Afry AB
STO:AFRY
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So to all a warm welcome to this webcast, where we will present the first quarter report for AFRY. My name is Jonas Gustavsson, CEO of AFRY. And together with me, I also have of course Juuso Pajunen our CFO, sitting in Helsinki, and Juuso will support me with a few financial slides, as always.So again, a warm welcome to this. We will run through the presentation rather quickly, and then we will have time for any questions when we have presented a few slides to all of you.So I will start up then with the first slide, which is basically a summarizing slide where we [ actually ] -- if you look on the first quarter, we believe it's a stable result. We have delivered a margin of 8.6% EBITDA margin, compared to 9%, but you have all, I guess, noted that we had made a change in how we account for the salary costs. Adjusting for that, we would be on 9.2%. Juuso will take you through the details related to that.Sales came in basically on SEK 5 billion, compared to SEK 5.2 billion. But here, we can also adjust for both 1 working day less and also quite negative currency effect. And if you adjust for that, we would be on 0.5% growth, which I think is a step forward. We are now showing growth again. And if you compare that number, 0.5%, to Quarter 4, where we were at minus 6.5%. So clearly, we see now that AFRY is moving back to growth.And I will say that across the whole -- all divisions, we continue to see a stabilization on the market. It differs of course between different segments. And as you have seen, some of our divisions are really delivering good growth and also high EBITDA margin.I'm also happy with the fact that we have now ramped up the acquisition agenda. And so far this year, we have announced 7 acquisitions, some of them smaller, but they add up to more than SEK 200 million in addition on our revenue.So I think we are getting back on organic growth, and we are also starting now to ramp up the acquisition agenda. So there are things that we would have liked to have better, as always, but it is clearly a step in the right direction for AFRY as a whole.And looking on the market then, it's fair to say that, for sure, we are still in the effects from the pandemic, and it differs quite a lot between different countries. We have quite a big operation in Brazil. They do very good, but you know that they have a lot of fighting with the pandemic. But overall, we could also note that in the quarter we have seen an improved utilization. So I think we started a bit slower, but we also picked up a bit better in end of the year.In infrastructure, a big part of our business, continued stable demand in the transport segment. I would say that the real estate is still not back to track where we would have liked to have it.We have to take a 2-minute break because for some reason Teams have gone down. I apologize for that. And our chief technicians are trying to get Teams back on track.Okay. I think we are back with Teams, with picture and sound. So we are doing Teams but also having YouTube broadcast. And I just want to wait for a signal that this works. All right. We're back on track. And I hope that you followed me when I went through the summary and started to do a market update, saying that...For some reason, we have problem to get Teams to work. So we will now move fully over to using YouTube, and we want to have the team that was in Teams to link in on YouTube. And we will also open up for sending questions to Cathrine Sandegren, Head of Communication, and she will then read the questions, and we will answer them to our -- so that's what we need to do. And we are so sorry for this. We will just wait for people to move from Teams to following us on YouTube.Juuso, are you still there?
Yes, I am. I'm here. All working.
