Sweco AB (publ)

STO:SWEC B

Earnings Call Analysis

Sweco's Strong Q3 with Growth and Acquisitions

In Q3, Sweco reported a 19% surge in net sales with organic growth sitting at 9% alongside 6% from acquisitions, and a 7.2% margin despite calendar challenges. The firm saw more than a 40% boost in EBITA, reaching SEK 465 million. Remarkable performances came from Denmark and Belgium, while the U.K. experienced hurdles, triggering actions to enhance business efficiency. The company's commitment to green transition proved to be a driving market theme. Despite a successful quarter with 3 new acquisitions, the net debt increased to SEK 4.2 billion, and leverage rose to 1.5, counterbalanced by a strong liquidity position with SEK 3.2 billion in assets.

Sweco's Q3 Performance: A Blend of Organic Growth and Strategic Acquisitions

Kicking off with a burst of vigor, Sweco dazzles with its Q3 report, showcasing a robust blend of organic and acquired growth. The company's strategic endeavors led to an amplified net sales increase of 19%, with organic growth contributing 9% and acquisitions adding another 6%, complemented by a 6% positive influence from currency effects. The burgeoning figures are not just numerical charm but translate into a tangible EBITA surge exceeding 40%, landing at SEK 465 million. An intriguing dance between strong pricing, recruitment, and beneficial acquisitions elevate margins to 7.2%, despite a resistive calendar effect and slightly dampened markets in some segments. Amidst variegated performance across geographic realms, Denmark and Belgium emerge as stellar performers, while the U.K. grapples with a recuperative phase marked by one-off costs aimed at a long-term bounce back.

M&A Momentum and Market Movements: Positioning for the Green Transition

In a tactical play of chess, Sweco unfolds its Q3 narrative with three impactful acquisitions. As the plot thickens, Sweco unveils Danish star OJ Radgivende Ingeniorer, promising to magnify its building business while Sweden welcomes niche water survey experts Medins Havs och Vattenkonsulter to its fold. These astute moves spotlight Sweco's relentless pursuit of becoming a market titan in every core segment, bolstering its position in the crucial journey of the green transition, as mirrored in newly-won mandates like electrification projects for Danish ports and renewable energy pursuits with Volvo Cars in Belgium.

Operational Rigor and Capital Prudence: A Tactical Balance

Sweco marches on with the tactical precision of a maestro, focusing on maintaining a stable order book, satisfactory levels of orders received, and a vigilant eye on billing ratios. Yet, even as they tread this tightrope, concerns ripple through the air regarding their working capital—which, while supporting growth, has become more substantial than favored. In response, Q4 heralds a systematic working capital reduction, promising to choreograph a more balanced financial stance. Further afield, the U.K. and Finland's operational tune-ups are scrutinized, with staff realignments poised to strike an efficient chord.

Forward Outlook: Steady Demand Amidst Economic Headwinds

Peering into the horizon, Sweco remains steadfast, relishing continued high demand across many segments, basking especially in the limelight of the Energy sector, Water and Environmental services, and Transport Infrastructure. A cloud of prudence hovers over a slightly weakened traditional industry, yet Sweco's diversified portfolio promises resilience. Tax rates fluctuate, akin to seasonal tides, but rest steady at 23.5% for Q3 with no overture to an upward trend. As for net debt management, Q4's symphony includes a classical working capital release, ensuring Sweco remains primed for strategic maneuvers with sufficient room to explore further M&A compositions.

Public Sector Engagement: Strengthening Ties in Challenging Times

Sweco intonates a message of solidarity with public sector clients, emphasizing the vitality of close ties amidst the fiscal uncertainties of municipal budgets. As fiscal landscapes shift, Sweco remains alert, vigilant, and adaptive, confirming sustained demand from valued public partnerships, which weave a reliable fabric through the company's market tapestry.

A Model of Success: Sweco's Blueprint for Expansion

Charting a course for substantive growth, Sweco adheres to a titular blueprint—The Sweco Model, zealously adopted by Denmark, which is distinguished by a market share-centric strategy, combined with a synergy of architects and engineers. This model heralds Sweco's strategic approach, entwined with organic growth and selective acquisitions, creating an enterprise resilient in its performance, with Denmark setting a benchmark of excellence amid fluctuating markets.

