Sweco AB (publ)

Good morning and welcome to the presentation of Sweco's results from this year's first quarter. To present the results and the report is Sweco's president and CEO Åsa Bergman and CFO Olof Stolnacke. After the presentation, there of course will be room and time for questions. Please, Åsa.

Welcome everyone to Sweco's Q1 presentation. Before we move into the quarter, let me give you a quick recap of Sweco. Sweco is today Europe's leading architecture and engineering consultancy with operations in eight geographical business areas across some 15 markets in Europe. We are a well-diversed business with projects in three broad segments. Building urban areas, water energy industry and transport infrastructure. We have a good balance of private and public clients, and the foundation for Sweco's long-term success is our mix of competencies spread across 20,000 experts, organic and acquired growth, as well as our efficient and decentralized operational model. With our solid financial position, we continue to build Sweco. As you can see, we have a steady improvement in sales and EBITDA. Our net debt EBITDA after the latest acquisition landed on 1.1%. Now let us take a look at the result of the first quarter. We started the year with excellent momentum, delivering strong organic growth and an all-time high EBITDA. Net sales increased to 7.1 billion SEC and the organic growth adjusted for calendar was 10%. We achieved a total growth of 17%. EBITDA increased by 19% year-on-year to 849 million SEK, adjusted for calendar. Our operating margin improved to 11.9%, more or less on par with our financial target of 12%. The strong performance was driven by solid demand connected to the green transition in Europe, higher average fees and a good FTE growth. If we move over then to the operational highlights in the quarter, There was a continued strong demand in most business areas. We had a solid inflow of new orders with the strengthened order book and we also had a good momentum in recruitment. All business areas reported strong organic growth and six out of eight business areas reported increased EBITDA. I especially want to highlight Sweden, Norway, Denmark and Belgium that all achieved EBITDA margins exceeding 14%. We also made four acquisitions during this quarter welcoming around 700 new experts to Sweco and we won several high-profile projects which I will come back to later in this presentation. The market overview shows that although the current macro situation continues to be uncertain there was overall good demand in the market of projects connected to the green transition in all segments. We have a particularly strong demand within water, energy and industry, where the markets for investments continue to be solid in building and urban areas. We see a good demand in public buildings. There is, however, continued declining demand in residential and in parts of commercial real estate. Within transportation infrastructure, we see continued good demand. Concluding the quarter proves the strength of our diverse offering and position in attractive segments. I will now hand over to Olof to take us through the numbers. Olof, please.

Thank you, Åsa, and good morning, everyone. Starting with an overview, we see net sales, as Åsa said, of 7.1 billion in the quarter, with 10% organic growth and M&A and FX each contributing 3%. EBITDA, 849 million, which is an all-time high for the second quarter in a row. We increased EBITDA by over 200 million versus last year, and we have a 19% EBITDA growth excluding the calendar effect. And the margin expansion is 1.2 percentage points up to 11.9%. Leverage increased to 1.1. That is driven by M&A and by a seasonal working capital buildup. On net sales, we are pleased to see solid organic growth in all BAs, ranging from Finland and Germany and Central Europe at around 6%, up to Belgium, Denmark, Norway and Netherlands at double digits. Very positive also to see that Sweden continues to increase growth and was at over 8% in the quarter, and that the UK is close to 10%. Across the board, the drivers have been continued price increases and FTE growth. We continue to have good momentum in recruiting and personnel turnover has declined somewhat in the quarter. In addition, part of the negative impact from sickness absence that we saw last year has been reversed. Looking at EBITDA, on the EBITDA side, we see margin improvements in 6 out of 8 BAs and double-digit margins in 5 BAs, with, as also said, Sweden, Norway, Denmark and Belgium all delivering above 14%. The EBITDA drivers are much the same as the growth drivers. Price increases, FTE growth, and also that about half the negative impact from sickness absence from last year has been reversed. Other operating expenses increased, but as in Q4, declined as percent of net sales and continues to be on a sustainable level. Billing ratio is the only disappointment in the quarter, declining by 0.4 percentage points. Looking at the EBITDA bridged by business area, it's Belgium and Denmark that continue to lead the EBITDA growth, but we also see significant contributions in Sweden, Norway and Netherlands. Finland is impacted by a one-off payment as part of the collective salary agreement of around 20 million SEK. In Germany and Central Europe, the negative impact comes from the Central European countries, which had a weak start in parts of their business. UK continues to improve in a challenging market. And it is important also to mention that the calendar makes this into a very big production quarter for us with eight more working hours. And that corresponds to 75 million in net sales and EBITDA impact. On the financial position, net debt is at 2.9 billion, significantly up versus last year. The LTM cash flow from operation is outweighed by larger outflows for dividends and M&A in Q1, especially the larger acquisition of VK, as well as seasonal and growth-driven working capital build-up. Leverage is also up at 1.1, just over half of our target maximum, but we remain financially strong with available liquid assets of 3.1 billion. And with that, back to you, Åsa.

