Earnings Call: Q4 2020

Feb 11, 2021

Welcome, everyone, to SWICO and to the report for the Q4 and for the full year 2020. Today, we have the privilege of listening to Asa Bergman, our CEO and Olof Stolnacker, our CFO, who will walk us through the presentation. So with that, I think we should start. Please, Asa. Thank you, Katarina, and welcome, everyone, to Sverko's Q4 presentation. Before we move into the quarter, I want to give you a short recap of Sverko. We are Europe's leading engineering and architectural consultancy with Just on 8 business areas in Europe and with projects in more than 70 countries worldwide. Our net sales rolling 12 months, which which is this quarter equals a full year of 2020 is SEK 20.9 billion and our margin is 8 0.5%. With our 17,500 experts, we have unique expertise to develop the solutions needed for a more sustainable society. Let us now move into the result of the 4th quarter. We end a strong year with a quarter that was affected by the 2nd wave of the pandemic and the previously announced write down in Germany. We report net sales of SEK 5,100,000,000 adjusted for the calendar and the write down in Germany, Our organic growth was minus 5%. The reason behind the decrease in organic growth is mainly linked to a continued weak demand within parts of the industry and private real estate and building segments. It's also related to the 2nd wave of the pandemic and the lockdowns and restriction that came as a result of that. The pandemic has affected our ability to recruit new people and it has impacted some of our clients and projects. The impact from the 2nd wave of the pandemic is especially clear in the U. K, but it has affected all business areas in the 4th quarters as the restrictions have been more extensive overall. We have a positive contribution of 3% from acquisitions and a negative currency effect in the quarter of minus 3%. Moving in moving over to EBITDA. As communicated on December 21, We had a major impact in the quarter related to the write down of SEK 290,000,000 SEK 290,000,000 in Germany. Adjusted for the write down, our EBITDA decreased by 3% to SEK514,000,000. When adjusted for the write down And calendar effect, EBITDA decreased by 14%. When summarizing the quarterly result. I would like to highlight that 5 out of 8 business areas improved their margins in the 4th quarter. We are not satisfied with the result in the quarter, but given the circumstances, I would like to emphasize The most business areas delivered a strong and a solid quarter and the Sveco delivered an overall strong full year. And before we move over to a recap of 2020, I would like to highlight a new assignment that we recently won. Sverko has been involved in the development phase of a new central hospital in Heme and Linnna Finland since 2018. And we will now continue with the implementation phase. The total order value for Sverko, including the development phase, is approximately EUR 22,000,000 Looking at the full year for 2020, I can conclude that it was a strong year for Sverko in light of the challenging market conditions. We delivered net sales in line with and actually a bit better than 2019, which was Sverko's best year to date. Adjusted for the write down in Germany, we strengthened our overall margin and reached close to 10%. We also managed to improve margins in 7 out of 8 Business Areas compared to last year. Five business areas also had an all time record margin: Finland, Sweden, Belgium, Denmark and the Netherlands. I'm also pleased that our 2 largest business areas, Sweden and Finland, outperformed the group profitability target and showed EBITA margins well above 12%. So there are many things that we have done right throughout the year and that has proven that our Sverko model is successful even in a more challenging market. One of those things is that we have continued to acquire companies that complement and strengthen our position in our core markets. In 2020, we completed 10 acquisitions, And we have started 2021 with new acquisitions as well. I will get back to this more in detail later in the presentation. I would also like to point out that we have a strong financial position. In 2020, we managed to improve our operating cash flow and decrease our net debt. This means that we have a strong position to capture market opportunities going forward. In light of our performance and financial position, the Board proposes a dividend of SEK2.20 per share. Before we move over to the market situation, I would like to highlight an assignment in Denmark. For Green Square Garden in Copenhagen, we are providing Architectural Services in a project covering more than 30,000 square meters and that has been gold pre certified. This is a really good example of how we win assignment based of our expertise within sustainability. If we then look at the overall market situation, the demand for our services is rather unchanged compared with the previous quarters. As previously communicated, we see weaker markets in some parts of the industry segment and the Private Building and Real Estate segments. What we have seen in the Q4 is that the second wave of the pandemic has impacted our business. It has been associated with yet another set of lockdowns and even harder restrictions. This has impacted our ability to recruit new And it has impacted our ability to grow. We expect COVID-nineteen to continue