Sweco AB (publ)

Good day and thank you for standing by. Welcome to the SWECO Q2 2023 IR report. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you'll need to press star 1 and 1 on your telephone and you'll then hear an automated message advising your hand is raised. To withdraw your question please press star 1 and 1 again. Alternatively you may submit your questions via the webcast. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Marcella Silvander, CCO. Please go ahead.

Good afternoon, everyone, and welcome to this presentation of SECO's Q2 report. As you heard, my name is Marcella Silvander, and I'm the Chief Communication Officer here at SECO. SECO's President and CEO, Åsa Bergman, and CFO, Olof Stornakert, will take us to the results of the second quarter. And after that, we will, of course, open up for questions. Sveko, go ahead.

Welcome, everyone, to Sveko's Q2 presentation. Before we move into the quarter, I would like to give you a short recap of Sveko. Sveko is today Europe's leading architecture and engineering consultancy with operations in eight geographical business areas across 15 markets in Europe. We are a well-diversified business operating across three 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 21,000 experts, our focus on organic and acquired growth, as well as our efficient and decentralized Sweco model. With a strong legacy, we continue to build Sweco's success Our solid financial position keeps proving itself essential, value creating acquisitions as well as dividend growth. The second quarter was another good quarter for Sweco with a strong performance across the group. We continue to deliver a strong combination of organic and acquired growth with the net sales increasing to 7.2 billion SEK in the quarter. EBITDA increased to 564 million SEK. Adjusted for the calendar effect, the result improved by 29% compared to Q2 last year. The result is driven by a positive momentum in pricing, a solid FTE growth, and positive contribution from recent acquisitions. especially from BK Architects and Engineers, and Olof will provide you with some more information on this later in this presentation. Moving over to the operational highlights in the quarter. Overall, the demand for Seco services remain good, and we continue to see good growth opportunities. One key to our organic growth is our positive momentum in recruitment. And over the past couple of quarters, we have established a solid level of FTE growth and we are also improving employee retention. The performance in Q2 was generally strong across our business areas. Seven out of eight business areas reported both organic growth and EBITDA improvements in the quarter. And I would like to especially highlight the strong performance in Belgium and Denmark that is driven by a strong positioning in attractive growth segments And we are also seeing good growth in Norway, Finland, while Germany and Central Europe continues to take steps in the right direction with good growth in the fortress. We made four new acquisitions, welcoming around 200 new experts to Sveko Group. With good demand and solid inflow of new orders, we also continue to strengthen our order book and won several new exciting projects. I will come back to this later in this presentation. Let us now look at the market situation. The market situation is overall unchanged compared to previous quarters. The underlying demand for services is good, but the market uncertainties related to the macroeconomic development remains. This means that we need to continue to stay agile in the market. The green transition continues to be a core driver for Sweco, and a theme that cuts across most of our business areas and projects. This is notable in the water, energy, industry, and transport infrastructure segments. The segment building and urban areas remained a bit mixed. We see stable demand in public buildings, but a continued weakened demand for services in residential and commercial real estate, driven by the macroeconomic situation. Overall, we continue to see good growth opportunities And we also see that our diversified offering and business models is a strength in this mixed market. And with that, I will hand over to Olof to walk you through the numbers. Please, Olof.