Thank you, Olof. Let me turn to some operative highlights of the first quarter. We completed four new acquisitions in Q1 with a combined net sales of one billion SEK, welcoming around 700 experts to Sweco. This strengthens Sweco's position in the Belgian, Dutch and Norwegian markets. It is a mixture of competences in architecture, engineering and project management, all in line with Sweco's strategy to have a strong integrated engineering architecture offering, all in our core markets. And I would like to dive into one acquisition from the quarter, as well as one recently announced. The acquisition of VK Architects and Engineers was our largest acquisition that we completed and consolidated at the end of March. The VK group came with some 600 experts and an annual net sales of around 890 million SEK. Vika is active in the Belgian market, but also has presence in the Netherlands, Luxembourg, the UK and Vietnam. This acquisition strengthens our position in the Belgian market in attractive growth segments such as healthcare, industry and infrastructure. On the 7th of April, Sweco announced the acquisition of Metrias Swedish Survey Business, a deal that closed last week. The business has 110 experts and an annual net sales of 130 million SEK. With its broad geographical presence and strong position within municipalities, this acquisition strengthens Sweco's already leading position in the Swedish survey market. I also would like to highlight some of the projects wins we had in the quarter. Our order book remained strong and during the quarter there was a solid demand from both public and private clients. The demand from sustainability related services is growing in all business areas and in all segments. Just to show you some examples, Sweco together with Team Aker will design Norway's largest hospital in Oslo, New Aker, currently the largest construction project in Norway. The project includes new construction and reuse of existing buildings. In Frankfurt, Sweco was commissioned to plan the new Frankfurt Long Distance Railway Tunnel, which will help increase capacity in the Frankfurt Transport Hub. And in Sweden, Sweco has been commissioned by the biotech company EcoHelix to design a state-of-the-art production facility in Örnsköldsvik. The facility will be built entirely in wood, which still is an unusual choice of material for industrial buildings. To conclude, I am very pleased with the quarter and with the achievements we made. Sweco's strategy and market position enable us to keep catering to the demand driven by the green transition in Europe. The current market situation, however, remains uncertain, which makes us place even further importance in managing fees, efficiency and costs. At the same time, continue to capture opportunities in the market. It is evident, particularly in the present market environment, that our diverse portfolio of clients, segments and solutions is a competitive strength. We are also maintaining good momentum in recruitment. The Sweco Group is growing. And to end, I want to give you a heads up on our capital markets day that we will host in Stockholm 14th of November. A formal invitation with program and registration details will be published at the later date on Sweco's website. Thank you.

Thank you, Åsa and Olof. And we will now open up for questions. So please, operator, if you could give us the instructions.

Yes, madam. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. The first question comes from Dan Johansson of SEB.

Thank you so much. Good morning, Åsa and Olof.

Good morning.

Good morning, Dan. Good morning. A couple of questions from me. I'll take them one by one. If it's possible to split the organic growth to 10% here, what's sort of the volume and price impact here in the quarter, if that's possible?

uh i think it's fair to say that roughly half of the organic growth comes from price a little less less from from fte growth and then sort of net rest a little bit of it but the main drivers are our price and ft growth okay thank you and also was curious a bit um it's impossible to specify how how much was the usage of sub-consultants in this this quarter It was less than 2% up, I think around 1.5% up or something, contribution to growth.

Okay, thank you. And also related a bit on the mechanics behind, you know, you had quite good dose of volume growth. You used a bit of subconsultants more now, but the billing rate has still declined from last year. What sort of the mechanics behind that decline there?

