Afry AB

STO:AFRY

Earnings Call Analysis

Afry Q3: Strong Growth, Mixed Markets, Margins Dip

Afry experienced strong sales growth in Q3 but faced challenges, leading to mixed financials. Sales rose to SEK 6 billion, and total growth hit 14%, with a strong order backlog. However, EBITA fell to SEK 326 million, down by 15% from the previous year, with margins declining from 7.3% to 5.4%. This margin decrease was attributed to lower utilization rates and a negative calendar effect. Despite this, divisions involved in the green transition showed solid growth and good results. An ongoing improvement program aims to cut costs, particularly in the Infrastructure division, with an expected restructuring cost of SEK 50 million in Q4. Operating cash flow improved over last year, with financial net debt decreasing and liquidity at SEK 3.8 billion. The company targets growth above 10% and an EBITA margin of 7.6%, albeit slightly down due to calendar effects.

Quarterly Overview - A Mix of Strong Growth and Challenges

Afry's third quarter depicted a company navigating through various market conditions, achieving solid sales of SEK 6 billion. While the Energy sector exhibited robust performance, volatility in other areas like real estate and certain industrial segments caused challenges, influencing overall results and utilization rates. Three divisions - Process Industries, Energy, and Management Consulting - stood out with substantial growth and profitability due to their positioning in the green transition, in stark contrast to the weaker outcomes seen in Infrastructure, Industrial & Digital Solutions, and AFRY X.

Financial Performance and Adjustments

Despite admirable top-line growth at 9%, there's a deceleration from previous quarters, with organic growth tapering off and order stock growth slowing to 8%, impacted partly by foreign exchange effects. Profitability took a hit, with EBITA falling by 15% to SEK 326 million and margins dropping from 7.3% to 5.4%, primarily due to lower utilization and negative calendar effects. Nonetheless, the 12-month EBITA remained robust at over SEK 2 billion, reflecting a sustained positive trajectory from SEK 1.7 billion in 2021.

Strategic Measures and Divisional Changes

Afry is actively addressing its underperformance with strategic actions. The leadership has changed in two divisions - Infrastructure and Industrial & Digital Solutions - to drive improvement programs and manage capacity. Additionally, AFRY X has been dissolved, integrating its business units into other divisions to cut costs and remove redundancies. This restructuring has resulted in a reduction of 45 full-time employee positions, aiming at efficiency gains and better financial results.

Transformation and Portfolio Management

Among Afry's priorities is optimizing its project mix, particularly in the Infrastructure division. The focus is on increasing profitability by avoiding low-margin projects and more stringent project selection. A comprehensive portfolio review is underway, indicating potential pruning to reinforce the company's strengths and address areas needing turnarounds, primarily influenced by acquisitions and regional performance variations. Though FTEs declined slightly, the company balances this with a cautious approach toward growth given a volatile market, maintaining strong organic growth and order intake.

Looking Ahead: Cost Adjustments and Market Dynamics

Afry is preparing for further adjustments come 2024, particularly with planned redundancy phases in Infrastructure. While precise details are forthcoming, the company anticipates some level of 'exceptional items' (EO) charges associated with these changes. The backlog figures align with typical seasonal behavior, and despite a year-over-year 4% growth with FX exclusion, the trend corresponds to expectations for the quarter. Seasonal variations, such as Q3's smaller size due to vacations, are standard in the company's operational cycle.

Earnings Call Transcript 2023-Q3

[Jonas Gustavsson, executive]

Dear all, a warm welcome to this quarter 3 presentation from Afry. My name is Jonas Gustavsson, CEO of Afry. And I will as always start off with some summarizing slide and then it will be followed by Bo Sandstrom, our CFO, who will take you through the financials, and then we will have the Q&A.

