Good morning, and welcome to Sweco Q3 report. I'm Tomas Carlsson, CEO of Sweco, and with me here, I have Jonas Dahlberg, CFO. We will give a short description of the third quarter for Sweco, and then we will open up for questions after that. And I will start out with the Q3 highlights, and this is the way I look at the quarter. Overall, good markets in all our core countries. And, you know, just for you, that goes for Swedish residential and Stockholm residential as well. Overall, good markets in Norway, Sweden, Finland, Denmark, Germany, Netherlands, Belgium, and UK. Second item is that we are very happy with this result. It's a performance improvement compared like to like, adjusted for calendar.
This is a SEK 20 million improvement on EBITA, which equals to more than 8% improvement in the operational result, adjusted to calendar and last year's extraordinary effects. Jonas will go into details on that. Having said that, we also see that there are room for continued operational improvements, and more specific, we see that there are room for more continued operational improvements when it comes to growth for particularly Sweden. So that's the highlights: good markets, good financial performance, continued operational improvements. Over the quarter, we have won a number of really interesting projects, and I've picked four.
We have won design for the new E6 motorway in Norway together with Veidekke, and this is interesting because the customer is the new entity, Nye Veier, in Norway, which is dedicated Norwegian government entity to have more efficient highway construction. We have been chosen to design the modernization of the Stockholm Central Station, which is with Trafikverket as our client, and that includes everything from environment, architectural design, but also rail technology, train control systems, et cetera, et cetera, et cetera. Third, Grand Central Station, which is not an infrastructure project in Frankfurt, but it's a real estate development project by the client, is a private developer called Groß & Partner in Frankfurt. Very interesting in a fast-growing city with many interesting real estate projects.
And then finally, we have won the project for design and management of the new train maintenance center for the Paris Metro with the Paris Metro as our client. And with that, I hand over to Jonas to go through the numbers in more detail.
Thank you very much. So, starting reiterating, the operational improvement. So on an operational basis, we are SEK 20 million better than, the same quarter last year, and this is then adjusted for the extraordinary items we had last year, which was negative last year, and we don't have that this year, and the calendar effect. So if you look at nominally, EBITA is down, but you need to remember this calendar effect of 7 hours, which impacts with some SEK 50 million compared to last year. The calendar effect has obviously an impact also on the top line, so top line is down due to that. Net debt and the financial position is solid. We're ending out with a net debt to EBITA of 1.4.
Important to remember that seasonally, this is a weak quarter when it comes to cash flow. Starting with the top line, in total, negative development on the top line, but there are some effects here which are important to recognize. The acquired growth is positive, but we have a negative currency effect of 3%. Then, on organic growth, that is important to recognize it's a combination of things going on here. First of all, 1.5% is roughly the impact of the calendar, negative. Then it's important to recognize that we have three markets which have close to or above 10% organic growth. So we have continued very strong growth in Germany, organically, more than 10%.
On top of that, they have a double-digit acquired growth. Finland close to 10% organic growth, coming back to Finland in a while. Tailwind from the market, but also a very strong position. And then in the U.K, also very strong organic growth. Then we are, by design and deliberately, downsizing the business in Denmark and the Netherlands to get better profitability. And that is definitely by design. So if you look at the Netherlands, that's - 6% organically, and Denmark, - 10%, but it is deliberate restructuring. And then it's fair to say that we could do better and have more potential in Sweden and Norway. So Sweden, we have a very strong market position.
We are the clear market leader, and we have a very strong employer brand, one of the strongest of all companies in Sweden, so we can do better there. Looking at, EBITA down, SEK +20 million calendar adjusted and adjusted for, for extraordinary items. The main driver of the improvement is, increased fees, but there is also some contribution of increased billing ratio with a 0.5% compared to last year. The calendar effects, we talked about that. You can see the trend line, and it's impacted by two consecutive quarters with negative calendar effect. Operationally, it is actually a positive momentum, so that's important to, to recognize.
