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

Good afternoon, everyone, and welcome to this presentation of Sweco's Q2 report. With us today, we have Sweco's President and CEO, Asa Bergman; and CFO, Olof Stålnacke. They will take us through the results of the second quarter of the year. And after that, we will open up for questions. So please, Asa.

Welcome, everyone, to Sweco's Q2 Presentation. Before we present the second quarter results, 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 Q2 2025. Sweco delivered a stable performance in the quarter marked by a significant negative calendar effect. Net sales were SEK 7.8 billion and the organic growth rate was 2% adjusted for calendar. Net sales were down 3% in the quarter, affected by a negative currency effect and the negative calendar effect. EBITA amounted to SEK 750 and the EBITA margin was 9.6%. EBITA increased by 15% or SEK 115 million adjusted for calendar. We continue to see further improvements in average fees and billing ratio. We are also executing on our M&A agenda with the announcement of several new acquisitions during the quarter. I will get back to the acquisitions later in this presentation. Altogether, this was a stable quarter, and we continue to execute on our strategic priorities. Let us now dive into some of the operational highlights from the quarter. In the quarter, 6 out of 8 business areas reported EBITA improvements and 5 out of 8 reported positive organic growth. We continue to be active and successfully navigating the market, resulting in an increase in both orders received and the order backlog. We are also seeing a continued solid operational trend across several business areas with 3 business areas reporting double-digit margins and the U.K. as well as Germany, Central Europe, continuing to improve their performance. The efficiency measures taken are having further effects with higher internal efficiency and a higher billing ratio. All in all, we are pleased to see that we are making steady positive progress across most business areas. Let's now move over to the market overview. The demand of Sweco services remained generally in line with previous quarters with some variations between segments and markets. Demand remained good in water, environment, energy and infrastructure segments as well in security and defense. The generally weak demand continue in residential and commercial real estate as well as in parts of the industry segment. The green transition, resilience, demographic changes and digitalization and AI are and will be key drivers for our business. And our well-diversified business continues to be a strength for us and provide stability. With that, I will hand over to Olof to walk you through the numbers. Please, Olof.

Thank you, Asa, and hello, everyone. Starting then again with a summary of the results. Net sales was SEK 7.8 billion (sic) [ million ] with 2% calendar adjusted organic growth, 1% from M&A and a significant negative FX impact. EBITA at SEK 750 million, and excluding the negative calendar effect, as you just heard, we are SEK 115 million or 15% up, and the margin is at 9.6%. Leverage down significantly from last year at 0.8. Looking then at net sales. We see organic growth in 5 out of 8 BAs, U.K., Germany and Central Europe and the Netherlands has the strongest growth. Finland continued to show negative growth. The Finnish market remains challenging. In the quarter, we also see slightly negative growth in Belgium with a weaker industry segment and in Denmark, where we see a slightly slower energy segment and have more vacation absence in the quarter. Sweden grows 2% and Norway, 5%. The growth drivers continue to be average fee increases and higher billing ratio. And these are partly offset by vacation absence and lower subconsultant revenue. On the EBITA side, we see a 15% increase despite the negative top line growth. And excluding the calendar effect, the margin would have been 11.4%, a 1.6 percentage point improvement versus Q2 last year. Sweden, Denmark and Belgium delivered double-digit margins. U.K. delivered 6% in another quarter of significant improvement. Germany and Central Europe improves margins, whereas Finland and the Netherlands are slightly down. And in Norway, you see the reversal of the large positive Easter effect from Q1. Looking then at the EBITA bridge by business area. Overall, higher average fees continue to be a positive driver, together with higher billing ratio and a net positive of SEK 47 million from restructuring costs. Higher personnel expenses and vacation absence had a negative impact. Looking at the BAs, 6 out of 8 deliver increased EBITA. Sweden and Germany and Central Europe saw significant EBITA improvement. U.K. also improved significantly. But again, this was versus a relatively weak quarter last year. Still, it's a positive sign that the turnaround in the U.K. is on track. The other 5 BAs are more or less in line with last year, and it's worth noting that Finland and Belgium would be positive, excluding the negative FX effect. Significant calendar effect from Easter with 11 fewer working hours, corresponding to a negative SEK 159 million in net sales and EBITDA impact and it is also worth noting that the FX effect, which normally is limited on EBITDA level, this quarter was as high as minus SEK 28 million. The financial position remains strong. Net debt at SEK 2.6 billion is significantly down versus Q1 last year. Leverage at 0.8, also significantly down versus last year and well below our target. We remain financially very strong with available liquid assets of SEK 4 billion. And finally, on the numbers, the calendar effects. After the big Easter effect, we now have limited calendar effects for the rest of the year. And for the full year, the total is minus 8 hours, which basically corresponds to the leap day we had in 2024. And with that, back to you, Asa.

