Afry AB
STO:AFRY
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Afry AB
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So then I would like to welcome all of you to this webcast presentation from Afry. We will present First Quarter Report. My name is Jonas Gustavsson, CEO. I have Juuso Pajunen who is actually here in Stockholm.
Yes, hello. Nice to meet you all.
So we will give you -- take you through a few slides initially and then of course, having time for questions that you might have. So I will start then to frame a bit on the quarter. Before you have seen the numbers, but just to give you a summary from our side.
And I guess there will be question about the demand, but when we look on where we are positioned and mainly also driven from the industrial side, we see a solid demand and of course we see a lot of transformation on the industrial side. New segments evolving, then there are segments of course with all the investment that will be done. I think the industrial transformation is really interesting and we are well positioned and here we see a solid demand.
I will say also that the infrastructure has been a solid demand in the quarter. We delivered 13.4% total growth, ending up at SEK 5.7 billion roughly, which is from yesterday note, from a company perspective, the highest we ever had. This was equal to 3.3% adjusted organic growth and after the calendar effects and clearly we would have liked to have more. But from a total top line perspective, it's been a solid quarter.
If you look on the result, I would say starting 4 divisions and we will look on that report at actually a year-on-year higher EBITA. The EBITA amounted to 8.3%, the margin, and that was SEK 472 million, last year, April 6. I will say that the quarter from a performance was a step in the right direction. We are not yet on the level that we expect from ourselves. And we have in our plan where the cost program is one plan, but we're also working in other areas. So I will say quarter one has been a step in the right direction for Afry, but not yet on the level that we expect.
And then coming back to the operational part. We have launched that cost program that we also presented during the fourth quarter presentation. And we have not taken the one-off of SEK 100 million and we are executing on that plan. I will say that we saw some small effects from that in the first quarter, but the large effect from the cost program will actually gradually come during the second quarter and we have said that the full run rate of that will come in the second quarter year and we have one slide on that.
We have also launched Afry X as a new division. We really believe in our -- that we can be analytically there in digitalization. And we have a strong service business that we will grow and strengthen and then we have this evolving software business to complement. So Afry X is now operating as a new division. It's been some work to set it up. But here we will push, push, push both organically, but also looking for acquisitions. So again, I just want to say one step in the right direction operationally, but not yet on the level that we expect from ourselves.
All right. A few things on the market. I mean, there is -- needless to say there's a lot of uncertainty also in the market. I mean, we have the war in Ukraine that actually started during the quarter. We have supply chain disruptions. We have inflation, we have interest rates, we have cost increases, so for sure there's a lot of uncertainty. So at the same time, we see that there is an underlying a strong demand for this transformation where the industrial segments actually are leading. So when you look on the segments, again, strong demand on the industrial side and also solid demand on the infrastructure side. Then, of course we get a lot of questions related to salary inflation, how do you see the future. We need to gain for new opportunities that we see and we will and we have done that. I think we will see that order stock for Afry is now stronger than ever.
At the same time, of course we keep a good eye on the macro what is happening because for sure there are some signs of, varying signs, but we don't really know how it will play out. It's a complex world, but we have seen down throughout the first quarter that the underlying demand is strong. Competition for employees is getting higher. We need to look on attrition. So -- but again summarizing the first quarter with all the worries we have on the macro, there is an underlying demand, but we keep good track on where it might go then.
Of course we have brought in a lot of new projects in the quarter. These are [indiscernible]. The first one is where we will part of the building up the Norrbotnia line. So it's an interesting rail project. OKG in Oskarshamn is actually using all the Afry Real Digital Twin, so that goes directly a Afry X. It's a really cool product. And then in Boliden we are the main engineering partner for the expansion of the zinc smelter in Norway. So these are 3 projects that also kind of mirror projects that we are becoming more ambitious moving forward to bring into Afry.
Then again just looking on the divisions then. If you look -- if you start with the infrastructure that has been on the agenda for quite some time, I will say that the quarter one was one step in the right direction for infrastructure. I know that the team have a plan where we are working in many areas and we have communicated that. The margin ended up with 8.2% last year, it was 7.7%. So we have a -- we have seen improvements in the business.
The new organization and operational focus we have starts to deal some effects. At the same time we would love to have a strong organic growth. Sick leave was an issue for us and we just look on the numbers, we had the high level of sick leave in the beginning of the quarter. It really improved throughout the quarter of course and we closed March in a very strong note, but that affected us and also infrastructure.
