Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2020-Q2

[Katarina Grönwall, Chief Communications Officer]

Hello, everyone. Welcome to Sweco, and welcome to the report for the second quarter for the Sweco Group. Today, we have Åsa Bergman, our President and CEO; and Olof Stålnacke, our CFO, who will present our report. Please go ahead, Åsa.

[Åsa Bergman, President, CEO & Director]

Thank you, Katarina. Welcome, everyone, to Sweco's Q2 presentation. I would like to start out by giving you a quick recap of our company. Sweco is Europe's leading engineering and architectural consultancy with focus on 8 core markets in Europe and with projects in more than 70 countries worldwide. Despite COVID-19, we have been able to increase the number of employees from 17,000 to 17,500. Looking at financials, our net sales on rolling 12 exceeds SEK 21.5 billion with an EBITA margin of 9.5%. Let us now move into the result of the second quarter. As we summarized the first half of this year, I can conclude that we delivered 2 solid quarters despite the uncertain times caused by COVID-19. Our net sales increased by 5%, and EBITA increased 12% adjusted for calendar. For the quarter, we reported a solid EBITA margin of 9% compared with 8.1% last year. We continue to deliver stable growth in the second quarter with a positive organic growth of 1% and acquired growth adding another 5%. Given the circumstances, we are satisfied with this growth. We have a strong financial position with low net debt and good liquidity and on top of that, we had a good cash flow in the quarter, which Olof will guide you through later in this presentation. Also -- we also made another acquisition during the second quarter, the Belgian company, SGI Ingénieurs. And I will get back to this in more detail in the presentation. In Q2, we continue to win exciting projects. One of them is our project in the municipality of Amsterdam that you see in the picture. Together with 4 other parties, we have signed an innovation partnership for the renovation of the quay walls in the historic city center. Although we had a stable start of the year, the market conditions are uncertain due to the COVID-19. Before we dive deeper into Q2, let us have a look at the market situation and what we have done to mitigate the effects of COVID-19. Looking at the market situation, the overall demand for Sweco services remained stable. Our order backlog was on a somewhat lower level in the second quarter. Most of our projects have remained relatively unaffected. The somewhat lower demand within industry and private buildings and real estate segments that we experienced at the end of the first quarter has continued throughout the second quarter. In March and April, we had some project that was temporarily stopped or canceled, but many of them have started again. What we see now is a rather high activity in several segments. But we also see signs of increased competition in some segments. It is too early to say what will be the outcome of that, but it could possibly have some short-term effects on the positive fee development that we have experienced in the recent quarters. Altogether, the market situation has improved during the second half of the second quarter. However, it's too early at this point to draw any long-term conclusions. Given the uncertain -- very uncertain nature of COVID-19, we expect a gradual recovery. Despite these short-term uncertainties, the long-term drivers remains the same. The demand for our services is driven by the need to address urbanization, digitalization and sustainability. And one good example of this is that we, during Q2, had -- has been accomplished by the Flemish Government Architect's team for the design of the central market square in Sint-Niklaas, Belgium, which you can see in the picture here. In these uncertain times, Sweco has taken some measures to mitigate the challenges caused by COVID-19. In a press release that we sent on April 6 and in the financial report for Q1, we communicated that we have quickly adapted to the situation with around 14,000 of 17,500 employees working remotely and with maintained production capacity. This has been possible main -- possibly mainly due to a high level of digitalization and our decentralized business model. And the quick adaptation has really helped us to keep the focus on business, our project and our clients. However, due to COVID-19 impact on industry and private buildings and real estate segments that we announced in April organizational adjustment as a result of this. At the end of the second quarter, around 130 employees in Sweden have been affected by these organizational adjustments that we announced in April. In addition to this, around 250 (sic) [ 215 ] employees in other business areas are on temporary layoff, of which approximately 150 in U.K. The focus now is to plan for all our employees to return to office according to guidelines and regulation in each country. Currently half of our employees have, at this point, already returned to office. We continue to monitor the situation very closely and evaluate potential further actions. The way forward now is that we continue to execute on our strategy and our long-term goals. What have been important through COVID-19 and will continue to be important is that we stay relevant to our clients, work close together and focus on winning new projects. We had a strong financial position with low net debt and stable cash flow that creates possibilities for us going forward. With that said, let us now go back to our performance in Q2. Starting with growth. As you can see on this slide, we delivered a positive organic growth of 1% in the quarter. We had a strong development in Belgium with an organic growth of 7%. We had a good growth in the Netherlands, Sweden and Finland. The main drivers for the organic growth were higher billing ratio and increase of 274 FTEs and lower absence. However, we had weak organic growth in U.K., Denmark and Germany, Central Europe. In U.K., it was mainly driven by an overall weakened market as a result of the lockdown in the country due to COVID-19, less revenue from sub-consultants and temporary layoff of 150 employees. In Denmark and Germany, Central Europe, the low growth was mainly due to lower average fees. EBITA increased by 12% in the quarter, adjusted for calendar, and we reported a solid margin of 9%. As you can see in the slide, 3 out of 8 business areas reported double-digit margins despite the uncertain market conditions. Finland, Sweden and Belgium continued to deliver margins above 10%. U.K. and the Netherlands delivered good margins. However, the overall performance continues to be weak in Germany, Central Europe. We work hard to fully implement the Sweco model, and this will take time. Let me now present the acquisition that we made this quarter. SGI Ingénieurs became part of Sweco on June 12. The company was founded 2009 and has 39 employees. SGI has a strong reputation in Brussels and Wallonia for structural design, building techniques and civil engineering. The acquisition strengthens our position on the Belgian building market. The activities and client profiles of Sweco and SGI complement each other well and together, we have a considerable number of interesting projects in our portfolio. The acquisition is in line with our strategy. Despite the uncertainties caused by COVID-19, we continue to look for interesting acquisition opportunities. And with that said, I will now hand over to Olof to walk you through the numbers.