Thank you, Olof. And as said in the beginning, acquisitions are one of Sweco's key growth drivers, and we are pleased to have announced several new deals over the past 2 months. In the Netherlands, we have announced 3 new acquisitions, civil engineering company, Juust, and security and building technology expert, Brain of Buildings. They were both announced in Q2. On 4th July, we also announced the acquisition of Volantis, an expert in engineering and architectural services for the industry and health care sector. Together, these companies will strengthen our offering and geographical presence on the Dutch market, adding SEK 350 million in net sales and over 200 experts to Sweco. On July 2, we also announced 2 new acquisitions in Luxembourg, PROgroup and +ImpaKT, and they are -- that are experts in data-driven project management and circular economy, and they will add SEK 58 million in net sales and some 40 experts. We also made a major announcement in Sweden during the quarter. On June 4, we announced a recommended cash offer for the listed company, Projektengagemang. It is one of Sweden's leading architecture and engineering consultancies with net sales of approximately SEK 800 million and some 650 experts. This is a great match for Sweco to strengthen our combined engineering and architecture offering while also extending our geographical footprint in Sweden. On 14th of July, we announced that we completed the offer for the chairs in Projektengagemang and that the offer had been accepted by shareholders representing approximately 97.9% of the outstanding shares and 99.2% of the outstanding votes. All conditions for the offer have been fulfilled and the offer is now being completed. We are pleased with the increased M&A activities with the new acquisitions I just mentioned. And now we are really looking forward to welcoming all these new colleagues to Sweco. The projects won in the quarter highlights Sweco's vital role in the transformation of societies and industries. Sweco was awarded a major long-term contract by Deutsche Bahn for a significant infrastructure projects aimed at doubling the capacity and efficiency in the S-Bahn in Munich. Sweco was also selected to be part of a framework with U.K. National Highways, focused on sustainable and digital transportation solutions. The city of Antwerp selected Sweco to redesign the Meir, one of Belgium's most well-known shopping boulevards, services, including landscape architecture, mobility expertise, the sign of day and night-time experience, and public engagement. Finally, we were commissioned to provide design services to support the establishment of the new data center for Litgrid, the electricity transmission system operator in Lithuania. These client projects show the wide and deep expertise offered by Sweco across markets and segments. And with that, I will conclude with our key priorities and focus areas going forward. To summarize, Sweco delivered a stable performance in the second quarter of the year. We continue to execute on the priorities communicated over the past quarters by accelerating the pace of acquisitions and further improving efficiency and margins. The quarter demonstrates the strength of Sweco's well-diversified business and operating model. Going forward, we will continue capturing growth opportunities and navigating in a mixed market as well as further improving our efficiency. We will also focus on integration of our latest acquisitions to realize synergies and optimize output. We remain focused on our M&A strategy to support future growth and strengthen our position in core markets and segments. Thank you.

Thank you, Asa and Olof, and we will now open up for questions. I just want to remind you of our Q3 report that will be released on October 29. But now, [ Heidi ], if you can please give us the instructions for the question session.

[Operator Instructions] And the first question comes from the line of Adela Dashian from Jefferies.

A couple of questions from me. First, on the efficiency gains, especially with respect to the billing ratio improvement. Could you highlight what further internal efficiency measures you have planned for the remainder of the year? And maybe also specifically as it relates to the Finland weakness and what actions you're taking here to stabilize the performance?

Yes. Adela, we have -- I mean, as we have done historically, if we have any large plans that we know that we will execute during the coming quarters, we tend to announce them in the quarterly report. So we will continue with any adjustments needed, but there are no specific big plans. But we will continue to review management layers and overhead functions, and we will continue to look at areas where we have lower demand and lower billing ratio. So it will be continued actions as needed, but nothing specific being planned right now.

Okay. And then maybe also on M&A. I appreciate all the color around the recent deals, but it's also been, I guess, you could say, a pretty front loaded M&A pace so far in the year. What are expectations for H2? And could you remind us of what exactly type of deals you are looking for, maybe fundamentals also would be a good to know.

