Solwers Oyj (SOLWERS) Earnings Call Transcript & Summary

Welcome to Solwers Financial Statements Release 2024 webcast. My name is Jasmine Jussila. I'm the Head of Group Communications, and we are here today with Solwers' CEO, Stefan Nyström.

Hello.

And CFO, Teemu Kraus.

Hello.

Today, we will briefly go through what's Solwers -- what kind of company Solwers is today. And then Stefan will continue with the 2024 highlights, market situation, interesting projects, and then Teemu will continue with the financial review and dividends. And then Stefan continues with the outlook for the year -- ongoing year '25 and the midterm targets. In the end, you will have -- we will have some time to discuss your questions. So feel free to write your questions in the webcast chat. So let's kick off. So what Solwers is? We are a group of consultancy companies that offer architectural design, technical and other consulting as well as project management services locally close to clients. We operate in 2 countries, Finland and Sweden. We have 29 subsidiaries across those countries and over 700 experts. In 2024, our revenue reached EUR 78 million, and the EBITA margin was 7.0%. Our strategy is based on growth through acquisitions and organically, the attractiveness of our companies for diverse experts and continuous development of expertise. So Stefan, can you tell more about what makes Solwers special.

Yes. Thank you. Yes, the concept -- Solwers concept is unique, and it's actually a combination of the advantages of a small company and a big company. As you can see, we have a light integration, which means that the subsidiaries continues under own brand and identity, and we don't change the organization or processes in the administration. They will mainly be -- remain as they are. This light integration means for us that we can actually grow profitably. We have done that actually last 7 years on average, 25% per year. And it's also the kind of -- for the employee satisfaction, it's benefit because nobody likes integration. So we think that the light integration means that we are actually focusing on the common business, not other things. And collaboration, we have actually our common management teams where we are focusing -- one in Finland, one in Sweden, where we are focusing on actually marketing and sales, common offering, common projects. And that's the biggest advantage we can use each other's client contacts, and we can offer much broader than the companies could do before alone. And it's a growth platform. The platform gives actually support to the subsidiaries first through these common projects, marketing and sales and things like that, also all kind of support and references, and we can together offer much broader than before. So I would say that together, we are stronger than separately. That is the thinking of our concept shortly. And I already told about the growth. You can see in the middle, the IPO. From there on, we have grown 25.3% on average every year. But if we take it from the beginning when Solwers was founded, 2017, we have had about the same growth from the beginning. And we are -- started from EUR 16, we are now at EUR 78 million. We have from June 2024, 2 companies analyzing our figures, Inderes, which has been from the beginning or since our IPO and then now from June, Nordea as well. So if we go to the business and the highlights of last year. We continued with our acquisitions. We actually made 6, of which 3 was kind of bolt-on acquisitions into existing subsidiaries and 3 was from Sweden and 3 was from Finland. The biggest one was the one to the left, WiseGate, which is actually 2 companies. It's WiseGate Consulting and DEMAB, and they are very much into the energy engineering and working towards the industry. And then another interesting one is Siren Arkkitehdit from Finland, which is the oldest architectural company in Finland. And they have very convincing references, and they are now together with Davidsson Tarkela. And then we have -- the last one was Spectra, which is actually in South Sweden, working very much towards public projects, both -- and actually, they are also working with projects for the defense, Swedish defense. And then we have been working a lot with this transfer to main list. We are ready to go. It's, of course, the Board, which -- who decides when is the right timing and when we are going. So -- but we have made a lot of preparation for this. We also