Sweco AB (publ) (SWECB) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining us for this presentation of Sweco's Q2 Report. Asa Bergman, Sweco's President and CEO, is here together with Jan Allde Sweco's CFO, to take us through the results of the second quarter. And after the presentation, there will, of course, be an opportunity for you to ask questions. So with that said, please Asa.

Welcome, everyone, to Sweco's Q2 presentation. Before we present the results for the second quarter, let me give you a quick overview of Sweco. Sweco is Europe's leading architecture and engineering consultancy with operations in 8 geographical business areas across 14 markets in Europe. We are a well-diversified business operating across 3 different segments with a good balance of private and public clients. The foundation for Sweco's long-term success is our mix of competency spread across 23,000 experts, our focus on organic and acquired growth as well as our efficient and decentralized operational model. With a strong financial track record and financial position, we are focused on continuing our growth journey and build on Sweco's success. Let's start with a summary of the second quarter of 2026. It was a solid second quarter in a continued mix market, characterized by broad organic growth, higher average fees a strong billing ratio and continued acquisition activity. Net sales increased by 9% to SEK 8.6 billion and organic growth amounted to 3% adjusted for calendar effects. EBITA increased to SEK 864 million corresponding to an EBITA margin of 10.1% and EBITA increased by 7% adjusted for calendar effects. The positive development was supported by higher average fees and an improved billing ratio as well as positive contributions from recent acquisitions. We also continued to execute on our M&A agenda by announcing 2 new acquisitions during the quarter. Moving over to the operational highlights. Overall, we delivered a solid second quarter. 7 out of 8 business areas reported organic growth and 6 out of 8 increased EBITA. We continue to navigate the market well, increasing both order backlog and orders received. We also maintained a strong focus on efficiency reflected in an increased billing ratio of 75.9%. The solid operational trend continues across several business areas with 3 reporting double-digit margins. I would also like to highlight the strong EBITA improvement in the quarter from Sweco Sweden and the Netherlands. Overall, we are pleased to see that we continue to make progress across our business areas. Turning then to the market overview. Demand for our services remained broadly unchanged compared with previous quarters. Demand was good in energy infrastructure, water and environment. We also continue to see growing demand related to security and defense across several of our markets. At the same time, residential and commercial buildings as well as parts of the industry segment remained weak. While the geopolitical and macroeconomic environment is uncertain, Sweco benefit from a diversified business model, a strong local presence and a clear European focus. Trends related to sustainability, demographic shifts, digitalization and AI as well as security and defense are driving demand for Sweco services across our core segments. With that, I welcome our CFO, Jan Allde to walk you through the numbers. Please, Jan.