I mean, as you know, we have an active M&A agenda in all our business areas that we work continuously with. Last year, it was slower, and that was mainly due to transaction activity in general was lower on the market. So now that this is -- what you see now is a result of lots of dialogues and lots of work on each market, so to say. But as I said before, this is more about, I mean, when we get the opportunity and when we have done our -- the way we work on the market, then we will announce and then we will acquire companies. What we're looking for is expertise as the spearheads. When it comes to those competencies, we see that we need to be able to take on the growth in the specific segments. And I mean you have some good examples here in this quarter, circular economy. We're talking security, we're talking broad in the different energy segments. We are also talking architecture because we want to combine architecture and engineering in all our different business areas, but it's also about making sure that we can broaden our portfolio in each area, so to say. So in our architecture portfolio, we would like to have both private and public clients. We would like to make sure that we have health care. We would like to make sure that we have those segments that makes us resilient over economic cycles. So we have kind of a blueprint for what we aim for. But it's more about the timing when we get the opportunity, then we will buy and integrate companies. I hope that answers your question.

And then maybe just lastly on the end market trends. I think you've mentioned previously that so far, you're seeing pretty limited disruptions from the geopolitical instability or the trade conflict. Does this still hold true? Or is there anywhere in your project portfolio, where you are seeing maybe investment decisions are being impacted by this?

No. I mean we see, as we said before, a mixed market between countries and segments. And I mean, even if the European economic growth remains generally a bit slow and that there are geopolitical uncertainties, we have -- we see good growth opportunities in the green investments, energy transition, defense and security, digitalization and infrastructure, as I mentioned before. And our ambition is to capture those opportunities. I mean we have seen some slowness in the decision making in parts of the industry segment, but no major changes in this quarter compared with last quarter.

The next question comes from the line of Dan Johansson from SEB.

Maybe first of all, I will take the opportunity and say thanks to you, Olof, for the good collaboration here throughout the years. Also, best of luck now on your future endeavors.

Thank you very much, and thank you for the collaboration, Dan.

And then 2 questions then. Maybe I'll start a bit on what you highlighted in the report with the higher personnel expenses across quite a few of your geographical markets. Have you reflected that higher wage cost already in terms of pricing? Or is that something you will push through harder now in Q3, Q4? And also, what was the price component in organic growth now in Q2, if possible?

Yes. I think I'll answer the same as I've done before. So far, we have managed to balance the personnel cost increase from salary revisions with price increases, but it remains a challenge for us and an important priority to continue that. But so far, we managed to balance.

Understood. And maybe one more question also on U.K. and Germany, quite encouraging to see that you continue to produce much better results now there. And I guess, supposed to take them towards the next level, correct me if I'm wrong here, but you have still have a challenge there that you are a bit subscale in your market positioning in those countries. How do you plan to resolve that? Are you closing now to also consider M&A in those markets? Or is it still Benelux and the Nordics, which will take the lion's share in terms of M&A now going forward?

Yes. As -- I mean, first of all, I am really happy to see the development, both in Germany and in U.K. and that is due to that the long history of Germany implementing the Sweco model and also getting back on track and expanding ourselves on the market. And we see we have a higher hit rate on the market, and we strengthened our order backlog and so on and so forth. There is more to it. As you referred to, there is potential to take on more growth and focus the M&A agenda and try to be part of consolidating that market and that is what we have in our plans. But if we want to do it, I mean, step by step. So that is Germany. And the same goes for U.K. after a weak 2024, we are seeing a good development and a stronger result in the U.K. We have focused our business in a good way. So long term, we see opportunities on the U.K. market as well.

Yes. And I would add that U.K., it's -- as I said in the presentation, good progress on the turnaround, but we are still a bit away from sort of when we will start making M&A, et cetera, in the U.K. again.

Yes, makes sense. And maybe a final one from my side, if I may. And maybe following up a little bit on the demand situation. And you say your orders received increased and also strengthened the order backlog here. Can you say something about the split there? Is it mainly larger orders? Or do you also see better opportunities in the small and midsized projects coming in? And would you say you see more signs of a market recovery now perhaps compared to beginning of the year? Or are we still in this sort of wait-and-see mode due to general uncertainty?

