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

Good morning, and welcome, everyone, to this presentation of Sweco's Q1 report that we released earlier this morning. With me today, I, of course, have Sweco's President and CEO, Åsa Bergman, together with our CFO, Olof Stålnacke. They will present the results of the first quarter. And after that, we will open up for questions. But with no further delay, please, Åsa.

Welcome, everyone, to Sweco's Q1 Presentation. Before we present the first quarter of the year, let me give you a quick overview of Sweco. Sweco is 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 22,000 experts, our focus on organic and acquired growth, as well as our efficient and decentralized operational model. With a strong financial track record and financial position, we are focused on continuing our growth journey and build on Sweco's success. With this introduction, let me start the presentation of Q1. We began the year with a solid quarter with continued growth and improved margins. Net sales exceeded SEK 8 billion, and we delivered a stable organic growth rate of 4%. EBITDA increased by 10%, and the EBITDA margin increased to 11.2%. We sustained our positive operational trend with higher average fees, improved billing ratio, and positive effects from cost control measures. Altogether, this shows a solid start of the year. Let us now dive into more details in the first quarter. In this quarter, 6 out of 8 business areas reported EBITDA improvements, and 7 out of 8 reported positive organic growth. We have managed to successfully navigate a mixed market with a solid organic growth rate in the quarter. Our new project wins are reflected in a stable order backlog and a good order inflow in the quarter. As I mentioned, we sustained our positive operational trend, and the EBITDA improvement was supported by higher pricing, higher billing ratio, and lower operational expenses. In the quarter, Sweden, Finland, and Norway initiated further efficiency measures, and we will remain committed to higher operational efficiency and to adapt to the market development going forward. Let's move over to the market overview. The demand for Sweco services generally remained in line with previous quarters, with some variations between segments and markets. Demand remained good in the infrastructure, water, environment and energy segment as well as in security and defense. The general weak demand continued in residential and commercial real estate as well as within traditional industry services. As you know, the general market uncertainty increased in light of political events and threats of political trade conflicts. From Sweco's perspective, this has not materialized in any substantial effects on demand. But we are, of course, monitoring the development closely and are prepared to take actions when and where needed. With that, I will hand over to Olof to walk you through the numbers. Please, Olof.

Thank you, Åsa, and good morning, everyone. This is a quarter very much in line with Q4. Net sales is at SEK 8.1 billion with 4% calendar-adjusted organic growth, 1% from M&A and no FX impact. EBITA is SEK 900 million. Excluding the positive calendar effect, we are SEK 81 million or 10% up, and the margin is at 11.2%. Leverage is down significantly from last year at 0.5x. Looking at net sales, we see organic growth in 7 out of 8 BAs. Netherlands has the strongest growth, driven by increased average fees, but also FTE growth. Finland continues to show negative growth and the Finnish market remains challenging. All other BAs grow between 2% and 5% in markets that remain mixed in terms of demand. The growth drivers continue to be average fee increases and higher billing ratio. On the EBITA side, we see a 10% increase. We are up against a relatively strong Q1 last year and still managed to grow EBITA more than top line. Sweden, Norway, Denmark, Belgium and the Netherlands delivered double-digit margins. U.K. delivered 7% in another quarter of significant improvement. Finland and Germany and Central Europe are more or less in line with last year. Looking then at the EBITA bridge by business area. Again, higher average fees continued to be a positive driver together with higher billing ratio, while higher personnel expenses, including restructuring costs, had a negative impact. Looking at the BAs, 6 out of 8 delivered increased EBITA. Netherlands, Belgium, and Denmark all delivered significant EBITDA improvements. U.K. also improved significantly. But again, this was versus a relatively weak quarter last year. Sweden, Finland, and Norway had a slightly weaker first quarter and are also the markets where we get the least help from market demand, and where we are also initiating actions. Sweden has taken SEK 20 million of restructuring costs related to a reduction of 50 employees. Finland also taking action with a 40 FTE reduction and SEK 13 million of restructuring costs that will impact Q2. Norway are also executing layoffs, primarily temporary in Q2. And Germany and Central Europe then finally is, as you can see, in line with last year. The calendar effect from 2 more working hours corresponded to a positive SEK 27 million in net sales and EBITA impact. Looking at the financial position, net debt at SEK 1.6 billion is significantly down versus Q1 last year, driven by an improved working capital position and also by lower M&A outflows. Leverage is at 0.5x, also significantly down versus last year and well below our target. We remain financially very strong with available liquid assets of SEK 4.8 billion. Finally, as usual, a reminder of the calendar effects for 2025. In Q2, we get the negative impact from Easter moving between quarters, and the biggest impact is, as always, in Norway. And the total for the year, as you know, is back to negative with one working day less. And with that, back to you, Åsa.

