Good afternoon. This is the conference operator. Welcome, and thank you for joining the Sweco Q2 Report 2022 conference call and webcast. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Miss Marcela Sylvander, Chief Communication Officer of Sweco. Please go ahead, madam.
Hello, everyone, and welcome to this presentation of Sweco's Q2 report that was published just an hour ago. My name is Marcela Sylvander, and I'm the Chief Communications Officer at Sweco. Sweco's President and CEO, Åsa Bergman, and CFO, Olof Stålnacke, will take us through the results of the second quarter, after which we will open up for questions. Please, Åsa.
Welcome, everyone, to Sweco's Q2 presentation. Before we move into the quarter, let me give you a short recap of Sweco. Sweco is today Europe's leading architecture and engineering consultancy with 18,500 experts and a turnover of close to SEK 23 billion. We have eight geographical business areas in Europe and with business in many countries across the world. Let me now present the Q2 result. We delivered a solid organic growth of 5% in the quarter, adjusted for calendar effect. It is driven by transformational trends in society with sustainability and digitalization being the main drivers. Acquired growth amounted to 2% and currency effects were 2%. Net sales increased to SEK 6.1 billion, with an EBITDA of 486 million and an EBITA margin of 7.9%.
There is a significant negative calendar effect in this quarter, and mainly due to the Easter holidays in Norway. Adjusted for that, the EBITDA improved slightly with 0.4%. We have a strong financial position and low net debt, which allows us to continue to act on opportunities in the market. Made four acquisitions during this quarter with Arcasa Arkitekter being the largest one, and I will present Arcasa Arkitekter a bit more in detail later on. Among the projects that we have won in the second quarter, I would like to highlight that Northvolt has commissioned Sweco to assist in the conversion of a paper mill into a battery gigafactory in Borlänge, Sweden. It is a very good example of how we support clients in the transformation of the energy sector, and in this case, energy storage.
Further, the reconstruction will be characterized by circularity, since the aim is that everything in this project will be demolished, and then to be reused. Moving into the market situation. Demand for Sweco services remained good in the second quarter, driven by the accelerating sustainable transformation across our segments and business areas. Apart from the effect of high absence, the COVID-19 impact on the market was limited. Essentially all business areas experienced good demand for Sweco services in the infrastructure, water, environment, energy, and industry segments. Demand for services in parts of the building and real estate segments remained slightly weaker with continued market uncertainty. We have a stable inflow of new orders and continued to strengthen our order book in Q2. One example of a new assignment is related to drone aviation, in which Belgium is in a strong position.
Sweco will support the Belgian client LRM with a business plan and strategy for how a former Air Force base can become Belgium's first drone cargo airport. Now, let us take a close look at the second quarter. Our organic growth was 5%, and I'm pleased that we had positive organic growth in all our business areas. As you can see here, U.K., Belgium, Denmark, and Norway delivered strong organic growth. Also had solid levels in Sweden and Netherlands, while Germany and Central Europe delivered a slight positive improvement. The development was supported by higher average fees and improved FTE growth. We have a positive momentum in recruitment with a net head addition of close to 400 experts. High absence connected to COVID-19 in the beginning of the quarter and low billing ratio had negative impact. With that, let us move over to the result.
EBITDA amounted to SEK 486 with an EBITDA margin of 7.9%. Year average fees and FTE growth contributed positively, while higher operating expenditures compared to the levels during the pandemic, higher absence and lower billing ratio had negative impact. In total, four out of eight business areas had EBITDA improvements. Germany and Central Europe, the U.K., Belgium and Norway had increased EBITDA levels, and I'm happy to see that both U.K. and Germany and Central Europe continue to take steps in the right direction. Norway had strong underlying organic growth and an improved EBITDA, but was impacted by a negative calendar effect related to the Easter holidays. Sweden and Belgium delivered strong margins close to our profitability target of 12%. Adjusted for the significant negative calendar effect, EBITDA improved slightly with 0.4% in the quarter.
