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

Good day, and thank you for standing by. Welcome to the Sweco Q2 2023 IR report. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Marcela Sylvander, CCO. Please go ahead.

Good afternoon, everyone, and welcome to this presentation of Sweco's Q2 report. As you heard, my name is Marcela Sylvander, and I'm the Chief Communication Officer here at Sweco. Sweco's President and CEO, Asa Bergman; and CFO, Olof Stalnacke will take us through the results of the second quarter. And after that, we will, of course, open up for questions. Please go ahead, Asa.

Welcome, everyone, to Sweco's Q2 presentation. Before we move into the quarter, I would like to give you a short recap of Sweco. Sweco is today Europe's leading architecture and engineering consultancy with operations in 8 geographical business areas across 15 markets in Europe. We are a well-diversified business, operating across 3 different segments with a good balance of private and public clients. The foundation for Sweco's long-term success is our mix of competencies spread across 21,000 experts, our focus on organic and acquired growth as well as our efficient and decentralized Sweco model. With a strong legacy, we continue to build Sweco's success. Our solid financial position keeps proving itself essential, value-creating acquisitions as well as dividend growth. The second quarter was another good quarter for Sweco with strong performance across the group. We continue to deliver a strong combination of organic and acquired growth, with net sales increasing to SEK 7.2 billion in the quarter. EBITA increased to SEK 564 million. Adjusted for the calendar effect, the result improved by 29% compared to Q2 last year. The result is driven by a positive momentum in pricing, a solid FTE growth and positive contribution from recent acquisitions, especially from VK Architects+Engineers, and Olof will provide you with some more information on this later in this presentation. Moving over to the operational highlights in the quarter. Overall, the demand for Sweco's services remained good, and we continue to see good growth opportunities. One key to our organic growth is our positive momentum in recruitment. And over the past couple of quarters, we have established a solid level of FTE growth, and we are also improving employee retention. The performance in Q2 was generally strong across our business areas; 7 out of 8 business areas reported both organic growth and EBITA improvement in the quarter and I would like to especially highlight the strong performance in Belgium and Denmark that is driven by a strong positioning in attractive growth segments. And we are also seeing good growth in Norway, Finland, while Germany and Central Europe continues to take steps in the right direction with good growth in the quarter. We made 4 new acquisitions, welcoming around 200 new experts to Sweco Group. With good demand and solid inflow of new orders, we also continue to strengthen our order book and won several new exciting projects. I will come back to this later in this presentation. Let us now look at the market situation. The market situation is, overall, unchanged compared to previous quarters. The underlying demand for our services is good, but the market uncertainties related to the macroeconomic development remains. This means that we need to continue to stay agile in the market. The green transition continues to be a core driver for Sweco and a theme that cuts across most of our business areas and projects. This is notable in the Water, Energy, Industry and Transport Infrastructure segments. The segment Building and Urban Areas remained a bit mixed. We see stable demand in public buildings, but a continued weakened demand for services in residential and commercial real estate, driven by the macroeconomic situation. Overall, we continue to see good growth opportunities, and we also see that our diversified offering and business model is a strength in this mixed market. And with that, I will hand over to Olof to walk you through the numbers. Please, Olof.

