Good morning, good morning, everybody. Good to see so many of you here, and good morning to the people that are following us online as well. And as always, I'm Tomas Carlsson, and with me here, I have Jonas Dahlberg, our CFO, and we're going to present the fourth quarter 2017 to you this morning. I will do the helicopter view, and Jonas will give you the details, as always. So, Q4 and full year, and the summary goes like this: This is the fourth consecutive record-breaking year for Sweco, which I'm very pleased with, so fourth consecutive record-breaking year. Q4 is a stable quarter, but it is, however, impacted with project writedowns in specific locations and clearly identified locations in Norway.
It's actually Trondheim, if you like to know exactly, and it's also Water and Energy in Denmark. On the positive side, or the slightly artificial positive side, there's a positive gain from recognition of deferred tax assets in Netherlands. The positive part of that is that's because we have what we think is sustainable earnings growth in the Netherlands now, which is part of the growth, my plan. The earnings itself, they are more dubious. Overall, good market. We see the same trend as we saw in the third quarter, where basically all markets are converging towards good.
As a consequence of the earnings and the strong balance sheet, the board proposes to the annual shareholders meeting an increase of the dividend from 4.3 SEK to 5 SEK, which is more than a 16% increase. So that's the highlight of 2017 and the fourth quarter. To give you some examples of projects that we have won and other activities, we have won the design of a part of the new E6 in Norway. The client is ultimately Nye Veier, which is the new entity in Norway for highway construction and investments, and that's a very interesting project. We have also won support project for infrastructure in Afghanistan, and this is our German entity that has won this project in Afghanistan.
And we have actually a pretty long tradition of working in Afghanistan together with German authorities. And in Germany as well, we have won the project called Grand Central, and it's not the infrastructure, it's an office and commercial complex in connection with the Grand Central Station in Frankfurt. That's an interesting project. After the fourth quarter, we concluded the acquisition of Årstiderne Arkitekter. It's roughly 200 architects in Denmark. It's not our biggest acquisition, but it's interesting because it changes the dynamic on the market in Denmark. For the Danish organization, it's a 20% increase of the Danish organization, and we think -- and it also increases our architectural practice with roughly 20%. So that's a really interesting acquisition.
And then in addition to that, and it's not on the slide, if you look behind you, we have a roll-up there for something called Urban Insight, which is Sweco's initiative to share our knowledge on urban development, to show the potential for different stakeholders in society in using our knowledge to develop societies. And it will be a series of reports from our experts on various topics. 2018 topic or theme is Urban Move , and that will be a number of reports on mobility in the urban environment. The first report was published last week, and it's about alternative uses of bridges and tunnels, and then there will be a series of reports. So go to swecourbaninsight.com, swecourbaninsight.com. And with that, I hand over to you, Jonas.
Thank you, Tomas. So, when concluding the year, it's good to also put the year in perspective, and we should start on that end. This is the best year so far for Sweco, both in terms of profit and in terms of revenues. And, we are on a trajectory that we've been for a long time. When I joined Sweco in 2008, we had basically the same chart looking 10 years backwards, and it was the same curve. We are on this 15%-ish trajectory of growth, of which 2/3 acquired and 1/3 organic.
Though, when you look at this curve, it's important to realize that it's not always a linear development, and it is in that context, I think we should look at 2017 also. It is the best year so far, but we can do better. We can do better. Also, taking the long-term perspective on profit, EBITA follows the revenue curve. What's important to realize, if you go five years back, is that roughly half of the company is acquired, and we acquired, the acquired units had four-ish or, you know, below that percent margins on EBITA level. And we're still, you know, at the same profit margin as we were five years back.... So, we're very confident about the trajectory and the development.
With that, we should move to the fourth quarter. The fourth quarter in absolute or nominal terms, EBITA increased with SEK 53 million. If you look at excluding extraordinary items, last year, we had a fourth quarter extraordinary items amounting to SEK 83 million. So, there is a negative calendar effect of SEK 17 million in the quarter. And then we have write-downs in Denmark and Norway in projects, and we'll come back to that, which amounts in total to SEK 32 million. If you look at the business areas one by one, we should start by congratulating Sweden coming out with a full year on 12% margin, realizing the margin target for the group.
It's the gold standard for profitability in the group, and they show that it's possible. Also ending with a fourth quarter with a margin increase compared to last year, ending with more than 50% margin and a SEK 22 million improvement. The improvement mainly comes from pricing. Norway had a slower end of the year, impacted by, most notably, project writedowns in Trondheim, amounting to SEK 60 million. Important to realize those writedowns are isolated, and actions have been taken, primarily around leadership, being closer to following up the projects. Finland had a very good year, with a tailwind of a strong market in Finland.