to impact our ability to grow for some time, but we see gradual improvements as measures are taken throughout Europe to improve the situation. All in all, the overall demand for our services remains good and our order book is on stable levels. We also see that the long term driver that I have talked about many quarters before For us, those remains strong. There is an increased demand for sustainable solutions. We see an accelerated need for digital solutions and ongoing urbanization will, of course, also drive demand for many of our services. One example of this is the assignment commissioned by the Swedish Transport Administration to provide railway services for the section between Uppsala Central and Soderbeisbruna in Sweden. In uncertain times like these, we see that our diverse business is one of Sverko's core strength. We have a broad geographical footprint across 8 business areas in Europe. Sweden is our largest market, while our other business areas are relatively comparable in terms of net sales for the quarter. And looking at our offering, we have a balanced mix between the 3 business segments: Building and Urban District, Water, Energy and Industry, Transport Infrastructure. We have a good mix between public and private clients, which together with the fact that we have many small and midsized projects enable us to stand stable. Let us now take a closer look at Q4. Organic growth in the quarter was 5% adjusted for calendar affected calendar effect and the write down in Germany. COVID-nineteen and the imposed restriction have resulted in us not being able to recruit as much as we normally would have a flat FTE development together with lower average fees have impacted organic growth negatively. We also see a slightly lower billing ratio. I would like to mention Finland that has delivered strong organic growth 5%, which is very good considering the circumstances. The organic growth in Germany and Central Europe is weak in the quarter. Sverko Germany now has full focus on implementing the Sverko model, including strict project governance and execution. And with the new leadership, we have taken significant actions, and I am positive about the long term outlook for our German operations. But this is a change journey and that will take time. In UK, we report negative organic growth of 13%. The decline was mainly driven by lower average fees and slightly lower billing ratio. Going forward, We will have full focus on resuming recruitment, while maintaining profitability at a stable level. However, we expect continued impact in the coming quarters due to onboarding processes. Let me now present the acquisition that we have made during 2020. Since our listing, 1998, Sverko has successfully acquired and integrated more than 130 companies. And despite the uncertainties caused by the pandemic, we have continued to execute on our long term strategy and completed Excessions in 2020, of which 8 were more significant size. We are continuously looking for targets that strengthen our market position and multidisciplinary architectural and engineering offering. A strong financial position and low net that creates strong opportunities for continued acquired growth going forward. I would now like to take to talk about 2 recent announced acquisitions. We announced that we have signed an agreement with NCC Finland to acquire Optiplan. The company provides engineering Checkshore Services with a focus on designing sustainable and energy efficient real estate and non Efficient residential and non residential buildings in the area of Helsinki, Tampere, Turku and Oulu. In 2019, Optipa plant had 150 employees and had a revenue of EUR 13,000,000. On January 19, we announced the acquisition of Bir in Belgium, and the company has a strong reputation in climate adaptation, Urban Planning and Landscape Architecture in the area of Leuven, Ghent, Antwerp and Brussels. In the financial year ending June 13, 2020, beer had over 60 employees and a revenue of 4.5 €1,000,000 These acquisitions strengthen our market positions in Finland and Belgium as well as our multidisciplinary engineering and architectural offerings to our clients. As we have communicated In previous quarter, Sverko had some challenges in our German operations. And therefore, we announced in the Q3 that we would conduct a full project review in the German project portfolio. After concluding the revenue, Sverko announced Significant write down of working capital amounted to SEK 290,000,000 in the 4th quarter. The write down is mainly related to large public contracts within buildings and civil engineering and contracts within architecture. In these cases, revenue recognition has been too aggressive and project governance unsatisfactory. And as a result Of the action plan for Germany, we now have full focus on taking necessary actions to ensure profitable growth. This includes accelerating the implementation of the Sverko model, including stricter project governance and execution as well as tighter project And as I mentioned before, this is a change journey that would take time, but the long term Potential for our German operations remains. It is one of our core markets, and we see great potential in the long term perspective for Sverko to continue to grow on the market. We will, of course, put Further focus on working close to our clients and winning new contracts on the