.5%. Depreciation increased by $275,000 and summed up to EUR 1.8 million, where IFRS 16 related depreciation was EUR 1.5 million. EBIT or operating profit fell by EUR 530,000 and 2.6 percentage points. Financial net expenses increased by EUR 302,000, while net expenses were EUR 808,000 in H1. H1 taxes were EUR 0.4 million. Then moving to balance sheet and asset side. In H1 2024, total assets grew compared to H1 2023 by EUR 10.3 million and amounted to EUR 92.6 million. Whereof noncurrent assets grew EUR 7 million and current assets, EUR 3.3 million. Goodwill growth was $5.8 million and tangible assets increased by EUR 1.3 million. Short-term receivable increased by EUR 4.3 million, mainly due to the acquisitions. Cash and cash equivalents were EUR 30.2 million, decreased by EUR 773,000 but still remaining on a good level, facilitating our acquisitions strategy to continue. Balance sheet, equity and liabilities. In equity increase was EUR 2.3 million compared to H1 2023 and ended up to EUR 39.7 million. Equity belonging to non-controlling interest was EUR 445,000. Here, we have redeemed the minority shares from Dreem AB and KAM Redovisning AB in Sweden. Liabilities in total grew by EUR 8 million and added up to EUR 52.4 million. Non-current liabilities decreased from EUR 27.3 million to EUR 24.5 million. In Q1, bank loan of EUR 2.3 million was drawn down, bank loan related to acquisition purposes. Non-current acquisitions related consideration decreased by EUR 5.7 million. Non-current leasing liabilities increased by EUR 944,000 driven by the change in IFRS 16 application and acquisitions. Current liabilities increased by EUR 10.7 million. Our current acquisition-related contingent consideration increased by EUR 6.6 million, mostly due to the maturity falling below 12 months level. Accruals and deferred income increased by EUR 1 million, and accounts payable increased by EUR 712,000. Current leasing liabilities increased by EUR 596,000. A few comments about cash flow. During H1, the liquidity continued to remain at a good level. Cash and cash equivalents ended up to EUR 13.2 million, being EUR 14 million in H1 in 2023. Cash and cash equivalents have decreased from fiscal year-end 2023 by EUR 2.7 million, mainly due to acquisitions and dividend payment. The company's operating cash flow during the reporting period was positive, EUR 1.1 million, being EUR 1 million in H1 2023. The Net cash flow from investing activities was EUR 2.9 million last year, EUR 1.9 million, an increase due to high activity in acquisitions, which amounted at EUR 2.5 billion last year in H1 EUR 1.9 million and also, from acquisition of non-controlling interests, which amounted to EUR 299,000. Last year, such acquisitions did not exist. Dividend payments amounted EUR 738,000 and M&A dedicated loan of EUR 2.3 million was withdrawn. Bank loan instalments amount to EUR 1 million and last year at the same period, EUR 0.7 million. That's all from finance, and I will give the control back to Stephen. Thank you.

