Sweco AB (publ)

STO:SWEC B

Earnings Call Transcript 2021-Q3

[Katarina Grönwall, Chief Communications Officer]

Good morning, and welcome to Sweco, and welcome to the report for the third quarter. Today, we have with us Asa Bergman, our President and CEO; and Olof Stalnacke, our CFO, who will walk us through the presentation. So I think with that, we should get started. Please go ahead, Asa.

[Åsa Bergman, President, CEO & Director]

Welcome, everyone, to Sweco's Q3 presentation. Before we move into the quarter, let me give you a short recap of Sweco today. Sweco's is Europe's leading engineering and architectural consultancy with 17,500 experts. And we have 8 geographical business areas in Europe, and we do business in many additional countries worldwide. Let us now start the Q3 presentation. Q3 was a quarter with mixed performance from our business areas. We had strong performance in Belgium, Finland and Denmark. We also had strong performance in the U.K. despite the challenging market. In Sweden, Norway and the Netherlands, we had a slower quarter. We also had one-off costs in Germany that affected the result. Adjusted for one-off costs, we had an organic growth of 1%. EBITA is in line with last year with a somewhat lower margin of 8.8%. We have a strong financial position and continue to act on opportunities in the market with 2 new acquisitions in the quarter. I will get back to those later. One example of a project that we have won during this quarter is the one you see here in the picture. Sweco is part of the alliance group that will construct a new Crown Bridges Tramway in Helsinki. When this is completed in 2026, the Crown Bridges Tramway, with this 1,200 meters, become the longest bridge in Finland. With this introduction, let us move over to the market situation. The market situation improved in the quarter. However, we still see some remaining impact from the pandemic, mainly in the same segments as previous quarters, private buildings and real estate and parts of the industry segment. We continue to build and strengthen our order book in the quarter, and the long-term demand for our services is driven by strong trends in society. Within sustainability, we clearly see an increased demand in our expertise. And one example is an assignment won by Sweco Belgium for the Flemish transportation company De Lijn to conduct a study and provide support for the electrification of its bus depots. And now let us take a closer look at the third quarter. Our organic growth is 1% in the quarter adjusted for calendar and one-off costs. We have positive organic growth in 5 out of 8 business areas. And as you can see here, Belgium continues to deliver good organic growth. And we're also pleased with 5% organic growth in Denmark. The main drivers are higher average fees and the fact that we returned to FTE growth in this quarter. Recruiting has been a challenge throughout the pandemic, and therefore, I'm pleased that we are taking steps in the right direction. Sweco Sweden had a slower quarter with negative organic growth mainly due to higher absence as a result of more vacation days taken during the summer holidays compared with last year. And we still have a strong order book in Sweden, and we focus really to improve growth in Sweco Sweden going forward. Let us move over to the result in the quarter. Adjusted for one-off costs, our EBITA improved by 1% in this quarter. As I mentioned before, we had good development in Finland, Belgium, Denmark and the U.K. In total, we have margin improvements in 4 out of 8 business areas. And I'm really pleased that we are seeing gradual improvements in U.K., reflecting in a major margin improvement in this quarter. We expect that it will take time for the market in U.K. to fully stabilize, but we are seeing positive signs. Adjusted for one-off costs, we have an underlying positive result in Germany and Central Europe. And let me give you a bit more information about the development in Germany. As I have mentioned before in previous quarterly presentation, we have taken firm actions to drive a turnaround in Germany. And with the new leadership in place, we are taking the necessary steps to ensure a future healthy and competitive Sweco Germany. And the execution of the turnaround plan resulted this quarter in one-off costs of SEK 56 million. And this is mainly linked to the closing of an underperforming architecture business and costs related to that. We know that the turnaround will take some time, but we are acting firmly to accelerate the return to profitable growth based on the right leadership, the right offering and project portfolio. We want to emphasize that we see great long-term opportunities on the German market. It is a large and highly fragmented market with growth opportunities, and we have strong offerings in many segments. And on this slide, you see an example of a project that we recently won with the sustainable renovation of Munchberg Clinic in Germany, including both the existing site as well as the construction of the extension building. Let us now move over to the acquisitions of this quarter. I'm pleased that we continue to execute on our acquisition agenda. In Q3, we announced 2 new acquisitions. First, AdviceU, a Swedish consultancy focused on digital services with expertise in IT systems and IT management, and this is a perfect match that further strengthens our offering with digital services. We also announced the acquisition of the Dutch consultancy Bureau Stedelijke Planning specialized in urban planning and strategic advising. And this is the first acquisition in the Netherlands since the acquisition of Hunt by 2015. And it adds great value to our offering in Sweco Netherlands. And with that, I will hand over to Olof to walk you through the numbers. Please, Olof.