With that said, I'm pleased that we continue to execute on our acquisition agenda. As mentioned earlier, we announced the acquisition of Arcasa Arkitekter during Q2. Arcasa Arkitekter is a Norwegian consultancy with 70 experts specialized in sustainable residential development. This acquisition makes Sweco a leading architecture player and the largest within residential architecture in Norway. With that, I will now hand over to Olof to walk you through the numbers. Please, Olof.
Thank you, Åsa, and good afternoon, everyone. Starting with net sales development. Net sales in the quarter was SEK 6.1 billion, taking LTM net sales to SEK 22.8 billion. Adjusted for calendar, we saw organic growth of 5% despite continued negative impact from higher absence. Significant negative calendar effect from five more hours, which was most clearly visible, as also said in Norway, where the timing of Easter had a significant impact. We see positive impact from M and A of 2%, from FX of 2%, and that brings total growth to 8% for the quarter. Looking at EBITDA development, EBITDA SEK 486 million in the quarter, bringing LTM EBITDA to SEK 2.1 billion. The reported EBITDA is 43 million down, but adjusted for the calendar effect, we are slightly up in the quarter.
Impact of higher sickness rate declined versus Q1, but sickness rates still increased by 0.5% year-on-year, having a negative EBITDA impact of approximately SEK 30 million. Looking at the EBITDA bridge by business area, we see positive contributions from four BAs, Belgium, Norway, U.K., and Germany. Belgium continues with consistent strong performance and high margin. U.K. and Germany improve significantly versus weak quarters last year. In Sweden, Finland, Denmark, and the Netherlands, we are down versus last year, driven by different combinations of higher absence related to COVID, lower billing ratio, and also reversal of the COVID cost savings that were still present last year. Sweden, however, maintain a high margin in the quarter.
The impact from higher operating expenses and absence can be seen across most BAs, but in the other direction, EBITDA is positively impacted by continued fee increases and by accelerating FTE growth. Our financial position remains strong. Net debt is just north of 2 billion, slightly up versus last year. Stronger operating cash flow in the quarter is outweighed by larger outflows for dividends and for acquisitions. Leverage is at 0.9, below last year and less than half of our target maximum. Have available liquid assets of 3.3 billion, and thereby remain well-positioned to continue to capture any opportunities that may come. With that, back to you, Åsa.
Thank you, Olof. Let us now conclude the second quarter. As previously said, it was a quarter with solid organic growth driven by transitional trends in society. All business areas delivered organic growth, and four out of eight business areas reported improved EBITDA. Essentially all business areas experienced good demand for Sweco services. In the second quarter, we had a stable inflow of new orders, and we continued to strengthen our order book. We have a strong financial position that enables us to act on opportunities in the market as they arise. The image you see here on the slide is a new project where Sweco will support in parts of the reconstruction of the bridge that crosses the Kiel Canal in Germany, which is one of the world's most frequently used artificial waterways. Let us conclude with some last words about our focus going forward.
Continue to focus on working closely together with our clients and be the partner of choice in the ongoing transformation of society. Cooperation with Northvolt that I mentioned before being one example. As always, our focus going forward is on profitable growth. This is based on a combination of organic and acquired growth, and we continue to actively look for interesting acquisition targets. We at the same time build on our positive momentum in recruitment to ramp up FTE growth and organic growth. We also continue with the implementation of our operating model, the Sweco Model, across all our markets. It defines how we deliver our strategy and is the key for our future growth.
Despite the market uncertainties that we see in certain segments, I believe that the demand for our expertise will continue to grow as we need to accelerate the sustainable transition in society. I'm really proud to say that we, in many aspects, are leading the way together with our clients. With that, let's open up for questions. Thank you.
Thank you, Åsa and Olof, and we will do just that. It will be possible for you to ask questions either directly through the conference or through the chat function. Please, Judith, if you can give us the instructions.
Thank you. This is the conference operator. 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 yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Johan Dahl with Danske Bank. Please go ahead.
Yes. Good afternoon, everyone. Just a couple of questions. Firstly, on the billing ratio, I think it was sort of the weakest Q2 billing ratio that I have on record for Sweco. Could you just talk about what drove that low efficiency in the quarter? Was it market related? Is it execution related? Just to understand how you ended up there.
