Earnings Call: Q2 2021

Jul 16, 2021

Good day, and thank you for standing by. Welcome to the Esvelco Second Quarter Report. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's meeting is being recorded. And I would now like to hand the meeting over to your host today, President and CEO, Ursa Bergman. Please go ahead. Good afternoon, everyone. And as said, this is Orca Reimann, CEO and President of Sverco. Today, we're going to look into Sveo's Q2 presentation. And with me today, I have Olofsdol Nackke, our CFO. So with that, really welcome. And before we move into the quarter, let me give you a short recap offerco. We are today Europe's leading engineering and architecture consultancy with 8 geographical business areas in Europe, and we do business in more than the We employ 17,500 experts, which means that we can deliver a unique set of competencies to serve our clients. And with that, let us move over to our performance in the second quarter. So we continue to deliver an overall stable performance even though we are still seeing some effects from COVID-nineteen. We grow our net sales with 3% and delivered organic growth of about 1%, mainly driven by higher average fees. EBITDA is EUR 529,000,000 with a margin of 9.4%. I'm pleased that we delivered margin improvements in 5 out of 8 business areas. Adjusted for calendar, EBITA decreased with 9% compared to last year, and this is mainly related to continued weak performance in Germany and the UK and a slow quarter in parts of the Finnish business. We continue to win the right type of projects. One example From the Q2 is that Sverko has been chosen by the Danish Energy Agency to establish the world's first energy island As you can see on the picture here on the right, and this project will become Denmark's largest offshore wind farm. And finally, we continue to have a strong financial position, giving us flexibility and allowing us to act on opportunities on the market. We continue to make strategic acquisitions. We have announced 3 acquisitions during this quarter that I will get back to later in this presentation. Let us now move over to the market situation. The overall market situation and demand vehicle services, it's rather unchanged compared to the previous quarters. We see remaining effects of COVID-nineteen. The demand is demand in parts of the industry segment and the private building and real estate segments remains weaker, quarter, demand is relatively good in infrastructure, water, environment and energy. However, we see signs that the market is improving. We continue to have a stable inflow of new orders, and our order book remains strong. Another good example of a project run-in the second quarter is a 10 year contract to work on an extension of the North Bosnia line in Northern Sweden. The demand for our services is largely related to sustainability, digitalization And our well diverse business continues to be a strength for us and provide stability. Now let us take a closer look at the results in the second quarter. We delivered slightly positive organic growth of approximately 1% adjusted for calendar effects in the quarter with a positive development in Belgium and Denmark, and this is mainly driven by higher average fees. The development in U. K. And the Netherlands was weaker in the quarter, U. K. Still being affected by challenging markets, While growth in the Netherlands was weak due to fewer full time employees. Belgium continues to deliver very strong performance with double digit organic growth in the quarter. Our ambition going forward is to focus on recruitment while maintaining stable operating margins. Let us now move over to the results in the quarter. 5 out of 8 business areas improved their margins in the quarter. Feko Sweden continued to deliver strong margins of 13.5%, and Belgium sustained their positive business momentum with strong margins of 12.5%. Norway showed significant margin improvement, while Denmark and the Netherlands continued to show gradual improvements. EBITDA decreased by 9% adjusted for calendar, and this is mainly related to the continued weak development In the UK and Germany and that Finland had a slower quarter in 2 divisions along with higher costs related to acquisitions and integrations. I have mentioned the development in Germany in our previous presentation, and I want to emphasize that the new leadership is focused On the turnaround of the German business, and this includes implementing efficient way you're working with focus on the right type of projects and underpinned by strict project governance and project control. And this is a turnaround, I said, that will take time. So let us now have a look at the acquisitions made in the quarter. I'm pleased that we continue to execute on our acquisition agenda, in Q2, we closed the acquisition of 2 Finnish companies, Gaia Consulting, Finland's leading sustainability consultancy And the architecture consultancy, Linea Architects. I talked about these 2 in our Q1 presentation, so let me now time, I'll give you some more background to our latest acquisition, Boidens Engineering in Belgium. Volunden Engineering was founded in 1961 and have 140 employees specialized in sustainable buildings. They are also especially known for designing net zero mission buildings. And together With Vodens, we create a market leading building design and engineering business with a clear sustainability profile on the Belgian market. With that said, I will hand over to Olof to walk you through the number. Thank you, Otha, and good afternoon, everyone. Net sales in the quarter, EUR 5,600,000,000 Adjusted for calendar, we see an organic growth of 1%, increasing slightly from Q1. A significant positive calendar effect in the quarter from 8 more hours, And we can also see the positive impact from M and A is slightly higher than the negative FX effects in this quarter. Looking at the EBITDA development, we