Thank you, Åsa, and good afternoon, everyone. Starting with a quick summary again, then. Net sales in the quarter, 7.2 billion SEK. We see 9% organic growth, 7% from M&A, and 4% from FX. EBITDA, as also said, is $564 million. We are $77 million up versus last year. And excluding the negative calendar effect, we are $140 million or 29% up. Margin is 7.8%. Leverage increases to 1.5%, and that's driven by M&A, dividend growth, and also working capital buildup, both seasonal and growth-driven. In this quarter, we now have VK Architects and Engineers in our P&L. It is consolidated into Sweco Belgium primarily, but also into Sweco Netherlands. This is our largest acquisition since 2015, and they make a significant contribution in the quarter. 230 million in net sales, 32 million in EBITDA, and 14% in EBITDA margin. And the integration of VEK is progressing according to plan. Looking then at net sales, we are pleased to see solid organic growth in seven out of eight BAs, ranging from Sweden and the Netherlands at around 5% up to Norway, which is close to, and Finland, Belgium, Denmark, and Germany and Central Europe, clearly in the double digits. The only exception in the growth pattern is UK, where we have seen a further weakening of the 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. On the EBITDA side, we see a 29% increase year-on-year adjusted for calendar. We see margin improvement in three BAs despite the significant negative calendar. And the EBITDA drivers are much the same as the growth drivers. Price increases and FTE growth, and also that the negative impact from sickness absence we had last year in Q2 has been largely reversed. Billing ratio declined slightly in the quarter, but excluding the acquired entities, which are not yet into the SWEC of time reporting and billing ratio follow-up processes, we saw a slight increase in the billing ratio. Increasing efficiency and improving the billing ratio remains the focus for us going forward. Looking then at the EGITDA bridge by business area, Belgium has a stellar second quarter with a VK acquisition coming in with a significant dividend contribution as we just saw and the existing business also continues to perform very strongly. Denmark also continues on a very good trajectory and we see significant contributions also in Finland, Norway and the Netherlands. Sweden is slightly positive despite that we got the impact from the salary increase in this quarter. germany and central europe improves after weaker q1 and as you can see the decline in parts of the uk market has an impact all the way down to ebitda and we are now taking action to get the underperforming parts of the business back on track important also to mention that the calendar makes this into a relatively small production quarter for us with six less working hours, corresponding to a negative 63 million in net sales and EBITDA impact. And finally then on the numbers, the financial position. Net debt is at 4.1 billion, significantly up versus last year. LTM cash flow from operations is outweighed by larger outflows for M&A and dividends. especially the larger acquisition of VK that we made in Q1, and we also see seasonal and growth-driven working capital build-up. Leverage is also up at 1.5, but still well below our target, and we remain financially strong with available liquid assets of 3.2 billion. And with that, back to you, Åsa.

Thank you, Olof. We continue to deliver on a strategy to combine organic and acquired growth. Altogether, we have made eight new acquisitions during the first six months of the year. In the second quarter, we announced four new acquisitions and another one just after the closing of the quarter in the beginning of July. add a combined net sales of approximately 260 million SEK and around 220 new experts to Sweco. The acquisitions are spread across four countries, Sweden, Finland, UK and Belgium, and a wide range of interesting service segments such as buildings, architecture and infrastructure. These acquisitions all contribute to strengthen Sweco's position in attractive segments. Our strategy with regard to acquisitions will remain on top of our agenda going forward. And with that, let us now have a look at some of the new interesting projects that we've won in the quarter. We continue to see a good demand for Sweco services, driven by the green transition in society. Just to give you a couple of examples. In Belgium, Sweco will assist Belgium public transportation company Delim to transform facilities for electric buses. This is a part of making the public transportation emission free by 2035. In Finland, Sweqo is taking part of a unique wood building concept together with Stora Enso, proposing new ways of increasing the circularity in buildings. We are also seeing that our new acquisitions play a vital part in winning new projects. In UK, our newly acquired company, Ball & Barry, was commissioned to help in the transformation of a listed heritage property. To conclude, I am very pleased with the quarter and with the achievements we made. Circle 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 and continue to execute on our M&A strategy. It is evident, particularly in the present market environment, that our diversified portfolio of clients, segments, and solutions is a competitive strength. We are also maintaining good momentum in the recruiting. The Sverker Group is growing. Thank you.

Thank you, Åsa and Olof. And now we will open up for questions and as we were instructed in the beginning, it is possible for you to ask them directly through the phone line. or through the chat function. Please, Sarah, if you can give us the instructions perhaps one more time.

Thank you. So to ask a question, you'd need to press star 1 and 1 on your telephone and wait for your name to be announced. And so we'll draw your question. Please press star 1 and 1 again. And if you wish to ask your question via the webcast, please type it into the box and click Submit. Thank you. We'll now go ahead with our first question.

Please stand by. First question comes from the line of Daniel Joberg from Handelsbanken.

Please go ahead.

Thank you, operator. Hi, Åsa and Olof. And a big congratulations to a strong performance here in Choppy Waters.

Hi, Daniel. Thank you. Hi.

Hi. The first question would be a little bit looking at the solid organic growth. Can you comment a little bit on the level that came from prices versus volume and mix? Would be great. It's like half-half, similar to your fear in the Nordic perhaps?

Yeah, I think it's fair to say it's been like it has been for the last few quarters. It is roughly 50-50 from price and volume in the quarter.

Perfect, thanks. And another question on the employee retention coming down. Do you see a risk that it comes too low that you need to work the demographic in the company, you know, more on hands-on level? Or how do you see this?

