Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Sweco Second Quarter Report. [Operator Instructions] Please be advised today's meeting is being recorded. [Operator Instructions] And I would now like to hand the meeting over to your host today, President and CEO of Asa Bergman. Please go ahead.

[Åsa Bergman, President, CEO & Director]

Good afternoon, everyone. And as said, this is Asa Bergman, CEO and President of Sweco. Today, we're going to look into the Q2 presentation. And with me today, I have Olof Stalnacke, our CFO. So with that, we welcome. And before we move into the quarter, let me give you a short recap of Sweco. We are today Europe's leading engineering and architecture consultancy with 8 geographical business areas in Europe, and we do business in more than 70 countries worldwide. We employ 17,500 experts, which means that we can deliver a unique set of competencies to serve our clients. And with that, let us move over to our performance in the second quarter. So we continue to deliver an overall stable performance even though we are still seeing some effects from COVID-19. We grew our net sales with 3% and delivered organic growth of about 1%, mainly driven by higher average fees. EBITA is SEK 529 million with a margin of 9.4%. I am pleased that we delivered margin improvements in 5 out of 8 business areas. Adjusted for calendar, EBITA decreased with 9% compared to last year, and this is mainly related to continued weak performance in Germany and the U.K. and a slow quarter in parts of the Finnish business. We continue to win the right type of projects. One example from the second quarter is that Sweco has been chosen by the Danish Energy Agency to establish the world's First Energy Island that you can see on the picture here on the right. And this projects will become Denmark's largest offshore wind farm. And finally, we continue to have a strong financial position, giving us flexibility and allowing us to act on opportunities for the market. We continue to make strategic acquisitions. We have announced 3 acquisitions during this quarter that I will get back to later in this presentation. Let us now move over to the market situation. The overall market situation and demand in vehicle services is rather unchanged compared to the previous quarters. We see remaining effects of COVID-19. The demand is -- demand in parts of the industry segment and private building and real estate segments remains weaker, while demand is relatively good in infrastructure, water, environment and energy. However, we designed that the market is improving, we continue to have a stable inflow of new orders and our order book remains strong. Another good example of a project won in the second quarter is a 10-year contract to work on an extension of the North Bothnia Line in Northern Sweden. The demand for our services is largely related to sustainability, digitalization and urbanization, and our well-levered business continues to be a strength for us and provide stability. Now let us take a closer look at the results in the second quarter. We delivered slightly positive organic growth of approximately 1% adjusted for calendar effects in the quarter with a positive development in Belgium and Denmark, and this is mainly driven by higher average fees. The development in U.K. and the Netherlands was weaker in the quarter. U.K. is still being affected by challenging markets, while growth in the Netherlands was weaker due to fewer full-time employees. Belgium continued to deliver a very strong performance with double-digit organic growth in the quarter. Our ambition going forward is to focus on recruitment while maintaining stable operating margins. Let us now move over to the result in the quarter. 5 out of 8 business areas improved their margins in the quarter. Sweco Sweden continued to deliver strong margins of 13.5%, and Belgium sustained their positive business momentum with strong margins of 12.5%. Norway showed significant margin improvement, while Denmark and the Netherlands continued to show gradual improvement. EBITA decreased by 9% adjusted for calendar, and this is mainly related to the continued redevelopment in the U.K. and Germany, and that Finland had a slower quarter in 2 divisions, along with higher costs related to acquisitions and integrations. I have mentioned the development in Germany in our previous presentation, and I want to emphasize that the new leadership is focused on a turnaround of the German business, and this includes implementing efficiency way of working with focus on the right type of projects and underpinned by strict project governance and project control. And this is a turnaround, I said that will take time. So let us now have a look at the acquisitions made in the quarter. I'm pleased that we continue to execute on our acquisition agenda. In Q2, we closed the acquisition of 2 Finnish companies: Gaia Consulting, Finland's leading sustainability consultancy, and the architecture consultancy Linja Arkkitehdit. I talked about these 2 in our Q1 presentation. So let me now give you some more background to our latest acquisition, Boydens Engineering in Belgium. Boydens Engineering was founded 1961 and have 140 employees specialized in sustainable buildings. They are also especially known for designing net zero emissions buildings. And together with Boydens, we create a market-leading building design and engineering business with a clear sustainability profile on the Belgian market. With that said, I will hand over to Olof to walk you through the numbers.