[Olof Stalnacke, Chief Financial Officer]

Thank you, Asa, and good morning, everyone. We start with the net sales development. Net sales in the quarter, SEK 4.7 billion, taking LTM net sales to SEK 21 billion. We see organic growth of 1% adjusted for IAC and for the calendar effect. And the calendar effect is relatively small in the quarter, negative 1 less hour -- working hours. We see positive impact from M&A of 3%, and we have no impact from FX in the quarter. Looking at the EBITA development. We have an EBITA of SEK 415 million in the quarter, taking LTM EBITA to almost exactly SEK 2 billion. Reported EBITA, slightly down versus last year, but adjusted for the small calendar effect, we are SEK 2 million or 1% up. And again, we see the negative calendar effect, which corresponds to SEK 4 million. Looking then at the EBITA bridge by business area. We see positive contributions from Finland, Belgium, Denmark and the U.K. Finland is back on high margin levels, 13%, after a slower first half of the year. Belgium continues to perform strongly with a margin of 12.6%. And Denmark continues with the positive momentum we have seen for quite some time now. U.K., as Asa said, really pleased to see them back on high growth and high margins, but the market remains challenging. Norway and Sweden, impacted by more and also later vacation taken than normal more than last year. And we also see part of the COVID savings from last year's being reversed. And these 2 effects can be seen to some extent across all our business areas. And in the other direction, we see continued positive impact from fee increases impacting EBITA positively. Our financial position remains strong. We have a net debt at SEK 2.1 billion, which is SEK 700 million higher than Q3 last year, driven by trade working capital increases and also by a higher dividend payment year-to-date compared to last year. Leverage, still low at 1.1. And we have available liquid assets of SEK 2.9 billion at the end of the quarter. And the decrease you see in available liquid assets is primarily due to the fact that we repaid the COVID-19 insurance credit line that we took in Q4 last year. We remain well positioned to continue to capture any M&A opportunities that may arise. And with that, back to you, Asa.

[Åsa Bergman, President, CEO & Director]

Thank you, Olof. And let us now conclude the third quarter. As previously said, it was a quarter with mixed performance. Some of our business areas performed well, while others had a somewhat slower quarter. Adjusted for the one-off costs in Germany, organic growth and EBITA increased 1% with organic growth in 5 business areas and margin improvements in 4 business areas. We managed to return to FTE growth in the quarter, which is positive and will continue to be a key focus going forward. We see that the market is steadily improving, and we continue to strengthen our order book. We also have a strong financial position and continue to act on opportunities. Let us conclude with some last few words about our focus going forward. As always, our focus going forward is on profitable growth. This is based on a combination of organic and acquired growth. We continue to actively look for interesting acquisition targets while we, at the same time, work on securing FTE growth to support our organic growth. We are also focusing on implementing the Sweco model across all our markets. In Germany, we are taking firm actions as part of the ongoing turnaround of Sweco Germany to secure the right leadership, the right offering and the right product portfolio. We continue to stay focused and close to our clients to ensure that we are relevant. And one example is a new assignment in West of London, where Sweco is design manager and will be providing civil, structural and architectural services as well as sustainability consultancy. Once built, the site will be one of the largest data site developments in U.K. And as a final word, I want to bring your attention to the upcoming COP26 conference in Glasgow. At Sweco, we want to be a front runner within our own business operations, which is why we have set a group-wide goal to be climate neutral by 2040. But this is not enough. Our main impact is from our projects, from what we do for our clients, and therefore, we are sharing a work group with the World Business Council for Sustainable Development to develop a method to be able to calculate and verify the climate impact that we have in our projects. This can hopefully also be used by other consultancy firms in all segments who want to make a difference for the climate outside the Scope 1 to 3. I believe that the demand for expertise will continue to grow as we need to accelerate the transition to a more sustainable society. And I'm proud to say that we, in many aspects, are leading the way together with our clients. And with that, let us open up for questions. Thank you.

[Operator]

[Operator Instructions]

[Katarina Grönwall, Chief Communications Officer]

Thank you. Please go ahead, operator. Do we have any questions?

[Operator]

Yes, ma'am. And your first question comes from the line of Johan Sunden from Carnegie.

[Johan Sundén, Research Analyst]

A few questions from my side. First is related to the concrete situation in Sweden. You show a little bit organic decline in Sweden this quarter. Can you -- is that to some extent driven by some uncertainty in the market related to the supply of concrete during the coming year or so given what is written in the newspapers and so on regarding Semanta, et cetera?

[Åsa Bergman, President, CEO & Director]

Johan, we haven't seen any effect of that so far in our projects and on the market. But I also need to emphasize that it is a serious situation. So we're monitoring the situation closely and ensuring that we're staying close to our clients and support them in whatever will come. But of course, if the supply of concrete is not, I mean, in line with what we need, the effects for our clients will be postponed or stopped projects. So -- but I think it's too early to say depending on the solutions in the weeks to come, but no effects in this quarter.