No, I mean, if we look back and before the pandemic, we were on lower levels. And that means that we have seen an uptick after the pandemic. And we have referred to the personal turnover being one of our, how to say, challenges due to that is of course costly and to onboard people and So we are really welcoming this Decrease of the personal turnover. This is the second quarter in a row where we see see lower levels and too early to see it as maybe a trend but it is a positive and There is no risk that we are going to see personal turnover levels that is too low. But we have to expect and we have the capability of working with the personal turnover on those levels that we now see in the business. So the answer to your question is no, I don't see that coming. But I would welcome even lower levels of personal turnover than we have right now. even if we are on the benchmark in the market.

Perfect. And if I may, a question on the profitability in Belgium and Denmark was obviously strong and surprised me a bit, also underlying. Did you have any non-recurring or one-off projects that helped that we should be aware of or is this the going concern or the level we should expect given the current

uh demand situation no there is there are no sort of non-recurring items in there no no one else it's just the continuation of the strong performance in belgium is also the addition of vk obviously which yeah strength to the business and in denmark is again just the continuation of the trajectory we've seen that's great uh thank you and have a good summer and we'll get back in the queue

Thank you very much. Thank you. Thank you. We'll now take our next question. Please stand by. This is from the line of Stefan Knutsson from ABG. Please go ahead.

Good afternoon, Åsa and Olof. My first question is regarding the outlook in the real estate market. Have you seen any increase in uncertainty and, for example, within public buyers of late.

The market situation related to the building sector remains weak in this quarter and I have to say it's more that it continues and it's mainly related to the residential sector with newly built. So it's more that it continues. In our business, it's really a strength, and as I said before, of this broad client portfolio and this broad project portfolio that we have, so we can utilize the resources also into the public buildings, meaning schools and healthcare and so on. But with that said, it is an uncertain market that we are capable of handling and maneuvering so far.

But I mean, just to add to that, overall in our market, we have not seen any sort of increased weakness in the public building market.

And still good demand in the public spending, as you refer to.

Perfect. Very clear. And then also, Olof, on the working capital, you said that it increases from strong growth I also have it increasing in share of revenues and approaching historical high levels. So any further comments on the development there would be helpful.

No, then we are working off the same numbers. I also have the percentage increasing. There is two factors in this. I think when you have the kind of growth we've had over the last 12 months, you will have sort of an excess buildup in work in progress. And the same thing when we go down, you have a sort of further decline in the percentage of sales. So there is sort of an extra effect from growth. What we also have in the quarter is that the acquired entities come in with higher working capital ratios than we normally have. And we see that as an opportunity to release cash once we get them into Sweco's working capital regime.

Okay, perfect. And then my last question is regarding Germany and UK, which still have sort of lower profitability levels. Are you taking any specific actions in those countries to improve that?

Well, in Germany, as you know, we have been executing on a turnaround plan for quite some time now. What is positive is that we see good growth, we see good ordering flow in Germany. The margin has not yet lifted, and that's obviously something that we are working with to sort of get the cost levels right, et cetera. So in Germany, I would say it's just continue to execute on our plan. In the UK, we've had more of a rapid negative impact in the quarter, as you've seen, and there we are taking actions in terms of cost reductions on a sort of more shorter timeframe.

Perfect. Thank you very much for the answers, and I wish you a nice summer.

Thank you. Thank you.

Thank you. Thank you. We'll now take our next question. Please stand by. This is from the line of Johan Sundin from Carnegie. Please go ahead.

Hi, Ulf and Åsa. A question from my side as well. And it's touching upon the topic that we discussed earlier. It's the building and residential and the wider construction market. If we can assume out the last kind of four, five quarters, is it possible to walk us through how and the direction of the market and where you are end of Q2 compared to where you have been earlier during the last four quarters and where to expect going forward without guiding specifically because it should be pretty early cyclical in that sense and we've seen many other companies commenting that the weakness in the construction market has increased during the Q2 I said earlier these are the weak

segments, and we have experienced that the residential market has decreased, I would say, the last two or three years. It intensified in the beginning of last year with the Russian full-scale invasion of Ukraine with the inflation and the crisis on the market. And of course, the inflation and the rates is pushing our clients in different perspectives. But with that said, we have been able to maneuver the market due to that we have a very vocal presence and that we stay close to our clients in those segments. And that we also are able to utilize resources into other building clients that really invest. What we also see is that real estate companies and residential investors still are competent in sustainability services, in energy efficiency, in reconstruction and change is weak. There is still a project in those sectors. It's weak, but there's still a market, I have to say. And your question around the future, I think that I can guess as much as you by the information we have right now. But of course, it's uncertain. And let's see. And it's also one other thing, I think it's important to emphasize that the different markets we have in our portfolio is maneuvering this economical macro perspective in a different way. So each market has their different flavors when it comes to its investing and not. For us it's really about working really local towards our different markets.