[Olof Stålnacke, Chief Financial Officer]

Thank you, Åsa. When we look at net sales to start with, it is, in the quarter, close to SEK 5.5 billion, taking LTM net sales to SEK 21.5 billion. Organic growth is 1%, with a small additional positive effect from 3 more working hours in the quarter. M&A had another 5% and including the negative FX effects from the stronger Swedish krona, total growth is 5%. If we then look at EBITA. The solid EBITA development that started back in Q1 2018 continues. EBITA in the quarter is SEK 495 million, SEK 73 million higher than Q2 last year, and that brings LTM EBITA for the first time above SEK 2 billion. EBITA growth is SEK 51 million or 12%, excluding a net positive calendar effect of SEK 23 million. The calendar effect was positive in Sweden and Norway, negative in Finland and the Netherlands and neutral in the other BA. Looking then at the EBITA bridge by business area. As in Q1, the main EBITA drivers are Finland and U.K. In both countries, driven by lower operating costs and contribution from acquisitions; in Finland, that's supported by FTE growth; and in the U.K., by higher billing ratio as well as higher average fee. Denmark, Netherlands and Belgium also improved, whereas Sweden and Norway are slightly negative versus last year. It should be noted that Sweden is impacted negatively by restructuring costs of approximately SEK 40 million. 3 BA show double-digit margins, with Finland leading at 14.3%. Denmark comes back after weak Q1, but Germany continues to have challenges with profitability. In total, the cost savings related to COVID-19 in the quarter is around SEK 80 million, and that's primarily travel and training costs. Looking then at the financial position. We have a net debt at the end of Q2 of SEK 1.3 billion, roughly SEK 1 billion less than Q2 last year. And this is driven primarily by a strong cash flow from operations, but also by the dividend reduction. Leverage is at 0.5, and we have available liquid assets of SEK 4.7 billion at the end of the first half, including the SEK 1 million short-term credit facility that we took early in Q2. We are well positioned to manage through the current situation and also to capture the opportunities that may come out of it. And with that, back to you, Åsa.