German market. And one example of the assignment that we recently won to renew the waste To energy plant in Zwandorf, it's a project where we bring expertise from many different fields and work closely together with the clients to Find the best solutions. And with the average size of waste to energy plants in Germany, there will be many similar projects in the years to come. And with that said, I will now hand over to Olof to walk you through the numbers. Please, Olof. Thank you, Asa, and good morning, everyone. Starting with the net sales development. Net sales in the quarter was SEK 5,100,000,000 taking the full year net sales to SEK 20,900,000,000. Net sales is, of course, impacted by the German write down. As also already said, adjusted For calendar and the write down organic growth is minus 5% in the 4th quarter. We have a significant Positive calendar effect from 6 more hours. This positive calendar effect, however, fell Entirely in December. And with the holidays and vacation taken, it didn't really materialize in this Quarter, so we only got a small portion of that positive calendar effect. The positive effect from M and A and the negative FX effect balance out Looking then at the EBITDA development. EBITDA is SEK540,000,000 excluding IACs and full year EBITDA is SEK2.1 billion. EBITDA is slightly down versus Q4 last year. And adjusted for the calendar effect, we are SEK 73,000,000 or 14% down. But again, this significant positive calendar effect didn't really materialize in the quarter. Looking then at the EBITA bridge by business area. The main EBITDA drivers in the quarters were, again, Finland and Belgium, which have consistently shown the strongest improvements over the last 2 years. Both BAs also showed double digit margins. Sweden is somewhat down in EBITDA, but delivers a margin of 14 point 2% in the quarter. And including Denmark and the Netherlands, we have 5 BAs that show margin improvements versus last year. Norway is impacted by negative project adjustment and a quite significant FX effect. The U. K. Continues to be the market most impacted by COVID-nineteen as we've already seen from the top line growth. EBITDA in Germany and Central Europe is significantly impacted by the net sales decline that we see in the quarter 1st is a very strong growth quarter last year. We also have year to date corrections in the quarter. Underlying EBITDA in Germany and Central Europe is around breakeven and that's also more or less where they are for the full year 2020. Overall, in the quarter, as for the whole of this year, cost reductions are the main drivers of the margin improvements, and we see about SEK 90,000,000 of cost savings in this quarter compared to last year. But overall, looking at the full year, we are very pleased that in this kind of challenging environment, 7 out of our 8 BAs improved their margins versus last year and 5 BAs reached all time high levels In terms of margins, the financial position Remains strong. Net debt is below SEK 1,000,000,000 in the quarter at the end of the year, which is SEK 1,200,000,000 less Than at the end of last year. And this is driven primarily by very strong cash flow from operations. The total outflow for M and A and dividend is also EUR 200,000,000 lower than last year. Leverage It's at €500,000,000 at the end of the year, which is half of what it was at year end 2019. We have available liquid assets of SEK 3,900,000,000 and we have also terminated the Insurance bridge credit line that was set up in April at the start of the COVID-nineteen situation. We believe we are well positioned to manage through the current situation and also to capture any opportunities that may come out of it. And with that, back to you, Asa. Thank you, Olof. Let us now conclude the Q4. We end strong year with the quarter that was affected by the 2nd wave of the Pandemic and the write down in Germany. Despite that, most business areas are delivering a solid Performance in the quarter with 5 out of 8 business areas improving margins. For the full year, It's also positive that our 2 largest business areas, Sweden and Finland, outperformed the group profitability target and show Margin EBITDA margin is well above 12%. And even though COVID-nineteen causes uncertainties, our order book And the overall demand for our services remains stable. We have a strong financial position, And we continue to acquire companies to strengthen our position on our core market and as the European leader. In light of the strong financial position and a stable full year result, the Board proposes a dividend of to SEK 2.20 per share. 