Earnings Call Transcript 2023-Q3

[Marcela Sylvander, executive]

Good morning, everyone, and welcome to this Presentation of Sweco's Q3 report. We will be joined this morning by Sweco's President and CEO, Asa Bergman; and CFO, Olof Stalnacke. They will take us through the results of this third quarter. And after that, we will, of course, open up for questions. Please Asa.

[Åsa Bergman, executive]

Welcome, everyone, to Sweco's Q3 presentation. Before we present the quarter, let me give you a quick recap of Sweco. Sweco is Europe's leading architecture and engineering consultancy with operations in 8 geographical business areas across some 15 markets in Europe. We are well diverse business operating across 3 broad segments with a healthy balance of private and public clients. The foundation for Sweco's long-term success is our mix of competencies spread across 21,000 experts, our focus on organic and acquired growth as well as our efficient and decentralized operational model.

The third quarter shows that we continue to deliver a strong combination of organic and acquired growth. Net sales increased by 19% in the quarter. Adjusted for calendar, the organic growth was 9%, and the acquired growth was 6%.

Positive currency effects added another 6% to net sales. EBITA increased by more than 40% to SEK 465 million and there was a slightly improved margin to 7.2% despite a negative calendar effect. The result was mainly driven by our continued good momentum in pricing and recruitment and positive contributions from acquisitions. The result was negatively affected by weaker demand in some markets and segments. Moving over to the operational highlights in the quarter. Overall, we noted a positive development in most business areas. I can conclude that we have done a good job at maneuvering the market conditions. And so far, adapting well to challenges.

The organic growth is on the level where we want to be, and it is positive to see 7 out of 8 business areas delivered strong organic growth in the quarter. We also had a positive EBITA development in 6 out of 8 business areas. In this quarter, I would like to highlight the continued strong performance in Denmark and Belgium, both delivering a good growth and result.

The Netherlands also reported a solid quarter, and Germany continues to take steps in the right direction. However, the situation remains challenging in parts of the U.K. market. This resulted in negative growth and a negative result due to one-off cost that we are taking to get back on track long term in U.K..

We also continue to take necessary actions when needed in other markets. We continue to strengthen our order book. And on the M&A side, the pace remains good with 3 new acquisitions in the quarter, which I will come back to later in this presentation. Let us now take a look at the market situation. The green transition continues to be a core driver for us and a key theme across most markets and segments. We can see this in the Energy segment where demand is strong in all countries.

We are also seeing good to strong demand in the Water segment and in Environmental Services. Transport infrastructure remains good. But the macroeconomic situation is challenging in parts of the segments where we operate, and this is mainly seen in the Building segment.

Demand remains weak in Residential and Commercial Buildings. Parts of the Industry segment is also being affected in some markets with clients being more cautious. This means that we need to continue to stay agile and adapt to the market conditions to capture opportunities and mitigate challenges. Our well-diverse offering and flexible organization is a strength for Sweco. And with that, I will hand over to Olof to walk you through the numbers. Please, Olof.

[Olof Stålnacke, executive]

Thank you, Asa, and good morning, everyone. Starting with a recap of the quarter. Again, net sales, SEK 6.4 billion in the quarter with 9% organic growth. 6% from M&A and 6% from FX. EBITA SEK 465 million. We are SEK 83 million up versus last year, but excluding the negative calendar effect, we are SEK 158 million or 41% up. Margin slightly up at 7.2% despite the significant negative calendar. Leverage increases to 1.5%, driven by M&A, dividend growth and working capital buildup.

Looking then at net sales. We are pleased to see solid organic growth in 7 out of our 8 BAs with Sweden, Norway, Finland and the Netherlands at around 7% to 9%. Denmark and Germany and Central Europe in double digits and Belgium, over 18% in the quarter. The only exception on growth is U.K., where we continue to see a weak market in some segments, negatively impacting parts of our business.