I would say the order book for us will always be mostly small projects because that is the bulk of what we do and sort of no big change in there. And I think it's -- I mean given that we -- I mean, still good organic growth, but we don't see any increase, the order backlog and the orders received are sort of a good foundation for going forward. But it's -- I think it's still too early to talk about any break in trends in the quarter.

The next question comes from the line of Raymond Ke from Nordea.

A couple of questions from me as well. First, regarding these acquisitions. From the outside, it can look like you decided to push the M&A button here, of course. But in reality that's rarely so simple. Could you just help us understand maybe how long you worked on landing these 3 deals, especially whether you made this acquisition now because the sellers were ready? Or was it more on you guys feeling that the timing was right on these deals that you announced?

I mean I cannot -- I don't want to comment on specific cases. But I mean, a dialogue with a company could take years. So for us, it's about having a clear strategy of what we aim for country by country and also reaching out to the companies that we think has the right quality and the right match with us culturally and would create value in the combination with us. So in some cases, it's about that we have really massaged the owners. It could have to do with that someone is ready. So there is many different cases in the reason to why it happens in this volume and pace. But for sure, we are focused on succeeding with M&As but that doesn't mean that we kind of could expect that we will keep this pace quarter-by-quarter because again, it's about making the right deals when we get the opportunity, and we're not making deals for the sake of making deals. I think that is really important. I think I've said it before, for us, it's really to make sure that we can create value and the value needs to be a great combination with us because otherwise, the value will walk out the door. And that is not a situation which we would like to see. We really needs to make sure that we can create something really, really strong in the combination with the company that we acquire.

And then just a question on Denmark. I get that calendar had a negative impact of SEK 23 million. There was currency headwind, and you were 1% fewer people. But when I add this up, I still don't really get the sort of minus 5% organic growth drop here year-over-year. Could you just help us understand, is there anything related to maybe a shift in the market? Or was it like you mentioned, just energy being slightly weaker and more vacation being behind this?

No. The 2 -- I mean, you always see a bit of fluctuation between quarters. But the big explanations were some slowness in decision-making and in sort of starting projects in the energy sector and also we had quite a big vacation effect for the whole group, but it was largest in Denmark. So a lot of vacation mostly around Easter. So we don't see any shift in the market otherwise. So those are the main explanations and remains to be seen if the energy market is just temporary or if we are seeing a shift there.

Yes. Got it. And one more from -- on U.K. maybe. U.K. now delivered its third consecutive quarter of year-over-year growth. It's looking stable. Could you just help us understand like where are you in your repositioning here? Are you where you feel like it's stable? Or yes, just help us understand that.

No. I think just like with what you've seen with the turnaround in Germany, we want to see a little bit more time of growth and of strength and margins before we consider the turnaround done, so to speak.

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

Many have been answered. But maybe a bit on Finland, sort of struggling a little bit continuously. You did a -- you took actions last year in Q2 as well. And then following that, we saw a further drop in calendar adjusted organic growth in Q3 of '24. Should we sort of expect your adjustments to have the same type of effects on organic growth in the coming quarter? So that's really one question. And then maybe in Netherlands, if you could explain a little bit behind the margin that took a step down. Is that also the only seasonality and calendar effects that's behind that compared to what you had in Q1?

Yes. Netherlands is mostly Easter. So that's the big explanatory factor for the Netherlands. On Finland, I mean, we say that the market is still challenging. I think we've done a good job in Finland in terms of adjusting to the market circumstances, but we don't get any help from the market. I mean, hopefully, it has or will bottom out the Finnish market. But since we try to avoid forecasts, I won't say anything about expectations for Q3. But our management team there is really doing a good job of adjusting to the market circumstances.

Okay. And I noticed you had a section in the report talking about that you have started a captive insurance company. Is that something we should put some time on as analysts? Or is that a small thing for us?

It is truly a small thing for you. And as we write in the report, it is a so-called front-end captive with an insurance company that sort of runs the insurance operations towards the Nordic countries, which this covers. So financial impact is limited and the reinsurance is also capped. So we'll have very limited financial impact apart from lowering our insurance costs, which has been the reason we have put that in place.

Your next question comes from the line of Tom Guinchard from Pareto Securities.

A question on the billing ratios and margin dilution, I guess, primarily related to Sweden, but 75% billing ratio is a very high number here in Q2. Should we expect you to compensate for the margin dilution with continued organic bidding ratio improvements? Or what sort of lag are you seeing there looking into the end of the year and beginning in '26?

