Good morning, everyone, and a warm welcome to the Sweco Group's second quarter 2018 telecom conference. My name is Lars Torstensson, and I am the Communication Director at Sweco. Together with me today, I have Jonas Dahlberg, our CFO, and of course Åsa Bergman, our President and CEO. So without any further delay, I would like to hand over to Åsa to lead us through the presentation. Please, Åsa.
Good morning, everyone. Thanks for joining us for the Sweco Q2 2018 conference call, despite this excellent and hot summer weather. I'm very proud to present a solid second quarter this afternoon. With that, we move on to slide number two. The positive trend from the start of the year continued in the second quarter. The organic growth increased to 7%, and the EBITDA increased to SEK 79 million, and that is adjusted for the calendar. From a revenue perspective, organic growth was particularly strong in Western Europe, the Netherlands, and Norway. For the EBITDA, the positive development in the Netherlands and Denmark continued, and they were the main contributors for improved operational performance in the quarter.
The underlying levers driving growth were new colleagues joining us and improved pricing, two areas that we have been focusing on to drive positive revenue development. It's also the same drivers that actually were the drivers in Q1. I would like to highlight that the quarter is showing the strong value that the Grontmij acquisition has brought to the Sweco Group, and it underscores the successful inorganic growth strategy that we have in Sweco. It is through a combination of organic and inorganic efforts that Sweco will continue to grow into the future. So all in all, the quarter showed good markets with a positive outlook. Then let's look at some of the projects that we have won in Q2 2018, and with that, we move to slide number three.
As I said before, all projects are equally important in Sweco, and large and small, and that is how we ensure that we will support our customer in the best way, independent of project size. It also ensures that we can keep a high billing ratio in all our units. It also makes us less affected by economic volatility and market fluctuations. Here are some highlights from Q2. Sweco has been commissioned by PKP Polish Railway Lines to supervise safety improvements at railway crossings throughout Poland. The project concerns a total of 182 railway crossings. It includes upgrades and introduction of safety devices and improvement of road surfaces, and allowing smoother passages.
And then in the energy scene, on behalf of Swedish Transport Administration, Sweco will investigate the need for fast chargers for electric cars along the major roads in Sweden. This is-
Ladies and gentlemen, the speakers for today are experiencing technical difficulties. We will resume the conference once they've reconnected. Thank you for your patience.
Oops! Okay, we have technical issues here. We're starting over at the financials, on page four. Sorry for that. Åsa, thank you for the introduction. One of the highlights in this quarter is the strong growth, that in total amounts to 16% compared to second quarter last year. Of this, the organic growth when adjusting for calendar effects amounts to 7%, and in addition comes acquired growth of about 3%. The remainder to 15% constitutes calendar effects and currency effects. The calendar effect is due to the Easter holiday being earlier this year, and it added 10 hours to the quarter, and that had a positive contribution to revenues and EBITA of approximately SEK 73 million, which adds more than about 2 percentage points to organic growth.
The current effect is due to the depreciation of the Swedish krona and the translation effect of the, you know, revenues and profits denominated in other currencies to Swedish krona. That adds another 4% to the total growth. The strong growth we have is supported by a strong and growing order backlog, which is very positive. Moving to page five, what's most encouraging about the organic growth is that all business areas are contributing positively to the development. In particular, I'd like to highlight the contribution from Netherlands and Denmark, which is very positive. As many of you know, when we acquired Grontmij 2.5 years ago, Denmark and Netherlands were restructuring cases.
During 2017, we downsized both countries with some 10%, to reduce low-performing parts of the businesses. Since a few quarters, the downsizing is complete. Both business areas are well positioned now for growth, and they're benefiting from the tailwind of the good markets. And this is now paying off, and both countries are delivering strong organic growth during the quarter. It's also encouraging to see the growth in Sweden and Norway to pick up. Both business areas have good markets, and is now fully capturing those markets. At the same time, they have sustained good growth in Western Europe and Central Europe, although not at the standard +20% growth rate as we had in the first quarter.
