Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon. This is the conference operator. Welcome, and thank you for joining the Sweco Q2 Report 2022 Conference Call and Webcast. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Marcela Sylvander, Chief Communications Officer of Sweco. Please go ahead, Madam.

[Marcela Sylvander;Chief Communications Officer, executive]

Hello, everyone, and welcome to this presentation of Sweco's Q2 report that was published just an hour ago.

My name is Marcela Sylvander, and I'm the Chief Communications Officer at Sweco. And Sweco's President and CEO, Asa Bergman; and CFO, Olof Stalnacke will take us through the results of the second quarter, after which we will open up for questions. Please, Asa.

[Åsa Bergman, executive]

So welcome, everyone, to Sweco's Q2 presentation. Before we move into the quarter, let me give you a short recap of Sweco.

Sweco is today Europe's leading architecture and engineering consultancy with 18,500 experts and a turnover of close to SEK 23 billion. We have 8 geographical business areas in Europe and with business in many countries across the world.

Let me now present the Q2 results. We delivered a solid organic growth of 5% in the quarter, adjusted for calendar effect. It is driven by transitional trends in society with sustainability and digitalization being the main drivers.

Acquired growth amounted to 2% and currency effects were 2%. Net sales increased to SEK 6.1 billion with an EBITA of SEK 486 million and an EBITA margin of 7.9%.

There is a significant negative calendar effect in this quarter, and mainly due to the Easter holidays in Norway. And adjusted for that, the EBITA improved slightly with 0.4%.

We have a strong financial position and low net debt, which allows us to continue to act on opportunities in the market. Made 4 acquisitions during this quarter with Arcasa Arkitekter being the largest one, and I will present Arcasa Arkitekter a bit more in detail later on.

Among the projects that we have won in the second quarter, I would like to highlight that Northvolt has commissioned Sweco to assist in conversion of a paper mill into a battery gigafactory in Borlange, Sweden. It is a very good example of how we support clients in the transformation of the energy sector and in this case, energy storage.

Further, the reconstruction will be characterized by circularity since the aim is that everyone -- everything in this project will be demolished and then to be reduced.

Moving then into the market situation. Demand for Sweco services remained good in the second quarter, driven by the accelerating sustainable transformation across our segments and business areas.

Apart from the effects of high absence, the COVID-19 impact on the market was limited. Essentially, all business areas experienced good demand for Sweco's services in the infrastructure, water, environment, energy and industry segments.

Demand for services in parts of the building and real estate segments remains slightly weaker with continued market uncertainty. We have a stable inflow of new orders and continue to strengthen our order book in Q2.

An example of a new assignment is related to drone aviation in which Belgium is in a strong position. Sweco will support the Belgian client LRM with a business plan and strategy for how a former air force base can become Belgium's first done cargo airport.

Let us take a closer look at the second quarter. Our organic growth was 5%, and I'm pleased that we had positive organic growth in all our business areas. And as you can see here, U.K., Belgium, Denmark and Norway delivered strong organic growth. We also had solid levels in Sweden, the Netherlands, while Germany and Central Europe delivered slight positive improvement.

And the development was supported by higher average fees and improved FTE growth. We have a positive momentum in recruitment with a net debt addition of close to 400 experts. High absence connected to COVID-19 in the beginning of the quarter and low billing ratio was negative -- had negative impact.

With that, let us move over to the results. EBITA amounted to SEK 486 sic [ SEK 486 million ] with an EBITA margin of 7.9%. Peer average fees and FTE growth contributed positively by higher operating expenditures compared to the levels during the pandemic. Higher absence and lower billing ratio had negative impact. In total, 4 out of 8 business areas had EBITA improvements.

Germany and Central Europe, the U.K., Belgium and Norway had increased EBITA levels, and I'm happy to see that both U.K. and Germany and Central Europe continued to take steps in the right direction.

Norway had strong underlying organic growth and an improved EBITA, but was impacted by a negative calendar effect related to the Easter holidays. Sweden and Belgium delivered strong margins close to our profitability target of 12%. Adjusted for the significant negative calendar effect, EBITA improved slightly with 0.4% in the quarter.