have invested a lot in future growth. So we are ready to go. And we also have expanded to a third country, Poland. So far, we are actually -- have our first Solwers Poland company established, and we have some M&As actually on the table, but no decisions has -- or deals has so far been made. We think that Poland is an interesting market and that, first of all, it's big. It's -- 40 million people are living there. Mainly our target is to actually work locally, which we are doing in all countries. But of course, we see a potential to cooperate also with Finland and Sweden. And then also if there one day will be more engineering opportunities in Ukraine. And here are some bullets about last year. We grew 19%, and the revenue was EUR 78.3 million. And I think that our business was -- our operating business was okay in a challenging market. Of course, we are not happy with it, but we think it was okay. We then have a lot of other things that was actually impacting our result more. And we have a lot of increase in collaboration between the subsidiaries. We are all the time doing more and more together, which is actually the thinking behind this concept. In some places, we have layoffs or temporary layoffs. And in some places, we have need for recruitment. During the end of last year, the order backlog has improved. And we can say that the billing rate, even if it has a little bit coming down compared to 2023, it's still on a good level. And then we can see that the profit was impacted mainly by increase in following costs. We had group costs was actually increased by EUR 1.2 million compared to 2023. And that is, of course, the investment into the future and also the preparation for the transfer to the main list. But that is one-off cost, and we see that we are now, as I said earlier, ready to go. Then we had some write-downs of receivables. We know that the construction market is tough today. There are more write-downs, not very much more, but we can see that there is -- has a little bit growth there. And then we had a repayment of a government subsidiary support in one subsidiary. It's in Sweden called FOU, and we have reclaimed that, but anyway, it impacts now our results negatively. If we can get our reclaim accepted, then it will have an impact in a different direction. And then a little bit about our presence. We are in 28 locations. We are -- I think we are considered as a local player. We have -- our clients are close to our offices. And every office has actually their own client register. So that's, for us, very good. If you think about our clients, we have about half is private sector and then we have -- the other half is public, of which about half is infra projects and the other half is hospital, schools, et cetera. And our biggest clients are very good clients, I would say, Trafikverket, Väylävirasto, this Laakson Hospital and then HUS Kiinteistöt also hospital and then this KPO-Kiinteistöt, which is in Vaasa, where we have had huge -- a big project. We don't have very much very big projects. Our workload is mainly consisting of small projects. We have had last year more than 5,500 active projects, of which 70% are below EUR 10,000. So a lot of small projects, which are actually many of them are running price work. And that is, of course, some kind of safety for us. And it's very often when we have hard times, it's the big projects that are canceled or stopped. And then we have framework with -- more than 250 frameworks with different clients in both Finland and Sweden. And we are doing more than half of the projects are running projects. And here, some interesting projects, railway line, 90-kilometer renovation by Finnmap Infra. Then we have this hospital project that I already mentioned in Helsinki. It's very big. It will end in 2030. And we have there involved also our architects, but also Kalliotekniikka and GeoUnion. Then we have this Sokos Hotel in Vaasa, I already mentioned. It's interesting we have there many of our subsidiaries involved. We have Polyplan, Contria, Zenner, Kalliotekniikka. And then the last one is actually a project in its pre-engineering phase. It's an affluent treatment plant in South Sweden, Malmö region, and we are now involved in this pre-engineering. And of course, we hope that we -- one day will be able also to take part of the detailed engineering when it's so far. So -- and now I will give the word to Teemu, and he will tell about our numbers, please.

