Afry AB
STO:AFRY
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Afry AB
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So dear all, a warm welcome to this Quarter 2 Presentation from Afry. My name is Jonas Gustavsson, the CEO of Afry. And I will do part of the presentation. And joining me will, of course, Bo Sandstrom, do, our CFO.
So again, welcome to this presentation. So starting up now with a summary of the quarter. And as the headline is saying, we had strong organic growth in a quite mixed market.
Net sales ended up at SEK 6.8 billion. And we continue to see strong demand in the Energy and Industrial segments. But what we saw also in the quarter, we saw for us a clear slowdown in the Real Estate segment. And of course, the Real Estate segment had been a segment with uncertainty, but for Afry, we saw a clear slowdown in the quarter.
Total growth of 15% and also strong adjusted organic growth of 10.8%. The order stock continued to be on a high level, and we will talk a bit more about that. So in general, good and strong order stock. But the result then was clearly impacted by lower utilization and also the negative calendar effect.
And the Infrastructure division, which really took the slowdown in the real estate segment, we saw the biggest impact on utilization. So we delivered SEK 421 million in EBITA equal to 6.1% in EBITA margin. And for sure, this was below our own expectation in the quarter.
We'll get back to that later on. But when you look on our divisions, I just want to highlight that Process Industry and the Management Consulting, these 3 divisions all delivered solid and even good result in the quarter.
We did 1 acquisition in the quarter, KSH. This is a Canadian-based company with an annual sales of SEK 180 million, adding up to our Process Industry division and strengthening our position in North America, and we will now be able to combine South America and North America in our Process Industry division, and we're really happy that we could close that acquisition.
Just a few words about the first 6 months. From number wise, we ended up on sales SEK 13.7 billion, total growth of 18% and 13% adjusted organic growth. So for the first 6 months for us have been strong when it come to the top line.
The EBITA SEK 1.1 billion and EBITA margin on 8%. We had a really good strong first quarter, but of course, second quarter had been more challenge for us, both with the calendar effect, but also utilization.
I was into the market. And I think in general, we continue to see solid demand. And clearly, the Industrial segment is driving that. So we see a continued strong underlying demand in most Industrial segments. Energy, of course, being strong and sectors like metal and mining, and the energy transformation, and also electrification. So, I would also like to highlight that the automotive sector has also been strong and solid throughout the quarter for Afry. So the Industrial segment, including energy is strong.
One part of the Industrial segment, pulp and paper, we, of course, follow and see that there is an increased uncertainty to CapEx investment moving forward. Quarter 2 was strong for us. But of course, there is an increased uncertainty that was also highlighted from many clients when it comes to the CapEx investment moving forward.
On the Infrastructure, we at Afry, we saw a clear slowdown on the Real Estate segment that was impacting our utilization. Finland was the, I would say, the 1 where we were fighting the most, but also in Sweden, we ended up with having also to take action in reducing number of employees to mitigate the slowdown in the Real Estate segment.
However, on the public transport infrastructure, it remains quite stable for us. So we have been battling mostly into the Real Estate segment in the quarter.
Looking on divisions, as I was into Infrastructure, being -- have continued to grow, but for sure the 4% in EBITA margin was a disappointment for us. I mean, the big challenge we had was that the reduction in the Real Estate was -- we had to take action on that. So we reduced number of employees. We took some one-off costs to do that to mitigate capacity to demand. And end of the day, this affected the margin on Infrastructure. So this is 1 area that we will need to continue to work on, of course.
Process Industry, highlighting as the superstar in the portfolio. As you see, being able to grow close to 21% adjusted organic growth with a strong margin in the quarter. So I think the development of Process Industry throughout the quarters and the years is really strong. And we have a very, very strong position. And we are really happy with that performance and the order books looks very solid.
AFRY X is another area where we had a disappointing quarter. Just 1.6% adjusted organic growth. And even though we have done the restructuring, taken out of software products, we had a quarter with low EBITA margin. And reason for this was that we, in the quarter, lost a couple of important contracts or assignments for us, and that ended up that we have people not utilized, and this really affected AFRY X in the quarter. So here, we need to continue to work to bring AFRY X to the level that we expect them to be.
