Good morning, everyone. Welcome, and thank you for joining us on this presentation of the Sweco Q3 Interim Report, 2018. I would also like to welcome those of you who has joined us in the conference call. My name is Åsa Bergman, I'm the CEO and President of Sweco, and with me today, as always, by my side, is my CFO, Jonas Dahlberg. Let me start by saying that Sweco is overall performing well. Most of our business areas is performing according to plan or above the plan. It goes for Netherlands, Denmark, Norway, and Central Europe. The growth was 7%, adjusted for currency, the organic growth was 4%, and the EBITDA increased SEK 27 million compared with last year.
Also, let me remind you that there were no calendar effect in this quarter compared with last year. When breaking down the group, revenue growth, organic growth was solid in Western Europe, in the Netherlands and Norway. For EBITDA, the positive development in Netherlands, Denmark continued, which is very nice to see, it connect to the turnover that we've done in those countries. They are performing well. That, together with the strong development in Norway, those countries were the main contributors to the solid, the operational performance that we had. The underlying levers driving the growth was that we have new colleagues joining us, and also that we have positive development of our prices.
This is two areas that we have been focusing on, and we see positive development there. Even though majority of our market is performing well, we experienced some headwind in Sweden and UK, and that is due to some headwind in sub-segments. Overall, the market for Sweco services is good, with some variations in countries and in some segments, and I will, during this presentation, come back and elaborate a bit more connected to that. Let's look then at some of the project that we have won during the Q3. At Sweco, all projects counts, large and small, and this is how we ensure that we always deliver and support the customer we have on all our markets, independent of project size.
For us, this is how we ensure that we can keep a high billing ratio in all our units and divisions, and it also makes us less vulnerable for the market fluctuations. Here I have some highlights from the Q3. We have been chosen for a project in Poland, where we should work with a tunnel that will connect two islands to ensure growth in this region. It's a tunnel that is approximately 3.2 kilometers long, and will ensure that the travel time is reduced, and really makes this region more livable. The order value is around and will exceed EUR 4 million, and it's a project that will go on until 2022.
In Finland, Terrafame will invest in developing a technology to produce high-quality battery chemicals with low carbon footprint. This plant will produce these chemicals, and it's for electric vehicles. And ultimately, this actually provides solutions for the more sustainable transportation going forward. And we will be involved in this project for several years. 100 persons will work in this project over the project time. In the Netherlands, Sweco and 2 other partners have been chosen by the Dutch energy system operator, TenneT, to expand and replace the high-voltage grid to several locations in the Netherlands. And this is to ensure reliable and secure electricity supply in the country. And this project is a 3-year framework for us.
In Sri Lanka, project export for us, we will work with wastewater solutions. There is a lack of collective wastewater solutions in Sri Lanka, and the effect of that is that there is heavy pollution issues around the coastline and in the lagoons, and we will work with a solution for that in the country. And with that, over to Jonas, go through the financials. Jonas?
Thank you. So, let me start with the top line, as we usually do. Strong growth in the quarter. We grew 12% compared to same period last year. Yes, there's a currency effect of 5% in that, but even if you discount the currency effect, solid organic growth of 4% and 3% acquired growth. And I'd like to go a little bit deeper into the development of the organic growth, and remind you about what we said last quarter. Sweco's historical organic growth is around 5%, and I think that's what you should consider.
We had a period last year, which was sort of related to the Grontmij integration, where we had lower organic growth. But since the beginning of the year, we've picked up again on organic growth, and we think it's a solid organic growth, and as we said then, sustainable. We had 7% in second quarter, and what we said there is, you know, we think you should look at more the long-term historical average. And that's where we are, basically. Now, where is this coming from, and who's contributing? And what's really encouraging here is that five out of seven business areas contribute to the organic growth.
And, in fact, we have two business areas who contributes with a double-digit organic growth, and that's Norway and Central Europe. But also, we have solid growth in Denmark, Netherlands, and Western Europe during the quarter. Also, if we look at the organic growth, this is very much supported by a solid order backlog. In fact, it's a growing order backlog. And it's also supported by the increase of capacity in terms of more consultants joining Sweco. So we have 400 more FTEs in this third quarter compared to the same period last year.
This capacity increase comes mainly from Central Europe, Sweden, and Norway, and all of those three business areas are adding between 100 and 200 FTEs. And we're very, very happy with those consultants joining Sweco. Now, moving over to the profit development, also, EBITA increased in the quarter with SEK 27 million. And this essentially means that we maintain a stable EBITA margin during the quarter, compared to the same period last year. The absolute increase of SEK 27 million is mainly driven by a positive fee-to-salary ratio, so gross margin expansion, if you will. It's also contributions from organic growth and M&A.