With that said, I'm pleased that we continue to execute on our acquisition agenda. And as mentioned earlier, we announced the acquisition of Arcasa Arkitekter during Q2. Arcasa is a Norwegian consultancy with 70 experts specialized in sustainable residential development. This acquisition makes Sweco a leading architecture player and the largest within residential architecture in Norway.

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

[Olof Stålnacke, executive]

Thank you, Asa, and good afternoon, everyone. Starting with net sales development. Net sales in the quarter was SEK 6.1 billion, taking LTM net sales to SEK 22.8 billion. Adjusted for calendar, we saw organic growth of 5%, despite continued negative impact from higher absence.

Significant negative calendar effect from 5 more hours, which was most clearly visible, as also said, in Norway, where the timing of Easter had a significant impact. We see positive impact from M&A of 2%, from FX of 2%, and that brings total growth to 8% for the quarter.

Looking at EBITA development. EBITA SEK 486 million in the quarter, bringing LTM EBITA to SEK 2.1 billion. The reported EBITA is SEK 43 million down, but adjusted for the calendar effect, we are slightly up in the quarter. Impact of higher sickness rates declined versus Q1, but sickness rates still increased by 0.5% year-on-year, having a negative EBITA impact of approximately SEK 30 million.

Looking at the business area bridge by -- EBITA bridge by business area. We see positive contributions from 4 BAs, Belgium, Norway, U.K. and Germany. Belgium continues with consistent strong performance and high margin. U.K. and Germany improved significantly versus weak quarters last year.

And in Sweden, Finland, Denmark and the Netherlands, we are down versus last year, driven by different combinations of higher absence related to COVID, lower billing ratio and also reversal of the COVID cost savings that were still present last year. Sweden, however, maintained a high margin in the quarter.

The impact from higher operating expenses and absence can be seen across most BAs, but in the other direction, EBITA is positively impacted by continued fee increases and by accelerating FTE growth.

Our financial position remains strong. Net debt is just north of SEK 2 billion, slightly up versus last year. Stronger operating cash flow in the quarter is outweighed by larger outflows for dividends and for acquisitions.

Leverage is at 0.9 below last year and less than half of our target maximum. And available liquid assets of SEK 3.3 billion and thereby remained 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 second quarter. As previously said, it was a quarter with solid organic growth driven by transitional trends in society. All business areas delivered organic growth and 4 out of 8 business areas reported improved EBITA. Essentially, all business areas experienced good demand for Sweco services.

In the second quarter, we had a stable inflow of new orders, and we continue to strengthen our order book. We have a strong financial position that enable us to act on opportunities in the market as they arise.

In the image you see here on the slide is a new project win where Sweco will support in parts of the reconstruction of the bridge that crosses the Kiel Canal in Germany, which is one of the world's most frequently used artificial waterways.

Let us conclude with some last words about our focus going forward. We continue to focus on working closely together with our clients and be the partner of choice in the ongoing transformation of society.

Cooperation with Northvolt that I mentioned before, being one example, and as always, our focus going forward is on profitable growth. This is based on a combination of organic and acquired growth, and we continue to actively look for interesting acquisition targets, at the same time build on our positive momentum in recruitment to ramp up FTE growth and organic growth.

We also continued with the implementation of our operating model, the Sweco model across all our markets. It defines how we deliver our strategy and is the key for our future growth.

And as a final word, despite the market uncertainties that we see in certain segments, I believe that the demand for our expertise will continue to grow as we need to accelerate the sustainable transition in society. I'm really proud to say that we, in many aspects, are leading the way together with our clients.

And with that, let's open up for questions. Thank you.

[Marcela Sylvander;Chief Communications Officer, executive]

Thank you, Asa and Olof, and we will do just that. It will be possible for you to ask questions either directly through the conference or through the chat function. So please, Judith, if you can give us the instructions?

[Operator]

[Operator Instructions] The first question is from Johan Dahl with Danske Bank.

[Johan Dahl, analyst]

Just a couple of questions. Firstly, on the billing ratio. I think it was the sort of the weakest Q2 billing ratio that I have on record for Sweco. Could you just talk about what drove that low efficiency in the quarter? Was it market related? Is it execution related, just to understand how you ended up there?

[Olof Stålnacke, executive]

On the billing ratio, where we saw the decline in the quarter versus last year was primarily in Finland and Sweden. And the main reasons we see are -- it's not across all of the business, but parts of the business.

