Afry AB

STO:AFRY

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the ÅF B first quarter financial report conference call. Today's conference is being recorded. At this time, I would like to hand the conference over to Jonas Gustavsson, CEO. Please go ahead.

[Jonas Gustavsson, President & CEO]

All right. Hello. Jonas Gustavsson here, CEO, and I'm sitting here with Stefan Johansson, CFO, and we will take you through the interim report for the first quarter 2018. So again, welcome to this conference call. So I'll start off with the first summary slide of the first quarter and it's been -- as you see, it's been -- improved result in the continuous favorable market. And what we have seen is that we have improved our margins -- profit margin and it's safe to say that we have good order pipeline in all divisions. So our sales ended up at SEK 3.4 billion, which was up plus 4.6% compared to the last year and EBITA ended up at SEK 325 million, which was such an improvement of 13.5% compared to the same quarter last year. The EBITA margin ended up at 9.5% and that should be compared to 8.8% last year, at the same period, which was an improvement. So overall, improved results and in a continuous favorable market so the [indiscernible] continued to be strong. We have seen in the quarter that it is a challenge to drive organic growth due to the fact that it's a high competition for the best engineers. So I will say that we could have had some stronger growth if we would have find the right people actually towards that. Even though we are ranked at the top 3 companies in Sweden, we are fighting today to get the best engineers to [ work here ] but in general, solid results on the first quarter this year. We are an engineering design company. This is 2017 numbers where you see the share between each of our 4 divisions that we are organized from January 1. It's worth mentioning that we have now passed 10,000 employees. For the first time, we have been close to that number for quite a while. But now, we're actually more than 10,000. Very talented engineers in the [ West-Link ]. 1/3 of our business, 1/3, approximately to the public sector and 2/3 to the private sector. And as you know, we have acquired [indiscernible] portfolio, which we see as a great asset moving into many of the new assignments, which actually goes across many different competent areas and divisions. The new organization that's effective January 1 is reflective on this slide where we have 4 divisions: infrastructure, energy, industry and digital solutions. And in each division, then, we have organized ourselves in business areas. So for example, in infrastructure, we have 5 business areas with full P&L and the same is valid for the other 4 -- 3 divisions then. It's up to 21 business areas. So I think we have clarified our organization where each of the business areas have a clear focus on their respective target markets. So that's the structure we are operating as of January 1. We see a continued high demand related to many of the global trends, and we have used these in our strategic work last year and we see that if you look at smart [indiscernible] and the need for smart infrastructure solutions, it's increasing the mobility question with electrification and connectivity. This is one of the areas where we are working. The same as valid for the industrial digitalization and also, the energy market that is changing. So these 4 kind of summarizes some of these trends that really affect and support the ÅF journey going forward. The market in quarter 1, we see the overall market is normally unchanged compared to the previous quarter, meaning that it is still a strong market. It is a strong market. Industrial market is strong and most of the sectors we see a continuing high rate of investments in the Infrastructure market in Sweden and Norway but actually, I will say, Scandinavian, and what we have seen and connected to that is that we see a higher volume of small- and medium-sized projects and, I think, Infrastructure Division has been very good in changing a bit the operation to operate in that kind of landscape. The energy market, which is stabilized but still weak in Europe and overall conversion to fossil-free production and increased need for energy storage and smart grids, of course, is a very interesting area even though a lot of that growth is, I would say, ahead of us. Still the energy market is a bit, I would say, it's not growing that much but we see more stabilization on the [ lower level ]. And finally, the digitalization trend drives, of course, increasing demand in all markets and all segments. We have during quarter 1 often quite -- of course, a lot of new assignments on [indiscernible]. This is the selection of them. We had one big order for automation for Henriksdals purification plant, Stockholm Vatten, around SEK 200 million. So it's a good order for us that will give us a good workload for quite some time in some of our industrial areas. And we also worked out this morning in a separate press release that we have actually booked this -- the biggest order so far in the history of ÅF [indiscernible]. And this is an expansion of the world’s largest dissolving pulp mill in South Africa. The company's [indiscernible] and estimated order value for ÅF is around SEK 175 million. It's a joint venture that we're doing together and another player and we're very happy for that. And South Africa has been one of those home markets for ÅF in the area of pulp paper. So this has been a very good work, and I will say we saw some result of the new strategic direction. And so this is hopefully a beginning of new segment where we can be a bit more [indiscernible]. So we're very proud of that order. We have also extended our strategic partnership with Electrolux. This is a business where we actually take over a team of engineer from Electrolux, and we are doing business with them moving forward. It's an interesting assignment, together with a good industrial player in Sweden. A pre-study expansion of Arlanda Terminal 5 is another project. Green profile design assignment of a new biomass plant in Hamburg. This is also related to a new upscale -- consistent [indiscernible] or design company or architecture company in Denmark. So they have a very interesting profile into architecture design into industrial and infrastructure building, among others. Our [sixth] company has received a good order to a bridge in Switzerland, and we also booked a new hydro plant in the South Asia. I will say that our order pipeline remains strong. Acquisition we mentioned that during 2017, we have slowed down number of acquisition a bit related to the fact that we went through a strategic direction and also, we needed and wanted to strengthen the balance sheet, but I'll say now, we are clear with the strategic direction, and we will now -- I would say increase our activities into acquisitions. Still we did 1 one good one here in Gottlieb Paludan Architects in Denmark, SEK 140 million in revenue and 2 small ones on top of that. And again, we will increase the activity level related to acquisitions moving forward.So now, I leave over to Stefan who also want to take you through slides, related all to finance and the number. So Stefan, please?