But there are also a couple of other drivers, like less absence, positive FX effect, but those are not the most important contributors. Please note that there is no calendar effect in the quarter, so both on top line and on EBITA, it's very much a clean comparison to the same quarter during the previous year. Now, let's look at a bit more details of EBITA. There was a negative, and let me address that head-on, and that is the development of the billing ratio. We had a drop of billing ratio of 1.4%, and there may be some questions around this, given the public sentiment about the market development and the business cycle in general.
And yes, we had a slower start after the summer, but we want to emphasize that we still have a good market in most segments. And we're growing the order backlog, and we're growing capacity. There are pockets out there, sub-segments, which shows weakness, but in general, it is a good market, and it's really in our hands. The market opportunity is in our hands. So, we believe that working harder is the solution here. Zooming in on EBITA development, as also said, we're very happy with the continued positive development in Denmark and the Netherlands. It's back to the Grontmij acquisition and the turnaround of those units. Strong trajectory. Also, Norway swung back during the quarter in a very positive way.
But also Finland and Central Europe improved, although a little bit less. On the negative side, it is mainly Sweden we're talking about, and it is related to a drop in billing ratio, slightly higher project adjustments as well. It's true that we see a headwind in the residential segment, but you need to understand that this is a relatively minor part of Sweco, and also the market for architects and engineering consultants in general. Also in Sweden, we see a positive development of order backlog, and we see also more people joining us, where we need them. We're more selective in recruiting, but we're adding capacity where we need.
When it comes to the UK, the decline is also related to, and this is part of Western Europe. The decline here is partly market related, but there is also a large number of large projects where we have intermissions in the project for. In the water sector, it's planned, in transportation, it's a little bit unexpected. It's you can say that in some way it's related to the market, but it's not a systematic effect. It's more, you know, individual event-driven effects in these projects. So, moving over to cash flow.
The cash flow in Q3 very much in line with normal seasonal pattern, which is meaning we're building working capital and net on the operating cash flow, it's quite weak, but that's a normal seasonal development. As you can see, it's actually better than the last year, the same period, and year to date, operating cash flow is better than last year, and we have less of a build-up of working capital. And now for Q4, as always, we will expect a significant cash release, and this is the normal seasonal pattern. But in overall, operating cash flow as expected and stable.
When it comes to working capital, it is still on a slightly higher level than normal, but it's definitely within the normal variations. Moving over to financial position, we're increasing net debt, and the increase is mainly driven by acquisitions we've done. There are some currency translation effects also on euro-denominated debt, and it's an increase of dividends. All in all, still very solid financial position, leverage ratio of 1.5. And with that, Åsa, market?
Some comments on the market. It is clear that Sweco today is a more diverse company with operations in many countries in Northern Europe. On average, there is good demand for our services across our footprint, as I said, with some variation between countries and segments. Essentially, all eight core countries experience good demand for our services, especially in infrastructure, in industry, and in water and environment. Also, demand in real estate is overall on a good level, but, as Jonas said, zooming in to a residential area in Sweden, still slowing down, and focusing on Norway, and the capital area especially, the residential is slowing down, and some early signs in Denmark connected to the residential area.
So starting with Germany and Netherlands and Belgium, overall good and developing positively. Denmark, good, but early signs of a residential weakness. Finland, stable development, and Sweden, overall good, but residential market is still on low levels. Norway, overall good, strong in infrastructure and power transmission, but also their residential market is slowing down. And as Jonas said, overall in UK, it's okay, but still there is an uncertainty when it comes to Brexit and some weakness in the real estate market. So once again, overall good demand for our services and with some variations between countries and segments. This bring me to our strategy and our priorities going forward.
Sweco has a successful strategy, and we will continue to execute on it. To capture the potential of the way we know is our way of working, that we call the Sweco model, to really execute on that is what is on the agenda. And to really capture the potential, we need to consistently ensure that we implement and execute on that way of working. And it means that we need to strengthen the customer relationships in all our countries, ensure that we can deliver the right services on all our markets, but also ensure that we are the most attractive company for both customer and employees in all our countries.
It means also that we need to continue to implement the decentralized responsibility and our operating organizational model in all countries. The strong corporate culture we have and a clear leadership that supports the way we want to work. And now we need to filter this through the whole of our organization. And then connected to the Q3 result, the Q3 result shows that we need to continue to execute on the strategy. And to achieve the goal and the long-term financial goal and continue our growth, we need to be really clear on the strategy.