And then if you look on industrial divisions, I will say all of them gains from a strong market. If you look on industry and digital, strong growth and improving margins. So for example, the demand or for software engineering service is really improving. And here we are focusing a lot.
Process industry dropped a little on the margin, mainly driven from the fact that we have to use more sub-consultant just to handle the volume. They grow strong and I will say the margin is on a high level. Annually, last year we had the big nuclear project. So that's the negative growth, but the EBITA margin we keep on high level. And of course now the underlying demand for energy business, we believe, will increase and we will push to get on growth.
Afry X, a new division and of course we are looking on that from 2 perspective. The cash business has actually generated 10.9% margin and then we have the investments that we are doing in driving that software driven business up. So they are 2 parts of the Afry X. And finally, the management consulting strong. So -- and I want to say that, again, not yet from a group where we want to be, but for sure quarter one was a step in the right direction and we have now a plan that we will execute on.
So with that I will leave it to Juuso to take a bit on the financial slides. Juuso?
Thank you, Jonas. So basically we first talk -- start talking about revenue development, Jonas quite well covered it on the divisional part. But we have reported a handsome 13.4% total growth of which then organic growth was 4.5% and the adjusted organic growth was 3.3%. The adjusted organic growth was hampered by the sickness leaves during the quarter that's -- that have been following geographically, the pandemic development and has been impacting especially the Nordics.
If we then think about overall growth and where we are improving, it's definitely the industrial offering where we have seen solid growth figures throughout our both geographies and segments. Infrastructure and Afry X have been reporting lower organic growth. Both of them have been impacted by the sickness leaves and to a certain degree also the industrial offerings, but the heavier weight has been in the infrastructure and Afry X that have a higher proportion of the revenue within the Nordic countries.
Energy Division is showing a negative growth due to a large nuclear project being in heavy execution phase previous year. What is then good to note is that we have a strong order stock, it continues to be strengthened and despite the macro-environment and the uncertainties in there, we have a good base to jump forward and that is within the order stock.
If we then talk about the EBITA development, 8.3% as a margin compared to 8.6% previous year is not within our ambitions. But as Jonas said, it is a step to right direction. We have operationally been able to improve our margins, especially in infrastructure and industry and digital solutions. And then we have the double digit margins of the process industries, energy and management consulting and the service business in the Afry X.
So we have a solid margin delivering engine that was now hitting a speed bump with the sickness leaves, which are impacting approximately SEK 60 million during the quarter. The other part that is very good to note in this one is that we have with the quarter sequential solid improvement. So the sickness leaves were impacting especially January and then little by little going down in February and then March being already strong throughout the offering. So we have been seeing the development in the right direction and that applies also to the operational performance. So the quarter ended up with a solid note.
If we then go forward on looking a bit on the absolute numbers. As stated, basically we have infrastructure and industrial and digital solutions are delivering strong improvements, SEK 32 million in the infrastructure, SEK 40 million in the industry and digital solutions, now excluding the operations carved out to Afry X. Then what we see in that process industry is energy and management consulting are delivering solid margins, within their operational environment, double digit margins. And -- but on absolute levels, they are dancing around the zero improvement due to the margin actually being slightly weaker in previous year.
Then if we look into the Afry X and then on the common costs, we have the Afry X includes the development and ramp up of the software offering and that one hampers down both the absolute and relative numbers. But the underlying IT service business is doing well, growing, delivering 10.9% margins. And then in the common costs we have the ERP project as we have been stated, it is ongoing and it is having an expense component still during this quarter and the empty premise is a topic that we are continuously working on. And that is continuously on a higher level compared to previous years.
And this is operationally an important topic for us because we have truly learned during the COVID that we can utilize our premises in a better manner and we are committed to take that one into a new ways of working which then obviously means cost efficiency in the future.
Then we have finally an impact from IFRS16-leases, if you flip through the report and you go into the notes of it, you find that it is something like SEK 5 million compared to previous year that basically the interest rate environment and some prolongations of lease agreements and so one have brought as an expense on to the EBITA. So with these ones, then we end up from the 530s range to 570, 572 during the quarter.
And then if you look on the net debt development, we continue to have a strong liquidity. Basically we had a solid normal quarter one operational cash flow. It seems to be taking like a clock between the quarters, delivering cash home on a modest scale during first quarters and then in Q4 always a strong cash avalanche as I like to call it internally.
With that one we have been able to reduce the net debt, but then with the acquisitions that we have taken during the quarter or close during the quarter, we are now at SEK 4.2 billion or 2.2 net debt to EBITDA when adjusted for the items affecting comparability. We continue to have a strong liquidity. We continue to have a solid balance sheet position to go through the [indiscernible] markets and invest if we see lucrative opportunities.
