Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2019-Q3

[Katarina Grönwall, Chief Communications Officer]

Good morning, everyone. Very welcome to Sweco, and very welcome to the presentation of our third quarter. Today, we will have the opportunity to listen to our CEO and President, Åsa Bergman, and our new CFO, Olof Stålnacke, walk us through the report. So thank you, everyone, for being here. And, please Åsa.

[Åsa Bergman, President, CEO & Director]

Thank you, Katarina, and again, welcome to Sweco's Q3 presentation. And let us start with the overall picture. Q3 is another quarter of continued profitable growth. Adjusted for calendar, we grew 6% organically. And the EBITDA improved with 22% or SEK 58 million adjusted for the calendar. And as we continue to grow, I'm happy to announce that we now exceeded SEK 20 billion, rolling 12 for the first time in Sweco's history. I'm also happy to announce another important acquisition this quarter. We acquired NRC Group's railway division. And with that, we'll take the market-leading position in railway in Finland. We will reinforce our position in Sweden and in Northern Europe in the rail business. So now we are 2,200 railway experts in the field of railway design. So altogether, a solid performance in a seasonal weak quarter. As you know, I've been speaking about this before. This quarter is a quarter where we have to start up our business after the summer holiday. It's also so that we have grown a lot. So we have many new colleagues coming into Sweco that we introduced, and that is affecting us always in the third quarter. So we would like to -- oh, I will mention this project on the picture to the right. This is a very good example of a project that we do. This is the UN17 building in Copenhagen. This project will house more than 800 people, and it's the first project that has tangible solutions connected to all UN17 sustainable goals, the SDGs. And these construction solutions will set new standards for a sustainable housing project. This will also be a very important project, I think, for the world to look on when it comes to new solutions in this field, a good example of our architectural business. So we would like to grow, but it's important that we grow with profit. And what you see in this quarter is that we continue to deliver profitable growth and in line with the recent quarters. So it's driven by higher average fees, more FTEs, and we -- is also backed with a growing order backlog. But let's start with the growth. We delivered 6% organic growth adjusted for the calendar. Our growth is supported with those drivers, as I mentioned. And if we are looking into the different business areas, I would like to start to mention Belgium and Finland, where we have a strong performance in the growth. And in Belgium, it's mainly driven by higher average fees and new employees coming into the business. In Finland, it's driven by higher average fees and billing ratio. We have solid performance in Sweden, Norway, Netherlands, Germany, Central Europe. And moving into U.K., Denmark, I'm not that satisfied with the development there. In Denmark, we would like to see more FTE growth and higher billing ratio. In U.K., we have uncertainty due to Brexit. We experienced that decision-making in U.K. is somewhat slow. We have large public tender studies financed, procured, but they don't start the project. So it's a somewhat slower environment that we operate in. Long term, we believe in U.K., but short term, we don't expect any improvements. So let us move over to the result. So we delivered solid EBITDA improvement in the quarter. EBITDA increased with 22% or SEK 58 million, adjusted for calendar, and the EBITDA improvement was positive in 6 out of 8 business areas compared to last year. We also have strong margins in Finland, Belgium and Denmark and Norway. In U.K. and Central Europe, our result is supported by the acquisition of MLM U.K. and imp in Germany. So in Sweden, the EBITDA was more or less in line with last year, adjusted for calendar. We have positive growth of 5% in the quarter, and we see good demand for our services. But we have the seasonal effect in Q3 after the holiday. And we also have new -- many new colleagues affecting the profitability in Q3 in Sweden. Altogether, I'm pleased to see that we improved our profit. So let's move over to another highlight this quarter. So we announced the acquisition of NRC railway division in this quarter. This is another exciting acquisition that is in line with our strategy. It will make us market-leading in Finland in this field. It will reinforce our position in Sweden and in the Northern Europe. And now we are, as I said, 2,200 railway experts. It's also so that this is the platform for us to organically grow in the area of infrastructure and rail. So this is an area where we see good potential going forward to grow. So railway design and infrastructure, there -- it's supported by strong underlying trends and large investments is needed. Increasing railway in all Europe's countries is part of a sustainable transportation, and it prevents the climate change. That is connected to where we see good growth opportunities in this area. To give you some more details about the acquisition, 320 new railway design experts into Sweco, 80% in Finland, 20% in Sweden. They are acting in rail track design, electricity and signaling systems. And it's a very good match with Sweco as we have complementary competencies, and we share the same culture. And I've said it before, for us, it's important to find companies where we match culturally because that's create a very good environment for integrating consultancy services. And this acquisition is a very good example of that. The acquired division will be part of Sweco from 1st of November, and we see that integration planning is going well and according to plan. Now let me give you a quick summary of the market situation. As you all have heard me say before, the demands for our services is strongly supported by the underlying trends, such as globalization, urbanization, digitalization and climate change. So one example of this is the engineering and consultancy service we deliver to an urban transportation region. So in the picture here, to the right, it's an urban planning project. It involves complex traffic and transportation solutions. And it's about making life easier for people in this region to travel in a sustainable and efficient way. And it requires knowledge in mobility, innovation, circularity and sustainability. So looking at the overall market for Sweco services, it remains good. So we continue to see good demand in infrastructure, water industry. And if we are looking into the sub segments, the demand for the real estate segment is overall good, with the exception of U.K., and that is Brexit related. And the residential construction market in the Nordic. It's still on weak -- it's still weak or on lower levels. With that, I would like to hand over to my new colleague, Olof Stålnacke, to walk you through the figures.