Looking at the drivers for the organic growth on the group level, the key drivers are more employees. We have been successful in our recruiting and have about 400 more FTEs compared to last year. Having a strong employer brand, being an attractive employer, we can recruit competitive talent. We can recruit competitively and good talent in the market without overbidding on salaries. This is obviously very important and something we're monitoring closely, and what we can see is that our salaries are moving in line with our fee development. Speaking of our users, this also adds to organic growth, and the increase is in line with the trend we've seen for seven quarters now. An increase in sub-consulting revenues is an important driver to the organic growth.
Last year, we had net negative contribution to the organic growth from sub-consultants, and this year it's turning to a positive contribution. These two drivers, more staff hour users and sub-consultants, each contribute about 2 percentage points each to the organic growth. In addition, comes another percent from lower absence, lower vacation, vacation that is mainly. Moving to page six, a bit more on the organic growth. In our Q1 presentation, we talked a bit on the long-term trends and the current momentum of organic growth, and I'd like to reiterate that story. If you look at our long-term average organic growth over the last 15 years, 20 years, that has been around 5%.
But it varies, varies a bit up and down, depending on the market, of course, but also, when it comes to our internal priorities. As you know, some of you, that, 2016, we had very strong growth, and 2017, it was a bit slower. And this was mainly due to, integration with Grontmij, where we had full focus on synergy capture, which was very successful, and focusing on, on our customers and building order backlog. But we didn't have as, strong recruiting as, as we usually have.
Now, the integration is completed since one and a half year back, and last year, we started to position ourselves for growth, and that started to pay off now in the first quarter with a 4% calendar organic growth, and now that is increasing to 7%. I think what is important to realize is that the organic growth goes up and down, but the long-term average is about 5%, and that's really a sustainable growth rate in the long run. Now, moving, continuing down in the income statement, turning to page seven, looking at the EBITA development. Second quarter EBITA was SEK 152 million better than last year. And, adjusting for calendar, the increase is SEK 79 million.
Of this calendar versus improvement, more than half comes from operational improvement in the existing business. That's like to like. And less than half comes from a combination of recent acquisitions, and then there is some contribution also from foreign exchange translation effects. In total, EBITA landing at SEK 464 million. Moving to page 8, the currency-adjusted EBITA bridge by country. We can see that essentially all business areas are contributing, but most importantly, Denmark and Netherlands combined they contributed SEK 60 million to the improvement. And that's, of course, very satisfying. And what this shows is that we're delivering on the value creation plan set out at the acquisition of Grontmij. The first phase was completed one and a half year back, with the delivery of the cost savings.
And what we see now is really the second phase, paying off, with culture and operational improvements, increasing customer focus, increasing internal efficiency, which is boosting both organic growth and EBITA. Also, we have started to touch upon the third phase, in the value creation plan, which is further growth, with M&A, in this new footprint. And we've done acquisitions in Germany, Denmark, and Belgium, and they contribute significantly to the quarter. In particular, the acquisition of Årstiderne Arkitekter that we did in Denmark, that was consolidated first in March, contributes with some SEK 10 million effect to the quarter. Now, what is also positive in the quarter is the positive development in Finland and Norway, compared to the slow start of the year.
There's still more work to do before we are fully healed and we have full stability. In Norway, it's actually the two other divisions which are overcompensating, so there's more potential in Trondheim and the Energy division . In Finland, issues we had in the first quarter in the construction design, we are back on track, but we would like to see more traction before we have full stability. All in all, good progress, but clearly more potential. All business areas still have way to go until they reach the market leadership and operational performance of Sweco Sweden, landing at a very strong growth margin of 12.1% in the quarter. Turning to page nine, a few words on the cash flow statement.
Cash flow from operating activities increased compared to last year, both in the quarter and half year. Seasonal increase in working capital, very much in line with normal, seasonal pattern, and last year. Turning to page 10, looking at net debt. During the first half year, we've increased net debt with SEK 0.81 billion compared to last year. In the first half year, this is mainly driven by acquisitions, but also increased share buybacks, and then there's some currency translation effects on debt we have, which is euro denominated. In forecast, working capital very much developing in line with same period of last year, seasonal patterns. We are on a somewhat elevated level on working capital, and this elevation happened the second half of last year.