[Stefan Johansson, CFO & Head of Investor Relations]

Thank you, Jonas. If you look at our net sales in the quarter, it amounted to SEK 3.4 billion, which means a growth rate of 4.6%. 4.3% were related to acquisitions and, as Jonas mentioned, we have slowed down the pace in acquisitions, but the pipeline is growing. So in the coming years, we hopefully have -- we will be able to put a higher number in this area. The reported organic growth was 0.3% but if we adjust for a calendar effect, which means 1 less working day compared to quarter-on-quarter, last year. And with currency effects, the growth rate was 2%. And that is not adjusted for the Easter effect in 2017. The Easter was falling partly in March whereas in 2017, 2 weeks fell in -- during April. So all in all, rather okay organic growth even though we are not meeting our targets. Infrastructure is the main contributor to the growth. We'll come back to each of the divisions. And as Jonas has also mentioned, the main -- one of the reason for the slightly lower organic growth is the supply change. The demand is on the market, but the supply chain is our challenge at the moment.Margin wise, we are pleased to report 9.5% EBITA margin, an increase versus last year. And Infra especially increased -- especially Infra is increasing the margin but 3 out of 4 divisions has a high margin 2018 compared to last year's. And we also see the savings from the restructuring program are kicking in. 2/3 of the program has now been translated into cash and into EBITA profits. Cash flow wise, we had a good cash flow during the quarter. Good cash conversion rates, and so we ended up quarter over -- a net debt position of SEK 2.5 billion, which means a key ratio of 2.2x to be compared on the target of 2.5x. So we do have a strong balance sheet, and now, we do have ammunition to continue our [indiscernible] growth.

[Jonas Gustavsson, President & CEO]