[Olof Stalnacke, Chief Financial Officer]

And if I can add, the impact on organic growth in Sweden is almost entirely due to what I talked about earlier, with more and also later vacation taken in the quarter.

[Johan Sundén, Research Analyst]

Perfect. And then over to Germany then, you make this restructuring this quarter. First, just a reflection. You took almost as big restructuring charges in Sweden in Q2 last year, but that you didn't adjust for. What made you adjusting for this restructuring? And the second on Germany, how isolated has the issues been to this unit? Should we expect that the problems are gone after this restructuring? Or how is the -- how should we think about Germany going forward?

[Olof Stalnacke, Chief Financial Officer]

To start with, I understand the question on the size of this, but I think the comparison with Sweden, which was actions across the Swedish divisions, this is a very distinct closedown of one of the units in Germany, so it's different in that way. We also think it is important as an information in the report to clarify what's the underlying profit in Germany. And would this have been bigger, it would have been a discontinued operations and reported as such. And that's why we chose the IAC. We don't foresee at present any more restructuring costs, to answer your second question. But on the other hand, we are also prepared to do everything that is needed to get Germany turn around and back on track.

[Johan Sundén, Research Analyst]

Because earlier, you talked about the issues in Germany focused around a few projects, a few bigger projects. If those projects related to this unit or if those projects related to other units, so we still will have these issues going forward.

[Olof Stalnacke, Chief Financial Officer]

What we have said is that it has been 3 divisions that have had the problem, 3 out of 6 divisions in Germany. And architects have been 1 of them. And this has been the most underperforming unit on the architect side, so it's part of the previous. But that being said, none of the big projects that we talked about earlier are in this unit.

[Johan Sundén, Research Analyst]

Okay. Perfect. That's very good to know. And then on the OpEx side, you had -- you benefited last year from COVID rate savings. Where are you now on the OpEx side? How much of the cost savings on last year has swing back during this quarter? And where should we expect you to be maybe 1, 2 quarters ahead in time in terms of phasing back the costs?

[Olof Stalnacke, Chief Financial Officer]

We are -- this quarter, we have roughly half of the COVID-19 savings from last year have reversed. And I think that will gradually increase as we open up the costs. That being said, as we have said before, there will be a portion that will be permanent savings. We'll probably have sort of a pent-up demand of training and travel, et cetera, that may give a quarter where we are sort of back to the old cost levels. But as we said before, somewhere around 20% to 30% will probably be permanent, but it's still a bit early to give a firm number on that.

[Åsa Bergman, President, CEO & Director]

And it's strongly linked to that we learned a lot when it comes to working on the distance, and we don't expect the volume of traveling to meet physically, I mean, up to the levels that we had before the COVID situation. But as Olof said, it's too early to have a clear view on at what level.

[Johan Sundén, Research Analyst]

And just one final question from my side. It's on U.K. The furlough system in Germany -- the U.K. end of September, you showed a good margin in U.K. during the quarter. Is there a risk that the margin should come down in the next quarter when this kind of furlough system is not in play?

[Olof Stalnacke, Chief Financial Officer]

I think the biggest risk in U.K. is not with a furlough system because I think we are managing that quite well, the people coming back and how we handle that going forward. I think the bigger risk is in the uncertainty in the market still with sort of the post-Brexit impacts on supply, for example. So I think furlough -- the furlough scheme is not the biggest issue for us in the U.K.

[Åsa Bergman, President, CEO & Director]

And volume-wise, we're talking about quite a few people that is linked to the furlough scheme. It has been less than 50 people in the last months.

[Johan Sundén, Research Analyst]

Perfect. That was all for me, so I get back in line.

[Åsa Bergman, President, CEO & Director]

Thank you.

[Olof Stalnacke, Chief Financial Officer]

Thank you, Johan.

[Operator]

And your next question comes from the line of Erik Elander from Handelsbanken.

[Erik Elander, Research Analyst]

All right. So I have 2 questions, actually. First of all, starting with Germany, I've covered other consulting firms, though IT consultants such as Acando Stockholm. But also AFA had some operations in Germany. As far as I understand it, it's quite difficult to make it work in Germany in terms of profits because, locally, the customers tends to choose local companies rather than international or something like that. They talk about that. Given what Sweco has now experienced in Germany, why would you succeed, actually?