So let's start up with a summarizing slide as we have in the headline. For us, it's been a quarter with strong growth, but also a challenging quarter. Sales came in at SEK 6 billion, and we see the market is mixed. We have sectors doing very well and strong like Energy sector. And then we have some more volatility and mix in other segments. I will get back to that on the next slide.

Growth was strong in the quarter, and we have a solid order stock. However, we can now see that sequentially, both the order stock growth sales growth are a bit lower. And again, we will show you some graphs on that. The result was lower than we hope for. And of course, this is not a level that we want to be or what we expect us to be. And the result was impacted by, first of all, we have a negative calendar effect. And we have seen some volatility in the segment. I mean, we knew that the real estate segment was weak, but what we've noted in the quarter was increased volatility in some industrial sectors and that impacted the utilization that also then impacted the result.

However, in 3 of our divisions, Process Industries, Energy and Management Consulting, which are our international global divisions that are in the middle of the green transition, they continue to deliver solid growth and also very good results.

We had weak performance in Infrastructure in Industrial & Digital Solutions and AFRY X. I'll get back to that because you have also seen that we today then published some information that we are expanding the improvement program related to Infrastructure. We have, in the quarter, changed 2 of our divisional heads, and I'm very happy and pleased about that, and I'll get back to that also. And as I said then, we have also extended the improvement program in Infrastructure and we have also in the quarter restructured AFRY X.

So that's a summarizing slide and just moving over to the market and starting with the Industrial sector. And this is where we see some more mixed between segments.

So in general, there is a solid underlying demand driven from the whole green transition. So when you look on some of the process, industrial-related segments continue to be strong even though, as we said before, some of the bigger CapEx projects, for example, in Pulp & Paper segment, we have some delays in the decision. And what we noted in some other segments also in the more Swedish related industrial business, we saw project or smaller assignments that was postponed, that also impacted utilization in the quarter. So that was maybe changed from quarter 3. That's what is a bit more mixed in the Industrial segment.

On the other hand, we see segments like automotive or defense continue to be very solid. And really, I will say that it continued to be very strong, of course, driven from all the investment into the Energy segment. And in the Infrastructure, the real estate segment continues to be very weak for us, and we are quite exposed to that in Sweden and Finland. So quite a big portion of the program that we're expanding is also to adjust even more on the capacity side. However, public investment in infrastructure, railroad continue to be on a stable level. So a bit more mixed on the market.

Looking at divisions, again, Bo will get a bit more in the detail, but you could easily see here that we have 3 divisions continuing to deliver solid and good result and good growth. Process Industries, Energy and Management Consulting together roughly a bit more than 40% of Afry. All these 3 divisions are really global divisions, and they are in the middle of the green transition continue even in the calendar week quarter to deliver good margin and solid growth.

Then Infrastructure, for sure, that's one area that we are not pleased or happy, of course. And we have seen that for a longer time. So now we are expanding the program in the infrastructure, and we have a new division head, Robert Larsson, who is now driving that in a very good way, and we are expanding it. I'll get back to that.

AFRY X. Well, we took a decision in the third quarter to actually dismantle the division and those business units in AFRY X have now been integrated in other divisions. And by doing that, we have also taken some 45 full-time employees down and further activities will be done during the fourth quarter.

So what was maybe a bit for us then was that Industrial & Digital Solutions, they have this effect with some of the smaller assignments in the quarter were postponed, and that led to a bit lower utilization in the quarter affecting the result of Industrial & Digital Solutions. There's a lot of activities to bring that back. So a lot of good plans under the new division head, Martin Oman. But that's a summary, 3 divisions doing very well, and we have 3 divisions then not doing as good. And here we have plans to work on that.

Well, we are bringing in good projects. So these are 3 examples. So we have a Tram project in Tammerfors in Finland. That's one. We have a wind power project in the Baltics, and we are also in a future mill in Metsa Tissue in Mariestad in Sweden. So of course, as Bo will say, the order stock remains stable and solid, and we are bringing in a lot of new good projects into Afry.