Industrial & Digital Solutions, solid growth. And if you adjust for the calendar effect, I would also say that the margin is solid. We would expect more, but it's a solid quarter from Industrial & Digital Solutions. And I also want to highlight that the automotive segment was also rather strong in the quarter.
Energy a bit lower on growth, but also here, the margin is solid in the quarter. And finally, Management Consulting, as they have been over the quarters strong on top line, also solid margins. So our challenge, and you have seen that is, of course, Infrastructure being a big part of Afry, but also AFRY X, these are 2 divisions that we need to continue and implement actions to bring them to levels where we want to be. And with Infrastructure, we also now have a headwind affecting us on the real estate market.
Just 3 assignments I want to highlight to Fortum. We had an assignment for engineering assignment for hydrogen study; super interesting to Stena Recycling. It's a recycling plant for electrical car batteries; and finally, to Swedish Transport Administration. We are getting the assignment for project management for Södertörn Crosslink. 3 good projects for Afry, adding up to a good and solid order book.
With that, I'm leaving it to Bo, our CFO, to take you through the numbers.
Thank you, Jonas. So I will cover the main financials for Q2, and I will start as usual with sales. Total net sales in the quarter was SEK 6.9 billion, some SEK 900 million higher than last year. And on a rolling 12 months perspective, we are now surpassing SEK 25 billion.
We report 15% total growth and 11% adjusted organic growth. Sequentially, a somewhat lower growth level but still at a very high level. Growth was driven by high demand across most of our segments, supported by price increases, again, just north of 5%. So similar level as in the last quarter. We see a continued strong development of the order stock, which is now at SEK 21 billion, some 14% higher than last year, which is the same as it was in Q1.
EBITA came in at SEK 421 million, 7% lower than last year. The EBITA margin ended at 6.1%, a decline from 7.6% in the corresponding quarter last year. The decline in utilization and the negative calendar effect which was estimated at 0.9 percentage points more than explains the difference to last year.
We see a continued strong recruitment pace in general, but with attrition coming down somewhat, and to get so quickly changing market conditions, we've been managed to strike the balance on utilization this quarter. Whereas the level of sub-consultants in the quarter was stable.
Some costs for early termination of office lease -- office-based leases is reported as items affecting comparability as we continue to optimize our cost base. There are, for the group, no material project one-offs affecting the quarter.
Looking then at development by division. We see positive adjusted organic growth in all divisions, although sequentially, growth is coming down somewhat with process industries being the main or the clear exception to that.
Margin development, however, was clearly mixed in the quarter. Process Industries, Energy and Management Consulting, all delivered strong results. For Process Industries, even a clear improvement and yet another quarter with double-digit growth and EBITA margin simultaneously.
Industrial & Digital Solutions has a stable development adjusted for calendar effects. Continued strong pricing compensated for increased salary costs and somewhat lower utilization in the division.
The Infrastructure margin was down 3.6 percentage points compared to last year, 1/2 of it related to lower utilization and the other 1/2 related to calendar and redundancy costs in the quarter. The vast majority of the non-calendar effects was related to the Real Estate segment in the division.
AFRY X margin was significantly pressured by low utilization and the effects thereof eliminated the positive effects from the restructuring of the project portfolio in Q4 last year.
Some words on operating cash flow, financial net debt and available liquidity. So cash flow from operating activities was clearly stronger than last year. And in the quarter, we maintained working capital at a stable level despite the strong growth.
Financial net debt increased directly on the back of dividend payout and the acquisition of KSH in the quarter. And available liquidity remain very strong currently at SEK 4.1 billion.
Before looking at our financial targets, we want to stay a bit at our working capital development. This shows Afry's net working capital ratio to net sales over the last 5 years. And the quarter 2 ratio is highlighted in the graph.
In a consistent moderate growth environment, this KPI is rather stable year-over-year, although seasonality effects can be seen throughout the year, depending quarter. However, when ÅF acquired Pöyry in 2019, this normalized level was shifted downwards given that a substantial large project business with different cash flow mechanics was integrated. And then it became Afry from 2019 and onwards.