I'd like to emphasize that we see no structural change driving this development, and we are within normal variation. It also showed that if you look at the growth, we've had of increase in working capital of about SEK 500 million, SEK 200 million is related to growth, both organic acquisitions and currency effects. So the remaining SEK 300 million is what makes a difference and what we have to work with. We're on it, I can promise you that, but we will not give any forecast for the development. All in all, solid financial position, we have the capacity we need to capture opportunities in the market as needed. With that, handing over to Åsa to walk you through the market situation, and back with feedback.
And then we are moving to slide number 11. Thank you, Jonas. As you already understood, our markets are overall good, and demand for services is solid. But let me go through a few country highlights, starting with Sweden. In general, the Swedish market remains overall good. We have a positive FTE development and improved pricing. We attract the right people. It's a ground for a strong and attractive brand, and with attractive products to offer. And the demand for our services is really strong. There has been discussions about the health of the Swedish real estate market, so let me comment on that in particular. The real estate market remains good, particularly in public buildings.
Residential construction is, as you know, slowing down, but the impact on Sweco is limited and mitigated by growth in other segments. Other markets that I would like to highlight are Denmark and the Netherlands. As Jonas mentioned earlier, they were both underperforming when we acquired Grontmij, and now both are showing very good operational momentum in the quarter. As a result, our conclusion is that in Denmark, the restructuring of Sweco is now completed and we are focused on profitable growth. The same is true for Sweco in the Netherlands, where downsizing is now completed and the focus is, as in Denmark, on profitable growth. Going forward, it is key to focus on the operating model of Sweco and ensure strong execution towards the customer. This is true for Denmark and the Netherlands, but of course, for the other Sweco countries as well.
This brings me to our strategy and priorities going forward. Moving on to slide number 12. As I said before, our strategy is set. It has proven to be successful, and we will continue to execute on it. I have spent my first three months visiting our countries to create a better and deeper understanding of the local needs. As I now have a view of what to focus on, and improve, and I look forward to develop my thinking together with my executive team. We are acting from a position of strength, and I see potential going forward. To capture this potential, we need to build even stronger customer relationships and ensure that we are the most attractive company for the best people.
Our operating model with a decentralized responsibility, a strong, corporate culture and clear leadership supports the way we work. Now it needs to filter through all our operations, including the newly integrated countries. And on top of this, I see that we have potential to realize more value as a multinational company. Today, cross-border collaboration with Sweco is only a tiny part of our total, turnover, and I see synergies to cooperating between countries and business units going forward. This quarter showed continued positive organic growth, a result, of us executing on our strategy, and we expect to be able to maintain our trajectory, for both organic and acquired growth as there is room for improvement. And to repeat, our strategic priorities, we will maintain our relentless focus on our customers, understand their needs, and be approachable and committed.
We will attract the right people, continue to strengthen our employer brand in all countries, and improve pricing when possible. Ensuring that in all perspectives, we use our resources in an efficient way, reinforce our decentralized business model in all our countries. Moving on to slide 13, to summarize. So once again, our second quarter showed continued positive development, with our EBITA increased by SEK 79 million, and organic growth expanding to 7%, adjusted for the calendar effect. The positive organic growth was mainly driven by new colleagues joining us and improved pricing, two areas that we have been focusing on to drive positive revenue development. Our hard work is definitely paying off. So all in all, the quarter showed good markets with a positive outlook. We now look forward to have some questions from the telephone conference. Thank you.
Thank you, Åsa. So that concludes our formal presentation, and we would like to open up for Q&A. Operator, can we have the first question?
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question over the phone, you may press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, you press the hash key. The first question comes from the line of Johan Dahl. Thank you. Your line is now open.
Yes, hi there. Thank you for taking my question. I was just wondering, there seemed to be, you know, quite significant step-up in profitability in the group, comparing first quarter compared to the second quarter. I mean, now knowing where the billing ratio went, you know, organic growth, acquisitions, et cetera, could you comment a little bit what those drivers are? Is that correct, that it is a step up in Q2? Is it sustainable, going forward?
There is a step up in profitability, but most importantly, the contribution to EBITDA comes from growth, really. If you, I mean, if you wash away the calendar effects, and then, looking at the organic amount, it is primarily, you know, the growth that drives the profit improvement. So, a slight increase in profitability, but it's mainly growth driven.
Okay. Would you argue that the net between, you know, cost inflation and prices is similar in Q2 compared to Q1 this year?
