Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2022-Q1

[Marcela Sylvander, executive]

Good morning, and welcome, everyone, to this presentation of Sweco's Q1 report that was published earlier this morning. My name is Marcela Sylvander, and I'm the Chief Communication Officer here at Sweco. And with me this morning, I have Sweco's President and CEO, Asa Bergman; and CFO, Olof Stalnacke. They will take us through the results from the first quarter. And after their presentation, we will open up for questions. Please, Asa.

[Åsa Bergman, executive]

Welcome, everyone, to Sweco's Q1 presentation.

Before we move into the quarter, let me give you a short recap of Sweco. Sweco is Europe's leading engineering and architecture consultancy with 18,000 experts. We have 8 geographical business areas in Europe, and we do business in many countries across the world.

And let us now start the Q1 presentation. We had a positive start to the year. Net sales increased to SEK 6 billion, with organic growth of 3% and acquired growth adding another 2% in the quarter. EBITA increased to SEK 640 million, and we improved our margin to 10.7%. We have a strong financial position and low net debt, which allows us to continue to act on opportunities in the market.

We made 2 new acquisitions in the first quarter, and I will get back to those later in the presentation. Among the projects won in the quarter, I would like to highlight some projects related to the growing demand for sustainable mobility and public transportation. Sweco won 3 out of 4 assignments connected to the development of Stockholm's new metro line, which you can see here in this picture. We also won a 10-year railway project in the Öresund Region in Sweden and the tram project in the city of Ghent in Belgium. These projects reflects our position as the European leader in railway design.

With that introduction, let me move over to the market situation. The demand for Sweco services remained good in the quarter, but there is a mixed market outlook. While the negative impact from COVID-19 is diminishing, the Russian invasion of Ukraine is causing market uncertainty. We are monitoring the situation closely and have not yet seen any significant impact of Sweco's business.

In turbulent times, Sweco's highly flexible business model is a core strength as it allows us to quickly adapt to the market situation. And with that said, we continue to build and strengthen our order book in the quarter. The long-term demand for our services is driven by strong trends in society connected to sustainability, digitalization and urbanization. One example of this is that Fortum has a science vehicle to design Finland's largest air-to-water heat pump plant, which will provide 0 emission district heating and cooling to residents.

Now let us take a closer look at the first quarter. Our organic growth is 3% in the quarter. We have positive organic growth in 6 out of 8 business areas. As you can see here, Norway, Denmark and Belgium delivered good organic growth. The positive development is supported by higher average fees and improved FTE growth, while high levels of sickness absence had a negative impact.

Let me now move over to the result. EBITA improved by 2% in the quarter. The positive development is highly supported by higher average fees, while high sickness absence and higher operating expenses had a negative impact. In total, 4 out of 8 business areas report EBITA improvements. We also improved our margin in the quarter. We have strong margins in Sweden, Norway and Belgium, and a positive development in Denmark. I'm also pleased to see that Sweco Germany continued to take steps in the right direction on its long-term turnaround journey. We see the improvements in Germany as a sign that actions we are taking continue to have positive impact.

I am pleased that we continue to execute on our acquisition agenda. In Q1, we announced 2 new acquisitions. Stema Rådgivning, a Norwegian consultancy specialized in project and construction management. This acquisition strengthened Sweco's offering and enables us to capture an even larger share of the Norwegian market.

We also earlier this year announced the acquisition of Swedish Net Engineering, focused on physical and technical protection and security. This is a good example to our expertise within buildings and well aligned with the increasing demand for security solutions. I would also like to mention that we last week acquired Arcos Architecture in Norway, with 70 employees. They are mainly active within sustainable residential development. This acquisition makes Sweco a leading player in architectural services and the largest in residential architecture in the Norwegian market. In terms of the entire group, Sweco is today the world's fourth largest architecture company.

And with that said, I will now hand over to Olof to walk you through the numbers. Please, Olof.

