Sweco AB (publ) (SWECB) Earnings Call Transcript & Summary

Welcome, everyone, to Sweco and to the report for the fourth quarter and for the full year 2020. Today, we have the privilege of listening to Asa Bergman, our CEO; and Olof Stlnacke, our CFO, who will walk us through the presentation. So with that, I think we should start. Please, sa.

Thank you, Katarina, and welcome, everyone, to Sweco's Q4 presentation. Before we move into the quarter, I want to give you a short recap of Sweco. We are Europe's leading engineering and architectural consultancy with focus on 8 business areas in Europe and with projects in more than 70 countries worldwide. Our net sales rolling 12 months, which is -- this quarter equals the full year of 2020, is SEK 20.9 billion, and our margin is 8.5%. With our 17,500 experts, we have unique expertise to develop the solutions needed for a more sustainable society. Let us now move into the results of the fourth quarter. We end a strong year with a quarter that was affected by the second wave of the pandemic and the previously announced write-down in Germany. We report net sales of SEK 5.1 billion, adjusted for the calendar and the write-down in Germany, our organic growth was minus 5%. The reason behind the decrease in organic growth is mainly linked to a continued weak demand within parts of the industry and private real estate and building segments. It's also related to the second wave of the pandemic and the lockdowns and restrictions that came as a result of that. The pandemic has affected our ability to recruit new people, and it has impacted some of our clients and projects. The impact from the second wave of the pandemic is especially clear in the U.K., but it has affected all business areas in the fourth quarter as the restrictions have been more extensive overall. We have a positive contribution of 3% from acquisitions and a negative currency effect in the quarter of minus 3%. Moving in -- moving over to EBITA. As communicated on December 21, had a major impact in the quarter related to the write-down of SEK 290 million in Germany. Adjusted for the write-down, our EBITA decreased by 3% to SEK 514 million. When adjusted for the write-down and calendar effect, EBITA decreased by 14%. When summarizing the quarterly results, I would like to highlight that 5 out of 8 business areas improved their margins in the fourth quarter. We are not satisfied with the result in the quarter. But given the circumstances, I would like to emphasize that most business areas delivered a strong and a solid quarter and that Sweco delivered an overall strong full year. And before we move over to a recap of 2020, I would like to highlight a new assignment that we recently won. Sweco has been involved in the development phase of a new central hospital in Hmeenlinna, Finland since 2018, and we will now continue with the implementation phase. The total order value for Sweco, including the development phase is approximately EUR 22 million. Looking at the full year for 2020, I can conclude that it was a strong year for Sweco in light of the challenging market conditions. We delivered net sales in line with and actually a bit better than 2019, which was Sweco's best year to date. Adjusted for the write-down in Germany, we strengthened our overall margin and reached close to 10%. We also managed to improve margins in 7 out of 8 business areas compared to last year. 5 business areas also had an all-time record margin, Finland, Sweden, Belgium, Denmark and the Netherlands. I'm also pleased that our 2 largest business areas, Sweden and Finland, outperformed the group profitability target and showed EBITA margins well above 12%. So there are many things that we have done right throughout the year, and that has proven that our Sweco model is successful even in a more challenging market. One of those things is that we have continued to acquire companies that complement and strengthen our position in our core markets. In 2020, we completed 10 acquisitions, and we have started 2021 with new acquisitions as well. I will get back to this more in detail later in the presentation. I would also like to point out that we have a strong financial position. In 2020, we managed to improve our operating cash flow and decrease our net debt. This means that we have a strong position to capture market opportunities going forward. In light of our performance and financial position, the Board proposed this dividend of SEK 2.20 per share. Before we move over to the market situation, I would like to highlight an assignment in Denmark for Greensquare Garden in Copenhagen. We are providing architectural services in a project covering more than 30,000 square meters and that has been gold precertified. This is a really good example of how we win assignment based off our expertise within sustainability. If we then look at the overall market situation, the demand for our services is rather unchanged compared with the previous quarters and as previously communicated, we see weaker markets in some parts of the industry segment and the Private Building and Real Estate segments. What we have seen in the fourth quarter is that the second wave of the pandemic has impacted our business. It has been associated with yet another set of lockdowns and even harder restrictions. This has impacted our ability to recruit new people to Sweco, and it has impacted our ability to grow. We expect COVID-19 to continue to impact our ability to grow for some time, but we see gradual improvements as measures are taken throughout Europe to improve the situation. All in all, the overall demand for our services remains good, and our order book is on stable levels. We also see that the long-term driver that I have talked about many quarters