All right. Thank you, Stefan. Then I will take you through short plans on each of the divisions, starting with the Infrastructure and, as you have seen, delivered a strong growth and also increased profitability. So we're very pleased with the performance of Infrastructure. And we said that the investment continues to be strong in both Norway and Sweden as our 2 key countries but also in other areas like Switzerland where we have a big operation is also doing very well. We also acquired [indiscernible] company, Gottlieb Paludan Architects in Denmark. [indiscernible] had a good total growth of 10.8% and again, ended up [indiscernible] [ 11.3% ]. So that's a strong performance in a continuous good market. Industry division, which was actually one of the division step did not [indiscernible] the same margin level compared to last year, 8.8%, but [indiscernible] 0.2%. [indiscernible]. We have seen a stable profitability. We have had some slow growth due to resources. We see, of course, that many of our customers are doing very well. I mean, the climate in Sweden and the near area is very strong. And many of our customers are hiring people. So it's quite hard to get the best engineers but -- and we see again then that the demand side, as Stefan mentioned, is still very strong. We also feel that they have a strong order pipeline in the industry and hopefully, as we mentioned, some assignments that they have taken in South Africa. The corporation with Electrolux also shows that there is a good market on the Industry side. So it's a solid result in the Industry division. We could wish more for the growth side, which we are working very hard. And again, all the business for us. So this is the new and the reservation where we have taken and focusing on all the debt and [indiscernible]. We could see that the whole European markets is still weak. It is marked that this is still in a change mode from the big scale [indiscernible] to a much smaller scale with a lot of [indiscernible] and a lot of storage solutions with nuclear decommissioning so -- and we are following that, and we are setting up our new structure to meet that market. But in this transition phase, it's still kind of a weak market even though it's flattening out. We are taking some good orders on a more international base. One example here in Turkey. Another is a hydro power plant in Asia. So you could see that if we adjust for the working base, we ended up on a flat growth, will not shrink which, I think, is, for the first time for quite some time that this business is not shrinking. And we also had an improvement on the margins. We ended up on an EBITA of 4% which, compared to the same quarter last year, with a comparable unit of 3.4%. So still more to do but I think we are moving in the right direction in the energy division. And finally, on digital. Of course, you can say that all our customers and clients in all industrial work [close] segments are wanting to have more digital support. But also -- so here which, of course, let's say, there's a big fight for getting the best competent into our company. But this demand is very high, and then one of this cooperation with Electrolux is related to the digital division. We ended up with 10.2% EBITA margin. It's a strong solid margin but again, then, we are not growing as we want. But we also have had some change of client structures. We had one client that would use a bit consulting part of Sweden. But we are working very hard to get strength in the growth in this site. It's a very interesting area for us, the digital area, of course now. Then up to the summary of the divisions, as we have talked about, where also infrastructure is the one division that sticks out with very good numbers in all areas, actually. And again, we see a continued good demand basically for most of the segments related to [indiscernible]. Just look at this one, the fact that we -- last year, we released our revised structures. We had a vision that we are working very much with and that gives us [ new work ] but also related to our customers, providing leading solutions for generations to come. It's been received very well in our company and we are now executing the strategy of making future, and I think it gives us a lot of fuel in discussions, internal but also with our clients and the fact that we hear some that said, company creating sustainable engineering and design solutions. And I see this as excellent base we'll continue to develop moving forward. And then the strategy we have talked about quite some time, now we are executing the work in how do we grow our business, the value creation, the fact that we are step by step shifting towards higher values but also how can we further develop our service business down. We still have a big portion of professional service, it's one of our key things. Operations, how to operate a company, as we have mentioned, the fact that we are working on executing our restructuring program but how can we optimize our sourcing. Of course, for us to find new ways to use [up for] sourcing then there is a challenge to get capacity in-house is important for us. And then, of course, best-in-class people. We are a company that is highly rated among engineers and we need to continue to be one of the best companies to work with and I think we have an excellent platform. And then if you look on the business model, we have kind of formulated like that. We have one big leg related to service and another, which is moving into projects. And today, we can see that when we look deep into our numbers, 60% of the business is related to projects and some 40% to service. And you can see on the service side, there is different ways to develop that offer further. Professional service, which is more the [indiscernible] consultants we are doing. We see more and more demand on team delivery. Then we can see that it can move. Aftermarket is one area that we have not penetrated solely and also, to cooperate [ centralized ] to our clients. On the right side, projects. The time and materials projects, fixed price and even turnkey projects now. So to climb the value chain and add more value to our clients, to have increased scalability and delivery, we leverage from our extensive corporate portfolio across different divisions. We don't see a big risk increase because we will balance that and reduce risk in some other areas. We are doing a lot of projects today. It's more about where would you like to go in to, turnkey projects and bigger assignments.

[Stefan Johansson, CFO & Head of Investor Relations]

And we will claim that we have good experience and very good [indiscernible] projects. And so even so we are mentioning in our report that we had some -- had one hiccup. In general, we do have more positive variances in our projects than negatives. So we have a long experience of doing projects. So we feel that long term, that will contribute to the margin and to the top line.

[Jonas Gustavsson, President & CEO]

And we are currently also rolling out state-of-the-art project model that we will use and are using for -- in other projects. We will also strengthen our tool base. So I see AF as a company who knows doing projects and we will become even more professional because we believe that is one way we differentiate ourselves towards small consulting companies that can offer a lot of [articles] out there.Still, we will have a big leg into the service model and we believe that there are a lot of different ways to further develop that business. So I think it's -- and of course, then we are looking for interesting top end projects to say, how can we conceptualize and drive solutions. But today, it's 60-40. So that's ongoing and we are running the rollout in our company in a structured way, where the first step was to engage and involve a lot of people. We are looking very much how can we further drive cross-work solutions in business and team. Smart cities is one very interesting area. A few of the [ finals ] that we have been taken has been related to the fact that there is more and more cooperating between divisions and we will also step-by-step strengthen the tools to our different managers, not the least related to how we drive projects. So I'm very proud at the fact that we are a people business. We have done quite some changes, but we are delivering a strong quarter 1. Also, and up here we have done some changes and are operating in that new organization. So the platform that we have created, made a strong vision, value and mission. The growth drivers are clear there, and then we have our 4 pillars in the strategy. It's a good foundation for -- continue to develop ÅF down. And sustainability is something that we see is more and more integrated part of our business. We see that our clients and customers are extremely interested to understand how can our competence support them in developing new sustainable solutions, if it's in the R&D side but also related to their operation. And so we're very happy to have that DNA in us. We have ourselves develop different tools that we are supporting and helping with. We have a sustainable business performance index that we are actually working, SBPI. And I also would like to mention one initiative that ÅF have been very successful for quite some years that we have assigned persons, diversity coaches who works full-time in how can we, at ÅF, bring in new immigrated engineers and we have today more than 70 engineers at that has been coming to Sweden and that's been quite some success and I'm very proud of the fact that we take that responsibility, but it also is driving business for ÅF. So that's something that we should be very proud of and I think it's a part of the DNA on all [ ÅF staff ]. Again, we are ranked as a top player. We are in this -- from young Sweden professionals that are doing engineering studies. Here, we are competing with 2 other good companies, Ikea and Google. I think you heard about them, too. We are on second place in this one. So this is very important for us and we will continue to strengthen our brand. The targets you know about, and as Stefan said, we have a slower organic growth in quarter 1. We are working very hard on that and we will give up acquired growth because we feel now that the balance sheet is also very solid. So summary then. Repeating what I already said, we came up at plus 4.6% on the net sales, strengthened the EBITA and also the margin, which we are proud of. And in general, the market is good and divisions are doing very well. We are plotting to get the best talents to us, and we continue to deliver on our strategic agenda. So with that said, I will leave over to you, operator, any questions that you might have.