[Åsa Bergman, President, CEO & Director]

Thank you, Olof. Let us now conclude Sweco's second quarter. We continue to deliver solid performance despite uncertain times. We managed to deliver 1% organic growth with acquired growth adding another 5%. Our business areas are overall delivering solid margins for the quarter, and we report an EBITA margin of 9% compared with 8.1% last year. We have a strong financial position going forward with a low net debt and good liquidity. The primary impact from COVID-19 continues to be in the industry and the private building and real estate segments. Still, the long-term demand for our services is driven by strong trends in society. One good example of this is a new assignment appointed by Yorkshire Water to provide consultancy service and a technical service framework, including project management, innovation and process optimation (sic) [ optimization ]. Our focus right now is to continue to deliver on our strategy and to implement the Sweco model on all our markets. We work close together with our clients to ensure that we are relevant and deliver the best solutions, and we focus on winning new projects. We are monitoring the COVID-19 situation closely and are prepared to take additional measures if necessary. We have plans in place for all employees to return to office according to guidelines and regulations in each country. Looking ahead, our long-term focus is, of course, to continue to stay relevant and develop sustainable solutions together with our clients. Our societies, cities and industries are all going through major transformations, and Sweco is well positioned to support our clients in this. Thank you.

[Katarina Grönwall, Chief Communications Officer]

Thank you, Åsa and Olof. And with that, we open up for questions. And those who prefer to use the chat, and that is also possible. Please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of Johan Dahl.

[Johan Dahl, Analyst]

Johan Dahl at Danske Bank. So just a quick question on [Foreign Language]

[Åsa Bergman, President, CEO & Director]

English, please.

[Johan Dahl, Analyst]

No, exactly. Just wondering if it is difficult to evaluate the performance given the very special rules regarding furloughs, et cetera. Would you say that the improvement in the billing ratio that we saw in this quarter, is that sort of an underlying improvement? Or is it more a result of the very special rules that theoretically could help you to raise the billing ratio?

[Åsa Bergman, President, CEO & Director]

I would say it's both. But if you think about how few we actually have furloughed or temporarily laid off, I would say it's an effect of that we -- mid-March transform the business. And actually, I was super clear on that we focus on the clients, market and the projects, and we stopped the noncritical internal work. That means that the whole organization is focusing on the clients and the project. And that is why we could increase the productivity, even if we work remotely and even if we have faced difficulties or uncertainties on the market.

[Johan Dahl, Analyst]

Understand. Just can you elaborate a bit also, Åsa, you seem to be slightly more cautious regarding the fee development at the moment. I mean you made clear that competition is sitting up in certain segments, which segments are those? And do you see this sort of slightly changed pricing regime in your order book as of now?

[Åsa Bergman, President, CEO & Director]

Your last question, no. During this quarter, we don't see that, but there is an increase when it comes to competition. And short term, we see that in most of our segments. And I think that is more due to the nature of a crisis environment. When companies and leaders tend to be distressed, you see different behaviors in relation to what kind of prices and tenders you put out on the market. In the long term -- or in the medium term, I would say that it might be in the industry segment, but -- and also in the private buildings and the real estate segment that we see more price -- competition in those segments. But I think it's really important to emphasize that our order backlog is an order backlog that we have built for several years. So what we have done the last years and what you have seen when it comes to price development is what we now have in our portfolio. And I always say that what you have in contract and fees, you have in your portfolio. So for us, it's super important now to focus on putting the right prices on the market and really show the value towards the market. So we follow that and monitor that closely. But I, of course, see this as a risk because we need to really make the right choices here.

[Johan Dahl, Analyst]

Got you. Just finally, can you say anything regarding the order book, how it looks end of the quarter compared to last year? And can you say if the sort of fee tailwind, was it less in Q2 compared to Q1? Or was it similar to Q1?

