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Edited Transcript of SWEC B.ST earnings conference call or presentation 12-Feb-20 8:00am GMT

Q4 2019 Sweco AB (publ) Earnings Call

Stockholm Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Sweco AB (publ) earnings conference call or presentation Wednesday, February 12, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Åsa Bergman

Sweco AB (publ) - President, CEO & Director

* Katarina Grönwall

Sweco AB (publ) - Chief Communications Officer

* Olof Stålnacke

Sweco AB (publ) - CFO

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Conference Call Participants

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* Dan Johansson

SEB, Research Division - Equity Research Analyst

* Erik Elander

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Johan Dahl

Danske Bank Markets Equity Research - Analyst

* Ola Soedermark

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Katarina Grönwall, Sweco AB (publ) - Chief Communications Officer [1]

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Good morning, everyone, and you are very welcome to Sweco and the presentation of our year-end report for 2019.

Today, we have the opportunity to listen to our CEO, Åsa Bergman; and our CFO, Olof Stålnacke. And after their presentations, you have the opportunity to ask questions.

So I think we should get started. Åsa, please.

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [2]

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Thank you, Katarina, and welcome, everyone, to this Q4 presentation of Sweco. I will start by giving you an overview of the company of today. Sweco is today Europe's leading engineering and architectural consultancy. We operate on 8 core markets and we are executing our business in more than 70 countries. We are at year-end more than 17,000 employees, meaning that last year, we grow the number of FTEs, or employees, with 1,500 people. We have now a net sales exceeding SEK 20 billion and a margin of 9.1%.

Last year was a good year for Sweco, and we achieved lot. And I will come back to this later as well as the focus going forward. But let us first go through the fourth quarter. So the fourth quarter was another solid quarter with profitable growth. We delivered an organic growth of 5% and acquired growth adding 5% to that. The EBITA is SEK 532 million, that means an increase of 13% compared with last year adjusted for calendar.

In January, we also announced a strategic acquisition. We signed and closed the acquisition of Talboom Group. The company is experts in the fields of pharmaceutical, biotech and the infrastructure. I will get back to that acquisition more in detail later in this presentation.

The trends and the market situation is in line with previous quarters. So to summarize Q4, we delivered a solid quarter with continued profitable growth.

To the right, on the picture, you see a project that we won during Q4. It's a light rail line that connects eastern part of Helsinki to downtown, a new track of 10 kilometers. And this project shows how we are part of the ongoing transformation into sustainable transportation and sustainable urban planning.

Before we dive into Q4 more in detail, I would like to summarize 2019. So 2019 is Sweco's best year to date. We delivered solid growth of 10%, with organic growth of 5%. We reached a new milestone when we exceeded SEK 20 billion on our net sales. We improved EBITA with 15%, and we made a clear margin improvement. We have a strong financial position, which ensures that we can continue to act on opportunities on the market. Based on Sweco's performance, 2019 and our strong financial position, the Board of Directors has proposed an increase of dividend of SEK 6.2, and this is in line with our dividend policy.

Let us now take a closer look at the quarter, starting with the growth. We see that we delivered a solid organic growth of 5%. I'm really pleased to see that, this quarter, all business areas contributed to the growth. Germany and Central Europe and Belgium delivered strong organic growth, while Sweden, Norway and Finland delivered solid organic growth. The main driver in this quarter is in line with previous quarter. We improved our prices, we continue to hire new experts and our growth is supported by a stable order backlog. We also see that the orders received is in line with our expectations.

Let us now move over to the results for the quarter. Adjusted for calendar, EBITA increased with 13% or SEK 64 million. As you can see, 7 out of 8 business areas had a positive EBITA development compared to last year. Sweden, Finland and Belgium continued to deliver strong margins, while Norway and the Netherlands delivered solid improvements compared with last year.