[Operator]

[Operator Instructions] We'll now take our first question from Johan Dahl from SEB.

[Johan Dahl, Analyst]

I was wondering, could -- do you have a number for the sick leave in the first quarter was a problem for you due to the [indiscernible]?

[Jonas Gustavsson, President & CEO]

Yes. You can say that we were affected as, I think, the most Swedish companies. I think, we're affect to bit higher feeling from the flu in quarter 1 actually. And I heard that many in the business that relate to people had an effect on that. Clearly, we could see that we had -- of course, a lot of people that were home due to sick leave in quarter 1 but we do not have a number that we would like to disclose at this time. But I can assure you, it didn't help our number of hours in the first quarter. It had some effect. I can't say exactly how much it is -- how much it was but it was clearly affecting us a bit.

[Johan Dahl, Analyst]

Okay. In this environment you're describing with strong demand and lack of resource, what sort of impact is that having on your organization? And we see that organic growth is weak but what other things are you seeing out there that's a result of this?

[Jonas Gustavsson, President & CEO]

Well, I think, we are working on 2 sides, actually one is to continue to be a very effective company to start to work with. But we are also working very hard to make sure that we are very effective for them to stay in. We have a lot of things that we can improve internally because we have a lot of interesting assignments. I believe that the new strategy that we have rolled out will be one of the best tools because, with that, we will have more and more interesting assignments and crossover projects. But in general, I would say that the ambition and the dynamic in the company is very good. So I don't see an immediate effect related to that more than its effect that we have a more competitive environment to hire people, not the least because many of our clients, especially the industrial companies, are also very keen on hiring people in the different areas. If you go back like -- I'm coming from [indiscernible] myself, and for managers we have the -- as you know that's a tough environment. But I mean, over the last 1.5, 2 years, it's full steam ahead so -- but I think we will need to be even better in hiring and finding the best people, and we need to invest to keep the best people in AF by having the most interesting assignments.

[Johan Dahl, Analyst]

All right. But it doesn't seem farfetched that you can build the order book more and perhaps they're a bit picky on which orders to take. But that doesn't appear to be on the priority.

[Jonas Gustavsson, President & CEO]

Of course, I will say in infrastructure -- I will say that we see that -- I could -- I would say that a bit on the improvements that we clearly see in the infrastructure is related to the fact that we are also turning down orders. So yes, that's one thing. But then, of course, we are now, as you see on this South Africa project, which is an order that we would not have been taking a couple of years ago. So but clearly, we see in some of the segments, we are able to be more picky on the orders we are saying yes to. As all industries, when you have a strong position in the niche, you can be picky. But then, of course, we also have areas where we are not so strong.

[Stefan Johansson, CFO & Head of Investor Relations]

And Johan, one of the reason why we have been running at close to 10% margin even historically is that we are saying no to orders that are not having decent margins. We are not hunting top line for -- as a full priority. And that's not being you, Johan. We are very -- we'll continue to be picky.

[Johan Dahl, Analyst]

Okay, were you happy with the billing ratio in Q1? Anything, in particular that impacted that number?

[Stefan Johansson, CFO & Head of Investor Relations]

No, we have a stable billing ratio, yes.

[Operator]

We'll now take the next question from Predrag Savinovic from Nordea.

