Sweco AB (publ)

STO:SWEC B

Earnings Call Analysis

Sweco Q2 2024: Solid Growth and Improved Margins

Sweco reported strong Q2 2024 results with a net sales increase of 11% and organic growth of 6%. EBITA rose by 12%, lifting the margin to 9.8%. Efficiency measures, including restructuring in the UK, Sweden, and Finland, improved profitability. Demand remained robust in sectors like Water, Energy, and Transport Infrastructure, while traditional industry services showed weakness. The company announced two acquisitions in Germany and the Netherlands, enhancing its expertise in water treatment and technical installations. Sweco remains focused on tapping into Europe's green transition and attractive growth segments like healthcare, pharma, and defense【7:1†source】【7:4†source】【7:5†source】【7:6†source】.

Steady Growth and Increased Margins

In the second quarter of 2024, Sweco showcased solid financial performance, with net sales reaching SEK 8.1 billion—a significant boost from previous quarters. Organic growth, adjusted for calendar effects, was at 6%, while growth from mergers and acquisitions contributed an additional 3%. No major shift in foreign exchange rates influenced these figures. The company also reported an EBITA of SEK 794 million, marking an increase of 12% from last year and a commendable margin of 9.8%. Adjusting for restructuring costs of SEK 58 million, the EBITA growth would stand even higher at 22%.

Efficiency Improvements Drive Performance

Sweco has been relentless in pursuing efficiency, implementing measures that include redundancies mostly in the UK, Sweden, and Finland, alongside a systematic review of organizational structure. These actions have started yielding positive results, with improved profitability in various business areas and better billing ratios. For instance, the billing ratio improvement in Q2 has significantly contributed to the overall revenue growth. Despite these changes, the company continues to emphasize maintaining recruitment and reducing personnel turnover.

Diverse Market Demand

The demand for Sweco's services remains robust, especially in segments aligned with the green transition. The Water, Energy & Industry segment is experiencing strong demand due to energy transition efforts and water management projects. Similarly, the transport infrastructure segment has benefited from investments geared towards sustainable transportation. However, traditional industry services and residential/commercial real estate areas showed weaker demand, highlighting a variability across sectors.

Financial Position and Leverage

Sweco's financial health is solid, with a significant reduction in leverage from 1.1 last year and maintaining available liquid assets of SEK 3.3 billion. This is a testament to a strong cash flow quarter and effective working capital management. The company's effective financial strategies ensure it remains flexible and resilient amidst varying market conditions.

Restructuring and Geographic Performance

Despite overall positive performance, not all regions experienced growth. Finland and the UK saw negative growth, warranting considerable restructuring efforts. Sweco has taken significant actions in these regions, including the reduction of around 100 FTEs in the UK during Q2 alone. However, other regions such as Denmark, Germany, Central Europe, and the Netherlands posted strong growth, driven by continued fee increases and FTE growth. These strategic moves have fortified the company's foundation in these key European markets.

Acquisitions and Future Outlook

Sweco continues to expand its footprint through strategic acquisitions. Notably, the acquisition of Frilling + Rolfs in Germany, and Valstar Simonis in the Netherlands, adds a combined 90 experts to its cadre. These acquisitions form part of a broader strategy to tap into growth segments like water treatment and technical installations for sustainability. Additionally, the company's participation in high-impact projects like the green hydrogen plant in the Netherlands and sustainable transportation projects in Finland and the UK signifies its commitment to driving future growth. The order book remains strong, with a slight decrease in relation to last twelve months' net sales growth, but still showcasing a healthy inflow.

Guidance and Strategic Focus

Looking ahead, Sweco plans to sustain its growth trajectory by focusing on market sectors such as healthcare, pharma, and defense—all poised for expansion. The emphasis on improving efficiency through enhanced billing ratios and margins remains a priority, bolstered by new initiatives and a vigilant approach to mergers and acquisitions. With its strong market position and strategic moves, Sweco is well-prepared to capture future growth opportunities and continue on its path of profitable growth.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Sweco Q2 2024 Financial Report Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Marcela Sylvander, CCO. Please go ahead.