Just highlighting what we already communicated that we have 2 new divisional heads. I'm very pleased that Robert Larsson then, who has been with us for some 5 years with a long experience in AB before he joined us and he has done a lot of good things in the Industrial & Digital Solutions has now taken over Infrastructure with a very clear mandate to execute and drive the improvement program, and we are pleased that the program is now expanded. And this is both to handle capacity, but also to improve profitability.

And Martin Oman is now taking over -- has taken over Industrial & Digital Solutions. He has also a very, very background and been with us for a few years. So both these 2 divisional heads have joined new positions. And again, very pleased to them in their new roles.

Finally, before I give it to Bo. Just a summary of the improvement program that we delivered in the quarter. We have then extended the improvement program in Infrastructure, and we have restructured AFRY X. So in infrastructure, we are now a lot of actions, of course, but we are now adjusting full-time positions with some 300. We're 150 in the fourth quarter and then another 150 planned for the beginning of 2024. These are partly to adjust capacity due to the weaker market and partly also to do structural improvement to improve profitability.

The estimated restructuring costs for the first leg of that in quarter 4 will be SEK 50 million. And we are on top of that in the program. Two very important things: strengthening, improving our commercial management and resource planning. So basically ensuring that the volume productivity that we are bringing into Afry have the profitability level. So we are steering the structure around that in a new way and Robert and the team is working heavily with that, including, of course, that we have a good balance on the resource planning.

And then we have intensified our portfolio review across Infrastructure at Afry. At AFRY X, we have decided then in quarter to dismantle the divisions. So those business units that was in AFRY X have now been integrated in Norway, Finland and Sweden. And when we did that, we did some restructuring, taking out some 45 employees, full-time employees, to reduce cost and increase efficiency. That was a one-off of SEK 16 million in the third quarter, and further activities will be done in the fourth quarter to tune into that business, bringing it up to profitability there it should be. So we are pleased on expanding this program. And again, Robert is taking that with a high pace in the Infrastructure division.

With that, I will invite Bo Sandstrom, our CFO, to take you through the financial numbers. Give it to you, Bo.

[Bo Sandstrom, executive]

Thank you, Jonas. So I will cover the main financials for Q3. And Q3 is, as you are aware, is our seasonally weakest quarter and also the quarter with the lowest volumes in a sense due to vacations.

Looking at sales for the quarter, it was -- as Jonas said, it was SEK 6.1 billion, some SEK 750 million higher than last year, corresponding then to a total growth of approximately 14%. On a rolling 12-month perspective, we have now surpassed SEK 26.5 billion. And with the 14% total growth, we report 9% adjusted organic growth in the quarter.

Growth was driven by high demand across most of our segments, supported by price increases in the quarter of approximately 5.5%. We see a growth of 8% on the order stock in the quarter, which remains high at SEK 20 billion. In terms of growth over the last number of quarters looking then at adjusted organic growth, growth remains at a high level in the quarter, as you could see, at 9%. But sequentially, adjusted organic growth is now clearly fading from the peak levels that we saw in the beginning of the year, Q1 being the most imminent quarter. And it's actually now below 10% for the first time since beginning of 2022.

Order stock growth year-over-year increased 8%, where approximately half related to FX effects. Sequential trend show a similar pattern, as you can see on the net sales development, where order stock growth was 14% last 2 quarters and then, as I said, 8% this quarter.

EBITA came in at SEK 326 million, which is 15% lower than last year. The EBITA margin ended at 5.4% in -- a decline from 7.3% in the corresponding quarter last year. The decline in utilization and the negative calendar effect, which is estimated at 1 percentage point, again, more than explains the difference to last year. Despite the more cautious approach to recruitment, with attrition still coming down and pockets of quickly changing market conditions, most imminent in some industrial segments in the quarter, utilization was again affected and overall lower than last year.

