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

[Presentation] Welcome to Sweco and the presentation of the interim report for the fourth quarter and the full year of 2021. With us today, we have Åsa Bergman, our President and CEO; and Olof Stalnacke, our CFO. And with that, we should get started. Over to you, Åsa.

Welcome, everyone, to Sweco's Q4 presentation. Before we move into the quarter, let me give you a short recap of Sweco. Sweco is Europe's leading engineering and architectural consultancy with 18,000 experts. We have 8 geographical business areas in Europe, and we do business in many countries across the world. In 2021, we conducted more than 100,000 projects. Net sales for 2021 amounted to SEK 21.8 billion, and we continue to expand our margin. I will soon get back to our full year performance. But let us first have a look at the fourth quarter. We end 2021 with a solid quarter, delivering a good organic growth and improved margins. Net sales increased to SEK 5.9 billion with organic growth of 5% and acquired growth adding another 3% in the quarter. EBITA increased to SEK 585 million, and we improved our margin to 9.9%. One of the projects that we won in the fourth quarter is the one you see on the picture here. It's an assignment to deliver engineering services for a pilot plant for hydrogen production in Finland. At Sweco, we support our clients' sustainable transformation in a wide range of areas. Hydrogen is one area where we see growing business, and this project is a good example. With this summary, let us take a look at Sweco's full year. We had a solid end to a year still impacted by the pandemic. Net sales increased to SEK 21.8 billion, with an all-time high EBITA of SEK 2.1 billion and a margin of 9.5%. For the full year, 4 out of 8 business areas improved their margins. We continue to execute on our acquisition agenda and completed 8 acquisitions in 2021, of which 6 are of a more substantial size. We also continue to have a strong financial position with a good cash flow, a low net debt, which allows us to act on opportunities going forward. In light of our performance and financial position, the Board of Directors proposed a dividend of SEK 2.45 per share. The image you see here on this slide is another example of a project we won in Q4. We will deliver design to an arch bridge in Norway that will become the world's longest bridge of its kind. And let us now take a look at the market situation. Overall, the market has been healthy, and we have a stable inflow of new orders. The impact of the pandemic is varying across markets. And we are also seeing now that the third wave of the pandemic is causing higher levels of absence. We still see continued pressure in parts of the private building and real estate segment, but most market segments show positive development. There is a strong underlying long-term demand for our services driven by the trends in society connected to sustainability, digitalization and urbanization. One example is that Sweco is involved in the construction of a zero-carbon building that will demonstrate best practice in the King's Cross area in London, U.K. With that said, now let us take a closer look at the fourth quarter. Our organic growth is 5% in the quarter. We have positive organic growth in 7 out of 8 business areas. As you can see here, Norway and Belgium delivered good organic growth. Germany/Central Europe also had a positive development in the quarter against a very weak Q4 last year. The main driver is higher average fees while most of our business areas are affected by higher absence and more vacation taken during the holiday period. We continue to have a strong focus on close collaboration with our clients, executing in our projects and, at the same time, win new assignments in all markets. Let us move over to the result. EBITA improved by 5% in the quarter. In total, we have margin improvements in 5 out of 8 business areas. We have strong margins in Sweden, Finland and Denmark and a positive development in Norway and the Netherlands. I'm also pleased that we are seeing positive signs in Germany and Central Europe, which I will give you an update on now. As I have informed you about in previous quarterly presentations, we have taken firm actions in driving a turnaround in Germany. I am, therefore, pleased that we are seeing first sign of positive effects from the action taken. The German business was positively affected by general performance improvements, additional work agreements with clients in this quarter. We know that the turnaround will take some time, and we will continue to have a strong focus on accelerating the return to profitable growth based on the right leadership, the right offering and the right product portfolio. One example of a project from the fourth quarter is that Sweco Germany is part of an engineering consortium for overall project management in connection to the reactivation of the Siemens-Bahn railway line, which was originally built in the 1920s. We see long-term opportunities on the German market. It's a large and highly fragmented market with growth opportunities, and we have a strong service offering in many segments. Let us now move over to an update of the acquisitions. Despite the pandemic, we have continued to execute on our acquisition agenda. In total, we have made 8 acquisitions, of which 2 were smaller, complementary acquisitions. And we're happy to welcome more than 400 new experts to Sweco during 2021. For example, we acquired Gaia Consulting, the leading sustainability consultancy in Finland, and AdviceU in Sweden that boasted our digital offering expansion. The development continues into 2022 with our acquisition of Swedish Net Engineering being announced early February. The acquisition further strengthened our leading position in the market of physical and technical protection and security in Sweden. These acquisitions all contribute to strengthen our position in interesting growth areas and our combination of engineering and architectural services. Going forward, we will continue to be active in the market consolidation as our strong financial position allows us to act on the right opportunities. And with that, I will now hand over to Olof to walk you through the numbers. Please, Olof.