have an EBITDA of SEK 529,000,000 And in LTM EBITDA, just about SEK 2,000,000,000 EBITDA is up versus Q2 last year, But adjusted for the calendar effect, we are $47,000,000 or 9% down. And the positive calendar effect from 8 more hours It's SEK 81,000,000 in the quarter. Looking then at EBITDA by business area. Sweden, slightly down in EBITDA, but continues to show a high margin. Belgium continues to perform strongly with a margin of 12 point 5%, Norway comes back after weaker Q1, whereas Denmark and Netherlands continue the positive momentum from the last quarter. Looking then at the declines, Finland has a temporarily weaker performance, primarily in 2 divisions facing slightly weaker markets. With a number of acquisitions, there has also been integration focus and integration costs in the quarter. Finland still delivers 9.2% margin, but that's not where we've been used to see them over the last few years with very strong performance. The U. K. Looks similar to what we've seen in the last few quarters, and Germany and Central Europe is below last year and shows a small loss. New management in Germany, as Asa mentioned, has initiated the turnaround program for the troubled parts of the business. Finally then, the financial position, which remains strong. Net debt It's at SEK 1,900,000,000 which is SEK 700,000,000 higher than Q2 last year, but still significantly below the historical levels. We see trade working capital increases from very low levels in Q2 last year and a significant increase also in the dividend payout. Last year, the dividend was Dividend payout was split in 2, so we had one payment in the second half. Leverage is at 1, time, we have available liquid assets of 2.5% and that will be there due to the termination of the COVID-nineteen short term credit line that we took in Q2 last year. Time, we remain well positioned to manage through the current situation and also to capture the opportunities that may come out of it. And with that, back to you, Ursa. Thank you, Olof. Let us now conclude the 2nd quarter. Q2 was yet not a stable quarter. We continue to deliver a slight improvement, and we improved our margins in 5 out of 8 business areas. Q2 was still affected by COVID-nineteen, but we see signs of market improvements. We had a stable inflow of orders in the quarter, and our order book remains strong. Another interesting project from the 2nd quarter is one, you see on this slide with the design of an industrial scale green hydrogen plant in Finland. This is a good example of how Sverco is well positioned for industrial projects with a clear sustainability profile. We also continue to execute on our acquisition strategy with 3 new acquisitions in the quarter. With our strong financial position, we are ready to act on opportunities. Let us conclude with some last few words about our focus Our focus going forward is, as always, on profitable growth. As we see signs of the market situation improving and restriction being eased, there are great business opportunities for Sverco. The pandemic has accelerated digitalization and placed sustainability on top of the agenda, resulting in new investments with our core areas of expertise. We also have a strong position on ramping up our recruitment to be able to meet the clients' demands that we expect. By keeping our focus on implementing our way of working with vehicle model and staying close to our clients, I see that we are well positioned for future profitable growth. And with that, let us conclude Q2 and open up for questions. Time, And we have a couple of question, we have a question from the line of Erik Colisson of Nordea. Please go ahead. Yes. Hi there. So I have three questions. I start yes, hi. I start with the first one relating to Germany and Central Europe. You're talking there about project adjustments. And I guess this is write downs in project as we saw in Q4. And what is this relating to? And do you see there's a risk of further project write downs? The project adjustments or you're correct, Usim, that it is write down. The net effect in the quarter was It's around SEK 7,000,000, which is sort of within the range, I would call, normal in a business area in a quarter. So we see no risk for any major write downs. This is more of sort of normal fluctuations. Okay. And then my second question is relating to Finland. And you're talking about there are 2 Finnish divisions. Which ones were this? And do you think this will continue in the second half of the year relating to Finland and those divisions? First, I would like to start by saying that we have had or we have We are used to having very strong performance from Finland. So I would say that this decline is, as Olof said before, it's temporary and is due to market circumstances in Finland. And it's related to the divisions of Structure and Expert Services and also related to some high costs related then to integration and acquisitions. So I expect A gradual improvement in those 2 divisions. Okay. Thank you. And then finally, on the order book, I was wondering if the order book developed positively or negatively sequentially compared to Q1 and Q2 now. It developed positively sequentially versus Q1. Okay, great. Thank you very much. Thank you. Thank you. Your next question is from the line of Peter Testa of 1 Investments. Please go ahead. Hi, thank you very much. You mentioned the benefit of better fee levels this quarter. I was wondering if you could give some sort of context How they compared to employee costs? Were they sort of similar or one ahead or the other? Or any context, please? We have seen an increase in salary compared to last year, which was very low. But the fee increase is in total at the higher level. Okay, fine. And then Will you just a question on reorganization costs. Were there any particular reorganization costs in this quarter? And maybe if you could give context of how what if they were, how