[Predrag Savinovic, Analyst of Consumer Goods]

Could you comment a bit on the labor side and could labor shortage hamper your organic growth like it has done for some of your peers at least in last year?

[Jonas Gustavsson, President & CEO]

Yes. As we said then that we're seeing that if you look especially digital solution, which is one of the, I will say, very interesting area where you see a higher demand from industrial customers but also government and public data security and so on, there is a high demand from all actors. But, of course, mainly are investing in digital solutions. So here we see a competitive environment to get the best engineers. I think we can further look on how can we attract the best people. But again, we also are working very hard, which is a part of the new strategy, how do we make sure that we -- that we keep people staying at AF and see AF as being a great company with a long career and having a lot of different assignments. So that's -- then we have the quarter 1 that's also affected. We had an Easter effect also that affected us. Our people took out some extra day, and we had the flu season. So of course, it was a quarter where we had some effects. On top of that, we had a high market. And so still coming out on the organic growth that was [indiscernible] infrastructure up to 4%, 5%. So it's not that it's been very bad. It's more the effect that we've seen that, with the high demand, we should -- could have delivered more.

[Predrag Savinovic, Analyst of Consumer Goods]

And then you also mentioned -- a follow-up on that last comment as well, you mentioned that the order pipeline is good in all divisions, but could you maybe quantify this in any way?

[Jonas Gustavsson, President & CEO]

We are actually looking on how we are quantifying. Of course, we can see the fixed orders, who booked an order, as we went out this morning with the -- to South Africa. And we have order already. And then we have more and more frame agreement. We talked about Electrolux. So of course, we see more and more that we are able to follow the order backlog. But then, of course, the part of our business is service related. But at this point, we are not able to disclose on the numbers. But in general, we feel that we are strengthening the order backlog, so to say.

[Stefan Johansson, CFO & Head of Investor Relations]

That's right. And you have to remember that our average project is between SEK 300,000 and SEK 400,000, so I mean -- but so the backlog is very short. But what we can see is that the -- after having -- doing the reorganization, especially in the industry where we focus on each industry, we see that the business area managers are now loading their backlogs and loading their prospects' backlog. So we can clearly see that indications of an increased demand and backlogs. We are not releasing that number. That's what I was trying to say.

[Predrag Savinovic, Analyst of Consumer Goods]

Yes. And not considering the cost savings program that you say has come pretty far with, what would the EBITA or the EBITA margin be at then in order to get us for the profitability?

[Stefan Johansson, CFO & Head of Investor Relations]

What we have stated is that we have benefited from 2/3 of the program. 2/3 of the program has been implemented and reported into the EBITA. And the rest will kick in during Q2 and minor part could come in Q3 as well.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. And the final one from me. You state that a driving force is increased demand for smart solutions and smart cities. You also mentioned that in the call. Could you just add some more flavor, some examples to this so we better understand the -- what kind of project this is?

[Jonas Gustavsson, President & CEO]

Well, I think to be perfectly honest, I would say all the projects that we are involved in is sizeable. There is a discussion from also the clients about how can we make this a state-of-the-art business. So if you look on example the new automation order for Henriksdais purification plant in Stockholm water which is a project ongoing for many years, I will say that is a digital or a digital solution. There is a lot of automation and smartness in that solution. So -- and then of course, when you go into a city, if you look on the infrastructure side, we have small projects with smart solutions. But what we see more and more is larger interest in how can you connect different industry discipline to solve some of the information that is around. But all projects that we are delivering, we are always confronted with how can you make it more sustainable and how can we deliver a higher value, how can I use more of your knowledge into digital. So I can say all assignments today have that flavor in it. And we will be -- smart city is one concept, as a company that is growing over many years, we believe that ÅF have a strong position because maybe that we are one of the few who knows a lot of different disciplines. So Stefan has said we will be a bit more vocal how we can play in that segment when it comes to multidisciplinary solutions into different kinds of [indiscernible].

[Predrag Savinovic, Analyst of Consumer Goods]

And just maybe a final one here. You said you wanted to increase the pace on acquisitive growth. Could you give us some more hints on the magnitude here and what we should expect in terms of added sales for the next year?

[Jonas Gustavsson, President & CEO]

No, I think it's very difficult to do that. And the only thing we said is that you cannot foresee that 2016 there was a kind of a -- there was a lot of acquisitions that but a bit of pressure on the balance sheet. Now we slowed down a bit. We are down a few. But we see that the balance sheet is stronger. And we are increasing our own pace and looking on both bolt-on and as we said, we will also always look for platform acquisitions that are on the larger scale. Of course, you need to be a bit selective because we know, with today's business climate, there's a quite high value for many of the companies. But clearly, our ambition is to increase organic growth. We want to be very selective and buy companies that really adds value and actually supports our journey on the strategic side. But I can't and I don't want to disclose on the numbers because as you can see on our platform -- there are also -- they can happen, but they cannot happen. The only thing I can say is that we are driving a lot of ongoing discussions. So then we and myself is increasing the focus in that area after spending quite some time in looking how can we set up our structure.