[Marcela Sylvander, executive]

Hello, everyone, and welcome to this presentation of Sweco's Q2 report. Sweco's President and CEO, Åsa Bergman; and CFO, Olof Stålnacke are with us today to take us through the results of the second quarter. Åsa?

[Åsa Bergman, executive]

Then welcome, everyone, to Sweco's Q2 presentation. And before we present the second 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 a good balance of private and public 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 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 Q2 highlights. Q2 was another good quarter for Sweco. We continued the positive momentum from Q1 and delivered a quarter of solid growth and improved margins. Net sales increased by 11% and the organic growth amounted to 6%. EBITA improved by 12%, adjusted for the positive calendar effect in the quarter as a part of our efficiency measures, restructuring cost of SEK 58 million are also including it in the results. The positive development was mainly driven by higher average fees, higher billing ratio and a continued FTE growth. I am very pleased that the margin improvement increased to 9.8%.

With this summary, let us dive into more details. As I mentioned, we continue to build on the momentum from the first quarter with a positive operational trend. 6 of 8 of our business areas reported organic growth and EBITA improvements in the quarter, and we continue to keep a good pace in recruitment. I would also like to highlight that 7 out of 8 business areas achieved margin improvements in the quarter. Over the past few quarters, we have put increased emphasis on our efficiency and billing ratio. And I'm pleased that we are now seeing a higher billing ratio in the second quarter.

Let me give you an update on our work to improve our efficiency. Efficiency improvements are key to improve our margins. And over the past quarter, we have implemented a series of measures. This includes redundancies, mainly in the U.K., but also in Sweden and Finland. We have also initiated a group-wide organizational review to streamline the organization. We are now pleased to see that these measures are starting to have effect. Repositioning in the U.K. is progressing according to plan, and the business area reported a positive result in the quarter. We are also seeing an uplift in our profitability across most business areas and improvements in our billing ratio. This will remain the key priority going forward, but we are pleased to see that we are taking steps in the right direction.

Looking then at the overall market situation, it is generally in line with previous quarters. The overall demand for Sweco services remained good, especially related to the green transition. In Water, Energy & Industry segment, we see continued strong demand related to the transition in the Energy and Industry segments and a strong demand in Water. We see a weak demand in traditional industry services. In the transport infrastructure segment, we see good demand supported by infrastructure investments and transition to more sustainable transportation. And in the Buildings and Urban Areas segments, we see stable demand in public buildings and a continued weak demand in residential and commercial real estate 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, Åsa. Starting again with a summary of the quarter. We see net sales of SEK 8.1 billion. 6% calendar adjusted organic growth, 3% from M&A and no significant FX effect. EBITA is SEK 794 million, excluding the significant positive calendar effect, which are SEK 68 million or 12% up and margin is at 9.8%. In the EBITA, we have also taken SEK 58 million in restructuring costs a bit more than we announced in Q2 where we talked about around SEK 45 million. Excluding these restructuring costs, the EBITA increase would have been 22%. Leverage is down significantly from last year at 1.1 after a strong cash flow quarter.

Looking at net sales adjusted for calendar, again, 6% organic growth, and we see organic growth in 6 out of 8 BAs. Denmark and Germany and Central Europe continues to show very strong growth, and we see solid growth also in Sweden, Netherlands, Norway and Belgium. Finland and especially U.K. has negative growth. These are also our weakest markets and the markets where we have taken the most significant restructuring actions. The growth drivers, again, have been continued fee increases, also FTE growth. We maintain recruitment and personnel turnover has continued to decline in the quarter. In the quarter, we are also very pleased that billing ratio contributed positively to growth. And finally, one can add that there was no significant impact from absence in the quarter.

