Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2019-Q2

[Katarina Grönwall, Chief Communications Officer]

The setup will be as following. Our President and CEO, Åsa Bergman, will start by presenting the overall report and then hand over to Christel Retzlaff, our acting CFO who will walk us through the numbers. After the presentation, you will have the possibility to ask questions. Let us get right to Sweco's results for the quarter. Please, Åsa.

[Åsa Bergman, President, CEO & Director]

Thank you, Katarina, and hello, everyone. The second quarter was another stable quarter for Sweco with continued solid organic growth and profit development. The organic growth was 5% in the quarter, and please note that there is a significant calendar effect in this quarter. Adjusted for calendar, EBITA increased with 12% compared to last year. The result is driven by an increased number of employees and a positive trend in hourly fees. And the positive development is also supported by a solid order backlog in all business areas, so the same drivers as in Q1. In this quarter, I would like to highlight the performance in Belgium, Finland, Norway and Sweden. These business areas are the main contributors to the positive performance in the quarter. Belgium, Finland and Norway continue to deliver good organic growth and solid and strong margins, while Sweden continue to deliver industry-leading margins. And during the second quarter, we also announced 2 new strategic acquisitions, MLM in U.K. and imp in Germany. These acquisitions reflect our strategy to grow, with the combination of organic and acquired growth and to build market-leading positions in our 8 core markets, and I will come back to those acquisitions later in the presentation. Regarding the market situation, the overall demand for our services remains good and with some variation between markets and segments, and I will also come back to describing the market later on in the presentation. There's a picture here on the slide, and it shows the National Theatre in Oslo, Norway, and this is an example of project that we won in Q2. It is one of Oslo's most famous buildings, and Sweco, along with 3 other companies, were nominated as a group of companies to define the reconstruction of the main building. And this is truly a prestigious project, and we are very proud to be able to contribute to its development. Sweco's growth strategy is based on 2 pillars: organic growth and acquired growth. In the second quarter, we continued to deliver solid organic growth of 5%, and this is, as I said, mainly driven by an increased number of employees, higher hourly fees and a solid order backlog. And as you can see here on the picture, the organic growth was strong in Belgium, Germany, Central Europe, Norway and Finland. Sweco delivered solid organic growth, and The Netherlands also delivered positive growth in the quarter. On the other hand, you can see that U.K. and Denmark delivered negative organic growth in the quarter. In U.K., we are still facing challenges related to the building sector in London and some large public projects that is put on hold. We are, in U.K., exposed to large project and public clients, and we are addressing this by building a more diverse portfolio of clients and projects. One important step in that direction in line with our strategy is the acquisition of MLM, and they provide a more broad project portfolio and also more broad geographical footprint. And MLM was consolidated into Sweco U.K. in May and has contributed with a positive result and 35% growth in the quarter. In Denmark, there has been a decline in demands in the residential building sector especially in Copenhagen, and at the same time, we have not managed to drive growth at the desired pace in other segments. However, the Danish market is stable overall. And we'll continue our work to improve the operation in Denmark. All in all, the organic growth for Sweco was solid in the quarter, with 6 out of 8 market delivering according to plan. The other pillar in our growth strategy is acquisitions, and since we were IPO-ed, we have successfully acquired and integrated more than 100 companies. In this quarter, we announced 2 new strategic acquisitions, and these acquisitions are in line with our strategy to drive profitable growth and build market-leading positions in our 8 core markets. One acquisition is the MLM in U.K., and I presented that in our Q1 report. And with MLM, we add 460 experts in buildings and infrastructure to complement and strengthen our position on the U.K. market. Earlier in June, we announced another strategic acquisition, imp in Germany. This add-on acquisition will help us to further strengthen our position and create new and exciting business opportunities in Germany. The acquisition was completed on 5th, July after approval from the German Competition Authority, and I would like to walk you through the imp case. And already today, Sweco has a market-leading position in Germany and as in all our markets, the underlying demand for Sweco services is important by the megatrends such as globalization, urbanization, digitalization and climate change. And in Germany, one very specific example of these megatrends is the country's decision to take a transition from fossil and nuclear power to renewable energy. Germany has decided to shut down its nuclear plants by end of 2022 and its coal power plants by 2038. To enable this transition, there is a great need to invest in new energy infrastructure. Imp, they are experts in this field, and the acquisition of imp will strengthen our overall position on the German market and most importantly, position us to address this market opportunity and support Germany's transition towards renewable energy. The acquisition of imp marks a new chapter in our growth journey in the country. And then I would like to present some short facts about imp. The company has 380 employees and is primarily active in the power transmission and distribution market. They have a strong position on the market, a good track record and a healthy business with a 10% EBITA margin. And as you can see on the map, we are strengthening our footprint on the German market. All together, I'm very excited about this opportunity. Before I let Christel walk you through the numbers, let's first have a look at the market situation. First of all, again, the demand for Sweco services is driven by strong underlying trends. We are seeing an overall demand for Sweco services, and the demand remains largely unchanged compared with last quarter, and the demand is especially good within infrastructure, water and the industry segments. However, the demand in London's building market and residential construction in the Nordics remains weak. All in all, this is another solid quarter, and with that, I will hand over to you, Christel, to walk us through the numbers.