[Olof Stålnacke, Chief Financial Officer]

Thank you, Åsa, and good morning, everyone. Really happy to be a part of the Sweco team now since a week. I'm really happy to get the opportunity to present this quarterly report. Net sales, total growth 13% in the quarter, bringing LTM net sales to about SEK 20 billion for the first time, as Åsa said. Net sales in the quarter is SEK 4.6 billion, adding more than SEK 0.5 billion versus third quarter last year. Calendar-adjusted organic growth of 6%. And with 8 more working hours in the quarter, total organic growth is 8%. M&A adds another 4%; and FX, 1%. EBITDA improves by SEK 120 million in the quarter to SEK 384 million. And that brings LTM EBITDA to above SEK 1.8 billion. The improvement adjusted for calendar is SEK 58 million or 22%. And that is, as Åsa said, driven by improved average fees, increased number of FTEs and supported by a solid backlog. If we look at the EBITDA development by business area, we see 6 out of 8 business areas contributing to the EBITDA growth, and 4 out of 10 business areas show a double-digit margin in the quarter. The main drivers behind the improvement are Denmark, Belgium and Finland. As Åsa said, in all 3 countries, we improved average fees in Finland, supported by an improving billing ratio; in Belgium, by increased number of FTEs; and in Denmark, by positive project adjustments. Sweden is slightly down, driven by slightly lower billing ratio. Improvement in Norway, driven by average fees and increased number of FTEs. In Netherlands, we see small improvements across all dimensions. In U.K., the positive effects of the MLM acquisition. In Germany, we also see positive effects from the imp acquisitions, but those are slightly outweighed by lower billing ratio and project adjustments. All in all, we are very pleased delivering such a strong EBITDA improvement in the quarter when Sweden delivers in line with last year. I'm not going to spend a lot of time on the cash flow, except to say that year-to-date, operating cash flow remains strong despite a seasonal working capital build up in the third quarter. And this also shows in the financial position, which remains strong. Net debt is down versus Q3 last year despite the M&A outflows during the year. Leverage is at 1.2, and we have SEK 2.4 billion in available cash. And this makes us well positioned for future growth financially. And with that, back to you, Åsa.

[Åsa Bergman, President, CEO & Director]

Thank you. So thank you, Olof. To conclude, Q3 is another quarter of continued profitable growth. As we grow, for the first time, we are exceeding net sales with -- we are now over SEK 20 billion on rolling 12, and it's the first time in Sweco's history; EBITDA improvement of 22%, adjusted for calendar. And I'm also happy to announce the strategic acquisition of NRC railways division, which reinforce our position in our railway design. It makes us market-leading in Finland in this area and will be a strong platform for us to grow infrastructure and rail going forward. We have, as Olof said, a strong financial position, which makes opportunities going forward. And overall, we see good demand for our services. So with that, we open up for questions. Thank you.

[Katarina Grönwall, Chief Communications Officer]

Yes. Thank you, Åsa and Olaf. We now open up for questions, and we will do it like this. We will first start with questions from the audience. Then, we will take questions from the telephone. And then we will take questions from the web. And for those of you who would like to ask questions, we would like you to use the microphone so our friends who are with us on cyberspace also can hear what we say. Okay. So now we open up.

[Ola Soedermark, Equity Research Analyst]

Ola Soedermark, Kepler Cheuvreux. You're at large keeping your outlook from the past quarter. Can you give some more color? Have you seen any different nuances, changes or -- in the underlying markets?