Thank you, Asa. I'll start with a summary of the Q2. So net sales was SEK 8.6 billion with a calendar adjusted organic growth rate of 3% and with declined growth of 5% and giving a total sales growth of 9% versus last year. Calendar effect was 5 more working hours versus last year. EBITA increased 7% or SEK 53 million adjusted for the calendar effect. EBITA margin came in at 10.1% versus 9.6% last year and our net debt-to-EBITDA ratio of 0.8x at the end of June, which is the same as last year. Then let's look at net sales. So organic growth of 3% was driven by higher average fees and higher billing ratio. We saw organic growth in 7 out of 8 BAs. Germany and Central Europe had the strongest organic growth rate at 7%, driven by higher average fees and FTE growth in an overall stable market. The growth in Finland was still low, but we saw a somewhat improved demand situation within the public and commercial building segments. Denmark was impacted by lower investment in the pharmaceutical industry. However, they have been able to compensate this by strong growth in other segments and hence, showed an organic growth in Q2. The U.K. reported negative growth rate of 3% due to less subconsultants and less FTEs while the overall market was stable. Please note that the growth in both Finland, Denmark and the U.K. was negatively impacted by lower FTEs due to ongoing efficiency improvements and measures taken to adapt the organizations to current market conditions. Sweden, Norway and the Netherlands all reported organic growth rates of 4% versus last year. Then we look at the EBITA. So EBITA increased by 7% versus last year adjusted for calendar effect. The quarter was negatively impacted by restructuring and integration costs in Sweden and Finland of SEK 30 million, which is SEK 18 million higher than last year. Adjusting for this, EBITA for the group increased by 10% versus last year. The EBITA improvement was driven by higher average fees, improved billing ratio and contribution from acquisitions, while higher personnel and other operating expenses had a negative impact. The reported EBIT margin was 10.1% versus 9.6% last year and the calendar effect in Q2 affected the result positively in Sweden and Norway. Now let's look through the performance by BA. Sweden continued to improve its underlying EBIT margin as the positive calendar effect and the negative effect of restructuring and integration costs in Sweden was almost the same. The EBITA margin in Norway was unchanged adjusting for the calendar effects. Denmark reported improved margins from already high levels, and the Netherlands reported a strong margin improvement versus last year. The EBITA margin in Belgium was lower than last year, but they continue to perform at a high level. The EBITA margin in Germany and Central Europe was lower while the margins in Finland and the U.K. were roughly in line with last year. Then let's have a look at the EBITA bridge. So starting with Sweden, where the result was 10% higher than last year, driven by higher average fees, higher billing ratio and positive contributions from the PE acquisition. Please note that the Sweden booked SEK 26 million of restructuring and integration costs in Q2. Excluding this, EBITA improved by 20% versus last year. The restructuring integration costs were mainly related to optimizing the organizational structure in Sweden and drive efficiencies. The costs related to the PE integration was minor as the integration is now completed. The result in Norway was SEK 7 million higher than last year, driven by positive FX effects and the higher result in Finland was due to SEK 8 million less restructuring and integration costs compared to last year but also due to a higher billing ratio. The result in Netherlands was 34% higher than last year, driven by higher average fees, higher billing ratio as well as contributions from the acquisitions made last year. Denmark and Belgium delivered EBITA improvements, but the result in the U.K. was stable. Result in Germany, Central Europe were slightly lower due to higher personnel costs and less positive project adjustment versus last year. The calendar effect was SEK 5 million -- sorry, 5 more working hours versus last year, corresponding to a positive year-on-year impact of SEK 60 million. Overall, the integration of the acquisitions made in last year and also this year are progressing well, and we expect synergies to continue to materialize during the quarter -- sorry, during the year. Now let's look at the financial position. So cash flow from operating activities was SEK 911 million compared to SEK 680 million last year. M&A cash outflows was SEK 176 million and dividend paid was SEK 1.355 billion. The net debt position at the end of June was SEK 2.9 billion, slightly higher than last year, while our net debt-to-EBITDA ratio was 0.8x, same as last year. Hence, our leverage is well below our target, and we remain financially very strong to pursue an active M&A agenda. Then lastly, I look at the calendar. So the current effect for 2026 is that we expect to have 7 hours more than 2025 and in Q3, we expect 1 hour more than the same quarter last year. And by that, I hand back to you, Asa.