Thank you, Asa, and good afternoon, everyone. Starting with a quick summary again then. Net sales in the quarter, SEK 7.2 billion. We see 9% organic growth, 7% from M&A and 4% from FX. EBITA, as Asa said, SEK 564 million, we are SEK 77 million up versus last year. And excluding the negative calendar effect, we are SEK 140 million or 29% up. Margin is 7.8%. Leverage increased to 1.5 and that's driven by M&A, dividend growth and also working capital buildup, both seasonal and growth driven. In this quarter, we now have VK Architects+Engineers in our P&L. It is consolidated into Sweco Belgium primarily, but also into Sweco Netherlands. This is our largest acquisition since 2015, and they make a significant contribution in the quarter: SEK 230 million in net sales; SEK 32 million in EBITA; and 14% in the EBITA margin. And the integration of VK is progressing according to plan. Looking then at net sales, we are pleased to see solid organic growth in 7 out of 8 BAs, ranging from Sweden and the Netherlands at around 5% up to Norway, which is close to. And Finland, Belgium, Denmark and Germany and Central Europe, clearly in the double digits. The only exception in the growth pattern is U.K., where we have seen a further weakening of the market in some segments, negatively impacting parts of our business. Across the board, the growth drivers have been continued price increases and FTE growth. We continue to have good momentum in recruiting and personnel turnover has continued to decline in the quarter. On the EBITA side, we see a 29% increase year-on-year adjusted for calendar. We see margin improvement in 3 BAs despite the significant negative calendar and the EBITA drivers are much the same as the growth drivers: price increases and FTE growth and also that the negative impact from sickness absence we had last year in Q2 has been largely reversed. Billing ratio declined slightly in the quarter, but excluding the acquired entities, which are not yet into the Sweco time reporting and billing ratio follow-up processes, we saw a slight increase in the billing ratio. Increasing efficiency and improving the billing ratio remains a focus for us going forward. Looking then at the EBITA bridge by business area. Belgium has a stellar second quarter with the VK acquisition coming in with a significant EBITA contribution, as we just saw, and the existing business also continues to perform very strongly. Denmark also continues on a very good trajectory, and we see significant contributions also in Finland, Norway and the Netherlands. Sweden is slightly positive despite that we got the impact from the salary increase in this quarter. Germany and Central Europe improved after a weaker Q1. And as you can see, the decline in parts of the U.K. market has an impact all the way down to EBITA and we are now taking action to get the underperforming parts of the business back on track. Important also to mention that the calendar makes this into a relatively small production quarter for us with 6 less working hours corresponding to a negative SEK 63 million in net sales and EBITA impact. And finally, then on the numbers, the financial position. Net debt is at SEK 4.1 billion, significantly up versus last year. LTM cash flow from operations is outweighed by larger outflows for M&A and dividends, especially the larger acquisition of VK that we made in Q1, and we also see seasonal and growth-driven working capital buildup. Leverage is also up at 1.5, but still well below our target, and we remain financially strong with available liquid assets of SEK 3.2 billion. And with that, back to you, Asa.

Thank you, Olof. We continue to deliver on a strategy to combine organic and acquired growth. Altogether, we have made 8 new acquisitions during the first 6 months of the year. In the second quarter, we announced 4 new acquisitions and another one just after the closing of the quarter in the beginning of July. These acquisitions had a combined net sales of approximately SEK 260 million and around 220 new experts to Sweco. The acquisitions are spread across 4 countries: Sweden, Finland, U.K. and Belgium, and a wide range of interesting service segments, such as buildings, architecture and infrastructure. These acquisitions all contribute to strengthen Sweco's position in attractive segments. Our strategy with regard to acquisitions will remain on top of our agenda going forward. And with that, let us now have a look at some of the new interesting projects that we won in the quarter. We continue to see a good demand for Sweco's services, driven by the green transition in society. Just to give you a couple of examples. In Belgium, Sweco will assist Belgium public transportation company, De Lijn, to transform facilities for electric buses. This is a part of making the public transportation emission-free by 2035. In Finland, Sweco is taking part of a unique wood building concept together with Stora Enso, proposing new ways of increasing the circularity in buildings. We are also seeing that our new acquisitions play a vital part in winning new projects. In U.K., our newly acquired company, Ball & Berry, was commissioned to help in the transformation of a listed heritage property. To conclude, I am very pleased with the quarter and with the achievements we made. Sweco's strategy and market position enable us to keep catering to the demand driven by the green transition in Europe. The current market situation, however, remains uncertain, which makes us place even further importance in managing fees, efficiency and costs; at the same time, continue to capture opportunities in the market and continue to execute on our M&A strategy. It is evident, particularly in the present market environment, that our diversified portfolio of clients, segments and solutions is a competitive strength. We are also maintaining good momentum in the recruiting. So Sweco Group is growing. Thank you.