[Olof Stalnacke, Chief Financial Officer]

Thank you, Asa, and good afternoon, everyone. Net sales in the quarter, 5.6 million [Audio Gap] adjusted for calendar, we see an organic growth of increasing slightly from Q1. A significant positive calendar effect in the quarter from 8 more hours, and we can also see the positive impact from M&A is slightly higher than the negative FX effects in this quarter. Looking at the EBITA development, we had an EBITA of SEK 529 million and an LTM EBITA just above SEK 2 billion. EBITA is up versus Q2 last year. But adjusted for the calendar effect, we are SEK 47 million or 9% down. And the positive calendar effect from 8 more hours is SEK 81 million in the quarter. Looking then at EBITA by the business area. Sweden, slightly down in EBITA but continues to show a high margin. Belgium continued to perform strongly with a margin of 12.5%. Norway comes back after weaker Q1, whereas Denmark and Netherlands continued the positive momentum from the last quarter. Looking then at the declines, Finland has a temporarily weaker performance, primarily in 2 divisions, facing slightly weaker markets. With a number of acquisitions, there has also been integration focus and integration costs in the quarter. Finland still delivers 9.2% margin, but that's not where we've been used to see them over the last few years with a very strong performance. The U.K., a little similar to what we've seen in the last few quarters. And Germany and Central Europe is below last year and shows a small loss. New management in Germany, as Asa mentioned, has initiated a turnaround program for the travel parts of the business. Finally then, the financial position, which remains strong. Net debt is at SEK 1.9 billion, which is SEK 700 million higher than Q2 last year, but still significantly below the historical levels. We see trade working capital increases from very low levels in Q2 last year and the significant increase also in the dividend payout. Last year, the dividend was -- the dividend payout was split in 2. So we had 1 payment in the second half. Leverage is at 1, which is half of our target maximum. We have available liquid assets of [Audio Gap] SEK 2.9 million there is due to the termination of the COVID-19 short-term credit line that we think in Q2 last year. We remain well positioned to manage through the current situation and also to capture the opportunities that may come out of this. And with that, back to you, Asa.

[Åsa Bergman, President, CEO & Director]

Thank you, Olof. Let us now conclude the second quarter. Q2 was yet a stable quarter. We continue to deliver a slight -- we've improved our margins in 5 out of 8 business areas. Q2 was still affected by COVID-19, but we see signs of market improvements. We had a stable inflow of orders in the quarter, and our order book remains strong. Another interesting project from the second quarter is one you see on this slide with the design of an industrial scale green hydrogen plant in Finland. This is a good example of how Sweco is well positioned for industrial projects with a clear sustainability profile. We also continue to execute on our acquisition strategy with 3 new acquisitions in the quarter. And with our strong financial position, we are ready to act on opportunities. Let us conclude with some last few words about our focus going forward. Our focus going forward is, as always, on profitable growth. As we see signs of the market situation improving and restrictions being eased, there are great business opportunities for Sweco. The pandemic has accelerated digitalization and placed sustainability on top of the agenda, resulting in new investments with our core areas of expertise. We also have a strong position on ramping up our recruitment to be able to meet the client demand that we expect. By keeping our focus on implementing our way of working with Sweco model and staying close to our clients, I see that we are well positioned for future profitable growth. And with that, let us conclude Q2 and open up for questions. Thank you very much.

[Operator]

[Operator Instructions] And we have a couple of questions from the line of Erik Paulsson of Nordea.

[Erik Paulsson, Analyst]

So I have 3 questions. I start -- I'll start with the first one relating to Germany and Central Europe. You're talking there about project adjustments. And I guess this is write-downs in projects as we saw in Q4. And what is this relating to -- do you see there is a risk of further project write-downs?