Looking at Denmark. You see that there is a major improvement. Please note that there is a large portion of project adjustments in this improvement. In U.K., you can also see a clear improvement compared to Q4 last year. This is due to the continued positive effect of the MLM acquisition, but also, that some large public previous proposed contracts that I talked about last year now have been signed and we have been starting working with those contracts.

Looking at Germany and Central Europe. The performance in the quarter is not satisfactory. We continue to deliver good organic growth in Germany, and we see good market opportunities. However, there is work for us to do, and we are continuously implementing the Sweco model in Germany. But this will take some time and it's not a quick fix, but we are taking steps in the right direction.

So altogether, I'm really pleased to summarize that we delivered yet another solid quarter.

So let me now walk you through the acquisition that we recently announced. On 16th of January, we announced and closed the acquisition of Talboom Group. This gives Sweco Belgium a leading position in the area of pharmaceutical and also strengthen our business infrastructure. The outlook for the pharmaceutical market in Europe is healthy. And Belgium is the core market for pharmaceutical R&D. This offers an interesting market opportunity for us as we deliver a range of services in clean room technology, process knowledge in the cell industry's safety regulations.

So to give you some more details about the acquisition. This company was found in 1969. They have 110 employees. And 2018, the revenue was EUR 12.2 million. This acquisition is in line with our strategy to acquire businesses that strengthen our position in segments and in markets, while clearly matching our culture and values at the same time. The acquisition was closed 16th of January and now is part of Sweco, and the integration of the company is going well according to plan.

Looking at the market. It remains fairly unchanged with last quarter. The demand for our services, as I talked about before, is driven by strong underlying trends. And one example of this is how we see that the transformation of the energy market and also the electrification of cities and societies across Europe is driving demand for our services in the energy segment.

Looking at the other segments. We see continued good demand in infrastructure, water and industry. The building sector remains divided with an overall good demand in real estate, while the residential segment is -- remains weak in several countries.

And with that, I will hand over to Olof to walk you through the numbers.

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Olof Stålnacke, Sweco AB (publ) - CFO [3]

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Thank you, Åsa, and good morning, everyone. Let's take a closer look at the numbers then. Net sales in the fourth quarter is SEK 5.7 billion, taking full year net sales to SEK 20.6 billion. We see an organic growth of around 5%, including a negative calendar effect from 4 fewer hours in the quarter. M&A adds another 5%. And with positive currency effects, total growth is 11% in the quarter.

EBITA, as Åsa said, is SEK 532 million in the quarter. That's an improvement of SEK 64 million and an EBITA growth of 13%, excluding the negative calendar effect. And the calendar effect of minus SEK 25 million primarily affected Sweden in the quarter.

Looking then at the EBITA development by business area. The main drivers in the quarter are Denmark and U.K. In both countries, we see higher average fees and positive project adjustments. And in U.K., the development is also supported by the MLM acquisition. We see improvements also in Sweden, Norway, Netherlands, Belgium and Finland. In Finland, despite the fact that we had a 3-day industry-wide strike in December. The only country with a negative EBITA development, as Åsa has already talked about, is Germany. And as previous quarters, this is due to negative project adjustments.

Looking at the same summary for the full year. Calendar adjusted, we have an EBITA improvement in the year of close to SEK 250 million. Of that, more than half comes from Finland and Belgium. In both countries, we show strong performance on all dimensions, higher average fees, FTE growth and billing ratio. Sweden, Norway, Denmark, Netherlands and the U.K. also show solid improvement. Sweden maintains the margin at 11.5%, and the 4 other markets all improved their margins.

Germany, again, is an exception. Top line growth is strong in Germany, but EBITA development is unsatisfactory.

Where does this then take us if you look at the longer term? Over the 10 last years, we have increased net sales by 16% annually and EBITA by 17% annually. This means that net sales is close to 4x what it was in 2010 and EBITA is more than 4x what it was in 2010.