If we look at the various business areas, starting with the positive developments, firstly, Finland. Yes, so this is adjusted for calendar, so you can see actually the operational momentum here in the numbers. So Finland doing extremely well. This is, you can see what happens when you have a strong customer focus and strong internal efficiency and also strong market position. And then you get some tailwind from the market, and this is what you now see in Finland. It's really working. It's really working well for Finland. They are now also the margin leader, both in the quarter but also year to date in the group. So very well done by Finland. Second, very encouraging is Netherlands.
So the efforts I just talked about, this, restructuring and operational improvements, measures we're taking, actually, provide a positive effect into, to the P&L. And then once we start to grow again, we will also see improvement, in the margins. Important to recognize that even though Netherlands have a, a huge improvement, it is still on a low level, so there is more potential to give. Western Europe, both U.K. and Belgium, are increasing EBITDA with some 50% compared to, last year, so very positive development there. Also, some positive development in, primarily Germany, in Central Europe, and then lower costs on group level. So those are, very encouraging. Then if we look at, Sweden, important to say Sweden, I mean, Sweden is the mainstay of the group.
Sweden is doing very well, double-digit margins year to date, but they had a little bit slower start this quarter than they've had previously. Important to say that we see a good market. We see a good market in Sweden, so it's not primarily the market which drives a somewhat lower billing ratio. Norway, they are doing well. They had some mishaps when it comes to a couple projects, so that's project write-downs. Operationally, they are on a good trajectory. Denmark, here we have some restructuring costs for the continued improvements of the Danish business. And that's basically what drives the quarter.
Then obviously, we have this huge calendar effect of SEK 50 million, and last year we had some extraordinary items, and that takes us to EBITDA of the quarter. Looking at the financial position, we're basically ending with both the same net debt and the same ratio on net debt to EBITDA as we had one year back. What's important to recognize here is we have higher dividends; we've done quite a bit of share buybacks, and we've done some acquisitions. So that has an impact on net debt. We have an increase in working capital also. We are aware of that, but it's of temporary nature, and we're not sure that we can manage that by end of Q4.
But it's definitely not nothing that concerns us. It's more of temporary nature. Still, coming out in a seasonally, you know, weak cash flow quarter, we're coming out in a very strong financial position with a net debt to EBITA of 1.4. And with that, Thomas, take us through the markets.
Thank you. I think there's two things that we should maybe could be of benefit for this group. One is Norway and the project write-downs. Norway has a very good trajectory developing and lowering the project write-downs compared to the historical average, so they're actually doing good. There's an effect this quarter. Overall, they're developing well. Denmark, two out of three divisions are doing really well. We know where they are, have their challenges. Market, and we've changed this map a little bit from what you've seen previously because the message is overall good. The nuances on this is that Sweden is strong in all segments, but we see a little bit of a slowdown in the growth, but still on a high level.
We see a little bit of a slowdown in growth, but good. Norway, Denmark, Germany, Belgium, U.K., good markets, as we've said before, and as Jonas pointed out, UK have had a really good development with double-digit growth and also a very good development with the earnings. Brexit still remains an uncertainty for that country. And then we have Finland and the Netherlands. Finland, we see, you know, a good market now, and we see a good demand for our services in Finland, and in the Netherlands, there's been a clear improvement, and we think that there's a satisfactory market in the Netherlands. There are differences in the Dutch market with public sector lagging the private sector, but you see that being more and more equal on the market.
So good markets.... Going forward, still continued focus on Northern Europe, that's where we want to be. You've seen a number of acquisitions, local partner in Belgium, and now, Monday, this week was Dimensjon in Norway. Northern Europe is where we want to be. Make sure that we have a local market leadership through continued acquisitions, and then the focus is customer, internal efficiency, and make sure that we have the best people in the business. Summary: good market, good performance, continued work with operational improvements. And with that, we open up for questions. Victor?