All right. So we are back now, and we hope that you all have joined through the YouTube link, because Teams have been very unstable for us today.So I'm going back to the summary because I was also informed that you did not hear me. So I will start and again with the fact that we see Quarter 1 as a positive start of the year, a stable result. We delivered 8.6% EBITDA margin, but we also made changes in the salary accounting. Juuso will take you through that. Adjusting for that, we would be on 9.2%.EBITDA, SEK 432 million; and sales, SEK 5 billion. This is less than last year, but we have adjusted for currency, and it's also 1 working day less this quarter. We are on adjusted organic growth of 0.5%. That number, we can compare to minus 6.5% in fourth quarter. So we clearly see a sequential improvement. We're getting back to growth.We are also ramping up the acquisition agenda. We have announced 7, so far; some of them smaller, but positioned in a way to support AFRY, also our organic growth initiatives, adding some SEK 200 million on our top line. And we start to have a good pipeline on potential acquisitions, moving forward. I'm happy with that.The market is becoming more and more stable. Of course it differs a bit, and we are still not out of the COVID, as you know. But I will say that, in general, all segments start to have a feeling of positive development where demand is getting back, maybe most of all driven from the overall industry segment.If you look on Infrastructure, still stable. But we will say real estate, the big building projects, still not back to track. So that's clearly an area where we see not as good development in the market as we would have hoped.Industrial & Digital, food and life science, we have highlighted for some quarters. Still very strong. And we can also see automotive starting to pick up, from lower levels though.Process Industries and Energy, stable and good. And I would say the hard work we have done over the last years in Energy starts to yield really good effect, and I think we have a very strong position in the evolving energy landscape. And also Process Industries, which is of course then joining forces with Pöyry, who have proven to be very stable and strong. And we have a good pipeline, also solid margin and good growth.And the Management Consulting business that we have is really strong.So there are things that we would like to have better, but all over, it is a clear step in the right direction.We are, of course, Juuso will highlight the fact that our order backlog is as strong as ever, and we are starting of course -- we are booking a lot of interest in projects, highlighting a few here. For example, the framework agreement with Vattenfall. SEK 800 million over 3 years. Very important for us. We have a good agreement in Denmark for the Danish Road Direction. And also a project in Norway, et cetera. So I think when we look on our project portfolio, big assignments or projects, it is as strong as ever.This is just highlighting the companies we have announced so far this year. And there are of course a few small ones, but starting to get hold of really interesting companies that adds on to our position then. And we have then last week, I think, announced Evolve, which is a digital company in Gothenburg that adds on to AFRY's total digital agenda.So I think we start to be happy with the pace. We are looking into interesting acquisitions. As you remember, 2019, after the acquisition of Poyry, we ramped down smaller acquisitions. 2020, of course, was all about meeting the COVID. And now we are ramping up acquisition again, which has been a part of the success story for our company. I'm really happy about that.Sustainability. It's clear that we see now in all customer segments the need for getting support to transform into sustainable solutions. We can see automotive of course going to full electrification. We can see initiatives into base industries, like steel business. So it's fair to say now that all end segments, all our clients are finding ways to transform to sustainable business models.And of course, now we have great opportunities in AFRY: 16,000 experts, and we are also now pushing a lot to make sure that we can explain how we can help our clients to become more sustainable.We are focusing a lot also to move into the EU Taxonomy. So we are working both front and back end with our sustainability agenda.We have a lot of cooperations. We announced a few weeks back that we are joining forces with Norrsken. The Gapminder is another one. We have joined the 1.5 Degree Business Playbook. We have a lot of activity in boosting diversity in AFRY because we know that a more diverse company will perform better. It's part of our culture.So only in my 4 years in AFRY, I see now that also in the area of sustainability we are moving in all areas, and I'm happy about that.Before I leave over to Juuso, also last year we announced that we will ramp up our digital agenda. We have a long tradition of building digital competence in AFRY. But last year, we announced that we are also forming AFRY X as an accelerator. Together with all divisions and business units, we will join together, triple, that's our ambition, to triple our digital revenue in the next 5 years.And we have now formed AFRY X. We are starting to bring people from all our divisions into AFRY X, together with Solutions, and we are also recruiting from outside. And we announced that we have hired Per Kristian Egseth, coming from Hitachi, who has a long experience from both IBM and Hitachi in formulating and selling digital solutions, and we're very happy about that.Last Friday, we had a launch of our digital agenda, together with Norrsken, and we also highlighted a few solutions, and we had a good discussion with [indiscernible] Vattenfall, as an example, who are of course looking to transform part of their business into -- they have a big need for digital transformation in each of those companies.So I'm happy what we have been doing. And of course, now we will push for a new business model, recurring revenue, on top of pushing digitalization across the whole AFRY.So I would say sustainability and digitalization, 2 big things going across the full AFRY as a company.With that, Juuso, I will leave it to you to take us through the financial slides, and I will click on your mark, starting with the net sales.
