Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2023-Q1

[Unknown Executive]

Good morning, and welcome to the presentation of Sweco's results from this year's first quarter. To present the results and the report is Sweco's President and CEO, Asa Bergman; and CFO, Olof Stalnacke. After the presentation, there, of course, will be room and time 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 quick recap of Sweco. Sweco is today Europe's leading architecture and engineering consultancy with operations in 8 geographical business areas across some 15 markets in Europe.

We are a well-diversed business with projects in 3 broad segments: building urban areas; water, energy, industry; and transport infrastructure. We have a good balance of private and public clients, and the foundation for Sweco's long-term success is our mix of competencies spread across 20,000 experts, organic and acquired growth as well as our efficient and decentralized operational model.

With our solid financial position, we continue to build Sweco. As you can see, we have a steady improvement in sales and EBITDA. Our net debt EBITDA after the latest acquisition landed on 1.1.

Now, let us take a look at the result of the first quarter. We started the year with excellent momentum, delivering strong organic growth and an all-time high EBITDA. Net sales increased to SEK 7.1 billion, and the organic growth adjusted for calendar was 10%. We achieved a total growth of 17%. EBITDA increased by 19% year-on-year to SEK 849 million adjusted for calendar. Our operating margin improved to 11.9%, more or less on par with our financial target of 12%.

The strong performance was driven by solid demand connected to the green transition in Europe, higher average fees and a good FTE growth. If we move over then to the operational highlights in the quarter, there was a continued strong demand in most business areas. We had a solid inflow of new orders with a strengthened order book, and we also had a good momentum in recruitment.

All business areas reported strong organic growth, and 6 out of 8 business areas reported increased EBITDA. I especially want to highlight Sweden, Norway, Denmark, and Belgium that all achieved EBITDA margins exceeding 14%.

We also made 4 acquisitions during this quarter, welcoming around 700 new experts to Sweco, and we won several high-profile projects, which I will come back to later in this presentation. The market overview shows that although the current macro situation continues to be uncertain, there was overall good demand in the market of projects connected to the green transition in all segments. We have a particularly strong demand within water, energy, and industry, where the markets for investments continue to be solid.

In building and urban areas, we see a good demand in public buildings. There is, however, continued declining demand in residential and in parts of commercial real estate. Within transportation infrastructure, we see continued good demand. Concluding, the quarter proves the strength of our diversed offering and position in attractive segments.

I will now hand over to Olof to take us through the numbers. Olof, please.

[Olof Stålnacke, executive]

Thank you, Asa, and good morning, everyone. Starting with an overview. We see net sales, as Asa said, of SEK 7.1 billion in the quarter with 10% organic growth and M&A and FX each contributing 3%. EBITDA, SEK 849 million, which is an all-time high for the second quarter in a row.

We increased EBITDA by over SEK 200 million versus last year, and we have a 19% EBITDA growth, excluding the calendar effect. And the margin expansion is 1.2 percentage points up to 11.9%. Leverage increased to 1.1, that is driven by M&A and by a seasonal working capital buildup.

On net sales, we are pleased to see solid organic growth in all BAs ranging from Finland and Germany and Central Europe at around 6% up to Belgium, Denmark, Norway, and the Netherlands at double digits. Very positive also to see that Sweden continues to increase growth and was at over 8% in the quarter and that the U.K. is close to 10%.

Across the board, the drivers have been continued price increases and FTE growth. We continue to have good momentum in recruiting, and personnel turnover has declined somewhat in the quarter. In addition, part of the negative impact from sickness absence that we saw last year has been reversed.

Looking at EBITDA. On the EBITDA side, we see margin improvements in 6 out of 8 BAs and double-digit margins in 5 BAs with, as Asa said, Sweden, Norway, Denmark, and Belgium, all delivering above 14%. The EBITDA drivers are much the same as the growth drivers, price increases, FTE growth, and also that about half the negative impact from sickness absence from last year has been reversed.

Other operating expenses increased, but as in Q4 declined as a percent of net sales and continues to be on a sustainable level. Billing ratio is the only disappointment in the quarter declining by 0.4 percentage points.

Looking at the EBITDA bridge by business area, it's Belgium and Denmark that continue to lead the EBITDA growth, but we also see significant contributions in Sweden, Norway, and Netherlands. Finland is impacted by a one-off payment as part of the collective salary agreement of around SEK 20 million.

In Germany and Central Europe, the negative impact comes from the Central European countries, which had a weak start in parts of their business. The U.K. continues to improve in a challenging market, and it is important also to mention that the calendar makes this into a very big production quarter for us with 8 more working hours, and that corresponds to 75 million in net sales and EBITDA impact.