Finland ended, you know, for all practical purposes, on 10% margin for the full year, though the ending of the year was a little bit slower than what we could have hoped for. But they have a strong trajectory and a good tailwind from the market. Denmark, in the same, a similar story as Norway. Isolated product writedowns, it's related to water and energy. So two out of the three divisions are doing well. In water and energy, we have specific writedowns. We've taken actions to restructure, and they also underperformed operationally during the quarter. But already at the end of the quarter, we saw positive developments, and so we think they are reasonably out of the woods.
Netherlands, solid trajectory, contributing to improvement in the quarter, still important to realize on a comparable level to the other business areas, still more potential to give. But this is, of course, very encouraging. And also, very encouraging is to see in the fourth quarter, we have stopped the top line decline. So, we expect soon, according to plan and as we have communicated all the time, that now we're moving into the growth territory. Western Europe, good development organically in the U.K., also good acquired development in Belgium, and on a positive trajectory. Central Europe, super strong organic growth in Germany, more than doubled its organic growth.
They continue on that trajectory, also boosted by acquired growth, and that contributes significantly to the improvement. And then, slightly higher cost for the group, and a negative calendar effect brings us to the quarterly result. Now, I'd like to move to some of the more technical details on the quarter. We have recognized a deferred tax asset in the Netherlands. This relates to historical losses from primarily the Grontmij days, where they under, you know, a number of years, accumulated losses operationally, but also related to their headquarters, and significant costs they had in restructuring and advisory. The total losses carried forward amounts to close to EUR 120 million.
And now, given the solid trajectory we see, and given IAS 12, we're supposed to recognize deferred tax assets. These tax losses, they survive for nine years. And if you value them to a future tax rate of 20%, the value is close to SEK 240 million. But given the limited lifetime of the tax losses, we have valued them at SEK 160 million, roughly, which is something we're very confident about. So, that explains-
I think it's important to explain the footnote. There's no cash impact whatsoever with this.
There's no cash impact here and now, but obviously, this, this represents taxes that we will not pay in the future on this value.
Mm-hmm.
The tax effect is in the future. Turning to cash flow, commenting both the full year and the quarter. As always, in the fourth quarter, we have a good cash release. That's part of the seasonal nature of working capital we have. Looking at the full year, you see at operational level, it's still around SEK 500 million negative in working capital. It's important here to realize that more than SEK 300 million, closer to SEK 350 million, is related to a temporary increase we see in Sweden. There's nothing structural about it. We had it in Q3 also. In Q3, it was a work in progress.
Now, it is an accounts receivable, and we expect to get paid, and that this will be over with in the near future. With that, moving to the financial position, essentially, with the increase in working capital and also dividend share buybacks we've done, and acquisitions, we're ending more or less on the same net debt and leverage as we were one year back. We believe it's a very strong position, and that's why the board have proposed an increase of dividend to 5 SEK, also giving us the firepower needed for future acquisitions. With that, Tomas, take us through the markets.
Thank you, and that's pretty easy, and I've basically said it already. Conversion towards good. The small delta is Sweden, where we go from very good to good, and that's mainly due to the uncertainty that we see on the residential market now. Let me be clear on that. Our architects, and it's mainly architects working directly with the residential market, are fully occupied. They have good billing, but we see a little bit of an inertia development, the development in the housing market, but it's a good market. And then on the other side, you see a delta on the positive side. You see Finland and Netherlands with a positive delta going from weak to good.
And then the other countries has, for some time now, been had a good market, and that continues. So overall, good markets, and that's what we can see. And then reiterating what we said before, our strategy going forward reflects our history. We want, we want to grow in a selected geography, and that selected geography is Northern Europe, eight core countries in Northern Europe. And we want to grow, through organic and acquired growth to, to have local market leadership in all the countries where we are. And it's based on our history of customer focus, internal efficiency, and always, attracting and retaining the best people in the business. So that's the strategy. Q4, best, or fourth consecutive, record-breaking year for the Sweco Group, which is, really encouraging.
A stable Q4, Sweden doing 15.3% margin, 15.3% margin, and for the full year, 12%, which is really encouraging. We have two effects. We have write-downs in Norway and Denmark. Good to know that it's isolated at Trondheim in Norway, and in Denmark, two out of three divisions does really well on the Danish market. And then we have this slightly synthetic recognition of historic tax losses. And I think the important thing with that is that it is based on the fact that we have a good development in Netherlands. Overall, good market, strong balance sheet, and for our industry and for the business we are, and we see a positive development due to changes.