Thank you. Victor Lindeberg from Carnegie. Thinking about employee growth, I think you've been mentioning salary inflation, but looking at the overall market now, it seems to be doing very well, and also, competitors of yours might be interested in attracting some of your talent. Can you talk a bit about how you see recruitment, net recruitment going forward in the bigger part of your markets in the Nordic, I guess, is most interesting to hear about?
I think we can focus on Sweden, actually. Because in basically all other countries, we have a net recruitment in line with what we want to have. Sweden is a bit of a special case. We've had a very strong market for a long time, and there's you know everybody's struggling to get the right resources in. It's true for the engineering companies, it's true for the contractors, it's true for the public sector, it's true for the real estate companies, it's true for basically everybody that deals with this type of knowledge. We have a very strong employer brand. We hire a lot of people. We will hire, you know, 1,000 people or more in Sweden this year.
At the same time, we are an attractive source to recruit from. The easiest way, we are super transparent, we have good people with the quality, quality brand, so we are really attractive to recruit from. We are not trying to mitigate this with salary inflation. We are actually really making sure that we try to fight those tendencies on the market. We don't want to be caught in the trap that is so easy to get into of, you know, increasing salaries that you are stuck with forever on a too high level, in the organization. So we try to, you know, have a reasonable salary inflation.
What we try to do is make sure that we improve our leadership, what we make sure that we have the interesting projects that will attract and make sure that we retain the best people.
In light of that, do you think you will be more employees in Sweden in six months from now?
I think we will be more employees, but I don't think we will be drastically more employees.
All right,
I have to say, you know, Q3 is a little bit special, but because we try not to recruit people starting in the summer month. We try to have people starting during the fall.
The calendar effect has been negative, and it should also be negative in Q4. But if we look at how the distribution is, I think you have actually October being one good month. It's also, I guess, a month with high utilization billing ratios, whereas December has fewer working days. How should we think about the actual impact this year, given that it might be actually good to have fewer days in December and one more in October?
I think the way to think about it is that the impact is uncertain, because it, it boils down to how our customers and our organization planning the work over the Christmas break.
Mm-hmm.
So it may end up as vacation or-
Overtime compensation.
Yes. But, it's a good point.
I guess base case, it should be slightly better than what it looks on paper.
Maybe. I think that's speculation. My best estimate is, you know, you just look at the calendar as it is.
All right. Fine for me then. We read a lot of headlines on new built exposure and new residential exposure in Sweden, not the least in Stockholm, being maybe not the most favorable exposure right now. I know this is not a big footprint of yours, but could you comment a bit on this, and how this indirect effect may have an effect on Sweco?
I think there's a number of points to that. First of all, we, as you mentioned, we are not a residential developer, so we're not directly influenced. Second is that residential work for the residential development sector in general, you know, architectural design, but also indirect infrastructure, that type of thing, is part of our business, but it's not a major part of our business. It's, I would estimate it to a low single digit percentages of our business. And then the third point is that it all depends on what kind of development you see on the residential market, because there's one kind of development if you see a complete breakdown which spills over to...
to other sectors, parts of the construction sector, you know, and 1990s type of price. There's a completely different scenario if you see a more moderate decrease in residential sales and prices. And what would support that, in my mind, is that you still have a lot of demand for residential homes, but in certain sectors, high-end sectors, maybe too much has been built.
All right, thanks.
Okay, yeah, as you state there, in the report that organic growth during the quarter was 1%, but the billing ratio is up year-over-year. Average hourly fee, as you comment as well, is up, but the number of employees is lower than last year. Why is the organic growth just 1%, given that both average hourly fee and billing ratio is up year-over-year?
Well, I think, I think you said it yourself, yeah.
It's just a matter of-
Yeah.
Fewer numbers.
