Earnings Call: Q3 2020

Nov 4, 2020

Good morning, everyone, and welcome to Sveco and welcome to the presentation of the Q3 for Sveco. Today, we will listen to our CEO, Asa Beiman and our CFO, Olof Stornacken that will walk you through the presentation. After the presentation, you will be able to ask questions either through using the phone or using the chat. And I think we should get started. With that, Orsa, please go ahead. Thank you, Katarina, and very welcome, everyone, to Sverco's Q3 presentation. Before we move into the Q3, I would like to give you an overview of Sverko of today. And we are Europe's leading engineering and architecture consultancy with focus on 8 business areas and with projects in more than 70,000 countries worldwide. And our net sales rolling SEK 12,000,000,000 is SEK 21,400,000,000 and with a margin of close to 10%. With our 17,500 experts, we have unique expertise to develop the solutions needed for more sustainable society. Let us now move over to the result of the 3rd quarter. The 3rd quarter was another stable quarter with a good result. With our diverse business model and a way of securing that we offer relevant services to our clients, we have been able to maintain high activity and efficiency in our business. In the Q3, we improved our EBITA by 9% to SEK 417,000,000 and we report a solid margin of 9.2% adjusted for calendar. We report a net sales of SEK 4,500,000,000, which is a slight decrease of 2% compared with Q3 last year. Organic growth decreased by 2%, while acquired growth contributed with 3%. Currency effects had a negative effect of 3%. And given the circumstances, we are satisfied with the result in the quarter. We have a strong financial position. And during the quarter, we managed to improve our operating cash flow and decreased our net debt. And Olof will guide you through the financials later in this presentation. Our strategy is, as you know, to focus on both organic and acquired growth. In the quarter, we made the acquisition of Ares in Belgium. And after that, we have announced the acquisition of Saraco in Finland and TAG Architecte in Norway. I will give you more details on this as we move on through the presentation. We continue to win new exciting projects, and one example, as you can see in the picture, is a project we recently announced, where we will continue to support the city of Tampere in the 2nd phase of developing the Tampere tramway. And this project is a milestone in their journey towards carbon neutrality by 2,030. About 50 experts from Sverko will be involved in the project to transform Tampere City towards improved sustainable transportation and urban development. Before we dive deeper into Q3, let us have a look at the market situation. Overall, demand remained stable in the quarter. We continue to win new exciting projects, and our order book remained stable during the Q3. Even though most of our projects have been relatively unaffected by COVID-nineteen, we continue to see some negative impact, mainly in the Private Building and Real Estate segments and part of the Industry segment. We expect continued negative impact of COVID-nineteen in the coming quarters. But despite these short term uncertainties, the long term drivers remains the same. The demand for our services is driven by the need for addressing urbanization, digitalization and sustainability. Our demand follows the general macroeconomic trend in our markets with some time lag. And however, this impact will most likely be partly mitigated by increased public spending. To further mitigate the uncertainty, we continue to put strong focus towards our clients and on finding the best solutions for our clients. And on that note, I'm very proud that the Rand Selva Bridge project in Norway was awarded the world's best BIM project at the Tecla Global BIM Award. Rand Selva Bridge is a 634 meter long concrete bridge without and it's being designed and built without any drawings. It's based on only BIM models and Sverko was in charge of the modeling and the parametric design, and it is a very good example of how we are at the forefront of using digital tools within our industry. Before we move into the details, I would like to spend a few minutes on explaining our business model in relation to the current uncertainties that we experienced caused by COVID-nineteen. We have a broad geographical footprint across 8 business areas in Europe. Sweden is our largest market, while our other business areas are relatively comparable in terms of net sales for the quarter. Looking at our offering, we have a balanced mix between 3 business segments: Building and Urban District Water, Energy and Industry and the Transport Infrastructure. On the client side, we have a good mix between public and private clients. All in all, and together with the fact that we have many small and midsized projects, Starting with growth. We report a negative organic growth of minus 2% in the quarter. Belgium continues to deliver strong organic growth of 6%, and the market was good within most segments during the quarter. We report flat growth in Norway and Denmark, and the growth in Sweden was minus 2% due to lower market demands in Finland and in Norway Norway and Denmark, we report some negative growth. We have challenges on the U. K. Market due to lower demand on that market, And it's also affected