From this level, the ratio tend to contract in negative growth settings, the pandemic being the prime example while it expands in strong organic growth settings, which we have been in the last number of quarters.
In Q2, we see a slight improvement in this ratio sequentially following 4 quarters with really strong growth.
Finally, an update on the financial targets on a Rolling 12 perspective. Growth remains Rolling 12 on 19%, well above the 10% target. As calendar effects on the EBITA margin, as calendar effects year-to-date is now close to 0 compared to last year. EBITA margin is back slightly above full year 2022.
Improving the margin is our key focus area for this and upcoming years. And finally, the increase of net debt due to dividend and acquisition payout increased our leverage to 2.6x, marginally above our financial target. But being our weakest quarter in terms of leverage ratio due to dividends, we still expect good headroom to the target level at the end of the year, providing some room for further acquisitions.
And with that, I leave back to you, Jonas.
Thank you, Bo. So then just quickly wrapping up before I'm also inviting Bo and we will be open for questions. Of course, focus going forward, as you have seen in our portfolio and divisions, it's a mix. So in 1 hand, we will continue to lever from the strong position we have and good demand on the Industry and Energy segment. So for 4 of our divisions, the market and order stocks are good, so continue to push.
On the other hand, of course, we have now 2 divisions where we need to take more actions, and we also need to mitigate the short-term effects that we have done in the quarter and Bo said it, that we have done actions -- we have taken actions in the quarter. We were not fully able to balance it that it also affects the utilization, the real estate slowdown. So that's absolutely something that we will be very close now to the market and see where the real estate market continues for Afry.
And end of the day, we continue to work on the Infrastructure plan that we also presented earlier this year with clear ambition and target and plan is to improve the underlying profitability for infrastructure. It's just that now we also need to battle for Afry short-term effect from the real estate market.
So that's our absolute clear priority moving forward. And with that, inviting Bo again, and we will open up for questions that might be.
[Operator Instructions] And let's start with Daniel Uribe at Handelsbanken. Please go ahead.
Jonas and Bo, I am coming back to -- you mentioned Finland and especially a drag in Real Estate and Infrastructure, and that was also a drag in Sweden. And you also talk about some measures taken on downsizing a little bit of employees. Is it possible to give any more color on the magnitude of these adjustments in terms of annual cost saving, number of employees or anything to hold on to?
Absolutely. I think, as you're right, I mean, what we saw and you know that we acquired a company called Vahanen some time ago and combining our offering in Finland, where we have non-exposure to the Real Estate segment. We have now reduced just about 120-ish employees when you look on Finland and Sweden, together as a first step throughout the quarter.
And as I said, I think Bo is right. We were not able to mitigate demand and capacity as fast as we thought because we had a reduction during the quarter. But that's the magnitude we are on today. And we will see if we need to take more actions depending on where the market is going -- moving forward.
And if I may also ask you on the group organic growth, close to 11%, calendar adjusted. Can you give us ballpark the -- how much comes from pricing and which is more about volume mix in the quarter?
Yes. Out of the 11% adjusted organic, we see that right above 5% is related to pricing, and the remainder then is more regularly related to volume effects.
Perfect. And the last question for me would be, you mentioned a little bit of CapEx uncertainty within customers in Pulp and Paper. Still a strong quarter. How worried should we be about this? And when do you think this could start to hit the performance in the process?
First of all, we have a very good order stock in Process Industry. And I mean we know that many of the Pulp and Paper company have announced that due to pulp price and others, they are looking over the CapEx spending, even though going from a very high level, still having good CapEx plans.
So Difficult to say. We know there are good projects out there since we also have a very, very strong position also internationally. And at the same time, I also want to highlight for our division with that competence, we are looking on everything into the green transformation.
So recycling, hydrogen green steel making. So I think our process Industry Division are also broadening the offer to other verticals that compensate the Pulp and Paper segment still being an important segment for Afry.