[Olof Stålnacke, executive]

Thank you, Asa, and good morning, everyone. Starting with net sales. Net sales in the quarter was SEK 6.1 billion, taking LTM net sales to SEK 22.3 billion. Adjusted for calendar, the organic growth is 3% despite significant negative impact from higher sickness rate. A significant positive calendar effect goes in the other direction, and we have 10 more working hours in the quarter. With positive impact from M&A of 2% and from FX of 3%, this brings total growth to 10% in the quarter.

Looking then at EBITA. EBITA is SEK 648 million in the quarter, and LTM EBITA thereby closed to SEK 2.2 billion. Reported EBITA is SEK 108 million or 20% up. But adjusted for the calendar effect, we are SEK 8 million or 2% up. The sickness rate in the quarter increased by 1.8% compared to last year, having a negative EBITA impact of approximately SEK 95 million. And in the other direction, again, the positive calendar effect, which has a positive EBITA impact of SEK 99 million.

Looking then at the EBITA bridge by business area. We see positive contributions from Norway, Denmark, Belgium and Germany. Germany, obviously, again as a loss make in Q1 last year, as you know. Norway has a very strong quarter, driven by higher fees, increased billing ratio and also the effect of Easter falling entirely in Q2 this year. Denmark maintains the momentum we have seen for some time now and Belgium continues with consistent strong performance. Sweden is down versus last year, and this is mainly driven by high absence. Sweden maintains a high margin.

The Netherlands is up against an all-time high Q1 last year and was impacted by absence and by reversal of COVID cost savings from last year. And this impact from sickness absence and from higher operating expenses can be seen to some extent across most business areas. And in the other direction, EBITA is positively impacted by continued fee increases and also by increasing FTE growth.

Finally, on the numbers. Our financial position, which remains strong. Net debt is just below SEK 1 billion, in line with last year after a stable Q1 cash flow. And we maintain roughly 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. We have available liquid assets of SEK 4.1 billion, and we thereby remain well positioned to continue to capture any opportunities that may come.

And with that, back to you, Asa.

[Åsa Bergman, executive]

Thank you, Olof. Let us now conclude the first quarter. As previously said, it was a positive start to the year despite high sickness absence. 6 out of 8 business areas delivered organic growth and 4 out of 8 business areas improved EBITA. We have an overall good demand for Sweco services, with a stable inflow of new orders that continue to strengthen our order book. One example of a project during the first quarter is that Sweco was selected to deliver landscape architecture and engineering services to Ankeret, one of several apartment buildings in Havneparken in Norway. We experienced a mixed market outlook, with diminishing impact from COVID-19, but with uncertainty due to the Russian invasion of Ukraine. With that said, Sweco's decentralized business model and strong financial position creates flexibility going forward.

And I would like to conclude with some last words. As always, our focus is to continue our profitable growth. And this will be made through a combination of organic and acquired growth. We continue to actively look for interesting acquisition targets, while we at the same time focus on increasing our recruiting to support our organic growth.

We are also focusing on implementing the Sweco model across all our markets. We continue to focus on staying relevant and close to our clients. Yet another example during the first quarter is that Sweco Belgium was selected to outline the strategy for low emission mobility and phasing out combustion engine vehicles in the Brussels Capital Region.

As a final word, and as I mentioned earlier, we live in an uncertain time. The short- and long-term consequences of the Russian invasion of Ukraine together with the major changes brought by digitalization and climate adaptation will challenge and place new demands on society and businesses. It is clear to me that Sweco has both an important role to play and an ability to contribute and grow with these challenges. It is more relevant, challenging and inspiring than ever before.

And with that said, let us open up for questions. Thank you.

[Marcela Sylvander, executive]

Thank you, Asa and Olof. And as Asa said, now we will open up for questions. [Operator Instructions] Please, Ann, if you could give us the instructions, please?

[Operator]

[Operator Instructions] Your first question is from Johan Sundén from Carnegie.

[Johan Sundén, analyst]

2 questions from my side. The first is on U.K. And you highlighted in the report that you took a significant provision for the bad debt. Can you please give some more color on the situation in U.K.? And the -- just ballpark, how big that provision was in the quarter? And how we should think about the situation going forward? And the second question is regarding OpEx headwind during the quarter. How much of the OpEx cost savings that you had in Q1 last year is win back during this quarter?