Then finally, we have the cost program that is developing according to plan. We have currently achieved SEK 56 million check have run rate savings during the quarter. These are back heavy, meaning that they don't have a material impact within the Q1 numbers, but some impact. And we are reconfirming that by end of the second half -- by the end of the second quarter, end of first half, we will reach the target, its SEK 100 million savings.
At the same time we have taken the restructuring provision at full SEK 100 million during the quarter and that one will be then obviously consumed as we go forward to the future quarters. So all in all, I would say that this is a part I'm happy with, we have been executing within our ambitions. We have been able to kick this one off and we are progressing within the plan.
With these words, then handing back to -- excuse me, we have the taxonomy. So basically, as we all know, sustainability is an ever growing topic and the EU taxonomy has been published last year and now we have the first take on how it looks like on our end. We are talking about the taxonomy eligible turnover which is 48% and that is basically generated from buildings, road and rail infra, electricity generation, water and wastewater and then the low carbon technologies for transport.
So 48% is taxonomy eligible and this is material on the turnover. The CapEx part is basically very minor because we ourselves don't do that much of a CapEx. At the same time, it is good to know that this is now the eligibility and this will be followed up then in the next year on the alignment part. So this is the first step on this one, but I'm quite happy to say that we are roughly half eligible already at the starting point.
And now with this turning over to Jonas.
Yes. Thank you, Juuso. Yes. And I will move quickly into the summary slide that I thought was there. I mean, moving forward on summary. Our number one priority is of course execute on the plan. We have the improvement plan which includes the cost saving program. And as Juuso said, we are progressing according to plan.
So after the 2020 and 2021, it's all about getting our operational platform, focusing a lot on the infra, up on a level where we should be, not yet there, but we are progressing. Then the other one is of course to drive organic growth and attract and retain employees. I said it before, it will not -- it's not easier to hire. There are more companies out for the best competence, but also retain employees. So to drive organic growth.
The third one, we continue to have an interesting M&A agenda that we are of course pushing and then we launched Afry X. It's been an investment for us. It is an investment prospect. We truly believe that digitalization will be a key moving forward. And we are getting our operational platform together with Afry X and looking on the software and service business.
So these are, I will say, the 4 priorities on the highest level for me and for us then. But just to end on that that we are fully aware that quarter one, one step in the right direction, not yet on the level that we expect. So we have more work to do.
With that I will open up for any questions that we might have from the audience.
[Operator Instructions] So, we start with a question from Johan Dahl at Danske Bank.
Firstly, on this sort of this calendar effect, I mean, you're reporting according to a new sort of how you account for wage cost. What was the positive calendar impact in your view on a very sort of gross perspective sort of not including this COVID effect, but just looking from that perspective?
So basically if we look to calendar impact, it is roughly 1.2 percentage point positive, so you can translate that one into the ballpark of SEK 70 million.
But that leads me to the second question. If we just take away the contribution from acquisitions and the calendar impact, it seems that earnings is down some 10% year-over-year. Is that how you view it as well? And just if you -- what's the sense of urgency there from your perspective? You seem to describe a market that is fairly strong and you've got all of these drivers to approach your margin target. Just some perspectives on that would be great.
Yes. No. I think urgency one we are running a cost-out program and we have an improvement plan that we are executing on. And it's been a discussion that we have had with you for a couple of quarters that we are not really happy yet on the margin we have and we have not yet seen the big impact of this cost program because there's a lot of labor cost. So I would say the earnings is high. At the same time we can try from the fact that the order books are stronger than ever and many divisions shows like higher results. So I would say it's -- from a total, I fully agree with you, Johan, there is a sense of urgency. At the same time, we still see that there is an underlying demand for our services. And then, of course, like in process industry, we have used more sub-consultant just to be able to deliver. So it's a mixed picture. We need to improve from a cost perspective and drive margins up. At the same time, you're pointing on it that the market is including all the ifs and buts continue to be solid.
And at the same time, I complement that I can't relate to 10% operational decline excluding the M&As and all of that. And we do have a decline caused by the COVID sickness leave, which is very clear when we take the sickness leave rates and compare to that one, either previous year, which was clearly below the norms or then 3-year averages, and that one is explaining the performance gap we are having if you adjust for the calendar impact.
And that leads up to the second question, it is regarding capital allocation because, I mean, obviously looking at your statements from last year, it just is if you acquired companies for valuation multiples, pretty much at the level where you're at yourselves. So it just seems that this growth agenda at some stage should have an impact on the discussion in board and management on whether to repurchase shares or continue to buy companies. How do you think about that?