Thank you, Jonas. So when we talk about net sales development, we ended up pretty much SEK 5 billion mark on the revenues. That amounts to minus 4.9% as a total growth.But then if we look a bit further, we had quite significant FX impact rising, and then we had the 1 calendar day less. So all in all, we can say that adjusted organic growth was positive 0.5 percentage points, which I'm really happy about.At the same time, this is also excluding the M&A impact. We have roughly 0.3 percentage points on the M&A-driven growth. So as you may have noticed, many of those announced M&As have happened at the latter part of the quarter or even after the quarter. So those start to contribute us only at a later stage once we have started to consolidate them.On the FX component then, it was SEK 208 million [indiscernible] negative. And our biggest exposures are in euro, Swiss francs, Norwegian krone, British pound and Brazilian real. And with that type of portfolio, you can expect still in the second quarter, especially, the negative FX impact to continue. And then at the latter part of the year in 2020, we started to see stabilization on the levels where we are today on those parts.It is very good to note that we have very strong development, especially in Process Industries, Energy and Management Consulting, when we look about the adjusted organic growth, but also very consistent coming back into Industrial & Digital Solutions, with the star in there being the food and life sciences growing heavily.We still are burdened with the real estate, especially the commercial part of that one, and then automotive. But in all of those segments, we have seen also sequential improvement during the quarter. So March was looking better than January and February, and so on. So we are seeing positive on that side, too.At the same time, if we are looking at our order stock and order intake, they are continued to be on stable levels, and we are happy to go forward with such an order stock.So then let's talk about EBITDA if you can, Jonas, change the slides. On the EBITDA, basically, we amounted to SEK 432 million, compared to previous year, SEK 474 million.It has been impacted by the change of salary accounting method. I will come back at a later stage on that one a bit what it means. But if we would adjust that SEK 28 million, we would have been on a margin level at 9.2%; so SEK 460 million to a SEK 5 billion revenue. And that would have been better than previous year, where we marked 9%.So all in all, I would say that from an efficiency perspective we have been faring quite well, especially when you compare delivering improved margins on a materially pre-COVID quarter to now, a middle-COVID or hopefully late-stage of COVID quarter, with 1 working day less.And if we are looking on the underlying results, 4 out of 5 divisions are delivering clear underlying improvements, while then 1, being Infra, is rather stable if we adjust for the salary impact.So all in all, we can say that our operational performance is quite good.And obviously, then we see that we have a positive impact from the efficiency programs continued and cost savings arising both from measures we have taken, but then also underlying COVID impacts, no travel and such.So all in all, I would say that our EBITDA development, the 8.6%, is quite solid in the market conditions we are living today.Going forward, a couple of words on the salary accounting methodology. So just to clarify what does it mean, we have now gone live with our new ERP system in parts of the world, and Sweden is the first place to be impacted on that one. At the same time, we have improved our back end in both HR and CRM systems. But basically, we have now capability to record salaries when they occur on a more easier manner than earlier.So what we are basically doing differently compared to earlier, earlier if February had 19 working days and March had 23 working days, in February we had 19 working days work on salaries and, March, 23 working-day salaries. So February salaries were smaller, and March salaries were higher during that period.And now as most of our employees, north of 90%, are in fixed monthly salaries, we are showing the same salary amount both in February and March. And that basically means that when we have a quarter like first one, which is shorter than the average quarter during the year, it has a negative impact. Second quarter has 66 working days. So it has -- sorry, 60 working days, or 60-point-some working days, but it still has the same amount of salaries as in Quarter 3 when we have 66 working days. And that creates volatility in the salaries. But in the full year basis, it is 0. So it is how we [ phase ] the monthly salaries during the year.And once again, to repeat, if we would have not taken this improvement in the salary accounting methodology, we would have recorded SEK 28 million better EBITDA in Q1 compared to old methodology. So main of this one is coming from Sweden, and that continues to impact then in Q3 and Q4 also.If we talk about the systems, I'm really happy to tell you a bit about the system landscape upgrade that