Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2024-Q1

[Marcela Sylvander, executive]

Good morning, everyone, and thank you for joining us for this presentation of Sweco's Q1 Report.With me this morning, I have Sweco's CEO, Asa Bergman; and CFO, Olof Stalnacke. They will take us through the results of this first quarter and afterwards, of course, we will open up for questions.But now I leave the floor to Asa Bergman. Please, Asa?

[Åsa Bergman, executive]

Welcome everyone to Sweco's Q1 presentation. Before we present the first quarter of 2024, let me give you a quick overview of Sweco. Sweco is Europe's leading architecture and engineering consultancy with operations in 8 geographical business areas across 15 markets in Europe. We are a well-diversified business operating across 3 different segments with good balance between public and private clients. The foundation for Sweco's long-term success is our mix of competencies spread across 22,000 experts, our focus on organic and acquired growth as well as our efficient and decentralized operational model. With a strong financial track record and financial position, we are focused on continuing our growth journey and build on Sweco's success.With this introduction, let's move over to the Q1 highlights. In summary, Q1 was a good quarter for Sweco. We continue to capture growth opportunities driven by the green transition in the industry, energy, transportation and urban areas. Net sales increased by 8% in the quarter, of which, 4% is organic growth and EBITA improved by 16% adjusted for the significant calendar effect. These improvements are mainly driven by good demand, higher average fees and an increased number of FTEs. Even though the actions that we are taking to improve efficiency are starting to have effect, the billing ratio continues to have a negative impact. We are taking further actions to improve the billing ratio, and I will get back to this later in this presentation.With this summary, let us dive into more details in the first quarter. As mentioned, we have had a positive start of the year with performance improvements across most business areas. 6 out of 8 business areas reported positive organic growth and improved EBITA compared to last year. Belgium, Denmark and Sweden delivered strong growth and positive EBITA development and double-digit margins. And Germany, Central Europe continues to improve their performance. These improvements are mainly driven by continued positive momentum in pricing and good demand linked to the green transition as well as from growth segments such as pharma, defense and data centers.In the quarter, there is a significant calendar effect due to the early Easter holidays, corresponding to a negative year-on-year impact on SEK 195 million. Olof will get back to this in more details later in this presentation. We are starting to see effects from the measures taken in Finland and the U.K., but the billing ratio remains a challenge for us. Improving efficiency and billing ratio is a top priority, and I would also like to give you an update on our ongoing measures. The billing ratio is a key component in improving our margins going forward and are taking -- and we are taking several actions.In Finland, the actions taken in Q4 2023 and Q1 2024 are starting to have effect. Further actions have been taken in April to adapt staffing, mainly in the buildings and industry segments, and this is to meet the current market situation. The repositioning of our U.K. business shows positive progress with a substantially improved result compared to Q4 2023. As part of this turnaround, Sweco U.K. is making further redundancies during the first half of 2024.Sweco Sweden is also making staffing adjustments during the first half of 2024, affecting approximately 140 employees. We are also currently conducting a review across all our business areas to further streamline our operations, including making sure we have the optimal team size and staffing. These actions for improved efficiency are starting to show effect, but taking sufficient measures will be a gradual process. Looking then at the overall market situation. The demand for services related to the green transition continues to be good, while parts of the building segment remains weaker. Demand in water, energy and most industry segments remains strong overall, powered by the demand connected to Europe's green transition, although we see a weaker demand in traditional industry services.Transport infrastructure remains good in most markets, driven by large needs to update Europe's transport infrastructure. In the building segment, the demand for public buildings remains stable, while the demand in residential and commercial real estate continues to be weak with variations across markets and subsegments.With that, I will hand over to Olof to walk you through the numbers. Please, Olof.

[Olof Stålnacke, executive]