Across the board, the growth drivers have been continued price increases and FTE growth. We continue to have good momentum in recruiting and personnel turnover has continued to decline in the quarter. Looking then at EBITA. On the EBITA side, we see a 41% increase adjusted for calendar. We are very pleased by the increase, but we are also aware that we are up against a relatively weak quarter last year.

We see margin improvements in 3 BAs despite the negative calendar. Denmark has a stellar quarter with close to 15% margin. Netherlands improves and also very positive to see Germany and Central Europe delivering 8.5%, the highest level we've seen in a very long time.

It should be noted that the German EBITA in the quarter is also supported by positive project adjustments of around SEK 12 million. Looking then at the EBITA bridge by business area. Belgium has a strong third quarter with the VK acquisition, making a significant EBITA contribution and the existing business continuing to perform well. Denmark also continues on a very good trajectory, and we see significant contributions also from Sweden and the Netherlands. Germany and Central Europe has had very strong development compared to a relatively weak Q3 last year and a good sign that we are continuing to develop in the right direction. The weakness in parts of the U.K. market, as you can see, has an impact all the way down to EBITA.

Actions have now been taken in the U.K. to improve the underperforming parts of the business and redundancy costs, therefore, also reduce EBITA in the quarter. Finland improved EBITA in the quarter, but are facing a weaker market in some segments and are now in a formal negotiation process to reduce personnel in these areas with less demand.

The main EBITA drivers are much the same as the growth drivers, price increases and FTE growth, but we also see positive impact from M&A, from FX and from less absence. Higher personnel costs continue to have the main negative impact. Billing ratio had a limited EBITA impact but declined in the quarter. This was partly driven by the acquired entities, which are not yet fully into the Sweco time reporting and billing ratio follow-up processes.

We also see lower billing ratio in the U.K., driven by the market development and also in Sweden. We have been taking actions in Sweden, but we need to continue to work on efficiency, which remains a focus for us. Important, again, also to mention that the calendar makes this into an even smaller production quarter than normal for us. With 7 less working hours corresponding to a negative SEK 76 million in net sales and EBITA impact.

And then finally, on the financials, our financial position, which remains strong. Net debt is at SEK 4.2 billion, significantly up versus last year. The LTM cash flow from operations is outweighed by larger outflows for M&A and dividends. And this, of course, on the M&A side, especially goes for the larger acquisition of VK and we also see seasonal and growth-driven working capital buildup.

Leverage is also up at 1.5, but still well below our target we remain financially strong with available liquid assets of SEK 3.2 billion. And with that, back to you, Asa.

[Åsa Bergman, executive]

Thank you, Olof. We continue to be active on the market with 3 new acquisitions in the quarter, adding up to a total of 10 so far this year. We presented 1 of these acquisitions in our last quarterly report, the Fire Protection firm FPC Risk in Belgium. Since then, we have announced 2 new acquisitions, 1 larger acquisition in Denmark, OJ Radgivende Ingeniorer, and they are one of Denmark's leading engineering firm in the buildings market.

They have a well-balanced portfolio of public and private clients in a wide range of segments. The acquisition will almost double the size of our building business in Denmark. It will also strengthen both our geographical footprint and our position as a leading engineering and architectural firm in Denmark. This is a good example of our ambition to use acquisitions to take market-leading position in all core markets and segments.

In Sweden, we made a niche acquisition Medins Havs och Vattenkonsulter and they are specialized in water surveys. This is an area that is vital in the green transition and where we are seeing increasing demand from both private and public clients across Europe. The acquisition will make Sweco the leading firm in this area in Sweden. Let me now present some of the project wins in the quarter. We continue to win many new client projects, displaying the range of services needed in the green transition. In Sweden, we have been commissioned to support the Swedish authority Svenska kraftnat in review and upgrade of the electricity transmission system.

In Denmark, we won a project to support the Danish transport authority to analyze the access to electricity and green fuels in 39 ports. And in Belgium, we will support Volvo Cars in a project that is part of their plan to increase the use of renewable energy in their production facility in Gent. Let me now conclude the quarter and present our focus going forward. I am pleased with the quarter. As I said, we have done a good job at maneuvering the market conditions and adapt well to challenges. Going forward, we will capture market opportunities and stay agile and continue to strengthen our order book by being forward-leaning, staying close to our clients and winning new projects. And we are happy that we can continue to increase our fees, and we will continue focusing on that.