[Olof Stalnacke, Chief Financial Officer]

The project adjustments or you are correct to assume that that is write-down. The net effect in the quarter was around SEK 7 million, which is sort of within the range, I would call normal in a business area in the quarter. So we've seen no risk for any major write-downs. This is more of sort of normal fluctuations.

[Erik Paulsson, Analyst]

Okay. And then my second question is relating to Finland. And you were talking about the 2 Finnish divisions, which ones were this? And do you think this will continue in the second half of the year relating to Finland, those divisions?

[Åsa Bergman, President, CEO & Director]

Of course, I would like to start by saying that we have had -- we had -- we are used to having very strong performance from Finland. I would say that this decline is, as Olof said before, it's temporary and it's due to market circumstances in Finland. And it's related to the divisions of structure and expert services. and also related to some high costs related then to integration and acquisitions. So I expect a gradual improvement in those 2 divisions.

[Erik Paulsson, Analyst]

Okay. And then finally, on the order book, I was wondering if the order book developed positively or negatively sequentially compared to Q1 in Q2 now?

[Olof Stalnacke, Chief Financial Officer]

It developed positively sequentially versus Q1.

[Operator]

Your next question is from the line of Peter Testa of One Investments.

[Peter Testa, Analyst]

You mentioned the benefit of better fee levels this quarter. I was wondering if you could give some sort of context as to how they compare to employee costs. Were they sort of similar or one ahead of the other or any context, please?

[Olof Stalnacke, Chief Financial Officer]

We have seen an increase in salary compared to last year, which was very low, but the fee increase is in total at a higher level.

[Peter Testa, Analyst]

Okay. Fine. And then when you -- just a question on reorganization costs. Were there any particular reorganization costs in this quarter? And maybe if you could give some context to how -- if they were, how they compared to the quarter a year ago?

[Olof Stalnacke, Chief Financial Officer]

There were no reorganization costs of any significance. Last year, we had SEK 40 million in Sweden in Q2.

[Peter Testa, Analyst]

Right. Okay. Fine. And then just 1 question on hiring. You talked about being ready to ramp up recruitment. You've also talked about the billing ratio being a bit lower. And I was wondering if you could give some sort of context as to how you're treating recruitment in light of that comment, the billing ratio and maybe whether there's key business units where you're more proactive than others?

[Åsa Bergman, President, CEO & Director]

I would say that we are -- what happened last spring was that we didn't stop the recruitment, but we started to recruit on a really low level, and we have been really, I mean, focused on certain areas during the pandemic when we have recruited. And now, of course, when we're ramping up, we are looking into those segments that is growing more than others. But the work to be done going forward is to really look at all segments when it comes to recruitment. And if I should -- I mean, point you in any direction, I would say that if you look at the European Green Deal and what is in there when it comes to energy transformation and sustainable infrastructure and everything that is related to what is kind of boosted in that plan. There, you have the areas where we will need resources going forward. And then related to the billing ratio, that is a very important KPI for us. So we continue to focus on the billing ratio. But the combination of our order backlog is being stable and is received on a good level and what we expect of the market going forward, recruitment is -- is a priority for us.

[Peter Testa, Analyst]

Okay. So for example, in a key market like Sweden where you've had relatively stable employee levels through the period have been really plus/minus a couple of percent. Would you expect that employee level in total to start increasing? Or is it some areas like EU Green Deal increasing, but you're still managing with natural attrition on other areas of lower billing ratio, so net would be similar?

[Åsa Bergman, President, CEO & Director]

I mean, we work with all aspects at the same time. But when we talk about focusing on recruitment, in this context, we're talking about is make sure that we are coming back to FTE growth.

[Operator]

Your next question is from the line of Dan Johansson of SEB.

[Dan Johansson, Equity Research Analyst]

Just 1 follow-up question from my side. It's the U.K. and the slow development there. Could you elaborate a bit what's driving that and also, has the situation improved now since lockdowns were eased during the latter part of the quarter? Or is it still ahead of you? Or how do you view the U.K. market currently?