Yes. I think part of that question, as you say, is a board question. So I will maybe not comment on that. But what we are doing and which is in our responsibility is to push and find good acquisitions that supports the journey. And of course, we are in a big transition, Johan, where our offering is also moving from maybe more traditional towards these new future verticals. If you talk about offshore wind, that's one. So I think it's a matter of priorities as you say. We -- our priority is to find and hand good acquisitions that would be part of transforming Afry to where we want to be.
You provided some valuation multiples for the recent fairly big finished acquisitions. Is -- was that in line with what you had last year pretty much on the valuation multiple perspective?
Well, if you go through our Q4 release note, you have quite a good transparency on where the purchase price has somewhat been and that one is clearly below our own valuation. But at the same time higher than the valuations we saw like 2, 3 years ago.
So then we take questions from Dan Johansson at SEB.
A few quick questions from my side as well. First one on your statement in the report of a sequential improvement throughout the quarter and that you are not on a strong note. Is that due to you getting price decreases through, less impact from the sick leave or better market? Can you elaborate a bit on that statement, please?
Yes. I would not say that we -- with all the things happening on the market that we can really see that the market have evolved throughout the quarter. I think it started on a good note. But what we see for sure and that's quite simple. We had less sickness leave in end of the quarter, while we started up actually at least in Sweden and in the Nordic. We have many countries and areas that were still affected very much from COVID and different kind of quarantine rules. So that was the most evident thing. But then I will say that we are step by step, I will say, improving our operational platform. If you talk about the infra for a while that we talked about a lot last year, we know that we were not happy on the level that we operated.
And now we have changed the organization, the way we are working. There is an improvement program in place. And I think all of that have helped us in improving throughout the quarter. And at the same time, of course, 24th of February, the war in Ukraine started with all the ripple effects that that might have and inflation. But I would say the clearest thing we have seen in the quarter has been that the sickness leave have gone down and we are step by step improving our operational performance. I will say the market, in general, the demand for all of these new solutions is still as strong in the beginning as it was in the end.
And also a question on -- a bit on the Afry X investment. You took SEK 25 million here during this quarter, cost of sales and development, et cetera. How do you think about the investments now for the coming quarter of this year? Do you expect them to remain at the similar level? Or do you expect them to gradually increase from this one?
Well, I think we -- I would say that you could plan around this level moving forward. I mean, we have in our portfolio today, a few very promising solutions that we are pushing to the market if it's the real digital twin or if it's the Smart Forestry solution and some others. And we have now put teams together that we can scale it to a level that we have not done before. It is an investment. We believe in it. At the same time, talking about M&A is if it's one area that we are really looking into M&As that would be also transformative. It's on the digital side. So I don't think or we are not planning to build that investment level up. But you -- I think you can lean on the fact that it will remain on roughly the same level.
And final one from -- as you mentioned the infrastructure seems to take a small step in the right direction here, even if you have higher ambitions. But did the acquisition of Vahanen help you somewhat? Or is it sort of in line with the profitability of the business segment?
If I take that one. So basically, Vahanen is a clear improvement in our whole offering in Finland and the integration journey has started really well. I think that there's clear both operational and back-end synergies that we see within the Finnish operations, and we are super happy to have these 500 Vahanen people in there. And they have started the journey with us both from integration perspective, but with an operational perspective with a positive note. So that is, of course, supporting if you look in for numbers also there.
And then we have questions from Raymond Ke at Nordea.
Four questions for me, please. So first one, it would be interesting to know if you -- how you perceive your customers' demand and perhaps if you observed any past projects yet?
Okay. So I would say that the [indiscernible] in general, quite good. And then, of course, I think what is maybe from the client side on the big projects, the worrying is that you see this cost increases in a project and it goes pretty fast. I think the maneuvering space for many of these large CapEx project is probably more complicated. At the same time, I would say that surprisingly many projects moves on. And I think they are driven, again, we feel like we're repeating the same thing. They are driven from long-term investments in a future system meeting the long-term climate fossil fuel structure. So if it's electrification in automotive, if it's batteries or if it is in the new back-end systems moving into wind mills, whatever it can be, those projects, we feel they proceed because there's a long-term plan. At the same time, I would say there will be hiccups due to these extreme inflations that we can have local. I don't know, Juuso, if you want to add anything on that one.
No, I think that describes it very well, so.