[Christel Retzlaff, Acting Chief Financial Officer]

Thank you, Åsa. So let's focus on the financials. Starting with the top line. Net sales increased by 6% in the second quarter compared to last year. This growth is composed of 2% acquired growth, 1% currency effect and nominally, 3% organic growth. Now 3% was a nominal organic growth, however, it is very important to remember that we have a large negative calendar effect in this quarter. We had 12 fewer working hours, which means about SEK 97 million negative effect on net sales and EBITA. So adjusting for this calendar effect, we actually had an organic growth of 5%. The large calendar effect is partly due to the Easter holiday falling in the second quarter this year as opposed to the first quarter last year, and then we also had fewer hours in June. So 5% organic growth, that is in line with our long-term historical average. And as I said, acquired growth contributed 2%, and this was predominantly driven by the acquisition of MLM in the U.K. MLM was consolidated as of May, so we had 2 months of MLM in the numbers. Now moving to EBITA. As mentioned by Åsa, EBITA increased 12% adjusted for calendar. And in absolute terms, EBITA improved SEK 54 million, adjusted for calendar. Nominally, EBITA amounted to SEK 422 million compared to SEK 464 million last year. Nominally, this is a reduction, but please remember the large negative calendar effect in this quarter. So adjusted for calendar, we are SEK 55 million better. Of this improvement, the main drivers were a positive field development and an increased number of employees. Another important detail, the EBIT margin is nominally decreasing in the quarter, as you can see. The EBITA margin in the quarter was 8.1% compared to 9.4% previous year. But also here, you need to consider the calendar effect. Adjusting for calendar, the margin is actually better than last year. It's around 9.8%, so it's clearly above last year level. Now let's look at the earnings more in detail. This picture shows EBITA contribution by business area, adjusted for calendar, and as you can see, the improvement is mainly attributable to Sweden, Finland, Belgium and Norway. Sweden continues to deliver industry-leading margins and is performing around SEK 36 million better than last year. The margin in the quarter was 11.9%. Finland, Belgium and Norway also show a continued strong improvement. Both Finland and Belgium have another quarter of double-digit margin, and Finland has the highest margin in the quarter, 12%. You may wonder why Norway has a margin of only 2.7%, but please remember that Norway has a very large calendar effect of 40 fewer hours in the second quarter, and as you know, this is due to the Easter celebration in Norway. This has a negative impact of about SEK 41 million. So adjusted for this negative calendar effect, EBITA improved about SEK 9 million. The EBITA margin of 2.7% is not adjusted for calendar. If adjusting for calendar, the margin for Norway would actually be larger than last year. At the bottom of the page, you see the huge calendar effect of the quarter impacting with minus SEK 97 million. All in all, it is a quarter showing continued positive development, but we clearly have more potential to capture still. Now moving over to cash flow. We experienced a solid improvement of cash flow from operations, both in the quarter and half year. In the quarter, cash flow from operating activities increased by SEK 272 million versus last year, and the main reason for the increase is an improvement of working capital levels. On the other hand, cash flow was impacted negatively by higher taxes paid, but this is mainly an effect of timing differences in tax payments. All in all, we have a solid improvement of cash flow from operations, and this brings us to our financial position. Net debt reduced by SEK 264 million compared to last year. So we have a lower net debt than last year, and this is mainly due to improved working capital levels and less cash outflows due to share buybacks. Our financial position is strong with net debt-to-EBITDA of 1.2x compared to 1.4 last year. And with that said, I will now hand over to Åsa who will conclude.