Thank you, Asa, and good morning, everyone. We continue with -- again with a summary of the quarter. We had net sales of SEK 7.7 billion in the quarter, with 4% calendar-adjusted organic growth, 6% from M&A and the FX effect now being neutral. EBITA was SEK 793 million. Excluding the significant negative calendar effect, we are roughly SEK 140 million or 16% up, margin at 10.3%, and the decline in margins is entirely explained by the calendar.Leverage remains stable at 1.1x despite some negative cash flow impact from the quarter ending on Easter weekend. On net sales, we see organic growth in 6 out of our 8 BAs. Netherlands is more or less flat. And U.K. as could be expected down against what was still a strong quarter last year. Denmark, Belgium and Sweden continues to show solid growth. Germany and Central Europe once again has the highest growth in the quarter. They have a good momentum in the business, but it is also supported by positive project adjustments. Across the board, the growth drivers have been primarily continued price increases, but also FTE growth.We maintain recruitment and personnel turnover has continued to decline in the quarter. More vacation and lower billing ratio contributed negatively to the growth. On the EBITA side, as said, we see a 16% increase adjusted for calendar. We are happy with that development, especially since we are up against an all-time high quarter last year. With the negative calendar impact, we only see margin improvement in Finland and Germany and Central Europe, but Sweden, Denmark and Belgium delivered double-digit margins. Finland is close to 10%, and Germany and Central Europe delivered 7.9% in another strong quarter. Norway has the biggest calendar effect with 6 less working days in the quarter, primarily due to the Easter week. U.K., back to profitability after 3 quarters of losses, despite taking additional restructuring costs.Looking then at the EBITA bridge by business area. Overall, higher average fees continue to be a positive driver together with the FTE growth and the contributions from acquisitions, while higher personnel expenses and lower billing ratio had a negative impact. Looking at the BAs, 6 out of 8 deliver increased EBITA, and Norway is in line with last year. Belgium and especially Denmark maintains the good profitability trajectory. Sweden improves on a strong Q1 last year. Germany and Central Europe has another very strong quarter. Again, the result includes positive project adjustments. So one should not expect this kind of improvement every quarter. In Finland, the improvement is partly driven by a one-off salary payment in Q1 last year, but it's also an effect of the actions we are taking.To continue to drive improvements, Finland is utilizing the temporary layoffs that we talked about in Q4 and have also concluded reductions of an additional 40 FTE in April. U.K. down versus last year, but we are, as said, pleased to see them in positive territory, a sign that actions taken are having effect. We are taking further restructuring actions, adding another 100 FTE reduction to the 100 FTE redundancies in 2023. And finally, the calendar effect, 15 less working hours, which corresponds to a negative SEK 195 million in net sales and EBITA impact.And then quickly on the financial position. Net debt is in line with Q4 and Q1 last year despite the negative impact of around SEK 300 million on cash flow from the quarter ending with the Easter weekend. Leverage is at 1.1x, well below our target, and we remain financially strong with available liquid assets of around SEK 3.8 billion. And with the large calendar effect in Q1, we thought it would be a good idea to remind everyone of this year's calendar. The Easter effect will, of course, be reversed in Q2. We also have a positive Q3 and a small but still a positive total for the year, and this is the first time since 2020 we have that. And with our increased size, 1 hour of calendar now corresponds to SEK 13 million in net sales and EBITA impact.And with that, back to you, Asa.

[Åsa Bergman, executive]

Thank you, Olof. The green transition and its impact on energy, transportation, industrial and urban development continues to be core drivers for Sweco. And this is evident by the projects won in the quarter of -- all of which highlights Sweco's multidisciplinary role in enabling these transitions.In the Netherlands, Sweco won a EUR 100 million contract to support the energy operator, Gasunie, to develop new energy infrastructure for transportation of hydrogen, CO2, renewable gas and heat. In Germany, Sweco will support the City of Bremen to expand their public transportation. In Norway, we will provide architectural design to support a sustainable uplift of an urban area in Oslo. And in Belgium, Sweco has been commissioned to design an open-access rail terminal in Zeebrugge's port.Today, I am proud to announce that Sweco will be helping rebuild Ukraine by providing expertise in projects to secure drinking water and modernized wastewater treatment in 2 communities. Specialists from Sweco will provide expertise in wastewater treatment, water engineering, hydrology and environmental impact assessment in 2 projects financed by Swedfund. Sweco has been supporting Ukraine in projects rebuilding the country since 2022. For example, we are securing a drinking water supply for 220,000 residents in the City of Kremenchuk, and we are also supporting by building homes in 6 cities in Western Ukraine.Let me now conduct -- conclude by presenting our key priorities and focus areas going forward. We remain focused on capturing business opportunities in the market by further strengthening our market position and tapping into attractive growth segments. Continued FTE growth and M&As are 2 important pillars and prioritized areas. We are also accelerating our efficiency measures to improve our margins, including both an organizational review as well as specific measures in Finland, U.K. and Sweden to meet the market demand. All in all, Sweco remains well positioned to continue our journey of profitable growth, and we are committed to capture growth opportunities while driving efficiency improvements. Thank you.

[Marcela Sylvander, executive]

Thank you, Asa and Olof. And now it's time to -- for us to open up for questions. So please, operator, if you could give our audience and ourselves the instructions.

[Operator]

[Operator Instructions] And now we're going to take our first question on the line, and the question comes from the line of Dan Johansson from SEB.

[Dan Johansson, analyst]

Congrats to a strong start to the year here.

[Åsa Bergman, executive]

Thank you.

[Olof Stålnacke, executive]

Thank you.

[Dan Johansson, analyst]

I think I have 3 or 4 questions here. So I'll take them one by one, if that's fine. So perhaps starting with on the 4% organic growth here, I just wondering how much is from pricing here? And also your thinking about pricing for the full year, with the inflation coming down, do you find it more difficult to raise prices or is still ambition to be -- have a good pricing level during this year? I think that's my first one.