So I wouldn't say that we are super worried. We follow it very closely. And of course, these clients, since Pöyry and ÅF came together to Afry, we know them very well, and we are very close to them. So we're not super worried. It's just that there is an increased uncertainty, but order stock is solid, order intake has been good, and we have a good mix of projects in divisions. So we're not super worried.
Okay. We take the next question from Raymond Ke at Nordea.
So first question for me. Could you comment a bit on perhaps the staff turnover you see right now compared to maybe a year ago? And if you see any difference or if it remains high?
It's going down. I think as you indicated, we peaked a year ago. I think there was this post pandemic, and we had increasing turnover in basically all parts of Afry, but we have seen since, I would say, in the last 6 months that it starts to go down. So I would call it very close to normalized levels for Afry as a total.
Great. And if we could -- when it comes to the price hike trends. Do you see more friction in sort of implementing a price hike across Q2 as when you talk with clients, et cetera?
No, we don't see a specific change in that. I mean, it's always a negotiation in each of those situations. I think in general, we've been through the biggest portion of direct price negotiations first half of the year, although some are remaining.
And I think it's -- we're happy with the level of price increases that we have been able to achieve. And then also, of course, it's always a negotiation. But we don't see -- we don't see a big change in the sentiment in the market in that dialogue.
Let's take the next question from Stefan Knutsson at ABG.
My first question is regarding the outlook here. Four months ago, you held your CMD and 2 of the largest drivers to reach the margin targets were improvements within Infra and AFRY X. And that was, unfortunately, the division that underperformed here in Q2. I'm curious to what might have changed in such period -- in short period of time and like what you didn't expect back then?
Yes, it's a valid question. Starting with Infrastructure, I think, I mean, we have known that the Real Estate segment have been having an uncertainty for us. We have an exposure in Finland and now we have exposure in Sweden. So roughly 40% of infrastructure. I think over the last quarters, we have been able to mitigate moving to those part of the Real Estate segment being still strong.
But what we saw that was also for us, I think we were a bit late in adjusting is that we saw a slowdown in the quarter, that affected mainly Finland, but also the Swedish part of the real estate driven, including architectures at Afry then.
So that's 1 thing that was affecting us more than we thought when we had the CMD a couple of months ago. Still, the plan with the Infrastructure, the actions we are taking on the others, we continue to do them. We continue to have a clear ambition that we will and we need to improve the profitability for Infrastructure. For sure now, the urgency to take actions driven from the slower market affecting us with utilization is, of course, just increasing the need of taking further actions.
So that's when it comes to Infrastructure, we knew that the market were potentially becoming slower, but I think we were also caught with a bit of surprise that it went down in the quarter for us than with our position a bit faster than we could adjust to.
When it comes to AFRY X, you are right. We still believe that we have taken this restructuring, taking our software products that didn't have the position that we hoped for. What we have now is that we ended up with lower utilization in our service business in the quarter, since it's a very a bit smaller division that affected the result quickly.
So we're not happy with that. We need to look on utilization. But we do believe that the whole -- the story around AFRY X, bring it back on healthy levels still remains. But that's the 2 things that clearly came, partly surprising for us in the quarter. So the story remains, but of course, we have more work to do when we are coming into the second half year.
Perfect. And also to follow up on the Infra business because I noticed that you booked a 10% increase in the order book from what you reported in Q1. Can you talk a little bit about what has driven that? And if you see, yes, improvement short term?
Yes. I mean the market is clearly separate and the increase in the order book is the 1 related to other segments in Infra, where we still see a continuous demand from the customers related to transportation segments mainly, not being from Real Estate, where it's more flattening out in terms of order book perspective.
Okay. Perfect. And then my last question is just regarding the balance between price and wage. It looks solid to slightly positive here, if I have calculated it correctly. Any further comments on that and where you are in the cycle of annual wage increases for the group?
You're correct. I mean, we, of course, address different markets, but it's a fair assumption that with a 5% price increase, we strike the balance to compensate for the salary increases that we've seen throughout the year. And we have now, with Q2, we have completed the salary revision cycle for this year. So we're done with that and live with the salary increases that we saw during the quarter.