Looking at EBITA, we see a 12% increase adjusted for calendar. And as said, excluding the restructuring costs, the EBITA growth would be about 30%. The positive calendar impact, we see margin improvement in all BAs except Belgium, who still delivered 12.9%. Denmark, Norway and Sweden also delivered double-digit margins. Finland is at 9%, Netherlands at 8%, and Germany and Central Europe delivered 6% in another solid quarter. Norway, again, has the biggest calendar effect. 40 more working hours, primarily due to Easter. U.K. remained marginally profitable despite taking additional restructuring costs in the quarter. If we then look at the EBITA bridge by business area. Overall, higher average fees continue to be a positive driver together with FTE growth. and now also billing ratio, while higher personnel expenses, including the restructuring costs had a negative impact.

Looking at the BAs, 6 out of 8 delivered increased EBITA. Belgium is in line with last year. Denmark and Germany and Central Europe just as for the growth, once again delivered the largest EBITA improvements. Netherlands also had a strong quarter with Sweden and Finland improving despite taking significant restructuring costs in the quarter. We took SEK 35 million in Sweden and SEK 50 million in Finland. In the U.K., we have concluded our restructuring actions in the quarter, adding another 100 FTE reduction to the 100 FTE reduction we did in 2023. The calendar effect from 13 more working hours corresponded to a positive SEK 162 million in net sales and EBITA impact. Looking at financial position, net debt is significantly down versus Q2 last year after a strong cash flow quarter. The working capital release and also decreased M&A outflows.

Leverage is at 1.1, also significantly down versus last year and well below our target. We remain financially strong with available liquid assets of SEK 3.3 billion. And as last quarter, we have a slide on the calendar effect. And with the end of Q2, we have now put the big calendar swings from Easter behind us. We have a significantly positive calendar in Q3, a high number of working hours in the quarter, but of course, it's also the holiday quarter, making it our smallest from a financial perspective. Positive calendar is also in July, meaning that it will probably have limited practical impact in the Nordics. So we may not get the full impact of the calendar effect. We have a small positive total for the year for the first time since 2020 and with our increased size, 1 hour now corresponds to approximately SEK 13 million. With that, back to you Åsa.

[Åsa Bergman, executive]

Today, I am happy to announce 2 new acquisitions. First one is a company called Frilling + Rolfs and this is the first new acquisition in Germany for some years, and this is a milestone for us in Germany. The acquisition adds 30 experts specialized in the growing market segment of water treatment, enabling us to capture more business opportunities. The second company is Valstar Simonis, and this is an acquisition in the Netherlands that will further strengthen Sweco's position in the field of technical installations for sustainability, comfort and safety in buildings. This acquisition is adding 60 experts to Sweco in the Netherlands.

The projects won in the quarter reflect our broad and diverse expertise across several growth segments. Energy sector remains an interesting growth area. In the quarter, we won a project to support VoltH2 in the development of a green hydrogen plant in the Netherlands. Defense is another sector with growing demand. And here, we secured a 4-year contract with the Danish Ministry of Defense for support in construction and development of military properties. Need for more sustainable transportation is shown in 2 different types of projects 1 in Finland, where we will support the development of a tramway in the city of Turku and another project in the U.K. where we are transforming a major road into a corridor of walking, cycling and public transport.

Let me now conclude by presenting our key priorities and focus areas going forward. We remain focused on capturing business opportunities by further strengthening our market position in Europe's green transition and by tapping into attractive growth segments such as health care, pharma and defense. We also focused on executing on our M&A agenda, announcing 2 new acquisitions today and are actively working with a broad pipeline. And we will continue to focus on our efficiency to improve our billing ratio and margin. This includes all the initiatives I have presented today and a strong efficiency focus across the organization. All in all, Sweco remains well positioned to continue our journey of profitable growth. We are committed to capture growth opportunities. Thank you.