Then, you know, you need to recognize the calendar. The calendar, it takes out 1.5% of organic growth. And then what we don't talk about as much is, we have less sub-consultants currently, and that is a little bit, you know, up and down all the time. But currently, we are between some large projects where we have had a lot of sub-consultants, and that's in particular in Sweden. So in Sweden, in particular, actually, that has an impact of around 2% on organic growth, the sub-consultants reduction.
And currency.
Yeah, for the absolute top line, yes.
Yeah. Okay, thank you very much. So another question as well. Especially in other consulting businesses, such as IT, for instance, there is talk of a lot of like... I mean, high personal turnover, they are at elevated levels at the moment. Is that something you see as well in your sector, that the personnel turnover is at elevated levels compared to previously?
Yes, absolutely. But you need to be a little bit moderate. We are not at the level that you would see at some IT companies or so, but we're on a higher level than what we normally see, and that's typical for this type of economic cycle of this type of strong market.
Okay. Thank you. Because then it's very, I mean, it's very impressive that you can keep the billing ratio as high despite high turnover levels, I think. And also, a last question, it's related as well to what Victor here was talking about, but what would happen if, I mean, the construction, obviously, if you just look around, it's at the construction boom is obviously in Sweden here. What would happen to the billing ratio, the average hourly price for your services as well, if the construction market is generally slower than it is today?
I would say that that's too hypothetical, but, you know, in general, good markets are good for us. But then again, we have a very robust model that was... We proved it in, in, you know, 2008, 2009. We had the decentralized model and a very decentralized responsibility for the P&L that we were, you know, very robust in that type of markets. But, you know, that type of hypothetical speculations has too many solutions to actually go into.
Thank you very much.
Yeah. And I think that that's really the point, you know. In the worst recession since the thirties, we were not below 72% billing ratio. So we know how to adjust if the market turns.
Tom, Jonas, Arthur from Citi here. Just a couple of questions. You know, the flip side of this, you know, arguably weak growth, I guess, given that demand is strong out there, are prices, which you talked about in the earnings bridge. But I was just wondering, if you look at the gross effect in the quarter on prices and sort of project revaluations, which you talked about, is that effect accelerating compared to previous quarters, or can you give some more light on that, just to understand how that's evolving during the year?
It's like we rehearsed this, Johan.
I'm sure you have.
Thank you for the question. The situation is, when we talk about price effect, we typically talk about price effect including product adjustments. During the first half year, we had a positive momentum of both, so lower product write-downs and a positive effect on market prices. If you look at quarter three, it is mainly the market price effect, the hourly price effect, and then we do not have the same momentum in, you know, less product write-downs. We do not have more product write-downs than we had one year back, but we do not have a positive momentum in Q3. I would not even call it momentum, because I think, you know, we are getting better and better on product write-downs.
It's just that it's roughly on the same level as one year back.
On pricing in isolation, it's fairly the same sort of-
Yeah. So basically what you see now is a price effect. Almost everything is price effect.
Gotcha. Also-
I think there's one more point that we rarely talk about, and that there's a time lag. If you compare to what you can charge the market on a contract that you win today, compared to the cumulative effect in what we report, because more than half of what we report, of the revenue that we report, year-to-date today, is contracts that we won last year or earlier. So there's a time delay in that.
Very clear. If you just zoom out, look on 2017, the entire year, I mean, the churn in the infrastructure portfolio has been reported by many others, and it appears, you know, for some to have had an effect on also billing ratios. But do you see this as a major sort of delta on results for the current year in the Swedish operations? And it's something we should, you know, take into account if you look on the order book into next year, is that more of a normal development?
That's also a very good point. I mean, we are in between phases and in between some large projects in Sweden, in particular when it comes to rail. So Citybanan ended, that had impact, and we're in between two phases on the subway. And we're starting up now, you know, the encapsulation plant, Clink, for SKB, for the spent nuclear fuel, and we're also starting up Central Station. So that has an impact, clearly.