[Åsa Bergman, President, CEO & Director]

Thank you, Christel. So to conclude, this is another good quarter with solid organic growth of 5% and improvement in EBITA by 12%, adjusted for calendar. Our recent acquisitions are in line with our strategy to growth, both organically and by acquisitions, and we also have a strong financial position, which creates opportunities going forward. And finally, the overall demand of our services remains good. With that, we open up for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Predrag from Nordea.

[Predrag Savinovic, Analyst of Consumer Goods]

Starting with the U.K. So the margin comes in at 1.4%, and I think you mentioned previously that MLM has a margin of around 10%. Of course, there's some seasonality here too, but anyhow, it seems like you were making losses in the old U.K. operations for -- it kind of seems longer.

[Åsa Bergman, President, CEO & Director]

The -- we will not disclose the contribution of MLM in the quarter, and they had a margin, as you referred to, of 10%, 2018. And the performance of Sweco U.K. classic is not where we want it to be, and that is connected to mainly a weaker market in the London buildings area, but also the situation with the larger public projects but that was stopped some months ago. And we are utilizing the resources and focusing on really ensuring that we are working according to plan. But the most important thing is that we long-term believe in the U.K. market. But this quarter, we are not satisfied with the performance of U.K.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. Super. And looking forward, again, on the U.K. you mentioned that tendering process has slowly declined. Some projects have been postponed and that there are Brexit worries, which doesn't sound like it bodes well for growth, but yet again, you commented overall demand is good. So -- I mean just trying to look forward a couple of quarters on the performance. Should we expect similar like this? I mean it sounds like it's a bit more long-term, but if things works out, it should be positive again, right?

[Åsa Bergman, President, CEO & Director]

Yes. Yes, you're right that Brexit creates uncertainty. The 5-year public procurement cycle in water segment has affected us and also these -- those large infrastructure projects that have been put on hold. And again, the project mix we have in the U.K. business is not where we want it to be, so we are implementing the Sweco way of operating to broaden the project portfolio and to broaden the client portfolio, and by bringing in MLM, that is one step because they have the project portfolio and the client portfolio we want to see on that market, smaller or mid-sized projects, very locally. And I would argue that this uncertainty will stay. And of course, if we have a hard Brexit, we will have some kind of effect. But for us, it's about long-term. U.K. is a healthy market, and our focus is to keep improving and to fully implement the Sweco model. But again, it will take time, but we really have the eye on the ball and month-by-month, performing better and better.

[Predrag Savinovic, Analyst of Consumer Goods]

Super. And you managed to increase pricing in some regions. Can you say at what level approximately across the group?

[Åsa Bergman, President, CEO & Director]

We have been working with the prices for -- we're really focusing on that to ensure that we get paid on all markets. So we have that as a top priority. And we have succeeded with that, and we will continue to focus on ensuring that we keep the price level where it should be. And I think it's like half-half from prices and from fee developments when it comes to our...

[Christel Retzlaff, Acting Chief Financial Officer]

Yes. When it comes to growth and we look at the positive contribution from the FTE growth and the fee development, it's about half-half on both. So we see a solid improvement in fee levels.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. Super. And finally, you also mentioned that the backlog is increasing for some or most regions, and I know you don't report these numbers but can you give some flavor on the overall performance? I mean is it in the 10-ish percent, 5-ish of sorts?