[Marcela Sylvander, executive]

Thank you, Åsa and Olof and now we will open up for questions. And as said before, it is possible for you to ask them directly through the phone line or through the chat function. So please, Melanie, if you could steer us.

[Operator]

[Operator Instructions] Our first question comes from the line of Dan Johansson from SEB.

[Dan Johansson, analyst]

I have 3 questions here. I'll take them one by one, if it's okay. Maybe first one, it's quite encouraging to see the billing ratio improving this quarter. Did you see most of the positive impact from the efficiency measures already now in Q2? Or is that sort of more of a boost ahead of you as well that you only saw a minor impact on these measures made?

[Olof Stålnacke, executive]

I think you should see it. It will be a gradual impact. And obviously, all the actions we have taken has not happened at the start of the quarter, but gradually. So assume that the improvement will continue sort of all things equal.

[Dan Johansson, analyst]

Okay. Sounds good. And another question, more market-related perhaps. Yes, as you know, the weak demand for -- within residential and commercial real estate has been around now for many quarters. But in your more early cyclical exposure, I guess, such as parts of architecture, are you not starting to see more projects coming in now, perhaps starting now in H2, although from low levels, I guess? But -- or is it just still very, very dark out there in the real estate segment?

[Åsa Bergman, executive]

There is no change in the segments you referred to, it's still weak. And as I said in the previous quarter, we will start to report when we see effects in our orders received and in our order book related to those segments that you referred to. They are still weak.

[Dan Johansson, analyst]

Yes, fully understand. And maybe a final question. Interesting now to see the first acquisition in Germany for quite a long time. I guess we could see more of that coming in the coming years. But how do you assure that you're expanding in a controlled way this time? You don't run into similar challenges you previously had in Germany? It would be interesting to hear your take on that.

[Åsa Bergman, executive]

I mean, of course, you learn from whatever you experience and it's the same with us. So we work with a very strict DD process. We are working with a broad pipe of targets. So first of all, we are making sure that we focus on the right areas and the right competencies that we need to continue the growth in Germany in the right way. And then, of course, we're very selective in that process. So yes, and a very strict and firm DD process, I would say, be selective and have a good DD process.

[Olof Stålnacke, executive]

And I think -- I mean, we're adding to that is, of course, that we are making the acquisition is a sign that we see that we have ways of working and processes in Germany that are now a sort of a stable foundation to add companies to.

[Åsa Bergman, executive]

Yes.

[Operator]

Our next question comes from the line of Fredrik Lithell from Handelsbanken.

[Fredrik Lithell, analyst]

Congratulations to a nice and strong report. I have 2 questions for you, and it's really on your weak spots in U.K. and Finland. So I would like to hear you elaborate a little bit on the U.K. Is that a good enough platform do you think for bolt-on acquisitions? Or do you need to sort of restart the U.K. given where you are and what you're working with right now? And in terms of Finland, it has been a weak market situation in general in Finland is our assessment anyhow. It would be interesting to hear from you if you see this is mostly a market situation or is it something in your organization that is troubling you as well would be interesting.

[Åsa Bergman, executive]

If I start with the U.K. market, if we refer back a bit to the Q1 report, especially the public market has been challenging for some time. So when we're talking about positioning the U.K. market it is really to focus where we see more stable growth. So with that focus and the measures and redundancies taken, we foresee a more stable performance going forward. But -- so what you see in the quarter is that we see a gradual process related to the activities that we have taken. And we are optimistic about the business opportunities in the U.K. market going forward. When it comes to Finland, I have to say, it's mainly and have been mainly a market situation, if you refer to the weak performance going back in Finland. We see that with the measures taken and the redundancies that we have taken in Finland, both in Q1 and Q2 that we are in -- we are well positioned in the Finnish market. And then, of course, related to the efficiency measures that we talk about that, of course, covers Finland as well. So we work both with the market and with internal measures to become even more competitive on the Finnish market.