I mean, we have talked about this before, but one kind of more long term and overall thing for us is that the personal turnover has an effect of onboarding and offboarding that affects the efficiency. That is one thing. And really clear is so that we have increased the pace of recruitment. So there's lots of people that we need to onboard. But with that said, this is our main focus to make sure that we get really into efficiency and that we can break the trend to kind of increase the billing ratio going forward.

And if I can add, I think it's fair to say that we are quite pleased with what we have achieved on the cost side with the actions we announced last year and that we still have more to do on the billing ratio, I would say.

Yeah, I totally agree. The margin is quite good despite the slower billing reaches. Let's see what happens ahead. But also one more question, if I may, and I'll jump back into the line. In Finland, how much was that one-time salary payment you had here in Q1?

It was roughly 20 million SEK that we took, and that's part of the industry agreement, as we said, this one-time payment, which is, we think, quite a good solution, actually, to get sort of the short-term coverage of inflation without permanently increasing salaries there.

Perfect. Thank you so much for taking my question. I'll jump back into the line. Thank you.

The next question is from Frederick Lethal of Hanselbecken.

Thank you. Good morning. Thank you for taking my questions as well. Maybe two, if I may. On the central negotiations that have been sort of concluded in several markets, it would be great with an update on the various markets for you and if the impact is fully in your books from Q1 or if you have markets where that will sort of start to show from the second quarter or others. So that's the first one. And the second one, maybe, Olof, if you could sort of dissect the working capital build-up a little bit. Are there any elements from adding balance sheets from the acquisitions into that, or is this purely the momentum in your projects that is tying the cash in the quarter? Thank you very much.

Good morning, Fredrik. First question on the salary reviews. We have accomplished around half of our business area. So parts of it is done and affecting the quarter, but we haven't finished it in all our business areas. So we expect this also to affect in Q2. And I mean, what we're doing is that we continue to focus to mitigate it with price increases, which we have succeeded with in this quarter. Maybe you would like to add something?

No, I think that really covers our position. And on the trade working capital, we have a 1% increase in trade working capital as a percent of net sales. So I think this is primarily sort of the normal seasonal effect, but also effect of the high growth we are seeing now. There's no specific sort of additional impact from M&A in this, maybe a small piece, but most of it is seasonal and growth.

okay thank you that's very clear thank you the next question is from i'm sorry so do you have a comment the next question is from johan dal of thanks bank yes good morning um good morning everyone uh just very briefly

On your order intake, is that possible to put it a bit more into sort of color comparing it to last year compared to Q4 possibly and possibly the organic sort of increase in the first quarter compared to year end?

I think, I mean, what we can say is that when we say that our order book is growing, it's not only growing in absolute terms, but also related as percent of net sales. So we have an order book that increases with the organic growth we see now. So that's positive. And as we've been saying for some quarters now, it continued to strengthen in the quarter.

And just to add some flavor on that, that is that, I mean, it's really clear that those segments that are growing, we are kind of focusing on those. And it's really clear that we're winning contracts in the energy industry and infrastructure market and also in the pharma sector. And the obvious question might be how we manage kind of the architecture or the building sector. But it's really clear that we can utilize the resources. And I've talked about this before, that as we have this balance of public and private, we see good demand in the public building sector, meaning that that is where we kind of focus those kind of resources. And we have really been able to manage the market in that way.

Okay. Also on the billing ratio, can you just talk about what levers you're pulling exactly to sort of achieve improvements here? I mean, you talked about this for quite some time, and I think it was the lowest billing ratio on record we have for a Q1. But just talk about what projects you're initiating, what targets you're setting, and what timeframe. It would just be interesting to hear how you're actually driving this.

I think it's very much the things we talked about in connection with the Q3 report, with reducing reviewing and reducing overhead and management layers, reducing internal activities. and also have a very strong focus on improving onboarding. We saw some positive development in Q4, but as we said, now we are not happy with the development in Q1. So we need to continue those efforts, but it's very much the same. It's the sort of normal mechanics of our business.

All right. Just a final question on your acquisition payments. You've acquired some very profitable operations. But do you think here in the first quarter, those companies that you've consolidated and paid for, is that a good sort of fair description of where acquisition multiples are at the moment? Or is there anything that sticks out in terms of valuations of targets here in the first quarter?

No, I wouldn't say so because it's always so that we kind of look at the whole business case from different angles. So, I mean, multiple wise, it could be quite wide range what we are willing to pay depending on how much synergies and one of cost and also how we see the business case for us and how strategically important it is for us. But I mean, we're satisfied with the deals that we have made.