[Operator]

The next question comes from Viktor Lindeberg from Carnegie.

[Viktor Lindeberg, Financial Analyst]

Maybe just wondering if you can comment on the acquired growth contribution in the quarter. I was a bit behind on my numbers. I think you added close to SEK 140 million in revenue from acquisitions. And we know the bigger ones being Eitech, Koncept Stockholm, Gottlieb and inUse, so 4 fairly significant ones. But is there another or a couple of smaller companies adding more beyond that? Or maybe I have missed one -- one bigger one.

[Jonas Gustavsson, President & CEO]

Well, Viktor, it's hard to get into the details and compare your calculation with ours at a phone call. So we have a number of SEK 140 million as the current growth rate. And I think we need to take a look at and compare our numbers after this call, if it's okay with you.

[Viktor Lindeberg, Financial Analyst]

All right. Yes, that's fine. Then wondering about the slide where you provided the projects relative to the service model. And can you just help us sort out what kind of average size of these projects that you have in the project service delivery versus the service model delivery? I know the average for the group is just below 500,000.

[Stefan Johansson, CFO & Head of Investor Relations]

Yes, and that's what we say is that we tend to talk a lot about the big 200 million projects or so on. But of course, as Stefan said, the average size on our project is -- are at 200,0000 to 300,000 maybe then because, in buildings, I think we have a number of 10,000 projects per year. So I'm a strong believer that we will well manage not increase the risks. But well-managed, we will increase the value to our client. And it's everything from a small local project towards these bigger complex projects and we use the total power of AF then. And as you can see, even before I joined, before we started to talk about this, AF always talked about we want to increase the value chain and climb the value chain because that's really how we can use AF in a much more clear way than a local consultant company. Now we believe that we can also develop the service model firmly. We see an increased need of peer delivery, for example, where we are not just, so to say, delivering one person making -- sitting at e client's office and helping them but we actually deliver a full team. That's something that we will further explore because there you have another leverage on your pricing model and also how you can get some more leverage into that. Aftermarket, now there, so I believe that we -- to merge the market, we also will be a bit more precise in the shares between the different worlds. But as this goes, a continued analyzing our own business model and developing this further. But today, we can say that 40% is related to service and 60% is related to project. And then we see effects of the infrastructure that priority of project is time, a material project meaning not 6, 5 projects so with very low rates. And then we have of course a share when we take on [assumed] risk with turnkey assignments. But this is really a way forward. And I would not today say that one is maybe better than the other. Clearly, what I believe is that both the service model and the project model, we can increase the value. And by that [indiscernible] get away from the fact that we are so hindered from organic growth due to capacity shortage. Now I believe that offshore sourcing is some -- one area where AF -- many companies looked at this as low cost sourcing. But now with the cost range we have on the market, it will not just be local sourcing. It's another way to get capacity. So I also will say that we will increase the pace in setting up more clearly structure for offshore sourcing because it's not just to cost margin out, it will also be capacity support. But we will get back to you guys being more and more clear about this model that we have shown here. And we are using it a lot internally. So one, the roll out of our staff is that each unit, even if they are on the service level or on the project model, thinks on how can we further develop ourselves and increase the value that we deliver to our customers. So a very interesting model to work with both internally and in discussions with our customers.

[Viktor Lindeberg, Financial Analyst]

Yes. That's quite clear. And then thinking about this model and also relating to what you've been commenting on the shortage on finding the right people. I mean, going back to the Epsilon acquisition, along with that came this network of professionals that you could sort of utilize almost like sub suppliers to you in the delivery. Is this something that you utilize today? Is it something that you scrapped because it was not a core element of the new strategy? Or is it something...

[Jonas Gustavsson, President & CEO]

No, we use it. And it is an integrated part of our model and you're absolutely clear that it's a great model, and we are using our assumptions at work all the time. But of course, as a part of the strategy, we have been more clear how and where to use it because that's coming from the industry when you have the same, you're using a sub supplier network, you do not want to end up that you are depending in core areas on sub suppliers. So we need to be sure when do we hire an expertise in what area and when do we use it more for capacity. And that's what we have been so -- we are absolutely clear on using that but maybe we are step-by-step becoming more clear how and when to use it. But it's an absolutely integrated part of our model today too.