[Fredrik Lithell, analyst]

Very good answers. Just a follow-up on Finland there. I mean as you say, it has been a weak market broad-based, more or less. And there are other players there as well that also have suffered and are struggling a little bit evenly. Do you feel that you have the same pricing environment in Finland? Or is it so that, that is also a weak spot in terms of pricing?

[Olof Stålnacke, executive]

I would say -- and Fredrik, I would say that Finland had same -- have had roughly the same price increases in other countries. So we have sort of not -- as we said before, not sacrificed pricing for volume in that market either so.

[Åsa Bergman, executive]

And maybe that is good to comment on that we are and Finland is also very good at this to select the right projects and also to be able to utilize what we have to be efficient when it comes to the pricing as well.

[Operator]

Our next question comes from the line of Johan Lönnqvist Sundén from Carnegie.

[Johan Sundén, analyst]

First one is on the order book situation. You didn't give any comments that I have found in the report on the order book situation. Is it possible to quantify or put any direction of how the order book has developed quarter-on-quarter?

[Olof Stålnacke, executive]

The order book has continued to grow in absolute terms. It is slightly down in relation to LTM net sales growth, but we don't see any break in the trend it is growing in absolute terms, as said, then we will still have a good order inflow. No sort of directional change on that one.

[Johan Sundén, analyst]

Excellent. On the cash flow then, working capital released here in Q2 while you had the working capital buildup in Q2 last year. Was there anything particular that triggered the strong working capital release in this quarter?

[Olof Stålnacke, executive]

I think a couple of quarters back, we talked about taking action on working capital, and I think we are -- part of that is what we are seeing right now. So as you say, Q2 normally seasonally weak when it comes to trade working capital, but we have made a reduction and on trade working capital, we are back to the levels we saw in '21 and '22 before the acceleration of growth. So that's very positive.

[Johan Sundén, analyst]

Excellent. I guess my final question is on the M&A outlook. We have touched upon it during the presentation already, but just to give more color on the kind of M&A pipeline, how you're thinking about the German business in more detail regarding what pockets do you want to strengthen? I guess you have had quite a lot of time during the turnaround process to kind of start the German market and work with lead generation, et cetera?

[Åsa Bergman, executive]

First of all, if I start in Germany, I mean, in Sweco as you know every business needs to have the right to grow with acquisitions. And we are there now even if you will see it gradually coming. And I mean the areas we're looking for is where we see the green transition. And then so it's about the water segment, as you see now, it's about making sure that we strengthen ourselves in the Infrastructure Transportation, Transport Infrastructure segment related to the rail and light trade, it's really about sustainability services and different aspects. But -- so in all segments, it's related to that we can meet and support the green transition and what our client is needing in Germany.

So we -- I mean, we look at the German business, both of a -- in a geographical perspective, but we're also looking at it when it comes to competencies to make sure that we find companies that fits us both geographically, but also competence-wise. And we are working with the broad portfolio and then try to intensify the dialogues. And it's the same way we work in all countries to make sure that we -- when we get the opportunity to buy the right companies, then we will do it. But -- so it's more of a timing question in an overall perspective. And in Germany, it's very much to be in a step by step and being very selective.

[Operator]

Our next question comes from the line of Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Yes. Just a few questions. Firstly, on pricing. I mean, we've talked over the quarters lately about sort of prices being accretive to earnings, the net of pricing and wages. This quarter it seems to be many other things that are driving sort of strong results. I was just curious to know, do you see sort of a diminishing effect from prices versus wage and its accretion to earnings. So is there any cause for concern for that reason? Or why is that if that's the correct conclusion?

[Olof Stålnacke, executive]

I would say I mean, you will always have some fluctuations between quarters and Q2 is also when we get the impact of the salary revision in Sweden, so it's probably sort of the most difficult quarter from that perspective. But we see no general change in that trend, and we are quite confident that we can continue to balance prices and salary increases.

