Sweco AB (publ)

Good day and thank you for standing by. Welcome to the SWECO Q2 2024 Financial Report webcast. 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 will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one, one again. Alternatively, you may submit your question via the webcast. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Marcela Silvander, CCO. Please go ahead.

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

Welcome everyone to Sveko's Q2 presentation and before we present the second quarter of 2024 let me give you a quick overview of Sveko. Sveco is 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 Sveco's long-term success is our mix of competencies spread across 22,000 experts. our focus on organic and acquired growth as well as our efficient and decentralized operational model. The strong financial track record and financial position, we are focused on continuing our growth journey and build on Sweco's success. This introduction, let's move over to the Q2 highlights. Q2 was another good quarter for Sweco. continued the positive momentum from Q1 and delivered a quarter of solid growth and improved margins. Net sales increased by 11% and the organic growth amounted to 6%. EBITDA improved by 12%, adjusted for the positive calendar effect in the quarter. As a part of our efficiency measures, restructuring costs of 58 million are also included in the results. The positive development was mainly driven by higher average fees, higher billing ratio, and a continued FTE growth. I am very pleased that the margin improvement increased to 9.8%. This summary let us dive into more details. As mentioned, we continue to build on the momentum from the first quarter with a positive operational trend. Six of eight of our business areas reported organic growth and EBITDA improvements in the quarter, and we continue to keep a good pace in recruitment. I would also like to highlight that seven out of eight business areas achieved margin improvements in the quarter. Over the past few quarters, we have put increased emphasis on our efficiency and billing ratio, and I'm pleased that we are now seeing a higher billing ratio in the second quarter. Let me give you an update on our work to improve our efficiency. Efficiency improvements are key to improve our margins, and over the past quarter we have implemented a series of measures. This includes redundancies mainly in the UK, but also in Sweden and Finland. We have also initiated a group-wide organizational review to streamline the organization. We are now pleased to see that these measures are starting to have effect. Repositioning in the UK is progressing according to plan and the business area reported a positive result in the quarter. We are also seeing an uplift in our profitability across most business areas and improvements in our billing ratio. This will remain a key priority going forward, but we are pleased to see that we are taking steps in the right direction. Looking then at the overall market situation, it is generally in line with previous quarters. The overall demand for Sweco services remained good, especially related to the green transition. In the water, energy and industry segment, we see continued strong demand related to the transition in the energy and industry segments. and a strong demand in water. We see a weak demand in traditional industry services. In the transport infrastructure segment, we see good demand supported by infrastructure investments and transition to more sustainable transportation. And in the building and urban area segments, we see stable demand in public buildings and a continued weak demand in residential and commercial real estate with variation across markets and sub-segments. With that, I will hand over to Olof to walk you through the numbers. Please, Olof.