by that we were we put 150 employees in U. K. On furlough in Q2. Half of those employees are back in work end of Q3. And with that, moving over to the growth for the quarter. We have increased our EBITDA with 9% in the quarter, €36,000,000 adjusted for calendar. We see strong margins in Finland, Belgium and Sweden, double digit margins in those business areas. We have stable margins in Denmark, Netherlands and Norway. And U. K. Is impacted by challenging market and one off costs in this quarter. And we see weak performance in Germany. We have been challenged in our German business, and we have made some write offs and also started to do a deep dive in the German project portfolio, and we'll come back to more details around Germany later in the presentation. And as I said, in the quarter, we made some interesting acquisitions and looking into those, starting with the acquisition of Ares in Belgium. September 30, we made the acquisition. And Ares, they have a very strong reputation on the Belgium market in the area of construction supervision and segments related to that. They have business in Flanders, Brussels and Wallonia, 12 employees and a strong contribution to our business in Belgium. After that, we announced the acquisition of Saraco in Finland, a company in the area of project management, property development and in the building areas of Helsinki, Turku and Tampere, 34 employees and putting expertise in those fields into our Finnish business. And together, those acquisitions will accelerate our growth in both Belgium and Finland. Very interesting companies with a local presence. And then to our acquisition in Norway, a milestone for Sveco in Norway. The acquisition of TAG Architecture announced 15th October. The company was founded 2,009, 95 employees and revenue of NOK 130,000,000 in 2019. TAG Architecture are experts in the Real Estate and Landscape Architecture segment, and they have offices in Oslo, Bergen and Trondheim. And by this acquisition, Swirco established a combined architectural and engineering business in Norway. So this is a milestone for us that we can offer our clients a full integrated architectural and technical consultancy service on the Norwegian market. So this is an important step on our growth journey in the Norwegian market going forward. And with a total of over 1300 architects, Sveco is today one of the world's leading companies within the architectural field. The acquisitions that we have done are all in line with our long term strategy to grow through a combination of organic growth and acquisitions. And despite the uncertainties caused by COVID-nineteen, we will continue to look for interesting acquisitions going forward. With that said, I will now hand over to Olof to walk you through the numbers more in detail. Please, Olof. Thank you, Asa, and good morning, everyone. We start with net sales. Net sales in the quarter is SEK 4,500,000,000 taking LTM net sales to SEK 21,400,000,000. We see organic growth of minus 2% with a small negative calendar effect from 1 less working hour. The positive impact from M and A is balanced by an increased negative currency effect. Looking then at EBITDA. The positive EBITDA development that we have seen since Q1 2018 continues. The EBITDA in the quarter is SEK 417,000,000 which is SEK 36,000,000 or 9% up versus Q3 last year. Again, we see the small negative calendar effect of SEK 3,000,000 in the quarter. And the reason that 1 hour gives such a small effect is the geographical mix between the calendar effects. Looking then at the EBITA development by business area. The largest drivers of the improvement in the quarter are Sweden and the Netherlands in both countries, supported by lower operating expenses and higher average fees, in Sweden also by increased billing ratio. Sweden, as Asa said, shows a double digit margin in this seasonally weak quarter. Finland and Belgium also continued to improve and show high margins at 13.7% 12.3%. Norway and Denmark are slightly down versus relatively strong quarters in the Q3 last year. UK, as Asa said, most impacted by COVID-nineteen. And you could also see that on the top line, it's seen in the EBITDA. And the EBITDA has also been burdened by some one off costs. Germany has another weak quarter and is basically at breakeven. Looking then again at the group margin, we're at 9.2 percent EBITA margin in the quarter, which is 0.9% up versus Q3 last year. Moving on then, Asa talked about the project portfolio review that we are doing in Germany. We have had increased focus on the relatively high working capital levels in Germany over the last 12 months. We have seen some delays in the client negotiations, and we've also seen some disputes in some of the large projects. We did an internal audit now in the Q3 and concluded that we may have some risk in the revenue recognition in the division that was audited. We have therefore now decided and started a full review of the German project portfolio, which will be concluded before year end. We expect the negative effect of a more prudent revenue recognition to be up to potentially up to €120,000,000 It's still too early to conclude on the number, and therefore, we have made no reservation in the Q3 books. Our financial position remains strong. Net debt is at SEK 1,400,000,000 and decreased by SEK 1,100,000,000 versus Q3 last year. We