Thank you, Olof. The projects won this quarter reflects our broad and diverse expertise across several growth segments. In Denmark, Sweco was selected as the key partner by Danish distribution system operators, Cerius-Radius and Nexel, to expand the electricity grid in Eastern Denmark. The contract will support Denmark's climate goals by facilitating grid expansion and is valued to approximately SEK 580 million over 5 years. Sweco was also commissioned to provide project and planning management services for Swedish metal and mining company, Boliden, in the replacement of one of the Rönnskär smelter's oil-fired boilers with 2 electric steam boilers. This is part of Boliden's effort to transition to fossil-free copper production. In the Baltics, Sweco was selected as part of a project alliance to design and construct Section 1 of the Estonia Rail Baltica, an EU-funded high-speed rail link connecting to Baltic states -- connecting the Baltic states with the rest of Europe. This major project includes 230 kilometers of new European railway track with completion expected by 2030. Finally, Sweco has been chosen as the project manager for the new Oslo Spektrum Arena in Norway. This project aims to establish Oslo as the leading event capital in the Nordics. The project has ambition environmental goals, including extensive reuse of building materials. Now I will conclude with our key priorities and focus areas going forward. Again, the first quarter of 2025 was solid for Sweco. We continue to execute on priorities communicated over the past quarters, delivering solid growth and improved margins. The quarter demonstrated the strength of Sweco's well-diversified business and operating model as we continue to successfully navigate in a mixed market. Going forward, we will remain focused on operational efficiency and long-term margin improvements. And I see many promising opportunities for Sweco, and we will continue to strengthen our position in growing areas such as energy, security, defense, and digitalization. Given the recent events in the world, we are, of course, following the market development, and we are staying close to our clients to be able to act on opportunities and mitigate potential challenges. As communicated before, our aim for this year is also to increase the pace in acquisitions. It is one of Sweco's key value drivers, and we have a strong pipeline across several markets and segments. Altogether, Q1 marked a good start to the year for Sweco. Thank you.

Thank you, Åsa and Olof. And now we will open up for questions, and it will be possible for you to ask them either through the phone line or through the chat function. So please, operator, if you could give us the details.

[Operator Instructions]. We will now take our first phone question from the line of Dan Johansson from SEB.

I think I have 2 questions here. Maybe I'll start with the first one on the demand situation. It seems to be quite stable order backlog growing in line with sales. But looking at net recruitment, it's close to 0, and you're doing some further capacity adjustments here in Q2, it seems. Is it fair to say that you don't expect any major improvement from these levels? And are you more cautious now compared to, yes, at the end of the last year? If you could give some color on that.

I would say that the market is, as I said, more or less in line with previous quarters. And as we have done, we always try to take actions on areas where we don't see as big demand as in others. So we continue to monitor in segments where there is less demand, and we are focusing on really growing in other segments. But as you see, the order backlog is strengthening in the quarter, and we see also orders received on a good level. But with that said, of course, uncertainty ahead, but we don't see any major impact in our business in this quarter related to that. So this is more focusing on the efficiency measures and making sure that we continue to create efficiency and that we are well-positioned.

But just following up a bit on that, what part of the business is impacted? Is it still the building's side and the architecture part of your business that you're doing capacity adjustments? Or is there somewhere else?

No, I think it's -- I mean, there are some nuances in that, but it's still the, as you say, residential, commercial, and parts of industry. But as we said now in the presentation as well, there is also a nuance that the Nordic markets, excluding Denmark, are sort of a little bit softer on demand than the other markets.

And maybe one more question, if I may. And yes, I can't refrain from asking a bit on the M&A pipeline you're highlighting as maybe better compared to last year. And yes, of course, your balance sheet is super strong. Net debt to EBITDA declined quite a bit in Q1 year-over-year. So how are you thinking about capital allocation here? I understand it's difficult to predict the timing of larger deals, of course, but shouldn't we expect a couple of more small to medium-sized deals, perhaps -- yes, a few more than what you've done in this quarter, for example?