Thank you, Åsa. Starting again with the summary of the quarter, we see net sales of 8.1 billion, 6% calendar-adjusted organic growth, 3% from M&A, and no significant FX effects. EBITDA is 794 million, excluding the significant positive calendar effect. We are 68 million or 12% up, and margin is at 9.8%. In the EBITDA, we have also taken 58 million SEC in restructuring costs, a bit more than we announced in Q2, where we talked about around 45 million. Excluding these restructuring costs, the EBITDA increase would have been 22%. Leverage is down significantly from last year at 1.1 after a strong cash flow order. Looking at net sales, adjusted for calendar again, 6% organic growth, and we see organic growth in six out of eight VAs. Denmark and Germany and Central Europe continues to show very strong growth and we see solid growth also in Sweden, Netherlands, Norway and Belgium. Finland and especially UK has negative growth. These are also our weakest markets and the markets where we have taken the most significant restructuring action. The growth drivers again have been continued fee increases, also FTE growth. We maintain recruitment and personnel turnover has continued to decline in the quarter. This quarter, we are also very pleased that billing ratio contributed positively to growth. And finally, one can add that there was no significant impact from absence in the quarter. EBITDA. We see a 12% increase adjusted for calendar, and as said, excluding the restructuring costs, the EBITDA growth would be above 20%. The positive calendar impact, we see margin improvement in all BAs except Belgium, which still delivers 12.9%. Denmark, Norway, and Sweden also deliver double-digit margins. Finland is at 9%. Netherlands at 8%. and Germany and Central Europe delivers 6% in another solid quarter. Norway again has the biggest calendar effect, 40 more working hours primarily due to Easter. UK remain marginally profitable despite taking additional restructuring costs in the quarter. If we then look at the EBITDA bridge by business area, overall, higher average fees continue to be a positive driver together with FTE growth and now also billing ratio, while higher personnel expenses, including the restructuring costs, had a negative impact. Looking at the BAs, six out of eight delivered increased EBITDA. Belgium is in line with last year. Denmark and Germany and Central Europe, just as for the growth, once again delivered the largest EBITDA improvements. Netherlands also has a strong quarter. We see Sweden and Finland improving despite taking significant restructuring costs in the quarter. We took 35 million in Sweden and 15 million in Finland. In the UK, we have concluded our restructuring actions in the quarter. adding another 100 FTE reduction to the 100 FTE reduction we did in 2023. The calendar effect from 13 more working hours corresponded to a positive 162 million SEC in net sales and EBITDA impact. The financial position net debt is significantly down versus Q2 last year after a strong cash flow quarter. the working capital release and also decreased M&A outflows. Leverage is at 1.1, also significantly down versus last year and well below our target. We remain financially strong with available liquid assets of 3.3 billion. And as last quarter, we have a slide on the calendar effects. And with the end of Q2, we have now put the big calendar swings from Easter behind us. We have a significantly positive calendar in Q3, a high number of working hours in the quarter, but of course, it's also the holiday quarter, making it our smallest from a financial perspective. Positive calendar is also in July, meaning that it will probably have limited practical impact in the Nordic so we may not get the full impact of the calendar effect. We have a small positive total for the year for the first time since 2020 and with our increased size one hour now corresponds to approximately 13 million SEK. With that back to you Åsa.

Today I am happy to announce two new acquisitions. First one is a company called Frillingen Rolls and this is the first new acquisition in Germany for some years and this is a milestone for us in Germany. This acquisition adds 30 experts specialized in the growing market segment of water treatment enabling us to capture more business opportunities. The second company is Valstad Simonis and this is an acquisition in the Netherlands that will further strengthen Sweco's position in the field of technical installations for sustainability, comfort and safety in buildings. This acquisition is adding 60 experts to Sweco in the Netherlands. The projects won in the quarter reflect our broad and diverse expertise across several growth segments. Energy sector remains an interesting growth area. In the quarter we won a project to support Volt H2 in the development of a green hydrogen plant in the Netherlands. Defense is another sector with growing demand and here we secured a four-year contract with the Danish Ministry of Defense to support in construction and development of military properties. Need for more sustainable transportation is shown in two different types of projects. One in Finland where we will support the development of a tramway in the city of Turku and another project in the UK where we are transforming a major road into a corridor of walking, cycling and public transport. Let me now conclude by presenting our key priorities and focus areas going forward. We remain focused on capturing business opportunities by further strengthening our market position in Europe's green transition and by tapping into attractive growth segments such as healthcare, pharma and defense. We also focused on executing on our M&A agenda, announcing two new acquisitions today and are actively working with a broad pipeline. And we will continue to focus on our efficiency to improve our billing ratio and margin. It includes all the initiatives I have presented today and a strong efficiency focus across the organization. All in all, Sweco remains well positioned to continue our journey of profitable growth. We are committed to capture growth opportunities. Thank you.

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

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. If you wish to ask a question via the webcast, please type it into the box and click submit. Please stand by while we compile the Q&A queue. Our first question comes from the line of Dan Johansen from SEB. Please go ahead, your line is open.