Now we take questions from Johan Sundén at Carnegie.
A few questions from my side as well. And I think we should go back towards the kind of CMD comments and the Infrastructure margin. You were pretty clear 4 months ago regarding a clear step-up in margins year-over-year already in 2023. As the development seen in the last few months changed your view on, be able to see a step up already in 2023? Or how should we view that comment in the light of this report today?
Well, I think, it's made the journey slightly more challenging. That's for sure because, of course, now we have the 4% in the pockets for quarter 2. I mean, quarter 1 was still solid. And -- so of course, now there are some uncertainty on where the Real Estate segment, where we see the land will go in the third quarter as we are already in the third quarter. So it's not super easy to say. But for sure, we will take the needed actions to: one, mitigate the short-term effects from low utilization and at the same time, continue to drive the improvements that we have in the whole Infrastructure division, with still the ambition to improve.
And going back to the restructuring initiatives that you made in this quarter how quick of an impact can that have positively on the utilization for the second half? Should we expect utilization in the Infra business to bounce back quite quickly? Or is there more restructuring to be needed ahead? Or how should we view that?
I think what we did in the quarter is clearly impacting the second half year. But then the question again is that will it be enough? What we have done, what we believe now is the right thing. It's all based on where the market is heading. But the way we can address the direct cost in the front end, we can do it rather quickly. So basically, we will have a clear effect from that in the second half year.
The question remains still for us, will it be enough depending on where the market is heading. For sure now, we will hunt for finding more assignments in the industrial area or in the commercial area. But for sure, what we did, will impact second half year.
And the trend shift that you referred to during the second quarter this year, how quick was that impacting? Because we have discussed a weaker construction market for many, 2 years now.
Yes, you're right. And I think we have to remember, when we talk about the Real Estate market, we talk very much for us, for Afry, then about Finland and Sweden as being the 2 biggest markets where we have a consultant into that market.
And I think what we have been good at over the last quarters is to shifting from to the healthy part of the Real Estate market. But -- and we -- I think, when we went into the quarter, believe that it would remain rather okay, solid on that level. But I think we were -- it went for us at Afry rather fast in the quarter. And as Bo said, we were not able to maybe quickly enough adjust demand capacity to the demand in the quarter.
So for sure, and if that's a market or if it's more on where Afry is positioned, where we are positioned, with our offering it's difficult to say, but clearly, Finland became much softer in the quarter, and we also saw that Sweden ended up softer in the quarter. Now we have taken actions that we believe are enough, but absolutely, we will be very, very close on any tendency to take actions and try to do then ahead of the drop.
And just as an additional comment, I mean in Q2 was the first time when we saw tendencies for changes also in public real estate in these markets, not only not only related to residential but also on the public side, even though it's not a super clear trend, but the first tendencies during the quarter, whereas the industrial side is still fairly strong in a sense, although very crowded, as Jonas mentioned.
And the kind of big shift or did it happened early in the quarter or late in the quarter?
I would say more on the later part of the quarter than earlier in the quarter, if you have to decide. So...
Perfect. I had a question on AFRY X as well. You highlighted that you saw a drop in utilization during the quarter due to a few project that was canceled or postponed. How should we view that impact going into second half? Are those 2 products that should be in work during the entire second half or was those totally isolated to Q2? Or how should we view the utilization in AFRY X?
I think, the fair is that what we saw actually because AFRY X is not a global division, it's actually a Swedish main focus with some parts in Finland and in Norway. But we selected the Stockholm area for Afry being a bit softer with assignments that ended up in causing lower utilization. So what I think is that with that division's DNA, it can ramp up as fast as it is ramping down. So I think we have good hope that we can find assignments in the second half year for these people not being utilized when we moved into the summer.
So for sure, there is a clear focus on bringing utilization up. There is a need for digitization, but we have also seen that part of the analytics team that we have for different reasons, we're not able to get out and getting good assignments. But I do believe that we have a good chance, of course, to improve AFRY X moving forward. But it was a disappointment for us because we have to -- I mean, the restructuring we have done, taking out the products that we have done. This is actually where the service business has softened in quite too much in the quarter, ending up in a poor result, but that we can twist it upwards, we believe, in the second half year.