[Åsa Bergman, President, CEO & Director]

It's in line with our expectations, and it's in line with our expectations.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. So around 5%, which the organic growth expectations?

[Christel Retzlaff, Acting Chief Financial Officer]

We don't disclose the exact numbers on the order backlog but it's on a good level and it's solid, and we also see it increasing in several of our markets.

[Operator]

The next question is from the line of Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

A couple of questions. Firstly, I was just wondering on the pricing again. I mean there's been a tailwind for Sweco for some time. What's your visibility here in terms of how projects are churning going forward? Do you expect this tailwind to be sustained throughout the year?

[Åsa Bergman, President, CEO & Director]

I think the trend is that the -- and the demands and the requirements for our services and the competencies is really relevant due to the underlying trends of the whole transformation of the society in Europe, meaning urbanization and the climate change. Everything you read about climate change, you can translate it into the investments in our sector. So as long as we have a stable market when it comes to economics, we are in good shape. And the demands for our services is good, and we will continue to focus on pricing on all our markets.

[Johan Dahl, Analyst]

Okay. Good enough. Can you just mention briefly what you see in the more cyclical parts of your portfolio? You've talked about weakness in residential and parts of energy, but looking on your sort of industrial exposure, how does the -- how is the demand outlook there?

[Åsa Bergman, President, CEO & Director]

The demand for our services towards the industry sector is good. So I think it's important to say that we work more in the construction area of the industry sector, so now the demands for the industry sector in our portfolio is good.

[Johan Dahl, Analyst]

All right. Just finally, can you see any effects in the markets of the recent major consolidation that has occurred? Any sort of dynamic effects, especially in the Nordics?

[Åsa Bergman, President, CEO & Director]

No. No, and I think it's important to say that we have had the competition on those markets for many years, and we have had in market-leading position for many years. So it has -- it's the same situation for us. I don't think it's very good that we have 2 strong Nordic players but also my view is Europe and aiming for the market-leading position in the countries outside Nordic and keep the traction on the markets in the Nordics, of course, and growing.

[Operator]

[Operator Instructions] The next question is from the line of Ola Soedermark from Kepler.

[Ola Soedermark, Equity Research Analyst]

Sorry for coming back to your U.K. business area. I'm just trying to reconcile the numbers here because you have had MLM in the quarter for 2 months, and they have a margin of around 10%. Are there any write-downs or are there any purchase acquisition-related costs or something like that in the numbers?

[Christel Retzlaff, Acting Chief Financial Officer]

No. There are no write-downs or acquisition-related costs in the U.K. numbers.

[Åsa Bergman, President, CEO & Director]

No. Again, it's related to that we have a weaker market in the buildings, London area, and that we have a weakness in our performance in the infrastructure segment due to those projects that was put on hold and that we are in a procurement cycle of the water segments. So for us, it's about ensuring that we work towards the market to ensure that we broaden our project portfolio and our client portfolio because we are too focused on certain big public clients and we are -- we have in the portfolio 2 large projects, and that is not the way we want to operate. That makes us more vulnerable than if we work the way we want to operate. So that is the strategy for U.K., to broaden that portfolio.

[Ola Soedermark, Equity Research Analyst]

And the time frame, I mean, it's hard to see that it's going to be any relief in the coming quarter then. It's more likely going to take a couple of quarters, I assume.

[Åsa Bergman, President, CEO & Director]

It will take some time, and it's hard to say. And I will not forecast that because it's about implementing new ways of working and working towards the market, and slowly, step-by-step.

[Ola Soedermark, Equity Research Analyst]

And then maybe some more pleasant questions about the Belgium and the Finland. We have seen a quite good turnaround and improved margins over the past couple of quarters in both Finland and Belgium. How sustainable are these kind of margin levels we have seen over the past 3 quarters?