[Åsa Bergman, President, CEO & Director]

First of all, I would say that the market is still challenging. And that, as we reported, is the only market where we still have employees on temporary layoff or so-called furlough, and that scheme continues until end September, which said something about the market conditions in U.K. In the long-term perspective, and if we look beyond the current uncertainties connected to COVID-19 and Brexit, I am -- or we are positive about the market, but we are waiting for a number of interesting projects to start. And we are -- I mean, we have full focus to ensure that we -- I mean, get back to profit levels and get back to growth. But it's too early to say when that will happen. And even if we see some signs, I mean, -- and I'm not there until I'm there, so to say.

[Dan Johansson, Equity Research Analyst]

Maybe 1 more question, if I may. What do you see in terms of vacation days now during this year compared to last year when I guess people didn't take much vacation. Is that something you monitor? And do you see it as a risk now for the third quarter? Or anything in particular in regards to that?

[Olof Stalnacke, Chief Financial Officer]

It's definitely something we monitor. It's a bit of a special situation and has been for now for 18 months. But what we see year-to-date is it may be slightly less vacation taken in last year but not any sort of big changes. So we're watching it closely, but there is no sort of imbalance right now as we see it.

[Operator]

Next question is from the line of Johan Dahl of Danske Bank.

[Johan Dahl, Analyst]

It's Johan Dahl of Danske Bank. Just on the project adjustments you talked about in Germany, any of those adjustments related to the projects, I mean, the same projects which you wrote down last year? And also, can you sort of relate this project adjustments to the governance issues that you had last year?

[Olof Stalnacke, Chief Financial Officer]

I mean some of -- it's a sum of a number of projects, and some of them were included in the write-downs because that we did in Q4 because some of these are large sort of long ongoing projects, and you will add adjustments over time. I think the adjustments reflect the fact that we now are very strict when it comes to project accounting and project governance. So in that sense, there is still more to do as we also talk about in Germany in terms of sort of overall project governance. But in terms of project accounting and revenue recognition, this reflects the very strict approach we have now.

[Johan Dahl, Analyst]

Okay. On the -- you talked about a bit of a cost creep, a bit of a cost normalization in the group. What actually is that? Is it -- I mean, it seems as if to travel as it be very limited and digital sort of process is implemented. What does it represent? Is it education? Or is it -- can you elaborate a bit on that would be great.

[Olof Stalnacke, Chief Financial Officer]

I think I think it should be compared to what we did in Q2 last year when we really stopped anything in terms of travel, in terms of internal training, et cetera, in terms of sort of internal development projects. And we are now at a more sort of -- even if we are still low, we are at a level with slightly higher activity in these areas. And I would say to give you a number, we had SEK 80 million of savings last year and about SEK 25 million to SEK 30 million of that has come back in this year.

[Johan Dahl, Analyst]

All right. Do you ambition that do you have like a pent-up demand for that type of activities, i.e., we would get sort of a short-term more material headwind from this?

[Olof Stalnacke, Chief Financial Officer]

I think the first quarter that we see a more normalized situation, we may have sort of a boost in pent-up travel and meeting IRL, et cetera. So there might be sort of effect there. But I think at the same time, as we said before, I think part of these savings are obviously here to stay.

[Operator]

[Operator Instructions] And we also have a question from Johan Sunden of Carnegie.

[Johan Sundén, Research Analyst]

I also have a bit of question on the margin side. And related to the comment you had, Asa, regarding focus on recruitment with solid margins during the rest of this year. When I look at things, you talk about operational expenses coming up a bit as some short-term cost savings swinging back. Once you recruit, you should likely have a bit of pressure on the billing ratio as well. So basically, the fact that can hold up margin is prices. Are you very optimistic on price development during the second half so that you can offset those effects? Or should we expect margin pressure?