[Olof Stålnacke, executive]

It's -- I think you can say that sort of all the organic growth comes from pricing, meaning that the other factors, which in this case is FTE growth, it's billing ratio, and it is higher absence from more vacation related to Easter. So I think it's fair to say that the full net effect comes from pricing and then the other ones are 0. And as we've said before, increasing prices remains one of our biggest challenges, given the relatively high salary inflation, even if that is coming down this year. So -- but it's a good start to the year to summarize it, and we aim to continue to increase prices.

[Dan Johansson, analyst]

Okay, sounds good. A more specific question perhaps on Denmark. It's been looking quite strong now for a while, especially on margins. How much is the performance of Denmark sort of an effect of, I guess, [ Novo Nordisk ] investment bonanza? Or are there other factors also driving your Danish operations? It's much broader than just some pharma boost right now.

[Åsa Bergman, executive]

Pharma is one of the units in the Danish business. So it's rather the letter linked to your question that we have been able to implement the Sweco model. We have been able to broaden our client and product portfolio. We have been operationally strong, we -- and we combine that with the M&As that we did last year. So you see the kind of perfect mix of what we would like to see from a business area. So I mean, it, as you say, it's a strong combination, both of organic acquired and expansion of the margin. So that's good.

[Dan Johansson, analyst]

Yes. And maybe final one, if I may, perhaps on the last part you mentioned, Asa, on the efficiency improvement initiatives and clearly, you're not satisfied with the billing ratio and you're doing further adjustment of staff here. Have you already taken the costs related to [ the debt ] or is that something we should expect now during the course of the next few quarters? Or is it possible to say if it's material or if it's just, yes, sort of ordinary business? How do you view those adjustments that you will do there going forward?

[Olof Stålnacke, executive]

The costs are actually stated in the report. I understand that you haven't had time to read through it all yet, but it's -- we are taking SEK 13 million in Q1, Sweden and U.K. And we will take around SEK 45 million in Q2 related to Sweden and Finland.

[Dan Johansson, analyst]

Okay, that was super clear. That was a miss from my side there.

[Olof Stålnacke, executive]

No problem.

[Dan Johansson, analyst]

Maybe -- yes. Okay. I think that was all from my side now. So I'll jump back into the queue.

[Operator]

Now we're going to take our next question, and the question comes from the line of Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Yes. Can you say anything, Asa, on order intake, how that compares to sales, possibly the order book, how that's developed in the first quarter?

[Åsa Bergman, executive]

Yes, it's stable and orders received is on good level. So it continues in the right direction.

[Olof Stålnacke, executive]

Yes. And I have to add what I always say, and it's that the order book improves as a percent of net sales, not only in absolute terms, so it's supportive of further growth.

[Johan Dahl, analyst]

Got you. And following on to that, given how orders have developed, I'm just curious to understand the actions you took late last year. I would have thought that they were really aimed at getting that billing ratio to trough and bottom out. And still, it doesn't seem that it happened in Q1. I'm just interested to hear is it just some sort of delay effect from those actions taken last year or what has disappointed in Q1 in the operations for that sort of troughing or the billing ratio not to occur?

[Åsa Bergman, executive]

Should I start or you...

[Olof Stålnacke, executive]

No, you can start.

[Åsa Bergman, executive]

First of all, some of the actions that we're taking is really linked to that. We have pockets in the business where we don't have work enough, meaning that the order backlog is weak. And that's mainly in U.K. linked to the private building sector and infrastructure sector, meaning that you actually see in this quarter that we are moving in U.K., for example, in the right direction when it comes to their performance. It's the same with Finland. We reported that in the buildings and in the industry sector in Finland we have, we need to -- needed to take actions and we continue with that during this quarter. But related to your question is that, yes, we take actions and we can see things happening in the organization and in the result, but we can't see it yet in the billing ratio. So this is like a gradual improvement and we expect that to come in the quarters ahead.

[Olof Stålnacke, executive]

And I would add to that, it's always a balance for us between sort of taking actions to improve billing ratio and not becoming too short term. So we have to balance all the time, demand and our own capacity. And U.K., we're taking quite significant further action, which is -- we took significant action last year as well, but we continue that to ensure the turnaround. Finland, some additions now in Q2 and then Sweden, where we have taken smaller actions before, but are now taking a bit of a bigger one. But it is important for us to balance capacity and demand.

[Johan Dahl, analyst]

Understood. Just finally, Asa, you talked about this ongoing organizational review to streamline operation, what does that comprise, just to understand what you're actually doing there?