Thank you, Åsa, and good morning, everyone. Starting with net sales development. Net sales in the quarter was SEK 5.9 billion, as Åsa said, taking the full year net sales to SEK 21.8 billion. Adjusted for calendar and IACs, organic growth is 5%, increasing significantly from previous quarters. And this increase in growth is partly driven by Germany being up against weak comparables. We have a positive calendar effect from 5 more hours in the quarter. However, the net effect was entirely in the second half of December and, therefore, didn't fully materialize because of more vacation taken in the holiday period. We see positive impact from M&A of 3% and from FX of 1%. Looking then at EBITA development. EBITA of SEK 585 million in the quarter, bringing the full year EBITA close to SEK 2.1 billion. Reported EBITA is SEK 71 million or 14% up. And adjusted for the calendar effect, we are SEK 27 million or 5% up. Significant impact from sickness rate increasing. It increased by 0.8% in the quarter, having a negative EBITA impact of approximately SEK 40 million. And then again, the positive calendar effect, which has a theoretical impact on EBITA of SEK 44 million. Looking then at the EBITA bridge by business area. We see positive contributions from Norway, Finland, Netherlands and, most of all, Germany. Germany, again, obviously against a very weak Q4 last year. Denmark maintains the momentum from previous quarters. Sweden is significantly down versus last year, and this is mainly driven by higher absence. Belgium, also affected by higher absence in the quarter but, despite a slightly weaker performance in Q4, still delivers a full year margin of 12.1%, above our margin target. The impact from absence and also from higher operating expenses can be seen to some extent across most business areas. But in the other direction, EBITA is positively impacted by continued fee increases. Our financial position remains strong. Net debt is at SEK 900 million, slightly lower than last year after a strong Q4 cash flow. We have reversed a large part of the trade working capital buildup from earlier quarters and are roughly back at the same trade working capital position as we had before the pandemic. Leverage is at 0.4, which is less than 1/4 of our target maximum. And we have available liquid assets of SEK 4.2 billion. With that, we remain well positioned to continue to capture any opportunities that may arise in the market. And with that, back to you, Åsa.

Thank you, Olof. Let us now conclude the fourth quarter. As previous said, it was a solid end to the year. 7 out of 8 business areas delivered organic growth and 5 out of 8 business areas improved their margins. We have a stable inflow of orders that continue to strengthen our order book. We also have a strong financial position and continue to act on opportunities. Let us conclude with some few words about the focus going forward. As always, our focus going forward is on profitable growth. This is based on a combination of organic and acquired growth. We continue to actively look for interesting acquisition targets while we, at the same time, work on securing FTE growth to support organic growth. We are also focusing on implementing the Sweco model across all our markets. The positive development in Denmark and the Netherlands are a result of this. And in Germany, we are taking firm actions, as part of the ongoing turnaround, to secure that we return to profitable growth. We continue to focus on staying close to our clients and to continue to win the right type of projects. I have, in previous quarterly presentation, told you that we are chosen by the Danish Energy Agency to establish the world's first energy island. It will become Denmark's largest offshore wind farm. And I'm happy to announce that we in Q4 also have been selected to be part of the construction of another energy island, as you can see here in the picture, in the Belgium part of the North Sea. The project supports the Belgian government's initiative to almost triple the capacity of wind turbines at sea. And by 2030, these turbines should cover the consumption of all Belgian households. And as a final word, I believe that the demand for our expertise will continue to grow as we need to accelerate the transition to a more sustainable society. The energy island in Denmark and Belgium are good examples of how we are part of the energy transition. We are also involved in many similar projects in other sectors that are part of the sustainable transformation. And I'm proud to say that we, in many aspects, are leading the way together with our clients. And with that said, let's open up for questions. Thank you.

Thank you, Åsa. And now we're opening up for questions. [Operator Instructions] So please, Marie, could you give us the instructions?

[Operator Instructions] We have a first question from Dan Johansson from SEB.

Åsa and Olof, a couple of questions from my side. First one, I think, on Germany. Very strong deployment there. How sustainable do you see the margin recovery? Is 5% margin sort of the bottom now from where you plan to improve? Or will it still be sort of a bumpy ride ahead with some quarters being better, some being lower, et cetera? A few thoughts on that, please.

Thank you. We -- as said, we have a plan in place, and we have taken actions during the last year. And this starts to pay off. So there is positive signs in this quarter. But with that said, we -- there is more to work with in Germany. But, I mean, this quarter is positive, and the actions that we have taken, that is result of that. So it's about making sure that we continue to win the right projects and that we execute the project in the right way and are capable of growing the business at the same time in Germany. But as said, it would take some time before we're really stable and that we start to see levels in line with our expectations.