Good afternoon, Johan. Thanks for your question. On the billing ratio, where we saw the decline in the quarter versus last year was primarily in Finland and Sweden. The main reasons we see are, it's not across all of the business, but parts of the business. The main reasons are big projects coming to an end, leading to some lead time before people are back at work, and also quite a big inflow of new recruits and the onboarding, which also have created lags. There is very little market impact in this. I would say it's primarily a question of execution.
From your experience, I appreciate, you know, taking in a lot of new recruits. It, you know, takes some time to put them to work. When would you think that this has normalized, if you can talk about the type of normalization?
Hi, Johan. Åsa here.
Hi.
I mean, this is something that we of course address, because both being quick and efficient when it comes to onboarding and also offboarding, I have to say, is something that we're really focusing on. So this is something that we are addressing, and this is not the level that we would like to see going forward. I mean, and back to that, we have strengthened our order books, and we have won lots of projects during this quarter, and that is a good starting point.
All right. On the topic of pricing, you've had this tailwind on pricing. Has it been similar, the tailwind, if you look net of price and wage inflation? Was it similar in Q2 compared to previous quarters?
It is similar, and if anything, it is increasing.
Gotcha. Thank you.
The next question is from Dan Johansson with SEB. Please go ahead.
Thank you so much. Good afternoon, Åsa and Olof. Two questions from me. Just to follow up on the question on recruitment, what are you seeing in terms of wage increases currently for people joining Sweco today compared to the people you recruited two, three years ago? Is there a significant step up already now or something you anticipate ahead? Thank you.
Good afternoon, Dan. I should start with. There are increases, but still, as we've said before, nothing sort of that we don't think we can balance out with price increases. There are increases in the market. There is a general salary inflation as we have talked before, but still on manageable levels, I would say.
Okay. Thank you for the clarification. Perhaps jumping a bit back to the margin development in Q2 and perhaps comparing it a bit to Q2-Q1, I understand the drag from recruitment, but absence is also still a higher level than last year, but lower level than in Q1, and still you have a 60 million lower EBITDA compared to Q1 on the same revenue base, basically. Are there other factors as well, unusual levels of project adjustments or extraordinary costs that explains that gap in terms of EBITDA from Q1 to Q2 that I should have in consideration? Thank you.
No, I understand the question. I mean, one thing compared to Q1 is obviously we had a significant positive calendar effect in Q1 and a significant negative calendar effect compared to last year in Q2. Otherwise, as we say, it is the billing ratio, which according to sort of the sensitivity analysis we normally make in the annual report, it has around a 50 million impact. Then as we say in the report, we also see increases in operating expenses. Part of that is the catch-up we have been talking about on some of the areas where we saw big savings, like travel and training. Part of it is, for example, recruitment costs, given the high recruitment.
We also see costs that have increased continuously during the pandemic as well, like the IT costs and in addition, some inflation. There are some factors which are temporary on the cost side and some factors which are more permanent or at least longer term.
Okay, thank you so much. Now I understand it a bit better. Perhaps a final one, if I may. On the market demand, if you could say a few words on what you're currently seeing in the real estate market, which I guess is most debated right now. What are you seeing on projects? Are they being postponed already now, or is it still too early to say? What's your thinking about the real estate segment right now?
Hi, Dan. Åsa here. Thank you for the question. If I start with the latter, we don't see an impact in this quarter. We see as we report good demand for our service in most segments. We see even strong demands in some segments. But when it comes to the commercial real estate and in the housing segment, it is a bit of a weaker market. But with that said, we haven't seen. I mean, there's lots of uncertainty and lots of discussions going on. And of course, with the inflation and the rates and everything linked to that, you have to be cautious for the future.
For us, it's really about staying close to our clients, and that is also, I think, worth commenting again that our order books has strengthened and that we have won quite lots of nice projects during this quarter. No effects in this quarter. Uncertainty in the field of real estate and housing. I need to say that and clarify that if we look at the segments of commercial real estate and housing for Sweco, that is less than 15% of our net sales. It's also another thing worth mentioning is our project portfolio and our client portfolio being this mix of 50/50%, which we aim for public/private.