Urbanization is driving that, the climate change is driving that, our customers focusing on their core business. We see a positive outlook for the general business going forward. Then the board proposes increase of the dividend to SEK 5. With that, I open up for questions.
Yes, hi, it's Johan at SEB. I was just wondering, can you talk about what actions you're taking in Sweden and Norway to remedy the sort of growth issue you're having in these markets?
It's a long list of actions taken, but if you try to summarize it, it's putting it on top of the agenda for the business area, but also for all the divisions. It's everything from recruiting campaigns to development of leadership, to make sure that we have a better retention than we have, to making sure that we follow this on the monthly scorecard reviews with the divisions and the business units in Sweden and Norway going forward.
Can you be any more specific on what sort of tangible results you're expecting from these actions?
We have a target, but that would be a forecast. But if I stick to our historical development, we've had organic growth between 3%-5% annually, and I would assume that that's a realistic target going forward as well.
Just finally, on pricing, can you elaborate a little bit on what you're seeing as we move into 2018? Has the environment improved, has it deteriorated compared to what you talked about earlier in 2017?
We have for some time seen a positive trend with pricing, and we don't see any changes in the market environment that would change that going forward.
... Thank you. This is Pedro from Nordea. I mean, can you just comment a bit on the writedowns in Norway? Are they fully behind us now? And also you comment that you are gonna change the leadership there, but excluding the writedowns and restructurings, you are satisfied with the results, and why are you doing this?
The writedowns in Norway is essentially concentrated to Trondheim. It's concentrated to one business unit, and it's concentrated to two teams. We think that we have found everything that there's to find in that, in those two teams. We have two new team managers, we have a new business unit leader, and we have a new divisional leader in the organization.
Then the same goes for Denmark. Are we clear now on the Danish?
Yeah, we think so. The challenges in Denmark is a little bit more mixed because it's a combination of projects that we've done writedowns on, but also a changing market environment. But we have a new divisional leader. We have a new manager for the international business, which is part of Water and Energy. We have new team leaders, but we have also downsized the organization on Water and Energy to reflect the demand on the Danish market for this type of services.
Thank you.
Thank you. Victor Lindeberg from Carnegie. A few questions. Firstly, for you, Jonas, working capital, you mentioned it increased temporarily, but you expect it to normalize going forward. I think [OF], your peer, actually commented on that it will continue, but they have maybe a mix of bigger international clients than you. So can you comment a bit on why you expect it to normalize?
Yeah, there's nothing structural. I mean, Sweden is a time and material market. You work one month, you invoice the next month, and you get paid the third month. That's standard terms in Sweden. This is related to a change of ERP system. So, our internal processes, you know, they need to be fine-tuned, so we get this up to speed in our administration. And that is of temporary nature, and we expect that to be done with sometime during the year. Exactly when, I don't know, but there's nothing structural.
Okay.
It's in our hands.
Okay, okay. Looking at Finland, I think a few quarters ago, we could read about the subway hassle that now largely, hopefully, is resolved. How, and if, is that something that could impact you in terms of any writedowns or claims coming from the parties involved or behind us?
The subway is open, and that's always good for a good resolution of a problem like this. And we have a contract to continue to work with the second phase of the subway. I think that says something about what the client thinks of our work. And there are minor unresolved issues on the first phase, but nothing major.
Okay. And then moving to Sweden, you know, as you mentioned, performed at 12% margins, group target margins, and it's almost all stars aligned, I think, with a good market, good billing ratios and price increases. And could you elaborate on how we should get better confidence in this being sustainable, and also for the rest of the group actually approaching that level without just having the tailwind from a very favorable market? And also, is there upside to Sweden from here?
Can I start on that? And then-
Yes, yes.
I've always said, because I've got this question about the 12% margin on a, you know, at least a monthly basis for the last five years. And I've always given the same answer, that, you know, this is not the target that you should put in your Excel spreadsheet because it's very tough. It's, you know, well above the target for everybody else on the market, but we know it's doable, but it requires three things. It requires that we take smart decisions, we work hard, and we're a little bit lucky with a tailwind from the market. All of that happened now. And what I think it does, it shows that the group target is possible.
We have divisions that have even better margins than that, but we will continue to work to meet that target in more and more divisions, more and more business areas, but it's doable.