[Stefan Johansson, CFO & Head of Investor Relations]

And a very important part, so we are utilizing that.

[Viktor Lindeberg, Financial Analyst]

Got it. Then on -- maybe a question for you, Stefan, more on cost savings. The run rate you're mentioning is just above SEK 60 million and SEK 16 million in the quarter now. Is that an average number or the run rate by the end of the quarter? And then looking into Q2, maybe you start off at a higher level than SEK 16 million actually or...

[Stefan Johansson, CFO & Head of Investor Relations]

That's an average number for the quarter. So you're right. We are -- the run rate is higher when we are go in today -- go in Q2.

[Viktor Lindeberg, Financial Analyst]

Got it. And can you comment on the distribution. I think you've done that in the past, but maybe can you help us out on where have you seen the last realization so far in the divisions?

[Stefan Johansson, CFO & Head of Investor Relations]

Yes, I would say that energy division has concluded the program. So that's done. And the rest of the division is in progress.

[Operator]

[Operator Instructions] We'll now take our next question from Ola Soedermark from Kepler Cheuvreux.

[Ola Soedermark, Equity Research Analyst]

I have a short follow-up on the Industry Division. You mentioned that you have some impairment -- project impairments. Is it possible to quantify them? Because I can't really see you have done it.

[Stefan Johansson, CFO & Head of Investor Relations]

No, we don't. I mean we don't quantify that. But we normally don't, I will say, blame bad project for lowering our margins. But in this case, we did an acquisition and acquired a project related to that in the past, in the very past, so that has not been running according to estimates and core costs. But all in all, our positive variance is ahead of the negatives. But we would like -- we wanted to comment on that because we are happy with the margins in the division. But we are stating that we are expecting more. And they could have been higher if not for that budget.

[Ola Soedermark, Equity Research Analyst]

So one way to think about it is had it been really material, then they had to quantify it. So it's not really material, but it's worth the highlight, so it's about SEK 5 million or so?

[Stefan Johansson, CFO & Head of Investor Relations]

We don't quantify the amount, but it's not material. If it's not good -- very material then we have -- have we been forced to quantify.

[Jonas Gustavsson, President & CEO]

Yes, Stefan is right. But at the same time it's a project that is kind of affecting a bit. We have to fight with it. But you are right, it's not material on that.

[Stefan Johansson, CFO & Head of Investor Relations]

And one and another negative side is good -- as we are there are a number of resources -- we are [dining] up resources into that project so we're also losing out slightly on the top line. Because of resources have been used in other projects. Because the monitor and then our challenge is the supply chain.

[Jonas Gustavsson, President & CEO]

So you could put it that we'd rather use our people, good projects than bad projects.

[Ola Soedermark, Equity Research Analyst]

So it's kind of a way to say that you have an improvement potential after this?

[Stefan Johansson, CFO & Head of Investor Relations]

Correct.

[Operator]

We'll now take our next question from Erik Elander from Handelsbanken.

[Erik Elander, Research Analyst]

So obviously, we have talked about the staff shortage being quite obvious here for consultancy companies. But we are talking about it in a quite negative term. I mean, would it be possible to compensate the volume part of the organic growth by increasing prices instead because the demand for the customer is still quite high? I mean so the organic mix growth will be different between volume and price.

[Jonas Gustavsson, President & CEO]

I think you're right. I mean normally it is like that. If the demand is higher than the capacity, you get an increase. But you could say that we talked a bit about the infrastructure that is doing very well. Here, you can say that the infrastructure is also managing I would say a bit operated change handling more small and medium-sized project. We used to have -- gone there [indiscernible] Stockholm to really large projects that we are able to continue to have a lot of people in. So in one way we have been able to change the business model into the market demand, which is very good at the same time increasing our [market]. So I can say there you can mostly see effects on the fact that we are doing exactly as you say. Then we have also areas where we have a lower position where we maybe are not able to do it even though the market is good. And then there's a drag in how do we see ourselves and so on. But step by step, we will -- even highlighted that as a part of our strategy, to be more clear on pricing. How can we, in these times, be more clear on where do we say no to orders. And as you know, the AF model, which is very good, is a very decentralized model. But when it comes to pricing, I think, we have also some room to improve moving forward. We are on top of it on all the projects that we are booking, the sizable project that we have looked on, I can tell you we are very much on top of it. But of course, when you look on all this, we talked about tens of thousands of projects in one of the business areas, of course. Here, it will take some time before we maybe are able to implement that. But you're absolutely right. I think it's one of the potential to have moving forward.