On EBITA rolling 12 months, we remain above SEK 2 billion, and the negative movement last 2 quarters is mainly related to calendar effects. Year-to-date and compared to previous years, we maintain a clear upwards trend from the SEK 1.7 billion level in 2021. We report 1 negative project one-off in the quarter of close to SEK 20 million, which is affecting year-over-year comparisons in the Infrastructure division.

Finally, this was the last quarter reporting AFRY X as a division, and costs for that restructuring was reported as IAC in the quarter. Effect of the restructuring can be expected immediately in the receiving divisions. And we estimate payback of the restructuring in approximately 2 quarters.

Looking at development by division. We still see positive adjusted organic growth in all divisions, although sequentially as for Afry in total sequentially, it's also coming down in divisions -- in all divisions. Only the Management Consulting division now remain above 10% in adjusted organic growth for the quarter. Margin development, as Jonas said, very mixed in the quarter. Process Industries, Energy and Management Consulting continued to deliver strong results. Noteworthy, both Energy and Process Industries managed to increase their respective EBITA margin despite a negative calendar effect in the quarter.

Industrial & Digital Solutions was the division most clearly impacted by lower utilization for parts of the business in the quarter, and that's in combination with the calendar effect accounts for the margin dilution compared to last year.

Infrastructure margin was down 3.2 percentage points compared to last year, still affected by the weak real estate market. And additionally, as I said before, besides the calendar effect, we have a negative one-off item related to a finalized project affecting the quarter. AFRY X margin was, as in Q2, significantly pressured by low utilization.

So some words on operating cash flow, financial net debt and available liquidity. Cash flow from operating activities was again stronger than last year. In the quarter, we did increase working capital, but in line with growth. Financial net debt decreased somewhat sequentially and available liquidity remains strong currently at SEK 3.8 billion.

Finally, an update on financial targets on a rolling 12-month perspective. Growth is -- at the end of Q3 at 18%, marginally starting to come down, but well above the 10% target. EBITA margin rolling 12 months is affected by the negative calendar effect in the quarter and is now at 7.6%. The margin adjusted for calendar effects year-to-date is estimated at 7.9%, in line with full year of 2022 and improving the margin remain our key focus area for this in upcoming years.

Finally, leverage increased marginally in the quarter sequentially to 2.7x despite the lower net debt. Calendar effects on the EBITA is then the driver to the sequential increase. Typically, net of any acquisitions, Q4 is historically a strong cash flow quarter, and we expect to deleverage until end of the year.

With that, I leave back to you, Jonas.

[Jonas Gustavsson, executive]

Thank you, Bo. And I will just make one summary slide before Bo is back for the Q&A. So okay, looking ahead now, you could box our priorities into 3 areas, for sure, to now execute and drive the whole extended improvement program in Infrastructure is one of our priorities. We have been working with Infrastructure, as you know for quite some time. But I will say now with the new leadership with Robert and extended program and the activities we are building up, we will -- we are spending a lot of time in doing that. So that's one.

Second one is, of course, to continue to take the opportunities we have in those parts of the business that is doing well. As Bo said, and I also said before, 3 of our divisions are doing very well. Energy, Process Industries and Infrastructure. And we have also focused in the industrial part in Sweden that we see good demand like automotive and defense. And we will of course, grab all the opportunities we have there.

But the third one, I would say, is also for the whole company is to continue to build up the resilience and flexibility because what we have noted is that the market in sub-pocket subsegment could be and has been a bit more volatile. So for us to be a bit ahead of that to be able to adjust is key for us moving forward. Because in general, we believe there is strong underlying demand driven from the green transition in some segments, but we also expect some segments like real estate continue to be weaker, and we need quickly to adjust to that. So these are the 3 areas of priorities in general for us moving forward.

So with that said, I will invite Bo back here and we can open up for Q&A.

[Cathrine Sandegren, executive]

Some of you missed the first part of the presentation. We had some issue with link somewhere. But you can of course -- we recorded the presentation, and you can look at it at the website later on. We take the first question from Johan Sunden at Carnegie.