All right. Thank you so much. Thank you.

Thank you. The next question is from Stefan Nutzen of ABG.

Good morning. Some of my questions have been answered already, but just if you can talk about the recruitment strategy, given that you say that you see uncertain working conditions and that we have seen mainly in the architecture space that firms are a bit hesitant to recruit here.

I mean, you need to be able to do many things at the same time in a market like this, but we're kind of focusing on recruiting in those areas where we actually see a demand, short-term, mid-term and long-term. I mean, the baseline for all of this is that Europe is kind of lacking engineers for what we need to achieve of kind of transforming the whole society So if we look at the programs that EU has posted out on the market of EU55 and Repower EU and the Net Zero Industry Act, it will require a huge amount of competence and resources. So for us, it's really about understanding what is in those programs, what areas are will grow and focus to recruit and looking for companies to acquire in those areas. And then when it comes to our architects, I mean, we would like to take market positions when it comes to our architectural business also going forward. And we are We have gaps still in our portfolio. And that is also why we're focusing on finding the right architecture company in this kind of market to position ourselves with a combination of architects and engineers. So it's also a market where there might be opportunities that we can act on also for the future. So short term, yes, you could have a question on what to buy and not and what to grow and not. But in the long term perspective, it's also about how we position ourselves. So, be selective, focus on the right areas, and also making sure that we can execute on a strategy, which this kind of market circumstance actually can give you.

Thank you for the flavor. And also, Olof, if I can follow up on the cash flow that you mentioned briefly here. As far as I can see, I mean, the day's sales outstanding is quite high here in Q1, and maybe it's a bit seasonal effect, but any flavor on that?

No, that is true. And I think that's part of what I said about the growth driven working capital build up. And again, a lot of it is seasonal. And in terms of the total trade working capital, including the accounts receivable, we are 1% up on net sales. So still within the normal fluctuations, and we haven't seen any increases in credit losses or payment problems for customers, et cetera. But in this kind of market, of course, we follow it very closely. But so far, it's just sort of parts of doing business right now and growing quite significantly.

Okay. Thank you very much for clear answers.

Thank you.

Thank you.

As a reminder, if you wish to register for a question, please press star and one on your touch-tone telephone. The next question is from Johan Sandin of Carnegie.

Good morning, Oss and Olof, and thanks for taking my question.

Good morning, Johan.

A few questions from my side. The first one is on employee turnover. Was an issue in 2022. Now we have some uncertainty on the kind of general economic outlook, etc. The real estate markets don't seem to be that healthy. How is the employee turnover developing in the beginning of this year?

As I said in my presentation, it's actually going down slightly. So we had increased levels in 2022, as you know, 13.9% versus 13 in 2021. And we are now down more at the 2021 level. And of course, we hope that this is a break in the trend, but remains to be seen, but at least a good start of the year in that area.

And we continue to focus on every area that we can to kind of keep our employees in Sweco a little bit longer all the time.

Perfect. And one other question on the building side. You mentioned weakness on the residential new build and still quite solid demand on the public side. Has there been any kind of elements of spreading effects on price pressure to the public side when the residential building side has weakened or what's really happening here?

I mean, the residential market has been declining for, I would say, the last two, two and a half year. And the real estate sector, I mean, you all know, started to weaken after the full scale invasion, Russia's invasion of Ukraine, meaning February last year. And So it's a kind of more long-term perspective in this movement. But we have been able to increase our prices. And I mean, we have won good and nice contracts in the public area towards those clients over this period of time. But we have reallocated our businesses a bit.

Perfect. And just one final question. That's on Germany and Central Europe. Is it possible to give some more color on the kind of soft start of the year from the Central European business?

I would say not dramatic. We've had a relatively big project in one of the countries that has been postponed, which has quite an impact on those smaller markets. And we have not a big but still a write-down in one of the other markets. So it's relatively small things, but it has had an impact in the start. We don't think it's any sort of long-term issues or anything that will affect the rest of the year in Central Europe.

Perfect. Very clear. I get back in line. Thanks a lot.

Thank you.

Thank you.

At this time, there are no more questions from the conference call.

Thank you so much, operator. And there are no more questions. So I'd like to take this opportunity to thank you for joining us. And I wish you all a nice day and the weekend to come. Thank you.

Thank you.

Thank you.