[Åsa Bergman, President, CEO & Director]

So the -- so there is lots of discussions on the market. And as I said before, the overall situation for us is that it's good demand for our services. And as the order backlog is growing and the orders received is in line with our expectations. This is actually what we see. And I will not give any forecast because you are better at looking at the market going forward than we may be, but this is the situation for us. And the demand, as I said, is strong in infrastructure, water and industry, and that goes for all business areas. And residential, it's divided. Good in building services and public buildings, and then a bit weaker in the residential construction market, and especially then in the Nordics.

[Ola Soedermark, Equity Research Analyst]

Yes. Have you seen any changes in the residential market here in the Nordics during the quarter? Has it flattened out or...

[Åsa Bergman, President, CEO & Director]

It's on the same level as the previous quarters.

[Ola Soedermark, Equity Research Analyst]

And when it comes to Sweden, past -- last year, we had a slower start, and it seems like a slow start-up. There's summer season here in Sweden this quarter as well. How has it developed during the quarter?

[Åsa Bergman, President, CEO & Director]

It's in line with our expectations. It's, again, when we come -- when we have the vacation and come back to work, we need to start-up after the vacation. And then, yes, it's in line with our expectation. And as I said before, it's -- we have the same billing ratio this quarter as last year. So it's flat compared with last year. So yes, and lots of new hires in that we have to onboard. So that is connected to our growth. So Sweden are growing organically, 5% in this quarter, adjusted for calendar.

[Erik Elander, Research Analyst]

Erik Elander from Handelsbanken. So I have a couple of questions here. First of all, when do you expect the U.K. to be back in positive organic growth?

[Åsa Bergman, President, CEO & Director]

That is a tricky question as the uncertainty due to Brexit is what it is. And we do what we can to implement and work with our strategy in U.K. and what is important for us in the U.K. market is to implement the Sweco model, meaning that we operate with small teams really locally, and that we broaden our client portfolio and our project portfolio so we can have the right sizes of project. We would like to have more small project to midsize project in the U.K. portfolio. But this takes time, and we work with that because what we see is that connected to the Brexit situation and the uncertainty of Brexit but also connected to this slower decision-making that we experienced on the U.K. market. It hits the large public tenders and projects. So for us, it's important to implement the way we would like to operate on all our markets also in U.K.

[Erik Elander, Research Analyst]

All right. And what is actually behind the lower billing ratio in Sweden?

[Åsa Bergman, President, CEO & Director]

It is, as I said, in line with last year's Q3, and it's connected to this seasonal pattern of that in Sweden and some other business areas, after a summer holiday, we come back from holiday, and we need to start up everything. And it's also that we had many new hires that we need to introduce to work.

[Erik Elander, Research Analyst]

So I mean, actually, the billing ratio in Sweden was the same last year in Q -- you also had a slow start to Q3 2018. What did you learn from that? And why didn't you implement it this year?

[Åsa Bergman, President, CEO & Director]

So we are -- we have this -- this is an important area for us. We follow it really close week by week. We have a planning process in place to ensure that we have a very good way of following and planning what is happening. So we learned a lot, and we planned for this, but this is actually something that is really connected to the vacation and the start-up of new employees.

[Erik Elander, Research Analyst]

Okay. The Finnish performance was very impressive in the quarter, to say the least. How sustainable is it? And should we expect the Finnish margins to be at the same level as Sweden going forward?

[Åsa Bergman, President, CEO & Director]

So in Finland, we are operating according to the Sweco model. And if you can -- if you recall, Finland had problems with project write-downs some 1 year ago in one of their divisions. And what they have done is that they have implemented a very strong performance review process and put focus on ensuring that they don't have those project write-downs in the projects. And that is what you see in that business now. And of course, it's operational excellence in that business in very many perspective, but that is especially what you see in that development. I don't give you any forecast, but I'm very pleased with the way Finland is performing.

[Erik Elander, Research Analyst]

And the last one for me. Was it planned to reduce staff in Denmark? And if so, why? And when should we expect Danish recruitment and organic growth to be back in positive numbers?

[Åsa Bergman, President, CEO & Director]

Yes. If you go back, Denmark was a turnaround case for us, and we work to implement Sweco's operating model in Denmark. And it's so that if you don't -- if you're not up to speed with the recruitment, what happens in all our business is that we are shrinking. So it was -- it's connected to that they don't -- they're not fully up to speed with the recruitment process yet in Denmark. So that is what we expect going forward will happen.

[Erik Elander, Research Analyst]

So is it rather kind of high personnel turnover that dampens the organic growth in Denmark?