[Johan Sundén, analyst]

I think we should start off on the Infra segment, given the news today with the upcoming restructuring initiatives. And just to have your thoughts and how you compare these kind of initiatives with your initial plan? You had this slide on the capital marketing in March this year where you guided that margin should trend up towards 9% and 11% for '24, '25. Is this -- how much of a help can this be for bridging that margin gap compared to where we are today?

[Jonas Gustavsson, executive]

Thank you, Johan. Well, first of all, I think when we had the meeting in March, for sure, we have seen some of the like real estate segment being much weaker. So I would say you are right that what we are doing now is a real strong add-on to a lot of activities already ongoing. But clearly, we have seen then that what we have in the plan so far has not been strong enough. So we are gearing up. So what we are saying now is that what we are doing now then with the first SEK 115 million in the quarter is partly to address the weaker market, Sweden and Finland real estate and partly, this is to do structural improvement -- cost improvement to support the margin.

So -- and then on top of that, as we said, we have implementing different process on commercial steering and as Bo also talked about how we are balancing hiring basically capacity, and we continue to do the portfolio review. So I think the plan for us to improve the margin and to reach 9% to 11% for Infra remains. So I don't think we have -- we have not changed that per se. And if I remember correctly, we said within 3 years when we had the Capital Markets Day. So that remains, Johan. But I will say what we are doing now is partly to get a better balance in the capacity, but also to execute on the program to improve the margins.

[Johan Sundén, analyst]

Has there been any kind of facing of your view of how quickly the margin corridor can be reached? Or it is still the kind of set out time frame that we had?

[Jonas Gustavsson, executive]

Yes, I think the time frame remains. But what we have said internally for us, it's so important that we start to break the trend. I mean you know it, we know it that if you look back a quarters, we're not happy with the general Infrastructure margin development. And in fact, it has been a declining trend. So for us, it is so important that we now break the trend and start to trade in the other direction.

And then I think the target to go to 9 to 11 remains for infrastructure. And I still think that when we look on 2025, something like that, we should be on that corridor. But of course, now we also need to adjust to the fact that for us, at least in the real estate segment, it's been weaker, and we need to adjust to that. But for us, right now, coming quarter, it is so important to have a trend shift on the margin development.

[Johan Sundén, analyst]

Looking at utilization. Now year-to-date is at, say, 73.5%. Full year '22 was at 74.7%. How much of a help on utilization can this initiative be?

[Bo Sandstrom, executive]

No, I mean a lot of the activities that we do in Infrastructure is related to utilization. And we do believe that turning that negative trend that we relate to in that sense, that will be key for us to achieve the margin improvement that we strive for in that sense. So not putting the full improvement plan on the utilization level, but it's still a vital part in achieving that. So that is, in that sense, indirectly, that is something that we really try to close the gap and then turn the trend also on the utilization side.

[Johan Sundén, analyst]

Will it be -- from your perspective, is it likely or unlikely that you will be back at the, say, 2022 levels in '24, '25 on utilization?

[Jonas Gustavsson, executive]

At least that's our ambition. And then of course, we have an external market that we don't really know where it will go. But for sure, Johan, as Bo said, we know that utilization is so essential for us and as a consultant as a company. So there's a lot of focus in all divisions really to work on utilization, not at least for Infrastructure, but also if you look in the Industrial & Digital Solutions, we also saw utilization drop in the third quarter.

So our ambition is clearly that we need to improve utilization. That's why we also need to find a way to have a better balance by recruiting attrition and the demand side. But it's clearly for us that utilization has been weak in some areas, and that's where we need to improve moving forward.

[Johan Sundén, analyst]

Okay. Thanks for those answers. Questions also on the Process Industries area. We saw order intake -- order backlog been down quite a bit quarter-to-quarter. How should we read that development? Should we be scared that the kind of utilization in that segment takes us clear step down during '24, given the order situation currently?