And the main reasons are big projects coming to an end, leading to some lead time before people are back at work. And also quite a big inflow of new recruits and the onboarding, which also have created lags. So there is very little market impact in this. I would say, it's primarily a question of execution.

[Johan Dahl, analyst]

And from your experience, I appreciate taking in a lot of new recruits, if it takes some time to put it at work. But when would you think that this has normalized, if you can talk about the type of normalization?

[Åsa Bergman, executive]

Johan, Asa here. I mean this is something that we, of course, address, because both being quick and efficient when it comes to onboarding and also offboarding, I have to say, is something that we're really focusing on. So this is something that we are addressing, and this is not the level that we would like to see going forward.

But I mean, I'm back to that, we have strengthened our order books, and we have won lots of projects during this quarter, and that is a good starting point.

[Johan Dahl, analyst]

On the topic of pricing, you've had this tailwind on pricing. Has it been similar, the tailwind, if you look on the net of price and wage inflation? Was it similar in Q2 compared to previous quarters?

[Olof Stålnacke, executive]

It is similar and if anything, it is increasing.

[Operator]

The next question is from Dan Johansson with SEB.

[Dan Johansson, analyst]

Two questions from me. Just a follow-up on the question on recruitment. What are you seeing in terms of wage increases currently for people joining Sweco today compared to the people you recruited 2, 3 years ago? Is there a significant step-up already now or something you anticipate ahead?

[Olof Stålnacke, executive]

I should start with. There are increases, but still as we've said before, nothing sort of that we don't think we can balance out with price increases. So there are increases in the market. There is a general salary inflation as we have talked before, but still on manageable levels, I would say.

[Dan Johansson, analyst]

And perhaps jumping a bit back to the margin development in Q2 and perhaps comparing it bit to Q1. I understand the drag from recruitment, but absence is also on a lower level -- still a higher level than last year, but lower level than in Q1. And still you have SEK 60 million lower EBITA compared to Q1 on the same revenue base, basically. Are there other factors as well, unusual levels of project adjustments or extraordinary costs that explains that gaps in terms of EBITA from Q1 to Q2 that I should have in consideration?

[Olof Stålnacke, executive]

I understand the question. I mean one thing compared to Q1 is obviously we had a significant positive calendar effect in Q1 and a significant negative calendar effect compared to last year in Q2. Otherwise, as you say, it is the billing ratio which, according to sort of the sensitivity analysis we normally make in the Annual Report, it has around a SEK 50 million impact.

And then as we say in the report, we also see increases in the -- in operating expenses. And part of that is the catch-up we have been talking about on some of the areas where we saw big savings like travel and training. Part of it is, for example, recruitment costs, given the high recruitment. We also see costs that have increased continuously during the pandemic as well like the IT costs and in addition, some inflation.

So there are some factors which are temporary on the cost side and some factors which are more permanent or at least longer term.

[Dan Johansson, analyst]

Perhaps a final one, if I may. On the market demand, if you could say a few words on what you're currently seeing in the real estate market, which I guess is most debated right now? What are you seeing on projects, are they being postponed already now? Or is it still too early to say? Yes, what's your thinking about the real estate segment right now?

[Åsa Bergman, executive]

Dan, Asa here. Thank you for the question. If I start with the latter. We don't see an impact in this quarter. We see, as we report, good demand for our services in most segments. We see even strong demand in some segments. But when it comes to the commercial real estate in the housing segment, it is a bit of a weaker market.

But with that said, we haven't seen -- I mean, there's lots of uncertainty and lots of discussions going on. And of course, with the inflation and the rates and everything linked to that, you have to be cautious for the future. But for us, it's really about staying close to our clients.

And that is also -- I think, but commenting again that our order books has strengthened and that we have won quite lots of nice projects during this quarter. So no effects in this quarter, uncertainty in the field of real estate and housing.

But then I need to say that and clarify that, if we look at the segments of commercial real estate and housing for Sweco that is less than 15% of our net sales. And it's also another thing worth mentioning is our project portfolio and our client portfolio being this mix of 50%-50%, which we aim for public-private. But also if we look into the different services that we provide, we provide them into different sectors, meaning that if one sector goes down, probably we can move those resources into another sector, which makes us resilient. But again, with that said, we stay close and monitor the development closely as always.