Thank you, Jan. During the second quarter, we announced 2 new acquisitions. In Finland, we announced the acquisition of Platom a specialist consultancy providing technical advisory services across the full life cycle of nuclear operations. The acquisition strengthens Sweco's position in Finland making us the leading nuclear consultancy in the country. It also strengthens our European capabilities in this growing sector. We also announced the acquisition of Sitowise Sverige AB, adding approximately 250 experts within structural engineering, building services, project management and transport infrastructure. The acquisition further strengthens Sweco's position and geographical footprint in Sweden. After the quarter, we also announced the acquisition of STEIN Ingenieure in Germany, STEIN are experts within water and wastewater infrastructure, including sewer system rehabilitation, structural engineering, pipe jacking and inspection of engineering structures. The acquisition further strengthens Sweco's position in the growing water segment. Acquisition is a key growth driver for Sweco. And during the second quarter, we announced 2 new acquisitions. All in all, we completed 5 acquisitions to date. And by the end of July, Sitowise will also be completed. During the quarter, we secured several significant client projects that contributed to a stronger order book. These projects underscores the breadth of our offering and the continued demand for our expertise in resilience, sustainability and infrastructure across Europe. Some examples from the quarter and the rest you find in the report as always. Sweco was selected to provide planning and design consulting for a new railway section between Molndal and Landvetter Airport in Sweden, forming part of 1 of the country's largest infrastructure investments. During the quarter, Sweco was also commissioned to plan and design a new emergency hospital campus in Helsingborg, which will be 1 of Sweden's largest health care properties projects in modern time. In Norway, Sweco was awarded a framework agreement related to flood protection, supporting climate adaptation and critical infrastructure resilience across the country. Finally, Sweco was selected for the planning of Rail Nordica in Finland, a strategic railway project aimed at strengthening cross-border logistics security of supply and military mobility across Northern Europe. I would also like to take the opportunity to give you a quick update on how Sweco is using AI to maximize business benefits. We see AI as an ongoing structural transformation of our industry and an opportunity to strengthen our market position. We have worked with incorporating AI in Sweco's operations since 2023 and see the development as a technological lead for us as consultants. [indiscernible] and BIM one stage, we now use AI to create value for our clients and improve our own efficiency. Our AI approach is focused on 3 overarching business benefits. Individual productivity, allowing every employee to work smarter, creating immediate effects throughout Sweco by large-scale use of AI. Process automation, which is about creating structural efficiency by automating and reshaping workflows within our core business. And the third part is about accelerating digital innovation, developing and delivering IT solutions as integrated components in projects and thereby creating client value. Also, let's not forget in this as Europe is facing a significant shortage of engineers with a major infrastructure investments planned while facing deficit of roughly 2 million STEM experts, we are already today using AI as a mechanism for closing this gap. To summarize then, Sweco delivered solid second quarter characterized by broad-based growth, higher efficiency and improved profitability. Looking ahead, our priorities remain unchanged. First, we continue to position Sweco in attractive growth segments, while we see continued long-term demand building on a solid foundation. Second, we continue to execute our AI strategy with the opportunity-based approach I just talked about, supporting both our experts and our clients. Third, acquisitions remain an important part of our growth strategy. We will continue to evaluate opportunities across our core markets while maintaining a strong focus on successful integration and value creation from recent acquisitions. And finally, we remain committed to operational efficiency and continued margin improvement. Strong billing ratio, disciplined execution and efficient resource allocation will remain key priorities going forward. With a strong market presence, diversified portfolio and a solid financial standing, Sweco is well positioned to continue transforming society together with our clients. Thank you, everyone.

Thank you, Asa, and thank you, Jan, and it's now time to open up for questions. [Operator Instructions] We will now go to our first question and the first question today comes from the line of Julia Sundvall from ABG Sundal Collier.

As we have a few questions. And first question is on the utilization rate. It grows some in the quarter. But how should we think forward? How much headroom do you think is left?

Julia, first of all, it's an area where we have focused quite a long time, and we are really pleased to see that we are continuing to move in the right direction. And it's really hard to say where the limits are in this. So I mean, the only thing I can give you is that we will continue to work on the efficiency as it is as important as it has always been.

Yes. Okay. And on the average fees, you have had a positive momentum for quite some time. Will you be able to lift the price further in a mixed market? Or is the momentum from now? Is it sustainable? Or how do you view it? .

I mean we have shown in the past that we have been able to to meet the salary inflation and cost inflation with the fee increases. And the fee increase is just to remind us that it's both about what prices we put on the market and how we execute our projects. So our intention is to continue to focus on this and ensuring that we can meet the cost inflation and including then salary inflation into the future.

Yes, that sounds good. And looking at both the utilization rate and the prices and like kind of bridging it to your financial targets, going forward, how do you think you should work with these 2 components to reach the financial targets of the margin? .

I mean I think it's fair to say that it depends on where you're looking at Sweco. On the overall level, of course, we work with both and among others when it comes to different levers for creating the result, but it's also about which country you look at needs to work more on their efficiency and some countries needs to work with the price expansion. So it depends on how -- both the -- how far they have come with having this broad product portfolio that we're aiming for with the Sweco model and making sure that we actually cover all the sectors, cover all the kind of clients and have this balanced project portfolio in place. So we will work with both, and it depends on which business areas you're looking into.

Perfect. Sounds reasonable. Moving on to acquisitions. You have started the year quite good. Do you have any update on how the integration is going on the large ones?

Julia, Jan here. I would say the integrations are progressing well, and you see the comments that we make that we see good contributions from acquired companies into our P&L. So yes, overall, progressing well.

Is there some dilution effect in [ NBAs.]