On the financial position, net debt is at SEK 2.9 billion, significantly up versus last year. The LTM cash flow from operation is outweighed by larger outflows for dividends and M&A in Q1, especially the larger acquisition of VK as well as seasonal and growth-driven working capital buildup. Leverage is also up at 1.1%, just over half of our target maximum, but we remain financially strong with available liquid assets of SEK 3.1 billion.

And with that, back to you, Asa.

[Åsa Bergman, executive]

Thank you, Olof. Let me turn to some operative highlights of the first quarter. We completed 4 new acquisitions in Q1 with a combined net sales of SEK 1 billion, welcoming around 700 experts to Sweco. This strengthens Sweco's position in the Belgium, Dutch, and Norwegian markets. It is a mixture of competencies in architecture, engineering, and project management, all in line with Sweco's strategy to have a strong, integrated engineering architecture offering, all in our core markets.

And I would like to dive into 1 acquisition from the quarter as well as 1 recently announced. The acquisition of VK architects+engineers was our largest acquisition that we completed and consolidated at the end of March. The VK Group came with some 600 experts and an annual net sales of around SEK 890 million. VK is active in the Belgium market, but also has presence in the Netherlands, Luxembourg, the U.K., and Vietnam, this acquisition strengthens our position in the Belgian market in attractive growth segments such as healthcare, industry, and infrastructure.

On the 7th of April, Sweco announced the acquisition of Metria's Swedish survey business, a deal that closed last week. The business has 110 experts and an annual net sales of SEK 130 million. With its broad geographical presence and strong position within municipalities, this acquisition strengthens Sweco's already leading position in the Swedish survey market.

I also would like to highlight some of the project wins we had in the quarter. Our order book remained strong. And during the quarter, there was a solid demand from both public and private clients. The demand from sustainability-related services is growing in all business areas and in all segments.

Just to show you some examples, Sweco together with Team Aker will design Norway's largest hospital in Oslo, New Aker, currently the largest construction project in Norway. The project includes new construction and reuse of existing buildings. In Frankfurt, Sweco was commissioned to plan the new Frankfurt long-distance railway tunnel, which will help increase capacity in the Frankfurt transport hub.

And in Sweden, Sweco has been commissioned by the biotech company, EcoHelix, to design a state-of-the-art production facility in Ornskoldsvik. The facility will be built entirely in wood, which still is an unusual choice of material for industrial buildings.

To conclude, I am very pleased with the quarter and with the achievements we made. Sweco's strategy and market position enable us to keep catering to the demand driven by the green transition in Europe. The current market situation, however, remains uncertain, which makes us place even further importance in managing fees, efficiency, and costs.

At the same time, continue to capture opportunities in the market. It is evident, particularly in the present market environment that our diverse portfolio of clients, segments, and solutions is a competitive strength. We are also maintaining good momentum in recruitment, the Sweco Group is growing.

And to end, I want to give you heads-up on our Capital Markets Day that we will host in Stockholm 14th of November. A formal invitation with program and registration details will be published at a later date on Sweco's website.

Thank you.

[Unknown Executive]

Thank you, Asa and Olof. And we will now open up for questions. So please, operator, if you could give us the instructions?

[Operator]

[Operator Instructions] The first question comes from Dan Johansson of SEB.

[Dan Johansson, analyst]

A couple of questions from me. I'll take them one by one perhaps. If it's possible to split the organic growth to 10% here, what's sort of the volume and price impact during the quarter, if that's possible?

[Olof Stålnacke, executive]

I think it's fair to say that roughly half of the organic growth comes from price, a little less from FTE growth, and then sort of net rest a little bit of it, but the main drivers are price and FTE growth.

[Dan Johansson, analyst]

Okay. And also was curious a bit on -- is it possible to specify how much was the usage of sub-consultants in this quarter?

[Olof Stålnacke, executive]

It was less than 2% up, I think, around 1.5% up or something contribution to growth.

[Dan Johansson, analyst]

Okay. And also related a bit on the mechanics behind -- you had quite good also volume growth. And you used a bit of sub-consultants more now, but the billing rates still declined from last year. What's sort of the mechanics behind that decline there?

[Åsa Bergman, executive]

I mean we have talked about this before, but one kind of more long-term and overall thing for us is that the personnel turnover has an effect of on-boarding and off-boarding that affects the efficiency. That is one thing.

But -- and really clear is so that we have -- I mean, we have increased the pace of recruitment, so there is lots of people that we need to onboard. But with that said, this is our main focus to make sure that we get really into efficiency and that we can break the trend to kind of increase the billing ratio going forward.