[Åsa Bergman, President, CEO & Director]

As we are -- when we implement the way we want to operate with the smaller teams and the team manager responsibility, we get a very good traction on the market and towards the mid-sized and small projects. And that -- in that way, we can utilize our resources in a very good way. I would argue, in Finland, it was a situation, if you go back wherein Finland had project write-downs, but we really worked on that one to ensure that we have a project follow up and a project execution in Finland that is in place. And when it comes to Belgium, they had really excellence in their operations. So there, it's about for us to ensure that we put energy into the business so they actually can grow and really utilize what they actually have in place. So again, it's back to the strategy of implementing our way of operating and really focus into the customer projects and use -- spend our time externally on the right things. So yes, we are in good shape in Finland and Belgium.

[Operator]

The next one is from the line of Erik Elander from SHB.

[Erik Elander, Research Analyst]

So first of all, my question is maybe this is to Christel. What is actually included in the acquisition-related item expense cost for future services?

[Christel Retzlaff, Acting Chief Financial Officer]

Yes. That's the peculiarity of IFRS, and it's related to -- and this is quite technical but allow me to just shortly describe this. It's related to the acquisition of MLM where part of the purchase price is tied -- a contingent on the future employment of the sellers. And this means, in IFRS world, that you need to take this part of the consideration as a sort of compensation, and that's why we need to book it as a cost. And since it's not really a personnel expense, it is very much related to the acquisition. It is taken in acquisition-related items.

[Erik Elander, Research Analyst]

Okay. Perfect. And then the billing ratio. So now when you go in into Q3, you need to use your comparables in terms of billing ratio, especially in Sweden. How do you view the situation going into Q3 now given your billing ratio situation at the moment and also compared to last year? Do you think you're operating at a higher billing ratio now going into the next quarter?

[Åsa Bergman, President, CEO & Director]

So the billing ratio for this quarter was solid if you -- 74.8 compared to 75.2 last year. So we have a strong focus on internal efficiency and on allocation of staff. We plan our resources into the next quarter and after vacation really well. We have processes for that. And as I said, we are filling new order backlogs, and the demands for the services is good. So I won't give you any outlook but that's where we are.

[Christel Retzlaff, Acting Chief Financial Officer]

And you can also see, if you look at the historical pattern, that it's a part of a seasonality effect, you might even call it, when you look at the third quarter and the development quarter-by-quarter. But it's difficult to make a forecast on that as we have said.

[Erik Elander, Research Analyst]

Okay. And my last question then is what is actually behind the improved working capital levels that you saw in this quarter? Do you also expect to operate at the lower working capital to sales ratio going forward? Or can you talk a little bit about the improvements in the working capital situation?

[Christel Retzlaff, Acting Chief Financial Officer]

As you know, we -- some -- I think it was 1 year ago, we talked about having a higher working capital ratios related to the implementation of the new ERP system, and since, I mean, the whole organization has worked very focusedly on this. And this is where we also see the improvement in working capital coming from.

[Erik Elander, Research Analyst]

Okay. So we -- you can expect better level going forward in the [indiscernible].

[Christel Retzlaff, Acting Chief Financial Officer]

I don't want to give any forecast on working capital since working capital is easily going up and down, so this is a difficult one to forecast. But we have taken measures in those countries where we have a new ERP system to lower the levels.

[Operator]

The next question is from line of Dan Johansson from SEB.

[Dan Johansson, Equity Research Analyst]

Just a quick one for me. The acquisition you made in Germany in June, is that one already closed? If not, when do you expect it to be consolidated?

[Christel Retzlaff, Acting Chief Financial Officer]

Yes. It's actually closed on the 5th of July. We received the approval from the German Competition Authority sooner than expected. So imp will be consolidated as of July, so we will have 3 months of imp in the third quarter.

[Operator]

There are no further questions at this time. Please continue.

[Åsa Bergman, President, CEO & Director]

Thank you.

[Katarina Grönwall, Chief Communications Officer]

Okay. If we have no more questions, that is the end of today's presentation. We communicate our report for the third quarter, October 25, and then we have the privilege to work our way back to our headquarters. So with that, we wish you all a very good summer, and goodbye, and thank you.

[Operator]

Thank you. That concludes our call for today. You may all disconnect. Thank you all for participating.