[Olof Stålnacke, executive]

Okay. Maybe starting with the U.K. market quickly. As we write in the report, the -- there is a bit of sort of a 2-sided market in the U.K., where we see strength in the London area and in buildings, where we see weaknesses in some of the other markets. The bad debt provision was around SEK 8 million, and it's one case on Ireland of a constructor -- construction company. So it was SEK 8 million. There -- we see no other sort of any other development on bad debt provisions. So it's one single case. .

And sorry, yes, you asked about the operating expenses as well. What we see is that the positive impact which we had last Q1 of about SEK 60 million, that has been reversed. It doesn't mean that we are back to the same traveling or training costs as we were before. But the total costs are roughly back where they were in Q1 last year. So we have some cost savings remaining, but we also have some cost increases in other areas.

[Operator]

Your next question is from Dan Johansson from S&P Global.

[Daniel Johansson, analyst]

3 questions from my side. Perhaps I'll take them one by one. First one, is it possible to share how the organic growth developed throughout the quarter? I guess you started on a slow note due to the high sick leave. So my question is, was your growth in March clearly above January, and yes, at least the beginning of February? Or how did it develop sequentially?

[Olof Stålnacke, executive]

It was -- it became a little bit better throughout the first quarter. As you say, not sort of in any big way, but it became better in -- as we saw sickness absence decline over the quarter.

[Daniel Johansson, analyst]

Perfect. And perhaps a follow-up to that. Out of your markets, were there any specific ones you can highlight where you experienced more of a headwind from high absence or sick leave? Or was it more of a broad impact in -- across all markets as you see it?

[Olof Stålnacke, executive]

It was a broad impact across all our markets, but I think most market probably in Sweden and the Netherlands, a bit above the other ones.

[Daniel Johansson, analyst]

Perfect. And perhaps a bit on the market situation as well. You write a bit about it in the report. Are you already now seeing larger projects being postponed or stopped due to the material shortage or inflationary pressures? Or is it more of a risk for demand going forward? Or if this situation continue throughout the full year? Or are you seeing some projects already being pushed now? Or what's your feeling on the market right now?

[Åsa Bergman, executive]

That is really uncertain. There are lots of discussions related to everything that is going on. In Q1, we don't see any postponed, stopped project or anything. So there is no implication on the Sweco business during this first quarter. This is more about for us being prepared, staying close to our clients and really monitoring the situation going forward.

As I said before and also shown in the previous, I mean, market changes, we have this portfolio of both private and public sector, as you know, and quite many legs to really operate within. Meaning that we are quite quick, we can quite quickly shift our competencies into different segments. So yes, that's the situation right now.

[Daniel Johansson, analyst]

Great. And maybe a final one, if I may, and that's on the labor market. Are you satisfied with the recruitment situation right now? I guess you're recruiting a lot, but at the same time, churning, I guess, could come up now also after COVID. And what do you see in terms of wage inflation on new recruits coming in? And perhaps a few words on your ability to compensate that through higher prices.

[Åsa Bergman, executive]

Yes. I mean, I'm never satisfied though. But what we see is, and I have been quarter-by-quarter talking about, that we're now focusing on recruiting and we would like to see FTE growth. What we now see in the figures is that we see FTE growth coming. So we will continue to focusing on that, I would like to see a bit of a more result of that in some of our business areas. We also have to handle the personnel turnover that we have, all of us on the markets. Meaning that focusing on being the most attractive employer on each market is very important for us in times like this. So with our strong brand, our recruitment process and that focus, together with making sure that we attract and keep the best people, I know that we're going to succeed with this. But it's really hard work because it's a high competition on the market.

[Olof Stålnacke, executive]

And I think on salary inflation, what we have been saying is that we see increasing salary inflation. That continues. But I think we are also still quite confident that we can compensate for that with higher prices. And I think this first quarter is also a good sign that we are able to do that.

[Operator]

Your next question is from Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Yes. Just a question on -- you talked about this headwinds of the SEK 90 million something from COVID. You talked about the operating cost, up SEK 60 million. And that still, earnings are flat, you argue, on a sort of year-on-year basis, excluding the calendar effect. These are fairly big numbers. Can you just help us bridge that?