Yes. And on, I mean, on the spread between fees and salaries, we see both pretty much move in parallel. So gross margin fairly stable.
Okay. And you talk, just if you could elaborate a bit on the Swedish organic growth. You mentioned, you know, some less vacation, there were also some other positive effects. If you try to just break down Q2 and see what's sort of what is the underlying, organic growth, what would you say that is?
I mean, as I said, for the group, if you talk about group numbers, FTE growth is about 2%, and then price development, same order of magnitude. So that's around 4-ish%, and that's very much in line with what we had in the first quarter. And then what we had in addition, in the quarter was also, you know, more sub-consultant revenue and less absence. The two latter ones, 2% + 1%, are a bit more volatile.
Yep.
So looking at some of the core drivers of organic growth, they were in line with Q1, I would say.
Got you. Just finally-
Go ahead.
Yeah. No, I want to hear what you say, Jonas. What was finished?
No, trying to see it in particular, in order of priorities, the organic growth driver was first in sub-consultants. And, you probably remember that last year we had quite negative contribution from sub-consultants to organic growth in Sweden, mainly related to... Well, we were in between phases of the subway project here in Stockholm. The second driver is increase in FTEs, and the third is the order priority.
Okay. Just finally, on the order book, can you give any indication how that looks currently in terms of growth year-on-year and possibly profitability?
No, I just want to say there's a strong order backlog, and it's developing positively. And it will be able to support organic growth going forward also. It now is mainly about capacity, and in a disciplined way, recruit the right people at the right cost level.
Did it grow more than turnover?
You know, the issue with the order backlog is it can, you know, be. It's not the best indicator of future growth. So I just want to say with saying that it supports the organic growth that you're looking at right now, and it's strong.
All right. Thanks.
Thanks, Johan. Operator, could we have the next question, please?
Certainly, sir. Next question comes from the line of Viktor Lindeberg . Thank you. Your line is now open.
Oh, thank you. And first congratulations to a great Q2 report, guys. Interesting to see your growth rates accelerating, and that's also where I have my first question. I'm looking at slide number six, where you have the year-over-year growth in the past five years or so. And it seems to me that it's moving in waves. We could see it accelerating for some time back in 2014 until 2015, and we have now the second wave since the trough back in early 2017, now accelerating up to 7% this quarter. And just interesting to hear your thoughts about this, and actually, Jonas, you mentioned you expect continued organic growth, but how do you see these waves playing out?
If you could elaborate on that, that would be interesting to hear. Would you expect to peak here around the 7% or 9% reported, and then gradual slowdown, or how do you see it?
Well, you know, I'm in this for the long run.
Yeah.
That's how I would like to look at it. I would like to put emphasis on the long-term trend, and that's about 5% organic growth. And you're right, it moves a bit up and down depending on the market, and also, you know, what priorities we have. And it's a good momentum we have currently. You know, short-term where it can lead us, I think that's a bit speculative. We think that underlying growth is solid, and it's supporting the historical growth rate we've had over a long period of time.
Okay. And one more question relating to that. You mentioned sub-consultants adding some, I think, 2% to organic growth in this quarter year-over-year.
Yeah.
Can you comment on how has the contribution from these consultants in Q3 and Q4 last year so we understand the dynamics going into the second half?
The contribution to organic growth, that is?
Yeah. If it was negative also last year, the second half.
It was negative last year. I don't have the exact quarterly numbers top of mind, but it was negative contribution definitely last year, and in particular for Sweden. And this is strictly related to large projects, and in that case, it was mostly with the subway expansion in Stockholm.
Okay.
So fairly easy comps from sub-consultants when we think about that component.
It's a balance factor, and I think it's a bit more than a balance factor. Then the natural question is, okay, so is this now the sort of average level we're on? I think it's very difficult to say. I just want to say that, you know, last year it was negative, now it's a positive contribution, so we're excited about this.
Is there a profitability angle on adding or removing sub-consultants? Does it affect your profitability in a material way, would you say?
No, it doesn't. We have over 90% type of margins on the sub-consultants.