is progressing according to plan. So already in 2018, there was an initial decision to improve the system landscape and start working on it. And then the Poyry merger came in, in 2019, which basically put the system upgrade process and project into a assessment period. And after being reassessed, we have then gone forward with the whole integrated system landscape, where ERP is one component, but then we have a global CRM system, global employee systems, and also some other components in the background.We have now gone live globally in the CRM and in HR systems during Q4 2020, Q1 '21, and we are happy on that development. And now we have also started the ERP system go live entity by entity.So far, everything has gone as planned, and we are very happy with this progress and, at the same time, looking forward for the next steps. So, so far, so good and definitely seeing improvements throughout our organization.Then talking about the EBITDA bridge. So basically, if we compare to previous year, we have the calendar impact, approximately 9 hours. Then you can evaluate a bit what it means. You take our number of FTEs, you take our utilization, you take whatever you guess for our fee per hour, but you would end up into having an impact somewhere around SEK 70 million on that. So it is a material impact on the top line and then obviously flowing to bottom line.Then the salary accounting change means that the full calendar impact is always making our top line volatile, and it's not adjusted on the cost level.If we look then a bit on divisions, Infrastructure is facing the issues on the dampened real estate market.Industrial & Digital Solutions, actually quite a good performance, remembering that the automotive issues started to materially impact only fourth quarter. So it was, like, 27, 28, 29 of March, previous year, when the bigger impact started to be visible.Process Industries, Energy, Management Consulting, very solid development despite being impacted by the negative translation differences. Those ones amounted on group level a total SEK 25 million downwards. I need to remind that it's a translation difference. So it had -- we are hedging the projects. But when you translate euro revenues and euro profits into Swedish krona, they are translated on a smaller nominal amount when March 2020 euro was roughly SEK 11-point-some, and today it's rather SEK 10.1. So it comes at an impact.If we then go to the next slide and look a bit deeper on growth and profitability per division, first, we have the very solid performance what comes to Process Industries, Energy, Management Consulting. All 3 in double-digit profitability, all 3 on solid adjusted organic growth numbers: 7% and 7.1% in Process Industries and Energy, and Management Consulting, 16.6%.Then profitability is, respectively, Energy, 10.7%; Management Consulting, 14.6%; and Process Industries, 13.1%. I would say that this is a very solid performance compared to previous year and, once again, remembering with the translation differences, with 1 working day less. So very happy on that one.Industrial & Digital Solutions delivering 7.3%, compared to 7.7% previous year, being also impacted by the salary accounting. So actually, they are quite strong compared to previous year, once again remembering the 1 working day less. Minus 1.2% adjusted organic growth pre COVID/late COVID. So also in the very solid consistent sequential improvement quarter-by-quarter.Then we have Infrastructure, minus 1.0% in adjusted organic growth, being impacted by especially the commercial real estate segment. Profitability, 7.6%, compared to 9.1% previous year. This is something that has room to improve. But once again, if we look those numbers a bit deeper, we take the salary accounting impact, roughly SEK 13 million in Infrastructure. We take that one into account and the 1 working day less, it is still a solid performance, but not maybe a great performance.And all of that combined then amounts to the group performance, which once again I would say that it is, given the market conditions, quite okay.So then if we talk about a couple of words on the balance sheet, we continue to have strong liquidity. We recorded net debt of SEK 2.9 billion, compared to SEK 2.8 billion previous quarter or SEK 4.4 billion a year ago. So we are quite steady, 1.7x net debt to EBITDA when taking the items affecting comparability into account.We saw positive operating cash flow, but there has been normal seasonality in net working capital. So we have tied up a bit more capital. And especially when you compare to previous year Q1, where we released net working capital, it has been not as strong but still, I would say, quite positive quarter in total.It is in our business quite typical that in normal seasonality you tie net working capital in first quarter and then you in the second half start to release it, with being peaking in the fourth quarter.So all in all, solid balance sheet. Happy to take the M&As, like we have now announced 7, and continue forward with this balance sheet, looking for the growth.With these words, I would hand it over back to you, Jonas.