We also need to ensure that we work close to market with the customer relationships, focusing on sales and product execution, meaning that we also need to tighten up our operational management, means billing ratio. And as I said, continue to implement our customer promise in all our countries to ensure that we are the best choice for the customer on all markets that we are working on. And the last part, again, is connected to that we now more intense focus on implementing the Sweco operating model in all our countries. And this is according to plan, the next step for the countries that we acquired when we acquired Grontmij. So to summarize, overall, a good performance during the quarter.
Especially Denmark, Netherlands, Norway, and Central Europe are improving, and are performing according or above our plan. Growth 7%, currency adjusted, amounted, organic growth 4% and acquired 3%, and the EBITA increased SEK 27 million. And as we said, Norway, Denmark, Netherlands, Central Europe were the main contributors. And overall, the market for our services remains good, with some variations between the countries and between our segments. And now we're looking forward to some questions.
Ola Södermark, Kepler Cheuvreux. If you could talk a little bit more about Sweden, because I think that's what it sounds like in the report, and you highlight that the start after the summer has been a little bit slower than normal. If you can talk a little about the current situation, and also if it's possible to quantify the project adjustment that you mentioned.
So, what we experienced is that we had a more slow start after the summer than we normally had in Sweden. And we can also see in the quarter that we have some effect connected to the real estate area. And again, it's important to understand that it's a slow part of our business in Sweden. And the focus in Sweden now is to ensure that we work really close with the customers and really focus to execute on the project. That is the situation when it comes to... And again, the order backlog grows, and the demands for the services is good, except from the area of residential.
Is it possible to quantify the project adjustment that you mentioned? Is it write-downs, or is it just gap between different projects, or?
The project adjustments we're talking about, that's adjustments of work in progress, so it hits the revenue line. And this is part of the business. It goes a little bit up and down by quarter. There is nothing exceptional here. It's predominantly a billing ratio effect, but there is also contribution from more product adjustments. And on the billing ratio effect, as Åsa says, it's good market still. It's in our hands to execute mainly. Then there are pockets like residential development, which obviously is weak, but in general real estate is good, and in particular in public buildings, hospitals, schools, that still goes strongly, as well as infrastructure goes strongly, power transmission, the water market, et cetera.
The current situation, is it back to normal now, or... right now?
I mean, right now, it's a bit of a catch-up game when it comes to billing ratio. Typically over, you know, after vacation, you see a gradual increase of billing ratio. We see that also. But it is a catch-up game, and experience tells if you sort of when you come out of the corner, if you lose too much velocity in the corner, even if you put, you know, your throttle full, it's difficult to catch up fully. But we are catching up. But whether we will catch up, you know, to normal levels where we should be fully, that remains to be seen.
But you also highlighted the order backlog is increasing even in Sweden.
Yes, the order backlog is increasing in Sweden. So this is more an operational issue. And partly it's the market, when it becomes a little bit more, I should say, unevenly distributed in terms of demand, it becomes a little bit more challenging or more challenging to plan and staff projects, but it's possible.
And again, back to our decentralized model to work on and operate really local and project portfolio in Sweden is small and mid-sized project. That actually helps us, you know, to really focus on execution in projects.
Thank you.
Thank you. Viktor Lindeberg , from Carnegie. A couple of questions on Sweden, as well from my side. Firstly, thinking about the margin of just below 6% now in, in Sweden, in Q3, you're down more than I think it's from 8.8% in a two-year perspective, so, so quite a big contraction. Just to understand how much of this could be a billing ratio, is there other, operational challenges or structural challenges, like, increases of indirect costs or anything that, that is leading to this, two-year margin contraction? That was my first question.
There's nothing in the cost base. There's a bit of calendar effect. If you go two years back, there's no calendar effect to last year. It is mainly about billing ratio in the quarter. And well, as we said, you know, there is a bit of market effect there, but it's in our hands. So it's mainly about operations.
It's connected to how focused we are on the market and how focused we are on the customers and how efficient we are when we're working.
That was gonna be my follow-up. And thinking about you, Åsa, you were heading up the Swedish division until recently. Is there a succession reason behind this lost momentum in particularly Sweden, and that you were running it very tightly, evidently, and now you have a bit of a slack leaving over to other leaders in the organization? Is that a potential angle?
No, I would not argue that, it's connected to that. No.