[Åsa Bergman, President, CEO & Director]

Very good question, Erik. And I would say that, yes, Germany is a highly fragmented market, and that we have experienced in the past. You can look at almost all the Nordic countries then and look back some years ago, you would see a more fragmented market. Our model is to be very local, staying close to our clients and shows where we are established. So this is more about how we operate the market and having client interactions and being -- having a strong local footprint is one key for success. And another one is to implement Sweco model. And as shown and what we've discussed, it takes time in Germany due to the situation. But I would say, if I look at the German operations, we are talking about some of our divisions and not all. So we know that you can operate a healthy, profitable, growing business on the German market. But it's more about finding your way and not doing it the same way as everyone else on the German market. And again, it takes lots of efforts into how you maneuver your product portfolio, how you control your projects and how you work with the agendas, what products you bring on because it's also about making the selections on each market to not take on projects with lower margin and then execute them in a very good way. So now I -- as I said before, I strongly believe in the German market long term even if it's highly fragmented, because we also need to remember that there is a consolidation ongoing. So being able to be part of that consolidation is also part of our historical success. And that is why it's so important for us to stabilize Germany and have the platform that we can continue to grow from.

[Erik Elander, Research Analyst]

Okay. Yes, because actually, on the same subject, [Audio Gap] what I've heard from other people that are active in Germany, they say that it's very important to have the right people in place in terms of management because if you have the right management people in place, then they know how to navigate the market and do the right stuff. Somewhat, you haven't done that in the past in the German operations. How do you know that right now you have the right people in place?

[Åsa Bergman, President, CEO & Director]

First of all, as you know, we changed the top management, the business area president in Germany last autumn. So as I have chosen her myself, Julia Sante, that is one thing that makes me really comfortable about that she's the right person. And we're working really closely together, so I'm really sure that she's the right person. Then we also shifted out some divisional managers, and we are doing more management changes within the organization. So there is work ongoing to secure the leadership. But I think you're really right. For us, it's about having local strong, good management that understands the culture in each country, and that goes for all business areas, and implementing the Sweco model in those countries because it is about understanding the Sweco model and then kind of translate it and adapt to it in the country that you operate.

[Erik Elander, Research Analyst]

All right. Interesting. Actually, a third and last question for me on Germany as well. And that was, I mean, you acquired Jo. Franzke, I don't know if I say it correctly, but in 2016, the architecture firm. And now you closed it down 5 years later. First of all, what has happened? And what was the due diligence you did back then?

[Åsa Bergman, President, CEO & Director]

We did -- we -- of course, we did a due diligence, but what we didn't do was that we didn't start to integrate Jo. Franzke in the way we should have integrated them. I mean the recipe for success for us is to find targets, evaluate them and ensure that we kind of close the expectations gap and then that we, I mean, start to directly work firmly to integrate, so we can kind of bridge the potential risk of an owner or a founder or an important key personnel in that organization to secure that bridge into Sweco. And that work wasn't started as quickly and diligent that we would like to see in all our acquisitions. So I mean, it's clearly so that we should have integrated them the way we know that we should integrate companies. So it's linked to that.

[Erik Elander, Research Analyst]

So it was possibly -- I mean, it was in 2016, so I guess you had a lot to do with Grontmij. Was that the fact? Or was Grontmij acquisition and integration like the main focus, and then the smaller acquisition you didn't integrate them as well? Is that how you should interpret it?

[Åsa Bergman, President, CEO & Director]

I mean we should -- we have done more than, I think, almost up to 150 acquisitions since we were IPO-ed '97. We have a recipe for success. We have processes, we have competence centrally at group. We have the competence in our business areas. So we should be able to do integration of smaller targets at the same time that we handle and focus bigger targets to integrate. So I would say that you can, of course, blame that. But I think, again, looking forward, we should be able to do both.

[Erik Elander, Research Analyst]

So just what happened then? When you said you didn't integrate it profitably or quickly enough, was it a key person who left the company and then people left with him or her? Or what was the thing here?

[Åsa Bergman, President, CEO & Director]

Short answer, when you acquire smaller companies, the most important thing is to secure that the founder or the owner or the people that is important for the client interaction and the sales process is integrated into Sweco. And it's -- that it's kind of that you ensure that the new organization takes responsibility for that client interaction because otherwise -- because experience-wise, what we see is that some of those people, they are leaving the company after, example, 3 years of time. And then we need to secure that we have those client interfaces within Sweco, so you keep that value within Sweco. And the case with Jo. Franzke was not that. So the founder left the company, and we were not strong enough in that unit to be able to build on that.

[Erik Elander, Research Analyst]

All right. That's very clear. That was all for me.

[Åsa Bergman, President, CEO & Director]

Thank you.

[Operator]

[Operator Instructions] There are no further questions at this time. Please continue.

[Katarina Grönwall, Chief Communications Officer]

Okay. Thank you for that. Do we have any questions from the room? I think we can take them now. Okay. It becomes clear that you communicated the report very well. We don't have any more questions. So thanks, everyone, for joining. Thank you, Asa and Olof, for walking us through the presentation. Have a great day. Thank you.

[Åsa Bergman, President, CEO & Director]

Thank you.