have a leverage of SEK 0.6 billion in the quarter and available liquid assets of SEK 4,000,000,000. With that, we believe that we are well positioned to manage through the current situation, but also to capture any opportunities that may come out of it. And with that, back to you, Asa. Thank you, Olof. And to conclude the Q3, we continue to deliver a stable performance with a good result despite uncertain times. Our business areas are overall delivering solid margins for the quarter with strengthened EBITDA margins of 9.2% compared with 8 point 3% last year. We have a stable cash flow and continued strong financial position with a low net debt and good liquidity, which creates flexibility going forward. The impact from COVID-nineteen continues to be in the Private Building and Real Estate segments and part of the Industry segment. And with a broad geographical footprint and well diversed offering, balanced mix of public and private clients and a decentralized model with many small and midsized projects, we continue to stand on stable ground in uncertain times like this. In a long term perspective, we are well positioned towards the big trends in society with urbanization, digitalization and climate change as important drivers for our business. With 17,500 experts and more than 70,000 projects every year, we have a unique knowledge that we offer our clients to develop solutions that lead to a more sustainable society. And one example of this is a new excitement to preplan the upgrading and rebuilding of the Schepala Waste water treatment plant in Sweden that will serve 90,000 people in 2,040. The rebuilding is planned to start 2022 and last until 2029. Our focus is to continue to deliver on our strategy and to implement the Sverko model in all our markets. We work closely together with our clients to ensure that we are relevant and deliver the best solutions. And we focus on winning new projects and to deliver with high efficiency. And we are monitoring the COVID-nineteen situation closely, and we are prepared to take additional measures if necessary. Looking ahead, our long term focus is to continue to develop sustainable solutions together with our clients. Our societies, cities and industries are all going through major transformation, and Sverco is well positioned to support our clients in this. Thank you. Thank you, Olof and Asar. And with that, we open up for questions, and we will reach out to our operator first to listen in if we have any questions from coming in through the phone. Please go ahead. Yes, ma'am. Thank you. We have a question that came through over the phone. The first question comes from Erik Paulson. It's Erik Paulson at Nordea Markets in Stockholm. First of all, regarding this project portfolio review in Germany, what type of division in Germany is this? And do see it as a risk for other write downs or potential write downs in other segments and countries as well? I had some trouble hearing the whole question, but I think it was on whether we see risks in other countries and segments. And the question is no, I would say that this situation is completely isolated to Germany. We always will have negative and positive project adjustments in all countries, but we see no similar risk in any other business area. Okay. Thank you. And then a second one on acquisitions. In which markets can we expect future acquisitions from your side? And in which type of segments do you look for acquisitions? So we have focused on all our business areas to find potential targets to acquire, And we are looking in all segments to ensure that we find services, specialists and areas that we would like to grow. So that means that you can look in our 3 main markets and as the building urban areas, the water energy and the transport infrastructure. We look in all those segments. We're trying to fill gaps, but we also try to find bolt on acquisitions and targets to acquire. And we have an M and A agenda for all our business areas. So when we find an interesting target and we work really hard to ensure that the expectation gap is narrow and it's a good fit with Sverko. When it comes to service, when it comes to culture, then we will acquire those companies. Okay. Thank you very much. Thank you. And the next question comes from the line of Leo Haendahl. Your line is now open. Please go ahead and ask your question. Yes, thank you. Good morning. Just on the you talked in the report about cost savings, so that it was some 70,000,000 euros in the quarter. Could you just address the sort of net effect here of what is temporary savings the way you look at it due to sort of non travel, etcetera, also taking into account what's on furlough, etcetera. Just to try to talk about what sort of is normal in Sveco. Is this sort of the new normal? Or do you expect these savings to sort of reverse? If you could address that, please. So as you are aware of, we shifted in the spring towards focus all our efforts towards our clients and to into our client projects. We also stopped non critical spendings. And I think now what I would like to add is that we have in this quarter started to work with internal development in some areas. So it's not that we have stopped all internal development. What we have seen is that we are able to deliver and to have we have the capacity to deliver in remote. I would expect that we