before, for us, those remains strong. There is an increased demand for sustainable solutions. We see an accelerated need for digital solutions and ongoing urbanization will, of course, also drive demand for many of our services. One example of this is the assignment commissioned by the Swedish Transport Administration to provide railway services for the section between Uppsala Central and Sder Bergsbrunna in Sweden. In uncertain times like this, we see that our diverse business is one of Sweco's core strength. We have a broad geographical footprint across 8 business areas in Europe. Sweden is our largest market, while our other business areas are relatively comparable in terms of net sales for the quarter. And looking at our offering, we have a balanced mix between the 3 business segments, building and urban district, water, energy and industry, transport infrastructure. We have a good mix between public and private clients which, together with the fact that we have many small and mid-sized projects, enable us to stand stable. Let us now take a closer look at Q4. Organic growth in the quarter was 5% (sic) [ negative 5% ], adjusted for calendar affected -- calendar effect and the write-down in Germany. COVID-19 and the imposed restriction have resulted in us not being able to recruit as much as we normally would have. A flat FTE development, together with lower average fees have impacted organic growth negatively. We also see a slightly lower billing ratio. I would like to mention Finland that has delivered a strong organic growth of 5%, which is very good considering the circumstances. The organic growth in Germany and Central Europe is weak in the quarter. Sweco Germany now has full focus on implementing the Sweco model, including strict project governance and execution. And with the new leadership, we have taken significant actions, and I am positive about the long-term outlook for our German operations. But this is a change journey, and that will take time. In U.K., we report negative organic growth of 13%. The decline was mainly driven by lower average fees and slightly lower billing ratio. Going forward, we will have full focus on resuming recruitment, while maintaining profitability at a stable level. However, we expect continued impact in the coming quarters due to onboarding processes. Let me now present the acquisition that we have made during 2020. Since our listing, 1998, Sweco has successfully acquired and integrated more than 130 companies. And despite the uncertainties caused by the pandemic, we have continued to execute on our long-term strategy and completed 10 acquisitions in 2020, of which 8 were more significant size. We are continuously looking for targets that strengthen our market position and multidisciplinary architectural and engineering offering. A strong financial position, a low net debt that creates strong opportunities for continued acquired growth going forward. I would now like to take -- to talk about 2 recent announced acquisitions. We announced that we have signed an agreement with NCC Finland acquire Optiplan. The company provides engineering and architectural services with a focus on designing sustainable and energy-efficient real estate and nonresidential -- efficient residential and nonresidential buildings in the area of Helsinki, Tampere, Turku and Oulu. In 2019, Optiplan had 150 employees and had a revenue of EUR 13 million. On January 19, we announced the acquisition of BUUR in Belgium, and the company has a strong reputation in climate adaptation, urban planning and landscape architecture in the area of Leuven, Ghent, Antwerp and Brussels. In the financial year ending June 13, 2020, BUUR had over 60 employees and revenue of EUR 4.5 million. These acquisitions strengthen our market positions in Finland and Belgium as well as our multi-disciplinary engineering and architectural offerings to our clients. As we have communicated in previous quarters, Sweco had some challenges in our German operations, and therefore, we announced in the third quarter that we would conduct full project review in the German project portfolio. After concluding the revenue (sic) [ review ], Sweco announced a significant write-down of working capital amounted to SEK 290 million in fourth quarter. The write-down is mainly related to large public contracts within buildings and civil engineering and contracts within architecture. In these cases, revenue recognition has been too aggressive and project governance unsatisfactory. And as a result of the action plan for Germany, we now have full focus on taking necessary actions to ensure profitable growth. This includes accelerating the implementation of the Sweco model, including stricter project governance and execution as well as tighter project portfolio and performance management. With a new leadership in Sweco Germany, we have taken significant steps in the right direction. And as I mentioned before, this is a change journey that will take time. But the long-term potential for our German operations remains, it is one of our core markets, and we see great potential in the long-term perspective for Sweco to continue to grow on the market. We will, of course, put further focus on working close to our clients and winning new contracts on the German market. And one example of the assignment that we recently won is to renew the waste-to-energy plant in Schwandorf. It's a project where we bring expertise from many different fields and work closely together with the clients to find the best solutions. And with the average size of waste-to-energy plants in Germany, there will be many similar projects in the years to come. And with that said, I will now hand over to Olof to walk you through the numbers. Please, Olof.