[Dan Johansson, analyst]

Understand. And I guess when you're referring to the balance in your portfolio, I guess, it's energy-related services that you provide and also, I guess, public infrastructure that you hope will balance a potentially weaker development and demand in private real estate. Is that correct?

[Åsa Bergman, executive]

Yes, but also that we have public real estate, meaning hospitals, schools, smart cities, I mean, planning of urban areas and digital services. And the whole kind of transformation of the society is kind of pushing in also into that building segment. So that also is something that is -- we see good demands in.

[Operator]

[Operator Instructions] The next question is from Johan Sunden with Carnegie.

[Johan Sundén, analyst]

A few questions from my side as well. And I think we will stay as to topic of OpEx and billing ratio. First on OpEx, can you please remind us where we are in the phasing of the OpEx reversion? How much of the OpEx was reverted in Q2 last year? And how much was the negative impact in Q2 this year? And how should we think about OpEx reversion during the second half of this year?

[Olof Stålnacke, executive]

I think it's -- I mean, you can roughly say that of the savings we talked about in Q2 2020, roughly half was reversed in Q2 last year. And now with -- even if we do had COVID impact, there was relatively open societies everywhere. They are fully reversed in Q2 this year.

That being said, we have also talked about that we'll probably see a catch-up effect on training, internal activities and travel with -- when it opens up. Meaning, that we don't think that none of the savings will be permanent.

So I think longer term, we will travel less, we will train more efficiently, et cetera. So I expect these costs to be at a lower level going forward. Still too early to tell how much that permanent saving will be.

[Johan Sundén, analyst]

And this kind of catch-up phase, can you please give any guidance of how long time that will remain? Or is it just a quarter or is it the entire year that we will have a little bit of catch-up? Or how should we think there?

[Olof Stålnacke, executive]

No, I think it's primarily in the second quarter. We may see some of it -- again, depending on how COVID develop, we may see some of it in the second half. But I think Q2 was the big catch-up in terms of sort of training, internal activities and travel.

And I think one thing to add as well is that, travel is probably not the only activity. Travel activity increasing it's also the fact that traveling has become much more extensive, so part of that is also inflation in this one.

[Johan Sundén, analyst]

And on the billing ratio then, now we're approaching Q3 and Q3 is often a big vacation quarter that's a little bit tricky to manage as a consulting firm. Now with coming into the quarter with a lower billing ratio, should we be worried that there should be a slow start after the summer? Or what strategies do you have to get up in good utilization after the vacation period?

[Olof Stålnacke, executive]

To start that off, I think we ended the quarter on billing ratio stronger than the billing ratio as a whole. So there was an improved billing ratio in June. So we are leaving the quarter stronger as -- stronger than the average, so to speak. So that's one start. Maybe, Asa, if you want to talk about the startup.

[Åsa Bergman, executive]

Yes. I mean this -- Johan, thank you for a good question. This is always a topic for us how we start after vacation. And as we have so many new hires into Sweco, this is, again, very much in focus, and we are planning indeed as how we startup after summer.

But having strengthened our order books in this quarter and also received lots of interesting projects, I mean, I think it's the same as always.

[Johan Sundén, analyst]

And a little bit long term, you talked about that you want to ramp up recruitment in general and that you said -- that has lagged a bit during the COVID period. Do you see a risk that we should see a little bit lower billing ratio during a few more quarters while you start accelerating recruitment? Or is it more or less this onetime quarter that we see this effect or how do you think -- how do you view that?

[Åsa Bergman, executive]

I mean it's quite hard to kind of forecasting that. And we, as you know, don't do forecast. I mean, what we do is that we're really focusing on becoming more efficient when it comes to how we onboard and how we offboard, and also making sure that we really focus on internal efficiency, which always should be a focus for us, and will be going forward as well.

[Operator]

The next question is from Fredrik Lithell with Handelsbanken.

[Fredrik Lithell, analyst]

I was hoping to get a little bit of more color around specifically Norway and the big swings between EBITA between Q1 and Q2 to better understand what is what there -- what is seasonal effects, what is the 5 days of less billable hours, and what is the Easter effect there in order to better [ gross ] that.

And then I have a second broader question. The public sector as such, do you see any signs that parts or areas of public sector are looking into how they're spending and what pace they are spending? And are there any signs of anyone pulling any projects due to inflation in general? We heard talks about that in other circumstances. I was just hoping to get your color on how public sector behaves.