However, the bulk of our business is medium to small projects.
Yes.
You always have to remember that.
Absolutely.
Average project is rather small.
Yeah, but, but is there any visibility on this point, you know, going into next year? Or is this sort of normal operations maybe?
It's always difficult to say, but it looks better. And, you know, what you're now talking about is a contributor to the somewhat weaker billing ratio in Q3 for Sweden.
Okay.
But the reason that we don't talk about it that much, it is because it's a little bit part of the business. I mean, it is what it is. That happens.
Yeah, just finally, can you just mention what are you seeing currently in your order books? If you look on, I don't know, urban planning or infrastructure in Sweden that is related to residential, do you see... What do you see at the moment?
Pretty normal situation. I actually did check that two days ago, in particular for residential design-
Yeah, we looked at this.
for the architects. And it, we see no change over the last year in the order books.
Okay. Final question on foreign exchange. How, how is it negative 7%?
Can I add something to the residential thing? So historically, architects has been a good leading indicator for residential development. That was not the case 2008, 2009, because what happened was that developers kept redesigning the projects over the 08 and 09, and then they were ready when the economy turned up again in 10. So, you know, the historical pattern of architects as the leading indicator, we don't vote for that. So, but we don't see any change in the architecture business.
Raymond Ke from Nordea. You've been reducing top line in, in the Netherlands for quite some time now, which is by design, as you say. How far are you in this journey? How much should we expect going forward?
What we've said is, was that 2016 was the year of actions, and we took a lot of action in 2016, and 2017 would be the year of stabilization. And we think we have definitely stabilization. We actually have some improvement on the performance in the Netherlands. And then you know, it's a long journey of working with an organization. This is behavioral change, and that takes time, but we think we have a method for that.
On the revenue generated by sub-consultants in Sweden, can you quantify this number? And are you inclined to reduce this over time, or?
It's less than 10%, normal situation. The impact on organic growth now is around 2% in the quarter. And it's mainly related to the subway project in Stockholm, where we have a major share of a foreign sub-consultant helping us out with that project.
Looking at the EBITA number this quarter, you had positive eliminations of SEK 12 million. Could you elaborate on this figure?
Sorry, on the group level?
Yeah, on the group level.
Yeah, it's related to, well, basically, what's happening is, we're turning the headquarters into profit, because we have the same management as to the businesses, as we had, you know, prior to the acquisition, to make sure that we had, you know, stability. So it's more of a technical, internal pricing thing. So what you see now is what you should expect going forward. However, it's important to say, you know, what you see on that line is a little bit up and down between quarter and quarter. It's not as stable as any other, you know, business, if you will.
And finally for me, on the Norwegian market, it shows quite slow progress again. Is this only external factors, or is there anything more to it? Because some competitors of yours are also experiencing some headwinds there, so to speak.
Yeah, I think if you actually look into the statistics of the Norwegian market, it's pretty healthy. There are other, you know, competitors who are more prominent on the Norwegian market than maybe the ones who are listed in Sweden, and they are doing okay. It is a little bit of a mixed picture still in Norway, but the infrastructure is super strong. The Oslo area is strong in general. There are some, you know, pockets in Norway which have been challenging, but we also see improvements on the west coast of Norway.
You know, as an effect of the transition in Norway from being an oil economy-driven country to being a country driven more from investments into infrastructure and public sector that we've seen over a couple of years ago, we changed management in Norway one and a half years ago. Last year, we did a lot of action in Norway. We took out 25% of middle management. We took out 30% of administration. We closed a number of smaller offices, and we are dealing with project write-downs. So I think we have a very good development in Norway, and we think we have a good market in Norway.
This quarter, we had, you know, little bit of more project write-downs, but it's no, it's no drama in that. I think it, that's, it's a good development in Norway. No further questions? If that's the case, thank you very much for coming, and thank you very much to the people on the phone, and have a continued good Friday, and have a good weekend.