Yes. Hi also, Olof. Thank you very much for taking my question. I have three questions here. I'll take them one by one, if it's okay. Maybe first one, it's quite encouraging to see the billing rates improving this quarter. Did you see most of the positive impact on efficiency measures already now in Q2, or is that sort of more of a boost ahead of you as well, that you only saw a minor impact on these measures made? Thank you.

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

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

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

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

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

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

Yeah, sounds good. I think that was all my questions for now. So thank you very much and have a good summer.

Thank you.

Thank you.

Thank you. Thank you. We'll now move on to our next question. Our next question comes from the line of Frederick Little from Handelsbanken. Please go ahead. Your line is open.

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

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

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

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

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

Okay, very clear. Thank you very much.

Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Johan Longqvist-Sonden from Carnegie. Please go ahead, your line is open.

Good afternoon, Åsa and Olof. Thank you for taking my questions. Good afternoon. First one is on the order book situation. You didn't give any comments, but I have found in the report on the order book situation. Is it possible to quantify or put any direction of how the order book has developed quarter to quarter?

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

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

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

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

First of all, if I start in Germany, I mean, in Sverko, as you know, every business needs to have the right to grow with acquisitions. And we are there now, even if you will see it gradually coming. And I mean, the areas we're looking for is where we see the green transition. It's about the water segment as you see now. It's about making sure that we strengthen ourselves in the infrastructure, transportation, transport infrastructure segment related to rail and light rail. It's really about sustainability services in different aspects. So in all segments, it's related to that we can meet and support the green transition and what our client is needing in Germany. So we look at the German business both in a geographical perspective, but we're also looking at it when it comes to competencies to make sure that we find companies that fit us both geographically but also competence-wise. And we're working with the broad portfolio and try to intensify the dialogues. And it's the same way we work in all countries to make sure that when we get the opportunity to buy the right companies, then we will do it. So it's more of a timing question in an overall perspective. And in Germany, very much to be in it step by step and being very selective.

Excellent. My other questions have already been answered, so I get back in line. Thanks a lot. Have a good summer.

Same to you.

Thank you.

Thank you. We'll now move on to our next question. Our next question comes from the line of Johan Dahl from Danske Bank. Please go ahead. Your line is open.

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

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

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

Obviously, if you look over the last 12 months, we have, I mean, there is somewhere around 500 FT reduction in total in SWECO. And I think that's probably, and that obviously includes the turnaround in UK. think that is we will continue to be a sort of a high number for us but but so not on those levels going forward but i mean we if we need to make restructuring we will we will do that but there is nothing nothing in the plans right now all right finally also on the uh if you just look northern sweden northern scandinavia so you know pulp and paper the

battery manufacturing, etc. What are you seeing currently in your tendering activity? Is there any red flags occurring here for you guys in terms of demand from clients or is it too sort of small to be relevant for Sweco in total?

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

Gotcha. It's just interesting to hear your chat about it lately, obviously. Thanks so much.

Thank you. Have a nice summer. Have a nice summer. Same to you. Same to you. Thanks.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. If you wish to ask a question via the webcast, please type it into the box and click Submit. We'll now go ahead with our next question. Our next question comes from the line of Raymond K from Nordea. Please go ahead, your line is open.

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

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

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

We have talked about the bigger actions we are taking in the UK, Sweden and Finland. But we have also talked about reviewing the organization in all business areas. And these are sort of minor such actions taken in Denmark and Belgium. So not I would say market related, but related to our overall internal efficiency. And if we hadn't had the other restructuring costs in this month, we probably may not even have mentioned them since they are so small, but now it felt like we should sort of present the whole picture to be very clear externally.

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

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

Okay, brilliant. Thank you very much. I'll get back in line.

Thank you. Thank you. There are no further audio questions at this time, so I'll hand the call back to Marcela.

Thank you, Melanie. There are no more questions regarding this presentation, so with this, we want to thank you for joining us. Wish you all nice summer vacations and see you, if not before, on October the 3rd when we present our Q3 report. Thank you so much. Thank you. Thank you. Bye-bye.

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