Back to Q4 then and the cash flow. It's a seasonally strong quarter. So we see a significant working capital release taking the quarterly operating cash flow to over SEK 1 billion and the full year operating cash flow to SEK 2.3 billion. And with that cash flow, net debt is SEK 2.1 billion at year-end, which means that we have financed close to SEK 1 billion in M&A, to a large extent from cash. Leverage is 1, and we have SEK 2.7 billion of available funds, giving significant firepower for continued M&A.

And then finally, the dividend, as Åsa said, the proposal to the AGM is a dividend of SEK 6.20, which is a continuation of the historical trend of around 12% EPS growth, and it's a payout ratio of around 53%.

And with that, back to you, Åsa.

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [4]

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Thank you, Olof. Let me conclude then. Q4 is another solid quarter with continued profitable growth. All business areas show positive organic growth. And we see strengthened margins across the group. We have also a strong financial position, and we see an overall good demand for our services and opportunities on the markets that we operate.

Before we end this presentation, I would like to share my thoughts on 2019 and our priorities and focus going forward.

So '19 is Sweco's best year so far. We reached another milestone, exceeding SEK 20 billion in net sales. We delivered solid organic growth, in line with our historical average. And we also added 3% acquired growth from strategic acquisitions. I'm also pleased to see that we continue to deliver across business areas. We improved our result with 15% and have clear margin improvements. One market that I would like to highlight is Belgium, where we see continued growth and strong margins. It clearly shows that the way that we work actually gives result and that we can deliver strong margins and result outside the Nordics.

Another highlight of '19 are our strategic acquisitions. MLM in U.K., imp in Germany and also the rail design part of NRC Group in Finland and Sweden. They are all good examples of how we continue to strengthen our position on core markets and segments and how we also can integrate and get result out of new units into Sweco. We also keep talking -- taking important steps forward when it comes to implementing the Sweco model. And again, Belgium is a good example of this, where we see that when we work with strong client focus, having the best people in place, high internal efficiency and working in a decentralized way, it really shows good results.

I have mentioned before that demand for our services is strongly supported by the big trends in the society. A good example of this is that, last year, Sweco was appointed from the Danish Parliament on how to set a baseline and increase awareness in Denmark around the efforts how Denmark should work to actually -- work according to the United Nations Sustainable Development Goals, the SDGs. So with a good year behind us and with a strong financial position, the Board proposed a dividend of SEK 6.2 per share.

So to summarize, we closed another good year for Sweco, and I am pleased to say that we have taken several steps in line with our strategy and in line with our plans. We also have a very clear route ahead of us. And I would like to end this presentation with that.

So our focus for 2020 and beyond is to continue to stay relevant and develop sustainable solutions together with our clients. Our societies, cities and industries are going through major transformations. Our focus is to grow on our 8 core markets and to be part of the consolidation of these markets to really secure the long-term development of Sweco. Our goal is to obtain top 3 positions on all those markets, and that is to ensure that we are the top choice for the clients and for the employees on those markets. Going forward, we'll continue to execute on our strategy and implement the Sweco model on all our markets.

So with that said, Katarina?

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Questions and Answers

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Katarina Grönwall, Sweco AB (publ) - Chief Communications Officer [1]

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Yes. Thank you, Åsa, and thank you, Olof. Now we will open up for questions. And I think we will begin with questions in the room. So do we have any questions in the room? Yes, please go ahead. We will get the microphone here. Thank you.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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Ola Soedermark, Kepler Cheuvreux. You mentioned that you have some project adjustments in Denmark, U.K. and also in Germany. Can you quantify them and talk a little bit about them?