If we recall what happened last year was that 2024 was a kind of slower market when it comes to transactions. And as I said, we are working with lots of different potentials in the different countries. So we have an M&A pipeline in all our business areas. But I mean, even if we are financially strong, we will still select and buy companies that we really see bring value into Sweco's portfolio, meaning that when we get the opportunity to buy the companies that we want to buy, we will. But it is lots of things going on. But I cannot promise when and at what pace this will happen.

No, I understand it. I'm not pushing you on that either. It's better to do good deals than doing many deals, of course.

Our next question comes from Raymond Ke from Nordea.

A couple of questions from me also, starting off with maybe just sort of understanding your organic growth of 4%. How much was price against volume, if you could diverge that?

No, I mean, if you look at the FTE growth, it's close to 0. So it's fair to say what I've been saying, I think, for some quarters now, it's around 3% from price and 1% from billing ratio in the growth.

And regarding sort of the layoffs then, you mentioned SEK 20 million here in Q1 for Sweden, SEK 13 million in Q2 for Finland. Were the costs related to layoffs in Finland and Norway here in Q1 significant? And if so, how much were they?

There was nothing in Q1 in Finland and Norway. There will be, as you said, SEK 13 million on Finland in Q2. Norway smaller numbers and mostly temporary layoffs, so no significant cost for that.

And then a question on the start of the year. A peer of yours talked about sort of seeing a slow start of the year, especially the first 2 weeks. Did you also notice this? Or was this anything that impacted you to an extent that you would emphasize that?

I mean January is always a start-up month after Christmas and New Year's, but I would say no sort of significant change versus previous years.

And a final one on Germany. You had better utilization. You wrote sales were SEK 50 million higher. The calendar had a negative just SEK 1 million impact. I'm trying to understand how the margins did not improve as much as -- yes, did not improve more.

No. Last year in Q1, when we reported, we talked about positive project adjustments in Germany, and they had an impact of maybe somewhere sort of SEK 5 million to SEK 10 million on the result then. So I think that's one of the explanations. The other is just that you will see some fluctuations between quarters. But otherwise, I would say a solid quarter in Germany.

Our next question comes from the line of Fredrik Lithell from Handelsbanken.

Before I ask my question, I would like to say thank you, Olof, for your time. I think this is the last conference call you will be part of. Good performance and a good backup to us analysts as well. So thank you for all the time. My questions --yes.

I just have to say, Fredrik, that I will be around for the Q2 report as well. So you won't get rid of me yet.

Okay. Good. Good. All right. Can we go back to maybe Finland? I would like to ask a little bit more on -- it remains weak. Has it turned weaker? Is it just you that are doing the nitty-gritties sort of on a weekly basis? Or where are we in the Finnish market?

I would say that the market has been weak for quite a while. And as you know, we took actions in 2024 and also in 2023 in Finland, and that is linked to residential, commercial real estate, and parts of the industry segments. And of course, to maneuver a market like that, it's about making sure that we focus on sales and getting new contracts into the portfolio, but at the same time, take actions in areas when needed. So when the market not turning in the right direction, meaning strengthening in those areas, we need to take more action. So all in all, I think we are maneuvering the market in Finland in a really good way. Due to that it is weaker, we are winning good contracts, but we also need to mitigate in some specific areas, which we continue to do.

Okay. And could I also have a question on prices and salaries? You've had a tailwind from good price adjustments. How much more can you do on that? What do you see in front of you in terms of pricing? And then also, if you could sort of add in the aspect of salary increases and how we should gauge that for '25?

First of all, I think it's important to say that this is a kind of ongoing theme for us to make sure that we focus on how we price ourselves and that we make selections on the market, meaning that we select and deselect projects depending on -- making sure that we stay profitable and that we can increase our prices. And that will continue, of course, because it's such an important driver for us. It's also about how we execute the project, so we make sure that we don't get project write-downs and that we get paid for all the work that we are doing. So those elements are part of our model, and we will continue to focus on that. But more on the details.

Yes. I think, and if you look at Q1, we still have a positive balance between price and salary increases, which is important on the total of the group. And our aim is just to continue that. And we've been talking about it, and I think we've also been executing on it for a number of quarters and years now. So we will just continue on the track we are on.