Thank you. So let's start from the financial agreement. Solwers expanded the financial agreement with the company's principal bank in December 2024. In the agreement, the company's current loans were refinanced with the new EUR 24.2 million loan maturing in February 2029. The company agreed on a new EUR 10 million credit facility, which will be drawn for acquisition use if needed. In accordance with the terms of the financial agreement, the acquisition limit can be increased later by EUR 5 million. Then our key performance indicators. On the first row, you can see the half year numbers and on the second part, the full year figures. Revenue in January - December, revenue growth was EUR 12.3 million and respectively, 18.6%. Revenue growth was driven by acquisitions. The impact of currency fluctuation was slightly positive. Revenue growth accelerated compared to 2024, where revenue growth settled to 5.1%. In H2, revenue our growth was 17% compared to 2024 H2. Then the profit and loss and some highlights there. In January - December, variable own production cost increased by EUR 1.2 million, mainly due to new subsidiaries, which have material purchases compared to 2024, where we did not have such instances. Subcontracting cost increased by EUR 1.9 million and by 29%, and it was mainly affected by the new companies that rely relatively more on subcontracting. In January - December, personnel costs increased by EUR 8.7 million and 20.8%. Simultaneously, the average number of employees increased by 16% and was mainly coming from Sweden, where the salary level is higher than in Finland. Personnel cost growth in H2 by 21.2%. Other operating expenses -- between January and December, other operating expenses increased by EUR 3.3 million and 35.9%. Increase was generated by new subsidiaries, listing preparation costs, increase in IT costs and also other costs, which includes negative impact on M&A-related contingent considerations as the other positive end is in other operating income. This leads us to January-December EBIT, which was EUR 2.7 million and 3.5%. In 2024, the EBIT was 7.3%. Our second year half EBIT in 2024 was 2%. Adding back depreciation of intangible assets and depreciation related to right-of-use assets on premises, we arrive to Solwers EBITA. January-December EBITA was EUR 5.5 million and 7%. July-December EBITA was 5.9% and was affected by one-off nature of impacts. Solwers' midterm target is 12% and actions to get back on track have been started. Then headcount, it increased from 635 employees in the end of 2024 (sic) [ 2023 ] to 724 in the end of 2024. Increase in the number of employees is acquisition related and the increase is focused in Sweden, as already mentioned. Balance sheet assets. In 2024, Solwers had 7 acquisitions in terms of legal entities. The affection of these acquisitions increased goodwill by EUR 4.9 million and goodwill was at the end of the period, EUR 46.9 million. Cash. Solwers has extended cash pool and improved cash management processes. This has facilitated acquisitions to be funded on a cash basis instead of acquisition loan. Cash and cash equivalents are still strong to maintain acquisition strategy, and we can use external funding more flexibly. Solwers has redeemed noncontrolling interest in a few subsidiaries and thus, noncontrolling interest fell from EUR 546 million in the end of 2024 (sic) [ 2023 ] to EUR 181 million in the end of 2024. There's a shift from mergers and acquisition-related contingent considerations liabilities from noncurrent liabilities to current liabilities as some few liabilities fall due in H1 2025. The financing of these liabilities is secured. Solwers' January-December net cash flow from operating activities was EUR 4.3 million, where the change in current investments and noninterest-bearing receivables was EUR 1 million. Net paid income taxes amount to EUR 0.8 million compared to last year, EUR 0.5 million, and cash flow from net interest paid was EUR 1.2 million compared to last year, EUR 0.9 million. The cash balance at the end of the year was EUR 11.6 million, as already stated. It's still on a pretty high level. Dividends. The Board proposes to the Annual General Meeting that Solwers follows its dividend policy and practices previous years and pays 20% of financial year's profit as dividend, meaning dividend of EUR 0.024 per share and corresponding to total EUR 244,000. Okay. Thank you. I will pass the speech back to Stefan.

Thanks, Teemu. Okay. Outlook for this year. I think that there are signs of recovery. We can see that our own order stock has increased. And then also, we can see that -- we are actually the first one in when investments start to grow. We could see in [ Skolz ] barometer for the future, then new orders has increased since last quarter quite a lot actually. And that is also -- the same is our order stock telling, but we cannot see it yet in the figures. The price competition is still hard. It's both in Finland and Sweden. And there are many companies competing on less projects or fewer projects. It means that also in small projects, there is quite hard competition. And the good thing is that we have a lot of frame agreements where these prices already are decided in advance. In Finland, we see that there are positive signs, and we also have seen that there are more inquiries coming in. And we actually -- during the end of last year, we could see that there was improvements in many of the Finnish companies. In Sweden, the business is quite divided. We have this North Sweden where there is still a lack of resources when we have in other areas, there might be tougher competition. And then we also have different kind of services there where actually there is not so hard competition, for example, management consulting and things like that. So we have a shortage of skilled personnel at the same time when we are actually in some places, laying off. So it's really hard to find the experts. But then in some places, we don't have enough work. So this is the situation we have today. And still the megatrends, green transition, urbanization are actually driving our business and will also in the future. And there is one new one, and that is, of course, the defense equipment industry and also all kind of construction related to defense in both Finland and Sweden. Energy, green energy, all these kind of projects are actually giving work for us. So that is good. And our own outlook is still it's market outlook is -- there's a lot of uncertainty. We know that there is a lot happening in the world and also Finland and Sweden are affected. And then -- as we know that our business is depending on investments, we know that immediately when the recovery happens, which is actually estimated to happen during the -- or the second half of this year, we will see an improvement. But of course, we hope that, let's say, the forecast is -- from the economic experts are correct. But anyway, our focus area for 2025 is grow -- continuous growth through acquisition. And now we have 3 countries where we are active and then organic growth wherever it's possible. As I said, we have -- in some companies, we have possible to grow. In some, we have to actually reduce capacity. And then, of course, in all, increased profitability and then cost cutting in all our subsidiaries and also especially in the group. And the midterm financial targets, we have not changed. They are the same, 20% growth. We were very close to that this year. We could not reach the EBITA level of 12%, but the equity ratio, we also have achieved. So it's only the EBITA we need to now work hard on this year. So thank you. That was actually what I was going to tell about 2024. And now I give back the word to Jasmine.