Thank you so much, Juuso, for a very crisp and clear.So I will just summarize this one, and then we will go to questions. And I hope you have taken the chance then to send questions to Cathrine Sandegren and she will read it, and we will do our utmost to answer your questions.But looking forward and of course where we are now, we will push for growth. It's clear that we have growth opportunities across the whole company, organic, but also supported now from the acquisitions, to integrate them in a good way. And together with the acquired companies, we will push even more then. And also keep good pace on the M&A agenda. Juuso showed you we have room on the balance sheet to continue to be offensive on M&As.And I think the digital agenda. Over the last years, there has been a continuous digitalization across all segments, also on our client side. So clearly, digitalization is nothing new. But we can also see now with the transition in many segments with new business model, new offering, there is an increased need of digitalization, also in some of the segments being a bit more later in the whole digitalization process.Clearly, some segments, like automotive and banking sector, are very advanced, but utilities and the Process Industries more in the beginning, and that's also where we have a deep industrial knowledge. So increase our digital agenda, using our vertical or sector knowledge together, we believe is something we will push even more, moving forward.And to scale AFRY X, also finding new business models, being even more professional in developing platform systems where we can use our expertise to support our clients in improving their operations. That's what we are looking for.Sustainability. We have said this several times. Both in the back end, EU Taxonomy, but also in the front end, to be even more sharp how we can help our clients becoming more sustainable.Juuso mentioned that over the last year we have been working quite heavily in improving our system landscape. And we took decisions already in 2018. And then, of course, we joined forces with Poyry. But we are super happy and I'm impressed what our organization have been able to cope with at the same time as the pandemic, at the same time as integrating Poyry, to integrate and put new systems in operations: HR system, state-of-the-art; a new global CRM system that will improve our work together with the clients, in operation. And as Juuso said, we are now step-by-step starting to take the ERP system in operations. So it puts a lot of pressure on us. But so far, I think the organization have been able to do this in a fantastic good way.And then with all of that, we will continue to push for growth but also keep a good eye on, I would say, the operational platform. We have been working quite heavily, also 2020, to optimize and find a cost-effective platform. And we mentioned also last year, now when we are getting back to growth we need to make sure that we now can get the full benefit from growth and not growing our cost base in the same pace as our top line. And that's of course something that we will now look very closely into. But clearly, using the momentum, the positive momentum we have now across AFRY to focus a lot on going back to growth. And quarter 1 was one step in the right direction.So with that said, I will now apologize again for Teams. I guess Teams, the system Teams, is as tired as we are on having Teams meetings, but we have now tried to maneuver with YouTube.And I think, Cathrine, maybe leaving it to you, that you have a few questions that you picked up that we will try to answer.
Yes. Thank you, Jonas. So if you have any questions, please send me an e-mail, on cathrine.sandegren@afry.com.And we have the first 4 questions actually from, let me see, from Johan Sunden. So the first one, Why was group cost SEK 36 million higher in Q1 than previous year?
Juuso, did you pick up that? I think that's a question that fits well to your profile.
Good. Thank you, Johan. I think that's a valid and good question. When we look about the cost structure, in general, we have been progressing a lot. So if we take the total impact, it's highly positive.At the same time, when we are working with the group common, that is always a residual and coming from a certain level of platform. So today, for example, our last 12 months revenue is SEK 18.8 billion, give or take, and that doesn't satisfy our ambitions on that level. And we have set our group cost structure from a perspective where we can allocate when we grow further.So this is, more or less, a residual, and I wouldn't take it as an indication on how we look in total. So going forward, I would say that we have room to improve there and the further we go to growth, we need to remember that how we have raised our efficiency program is that we want to have a continuous margin improvement, meaning that the top line needs to grow quicker than the expenses grow, and that will bring the margin improvement.Obviously, then, if we would not see top line growth, then we have our ways to go deeper into our platform. And I think we have shown that we have all the capability to do that one [indiscernible].
Thank you. So that was question number one. Cathrine?
And the next one. Why did we see so big swings in the net working capital during the quarter?
Juuso?