Do you expect the utilization in the AFRY X to be at below trend in Q3 as well?
I think Q3 will be hopefully a step upwards. But for sure, with the lower utilization, we went in. Now it will probably take some time before we are on the levels that we expect. That's for sure. But we will -- we do what we know and I know the sales team are working actively to find new sign, because end of the day, of course, there is a need for digitalization across many of our clients. But for different reasons, we lost a couple of important ones in the quarter since the division is quite small, that affected the utilization of result pretty quickly.
Then we have questions from Johan Dahl at Danske Bank.
Just wondering, at the Capital Markets Day, I presume you had a back-up plan in Infrastructure, how to achieve that double-digit margin. Can you just talk about how that plan has changed compared to when you enter that. And secondly, also in terms of -- in time perspective, how much delayed it's been. Also on that topic, the order book that you built in Infra, can you talk about the profitability requirements on those new orders that you've taken? And how have you changed your assessment in taking orders in that business area?
Yes. I think when you look on the overall plan, Johan, of course, when you have this short term or the utilization challenge that we now had and as we said, it came even through the quarter. It will not speed up or get them back on the margin because we just -- we talked about -- the effects we are doing now is basically only to mitigate the market slowdown.
So if anything, you want, it will speed up the other parts of the plant that we have in Infra. So I think, when we went into the CMD, we have planned what to do. And of course, when you end up in this slower market with the utilization clearly affecting us in the margin of 4%, it will, if anything increased the need of taking actions in other areas too. How quickly will we be back to where we were coming to the question we had earlier in the call, difficult to say.
But we will clearly give it a fight both to mitigate any more short-term effects being a bit ahead of the curve. And on top of that implement the needed actions to bring Infra to where it should be.
But -- and to not to repeat too much, but the plan presented at CMD was a midterm plan. That hasn't changed. The underlying ambition in terms of margin for Infra and for Afry as a whole still remains. But short term, of course, it becomes more challenging with a quarter like this in that sense.
But to your second question, to understand that a bit better in relation to profitability on the order backlog related to Infrastructure, then you could think of it that, at the CMD, we presented a 2-plus percentage point margin step-up for Infra as a whole. It's fair to assume that orders built into the order backlog has the higher profitability requirement in relation to that step up.
And then, of course, we start the journey with the order backlog of different -- with different type perspective, some new, some older and some more longer term. But gradually, we're building in a higher profitability requirement into that order backlog also for Infra or specifically for infra.
Okay. So you can validate that on a group level that when you build the order book, that's with better profitability because that's not really what you're hearing from the rest of the sector that you get this huge shift in profitability, new orders from public buyers.
No. I mean it is, in that sense. It is case by case, and it's not easier in that perspective, but we're quite diligent when we process these cases to secure that we have a better profitability in the cases.
Just on this real estate issue, Finland, Sweden, do you expect that to swiftly recover in Q3? Or do you expect it to continue to be weak and weaken further?
For sure, we are planning for the worst, you always say, but we are not planning that it will recover, Johan. So in that sense, we have taken actions that we believe, for now is okay. Will we need to take more actions? Maybe. And then we will do it, hopefully, ahead of the curve. But we are not building in any fast recovery plan in our current plan.
So coming back to the Infrastructure, as we have talked about, the bringing Infra to the levels, I think we have built in the fact that the Real Estate segment will remain a tougher 1, and an uncertain 1 for a while. So it's not based on scenario where will we have a quick recovery. If it comes, it will help us for sure, but we are not building it into our current plans.
Finally, we have, I think, a follow-up question from Johan Sunden. So please go ahead if that's the case.
No, I just forgot to take down my arm. So no follow-up there.
Okay. Then we don't have any more questions.
Okay. Okay. So then, we just want to wish everyone a nice summer and hope to see you soon and take care. Thank you. Thank you.
Thank you.