Perfect. A question on organic growth as well. You have a strong sequential improvement now compared to Q3. I think you were at 1% or so then. I guess it's partly due to some of these comps, but you're also citing a somewhat slow market. I guess 5% at least to me sounds like a pretty good number. So my question is really, are you taking market share? Or what's going on here? And we also see the positive development you have continuing into '22 given an improved market. What's your feeling about that?

I mean, first of all, we have strived all along to get back to organic growth. So it is positive that we now start to see that it pays off, the focus and the ambitions that we have. And this is, of course, mainly driven by higher average fees, but we also started to succeed with our recruitment, that we raised the bar and our ambitions earlier in the autumn and during the summertime. But it's also important to talk a bit about the personnel turnover because during the pandemic, we were at some lower level, and what we have seen now is more of a normalization of the personnel turnover. So we will continue to focus on the FTE growth and securing that we can recruit even more people into Sweco going forward. And this momentum we had with higher prices is also something that we're pleased with because that is also important going into 2022.

Sounds good. Totally agree. And maybe a follow-up question to that. What are you seeing in terms of wage inflation currently on new hires, et cetera? Is it something -- yes, how big are the swings compared to last year?

I think if we compare to last year, as we've said before, we saw almost no wage inflation during the pandemic. We have seen an increase this year, and we expect to see a further increase next year. But we believe that it's possible to counter that with price increases. And I think it's important to remember that inflation is a two-way street. It's not only salaries. It's also an opportunity for us to increase fees.

Perfect. And maybe a final question, if I may. You mentioned that you've been impacted by higher absence, vacations. I would also assume sick leave. Do you see an impact from such factors also in Q1? I guess you have probably a bit higher sick leave now in January at least. Or do you feel it's manageable now during these first weeks of the quarter?

No. It's fair to say that the higher sickness rate were, to a large extent, at the end of the fourth quarter, and we see that continuing into January. Maybe a slight decline in the last few weeks, but it will have an impact also in Q1.

Next question from Johan Dahl from Danske Bank.

[Audio Gap] More successful, if I interpret you right. Can you just help us understand? In the report -- in the reported numbers on FTEs, if we adjust for acquisitions, if we adjust for this high sick leave, et cetera, can you just help us understand if we can see any tangible evidence of that recruitment being more successful?

If you look at the organic FTE growth underlying, it's slightly below 1%. And given that we have talked about recruitment, it's, as you understand, not quite where we want to be. But as also said, we have accelerated recruiting, but, at the same time, we've seen personnel turnover normalize back to prepandemic levels. So we continue to focus on recruitment, and we hope that, that will be paying off in quarters to come.

Okay. Got you. And can you just remind us? Looking into '22 and '23 with your margin target of 12%, what are the main sort of levers that you aim to pull here in the coming 2 years to get on a trajectory to approach that?

No, I think what we have seen this year in -- I mean, we've been seeing for some time in Belgium and what we are now seeing in Denmark and Netherlands, the impact of continuing to implement the Sweco model. It's a boring answer. It's the same answer we always give, but that is our focus. And we see that it is paying off even if we see some short-term headwind from absence in the quarter. So it is paying off in Denmark and Netherlands.

And, I mean -- and it's an ongoing work. So, I mean, as said, that is our focus going forward as well, continue to implement the right way of working, so we can stabilize the business and expand the margin and, at the same time, take on growth.

And I would add that -- if I can add to that, Johan. I think also, obviously, continuing the turnaround program in Germany where we now see the first positive signs.

No. I'm just trying to understand how you prioritize the strategic agenda right now because earnings are relatively flat sort of if you take away acquisitions. We're looking at recruitment fairly flattish, if I understand you correctly; the building ratio flat year-over-year. I'm just trying to see if it feels that we will make a big sort of impact approaching 12%. Or what are the tangible milestones that you're aiming for here in '22 to get on the right trajectory?

I mean correctly that we are satisfied with the development of our prices, and that will continue, the focus we have there. And as Olof referred to, the inflation -- inflation has 2 sides, meaning that we see opportunities going forward as well. When it comes to the FTE growth, we're not satisfied. So that is our main focus, to secure that we can ramp up and accelerate our recruitment. So there's lots of activities going on in all countries. And, I mean, we don't prioritize between countries. It's more that we are leaning forward everywhere. We have a strong brand. And as the market leader in Europe and having very interesting projects into our portfolio and also what is shown during the pandemic when we measure among our employees, the satisfaction around the leadership within the company on all levels is strong, meaning that we have the foundation to really succeed with the recruiting. And it's also, for us, very good to have different countries so we have the capability of working cross-border between countries to plan and resource-set our projects. So that is our focus going forward.

Next question from Johan Sundén from Carnegie.