[Johan Dahl, analyst]

Got you. Interesting to have also your long-term ambitions with regards to efficiency. Do you think that it will be required by Sweco sort of to do the type of restructurings that you've done in the last 2 quarters will that sort of be a recurring event? Do you think to continue to drive efficiency in the coming years? Or do you expect this to be a -- if this is sort of a subnormal position right now where you're taking sort of accelerated action?

[Olof Stålnacke, executive]

Obviously, if you look over the last 12 months, we have -- I mean, there is somewhere around 500 FTE reduction in total in Sweco and I think that's probably -- and that obviously includes the turnaround in the U.K. I think that is -- will continue to be sort of a high number for us, but -- so not on those levels going forward. But I mean, if we need to make restructurings, we will do that, but there is nothing in the plans right now.

[Johan Dahl, analyst]

All right. Finally, also on the -- if you just look Northern Sweden, northern Scandinavia, so pulp and paper, battery manufacturing, et cetera. What are you seeing currently in your tendering activity. Is there any red flags occurring here for you guys in terms of demand from clients? Or is it too sort of small to be relevant for Sweco in total?

[Åsa Bergman, executive]

Yes. I would say -- I mean I will say -- Åsa here. I would say that, I mean, overall, it's -- I mean, it's part of our portfolio, but no major red flags. We see a diverse portfolio or our orders received is quite diverse. So all in all, we're good. It's -- when it comes to industry, it's really related to the more energy-related industries. We see demand. And it's also fair to comment that we also work quite a lot across when it comes to those projects. So we work across the different Sweco markets here. So when we aid them we build up our project teams, we build them across borders, meaning that we utilize all markets at the same time in a way.

[Operator]

[Operator Instructions] Our next question comes from the line of Raymond Ke from Nordea.

[Raymond Ke, analyst]

A couple of questions for me. First, regarding sort of the improvement in utilization. What is a level of utilization that you consider to be satisfactory on a full year basis. Should we sort of look at your historic levels at close to 75%? Or do you have other industry peers as a guide here? How do you look at it long term?

[Olof Stålnacke, executive]

We obviously have internal targets, and we have internal targets for each business area, but we do not communicate them externally. And I think in general, Q2 is a good sign that we are moving in the right direction. We expect continued gradual improvement, but we'll not talk about it more than that.

[Raymond Ke, analyst]

Got it. And restructuring costs there in Denmark and Belgium, sort of surprised about those. Are you sort of seeing signs of a market becoming weaker there and trying to get ahead of it? Or could you provide some more context for these restructuring initiatives here?

[Olof Stålnacke, executive]

Well, we have talked about the bigger actions we are taking in U.K., Sweden and Finland, but we have also talked about reviewing the organization in all the business areas. And these are sort of minor such actions taken in Denmark and Belgium. So no, I would say, market-related, but related to our overall internal efficiency. And if we haven't -- hadn't had the other restructuring costs in this month, we probably may not even have mentioned them since they are so small, but now it felt like we should sort of present the whole picture to be very clear externally.

[Raymond Ke, analyst]

Got it. Makes sense. And I just think I sort of missed the answer there, but as you see now, you don't see any need for more restructuring efforts already in Q3, if I understood that correctly. Is that correct?

[Olof Stålnacke, executive]

We have -- I mean, if we had something big planned and sort of agreed, we would, of course, talk about it. But right now, I mean, we will continue to do take whatever measures are needed to improve our efficiency. But nothing that we have in the plans right now.

[Operator]

There are no further audio questions at this time. So I'll hand the call back to Marcela.

[Marcela Sylvander, executive]

Thank you, Melanie. And there are no more questions for this -- regarding this presentation. So with this, we want to thank you for joining us and wish you all a nice summer vacations and see you, if not before, on October 30 when we present our Q3 report. Thank you so much.

[Åsa Bergman, executive]

Thank you.

[Olof Stålnacke, executive]

Thank you.

[Åsa Bergman, executive]

Bye-bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.