[Olof Stålnacke, executive]

Good afternoon, Fredrik. To start with Norway, it's -- that's where we see the big calendar swings between Q1 and Q2. So they had 24 less hours -- working hours in Q2 compared to last year. They had something similar in Q1, but on the positive side. So that's why you see the big swing.

So looking at Norway -- and the reason for the big swing is obviously because everyone is -- in Norway takes holiday all of the Easter week, should be added. So you should really look at Norway year-to-date, where they have an 8% organic growth in total. They have, including M&A, a total growth of 17% M&A and FX, I should say. And they have a margin expansion of 1%. So that reflects sort of the performance in Norway. And then we get these big calendar swings, and I think probably a bit underestimated a calendar swing for Q2. But that's the reason. And I don't know, Asa, if you want to talk about the public sector.

[Åsa Bergman, executive]

Yes. As I understand your question was that if we see any differences in the public sector spending and I'd say that it's -- I mean, if we look at the Infrastructure segment, we see a continued strong focus in some business areas. We see then strengthening investment plans in the infrastructure segment.

And then as mentioned before, that the whole transition of the energy sector and the repower EU and focusing on of getting independent from Russian oil and gas, really pushed energy production into renewables and transmission/distribution and energy storage, and that goes for the whole of Europe. So there, we also see [ similar ] things happening. This is an answer to your questions, but we don't see any big swings in public spendings.

[Fredrik Lithell, analyst]

I mean it's -- the reason I ask the question is because the public sector is so important for you, keeps your revenue streams sort of stable over time. And thereby, given the very sharp inflationary environments, we do see some pockets of what public spending is, that they are holding back a little bit. And that's why I just wanted to see if you saw some tendencies of changes in behavior. But that's good to hear.

[Operator]

The last question from the conference call is from Raymond Ke with Nordea.

[Raymond Ke, analyst]

Two questions from me. First one, in your latest Annual Report, it states that you have an exposure to housing, real estate and construction of about 19%. Could you give us an approximation of how much of this is commercial real estate?

[Olof Stålnacke, executive]

Yes. It's -- commercial real estate is roughly 10% in total, and residential housing is around 5%, roughly. And then there are also construction clients within other buildings like public buildings, et cetera, so that makes up of the total. So it's not sort of entirely one-to-one. But commercial real estate and housing is 15% roughly.

[Raymond Ke, analyst]

And my second question is a bit about the Netherlands. So if we look over the whole first half of this year and compare it to the last year, there should be no calendar effects. But I see that Netherlands last year achieved SEK 30 million more in EBITA. Could you comment a bit about the trends that's happening over at Netherlands?

[Olof Stålnacke, executive]

I think the main reason for this change is one is that they had a very strong first half last year, and especially the first quarter was an all-time high in Netherlands, which we also commented at the time that it was not what should be expected going forward.

But if you look at the main reason for the EBITA decline is that they have quite significant COVID-19 savings, which are now being reversed. So that is the main reason versus the -- versus last year.

[Marcela Sylvander;Chief Communications Officer, executive]

Okay. Thank you. We have one question coming through the chat function from [ Philips Sal ]. And it might be so that partly of that question have already been answered. But I'll read it anyway.

And it goes like, could you please elaborate on the calendar effect, as I presume the negative calendar effect in Q2 would have been mirrored a mirror effect of a positive calendar effect in Q1, which you did not speak about when you reported Q1. Am I missing anything here?

[Olof Stålnacke, executive]

No. I think if you look at the Q1 report and the Q1 presentation, it's very clearly stated that we had a positive calendar effect for 10 more hours. So I don't recognize that we shouldn't have mentioned it, and we do mention it in every quarter since it is an important part of our year-on-year development.

[Marcela Sylvander;Chief Communications Officer, executive]

Thank you for that. There are no more questions in the chat function and then no more questions in the conference call.

So with that, we want to thank you for joining us. And I also want to take the opportunity to wish you all a nice weekend and a summer. Thank you.

[Åsa Bergman, executive]

Thank you, everyone.

[Olof Stålnacke, executive]

Thank you, everyone. Have a nice summer.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. And you may disconnect your telephones.