Thank you, Asa and Olof. And now we will open up for questions. And as we were instructed in the beginning, it is possible for you to ask them directly through the phone line or through the chat function. Please, Sarah, if you can give us the instructions perhaps 1 more time.

[Operator Instructions] First question comes from the line of Daniel Djurberg from Handelsbanken.

Asa and Olof, big congratulations to the strong performance here in choppy waters.

Hi, Daniel. Thank you.

Hi.

The first question would be a little bit looking at the solid organic growth. Can you comment a little bit on the level that came from prices versus volume and mix would be great? Or is it like half-half similar to your here in the Nordic perhaps?

Yes, I think it's fair to say it's been like it has been for the last few quarters. It is roughly 50-50 from price and volume in the quarter.

Perfect. And another question on the employee retention coming down. And do you see a risk that it comes too low that you need to work the demographic in the company more on hands-on level? Or how do you see this?

No as -- I mean, if we look back and before the pandemic, we were on lower levels, and that means that we have seen an uptick after the pandemic and we have referred to the personnel turnover being one of our, how to say, challenges due to -- that is, of course, costly and to onboard people. And so we are really welcoming this decrease of the personnel turnover. This is the second quarter in a row where we see lower levels. And too early to see it as maybe a trend, but it is a positive and there is no risk that we are going to see personnel turnover levels that is too low, but we have to expect, and we have the capability of working with the personnel turnover on those levels that we now see in the business. But -- so the answer to your question is, no, I don't see that coming, but I would welcome even lower levels of personnel turnover than we have right now, even if we are on the benchmark in the market.

Perfect. And if I may, a question on the profitability in Belgium and Denmark was obviously strong and surprised me a bit, also underlying. Did you have any nonrecurring one-off projects that helped that we should be aware of? Or is this the going concern or the level we should expect given the current demand situation?

No. There is -- there are no sort of nonrecurring items in there. No one-offs. It's just a continuation of the strong performance. In Belgium, it's also the addition of VK, obviously, which is a strength to the business. And in Denmark, it's, again, just a continuation of the trajectory we've seen.

This is from the line of Stefan Knutsson from ABG.

Asa and Olaf, my first question is regarding the outlook in the real estate market. Have you seen an increase in uncertainty and, for example, within public buyers of late?

The market situation related to the building sector remains weak in this quarter. And I would say it's more that it continues and it's mainly related to the residential sector with newly -- new build. So it's more that it continues. I think in our business, it's really a strength. And as I said before, this broad client portfolio and this broad project portfolio that we have, so we can utilize the resources also into the public buildings, meaning schools and health care and so on. So -- but with that said, it is an uncertain market that we are capable of handling and maneuvering so far.

I mean just to add to that, we -- overall, in our markets, we have not seen any sort of increased weakness in the public buildings market.

And still good demand in the public spending as you referred to.

Perfect. Very clear. And then also, Olof, on the working capital, you said that it increases from strong growth. I also have it increasing in share of revenues, so -- and approaching historical high levels. So any further comments on the development there would be helpful.

No. Then we are working off the same numbers. I also have the percentage increasing. There is 2 factors in this. I think when you have the kind of growth we've had over the last 12 months, you will have sort of an excess buildup in work in progress. And the same thing when we go down, you have a sort of further decline than the percentage of sales. So there is sort of an extra effect from growth. What we also have in the quarter is that the acquired entities come in with higher working capital ratios than we normally have. And we see that as an opportunity to release cash once we get them into Sweco's working capital regime.

Okay. Perfect. And then my last question is regarding Germany and U.K., which still have sort of lower profitability levels. Are you taking any specific actions in those countries to improve that?

Well, in Germany, as you know, we have been executing on a turnaround plan for quite some time now. What is positive is that we see good growth. We see good order inflow in Germany. The margin has not yet lifted and that's obviously something that we are working with to sort of get the cost levels right, et cetera. So in Germany, I would say it's just continue to execute on our plan. In the U.K., we've had more of a rapid negative impact in the quarter, as you've seen. And there, we are taking actions in terms of cost reductions on the sort of more shorter time frame.