[Jonas Gustavsson, executive]

No, I think we should not be scared. But for sure, we have also highlighted that when you look on the Pulp & Paper segment, that's one, we all know that there has been a lot of -- where some of our clients have highlighted that the CapEx project might be postponed or delayed a bit. So that we are looking at carefully. We still have a lot of projects ongoing. But then we have to remember in Process Industries, we are into batteries, we are into hydrogen, we are into a lot of other as mining and metals to make sure that we are broadening our exposure, so that is ongoing.

So I don't think we should be scared. But for us, we are now growing in other segments than, for example, Pulp & Paper. But we have seen that there are some more discussions related to delaying CapEx products. So now quarter 3, we will always have order intake a bit more with the timing effect between the quarters. So we're not scared, but we are very, very close to our clients to adjust also here.

[Johan Sundén, analyst]

How tough is it to move around resources in the various kind of pockets of that segment?

[Jonas Gustavsson, executive]

Yes. I think there is, of course, specialists into Pulp & Paper that you have in that segment. But then in process technology, there is also opportunities to move competence between like piping or any of the specialists. So we have opportunity, I think the division under Nicolas is doing it very well because we are also working in a global business here. So for many of the projects, we are using offices from Sao Paulo, from Finland, from Sweden, together. And then you can balance and mix between not only segments, but also between geographies in a different way than we have in other segments. So they are doing it in a very, very good way. And that way of working is improving quarter-by-quarter. So we have different ways to mitigate if one segment goes down by leveraging between different offices in a way that we do not have to the same extent in some other areas.

[Johan Sundén, analyst]

And just one final follow-up to Bo on the kind of Infra segment in the quarter. There was some problem with link. So I think I didn't catch that. Did you say there was some SEK 20 million in kind of one-off in the Infra segment this quarter that did not -- was adjusted for?

[Bo Sandstrom, executive]

Yes, we had a project one-off in the Infrastructure division of close to SEK 20 million.

[Johan Sundén, analyst]

And was there any kind of restructuring initiatives in the Infrastructure baked into the reported EBITA as well? Or was it just...

[Bo Sandstrom, executive]

No, no material effects in quarter 3.

[Cathrine Sandegren, executive]

Okay. So we take the next question from Fredrik Lithell at Handelsbanken.

[Fredrik Lithell, analyst]

I'm going to keep myself to 2 questions. You discussed a little bit during the call on small assignments that have been a bit softer and some specific pockets within industry, for example. Do you feel that these are sort of early indicators for that the large type of projects are pushed or delayed or something like that as well? So it is just an indicator on that the market will turn tougher. So that's the first one.

And then secondly, you had some earn-out considerations in the quarter. Do you have more of those kind of earn-out structures in earlier acquisitions that might create the need to pay out more cash and thereby hold back your possibilities to gear down just a detail?

[Jonas Gustavsson, executive]

Right. I will take the first one. Well, you are right that in the industrial area, and here, we talk more about Sweden, where industrial and digital solutions are more exposed. We saw that in -- I would say, the more generic manufacturing indices where we do a lot of different assignments. We saw assignments in the quarter being postponed and delayed, smaller project and different assignment that affected utilization. So there were a bit more volatility in the industrial segments.

At the same time, some of our verticals, like automotive, driven from the electrification or defense industry mentioning to, they continue to be rock solid in the quarter. So of course, we don't really know where it will go. We will be very close and those business units who had that drop, they are getting very close now because it came for them in a way that we were not able to adjust it quick enough.

Are these early signals? I don't know. And I don't really believe it. But for sure, we will be very close to those where we saw that drop to understand and adjust moving forward. But again, I want to highlight then that I think the automotive industry for us continued to be very solid. And of course, we are very much exposed in the whole electrification, new automotive or platforms. And here, we see a continued solid demand to our claims. So a long answer on the first one.