Also if we look into the different services that we provide, we provide them into different sectors, meaning that if one sector goes down, probably we can move those resources into another sector, which makes us resilient. But again, with that said, we stay close and monitor the development closely as always.
Understand. I guess, when you're referring to the balance in your portfolio, I guess it's energy-related services that you provide and also, I guess, public infrastructure that you hope will balance a potentially weaker development and demand in private real estate. Is that correct?
Yeah, but also that we have public real estate, meaning hospitals, schools, smart cities, I mean, planning of urban areas and digital services. The whole kind of transformation of the society is kind of pushing also into that building segments. That also is something that we see good demand in.
Okay. Thank you so much for the elaboration. I'll jump back into the line also. All I got for now. Thank you.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Johan Sundén with Carnegie. Please go ahead.
Thank you, and good afternoon, Åsa and Olof. A few questions from my side as well. I think we'll stay at the topic of OpEx and billing ratio. First on OpEx, can you please remind us where we are in the phasing of the OpEx reversion? How much of the OpEx was reverted in Q2 last year? How much was the negative impact in Q2 this year? How should we think about OpEx reversion during the second half of this year?
Good afternoon, Johan. I think you can roughly say that of the savings we talked about in Q2 2020, roughly half was reversed in Q2 last year. Now with even if we do have had COVID impact, there was relatively open societies everywhere. They are fully reversed in Q2 this year. That being said, we have also talked about that we'll probably see a catch-up effect on training, internal activities, and travel when it opens up, meaning that we don't think that none of the savings will be permanent. I think longer term, we will travel less, we will train more efficiently, et cetera. I expect these costs to be at a lower level going forward.
Still too early to tell, how much that permanent saving will be.
This kind of catch-up phase, can you please give any guidance of how long time that will remain? Or is it just a quarter, or is it the entire year that we will have a little bit of catch-up or how should you think there?
No, I think it's primarily in the second quarter. We may see some of it, again, depending on how COVID develops, we may see some of it in second half, but I think Q2 was the big catch-up in terms of sort of training, internal activities and travel. I think one thing to add as well is that travel is probably not the only activity, travel activity increasing. It's also the fact that traveling has become much more expensive. Part of that is also inflation in this one.
Okay. Excellent. That was a good clarification. On the billing ratio then, now we're approaching Q3, and Q3 is often a big vacation quarter that's a little bit tricky to manage as a consultancy firm. Now with coming into the quarter with a lower billing ratio, should we be worried that there should be a slow start after the summer? Or what strategies do you have to get up in good utilization after the vacation period?
I think to start that off, I think we ended the quarter on billing ratio stronger than the billing ratio as a whole. There was an improved billing ratio in June. We are leaving the quarter stronger than the average, so to speak. That's one start. Maybe Åsa, if you want to talk about the startup.
I mean, Hi, Johan. Thank you for a good question. This is always a topic for us, how we start after vacation. As we have so many new hires into Sweco, this is again very much in focus and we're planning in detail how we start up after summer. Having strengthened our order books in this quarter and also received lots of interesting projects, I mean, I think it's the same as always.
A little bit long term, you talked about that you want to ramp up recruitment in general and that has lagged a bit during the COVID period. Do you see a risk that we should see a little bit lower billing ratio during a few more quarters when you start accelerating recruitment? Or is it more or less this one time quarter that we see this effect or how do you think, how do you view that?
I mean, it's quite hard to kind of forecast that, and we, as you know, don't do forecasts. I mean, what we do is that we're really focusing on becoming more efficient when it comes to how we onboard and how we offboard and also making sure that we really focus on internal efficiency, which always should be a focus for us, will be going forward as well.
Great. That was my two questions. Thanks a lot.
Thank you.
Thanks, Johan.
The next question is from Fredrik Lithell with Handelsbanken. Please go ahead.