will see less travels and we will see parts of what you now see into the future. I think it's too early to tell how much of this will be, I mean, tapped as cost savings into the future. And so but of course, there's lots of learnings during quarters like this. And we will prioritize in detail on what we spend our time on going forward. Also on pricing, you seem to have had a continued tailwind from FUZE in the quarter. I think you expressed yourself a bit more cautiously Q2 results. Can you just talk about has pricing surprised on the upside here and any sort of forward looking comment in this respect? So I would say that the main focus for us in a market like this is that is to ensure that we make the right choices, that we take on the right projects. We ensure that we take on the right profit levels in our project. We price ourselves in a good way. We plan our set up and execute our projects in a very good way as the our set up and execute our projects in a very good way as the competition is fierce in most of our segments in the market that we now are operating in. So I would say that we have a strong focus on pricing. But again, I think you need we need to be humble. We are operating in uncertain times. We don't know exactly how the market will develop going forward. So for us, it's about focusing in our daily operation to really ensure that we take on the right projects, on the right profit levels and ensuring that we operate the projects in a good way so we don't get any write downs. And was it a positive surprise also? Did this surprise you how this turned out in the Q3 in terms of net of sales here? No, as we have so strong focus on it. But I think when we are talking about the market that we now are operating under and the stress we felt in Q2, my feeling was that it's really easy to be dragged into some kind of hard competition and stress in relation to the crisis we were in, but we have been able to keep the focusing on putting the right prices into. So I'm more satisfied than I'm surprised. And we will continue to have this focus. But again, I need to emphasize uncertain times and fierce competition. So I'm humble about how it looks on the market. Can you just address what in Germany here, you obviously, it's at an early stage, you're doing a review. But at this stage, what processes have failed in this instance? And how what business have you taken so far sort of to change how this business is run? We have in terms of the process that have failed, I would say it's also, to a large extent, external development. So it is large projects that have been going on for a long time. There has been delays in the projects themselves, delays with in customer negotiations, as we said, and also some disputes that have come up over the last year. But obviously, as we said, there has been what could be a lack of prudence in the revenue recognition, and we are not only going through the project portfolio but also making sure that our processes are where they should be and that we are certain to avoid similar situations going forward. And to add on that, Germany is an important market for Sveco, and there is a huge potential to grow into the future. As you know, the market is very fragmented, and the focus right now is to ensure that we have that we create stability in the German business, that we continue to implement the Sveo operating model. I have taken the decision to shift out the management in Germany due to the situation we have right now. And I think it's important also to look in the long term perspective because stabilizing the German business and ensuring that we handle those projects in a good way will create the platform to accelerate the growth for the future in Germany. Thank you. Thank you. And the next question comes from the line of Dan Johansen. Your line is now open. Please go ahead and ask your question. Thank you and good morning. A few questions from me. First, a follow-up on Germany, the potential revaluation of the SEK 1,000,000 or SEK 20,000,000. To get some more granularity on that, is that mainly related to 1 or 2 or a few larger projects? Or is it more or should we say it as general adjustments across the whole portfolio in Germany? Well, we are going through the whole portfolio as we have written. But obviously, the main risks are with the projects that are large and therefore has a large trade working capital and a large width in the balance. So it's, to a large extent, large projects within infrastructure and buildings, but we are going through the whole portfolio and looking at all divisions right now. Okay. And on the topic of increased public spending, is it fair to assume that there will be some sort of time lag? Or do you see an impact already this fall and into the beginning of 2021? Or will it be more of a medium term boost in as you see it? It's too early to tell. We expect, as you also are addressing, that there will be public stimulus in the investment streams that we are related to. We have seen in Finland project put out on the market. That has been put on the market in relation to the public stimulation in the rail and light rail segment in Finland. But when those stimulus will come, I think it's still too early to say. It's also in relation to that we now are in some kind of second wave, where we actually are seeing more measures to be taken in