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Olof Stålnacke, Sweco AB (publ) - CFO [3]

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Well, it's -- we don't give details on the project adjustment. But it's fair to say that of the improvement in both Denmark and U.K., around half is from positive project adjustments. And in Germany, again, the -- in sort of half or, I would say, rather, the full amount of the negative development is from project adjustments.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [4]

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Okay. That's very helpful. And in U.K., you also highlighted that you have seen that the projects seem to coming along because you have said before that you have quite a standstill in large projects. So this is a trend that we can expect to continue?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [5]

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I would say that, last year, we experienced the uncertainty from Brexit, and we talked about that we have a sense that there is a weakness when it comes to decision-making. And those postponed contracts was won, but they didn't start those contracts. But we now have seen that parts of those contracts are signed and we start working on them. So we see some signs that is positive. But it's also so that the Brexit uncertainty is still there. So we see some signs, but it's too early to say. But we have started to work on those contracts, yes.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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And then just out of curiosity, the high-speed train line that [Mr. Jan] seems to push through in the U.K., is it something you are -- is it important for you in the U.K. or is it not in your space?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [7]

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It's not -- we work with all kinds of infrastructure projects. So if there will be projects, and we -- then we can take on those and design those. But it's also so that we are focusing on a broad portfolio of clients and a broad portfolio of projects. So it's not that we are -- they're not that important for us. So it's something that really affects us in that sense.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [8]

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Okay. So it's not really intriguing, in other words, for you.

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Katarina Grönwall, Sweco AB (publ) - Chief Communications Officer [9]

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Yes. We have more questions from the room? Please go ahead.

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Dan Johansson, SEB, Research Division - Equity Research Analyst [10]

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Dan Johansson at SEB. Three questions from my side. I'll start with a question on organic growth. How much in the quarter was fee development? And how much was full-time employees? Was it about evenly split? Or...

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [11]

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Half-half.

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Olof Stålnacke, Sweco AB (publ) - CFO [12]

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It's about half-half. It's the same as in Q3. Yes.

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Dan Johansson, SEB, Research Division - Equity Research Analyst [13]

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Second question on Germany. I mean, you had quite nice growth for a couple of quarters now, but profitability is a bit below where you want to be, of course. Going into 2020, will you have more emphasis on improving the margin? Or we should expect some slower growth? Or could you elaborate a little bit on that?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [14]

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So we are focusing on growth where we have healthy businesses. So we grow on the healthy platform of the business. And then we need to work with our plans of really implementing the operating model in those divisions that doesn't work the way we want them to work. That is our plans.

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Dan Johansson, SEB, Research Division - Equity Research Analyst [15]

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Maybe last question from my side. On the outlook, it's basically stable conditions, same outlook as you had in the previous quarters. Is there any sort of nuances? Do you see the residential segments perhaps improving compared to Q3? Or I guess, it's down year-over-year, of course. But is there any delta there?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [16]

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I would say that the market and the demand looks fairly unchanged. There might be like some small changes in some segments, but that we are so broad and we operate in so broad perspective, also when it comes to different segments, it doesn't affect us quarter-to-quarter that much. But of course, we stay very close to the forecast on the market and the dialogue in the market. But so far, our order backlog is stable. And the orders received is growing in line with our expectations.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [17]

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Erik Elander from Handelsbanken. So I have 3 questions regarding organic growth in the different business areas. So first of all, why did the number of employees decrease in Denmark? Was it layoffs from your side? Or was it consultants ending voluntarily?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [18]

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It's a mix. So it -- we would -- it's a mix of that. We always ensure that we actually handle our business so we have the right competence in place. It's also so that the market circumstances also pushed pressure on personnel turnover. I would like to see more growth when it comes to number of FTEs in Denmark. So we're focusing heavily on getting that into place.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [19]

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Regarding organic growth in the Netherlands. You're stating in the report here that the market is very good. But the organic growth is still quite weak, I mean, compared to the other parts of the business. Why is that?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [20]

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I would say that this is also linked to how we operate in the history. So the Sweco model and the way we would like to work is that we like to be very strong local, have strong client relationships with our clients. But we are on a journey here where we need to continue to strengthen our client relationships and really to broaden the portfolio of our projects because that gives us organic growth.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [21]