[Åsa Bergman, executive]

I mean, we are looking through the organization that we have to make sure that we have the right team size that we don't have too much admin staff to really bring us back to efficiency. There has been lots of changes in the market and lots of new requirements on the market that we have, of course, adapted to. But also those -- this game of both pushing ahead and growing, but also be able to shrinking in some segments also creates some times that you don't operate in the optimal way, and that is what we now are going to secure in.

[Operator]

Now we're going to take our next question, and the next question comes from the line of Raymond Ke from Nordea.

[Raymond Ke, analyst]

A couple of questions from me. First one, just regarding the U.K. redundancy provision there of SEK 7 million, does that encompass all the redundancy adjustments plan for H1? Just checking.

[Olof Stålnacke, executive]

Yes, it does. It might be some minor addition, but nothing significant. And the reason for it being so relatively low compared to numbers is, is that part of it is people leaving the organization voluntarily. So it's -- that's part of the number there.

[Raymond Ke, analyst]

Great. And a similar question also regarding the size of the positive project adjustments in Sweco Germany. Could you help us understand what was the non-recurring here?

[Olof Stålnacke, executive]

Well, it's -- I mean, it is part of sort of normal project accounting, but it has been on the positive side. So it's probably sort of in the SEK 5 million to SEK 10 million range, that could be seen as possibly one-off or at least sort of adding to the total margin.

[Raymond Ke, analyst]

That's very helpful. And just one final one, when you sort of look at the order backlog, could you provide some color in terms of which geographies have grown their backlogs the most in the quarter and how the volume and price mix looks like in the order backlog?

[Olof Stålnacke, executive]

We don't -- I mean, we don't want to provide any more detail or we are not providing any more detail on the order book. But it's as said, it continues to grow also as percent of LTM net sales.

[Operator]

[Operator Instructions] And now we're going to take our next question, and it comes from the line of Johan Sunden from Carnegie.

[Johan Sundén, analyst]

A few questions from my side as well. The first one is a little bit on -- more on the market and the more early cyclical part of your business, such as architects. Have you seen any kind of trend shift there already, given the more kind of less -- the better kind of interest rate environment that is gradually coming into expectation from most market participants?

[Åsa Bergman, executive]

The market in the building, the residential sector and commercial real estate is still on the weak side. So we don't have seen any shifts or changes in our order backlog or our orders received in those areas. So that is yet to come and that is yet to see.

[Johan Sundén, analyst]

And although it hasn't really impacted your order intake, but the kind of client discussions, has there been any kind of trend shift recently or is it more of the same over the last, say, 2 years?

[Åsa Bergman, executive]

It's more of the same, I have to say. It's more experience-wise that we always want to search for the light, so to say, when we expect the market to change. But when we see shifts in our portfolio or in our clients' behavior, we will report that, but we don't see that yet.

[Johan Sundén, analyst]

Fine. And then another question on the M&A activity. How would you judge the M&A pipeline? I've seen a few of your peers have been a little bit more active on the -- in the Continental Europe recently. How do you view kind of the German business? Will they soon be able to start making acquisition again or where are we in the process there?

[Åsa Bergman, executive]

I mean, we have said before, and it's the same focus that we have to have a clear M&A agenda in each country. And that means that we are focusing to really prioritize and have dialogues and working with the pipeline in all our business areas. With the stabilization and the good performance that we now see in Germany, we are more positive and we are starting to looking for potential companies on the German market. But again, it's really about making sure that we select the right ones and that we get the opportunity to buy them. So when it happens, it depends on when we get the opportunity, so to say.

[Johan Sundén, analyst]

That sounds promising. And I also had some questions on the billing ratio. And it seems like you're more optimistic to turn in the trend now than you were, say, 3 months ago or 6 months ago. Is it naive to expect this to happen already before the summer? Or is -- will the billing ratio turning be something for H2 or how should we view your comments before?

[Olof Stålnacke, executive]

Yes, I think what you should see is that we are now with the actions we took in Q3 and Q4 and now in the first half of this year, we have taken more significant actions than probably, I would say, I haven't been around for that long, but probably than ever before in Sweco with the actions we have taken. We also talked about the organizational review in the other BAs. So we are definitely taking a lot of action here. But I mean, we don't want to comment on sort of giving any forecast, but we are definitely taking actions which should have effect on the billing ratio.

[Johan Sundén, analyst]

That's clear.

[Operator]

[Operator Instructions] Dear speakers, there are no further questions over the phone. I would now like to hand over the conference to the management team for any written questions.

[Marcela Sylvander, executive]

Thank you. And as I understand it, and as I can see, there are no further questions. So with that, I want to thank you all for joining us this morning. And also a short reminder for you to stay tuned when we release our next Q report on the 16th of July, so late vacation for us. Have a nice day, everyone.

[Åsa Bergman, executive]

Thank you.

[Olof Stålnacke, executive]

Thank you.