the countries where we operate. So we have to stand close to the changes that we see and we would take the right measures. But when it comes to those public stimulus, it's too early to tell when they will come and in which business areas they will come. Okay. Makes sense. And last question from Switzerland obviously showed a very strong profitability in the quarter. Did you experience some tailwind from the measures you took in Q2 in terms of the organizational adjustment? Or will that perhaps come in a bit later? We do see some tailwind from that, but that and that's part of the lower operating expenses that we that is sort of the biggest reason behind the uplift. But Sweden actually on both average fees and also on building ratio improved. So it's an improvement across the board, but there is some help from the measures taken in Q2. It's also to add on that, what we did in Q2 that we were really quick on focusing the whole organization towards clients and client projects and prepare ourselves to really ensure that we stay relevant for the clients and win new project because as we faced a crisis and also didn't know exactly how the market would develop. And what we see right now is that we see the result of that the whole organization with the decentralized responsibility has really handled that situation in a good way. Thank you. Thank you. And the next question comes from the line of Erik Elander. So I have 3 questions actually. Starting off by looking at you compared to your competitors, you're actually growing more or at least decreasing less compared to those guys. Why do you think that is? I mean, are you experiencing a market share gain? And are you also experiencing that people are moving from other companies to SUEKO? Or what could explain this fact? First of all, I would like to, again, go back to our geographical foot print, our well diverse portfolio and having in the balance of, I mean, public and private clients, fifty-fifty almost. I think this stabilizes us during a situation like this. Another thing is what I mentioned before that we were really, really quick to steer the whole of Sweco's organization with a decentralized responsibility towards clients, sales and stay relevant to the clients, so we actually can win projects in this kind of a market. So I would say it's about our business model, it's about our portfolio and it's about the focus that we have had in the organization. And that is now what you can see in the results. All right. And also then, I was kind of curious about this because all of the countries except for Belgium are declining in terms of year over year sales. Belgium increased organically by 6%, which is extremely impressive in this time. Why is this? I mean, is the country not affected by corona? Or is there a a specific difference between how you run those operations compared to other countries? Or why is it? So Belgium is definitely affected by COVID-nineteen, and they were in a hard lockdown during the spring, and they are in a soft lockdown down right now. Most of our employees in Belgium is working from home. They have been able to manage the situation in a very good way, but it's also so if you're looking at Belgium, what they have done is that they have really implemented the way we would like to work. So it means that the client portfolio and the project portfolio, the processes, the structures, the governance model, the culture we have there is it's in line and compliant with the Sverko operating model. So it's a very good example of a country where you have the fixed price and the time and material contracts within the portfolio in Europe that really operates the way we would like them to operate. And you see the combination in Belgium of organic growth and acquired growth. So they have been able to handle the situation, but it's also so their starting point was that they had really implemented this vehicle operating model. And that also shows really well that during a crisis like this, having the model implemented makes you more stable in the circumstances like this. Belgium is doing a great job. Yes, definitely. And very clear. Thanks for that. And then the last one, it's kind of related to Johan's question. But I guess you have I mean, some business areas are already there in terms of margins. You have a 12% margin target internally. I mean, has that changed since the corona outbreak because you're still delivering very good margins and margins improvement? Has that margin target changed internally since you now know that there are different ways of working, which should actually have structurally higher margins than 12%. So the overall goal for Sverko Group is 12%. And we have more we have I mean, we have more to do when it comes to strengthen the margins. As you know, we have business areas not operating at the levels we would like to see. The most important thing for me is that we step by step strengthen our margins because that is related to how we operate our business. So but of course, if you have a business area that operates on 12%, they put their own goals in that business area. But on the overall level, 12% is the goal that we have. And that is I mean, we do not change that until we're there. Okay. Because what I was wondering is that the 12% margin target was set prior to corona in like a normal environment. And now you