To follow up that, I don't think all stars are aligned in Sweden. We can do better on billing ratio. You also need to recognize, back to my first point on the long-term development, 1/3 of the business in Sweden has been acquired since 2012. And the business we acquired were, you know, 4-ish% margin businesses or even below. When we say 12% target, that is a business which has been part of Sweco for a long time, where we've applied our model. But given the acquisitive nature of what we're doing in our strategy, and given, you know, basically, the value creation comes from finding good companies with good engineers who didn't get the business going, and then the value creation is about expanding margins.
Uh, so-
That's a really important point.
Yes. And, and as I said, over the last five years, half of Sweco is acquired, and that was sub 4% margins, and now we're close to 9%. And all stars are absolutely not aligned in Sweden. We can do better on billing ratio.
It goes, you know, the extension of my normal answer is that then as soon as I've said that it's doable, we shoot ourselves in the foot by acquiring someone that earns 3%-4%. But to us, that's value creating. We acquire underperforming units, we apply a model to it, and we increase the margins, and that is more value creating than acquiring someone at 12% and then defending that position.
Then, the last part of your question, you know, to what extent is that applicable for the rest of the group? We don't see any structural reasons why other countries should have lower margins than Sweden. Though there are a couple of things that obviously helps. Market leadership and scale helps, but also, you know, having the culture that has been developed over a long time and the model that of course helps. But that's why we have the strategy we have. We want to focus on these eight markets. We want to develop them operationally and develop scale and market leadership.
Okay, that's quite clear. I'll get back in line.
We get sort of passionate about this.
Yes. Hi, Eric from Handelsbanken. So I have some questions regarding organic growth. You talked about organic growth about 3%-5%. You have done it historically, and it's also possible in the future. Considering that it's quite tough to recruit new staff, especially in Sweden, do you see organic growth coming more from improvements in billing ratio and also price going forward? Or how do you see the mix of the organic growth going forward?
I wish I could say yes. But, I mean, organic growth can, as you point out, come from a number of sources, billing ratio and prices being one of them. But in reality, long term, you need to recruit more people to grow. That's, you know, that's the end of that story. And that's why that's what we are focusing on. Is it easy? Is it something that you can immediately solve? No. But is it doable? Yes, we think it is.
Perfect. So just one more question regarding billing ratio. You see that it's you say that it's upside also in Sweden despite very strong margins at the moment. What kind of billing ratio do you see is possible in this type of market? I mean, it's very strong, obviously.
I don't think the market is connected to the type of billing ratio you can see. Of course, it helps, you know, if you have enough orders, it's easier to have a high billing ratio. But we've also seen that we can do it in very tough environments like Finland a couple of years ago. So it's more a question of how you operationally run the business, and it's very fine details in fine-tuning the business that it's all about. So I think we can improve in Sweden. Where the absolute limit is, I have no idea. It's like asking where the world record in high jump will be. There's an absolute limit of 100%, but I don't think we'll get there.
Yes, Tomas, you know, decided to step down and join a former employee of yours. Should we interpret this as Sweco is now in a good shape, and that there might not be very much structural on the table in terms of acquiring major peers, competitors, in light of that you're having a strong balance sheet now once again? Or is it that you're now simply enjoying more digging, getting your hands dirty?
Yes, I am. Yes, Sweco is in good shape. No, you cannot make that interpretation. Yes, I think I can make a better impact, you know, at NCC.
Okay, it's quite clear.
On the opportunity going forward, you need to recognize that 2/3 of our business is in Sweden, Norway, and Finland. Two thirds. In those countries, we have 10%-15% market share. That makes us... And these are three small economies in Northern Europe. This makes us number one in Europe. It says something about the huge opportunity we have in the rest of Europe. I don't know if NCC has that potential.
No further comments. No, no further comments. No further comments.
Just to follow up on that topic, Jonas, I was wondering, you know, given the fact that you seem to be a bit more happy with the development in the Netherlands, you know, we saw the first acquisition in Denmark, I believe. But in your view, is 2018 a, you know, significantly different year when it comes to perhaps growing these new countries in Sweco via acquisitions? Or will it take time to sort of develop a better acquisition pipeline there?
It takes time to develop an acquisition pipeline, and there is nothing like add to shopping cart. This is not online shopping. It takes time, and it's quite unpredictable how long every situation takes to develop. But we've been building the pipeline of opportunities, and we have multiple discussions going. And what we've said is, you know, first we need to get stability in the operations. We start to see that now. We start to see that we have the stability needed in several countries to move forward with M&A. And well, in the light of that, you should see the Årstiderne deal with it at the end of the year. And we have also done multiple, you know, small deals in both Belgium and in Germany.