The margin dilution is -- as it is for the group is entirely an effect of the Easter and the calendar effect. So taking out the calendar effect, we don't have a margin dilution in Sweden.

Referring to the forward-looking with Projektengagemang coming into the books.

Okay. I mean, as with all acquisitions, I mean, I can talk about acquisitions generally and most acquisitions we do are margin dilutive, but then with sort of synergies and also opportunities on the revenue side, we normally turn that around quite quickly. But I won't give any specific numbers for this acquisition, but that's normally the pattern you see.

So organic billing ratios and margins should be relatively intact here into Q3, Q4 with seasonality in mind, of course, but then reported figures on billing ratio should come down here toward the end of the year?

Again, we avoid making any forecast. But I mean, you should assume the usual pattern for more significant M&As for example, a good comparison is when we made the VK acquisition in Belgium a couple of years ago.

The next question comes from the line of Johan Lönnqvist from DNB Carnegie.

A couple of questions from my side as well. First one is a little bit curious to hear about your planning for net recruitment looking into the fall, given the higher M&A pace. Should we expect that you kind of pause your recruitment activity more focused on kind of integration in, say, Sweden and the Netherlands, and those geographies that have been more active on the M&A side? Or do you still -- do you have ambitious kind of recruitment plans ahead?

For sure, we have ambitious recruitment plans, and we will not slow down when it comes to the pace of recruitment. So in the right areas, we will really continue to be making sure that we do what we can to recruit. And that goes for all business areas.

And I think it's a follow-up also to Tom's questions on utilization or billing ratio. How much respect do you think you have for the kind of quite good progression you had on the billing ratio in Q3, Q4 last year? Looking at the business as we see it in the books as of today, without the Projektengagemang impact?

How do you mean -- how much respect you should have?

Do you think -- you had quite big uptick already second half last year. Do you think there's still room to improve because we saw a slightly lower uptick in the utilization in Q2 this year?

Now we are going against -- I mean, the comparables are with sort of after we started the real improvement of billing ratio. So as I've said before, there is definitely more room to improve, but of course, it will be more difficult to have the sort of large improvements we have had. But there is still room to improve as we've said before.

And we will -- and I said, we will continue to focus on efficiency and I mean to do what we can to strengthen.

Perfect. A little bit more color there. A final question from my side, and this is a bit more broader. Just also curious to hear where you are? You mentioned in the presentation also, you're working with kind of more digital solutions and trying to incorporate that in your day-to-day work. Where are you in the kind of process of incorporating more digital tools, say, AI and those kind of things?

I mean we have worked very much, I mean, a very long time to integrate digital ways of working in all our parts of the business to bring both efficiency, value towards the clients, new services into the business. So it's kind of part of our operations today. And when it comes to AI, we built a ChatGPT platform early 2023, really quickly, meaning that we utilize AI across the whole of Sweco. We measure how much usage there is, and we are testing new AI tools all the time to see what we will benefit from to make sure that we are in front when it comes to AI development and all kind of opportunities and consequences for us are integrated into our business.

And is it possible to quantify any kind of efficiency gains taken out this far? Or is it too early?

Too early.

Too early.

There seems to be no further audio questions at this time. I would like to hand back for webcast questions.

Thank you, [ Heidi ]. We have one question through the chat function from [indiscernible] and that question concerns the security and defense market. And the question is, could you detail a bit more the drivers -- give the drivers of better back drop in security and defense? Is it strong growth at this point and what magnitude?

I mean overall, the defense and security and resilience has been really high or are really high on the EU agenda. It's high on the different government's agenda, meaning that it drills down to investments in the different areas. We -- this is projects that we have across Sweco linked to the different segments of infrastructure and energy, water and so on and so forth. But then we, of course, have specific security projects into the direct relation to defense and the defense industry. But this is nothing that we measure and communicate outside. So it's embedded. It grows in importance for us, and we are well positioned to take on that growth going forward.

Thank you. Then there are no more questions at this point. So with that, we would like to say thank you and a special thank you also to Olof for his last Q report for Sweco and we wish you all a nice summer.

Yes. I wish you all a nice summer. And from my side, a special thank you to Olof for great collaboration. And I wish Olof good luck and a really nice summer when he walks out into his next chapter in life. Thank you, Olof.

Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.