[Bo Sandstrom, executive]

And on the earn-out side, we -- I mean, we continuously have those considerations going forward, but you should not expect any material in the upcoming quarters that will affect cash flow.

[Cathrine Sandegren, executive]

So we take the next question from Stefan Knutsson at ABG. Stefan, don't forget to unmute yourself if you have a question.

[Stefan Knutsson, analyst]

Sorry about that. Yes. Just a question on the Infrastructure business and the order situation there. I think you mentioned in the last quarter that you sort of increased the threshold for profitability from that point. Just -- I mean, I guess, you have to work through the current order book before we see any improvement in the mix there. Is that correct?

[Jonas Gustavsson, executive]

That's correct. I mean we have an order stock in Infra, which is mixed profitability level. Then, of course, with -- in Infrastructure, even though we do some of these larger projects, we have a lot big volume of smaller project or assignments. And I think what Robert and the team is doing now is to tweak and ensuring that in the decentralized structure we're working that we also have good control of the order intake on smaller assignments to make sure that we have the profitability level. But you are correct that order stock that we have, we need to work through, but we are now ensuring a lot that we have a different commercial view, I would say, improved commercial view on the order intake from now and moving forward.

[Stefan Knutsson, analyst]

Perfect. Very clear. And then also on the restructuring that you do in the Infra business. Do you have a rough guide on the utilization rate of the people that you let go? Just to get an understanding of what kind of potential it will have any for the group.

[Jonas Gustavsson, executive]

We don't have a number. I mean, Robert now and the whole team in Infra, looking, as we said then on the Swedish and Finnish real estate market where we have seen that over the last quarters, the market has gone down, and we started to adjust during spring, but clearly not enough. So I think it's a mixture of employees not having assignments at all, all the way to employees that have half time -- filling the half of the time with assignments. So of course, now we are with the 150 that we have now communicated we believe that we will take the first step to be in balance.

And then we have with all the activities, we are planning also pruning the portfolio improvement activities, we are seeing a potential 150 additional in the beginning of next year, where we, of course, have more tools to adjust than this first 150. So I don't have a number of utilization. But clearly, this should and will be driving utilization in those 2 countries, Sweden and Finland.

[Cathrine Sandegren, executive]

We take the next question from Raymond at Nordea.

[Raymond Ke, analyst]

Yes. A few for me. First one a more general question about sub-consultants. Do you see your current level of deployment of sub-consultants as a barrier in any way to your path towards sort of your margin -- long-term margin goal?

[Jonas Gustavsson, executive]

Yes, I think we have a model, and I think we're not unique in that, that we use sub-consultant, expert consultant and sometimes, we are even teaming up with medium-sized or other companies to take on bigger assignments. I think you are on to something, and that is if anything, and that goes into the commercial steering and infrastructure, for example, that we fully steer and drive the sub-consultant to support our margin development. So in the total improvement plan in Infrastructure, that is 1 area that we are looking at. Then we are using sub-consultant also in other divisions at Afry. But since infra has been on too low margins, that is 1 area where Robert Larsson now and the team are looking deeply into.

And here, we think, I mean, Robert has been in Industrial & Digital Solutions, they use sub-consultant. They have done it in a very structurally good way. So a lot of learnings from that. Robert is bringing in to now address or improve that process and infrastructure. But you are correct, that's 1 part of our business model.

[Bo Sandstrom, executive]

And if I just amend a bit to it because I share Jonas' view, I look at it more as an opportunity than a barrier. But back to Stefan's question on the backlog, that's where it could be a barrier where we have backlog assignments with subcontractors attached to that. That's the only barrier as I can see it.

[Raymond Ke, analyst]

All right. And then a question on sort of your hybrid way of working. Do you feel that it's hindering building cultures? And is this something that you are sticking to or -- yes, elaborate on that if you can?