Thank you very much. Thank you for taking my question as well. I was hoping to get a little bit of more color around, specifically Norway and the big swings between EBITDA between Q1 and Q2 to better understand what is what there, what is seasonal effects, what is the five days of less billable hours, and what is the Easter effect there and in order to better gauge that. I have a second broader question. The public sector as such, do you see any signs that parts or areas of public sector are looking into how they're spending and what pace they're spending in? Are there any signs of anyone pulling any projects due to inflation in general? We heard talks about that in other circumstances.
I was just hoping to get your color on how public sector behaves. Thank you.
Good afternoon, Fredrik. To start with Norway, that's where we see the big calendar swings between Q1 and Q2. They had 24 less working hours in Q2 compared to last year. They had something similar in Q1, but on the positive side. That's why you see the big swing. Looking at Norway, the reason for the big swing is obviously because everyone in Norway takes holiday all of the Easter week, should be added. You should really look at Norway year to date, where they have 8% organic growth in total. They have, including M and A, a total growth of 17%, M snd A and FX, I should say, and they have a margin expansion of 1%.
That reflects sort of the performance in Norway. We get these big calendar swings, and I think probably a bit underestimated the calendar swing for Q2. But that's the reason. I don't know, Åsa, if you want to talk about the public sector.
Yeah. As I understand, your question was that if we see any differences in the public sector spending. I have to say that it's, I mean, if we look at the infrastructure segment, we see a continued strong focus. In some business areas, we see even strengthening investment plans in the infrastructure segment. As mentioned before, the whole transition of the energy sector and the REPowerEU and focusing of getting independent from Russian oil and gas really push energy production into renewables and transmission/distribution and energy storage, and that goes for the whole of Europe. There we also see lots of things happening. That is an answer to your questions. We don't see any-
Yeah.
Any big swings in the public spending?
No, but I mean, it's the reason I ask the question is because the public sector is so important for you, it keeps your revenue streams very stable over time. Thereby, given the very sharp inflationary environments, we do see some pockets of what public spending is that they are holding back a little bit, and that's why I just wanted to see if you saw some tendencies of changes in behavior. That's good to hear.
No.
The last question from the conference call is from Raymond Ke with Nordea. Please go ahead.
Hello. Can you hear me?
Yes. Hi.
Hi. Great. Hi. Two questions from me. First one, in your latest annual report, it states that you have an exposure to housing, real estate, and construction of about 19%. Could you give us an approximation of how much of this is commercial real estate?
Yes. It's commercial real estate is roughly 10% in total, and residential housing is around 5%, roughly. There are also construction clients within other buildings, like public buildings, et cetera, so that makes up of the total. It's not sort of entirely one-to-one, but commercial real estate and housing is 15%, roughly.
Yeah. Yeah. Perfect. My second question is a bit about Netherlands. If we look over the whole first half of this year and compare it to the last year, there should be no calendar effects. I see that Netherlands last year achieved SEK 30 million more in the EBITDA. Could you comment a bit about the trends that's happening over in Netherlands?
I think the main reason for this change is that they had a very strong first half last year, and especially the first quarter was an all-time high in Netherlands, which we also commented at the time that it was not what should be expected going forward. If you look at the main reason for the EBITDA decline is that they have quite significant COVID-19 savings, which are now being reversed. That is the main reason versus last year.
Perfect. That's all for me. Thank you very much.
Thank you.
Okay. Thank you. We have one question coming through the chat function from Pau Vidal. It might be so that part of that question had already been answered, but I'll read it anyway. It goes like, "Could you please elaborate on the calendar effect, as I presume the negative calendar effect in Q2 would have been mirrored, a mirror effect of a positive calendar effect in Q1, which you did not speak about when you reported Q1. Am I missing anything here?
No, I think if you look at the Q1 report and the Q1 presentation, it's very clearly stated that we had a positive calendar effect for 10 more hours. I don't recognize that we shouldn't have mentioned it, and we do mention it in every quarter, since it is an important part of our year-on-year development.
Thank you for that. There are no more questions in the chat function and no more questions in the conference call. With that, we want to thank you for joining us, and I also want to take the opportunity to wish you all a nice weekend and a summer. Thank you.
Thank you, everyone.
Thank you, everyone. Have a nice summer.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.