[Åsa Bergman, President, CEO & Director]

The FTE growth is not in line with where we want it to be.

[Katarina Grönwall, Chief Communications Officer]

Yes. I think we have a question in the back.

[Dan Johansson, Equity Research Analyst]

Dan Johansson at SEB. My first question is in regard to the organic growth. I think you earlier said that it's been about 50-50 split between FTE growth, FTE development. Is that still the case? Or are you seeing anything leaning a bit heavier in this quarter?

[Åsa Bergman, President, CEO & Director]

It's approximately still the same.

[Dan Johansson, Equity Research Analyst]

Okay. And second question in regards to your M&A strategy. It seems like your acquisition pace is a bit higher this year than it's been previously. You had done 3 medium-sized acquisitions already this year. Are you being a bit more proactive now when it comes to M&A? And how does your pipeline look going forward?

[Åsa Bergman, President, CEO & Director]

So we have a strong financial position. We would like to see both organic and acquired growth. And we work with our pipeline country by country. And when the acquisitions happen is connected to when we find the target that matches us, meaning that you can't expect exactly certain pace or that it happens in the -- according to a certain plan because we work intensively with this, but it's about when we find the right targets.

[Dan Johansson, Equity Research Analyst]

Or is it more about finding the right target? Or are you targeting any specific regions right now where you think it's more interesting to do?

[Åsa Bergman, President, CEO & Director]

We are looking into all our business areas. Of course, it's so that if you are -- if you have a big market share, the focus will be more on organic growth. And if you have less market share, you need to focus a bit more on acquired growth in -- but still the combination. But we are looking into all the business areas. And that is also connected to that, for us, it's about taking on or reinforcing the market-leading position over and over again. And that's why we need to have a consistent process of looking into potentially good companies to acquire.

[Dan Johansson, Equity Research Analyst]

And one last question for me. I think you mentioned in the presentation that the industry demand remains good. Could you give us some more flavor on the more cyclical part of the portfolio? Is there any subsegments where growth is a bit slower going forward, et cetera?

[Åsa Bergman, President, CEO & Director]

As I said, what we see is that it's the residential construction market in the Nordics. And that is weaker and that we experience. Otherwise, the demand is good.

[Katarina Grönwall, Chief Communications Officer]

So do we have any questions from the telephone line?

[Operator]

[Operator Instructions]

[Katarina Grönwall, Chief Communications Officer]

So we have one question. Please go ahead.

[Johan Dahl, Analyst]

Åsa, can you hear me? It's Johan here with Danske Bank. Just -- could you just clarify also, you talked about the growing order book. Is that sort of taking into account the sort of orders in relation to sales you're growing all the time? Is the sort of situation improving on an apples-to-apples basis?

[Åsa Bergman, President, CEO & Director]

The order backlog is growing in line with expectations, and orders received in -- is on good levels. I don't want to disclose any more details around the order backlog because it's also connected to when project starts and what happens with the order backlog. But I can say that it's solid, and that is good.

[Johan Dahl, Analyst]

Okay. Can -- is there any -- can you make any distinguishment between private to public customers in terms of demand?

[Åsa Bergman, President, CEO & Director]

No. I would say that it's the same in those segments with some nuances maybe. But no, same.

[Johan Dahl, Analyst]

All right. And summing up the 9 months year-to-date compared to last year in terms of project adjustments, has this year been particularly sort of strong in that sense compared to last year? Or is it just normal in your view?

[Åsa Bergman, President, CEO & Director]

It's a bit lower this year compared with last year.

[Johan Dahl, Analyst]

Another positive comp, I guess, than in -- this year compared to last year?

[Åsa Bergman, President, CEO & Director]

And of course, you would like to think that this is connected to our -- that we are becoming more and more performance driven that when we implement the Sweco operating model with the key manager responsible and the small team and this process of following the projects more tight, that is related to that.

[Johan Dahl, Analyst]

All right. Just on fees. Is Sweden sort of following the similar pattern which you see across the group? Or is Sweden sticking out in any way, positive or negative, on fees?

[Åsa Bergman, President, CEO & Director]

Same level.

[Johan Dahl, Analyst]

Same sort of development you're seeing in Sweden [indiscernible]?

[Åsa Bergman, President, CEO & Director]

It's a positive development. Yes.

[Katarina Grönwall, Chief Communications Officer]

Okay. I don't think we have any more questions. So with that, I would like to thank everyone for being here today. And thank you, Åsa and Olof, for a great report. Thank you.

[Åsa Bergman, President, CEO & Director]

Thank you. Thank you.