Thank you, sa, and good morning, everyone. Starting with the net sales development. Net sales in the quarter was SEK 5.1 billion, taking the full year net sales to SEK 20.9 billion. Net sales is, of course, impacted by the German write-down. As sa already said, adjusted for calendar and the write-down, organic growth is minus 5% in both quarter. We have a significant positive calendar effect from 6 more hours. This positive calendar effect, however, fell entirely in December, and with the holidays and vacation taken, it didn't really materialize in this quarter. So we only got a small portion of that positive calendar effect. The positive effect from M&A and the negative FX effect balanced out in the quarter. Looking then at the EBITA development. EBITA is SEK 514 million, excluding IACs, and full year EBITA is SEK 2.1 billion. EBITA is slightly down versus Q4 last year and adjusted for the calendar effect, we are SEK 73 million or 14% down. But again, this significant positive calendar effect didn't really materialize in the quarter. Looking then at the EBITA bridge by business area. The main EBITA drivers in the quarters were, again, Finland and Belgium, which have consistently shown the strongest improvements over the last 2 years, both BAs also showed double-digit margins. Sweden is somewhat down in EBITA, but delivers a margin of 14.2% in the quarter. And including Denmark and the Netherlands, we have 5 BAs that show margin improvements versus last year. Norway is impacted by negative project adjustment and a quite significant FX effect. The U.K. continues to be the market most impacted by COVID-19, as we've already seen from the top line growth. EBITA in Germany and Central Europe is significantly impacted by the net sales decline that we see in the quarter versus a very strong growth quarter last year. We also have year-to-date corrections in the quarter. Underlying EBITA in Germany and Central Europe is around breakeven and that's also more or less where they are for the full year 2020. Overall in the quarter, as for the whole of this year, cost reductions are the main drivers of the margin improvements, and we see about SEK 90 million of cost savings in this quarter compared to last year. But overall, looking at the full year, we are very pleased that in this kind of challenging environment, 7 out of our 8 BAs improved their margins versus last year, and 5 BAs reach all-time high levels in terms of margins. The financial position remains strong. Net debt is below SEK 1 billion in the quarter at the end of the year, which is SEK 1.2 billion less than at the end of last year, and this is driven primarily by very strong cash flow from operations. The total outflow for M&A and dividend is also SEK 200 million lower than last year. Leverage is at 0.5 at the end of the year, which is half of what it was at year-end 2019. We have available liquid assets of SEK 3.9 billion, and we have also terminated the insurance bridge credit line that was set up in April at the start of the COVID-19 situation. We believe we are well positioned to manage through the current situation and also to capture any opportunities that may come out of it. And with that, back to you, sa.