Yes, I would say, overall, the margins of the acquired companies as they come through the P&L, I would say, are almost in line with the group with some variations between the BAs but overall, I would say they are quite close to the group average from a margin point of view. .

Okay. Perfect. And just a last question on the order stock that you say it's coming up in the quarter. Just wondering how is your visibility of the order backlog? And can you say anything about the margin?

Julia, as Asa said, we see that the order book is developing well. I believe you have seen also the orders that we have announced. I would say we -- 1 of the key aspects of our strategy is to make sure that we remain very price disciplined. And that's also why we continue to see price expansion in our P&L. I think that's all I can comment on.

Your next question today comes from the line of Daniel Djurberg from Handelsbanken.

Thank you, operator, and also Jan, congrats on a strong quarter. . I just wanted to ask a little bit on some SEK 25 million in restructuring charges and SEK 5 million for integration costs in few too here. Now we have close [indiscernible] as well. Can you give some indication on what we should expect here for Q3 and Q4 with regards to the similar levels or an input would be great.

Just to clarify Dan, you were asking about the restructuring and integration charges that we have taken and how we see them going forward.

Yes, correct.

Yes. I mean if we start with the Q2 then, as I said, we took, in total, SEK 30 million of restructuring and integration costs I would say the vast majority of that was restructuring costs related to Sweden. We took some integration costs, I would say, minor integration costs related to [ PA ] acquisition in Q2. And we took some integration costs related to the Fintech integration in Finland. I would say going forward, starting maybe with integration and going forward, I would say, as I said, the PA integration is complete. So you shouldn't expect more integration costs there. On the Fimpec case, there will be some integration costs coming through in the remainder of '26. When it comes to the restructuring costs, I mean, I would say we continuously adapt our organizational structure as the market situation develops. That's why you -- and also to drive efficiency improvement actions. So I think it's difficult to -- we don't normally provide forecast on restructuring. So I think it's just -- as part of our business model that when needed, we adapt our organization for the market efficiency for the market situation.

Yes. That's fair. May I ask you on Finland. You saw some improvement in public and you've taken some nice orders. So my question is, -- should we expect this mainly to be Sweco -related, are you that you take market share? Or is it so that you have the trough in Finland now behind? And if so, can you also use some historical temporary layoffs to bring back people quite fast, if so. .

I think first of all, I think the points we have here is related to that we have taken some orders and that we are growing our order or we see orders received in the back end of this quarter, positive in Finland. I think it's too early to say if this is a start of some market expansion that we don't have any proof points of yet. And then as you said, we have this temporary layoff situation that we can maneuver. So of course, but mainly, of course, it's about making sure that we can focus on growing the order backlog continuously and working with our own efficiency and also working with recruitment ahead. So too early to tell if this is the start of something positive on the Finnish market.

Perfect. And if I may, last question from my side would be a little bit on your stronghold in data center to build special entities there. And I think you do this from your U.K. business. Can you tell us a little bit on how important this is and the trends? Is it like growing still? Or is it like flattening out? And do you work with a lot of suppliers or the names like Microsoft and others? Or is it only a few hyperscalers?

So first of all, I would say that the exposure for us is is limited by the breadth of our business. But with that said, data center is on your question, a growing area. I -- and I mean for -- in our perspective, this is a long-term trend and we work with a broad range of different stakeholder clients in this and of many reasons, I can't outline them. But -- and we work with them locally, of course, distributing the design and the resources in our different business areas. But as the clients are mostly located from the U.K., we have strong client relationships from our U.K. business, and that is the reason to why we work with leading and heading the client relationships and the projects from the Sweco U.K. mostly, we work with data centers in early planning, permitting and predesign and those kind of areas, but also with the full scope, so to say.

Thank you so much for the input and have a great summer and good luck in Q3, both of you.

Thank you, Dan. Have a nice summer.

Thank you. Your next question comes from the line of Dan Heimer from SEB.

A couple of questions from my side as well. Maybe starting off maybe starting off on Germany. If we adjust for the project adjustments last year, would you say you're around par in terms of profitability in Germany versus last year? And also if you can share a few words on the strategy on how to lift Germany towards the next level now. Maybe we can add U.K. to the mix also how to get that into more group standards in terms of margins. .