Okay, events after the review period. We have continued to, with our acquisitions and the first was Siren Arkitekter, which is the oldest architectural company in Finland, which remarkable references and, of course, together with ADT, they will form a super team with excellent references in different areas. We have Spectra Consult, are being served and [ OML ] and they are actually supporting [Viscate], and they are about 20 persons and are operating in design and control of electricity and automation. And then about the outlook and targets for this year, end of this year, the market pick-up, which we are waiting for and investment activity has been delayed compared to what has been estimated not by us, but by others and I think the biggest reason is that the interest has not come down very much yet then still companies that are working with residential and office projects continue to struggle. Increased price competition we have seen, especially on the public sector, in these cases where only price and not quality requirement has been involved. So, if it's only the price, they will drop very low but luckily, in our projects, mainly quality has a big role. Industrial projects performed better, especially in Sweden, where we are active, North Sweden, and then I would say that the infra sector is performing okay. But, all in all, the market is a little bit waiting, I would say, what will happen. Acquisition continues to support our existing business. Of course, in our M&As, the focus is on areas where there are investments and production, for example, energy, automation, power transmission, also infra. And we have a quite good backlog in both public sector and also in the infra. We have a lot of schools under preparation, new projects there, and then we have also this long-lasting hospital projects. So, I think that is quite good. And then, of course, the majority of our projects are very small, below EUR 10,000, and we have a lot of them, more than 3,000 active projects by year on average, and they are distributed in 29 different subsidiaries. So, I think that that gives a kind of stable situation for us when we have a lot of companies, and they have a lot of clients and clients are ordering small projects in both Finland and Sweden. So, the Solwers' business climate is expected to improve towards the end of 2024, with the general market pick up. And what can we do? We can, of course, we are depending on investments but the investment activity, we cannot impact. But we can actually, first of all, focusing on increased sales in subsidiaries. So, now, the slogan is, sell as hell. And then we have, of course, on the M&A side, we can focus on business where the demand is high. And then last, if nothing else helps then we have to adjust the capacity where needed. But, of course, focus on sales, focus on profit improvement in all subsidiaries, that is what we, let's say, in all subsidiaries where we have profit on a lower level. We have subsidiaries where the profit is very high and very good. So, I think that, that was still, yes, the midterm targets, we have them still unchanged revenue growth, more than 20% a year. We had that so far this year. And EBITDA, we aim to get up to 12% and then equity ratio more than 4%, and yes, that is just the financial calendar, our silent period window, and when we are coming out with next time, November 29, with Q3 figures. And then I think the next is actually questions.

We have quite many questions. But let's start with some of these you have already answered during the presentation, but let's still repeat some of them. So, [ Sineka ] would like to know, was there any organic growth?

Yes. I think that we said that it was about 1% of the growth was organic.

Then we have a question from Svante Krokfors, Nordea. Are there any acquisitions that have been particularly good and any that have disappointed materially?

Well, I would say that we have companies that are performing excellent, and we have companies that are struggling. So, at the average, I would say, it's quite good.

Then Petri Gostowski is asking, how has the order backlog developed in H1? And are they now higher in the end of H1 than the beginning of the year?

I think that it has been quite stable, but the order stock is never distributed equally over the company. So, we can have a high order stock, but still we don't have jobs for everybody in the company. So, that doesn't exactly explain that because it's not equally distributed. But I would say that it has actually improved during Q2. It was a little bit lower in the beginning of the year. But as we also had a little bit more challenging in the first months of the year.

Then Svante continues that you have been adjusting capacity due to lower activity. How have layoffs and staff reductions look like in H1?

We have now less layout than we had in the year-end and we actually don't have very many left and we hope that we can, as soon as possible, get rid of them all, but we have still in some companies layoffs, temporary layoffs, mainly ongoing.

Then a question that is coming up quite often here in the questions is, what is the status of main market listing?

Well, the preparation are ongoing, but no decision has been made yet. And it's, of course, the Board who is then deciding when we go. But we have made preparation for that, which we have actually announced already earlier that we are preparing for that, but we have not yet made any decisions.

Then there is a question about the higher costs in H1, costs related to the initial preparations for the main list, and also costs related to contingent considerations. Then you mentioned some numbers on this, could you repeat some of this?

The costs related to listing initiative were EUR 78,000. And the costs which comes from the contingent consideration is EUR 215,000. And this latter one is a result of our subsidiaries performing better than expected. Due to the accounting regulation, this differs from the normal case, we need to book it also to the profit and loss. And thus, it has a temporary effect in our profit and loss.

Then the last question for today is, how does the outlook for infrastructure look in Finland and Sweden? And has there been material changes?

I think in Finland, we know that the public sector and the finance is not so good. So, there have been a lot of talks about, for example, is [ Tuni UNA ]. However, some parts of the design have continued, but I don't know what and when a possible investment decision for these projects will be taken. But there is a lot of small projects, and we are mainly involved in the small projects. For example, there are improvement of railroads and there are actually changing all these crossings of railroads, which is both rail and road design. So, I would say that the activity on the infra is in Finland, still quite okay. And in Sweden, there is a lot on the infra part. So, I think that the infra is okay.

That's all. Thank you.

Okay. Thank you.