[Olof Stålnacke, executive]

Yes. And if I can add, I think it's fair to say that we have -- we are quite pleased with what we have achieved on the cost side with the actions we announced last year and that we still have more to do on the billing ratio, I would say.

[Dan Johansson, analyst]

Yes, totally agree. I mean, the margin is quite good despite the lower billing ratio. So let's see what happens ahead. But also one more question, if I may, and I'll jump back into the line. In Finland, how much was that one-time salary payment you had here in Q1?

[Olof Stålnacke, executive]

It was roughly SEK 20 million that we took, and that's part of the -- as the industry agreement, as we said, this one-time payment, which is, we think, quite a good solution actually to get sort of the short-term coverage of inflation without permanently increasing salaries there.

[Operator]

Next question is from Fredrik Lithell of Handelsbanken.

[Fredrik Lithell, analyst]

Maybe two, if I may. On the central negotiations that has been sort of concluded in several markets would be great with an update on the various markets for you and if the impact is fully in your books from Q1. Or if you have markets where that will sort of start to show from the second quarter or others? So that's the first one.

And the second one, maybe Olof, if you could sort of dissect the working capital buildup a little bit, are there any elements from adding balance sheets from the acquisitions into that? Or is this purely the momentum in your projects that is tying the cash in the quarter?

[Åsa Bergman, executive]

First question on the salary reviews. We have accomplished around half of our business areas. So we -- part of it is done and affecting the quarter, but we haven't finished it in all our business areas. So we expect this also to affect in Q2. And I mean what we are doing is that we continue to focus to mitigate it with price increases, which we have succeeded within this quarter.

Maybe you would like to add something?

[Olof Stålnacke, executive]

No. I think that really covers our position. And on the trade working capital, we have a 1% increase in trade working capital as a percent of net sales. So I think this is primarily sort of the normal seasonal effect. But also effect of the high growth we are seeing now. There's no specific sort of additional impact from M&A, and this may be a small piece, but most of it is seasonal and growth.

[Operator]

The next question is from -- I'm sorry, sir. Do you have a comment? The next question is from Johan Dahl of Danske Bank.

[Johan Dahl, analyst]

Just very briefly, on your order intake, is that possible to put it a bit more into sort of color comparing it to last year, compared to Q4 possibly and possibly the organic sort of increase in the first quarter compared to year-end?

[Olof Stålnacke, executive]

I think -- I mean, what we can say is that when we say that our order book is growing, it's not only growing in absolute terms, but also related in -- as a percent of net sales. So we have an order book that increases with the organic growth we see now. So that's positive. And as we've been saying for some quarters now, it continued to strengthen in the quarter.

[Åsa Bergman, executive]

And just to add some flavor on that, that is that, I mean, it's really clear that those segments that are growing we are kind of focusing on those, and it's really clear that we're winning contracts in the energy industry and infrastructure market and also in the pharma sector. So -- and the obvious question might be how we manage kind of the architecture or the building sector.

But it's really clear that we can utilize the resources. And I've talked about this before that we -- as we have this balance of public and private, we see good demand in the public building sector, meaning that, that is where we kind of focus those kind of resources. And we have really been able to manage the market in that way.

[Johan Dahl, analyst]

Okay. Also, on the billing ratio, can you just talk about what levers you're pulling exactly to sort of achieve improvements here? I mean you talked about this for quite some time. And I think it was the lowest billing ratio on record, well, for a Q1. But just talk about what projects you're initiating, what targets you're setting, on what time frame. It would just be interesting to hear how are you actually driving this.

[Olof Stålnacke, executive]

Yes. I think it's very much the things we talked about in connection with the Q3 report with reducing -- reviewing and reducing overhead and management layers, reducing internal activities, and also have a very strong focus on improving onboarding. We saw some positive development in Q4. But as we said now, we are not happy with the development in Q1. So we need to continue those efforts, but it's very much the same. It's the sort of normal mechanics of our business.

[Johan Dahl, analyst]

All right. Just a final question on your acquisition payments. It's in -- you've acquired some very profitable operations, it seems. But do you think here in the first quarter, those companies that you have consolidated and paid for, is that a good -- sort of a fair description of where acquisition multiples are at the moment? Or is there anything that sticks out in terms of valuations of targets here in the first quarter?

[Åsa Bergman, executive]

No, I wouldn't say so because -- and we -- I mean it's always so that we kind of look at the whole business case from different angles. So -- I mean, multiple-wise, it can -- I mean, it could be quite wide range what we are willing to pay, depending on how much synergies and one-off cost and also how we see the business case for us and how strategically important it is for us. But -- I mean, we're satisfied with the deals that we have made.