Our next question comes from the line of Johan Lönnqvist from Carnegie.

A couple of questions from my side as well. I think I'll stick to where Fredrik started on salary and pricing, and especially looking at the Swedish business, where there's been some turbulence beginning of April with regards to the current union agreement. Can you give some color what the final outcome resulted in and how that will impact the Swedish business for, firstly, Q2 in '25, and then maybe if there would be possible to compensate for that salary inflation for the full year of '25?

I mean, the outcome is that there is an agreement in place on reasonable levels, I would like to say. And then there will be local negotiations regarding shortening of the time, but that is something that we will handle locally. With that said, the levels we're talking about is something that we make sure in Sweco that we have market-based salaries. And we are starting the negotiations right now. I don't see so much of a risk in this, of course, but we have local negotiations regarding these parts in the agreement. I don't see any reasons to why we shouldn't be able to mitigate this salary inflation with market prices going forward. So it's the same environment that we operate in that we have done the last years.

Looking at the quarter as such, margins in Sweden was down also excluding for the restructuring costs in Sweco Sweden step-down compared to what we saw during the last fall. Do you still think it would be possible to achieve a margin uptick in Sweco Sweden in '25, given the kind of backdrop and the market situation?

Well, as you know, we don't give forecast, and talking about the margin for 2025 would be a forecast. But I think the fact that we are taking action in Sweden shows that we are committed to continue to do what is needed to improve the margins, and that goes for Sweden as for any market.

I hear you. My third question is on the margin level in Denmark, 16% in this quarter, very high level. Just curious to hear how sustainable that margin levels are? And what has been the kind of main drivers from, say, 14 to 16? For a consulting business, it seems like a very high level.

I mean, Denmark has really implemented the Sweco model. They have a very broad and strong portfolio with clients and also with projects, and they are really focusing on what I talked about before, that maneuvering the market and select and deselect projects, but also executing the projects in a good way. So the combination of organic growth and acquired growth that they have been able to execute, and also how they operationally drive their business, good cost control, efficiency measures taken, but also focusing on growth in parallel with expanding their margins, is the recipe for success. I don't think, as I said before, that there is a kind of limit in any market. I think it's more about how you maneuver the market. And of course, you need some tailwind in parts as well in this mix. But when you have the recipe, you have the recipe for delivering the result.

And I think to add to that, you will always have quarterly fluctuations. So I think it's important to sort of look at the LTM margin trend over time. And there, Denmark has been consistent. It might not be 16% in every quarter, of course, but they have been consistent on the LTM margin. So I think that's important to look at.

You haven't had increased use of offshoring in the Danish business recently or to a greater extent than you have earlier done. It's just following the Sweco model that is the factor here.

Yes. On that note, cross-border collaboration and sourcing in Sweco is part of the recipe. So it's more about what kind of projects you have in your portfolio and what the potential is for cross-border collaboration and sourcing. So that is also part of the mix.

Yes, but it's nothing specific for Q1. Denmark has been among the best markets when it comes to utilize sourcing, but there is nothing sort of one-off in Q1.

And my final questions are on Germany and the kind of news flow seen during Q1 with regards to increased infrastructure spending. Have you seen any indications yet of a better order intake due to that? Or is that to come in the fall? Or where in the process are those projects?

I think it's still too early to see them. There is always a time lag between sort of the bigger investment programs and actual projects coming out. So probably later in the year, as you say.

[Operator Instructions] We will now take our next question from the line of Tom Guinchard from Pareto Securities.

I was just wondering, in Sweden, you commented on the water sector facing some financial challenges from the municipalities. Can you just give us some more insights into that? Is it isolated to the water segment? Or is it more broad-based?

I mean the big investments for the municipalities that we are looking at in terms of our sector is the water infrastructure, which is underinvested, as you know. And we are seeing not maybe sort of a decline there, but we see a bit of slowdown in investment decision due to the economy of the municipalities.

All right. But it's quite isolated to that sort of subsegment. It's not broad-based for the municipalities in general?

No.

There are currently no further questions. I'll now turn the conference back to the room.

Thank you so much. And there are no further questions from me or the chat either. So with that, I want to thank you for joining us this morning and also to remind you that we will release our Q2 report, Olof's last report, on July 16. Again, thanks for joining us, and have a nice day.

Thank you very much.

Thank you.