they compared to the quarter a year ago? There were no reorganization costs Of any significance. Last year, we had EUR 40,000,000 in Sweden in Q2. Right. Okay. Fine. And then just one question on hiring. You talk about being ready to ramp up recruitment. You've also talked about the billing ratio being a bit lower. And I was wondering if you could give some sort of context as to how you're treating In light of that comment on billing ratio and maybe whether there's key business units where you're more proactive than others. I would say that we are what happened last spring was that We didn't stop the recruitment, but we started to recruit on a really low level, and we have been really, I mean, time, we're focused on certain areas during the pandemic when we have recruited. And now, of course, when we're ramping up, we are looking into those segment that is growing more than others. But the work to be done going forward is to really look at it comes to Energy Transformation and Sustainable Infrastructure, everything that is related to what is kind of boosted in that plan, there you have the areas where we will need resources going forward. Time. And then related to the billing ratio, that is a very important KPI for us. So we continue to focus on the billing ratio, but the combination of our order backlog is being stable and orders received on good level and what we back of the market going forward, recruitment is a priority for us. Okay. So for example, in a key market like Sweden, where you've had relatively stable employee levels through the period have been really plusminus, a couple percent. Would you expect that employee level in total to start increasing? Or is it some areas like EU Green Deal are increasing, but you're still managing with natural Tricia on other areas of lower billing ratio, so net would be similar. I mean, we work With all aspects at the same time. But when we talk about focusing on recruitment in this context, we are talking about Make sure that we are coming back to FTE growth. Right. Okay. Perfect. Thank you very much. Thank you. Your next question is from the line of Dan Johansen of SEB. Please ask your question. Good afternoon, Olsson Olof. Just one follow-up question from my side. And it's on the UK and the slow development there. Could you elaborate a bit what's driving that? And also, has the situation improved now since lockdown has Reiss during the latter part of the quarter? Or is it still ahead of you? Or how do you view the UK market currently? First of all, I would say that the market is still challenging. And that, as we reported, is the only market where we still have employees on temporary layoff or so called furlough, And that scheme continues until end September, which says something about the market conditions in U. K. In the long term perspective and if we look beyond the current uncertainties connected to COVID-nineteen and Brexit, I am or we are positive about the market. But we are waiting for a number of interesting projects to start, And we are I mean, we have full focus to ensure that we, I mean, Get back to profit levels and get back to growth. But it's too early to say when that will happen. And even if we see some signs, I mean, I'm not there until I'm there, so to say. Great. Thank you so much. Maybe one more question, if I may. What do you see in terms of vacation days now During this year compared to last year when, I guess, people didn't take much vacation. Is that something you monitor? And do you see it as a risk now for the Q3 or Anything in particular in regards to that? It's definitely something we monitor. It's a bit of a special situation and has been for now for The amounts, but what we see year to date is maybe slightly less vacation taken than year? Last year, but not any sort of big changes. So we're watching it closely, but there is no sort of unbalances right now as we see it. Okay. Thank you so much. That was all for me. Thank you. Thank you. Next question is From the line of Durandall of Deutsche Bank. Please go ahead. Yes. It's Johandall, Durandall of Danske Bank. Just on the project adjustments you talked about in Germany, is any of those adjustments related to the projects I mean, the same projects which you wrote down last year. And also, can you sort of relate these project adjustments to the governance issues that you had last year. I mean, point? It's a sum of a number of projects, and some of them were included in the write downs because that we did in Q4 because some of these are large Sort of long ongoing projects, and you will have adjustments over time. I think the adjustments reflect the fact that we now are Very strict when it comes to project accounting and project governance. So in that sense, there is still more to do, as we also talked about German in terms of sort of overall project governance. But in terms of project accounting and Revenue recognition, this reflects the very strict approach we have now. Okay. On the you talk about a bit of a cost creep, a bit of a cost normalization in the group. What actually is that? Is it I mean, it seems as if the travel has been very limited and digital sort of processes implemented. What does it represent? Is it education? Or is it Can you elaborate a bit on that would be great. I think it should be compared to what we did in Q2 Last year, when we really stopped everything in terms of travel, in terms of internal training, etcetera, in terms of sort of internal development projects. And we are now at a more sort of even if we are still low, we are at level with slightly higher activity in these areas. And I would say, to give you a number, we had €80,000,000 of savings last year. And about SEK 25,000,000 to SEK 30,000,000 of that has come back in this year. All right. Do you envision that you have like a pent up demand for that type of activities, I. E, we would get sort of a short term, sort of