[Olof Stålnacke, executive]

Yes, Johan. Yes, I think it's just shows that the FTE growth is starting to have more positive effect than it had during 2021. So we see a bigger net effect from that. We also continue to see quite a big positive effect from average fee increases. So I think -- and if you look at it, the sickness -- higher sickness leave roughly balances out the calendar effect. So the rest comes basically from pricing and from FTE growth.

[Johan Dahl, analyst]

If you look on that price component, in particular, is that -- it seems to be a bit of a step change compared to previous quarter? Or is that incorrect?

[Olof Stålnacke, executive]

No, I think we are roughly on the same levels as we saw in Q4. So not a step change, but a continued good trend on the pricing.

[Johan Dahl, analyst]

And in terms of trying to locate in the report to see that FTE growth, I mean, we can see a sequential increase in employees, not on an organic basis, but still an increase. But could you argue that this is sort of a gross inflow that has improved? Or is it more sort of stopping outflow?

[Olof Stålnacke, executive]

It's more the gross inflow, I would say. We don't see any significant downward trend on the outflow yet.

[Johan Dahl, analyst]

All right. Can you say anything else regarding the order book? You argue that it continued to strengthen, I think it said in the report. But is it possible to put it a bit more in a sort of a sequential perspective, how that looks?

[Åsa Bergman, executive]

I mean, we, as you know, don't forecast our order book, and I mean -- and talk about the details. But it has been stable. And the inflow of orders in all segment has been good in this quarter. And as linked to the previous question here is that, I mean, it -- the feeling within the whole order book is that it's stable and no postponed or stopped projects so far.

[Johan Dahl, analyst]

All right. And just finally, can you say anything regarding your assessment of the business in Germany, CEE? Whether -- is that stabilizing and prospects for growth going forwards.

[Åsa Bergman, executive]

As you know, we implemented this turnaround plan last year. And it takes time. I mean, we have implemented new leadership, shifted out parts of the leadership within the Sweco German organization. We have implemented new processes. And now we're working hard to making sure that we're really relevant to the client and select the right projects on the market. But it also takes time because you need to build up the capability within the organization. One thing is processes and shifting out leadership, but it takes time to build up the way we would like to work.

So we are continuously implementing the Sweco model. And we continuously are creating capability within the Sweco German organization. So with that said, I see this quarter as positive signs, as said before. If I would say that we are stable for the future, I think it's too early to say. We are monitoring the situation in Germany closely and working hard. So I'm looking forward to continuously see the development of Sweco Germany. But I don't think we should expect that Germany will be up at the levels that we would like to see for a business area in the near future. But we're really happy for this quarter.

[Johan Dahl, analyst]

Okay. Sorry. One more. On the repurchase mandates on the AGM, should we -- is there any reason we should view that differently, how that will be utilized now versus previously? And any messages you can send there?

[Olof Stålnacke, executive]

No. There is no message. This is sort of the same purposes set that we had before. It doesn't reflect anything on our sort of how we see our capital allocation going forward. So it should not be interpreted in any way different than previous years.

[Operator]

There are currently no questions in queue. [Operator Instructions] As there are no more questions in queue. I'd like to hand the call back to your speakers today. Speakers, please continue.

[Marcela Sylvander, executive]

Thank you so much, Ann, and thank you for your questions. In the chat function, we just received a question concerning Germany, but I consider that you just answered that one. One more question about the comment, if you could give on the sickness absence going forward since this was mentioned in the report.

[Olof Stålnacke, executive]

Yes. I mean, if we look at April, we are still above last year's level. So we are at about one -- sorry, 0.8% above last year's level, but it -- the trend is downwards. So we hope that it will normalize later in Q2.

[Marcela Sylvander, executive]

Thank you so much. And with that, we have no more questions. I want to thank Asa and Olof and all of you for participating. And I wish you all a nice day.

[Åsa Bergman, executive]

Thank you very much.

[Olof Stålnacke, executive]

Thank you very much.