Perfect. And one second question on the summer period. We have had two years in a row now where you had a pretty slow start after the summer vacation period. How is your visibility and how are you planning to ensure that the kind of efficiency are at a good level when all the employees return after summer vacations?

Well, it is the same process that we have every year. I would say the visibility to start with is normal. As we said, our order book has improved, meaning that we have work to do for our consultants. And as usual, it's just a question of short-term work planning in the organization. And we are putting the same emphasis as usual on that. That being said, it's always a startup period. Our aim is definitely to make it as short as possible, like we do every summer.

But with regards to kind of recruitment, et cetera, last Q3 you had a pretty high recruitment activity. You are not planning to have the same kind of recruitment boost and onboarding initiatives that we saw in Q3 last year?

What we saw in last Q3 was that we really pushed to get up to speed with recruitment after the pandemic when the market opened up. And what you saw was the result of that recruitment. We really succeeded with that. came back quite heavily, meaning that we have never ever seen so many M2ing into Sverko as we did Q3 last year. With that said, we now are seeing a more kind of distribution month by month, people starting. So we don't expect the same kind of situation in Q3 this year.

Perfect. Thank you for the clarification. I get back in line.

Thank you. Thank you. We'll now take our next question. Please stand by.

This is from the line of Raymond Kaye from Nordea. Please go ahead.

Hello, hello. Two questions from me. First one on billing ratio. I see that it is practically flat year to year. Did you perhaps notice a change in the billing ratio as you progressed throughout the quarter, which might indicate sort of where it is heading?

Yes, not very much, but if anything, I would say a slight improvement towards the end. And it's also worth noting, I guess you've seen that and we mentioned in the presentation that we are actually slightly up, excluding the acquired entities, but slightly up if any trend during the quarter.

Great. Do you see any noticeable differences across your various industry segments that you perhaps could provide a bit of color on?

In what sense do you mean?

For example, architects compared to engineers working in industrial projects, say.

No, I mean we are organized as you know in country organizations and we don't disclose billing ratio information below group. What you can see from the report is that we see billing ratio decrease in Sweden and the UK. So that's the only information outside of the group information.

Fair enough. And one final question regarding the order book strengthening, as you described it. Does that also mean it is strengthened in relation to LTM sales?

Yeah.

Okay, perfect. Thank you so much. Have a great summer. I'll get back in line.

Thank you. Thank you. Thank you. No further questions on the phone lines at the moment, so I will hand over to the speakers to take any questions from the webcast.

Thank you so much, Sara. And we have a question from Steven from Goldman Sachs. The question is, can you give us some details about the reasons behind the margin decline in Sweden, Finland, and the UK, even when sales increased in each region?

Yes. I mean, to start with, one of the reasons in all three countries is the negative calendar effect which impacts all three countries. In UK, the margin decline, we talked quite a bit about that during the call. It is the weakness in infrastructure and in commercial buildings in the quarter, which has primarily impacted building ratio and is the reason behind the margin development. In Finland, we are actually excluding the calendar effect, improving both EBITDA and margin. And in Sweden, we are improving EBITDA, excluding the calendar effect, but have a slight decline in margin.

Thank you. And then there's a question from Quentin of Cambria. And the question is could you elaborate on wage inflation in your different markets? Do you expect additional wage increases going forward?

now with the second quarter the the biggest impact on salary inflation which is the Swedish one the biggest organization it is now fully included in the numbers we have some more impact coming in a couple of the smaller market but now a majority of the salary inflation is in the numbers And as we said before, we have managed to increase prices in line with or above the total salary inflation.

Thank you with that. We have no more questions on the chat function, and I guess no more on the phone lines. So with that, we want to thank you for joining us, and we wish you a really nice summer.

Thank you very much, everyone. Thank you all. Have a nice summer.

Thank you. This does conclude today's conference. Thank you for participating and you may now disconnect. Speakers, please stand by.