I think at least that's me. Perfect. A few questions from my side as well. We have already touched upon them. The first is the sick and absence rate that you mentioned is impacting negatively in Q4, if it's possible to give any ballpark quantification of the effect and what to expect in Q1.

As we said during the presentation, the impact of higher sickness rate, it went up 0.8% in the quarter. And that was -- had an impact of roughly SEK 40 million on EBITA. Still too early to say anything about Q1. But as I said before, we are seeing continued high sickness rates, especially in Sweden, in January.

And to add to that, I mean, we expect it to go down, but it's, of course, strongly linked to the development in the whole society.

Yes. And hopefully, we should leave this behind. But just to get a feeling for the underlying execution in the quarter. And also on Germany, is there any possibility that you ballpark can indicate how big the write-up of the project portfolio was in the quarter?

If you -- I mean, we talk in the report about that. A minor part of the improvement is due to write-ups in the projects. We saw write-downs last year. And the net impact of that is roughly SEK 5 million in the quarter.

Excellent. And the last question is on supply chain issues that you highlight is sampling a few of our markets. If we -- so how has that proceed during the quarter? Are you seeing that it's a little bit better situation end of Q4, beginning of Q1 than it was in the beginning of Q4? Or how is that developing sequentially? Or is that...

Are you -- I didn't quite catch the beginning there, Johan. Were you talking about the supply chain issues particularly in the U.K. or...

Yes. And in general, supply chain issues that's impacting or causing project delays or cancellations, et cetera. Is that improving? Or is it the same as when you entered Q4?

I mean it is the same. But with that said, I have to say that we don't see that much of an impact in our projects. We continue to win projects, and our projects is run according to plan. So no impact in our portfolio that we can measure, so to say.

But what I would add to that, that we see some impact in U.K. still. That's the exception, as I said.

But that's affecting more the whole market, and that we have seen for quite a while and that hasn't changed.

Next question from Erik Elander for Handelsbanken.

Yes. So yes, I just had a question here regarding pretty much the whole quarter from a very broad perspective. This is the best quarter I've seen Sweco perform in a quite long time. Should this be seen as a positive one-off? Or do you expect that you can pretty much operate on this level going forward in 2022 as well?

Maybe to say first, as you know, Erik, and good morning by the way, we don't give any forecasts. But if you look at the positive drivers in the quarter, which is primarily fees, that's long-term development, and our ambition is to continue that. If you look at some of the negative drivers, it's sickness, absence. So, I mean, that's something to base your forecast on.

And, I mean, our ambition is to get back to organic growth and, at the same time, look for M&A possibilities on the market where we have an M&A agenda in all our business areas. So it's more of a timing question when it comes to M&A. So that is also something that we have on the agenda to succeed with for this year.

Regarding organic growth, you're now at, what is it, 1% organic net recruitment, that you have been basically focusing on recruitment since last summer. How long does it generally take to get back to maybe, yes, 3%, 4% or something like that from like your experience historically? And how long do you expect it to get back now given that the recruitment market is maybe a little bit tougher than before? What would you say about that?

Now, as I said before, I mean, we are successful in some of our business areas already when it comes to recruiting or in most of our business areas. But I think it's also important to talk a bit about what happened during the autumn because we started to ramp up during the summer and then we have the second -- the third wave coming in November, meaning that we had to go back to remote work again. So that is in play here, of course. But, I mean, there is some time lag when it comes to onboarding. But this is more -- what you see now is more the effect of that. It takes some months before you are fully up to speed. And then we also see, as said before, this normalization of personnel turnover, meaning that we have to be even more ambitious when it comes to our recruitment.

And that's interesting because, I mean, the thing in Belgium was the same pretty much as the rest of your markets. But Belgium managed to recruit very, very well despite that being digital, I guess. Why did Belgium succeed so well compared to the other areas then if you try to learn across the geographies that we talk about?

It's a very good question. And they have succeed with some -- and so -- also have some other business areas. There's, of course, many dimension to this. They have best practice when it comes to recruiting and onboarding. And they've also strengthened their brand and taken market shares during the pandemic. So it has to do a lot about what -- I mean, position you have on the market, if you really are the preferred company on your market. So the strength of the brand and also how we have acted during the pandemic, I think -- or I know that is part of why they have succeeded to recruit during the whole pandemic.

So I guess pandemic recruitment is mostly juniors coming from universities because people who have job doesn't generally change job during the pandemic. Or how does the kind of age structure look in recruitment during the pandemic? Is it more tilted towards youth? Or how does it look like?

No. I would say that there's still a mix, and we are focusing on the mix here. So it has been both experts, senior experts, young graduates, I mean, a distribution of what we need to take on growth going forward.

Do we have any more questions? Okay. So no more questions, and we don't have any questions in the chat. So thank you, Åsa and Olof, for walking us through the presentation. And thank you for participating today. Have a great day.

Thank you.

Thank you.