know that you can decrease travel costs, you can work more remotely and stuff like that, but that is not reflected then in your in how you communicate the margin target of 12%, I. E. You have not increased it, for instance? No. And I mean, in the circumstances we operate right now, it's I mean, it's a complex market. There are so many things you need to lead and steer and to handle to really perform on high margin levels and also to create the growth. So I think the 12% margin is still relevant for the group. All right. Thank you so much, Jofa. Thank you. Thank you. Thank you. And we have a follow-up question from Johan Dahl. The line is now open. Please go ahead. Thank you. Just some follow ups. On the weakness in commercial real estate that you talked about, can you just specify is that broad based? Is it architecture? Is it installation? Where is it exactly? And the second follow-up is on the deal flow in terms of acquisitions. I mean, you've done a couple of small deals here. Still, Sveco is a fairly big company now. I'm just interested in if you look on the spectrum in terms of available acquisition candidates all the way from platform sort of big acquisitions to smaller, tiny bolt ons. How do you see the environment out there? Is the availability of targets across the whole spectrum? Or is it more sort of a challenge right now to find sort of meaningful sizable acquisitions? Thank you. So your first question around the commercial real estate, I would say what we have seen is a weaker market in the private commercial segment, and that is strongly related to the real estates connected to the markets and companies that you have seen that has been affected heavily in relation to the COVID situation. I mean, it's hotels, but it's also, of course, office buildings. So you can actually say that everything that is private and related to real estate is have some effect. I mean but I think it's important to say that we are working with lots of public real estates in combination with the private. But I mean, there we see the effects. When it comes to the M and A landscape, I mean, we have, as I said, an M and A agenda for all business areas, but we also look for bigger targets, of course, in Europe. And I mean, as you know, the consolidation has been going on quite a while in the Nordics, but there is more room to maneuver in some of our other business areas. So again, I we have a strategy that is country business area by business area, but also an overall agenda for group. Okay. I think that was the last question through the webcast. Do we have any questions through the chat? Yes, we do. First of all, we have a couple of questions from Johansen Degen from Carnegie. Can you please quantify the EO effects in UK and negative project adjustments in Norway? The EO effects in the UK is a couple of 1,000,000 in the quarter, so around SEK 2,000,000 to SEK 3,000,000, the EO effects. The negative project adjustments, we normally don't quantify. So but they are the as you've seen, they are the biggest reason for the EBITA decline. So it is relatively significant in the quarter. And another question from Johan Sanddian. Can you describe the development per month during Q3 and how Q4 has started? So I would say that what we saw in Q2 was that it started out with big effects in our we saw some projects stopped and delayed. And we saw in the end of Q2, some of those projects started up. And during Q3, we have seen a more stable market and also more stable orders received during the Q3 as a whole. But I also would like in relation to that, I mean, we all know we are in the 2nd wave. We have the same strategy of staying close to our clients, ensuring that we focus on the right things in your organization. But it's still too early to tell how this uncertainty will be played out in the market going forward. Thank you. Then moving on to a question from Jon Hiltner from EnterFonder. Do you have consultants that work at the customer sites? If so, has remote work functioned well for them as well? Yes, we have some, but that is not like our core business model, and it has worked for everyone. When we started out working in remote in all our business areas in Q2. I would say that there was some learnings, and we have learned a lot during this period of time. So it works really well for us. And finally, a few questions from Ola Sodermark at Kepler Cheuvreux. Can you quantify the German project write down? The German project write down in the Q3, I assume then, that's, I would say, in the range of SEK 2,000,000 to SEK 4,000,000 as well. And can you talk about the development in September October? Do you expect to return to organic growth during Q4 given the stable order book? I think in relation to the market that we now are operating under, as I said before, we will ensure that we stay close to our client and that we continue to win projects. But it's too early to tell how this will be played out. We have a stable order backlog right now, and we have orders received on the okay level, and we will do what we can to ensure that we actually can utilize those projects in the very best way going forward. Thank you. No further questions from the chat. Okay. I think with that, we finalize for today. Thank you, Asael. Thank you, Olof. And thank you, everyone, for joining. A lot of questions today. So we enjoy the engagement.