2020 was a challenging year, but also a strong year for Sverko. We continue to grow to improve our margins and to strengthen our market position. We will continue to focus on a long term strategy that is the foundation for Sverko's success with profitable growth through a combination of organic growth and acquisitions. We will also focus on implementing the Sverko model through all our markets and with special attention to our German operations. And of course, We will continue to work close together with our clients and monitor the COVID-nineteen situation carefully to be able to take actions if needed, but also to capture opportunities when they arise. Thank you. Thank you, Asa and Olof. And with that, we will open up for questions. And we begin by taking questions through the line, the phone line. Please go ahead. Your first question comes from the line of Erik Paulsen, Elan Sverdank. Please go ahead. Hi there. This is Erik. So regarding the order book, you talked about a very stable order book. I was just wondering if you can give some numbers around this. Regarding the order book and the order intake in the quarter. Thank you. So as said, we have continued to win projects Over the quarter, at the same levels as previous quarters, and we are, Of course, seeing some effects of the COVID situation, meaning with some clients affected and some Projects postponed, but in an overall perspective, we are stable in our order book. And we normally do not give you any detailed figures around the order book, but we are pleased It's what we see when it comes both to orders received and with the development of the order book. I don't know if you would like to add something, Olof. We don't communicate numbers on the order book, but it is basically the same numbers as we have seen previous quarters. Okay. Thank you very much. Thank you. And your next question comes from the line of Dan Good morning. A couple of questions from my side. First one on the weaker market somewhat weaker market you saw in Q4. Organic growth is, of course, a bit lower now than Q4. My question is really what does change compared to criticism in terms of market outlook? Is it Mainly related to the new lockdown restrictions or is there any specific statements more weaker than previously or is it just that you're feeling a General slowdown with a bit of a time lag. Would be something if you could elaborate on that? We don't see that much Changes compared to Q3 when it comes to the market condition despite that we have been In this quarter into this second wave of more restriction lockdowns and some construction sites affected, meaning that Our clients and some of our projects are affected. So that is The overall picture, I would say. But again, we are continuously winning projects. And I would say that our decentralized business model of having those local teams working really close with the clients to ensure that we Adapt and capture the opportunities even if there are changes going on or events happening on each market. That is really our success at times like this. And then as communicated before, where we see a more weak market is in parts of the industry and the Private Building and Real Estate segment, but on same levels as previous quarters. We have we also I also talked about and we have communicated that we haven't been able to Groot, as we normally do, and this is, of course, if you look at the FTE development over the last quarters And compare it with the previous years, you see that we haven't been able to recruit on a pace as normally, And that is now affecting us in the quarters. And of course, I mean, we are now focusing on taking on recruitment again. But as you all know, we are living in those Certain times, meaning that having strong views about the market development going forward, what was is not I would say we can't really tell because this is strongly related how long those lockdowns and this uncertainty around COVID-nineteen will look like. But we do what we can to resume the recruitment. But as you know, there is time lags in those kind of processes. I hope that answers your question. If you try my opinion also to just Put some numbers on this. If you take out Germany, which is a bit of a special situation as you have seen in the quarter also excluding the write downs And the fact that the calendar effect didn't really materialize given where it fell. We were at about minus 2% in organic growth And it was minus 1% in Q3. So we said that development is entirely related to stricter restrictions in In Q4. And also to add on that is that in the spring, we were up or Before the summer, we were up at, I mean, high levels of our employees working from home, and we are back to that Situation again with most of our employees working remote as this second wave has affected the whole office environment and working environment for Okay. Thank you. Additional question, if I may. You quantified the additional one not the impact in Germany, which was quite large. But in terms of the product adjustment you seem to have in Norway, the U. K. And there's also some unrest office lift in Netherlands. How How much are we talking about here in total? Is it $10,000,000 plus or is it just marginally impacted? In terms of the projects we have not tested, COVID-nineteen effect in there as well, meaning that project delays due to the restrictions. So what is the main drivers of project adjustments? If I can take that one also and you can add. The project adjustments in Norway The U. K. Are sort of so significant that we mentioned them in the report, but they are more part of the normal sort of up And write downs that you have in the project portfolio, the office onerous Office lease in the Netherlands is about €800,000 so a little bit north of SEK8 1,000,000 so that's quite significant. And that's an old office that we are not using anymore that we I mean, then you sort of write it off. But the other things are more within the within what's normal fluctuations in the business. Okay. Thanks for the clarification. And the last question, You're obviously doing great in taking out costs during 2020 as if you had temporary savings of SEK 