[Åsa Bergman, President, CEO & Director]

So if I look at the market situation, the overall demand, as I said, for our services remained stable but our order book was on a somewhat lower level in the second quarter, but most of our projects have remained relatively unaffected. So we are winning new orders because what we did, as I said, in mid-March, beginning of April was that we told the organization of this decentralized responsibility and our 1,500 team leaders and project managers to focus their effort towards clients and markets. And we need to be -- stay relevant and also focus on winning new projects due to this crisis and potential market turndown. And that, I would say, has paid off. So again, it's hard to say, I can't give you any forecast, but so far, I'm pleased with that we have good level of orders received, we have won new projects during the quarter and we only see a slight kind of a low effect on our order backlog during this period of time. And one more comment to that. I think it's important, again, to mention that we are not dependent on a few big projects or clients. The small- and medium-sized projects, along with the bigger ones and also the broad portfolio we have of public and private clients, but also 4 different segments, it's really crucial now in combination with the Sweco operating model.

[Operator]

Our next question comes from the line of Ola Soedermark.

[Ola Soedermark, Equity Research Analyst]

Ola Soedermark, Kepler Cheuvreux. A follow-up on the order book. Can you elaborate a little bit on how it has developed during the quarter if it has been a material change towards the end of the quarter? And also, I think you mentioned that you can see some positive effects. Do you think there are a lot of catch-up effects towards the end of the quarter? Or do you see a stable underlying demand?

[Åsa Bergman, President, CEO & Director]

So in the beginning or in late March and in the beginning of April or during April, beginning of May, we saw projects stopped, delayed and the procurement processes postponed. And that was the first part of the quarter. What we have seen last part of the quarter is that the level of projects affected in our order backlog is fewer and it seems that, that has stabilized. And we're also seeing some of the postponed procurement processes or stopped projects actually have restarted during this period of time. So that in combination with how we work so intensively with client interaction and winning new projects, that's why we are in a good shape when it comes to the order backlog. And again, it's really hard to -- normally, we don't detail and discuss in more detail when it comes to our order backlog. But again, back to that we have 70,000 ongoing projects and average fee of EUR 35,000.

[Ola Soedermark, Equity Research Analyst]

Yes. It's -- can you say anything about -- is it any business area when it comes to orders that stands out in a positive way and -- or a negative way?

[Åsa Bergman, President, CEO & Director]

It's the industry segment. And as you know, we have industry segments in most of our business areas. It's also the private building and real estate segment that has been affected. But again, as we push so hard for client interaction and trying to win new orders, I think we have met that decrease in those segments quite well. And as before, I would say that the industry segment, the energy and the water segments are still strong. So that will be the picture that we see right now. And also, we expect, of course, if we look at previous crisis, we expect there to be stimulation packages coming at in the back end of this crisis. We haven't seen any of those stimulation packages yet being implemented. But the discussions that I'm part of when it comes to governments, regions and communities -- municipalities, sorry, is in line with -- that there will be stimulation packages in relation to sustainable solutions and sustainable transportation, railway and electrification of road. So a green restart after this crisis is what is discussed, and that means that we are in the sweet spot when it comes to those stimulation packages, if and when they potentially happen.

[Operator]

Our next question comes from the line of Erik Elander.

[Erik Elander, Research Analyst]

So I think it's very interesting because when you look at the margins, especially in Finland and Belgium, it's really impressive what you have done in those areas. I mean if you go back just 2, 3 years from today, margins was around 7% in those countries. However, you have Sweden -- the Swedish operation, which has been really good for a long time, but then you have also the other operations, which is below 10%, for the moment, at least. Given the journey that you have done in Finland, which is now the highest margin within the group and also the Belgium journey that you have done, how long should one expect or how long do you expect it to take for the other operations to get to the same margin or at least about 10%?

[Åsa Bergman, President, CEO & Director]

That is a good question, and I have tried to answer this question before. And now we have this uncertain COVID-19 situation, which makes this even more tricky to answer. And my answer would be that for us, it's about to have a clear focus on implementing the Sweco operating model, and that takes different times for different business areas because it's in relation to where the starting point is and how the market works and what capability there is within each business areas to adapt the way we would like to work. And what kind of leadership there is culture-wise in a country. But our focus is, and it's on the agenda, we have a program to implement the Sweco operating model. But of course, a hit like COVID-19 and the period that we have right now will affect this, but we keep our eyes on the ball and continue to implement. But for me, again, the most important thing when it comes to [ leaders to your ] company is to take it step by step. And as long as I see continuous improvement, it's not the pace that I focus on. I focus on that is a step-by-step approach to become better and create a stronger performance in line with our model. But -- and then we will reach our goal. But when, I don't know actually, so we will see. But we have shown, as you referred to, both in Finland and in Belgium that is doable. So it's not like -- it's not doable in one country. It's more of how we implement and how long it will take for us to reach the levels that we would like to be on.