We see that our efforts improving cost control have had effects and our strong focus now lies in increasing efficiency and I would like to take this opportunity also to extend a warm welcome to all new Sweco employees. We will continue our growth journey by executing on our M&A strategy as well as attracting the expertise needed to continue to transform society together with our clients. Thank you.

[Marcela Sylvander, executive]

Thank you, Asa and Olof. And now we will open up for questions. And you can ask them directly through the phone line, of course, but also through the chat function. So please, Andre, if you can take us through the instructions.

[Operator]

[Operator Instructions] We will now take the first question from the line of Dan Johansson from SEB.

[Dan Johansson, analyst]

A couple of questions from me. I'll take them one by one, if that's okay. Maybe we can start a bit on the strong organic growth here of 9%. Is it possible to specify what the level of price increases was in the quarter and also a bit on your thinking on the support from price increases here going forward into the last quarter, I mean [ Q2 ].

[Olof Stålnacke, executive]

I think it's fair to say that on the organic growth adjusted for calendar, it's -- as we said, I think in Q2, it's about half from FTE increases and half from price increases and then the other factors sort of wash out in the end on the organic growth. So I would say that scheme, maybe a little more on the price increases than on the fee increases.

[Dan Johansson, analyst]

Okay. Perfect. And that strong organic growth also seems to consume some working capital. I think you tied up SEK 1.4 billion here during the first 9 months. What sort of the prospect of releasing that working capital here going forward, you expect it to come here pretty soon? Or what's your thinking on working capital situation?

[Olof Stålnacke, executive]

I mean we have built quite a lot of working capital, mostly growth driven over the 2 last years. And I mean, we're happy with the growth. We're not as happy with the working capital buildup. So we will have the normal seasonal release in Q4, but we are also looking into working capital reduction actions, which I think will have some additional effect.

[Dan Johansson, analyst]

Okay. Great. On Germany also, what's your expectation? I mean, look quite good in Germany here, even if you just for that SEK 12 million from project adjustments. Do you think that Germany still will have quite volatile earnings going forward? Or have you sort of reached a higher platform now with the changes you made there in terms of the margin?

[Åsa Bergman, executive]

I mean, as you know, we have made lots of changes, but we have gradually seen improvements in Germany. We have increased hit rates on the market, and we have 1 nice projects over the last, I would say, year in the German market. With that said, I mean, we're moving in the right direction, but we would like to see more from Germany before we are really satisfied. So step-by-step, we are getting there.

[Dan Johansson, analyst]

Yes. Sounds good. And maybe just the final one. The one-off costs in the U.K.. I guess it's fairly small, but could you specify that cost you took in Q3.

[Olof Stålnacke, executive]

It is SEK 13 million roughly in the quarter, the redundancy costs.

[Operator]

We will now take the next question. from the line of Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

I was just wondering, what can you say regarding order intake in the quarter? Clearly, good invoicing growth, but were you able to sort of defend your order book in the quarter?

[Åsa Bergman, executive]

I mean the order book is stable and orders received is on a good level. And as we have reported, the demand for services overall is good. There is pockets of weakness related to Residential and Commercial Real Estate and some parts of the industry and then related to more traditional industry. But the Energy sector is strong, we're winning a nice contract there. We see also strong Water environmental business and also good demand in the Transport Infrastructure. So stable order backlog and good orders received.

[Johan Dahl, analyst]

All right. On the efficiency or billing ratio, which you've talked about some time being a higher priority. And clearly, you're talking about the big growth going forward as well. But what exactly are you doing there? What milestones are you setting for the coming quarters and years and how do you actually execute on this? Just curious to know how you go about doing that? I mean looking at the year-on-year progression on the billing ratio so far, it's sort of a slight decline in the recent quarters. So just back to just hear that.

[Åsa Bergman, executive]

I mean the long-term perspective, we have faced quite a challenging market when it comes to this, meaning higher personnel turnover, hybrid work environment and also rapid growth, which, of course, is a positive one after the pandemic situation, so to say. But it affects the efficiency and then, of course, as we have talked about before that when we're acquiring companies, they are coming in some cases, with lower billing ratio due to their ways of working.