[Åsa Bergman, President, CEO & Director]

I would say that as the market looks right now on what we have shown so far is that -- I mean, we are really focused on how we price ourselves in the market. This is for us about making the right choices in the market, select and deselect projects and make sure that we execute them in a very good way, so we can minimize the write-downs we have we have full focus on this, and we will continue. You could expect competition on the market when it comes to resource talent, of course. And we will -- I mean, we will have [indiscernible] folks of this going forward. We have shown before that we are capable of, I mean, holding up the prices and develop them in a positive way recruit at the same time. I would say that if you are -- I mean, if you are steering this right, actually, the growth will potentially improve the margins. So no, I can't see that, and we are focusing on activities that will mitigate that risk.

[Johan Sundén, Research Analyst]

Good. And also another question regarding the general construction market in Sweden, where during this week, we have seen report of cement facility in Gotland supplying 2/3s of the concrete to the Swedish market. Do you see any risk that if those -- that situation doesn't get sold that there could be delays in project starts and so on. And how is discussions developing in the market?

[Åsa Bergman, President, CEO & Director]

It's a big question and my boring answer to that is that it's too early to tell. I mean we are, as you are reading the newspaper and of course, talking to our clients in the market that's using lots of concrete, but it's too early to tell as it is in the middle of the process. So -- I mean, what we're doing is that we follow and monitoring the situation. And the best way we can act is that we're staying close to our clients that potentially can get affected and ensuring that we understand their needs going forward. But of course, it's a serious situation, but there is lots of solutions. And I mean the final decision is not taken yet. So step by step.

[Johan Sundén, Research Analyst]

But if you just resonated regarding the topic, how late can the final decision come until -- so until it doesn't impact project starts during the second half. I guess it can't be -- you can't shift your mindset so in just 5 minutes of time and so on. So there must be some lead times now, people should be worried at some point.

[Åsa Bergman, President, CEO & Director]

But I mean, we are working with thousands and thousands of projects on the Swedish market and I mean there's lots of different materials when we design. And of course, the consequences related to the concrete if that would hit with 1 decision that will be affected the day after, the consequences will be big. There are lots of dimension when it comes to the overall society here. So I think we need to wait for the last word to be said here. So I cannot draw any conclusion at this stage. So we are, as everyone else, monitoring the situation to understand what this is developing.

[Operator]

[Operator Instructions] And it appears we have no further telephone questions. Excuse me, we have a follow-up question from Peter Testa from One Investment.

[Peter Testa, Analyst]

Yes. It was just a question on cash flow, please. I mean, obviously, you've had very different years, 1 year to the next on working capital. And I was just trying to understand whether you could give some sense as to how you thought the H1 working capital fit versus a normal period and the extent to which you thought that would largely unwind in H2? Or would that increase if you're able to grow?

[Olof Stalnacke, Chief Financial Officer]

I mean you should really look at the last 12 months because at the end of Q2 last year, we were at a very low position compared to historical levels. And now we are back to where we were June 2019 because last year, we had both the impact from a very, very strong focus on cash flow and cash flow protection from our side, but also effects from government measures in terms of delayed tax payments, pension payments, et cetera. and some customers paying earlier. So I think you should -- I mean, this means more being back to a normal position, then we will always be working with working capital to get it down, but it's more last year being lower than this year being higher, I would say.

[Peter Testa, Analyst]

Okay. Now because if you look at the slide on the other part of the report of the last 12 months, it's still a minus 8 or 9 of working capital, which I thought maybe that wasn't right to look at last 12 months, and that you should try to understand what a normal seasonality would be. But is that last 12 months the correct thing to look at?

[Olof Stalnacke, Chief Financial Officer]

Yes, I think so remember that we were at a very low working capital position at the end of Q2 last year. So now we'll go back to more of a normal working capital position.

[Operator]

Thank you. There are no further questions. Please continue.

[Åsa Bergman, President, CEO & Director]

Okay. Thank you, everyone, for joining this Sweco Q2 presentation. And with that, I wish you all a great summer.

[Operator]

That concludes the presentation. Thank you for participating. You may disconnect.