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Okay. Very clear. And lastly, regarding organic growth in Central Europe and Germany, it was very strong in Q4 now. What is behind this? Are you focusing a lot on recruitment in just this business area? Or what's happening here?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [22]

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It's a mix. Positive fee development. We have imp in the portfolio, the company that we acquired in the energy sector. And also new employees in those divisions that is having a healthy profit.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [23]

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So last question from me then. I mean, Germany and Central Europe was the only business area which decreased EBITA in the quarter due to these large project adjustments. Can you go into more details? What are those about since they are affecting the profit in the business areas so much?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [24]

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I think sometimes in our business what happens is that you see units where you actually don't -- we don't have control in detail of some projects or we actually end up in a difficult situation. And this is strongly linked in some parts of the German business to certain parts of it and certain contracts. And it's about how we execute the project. It's about how we follow up. It's about what kind of contract we have in that portfolio. And now we are implementing the way we would like to work in details in those units. That is kind of the explanation.

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Katarina Grönwall, Sweco AB (publ) - Chief Communications Officer [25]

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Thank you. And if we do not have more questions in the room, we open up for questions coming in on the telephone. Do we have any with us?

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Operator [26]

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(Operator Instructions)

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Katarina Grönwall, Sweco AB (publ) - Chief Communications Officer [27]

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Yes. So I know we have a question coming in. So please go ahead. Hello?

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [28]

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Yes. Can you hear me?

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Katarina Grönwall, Sweco AB (publ) - Chief Communications Officer [29]

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Not yet, but we're waiting for you.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [30]

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Okay. Johan Dahl here, Danske. Just wondering on the topic of acquisitions. You concluded 3% growth from acquisitions in last year. I think you had 4% for 2020. Do you see any reason, Åsa, to build some capabilities on acquisitions, change processes to accelerate this?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [31]

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So we have a strong focus on acquisitions. And as I said before, we have a pipe and we work with strong focus on this in all business areas. But again, it's about timing, and it takes some time. But we have the capability and we have the processes in place, so, no, I think we are in good shape.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [32]

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Okay. On project adjustments, just assuming reversal of this -- of the impact on earnings. We talked in Q3 that it was a tailwind in 2019. Should we assume that this is slightly negative in 2020, all other things equal?

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Olof Stålnacke, Sweco AB (publ) - CFO [33]

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You mean project adjustments in total?

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [34]

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Correct. Yes.

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Olof Stålnacke, Sweco AB (publ) - CFO [35]

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No, I think you should assume that we -- I mean a neutral effect from that because, I mean, we will have some quarters with positive and some with negative, I think, just as we've had historically. And I think you can see Germany, where we talk about negative project adjustments. You can also see Belgium and Finland with very strong processes in those areas, which have almost no negative project adjustments.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [36]

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Okay. And just finally, on net recruitment in the group. What sort of signal are you sending to the divisions? Is it full steam ahead in terms of net recruitment or anything else? And also on pricing, am I correct in seeing a sort of a declining tailwind from net prices in Q4? Or is that incorrect?

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [37]

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First of all, we are continuously focusing hiring new competence. It might be so that it might be -- and it's also that in some segments, we might not go full speed, but that's about where we want to grow. So we are focusing on continuously growing our number of employees. And when it comes to price development, we see -- as I said, the drivers and the trend we see in Q4 is continuous price development and we continue to focus on that going into 2020.

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Olof Stålnacke, Sweco AB (publ) - CFO [38]

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And the price effect is roughly the same as previous quarters. So no major change there.

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Operator [39]

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There are no further questions at the time -- at this time. Please continue.

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Katarina Grönwall, Sweco AB (publ) - Chief Communications Officer [40]

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Okay. Thank you very much. So with that, I think we will end today. Thank you, Åsa, and thank you, Olof. And thank you, everyone, for joining. Have a good day. Thank you.

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Åsa Bergman, Sweco AB (publ) - President, CEO & Director [41]

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Thank you.

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Operator [42]

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Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.