So yes, we're building the pipeline, and we look forward to more growth, both organically and acquired.
Also in Norway.
Yes.
And in Germany, fairly strong development last year.
Yes.
But is there any particular sort of routines or processes you can transfer from that country to other new geographies in the group? Or can you just shed some light on why they're doing so well?
Well, a couple of reasons for Germany. Firstly, in the Grontmij context, Germany was the country with the best performance, and also with a model which was very close to the Sweco model. So they were sort of ready to get started with growth, while some of the other countries had more of a, you know, earned the right to grow starting point. So, you know, they had a couple of years of, you know, head start compared to the others. And, of course, they're doing a very good job. The management in Germany does a very good job. So that is the situation.
But then on acquisitions, I mean, Germany is a really, really, really large economy, compared to anything, and it's super fragmented. So, you know, we have now slightly more than 1,000 employees in Germany on the market with a population of 80 million people. And that makes the list of potential acquisition targets is sort of endless. And so we have lots of material to work with. Then, at the same time, we need to teach the organization how to do acquisitions, we need to teach the organization how to integrate, so we need to be a little bit careful in starting that process.
But it started from a very good level, and that was one of the positive things that we saw in the Grontmij acquisition, that they had an organization, a model, and a philosophy on how to run the business that was really close to us, and they were actually doing pretty good on the market.
So the organic growth in Sweden, just to follow up on what we talked about before. On your own consultants, was 2%, but nominally it's -1% due to sub-consultants. How much have you reduced them in this quarter, and can you guide us a bit on what it's gonna look like for coming quarters?
You know, I can't give you any precise guiding, but one key driver of the reduction of sub-consultants during 2017 is several large projects ended or were between phases. And in those projects, we've used a lot of sub-consultants. The subway extension is one, and there are a number of other, you know, similar. We expect more of those large projects to be starting up and gaining momentum during the year. Exactly what impact that has on sub-consultants, difficult to predict, but that would, in normal circumstances, drive more sub-consultants. Though, important to say, I mean, that's not our main source of organic growth going forward. It should come from our own staff, and we have a super strong employer brand in Sweden.
We need to work harder in this market to convert that into recruiting and also develop our retention.
What was the organic growth then, for the full year, excluding sub-consultants for Sweden?
I think it's fair to say slightly, slightly below. I don't have the number at mind.
But adding to that, it's not an objective for us to have lots of sub-consultants. We really want to do the job with our own people, and that's part of our Sweco doctrine, if you will, on having our own people do the consulting and actually learning and growing Sweco knowledge base. While sub-consultants, you know, they do it for you and then next time for someone else, so the knowledge is not compounded in our company.
If you want to meaningfully differentiate from your competitors, you need to have your own people. Just shifting around the same people that everyone else has doesn't make a difference.
Just the final one, you do mention that the energy market is a bit challenging.
Yes.
I think you have mentioned before that in nuclear decommissioning and renewable energies is growing, but that nuclear decommissioning is gonna be kind of a big driver going forward. But when are we going to see that sort of affect the growth rates?
I really don't think that it will be big enough so you can output it in a meaningful way in the energy market. They are huge projects, but they are also very long term. So if you think about revenue recognized on a, on an individual year, it's very hard to see that influencing it, even if you think about the final storage.
So, I mean, one example of that is the encapsulation plant for waste nuclear fuel, which is, you know, a huge project for us. But it's over a very long time. And given the nature of all the safety requirements, you know, you can probably expect those projects to, you know, they may be slow at certain times, but they're huge. And what we see in the market is that, you know, the power generation market is slow, but transmission is good.
Mm.
This we see throughout all our markets. It's not just Sweden, it's basically everywhere.
And that has a real impact. On that note, I think it's always good to be careful about not overestimating the impact of individual large projects. And that goes, this is something I preach in the organization all the time, and you can do the numbers pretty quickly. If you think about this extension of the subway, I think the current number of our fees is around SEK 800 million. That's a public number from the transportation authorities in Stockholm. SEK 800 million as a consultancy fee, that's huge, right? But it's over more than 10 years. So the revenue recognized in an individual year will be, you know, some ranging from SEK 60 million-SEK 120 million. And on a base of SEK 16 billion plus, you shouldn't overestimate the impact of that.
Small changes in the general market, like the transmission market or the power generation market, with hundreds of small projects shifting the, you know, if people buy them or not, are normally more important. So, you know, the virtue of the small projects is really important, and we have to remember, it's the aggregated mass of the small projects that runs this company.
No further questions? Thank you very much, and thank you for attending, and, have a good day.
Thank you.