more material headwind from this? I think the Q1 that we see a more normalized situation, we may have sort of a boost in pent up travel and meeting IRL, etcetera. So there might be sort of a quarter effect there. But think at the same time, as we said before, I think parts of these savings are obviously here to stay. Thanks. Thank you. And we also have a question from Johan Sundin of Carnegie. Please go ahead. Thank you. And thanks for taking my question. I also have a bit of question on the margin side And related to the comment you had, Rosa, regarding focus on recruitment with solid margins during the rest of this year. When I look at things, you talk about operational expenses coming up a bit as some short term cost savings Swinging back, once you recruit, you should likely have a bit of pressure on the billing ratio as well. So basically, the fact that can hold up margin is prices. Are you very Optimistic on price development during the second half, so that you can offset those effects? Or should we expect a margin pressure? I would say that as the market looks right now and what we have shown so far is that we are I mean, we are really focused on how we price ourselves on the market. This is for us about making the right choices on the market, select and deselect projects and make sure that we Excuse them in a very good way so we can minimize the write downs we have. So we have full focus on this, and we will continue. You could expect competition on the market when it comes to resources and talent, of course. And we will I mean, we will have full focus On this going forward, we have shown before that this we are capable of, I mean, holding up the prices and develop them in a positive way, recruit At the same time, so I would say that if you are I mean, if you are steering this right, Actually, the growth will potentially improve the margins. So no, I can't just see that. And we are focusing on activities that will mitigate that risk. Good. And also another question regarding the general construction market in Sweden. We are during this week Simply for the cement facility in Gotland supplying 2 thirds of the concrete to the Swedish market. Do you see any risk that if those that situation doesn't get solved, that there could be delays in project starts and so on? And how is discussions dropping in the market? It's a big Yes. And my boring answer to that is that it's too early to tell. I mean, we are, As you are reading the newspaper and, of course, talking to our clients in the market that's using lots of concrete, But it's too early to tell as it's in the middle of the process. So I mean, what we're doing is that we follow and monitoring the situation. And the best way we can act is that we're staying close to our clients that potentially can get affected and ensuring that we understand their needs going forward. But of course, it's a serious situation, but there is lots of solutions. And I mean, the final decision is not taken yet. So step by step. But if you just resonate regarding the topic, how late can the final decision come Until it does so until it doesn't impact project starts during the second half, I guess it can't be You can't shift your wine set so in just 5 minutes of time and so on. So there must be some lead times there. People should be worried at some point. But I mean, we are working with 1000 and 1000 of projects on the Swedish market. And I mean, there's lots of different materials when we design. And of course, the consequences related to the concrete, if that would hit with one decision That will be affected the day after. The consequences will be big, but there is lots of dimension when it comes to the overall society here. So I think we need to wait for the last word to be said here. So I cannot draw any conclusion at this stage. So we are, as everyone else, monitoring the situation, to understand what this is developing. Perfect. That was all from me. Thank you. Thank you. And it appears we have no further telephone questions. Excuse me, we have a follow-up question from Peter Testa from One Investment. Please go ahead. Yes. It was just a question on cash flow, please. I mean, obviously, you've had very different years, 1 year to the next on working capital. And I was Trying to understand whether you could give some sense as to how you thought the H1 working capital fit versus a normal period and the extent to which you thought that would largely unwind in H2 2 or would that increase if you are able to grow? No, I think I mean, you should really look at the last 12 months because at the end of Q2 last year, we were at a very low position compared to historical levels. And now we are back to where we were June 2019 because last year we had both the impact from Very, very strong focus on cash flow and cash flow protection from our side, but also effects from government measures in terms of delayed tax Payments, pension payments, etcetera, and some customers paying earlier. So I think you should I mean, this means more being back So we have a normal position. Then we will always be working with working capital to get it down, but It's more last year being low than this year being high, I would say. Okay. Because if you look at the slide on the other part of the report, the last 12 months, it's still a minus €809,000,000 in working capital, which I thought maybe that wasn't right to look at last 12 months And that you should try to understand what a normal seasonality would be, but is that last 12 months the correct thing to look at? Yes, I think so remembering then that were at a very low working capital position at the end of Q2 last year. So now we are back to more of a normal working capital position. Right. Okay. Thanks very much. Thank you. There are no further questions. Please continue. Okay. Thank you, everyone, for joining this Sverko Q2 presentation. And with that, I wish you all a great summer.