Thank you, Olof. Let us now conclude the fourth quarter. We end a strong year with a quarter that was affected the second wave of the pandemic and the write-down in Germany. Despite that, most business areas are delivering a solid performance in the quarter, with 5 out of 8 business areas improving margins. For the full year, it's also positive that our 2 largest business areas, Sweden and Finland, outperformed the group profitability target and show margin -- EBITA margins well above 12%. And even though COVID-19 causes uncertainties, our order book and the overall demand for our services remain stable. We have a strong financial position, and we continue to acquire companies to strengthen our position on our core market and as the European leader. In light of the strong financial position and a stable full year result, the Board proposes a dividend of SEK 2.20 per share. 2020 was a challenging year, but also a strong year for Sweco. We continue to grow, to improve our margins and to strengthen our market position. We will continue to focus on our long-term strategy that is the foundation for Sweco's success with profitable growth through a combination of organic growth and acquisitions. We will also focus on implementing the Sweco model through all our markets and with special attention to our German operations. And of course, we will continue to work close together with our clients and monitor the COVID-19 situation carefully to be able to take actions if needed but also to capture opportunities when they arise. Thank you.

Thank you, sa and Olof. And with that, we will open up for questions. And we begin by taking questions through the line, the phone line. Please go ahead.

[Operator Instructions] Your first question comes from the line of Erik Paulsson.

This is Erik. So regarding the order book, you talked about a very stable order book. I was just wondering if we can give some numbers around this regarding the order book and the order intake in the quarter.

So as I said, we have continued to win projects over the quarter at the same levels as the previous quarters. And we are, of course, seeing some effects of the COVID situation, meaning with some clients affected and some projects postponed, but in an overall perspective, we are stable in our order book. And we normally do not give you any detailed figures around the order book. But we are pleased what we see when it comes both to orders received and with the development of the order book. I don't know if you would like to add something, Olof.

We don't communicate numbers on the order book, but it is basically the same numbers as we have seen in previous quarters.

And your next question comes from the line of Dan Johansson.

A couple of questions from my side. First one on the market -- somewhat weakened market you saw in Q4. Organic growth, of course, is a bit lower now than in Q4. My question is really, what has changed compared to previously in terms of market outlook? Is it mainly related to the new lockdown restrictions? Or is there specific segments where we [ carried ] it previously or is it just that you're feeling a general slowdown with a bit of time lag. I was just hoping if you could elaborate on that.

We don't see that much changes compared to Q3 when it comes to the market condition, despite that we have in this quarter into this second wave of more restriction lockdowns and some construction sites effective, meaning that our clients and some of our projects are affected. So that is the overall picture, I would say. But again, we are continuously winning projects. And I would say that our decentralized business model of having those local teams working really close with the clients to ensure that we adapt and capture the opportunities even if there's changes going on or events happening on each market, that is really our success at times like this. And then as communicated before, where we see a more weak market is in parts of the industry and the private building and real estate segment but on same levels as previous quarters. We have -- we also -- I also talked about and we have communicated that we haven't been able to recruit as we normally do. And this is, of course, if you look at the FTE development over the last quarters and compare it with the previous years, you see that we haven't been able to recruit on a pace as normally, and that is now affecting us in the quarters. And of course, I mean, we are now focusing on taking on recruitment again. But as you all know, we are living in those uncertain times, meaning that having strong views about the market development going forward, is not, I would say, we can't really tell because it is strongly related how long those lockdowns and this uncertainty around COVID-19 will look like. But we do what we can to resume the recruitment. But as you know, there is time lags in those kind of processes. I hope that answers your question.

If I may add, also to just put some numbers on this. If you if you take out Germany, which is a bit of a special situation, as you have seen in the quarter, also excluding the write-downs and the fact that the calendar effect didn't really materialize, given where it fell. We were at about minus 2% in organic growth, and it was minus 1% in Q3. So I would say that development is entirely related to stricter restrictions in Q4.

And also to add on that is that in the spring, we were -- or before the summer, we were up at, I mean, high levels of our employees working from home, and we are back to that situation again with most of our employees working remote as this second wave has affected the whole office environment and working environment for us.

Okay. And an additional question, if I may. You quantified the additional one-off impact in Germany on that -- which was quite large. In terms of the project adjustments you seem to have in Norway, you say, and I saw some onerous [ office leases ] in the Netherlands. How much are we talking about here in total? Is it SEK 10 million-plus or is it just a marginal impact? In terms of the project development, is there COVID-19 -- is COVID affecting there as well, meaning that project delays due to the restriction? So what is the main drivers of project adjustments?