[Erik Elander, Research Analyst]

So it's basically about how the country is adapting to the Sweco model of working, how quickly they adapt, I should say.

[Åsa Bergman, President, CEO & Director]

Yes, or how long it will take for them to implement and transform their capability. Because it's not -- it's only about implementing certain processes, it's about creating strong client relationships, broaden the product portfolio. It's about ensuring that we operate with internal efficiency in a certain way that we have behavior when it comes to leadership that really support and unleash the power of performance in each individual. So it's also behavioral things and cultural things that we work to change, and that takes time.

[Operator]

Our next question comes from Johan Sundén.

[Johan Sundén, Research Analyst]

Actually, we have covered much of those questions I have prepared. But is it possible to just quantify, say, the effects of the cost savings that you have initiated in Sweden, for example, during the second half of this year.

[Åsa Bergman, President, CEO & Director]

Olof?

[Olof Stålnacke, Chief Financial Officer]

Yes. I think the -- it's 130 people that has been affected in Sweden. We have seen very little of the savings in Q2, but we have, as you've seen, taken the restructuring costs. So with some assumptions on salaries, it's -- we don't have a number that we communicate, but it should be quite easy to estimate, and we'll come back in Q2 with the -- when we see the actual savings.

[Johan Sundén, Research Analyst]

Okay. Yes. I'll try to do my own calculation then.

[Operator]

Our next question comes from the line of Dan Johansson.

[Dan Johansson, Equity Research Analyst]

Two questions from my side as well. First one on Norway, perhaps a bit slower than at least what I had expected. Is it possible to quantify the impact from the negative project adjustments you had on [indiscernible]?

[Åsa Bergman, President, CEO & Director]

In Norway?

[Dan Johansson, Equity Research Analyst]

Yes, exactly.

[Åsa Bergman, President, CEO & Director]

Olof?

[Olof Stålnacke, Chief Financial Officer]

It is -- most of the decline in EBITA versus last year comes from project adjustments. You can roughly assume that, that's the negative project adjustments.

[Dan Johansson, Equity Research Analyst]

Okay. And another question, if I may. Cash flow, very strong in the quarter. On balance utilization, are you planning to look a bit more intensively now at M&A again after the summer, perhaps as overall demand also holds up a bit better than initially feared? And also, how is your acquisition pipeline looking currently?

[Åsa Bergman, President, CEO & Director]

So we have a strong -- a very clear long-term strategy for the acquisition that we follow. And we have a plan in place for each business area. And of course, during this period of time, it has been a somewhat slower pace because we haven't been able to travel and meet face-to-face, but we have a pipeline of companies that are of interest to us. So we keep up the dialogue, and we are ready to intensify that work when we get the opportunity and when we can start to travel. I would like to emphasize that we stick to our strategy. That means that even if there would be lots of possibilities out there on the market, we have the same way of doing this. We're looking for companies that suits us that is the right companies for Sweco, and we will take the time to have a dialogue to ensure that we make the right acquisitions. So we don't bring in risk to our portfolio due to a potential stress in the market -- on the market.

[Katarina Grönwall, Chief Communications Officer]

We have a question from the web, from the chat function. It's from Christian Hellman from Nordea. Can you mention what the organic growth was on a per month basis, April, May and June?

[Olof Stålnacke, Chief Financial Officer]

We don't want to get into monthly growth figures. It was relatively stable throughout the quarter.

[Åsa Bergman, President, CEO & Director]

Okay. Thank you, everyone, and have a great summer, and stay safe and healthy.

[Operator]

Thank you. That does conclude today's conference. Thank you to everyone who's participated in today's call. You may now all disconnect.