[Erik Elander, Research Analyst]

Okay, great. So just talking about the impairments as well within the industry division. Is this something we're going -- we can expect to see also in the coming quarters? The impairment continues, in other words.

[Stefan Johansson, CFO & Head of Investor Relations]

We will -- it's a project that contributes -- that are not contributing, I will say, to the margin. And the project will be running -- and the plan is to conclude the project during Q2.

[Erik Elander, Research Analyst]

Okay. But it will still -- this project...

[Stefan Johansson, CFO & Head of Investor Relations]

It's an individual project that will be finalized -- estimated to be finalized during Q2. So Q2 will also be impacted.

[Erik Elander, Research Analyst]

Okay. But because this was the main reason for the margin decline within the industry, right?

[Stefan Johansson, CFO & Head of Investor Relations]

Well, I mean, there are a number of reasons, ups and downs, but we will -- we wanted to highlight this one, yes.

[Erik Elander, Research Analyst]

Yes, okay. Perfect. So I also had a question regarding your corporate costs because it has been fluctuating quite much during the past quarters to restructurings in line with the new strategy, and so on. In this quarter, you have SEK 10 million, so a run rate of SEK 40 million per year. Is this a good estimate also for the quarters going forward or how should you look at the corporate cost?

[Stefan Johansson, CFO & Head of Investor Relations]

That's maybe a little bit too less. If you will compare with 2017, I think you'll get a good guidance. Out of the corporate cost 2017, 90 was related to the restructuring program. So how -- my estimate is that we will be in line with 2017.

[Erik Elander, Research Analyst]

Okay. So if we just go back to project versus the services, what is the margin difference for selling project versus services? And how do you see this mix changing going forward, like the coming 2 years or something?

[Jonas Gustavsson, President & CEO]

Well, I think a corresponding move up in the chain and take on, if I must say, higher risk, you sort of also have a higher margin and you're compensated for that. So at the same time, I see us becoming better and better in this year I've been in the company to develop our service model. So I see more and more. I came from the industry. Since I have a view on the project, delivered a turnkey automated robot line, front line, SEK 100 million, I really can see the value. But I also see now that the service that we are delivering, especially when you look into teams, if you add an aftermarket, 24/7 support, and so on, it's also high value to many clients. If you add a bit, you could get sales on top of that. So clearly, we see projects when we take it to 15-plus percent margin, but I also see that we can further develop our service model. So I can't give you a number. What I can say is that I believe, both the service and the project business can be improved when we are becoming more professional to add more value because end of the day, the way to improve margin is -- the way we can add more value to our customers and get away from a cost-plus model. When we talk about salary cost and plus with our clients, that's [where] negotiation position, you can have them. But when we can talk about the real added value that we deliver, then it's a different position. So let us get back to that when we meet, and we can further elaborate on potential margin increase related to the 2 different business models.

[Erik Elander, Research Analyst]

Okay. And also, just as a last question regarding staff turnover. I guess it's around 15% right now, but you talked about, when you implemented the new strategy, that you wanted people to stay more or longer in AF. Have you seen -- or maybe it's too short of a time to comment on that, but have you seen any changes in personnel turnover since you implemented the new strategy as of January 1, '18?

[Jonas Gustavsson, President & CEO]

At this time, I will say that we are basically 3 months, a quarter into the new strategy and new organization. At the same time, we have a higher external market than we've ever seen before. So what happens after that, very difficult to see. We are not seeing a super pickup on the turnover, which I'm good -- very happy with. So with all the changes we have done internally in the people business, we have been able to keep good track on our business, delivering to our customers with some quiet changes. So I think that's an evidence that people are very supportive and very curious on what this journey will lead to. So me, meeting a lot of our employees, I see that they have a good spectrum. But then, the market is tougher now than half a year ago. I think there's a higher demand for in the near resources now than it's ever been before for a long, long period. But I feel optimistic. And I believe, that we, if anything, will improve AF and make it an even more interesting company to work in. I mean, we are more, for example -- I'll give you an example, we have had very clear career models for managers, of course. We start to be very clear also on project career models. And we will further also look into that area especially, meaning that when you start at AF and you want to continue there, especially in some areas, how can we make sure that these people also see a possibility to increase their confidence level but also have a career path in that area. So we are looking in many different areas to become an even more interesting company to stay at also.

[Operator]

As there are no further questions, I will hand the call back over to your hosts.

[Jonas Gustavsson, President & CEO]

Okay. So with that said, I would like to thank you all for calling in, and I wish you a continued excellent day in sunny Stockholm where finally the Spring has arrived. So thank you and looking forward to meet you and hear you soon again. Thank you very much.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.