Thank you, Stefan. We have many great questions here. But before that -- before we go there, let's go through the financial calendar. So what happened in 2024, we introduced Q1 and Q3 business reviews, which will continue this year. And then the planned date for Annual General Meeting is 15th of April.

But okay, let's go to the questions. [indiscernible] is asking, Stefan, you commented lack of skilled workforce. Why do you not train personnel yourself to match the demand and skill requirements?

Well, partly, we are doing that. But of course, if you need really experts, then -- and for a project or something assignment, then you don't have time to do it. It takes a lot of time. So we do it, of course, when we are taking in new people and they are trained all the way. But in this business, you need a lot of also experts and who take actually lead in the projects. So we are doing it, but we cannot fix everything fast enough.

Then another question from the same person. How much do customers require quality systems in place to accept Solwers as a service provider?

We have so far not have a problem with this, but we have quality systems in place in most of the subsidiaries. So this has not been an issue for us. And now we are also actually taking these 2 requirements into use in the group, which will be in force sometimes probably this year.

Is it just a regular way for Solwers to take deals in small projects only? Or would Solwers like to have bigger projects also?

Yes, of course, together, we can offer bigger projects, but we have -- when we have 29 companies, they are actually present in certain regions. And for us, these local clients are very important for us. And we think that we are one of few that can actually serve them on a local level. So for them -- for us, they are very important. But of course, together, we are offering also bigger projects.

There's a similar question here. In what share of projects can you cross-sell other services under the Solwers umbrella? And what kind of potential is there to expand these opportunities in the future?

There is actually a lot of potential, and we have -- we are actually using that more and more the project I showed, you could see that there was a lot of Solwers companies involved. And I think that, that is the basic of our concept that we do things together. And we all -- all these small companies, they have their own clients, and they are -- before, they have only been selling their own disciplines, but now we can sell to the same clients also other discipline from other subsidiaries. So I think it's very important, and it's actually one base -- cornerstone of our concept.

As Solwers has over 5,000 different projects annually, how do you handle the management following of the thousands of projects?

I would say that most of these projects are small and they are on running base. So it's nothing exceptional with that. I would say that usually, if you have problems with some projects, it's usually the big ones where you have because the managing of the project and all these things are much more challenging than in small projects.

Then one more question regarding more of the operations. What is your opinion on building of data centers? Is market in data centers building too hot to handle and too risky?

We are actually involved in one data center project in the excavation work there. So -- but there are, let's say, global companies that are specialized in this data center engineering. So it's a different -- difficult market to step into. But we are doing -- for example, for this project, we are doing things that are actually around the engineering, let's say, construction and rock excavation and things like that. So there, we are active. And we also have partners who we can -- from Europe, who we can help if they get assignments in Finland because they always need also local partners. So it's a growing and big business.

Okay. Then maybe for Teemu, can you comment on the split between Finland and Sweden in '24, sales and revenue?

Roughly the sales split is 52% compared to 48% in favor of Finland.