[Operator]

The next question is from Stefan Knutsson of ABG.

[Stefan Knutsson, analyst]

Some of my questions has been answered already, but just if you can talk about the recruitment strategy given that you say that you see an uncertain market conditions and that we have seen mainly in the architecture space that firms are a bit hesitant to recruit here.

[Åsa Bergman, executive]

I mean, we really -- you need to do -- be able to do many things at the same time in a market like this. But we're kind of focusing on recruiting in those areas where we actually see a demand; short-term, midterm, and long-term. I mean the baseline for all of this is that Europe is kind of lacking engineers for what we need to achieve of kind of transforming the whole society.

So if we look at the programs that EU has posted out on the market of EU Fit for 55 and REPowerEU and Net-Zero Industry Act. It will require a huge amount of competence and resources. So for us, it's really about understanding what is in those programs, what areas will grow, and focus to recruit and looking for companies to acquire in those areas.

And then when it comes to our architects, I mean, we would like to take market positions when it comes to our architectural business also going forward. And we are -- we have gaps still in our portfolio, and that is also why we're focusing on finding the right architecture company in this kind of market to position ourselves with the combination of architects and engineers.

So it's also a market where there might be opportunities that we can act on also for the future. So short term, yes, you could have a question on what to buy and not and what to grow and not. But in the long-term perspective, it's also about how we position ourselves. So be selective, focus on the right areas, and also making sure that we can execute on our strategy, which this kind of market circumstances actually can give you.

[Stefan Knutsson, analyst]

And also, Olof, if I can follow up on the cash flow that you mentioned briefly here, as far as I can see, I mean, the days sales outstanding is quite high here in Q1 and maybe it's a bit seasonal effect, but any flavor on that?

[Olof Stålnacke, executive]

No, that is true. And I think that's part of what I said about the growth-driven working capital buildup. And again, a lot of it is seasonal. And in terms of the total trade working capital, including the accounts receivable, we are 1% up on net sales, so still within the normal fluctuations.

And we haven't seen any increases in credit losses or payment problems for customers, et cetera, so -- but in this kind of market, of course, we follow it very closely. But so far, it's just sort of part and parcel doing business right now and growing quite significantly.

[Operator]

[Operator Instructions] The question is from Johan Sundén of Carnegie.

[Johan Sundén, analyst]

A few questions from my side. The first one is on employee turnover. It was an issue in 2022. Now we have some uncertainty on the kind of general economic outlook, et cetera. The real estate market don't seem to be that healthy. How is employee turnover developing in the beginning of this year, Olof?

[Olof Stålnacke, executive]

As I said in my presentation, it's actually going down slightly. So we are -- we had increased levels in 2022, as you know, 13.9% versus 13% in 2021, and we are now down more at the 2021 level. And, of course, we hope to -- that this is a break in the trend, but remains to be seen, but at least a good start of the year in that area.

[Åsa Bergman, executive]

And we continue to focus on every level -- every area that we can to kind of keep our employees in Sweco a little bit longer all the time.

[Johan Sundén, analyst]

Perfect. And one other question on the building side. You mentioned weakness on residential new build and still quite solid demand on the public side. Has there been any kind of element of spreading effects on price pressure to the public side when the residential building side has weakened? Or what's really happening here?

[Åsa Bergman, executive]

I mean, the residential market has been declining for, I would say, the last 2.5 years. And the real estate sector, I mean, you all know, started to weaken after the full-scale invasion -- Russia's invasion of Ukraine, meaning February last year. And it's -- so it's a kind of a more long-term perspective in this movement, but we have been able to increase our prices. And -- I mean, we have won good and nice contracts in the public area towards those clients over this period of time. But we have reallocated our businesses a bit.

[Johan Sundén, analyst]

Perfect. And just one final question that's on Germany and Central Europe. Is it possible to give some more color on the kind of soft start of the year from the Central European business?

[Olof Stålnacke, executive]

I mean it's -- I would say not dramatic. We've had relatively big project in one of the countries that has been postponed, which have -- has quite an impact on those smaller markets, and we have not a big but still a write-down in one of the other markets. So it's relatively small things, but it has had an impact in the start. We don't think it's any sort of long-term issues or anything that will affect the rest of the year in Central Europe.

[Operator]

At this time, there are no more questions from the conference call.

[Åsa Bergman, executive]

Thank you so much, operator. And there are no more questions. So I'd like to take this opportunity to thank you for joining us, and I wish you all a nice day and the weekend to come. Thank you.