So for us, it's a constant process of focusing on efficiency. And then in the short-term perspective, as Olof presented, it's in this quarter related to U.K. market related and also VK coming in as acquired company with a lower billing ratio. And I mean when we integrate them, their ways of working will be in Sweco's way of working and a bit weaker in Sweden.

I mean we're not satisfied with the billing ratio, and we continue to focus on this. So it is about making sure that we take actions if we are seeing pockets of lower workload as we're now doing in U.K. and in Finland. It is also about making sure that we work with the organization to really be lean and efficient, and that is a constant work that we are focusing on. Maybe something you want to add?

[Olof Stålnacke, executive]

No, I think that, I mean, the typical actions we are taking are the ones that we have as Asa, said that we are talking about in the report now, both in U.K. and Finland, but we are doing these kinds of actions, but in a more targeted way across all parts of the organization where we see weaker demand.

[Operator]

We will now take the next question from the line of Raymond Ke from Nordea.

[Raymond Ke, analyst]

First one, I saw that billing ratio in Sweden was lower year-over-year, if I recall correctly, last year, Sweden had a record high recruitment quarter and fairly long onboarding processes, which also burden billing ratio. How come the billing ratio this year is down. If you could help me understand that.

[Åsa Bergman, executive]

There is a seasonal pattern that we talked about before in Sweden. So the start after the summer period has been slow. And then it is about being lean enough in the organization, and that is something that we are working on right now.

[Raymond Ke, analyst]

All right. And could you help sort of give an estimate of the layoffs in Finland, how much they might impact the financials?

[Olof Stålnacke, executive]

It is way too early to tell. It is a formal process. As we say in the report, it's a maximum number of 65 permanent and 175 temporary layoffs, but it's a formal process that will be concluded sometime around mid-November. So it's too early to say anything about that. And actually, with the process, we cannot say anything about it either.

[Raymond Ke, analyst]

Got it. All right, all for me. Congratulations on a good report.

[Operator]

We will now take the next question from the line of Stefan Knutsson from ABG.

[Stefan Knutsson, analyst]

Olof, just a question on the demand. I mean we have seen service PMIs coming down during the autumn. Have you seen any change during the quarter and into Q4? Or do you still expect that the strong areas are able to hold up the demand weakness where you see in certain parts of your business?

[Olof Stålnacke, executive]

I think what we said now about the continued high demand in a lot of the segments we work in, as also said earlier, that's a good sign. I think the only area where we have changed a little bit is that parts of the industry slightly weaker, traditional industry, as Asa said. But otherwise, demand continues to be good where we have pointed to strong points before.

[Stefan Knutsson, analyst]

Perfect. Really good. And also regarding the tax rate. I noticed it was quite high in the quarter. Should we expect tax rate for the overall Sweco to increase going forward?

[Olof Stålnacke, executive]

No. What this is really impact. It's an impact of having relatively low tax rate because of adjustments last year. We are now at an effective tax rate in the quarter of 23.5%. It depends a little bit on the mix of the profitability in the quarter. So you should not, in general, expect a higher tax rate. It will fluctuate a bit between quarters.

[Operator]

[Operator Instructions] We will now take the next question from the line of Fredrik Lithell from Handelsbanken.

[Fredrik Lithell, analyst]

And again, congratulations to a very nice report from your side. Maybe 2 questions. On the net debt now, the gearing [ 1.5 ] is not an alarming level in itself. I just wonder how you foresee the going forward levels? Are you more cautious on that one? Or do you feel you still have sort of room to move around in terms of M&A and connected to that earn-out considerations do you have any of those in your balance sheet that we should consider on our side. So that's really on the net debt side.

The second question is a bigger one on the public sector and the budgets on the public sector, if Asa,maybe you could elaborate a little bit on if you see any sort of tougher situations there or if municipalities have a difficulty to raise their budgets or if they take down budgets. Just in front of 2024, how do you foresee sort of the public sector if you could elaborate.