There is, basically, if we take a couple of different views, you always need to put the cash generation into a wider perspective than 1 quarter. Within 1 quarter, you are highly impacted on how quickly your clients pay their invoices, whether the last day of the month hits a weekday or weekend, and so on. So looking 1 quarter's cash flow is a bit shortsighted. You need to always look a longer perspective.Last year, in Q1, we were benefiting from 2019 sluggish net working capital development. And in 2020, in general, we were able to release net working capital, partly because of our own actions and partly because of the decline in revenues. Now we are converting back to growth, which starts to tie a bit net working capital.And then the second part is just normal seasonality. Sometimes you have a strong Q4, like we had previous year, and then you have a bit of lash back in Q1.So I wouldn't draw too many conclusions. I would keep my eye on 12-, 18-, 24-months rolling EBITDA, rolling net working capital. And I would just make sure that it is aligned with the development in total.So that is inherent in our business, have a bit volatility in the net working capital.
Thanks, Juuso. Question number three, Cathrine?
And it's regarding the Process Industries segment. So Q1 is usually a quarter with lower margins for the Process Industries segment. But still, you managed to report margins about 13% in the segment, same as in Q4 2020. How much of that improvement can be extrapolated?
I can start there and maybe to make it quick. I think we have a fantastic position in Process Industries, with the combined AF and Poyry. We talked about that over the last 2 years.We also see that the bioindustry segments, as such, are tremendously interesting.We are very strong in CapEx, but we are also improving our operational focus, meaning that besides big CapEx projects we will also be a partner for our clients in operation improvement.If you then add digitalization and sustainability, I think Process Industries, as such, where they also include mining and metals, it's a very interesting segment to be in.So I think we can just leave it with that. And then, of course, we will push Nic Oksanen and the whole division to continue to perform high margins. And if you go back even to the joining forces with Poyry, it's been very stable and solid, and we will continue to push on high levels.Next question?
And the final question from Johan Sunden, it's regarding the Energy segment. You have earlier mentioned the EBITDA margin in Energy segment should be 8% to 10%. For 2 quarters in a row, you have been about 10%. Have you reached a new level? Or should that still return to 8% to 10%?
Well, as you know then, I would say that segments related to CapEx projects and, especially, Energy, with a big transition going on, I think it's fair to say that we are still keeping the 8% to 10%.But we have also said internally, I know Richard Pinnock and the guys are pushing a lot, that with the interesting development in Energy right now there are tremendously interesting business opportunities. And I think we are well positioned to grasp some of them. And I think the team have worked a lot with efficiency and also the position on the end market.So let's see if we can push them to stay on over 10%, but I think it's fair to say that we still have that 8% to 10% margin corridor. But let's see. I don't know what you say, Juuso, but they have started in a very good way, internal performance, but also the market sentiment.
Yes, I would say that is absolutely correct. At the same time, we need to remember in Energy that it is a large project business and sometimes you have several large projects at a very hectic stage at the same time, and that can give you for momentary excess profitability. So this is something that is good to note, and we currently see no [indiscernible] occurring, especially this type of a situation.That also, in a way, when the previous question was on Process Industries, that sometimes also in there you have multiple large projects in a hectic implementation phase, and that creates a bit of the volatility in the profitability.So jumping to 2 big conclusions from one quarter, I would avoid that, both in Process Industries and Energy.
I fully agree with you, Juuso, but I also believe that if you look on over now many quarters, there is a strong stability, and I think that's good. And then you will always have some variations on the margins. But if you look on our Energy position now in AFRY versus 3 years back, it's a different game. So we are very happy about that.
Absolutely, very happy. And saying that we have 8% to 10% corridor, like you said, and then upgrading that to higher numbers would merit a couple of more data points.
We'll get back to that, hopefully.Okay. Cathrine, more questions?
There are actually no further questions.
There are no further questions. It probably means that we have been very clear, as always. I'm again apologizing for the Teams not supporting us, this presentation. I hope you were able to come through using the YouTube broadcast, and we will try to improve for the next quarter.But with that, I would like to thank all of you for taking the time to listen to us, and looking forward to meet you soon again. Thank you so much.