And secondly, if you look into process industries, for example, you wrote that component disruptions and inflationary pressures are impacting clients' investment decisions on bigger CapEx projects. Do you just mean in general? Or is this something you've observed being post already?
No, I would say that since none of those projects that we are working in process industry, they are really big and they are big CapEx investments. So here you could see that some of these projects have been impacted. It's not yet really material because we really have a good order backlog and the backlog has been strengthened. But for sure, we note when we have dialogues with our clients that, of course, they are getting concerned that you see these cost increases evolving.
And third, energy division. You wrote that you're expecting to see or starting to see impact from nuclear related to Russia. Should we interpret this as confirmed orders? And if so, should we expect them to start in 2022?
So basically, if we look at the nuclear environment and the Russia reference, it is good to note, for example, Rosatom, who is a big player in the nuclear market in the Europe, both within the Hungary atomic projects and the Finnish atomic projects. So I wouldn't put this one as a positive note on new projects starting at the moment.
All right. Final question for me. Regarding salary inflation, do you expect there to be a gap in rising salaries and when price increases start to kick in, meaning that there will be expected margin dip in Q2?
Yes. Coming back to the original plan, a question about when do we see margin improvement. We have a plan to operationally improve. And we see that we can push through price increases even now. So that is already happening. And then, of course, we are keeping a super good eye on salary inflation. But our overall ambition and awareness that we need to find ways to net out the salary inflation and improve our front end because we have a clear ambition and plan to improve the margin. And we know that for the last couple of years, we have been 2020 reacting to SEK 2 billion volume out that we reacted to and 2021 have been good from an industrial divisional client. But at the same time we have been lagging a bit in the infra. So I will say it's not A1 system. We are pushing for price increases as much as we can as we speak, and we are keeping a good eye on the salary inflation and our belief is that we will be able to improve the margin. I don't know Juuso, if you have anything.
No, I think that is exactly the point. But what we are actively doing is that through every offering, we are evaluating the pricing and pushing the prices up. And then at the same time we see a positive response from the clients who understand this problematic. So that is the program.
I would -- maybe last -- one is then as a company is of course, more you move into real value-based sell and even projects, the salary is a big part of it. But then the margin will be more a question about what value they deliver to your clients is more we can package our service that will not be 1:1 with the salary inflation. But for sure, for Afry as a company, salary is a huge -- the biggest cost bucket, so we need to keep a good eye on that.
And then we have -- I think we have a follow-up question from Johan Dahl.
Yes. But just a question on staff retention. I just glanced through the annual report and tell me if I'm wrong, but I think you had some 20% staff turnover in Sweden last year. Please just how do you interpret that number in a sort of a longer cyclical context also given COVID, et cetera? And the other question is, what are you doing looking forward to sort of address that? What are you tweaking in your strategy to, yes, reduce that number?
Yes. I would say, Johan, that in many parts of our business, the salary attrition has been high for -- since I started 5 years back, if you look on the business related to IT or software, it has been high and our business were good in attracting new ones. But of course we have seen after COVID, moving into 2021 and that we see, if anything, that the push for increased attrition is there across all segments. We are -- so people leave to clients and they leave to competitors, and we are equally hiring from clients and competitors. Our ambition is to be -- you talk about strategy, Johan. We know that we need to be able to build a culture and leadership style and bring in products that attracts the best people that Afry should have a portfolio project assignments and a culture where people want to work and stay. So that's the foundation in our strategy, Johan.
And then if anything right now with a really strong market where, as I say, many clients are now looking for the same competence as we hire. And the simple example is that 5 years back, automotive have the competence of doing new crank shaft in Gothenburg. Now the automotive like Volvo want to hire 700 software engineers in Stockholm. So for sure, the fight for competition is increasing. There's not one single silver bullet for that. We need to have career models, assignments, international projects, inclusion, diversity, brand, compensation level, leadership, all of that will form a company that retains people, Johan.
But you're right, in this industry where competence and organic growth have a clear line to hiring more people, that will be an increasing challenge for a company like Afry.
Okay. So then I don't think we have any more questions. So Jonas, go ahead.
Yes. No, I would like to thank you for taking the time. And again, we think the report as such is one step towards the level we want. It's not where we still have ambition to be. Yes, we see that there is an underlying demand for all this transformative. At the same time, we are fully aware that macro is getting, if anything, more complex. But we will do our utmost and I sometimes get the question how ambitious are you, but we really are ambitious, and we also know and we have a clear plan to improve the margin that has been a topic, at the same time, drive growth.
But with that said, thank you all for taking the time to listen and see you soon, hopefully also in real life. Thank you.