Okay. Then on Finland. I have Finland and then one more question from my side. Finland was definitely better than what I had in my estimates. I have been assuming a slight slowdown after you accomplishing very good margins and growth in 2017. And the outlook seems to be decent, and the delivery in Q2 was also stellar. Can you comment a bit on how you see the projects in your pipeline being finalized now? Was Q2 a phenomenal quarter in that sense, or would you say that looking at the first half of 2018 is representative, from, let's say, a margin perspective going forward also?
I think what you see now in Finland is definitely in line with the potential of the Finnish organization. Very high internal efficiency, strong billing ratio, they have a lot going for them. The issue we've had in Finland, in some quarters has been related to write-downs in projects. And so what you see now is the potential of the Finnish organization, but we need to get more stability in earnings and avoid those write-downs.
There's no element, there's no element of reversals or, or positive, calculation, earnings, in, in-
No. No, it's not, it's not. It's just that they're, they're avoiding false and tricky boons.
Okay. Final from my side, on the acquisition of Årstiderne in Denmark. You mentioned, I think, that it added SEK 10 million to earnings in Q2. Is that correctly understood?
That's correctly understood.
Okay, so looking at my notes, it was generating close to SEK 20 million on full year basis when you acquired it, and now it seems to be at a run rate twice that level. Is it top line or margin, or what is the main improvement that you have accomplished since you consolidated it?
It's both. It's both.
Okay.
I t's very strong trading.
Okay. And is it, I mean, something you would extrapolate even what you see right now, or was it just too good to be true in your view?
No, they're doing well, but I wouldn't extrapolate it fully. I would, you know, cautiously elevate the expectations on Årstiderne, but I wouldn't extrapolate it fully. Also bear in mind the strong calendar effect in this quarter.
Yeah. Yeah. Got it. Okay, thanks, guys.
Thanks, Viktor, for those questions. So operator, do we have any more questions?
Yes, sir. But once again, ladies and gentlemen, if you wish to ask a question, you may press star one on your telephone keypad. Your next question comes from the line of Predrag Sazdanovic. Thank you, your line is now open.
Thank you very much. I have another question on sub-consultants. So they contribute decently to growth here. I'm just wondering, are you involved in any larger projects at this moment that are contributing particularly much in Q2 for these values?
Yes. The subway expansion in Stockholm is one example, but you see it in several countries. We also have an increase of sub-consultants in the Netherlands and in other societies. So it's not just one project, there are several projects.
Right. And you also mentioned again on the residential market, that it is slowing slightly, and the take here is that you will, of course, be compensated by other projects, but is there any margin difference here when you change the mix?
No, also here, no, it's not. We have been, you know, growing other segments, step by step, and we aim for the same margin, so no.
Right. And on your financial position, which is very strong at this point, can you utilize your balance sheet in any special way or adding some platform in M&A or b ecause there seems to be some substantial headroom there.
No, absolutely. We have the financial capacity to further continue with M&A. And it's more a matter of finding the right target and making sure that we do the right deals. We have the financial capacity we need, at least for the bolt-ons. And then, if it would be at a, you know, substantially more sort of transformational type of deals, then we'll see what is needed. But for the bolt-ons we have in the pipeline and we have a pipeline, we have the financial capacity needed.
And on Norway, Jonas, you mentioned, I think, that two divisions are overcompensating. Could you talk more about these and how they're doing, and which the kind of divisions are there and which are not doing too well?
Yes. So there are two divisions in Norway. The issues we've had in the energy division, in particular in the Trondheim office, where they have a portfolio of projects that they have to make corrections in, and the office has not been performing as well as it should. So that is dragging down the entire energy division. But what is developing very strongly is the building construction division, as well as infrastructure division, and they are sort of overcompensating for the performance issues we have in energy. So there's more potential in energy.
Well, thank you very much.
Thanks, Predrag. Operator, do we have any more questions?
We have no further questions at this time, sir. Please continue.
So, in that case, we conclude our formal presentation, and, thank you everyone for, participating in today's conference call on, regarding Sweco's second quarter. Please feel free, as always, to reach out to us if you have any further questions following today's call, and we look forward to staying in touch, throughout, the third quarter. And, speaking of which, the third quarter then will be, reported the eighth of November. So with that, thank you very much, and have a great summer. Goodbye.
Thank you, ladies and gentlemen, that does conclude our conference for today. Thank you all for participating, and you now disconnect.