Okay. Thinking about U.K. then, finally from my side for now. Is this longer term a core market for you, given the uncertainty we have, not least with Brexit, and it's being a very minor portion of your business and your market position in the U.K. also not being a top player? It'd be interesting to hear your thoughts about that.
Yeah. We have decided to be in U.K., and it's one of our core markets, and we have the same strategy in U.K. as in the rest of the countries. Of course, what you are saying about the Brexit is, it's connected to uncertainty, but we are executing on it, which means that we focus on organic growth and to find companies in U.K. So, yes, we are there.
What is your idea of the future in a 2-3-year perspective? You're budgeting for continued growth, or you have backup plans, given the deteriorating environment. You're budgeting for growth, and that not materializing, it might lead to margin contraction. That's my-
Mm.
underlying question. What, what do you see in your-
I think, I mean, Brexit is highly uncertain what that will mean, so we need to plan for both, and we are planning both for a negative scenario as well as a less negative scenario, I would say. But Brexit has an impact. That's, I think, undeniable, but the question is to what degree? So we're planning in scenarios. But longer term, we think the Brexit effect is moderate. We think it's a good market opportunity. It definitely fits our geographical footprint. It's a fragmented market, but it's also a market with a lot of M&A opportunities. So it fits very well into our strategy, and it would be sort of the...
We have Germany as a large country in the portfolio, and UK would be the second large country in the portfolio for the long run.
Got it. Thanks.
Yes, hello, Erik Elander from Handelsbanken, and so I also have some questions regarding the billing ratio. So first of all, the billing ratio, you say it that it's in your hands to improve it going forward here. So I was also wondering, is it related to a higher personnel turnover? Because it's quite difficult to recruit, as I understand, or is it related to more project delays, a mix of both? Or have you just become complacent regarding the billing ratio in Sweden?
It's actually, as we said, it's connected to a slow start, and the personnel turnover has been on those levels that they are in Sweden for quite a long time now. It's more that the personnel turnover in Sweden is on stable levels. So our way of working connected to the personnel turnover is better today than it was, like, some years ago. We are attractive, and we are recruiting, so we're actually growing the numbers FTEs. So I would argue it's not connected to that because that is a situation that we have had in Sweden for a very long time. So it's mainly due to a slow start, and that we are not focusing and working efficient enough in Swedish organization. And that's why I argue that it's connected to...
That the focus we need to have now is that we really tighten up our operational management and ensure that we work hard with our local customers, or harder with the local customers.
Okay, thank you. So, so why, why, how come you have been not working that hard as you have been previously? Is it because Sweden has been performing so well for a long time?
Yeah, of course you can argue that when you are in a very strong market, it's really easy that you... Of course, your portfolio, your order backlog is full. And then you need to focus on the projects, and you need to focus on, you know, executing on the projects. And you take some things maybe for granted, so you need to have all the time full focus on the market and full focus on operational management. And so it's a bit. But it, as we said, it's also some kind of relations to the market, but that is in the residential area where we see the effects.
I mean, I can assure you that, we're not complacent about this. We need to remember that, Sweco Sweden, by all standards, is extremely high-performing, margin leader in the group, margin leader in any international benchmark. We have a growing order backlog, working well on the market. We have a positive development when it comes to fee levels. So a lot of KPIs goes in the right direction. Of course, to really perform, maintain the performance, all stars need to be aligned, and in this quarter, we didn't succeed with billing ratio. And we're definitely not complacent about that.
Excellent. So just a final question for me. You decreased number of employees, quarter-over-quarter, from Q2 to Q3. Is this just a seasonal pattern, or what is it?
Yes, it's just a seasonal pattern. And it's... In FTEs, you also have, you know, all the time included. So, that's partly a driver. And it's also, we try to make sure that, you know, people are joining in the right season. So you don't want to recruit and then bring people on board in July and August. And therefore, the FTEs, you know, are lower during Q3.
Perfect. That's all for me.
Hi, Tobias Kaj, Öhman Fonder. Could you quantify something about, initiative in, Sri Lanka? Did you say anything, how many people you have working with that project or, or order value or something?
No, I don't have that information.
Mm.
Sorry, Fred Nylund with AFA. Could you describe the competitive situation? Is it as strong as it was before? Is it increasing, decreasing? Any pressures that you feel are coming upon you?
It's the same situation as it has been for several years. There's no change. Okay? So with that, we say thank you for joining, and... Yeah. Thank you, Jonas.
Looking forward to see you next quarter, and of course, in between. Thank you.
Thank you.