Okay. How have recent acquisitions developed? Any negative or positive surprises?

Well, I think that when we have so many companies, there are always small surprises. But I would say that not any major we haven't seen. Of course, the market situation has impacted all companies somehow, but we also have companies where actually for some reason, they have improved their profitability. And then we need to remember one thing that when we are buying companies, the purchasing price is depending also on the performance of the company, for example, 3 years. So let's say that if there are more challenging challenges, we probably pay less for the company. So I think this goes a little bit hand in hand.

Okay. Then a question regarding Northern Sweden. What is the sentiment in Northern Sweden among your companies or customers?

What do you mean by sentiment?

How is Northern Sweden developing?

I would say that except for Northvolt, which is a company that is a little bit different from the normal Swedish industry companies. I would say that they are going forward, if you think about those who are -- I think the biggest project for the time being in North Sweden is actually the SSAB project, which goes -- continues. And then we have, of course, LKAB with big investment program. So I would say that there is a lot of projects in North Sweden. And there is really also a big competition about resources because all these projects also need project management resources. So that is where we have lack of actually resources in some companies. Maybe that was some kind of answer.

Yes. Then what are your observations on the Polish market? Have you found possible M&A targets that fit your criteria? You mentioned that we have...

Yes, we have, but of course, I cannot tell more about that until papers are signed, but we are negotiating with at least one company, and we are also looking for more.

Then there is a question about the dispute with Kreate. When do we expect this to be resolved?

It's difficult to say. We have not been in driver's seat in this claim, and we are preparing our contra claim. So I cannot -- I don't want to comment that anymore. We will try to solve it as soon as possible and in the best possible way. We have been the engineering partner in this project and the project has been actually led by Kreate.

Okay. Then more of financial questions. Can you clarify all of the nonrecurring cost items on the result? What was the driver of the other operating income, which was EUR 2.3 million on H2?

On other operating income, the driver is the other part of the continued liabilities change related to mergers and acquisitions as it splits on the 2 parts.

And how much of the M&A-related liabilities are you expecting to pay in H1 '25?

H1 is something around EUR 6 million.

Can you describe the growth in administrative costs that you said were EUR 1.2 million? To what extent are these nonrecurring and will end? Maybe Stefan.

Yes. I think that most of them are one-off costs and related to future growth and also to transfer to the main list. And of course, the target is to go back to 2023 figures, but maybe we cannot achieve that. But I would say that we have to at least reduce it by more than half. And then of course, we don't need these services anymore. They have been more or less external service providers that have done work for us.

Then for Teemu, how does the order backlog compare to the situation in the beginning of '24?

In the beginning of '24, since then, the order backlog was pretty stable until the first half -- end of the first half, but ever since it has been growing stably.

Let's take maybe one more question. Okay, there's maybe 2. Why does Solwers report EBITA and adjust the actual renting costs away? I think it doesn't tell about your profitability.

That's a tricky question. I do not have the details of the background of this solution, but we will probably consider whether we make some changes in the future. We understand that it differs from the market practice.

Just a comment that we have been reporting this since we went to the -- in the same way. And if we change it, then we need to, of course, tell the market that we are going to change. But we have not yet made that decision.

Then the final question that we will have today is what kind of cost cutting are you implementing, layoffs or personnel reductions?

Layoff and personnel reductions, they are quite -- as I see it, they are the same, but we are laying off people or we are laying off them temporarily where there is a need. But then, of course, we are also looking through all kind of costs in all subsidiaries and also especially in the group because we had -- as I said before, we had a huge increase in cost in 2024. We want to get it down. And our aim is, of course, to have as slim group as possible. And so we are -- there are many tools. Of course, other things are improving billing rate, improving price. In some cases, we want to increase also FTEs. So we have -- or people. So we have a range of things, but they are a little bit different in different subsidiaries, but we are going through them all.

Thank you. I think we are -- more or less have answered all the remaining -- also the remaining questions. So thank you, everyone, and wishing you a nice day.

Thank you.

Thank you.

Bye.

Bye.