[Olof Stålnacke, executive]

Maybe if I start then with the net debt one. We will see the normal seasonal working capital release in Q4 and as I said before, we are also taking some actions on working capital. So that, I think, will improve the net debt position. So with that said, we think we have the room to maneuver that we need, and it's not the constraint for us at present.

[Åsa Bergman, executive]

And on the market situation linked to the public sector, I mean, I don't want to give any forecast and think about the market to come. Of course, for us, it's about staying really close to both our public client and private clients. But so far, we see good demand from our public clients.

I mean the level of good, depending on which market you look at. And of course, in challenging time, you need to stay really close to the local public clients, and you mentioned the municipalities to make sure that you stay relevant as a supplier no matter what situation they are in. But so far, good demand.

[Operator]

We will now take the next question from the line of Johan Sunden from Carnegie.

[Johan Sundén, analyst]

Congrats on the good results. There's already been asked quite a lot of good questions. Two more from my side. The first one is on Denmark, which now is performing at extremely strong margin levels and also in Q3, which usually are a tricky quarter.

Just got to ask, how sustainable you think it is to be running at these kind of model levels that the Danish business has been during the last, say, 4 quarters or so? Or what has really made them taking the step change up across a 14%, which is not even the Swedish business has been able to do in many quarters.

[Åsa Bergman, executive]

I mean, we have talked in the last years a lot about implementing this Sweco model. So and that Denmark have worked hard to implement that model and the way we operate. That goes also for Belgium in the Netherlands, and we do the same in Germany and so on. So this is one answer to your question. Another answer is that part of our model and in our strategy is to take market share. So Denmark has been able to take market shares and be very good at selecting the right market segments and also making sure that they work hard to stay the preferred supplier even if the residential and commercial real estate has weak in the last time. And then it's a combination of acquired and organic growth, which is also part of our strategy. They are strong in their collaboration between architects and engineers, which is also the way we want to operate.

So there is many reasons, but they work extremely good when they work with their clients, but they also are working according to the Sweco model in their projects and succeeding with the work that they are doing on the market, I have to say. Anything to add.

[Olof Stålnacke, executive]

No. I think and on the margins, I mean, you will continue to see fluctuations as we do in all beers. But I think what also said Denmark is a fundamentally high-performing business area now, and we believe they will continue to be so.

[Johan Sundén, analyst]

Yes. Looking back just to 2020, the Danish business were just running at, say, 8% margins. And now we have Germany at around 8% if you adjust for the kind of project one-off in the quarter. But how long time could we take working in Germany to build up kind of similar structures from where you stand now?

[Åsa Bergman, executive]

I mean, as I said before, because I got this question the last years to give an answer about how long it will take until we reach our 12% the margin targets in each business area. But I don't want to forecast because it's about our step-by-step approach to increasing and building up capacity and skill set of the organization because it's not only structural, it's about start to win work and qualitative work and also building up the knowledge and capacity in the way we would like to work in the organization, and that takes time. So yes, step-by-step, we will get there.

[Johan Sundén, analyst]

Yes. And another follow-up on the German business. When the problem pops up a few years ago in Germany, you talked about that there was a few bigger infrastructure project that would run for a couple of more years. Has there been any element of that of those projects ending that has created the step-up in the margin near term or how is -- when are those kind of projects ending.

[Olof Stålnacke, executive]

Some of these -- I mean, those projects have are sort of gradually ending. So some of them has already ended and some will end -- are still ongoing and are not yet finalized. So it's no specific one-off effect from that in the quarter. Some of the project write-ups, a small portion are related to the same projects that we wrote down in 2020, but only a very small piece.

[Operator]

There are no further questions on the phone. I would like to hand back over to web questions, please.

[Marcela Sylvander, executive]

Thank you. And there are no further questions from the chat function. Before we wrap this off, I would just like to remind you also of our Capital Markets Day that will take place on the 14th of November here in Stockholm and which also include a site visit to the new Metro line in Stockholm. So there are still possibilities to sign up for that. Thank you Asa and Olof for your presentations, and thank you, everyone, for joining. We wish you a continued nice day and weekend, of course, that's coming. Thank you.

[Åsa Bergman, executive]

Thank you very much.

[Olof Stålnacke, executive]

Thank you very much.