90,000,000 or so now in Q4. How should we think about this going into 2020? What does what does this cost are temporary? And What portion can you actually stick to when demand returns, for example, by new ways of working and You say new ways of meeting digitally, etcetera. How should we think about that when demand returns? I can start, Olof, and then you can add on if you wish. So right now, as I said, we have most of our Engineers and architects working from home, remote work, we are not allowed to travel. So what you will see is that we As long as we are in this situation, we will, of course, have the non critical activities on low levels, meaning that you could foresee that we can, I mean, save work with those cost savings going forward? How much of this that we will bring into the future is too early to say Because it depends on, of course, how we will work and how much of office work, remote work, how much we will travel And in what kind of pace and it's related to restrictions, but it's also related to the working methods that we will choose for the future. What we will ensure is, of course, that we use what we have learned, that we capture the efficiency that we think is the right for us. But it also saw that working in this mode and in this way is not only positive. So we have to go back to office. We have to have our projects team together. But yes, I hope that answers your question. Yes, it does. Thank you so much. That was all for me. Thank you. There are no question over the phone. Please continue. Okay. I think we have questions on the chat. So please go ahead. Yes, hello. I'm really not lovely here. There are some few Questions from Johan Simeon from Carnegie. The first question, please quantify negative effect on project of project adjustment in Norway And please quantify negative nonrecurring effects in the Netherlands. How long time Do you expect that the negative effects on weaker fee development and lower billing ratio to resist? Given your current state of the order book, how should we think about organic growth for the first half of twenty twenty one? And should we expect a Sequential improvement or is it reasonable to expect that Q1 'twenty one to continue on the same level as Q4 'twenty? How big was the actual favorable calendar effect on sales and EBITDA? Thank you, Johan. Olof, should you start? Yes, Kent, I think we mentioned the owners lease in the Netherlands. It's slightly north of SEK 8,000,000 In the quarter. So without that, Netherlands would have been at somewhere around 9.7% in margin for the quarter. If we look at Norway, again, it's sort of within the normal fluctuations. So it's for the quarter, it's somewhere between €510,000,000 for Norway, maybe closer to €5,000,000 The calendar In fact, I would say the theoretical calendar effect was 55,000,000. It's difficult to quantify exactly, but I think we only got out about €5,000,000 to €10,000,000 of that. And let's see now The remaining questions. We have the impact in Q1. Maybe you want to comment on sort of how long we'll see the impact on the growth? Yes. And as we have communicated, the growth the organic growth in Q4 is Affected by that we haven't been able to recruit on the pace that we normally would do. And also, of course, of the write down in Germany. And As long as we are in this pandemic situation, you could expect that It's hard to really see positive FTE development. We will do what we can to ensure that we start up the recruitments, as said, but there is time lags in those processes. So it is still uncertain how fast we can go back at normal organic growth levels. So we are strongly dependent on what will happen in the market environment around us going forward. Yes. We have 2 follow-up questions from Johan Sundien, Carnegie. Please clarify the organic growth in Q4 2020 excluding actual calendar effects and German write down. You're right, minus 5% in the report, but you said minus 2% during the presentation. Yes. And that's minus 2% is excluding the calendar effect And excluding Germany and Central Europe, Germany and Central Europe is 21% down organically excluding the write down. So that's With Finland being positive in the quarter and then having small negatives across the other BSD, the total It's minus 2%, excluding Germany and the fact that the calendar effect didn't materialize. Another question from Johan Sundien, Carnegie. Please give an update on your M and A activity. Has that ramped up during the quarter? So as you know as you You heard in the presentation and also stated in the report, we completed 10 acquisitions and 8 of those were significant. So and we also started out the year to announce activities and completed acquisition. So we have an M and A plan for each business area. We have an M and A organization that works in a very clear and solid way. So we have ongoing dialogues. And when we find the right target that suits us, then we will acquire. But as I said before, we are not acquiring for the sake of it. We really ensure that we find the right competence in the Companies force vehicle. And when it happens, it happens. But In relation to our financial position and also that we have those Plans in place, we are in good shape. Okay. I think that concludes the questions. Thank you, Asa. Thank you, Ulf, and thank you, everyone, for joining Sverko today. Have a good day and stay safe. Thank you.