[Jonas Gustavsson, executive]

Yes. Good question. I will say that we are evaluating the hybrid work model as we go. We know that by -- to be in the office, it's -- or meeting each other, it's important to build culture. Now we also believe that the hybrid work model that we have done basically since the pandemic, beginning of 2020, it's not per se bad. We don't see it big operational or utilization drop due to the hybrid work model. But I think it's constant, I would say, optimization of the model to find the perfect balance by leveraging from hybrid work model and building culture.

So I don't think we will change it dramatically, but we will for sure fine tune it a lot moving forward. We are taking a lot of inspiration from other companies. And of course, there's a lot of opinions if it's bad or not bad. But I think for Afry as per se, it works, then it's also -- we need to remember that we are operating in, we have offices in 40 countries. And it is very different also from the kind of country culture, how you should think about it. But we are tweaking it, optimizing it moving forward because you are on to something, building culture, you need to meet each other for sure.

[Cathrine Sandegren, executive]

We take the next question from Johan Dahl at Danske Bank.

[Johan Dahl, analyst]

Just a question on this improvement program. I mean you talked about strengthening commercial and operational governance. Can you be a bit more tangible there in terms of actions? What that actually means in the coming 12-month period? Also, this portfolio revision that you sort of talk about -- have you identified sort of issues here in the portfolio? What should we read into that statement in the press release?

[Jonas Gustavsson, executive]

Yes. Thank you. I think when it comes to commercial governance, I would say that -- and we talk about the Infra specifically, we have, I would say, good control of the larger products in general with thresholds and how we are viewing and understanding the margin from each of these products. But we also know that in Infrastructure, depend a bit in Sweden and Finland, for example, it's a very decentralized model. And I think it's more about improving and ensuring that all the thresholds we have of bringing in small assignment, midsized assignments are targeting the right profitability level.

So there's a lot of detail into that, that we are working on. Some of them are purely process oriented, but some of them are more operational, how we are steering the whole Infrastructure division. I know that Robert and the team are looking at it, we are using best practice from other divisions to implement it in the Infrastructure. And we are targeting those units where we have had, I would say, the biggest profitability gaps.

So I don't want to go into more specifics into that now, but it is for sure one big lever because for sure, we have the cost base and we have utilization, which is really important. But on the other hand, we also need to make sure that we are not bringing in products that, from beginning, have too low margin when we are -- and that's where we are -- have seen a need to improve that process. That was the -- do you have one more, Johan?

[Bo Sandstrom, executive]

Portfolio.

[Johan Dahl, analyst]

Yes, this portfolio revision, what that sort of...

[Jonas Gustavsson, executive]

Yes. And I can say, when you start the portfolio revision, you probably should read into the fact that we are not super happy everywhere. And as you know, we have since 10, 15 years at Afry when we started to invest into Infrastructure, specifically in Sweden, very much organically driven. But when you go outside Sweden also, we have basically acquired companies, leading to having different positions in different countries.

So to simplify it, I mean, we are basically looking on our position, competitors, market pricing performance across the whole Infrastructure division and assessing where are we strong? And where can we make a turnaround? Where is it utilization and where do we potentially have a positioner problem where we, for example, are not strong enough to bring in the sizable projects, et cetera, et cetera.

And we are doing it across the whole Infrastructure portfolio. We started it up during spring, but we have accelerated now with Robert. And that's a part of the program, and that will lead to further tweaking portfolio prunings moving forward. And that's the part of the bridge bringing us up to the margin that we expect from the Infra division.

[Johan Dahl, analyst]

All right. Just a final one on -- I saw FTEs declined slightly sequentially on a group level, still organic growth is good, orders seem to be coming in. To what extent is that -- and you also -- I think you also said attrition was coming down. To what extent is this sort of a desirable sequence of events for you guys? Or is this an issue for you that in case you're unable to recruit?

[Bo Sandstrom, executive]

No, I wouldn't say that at all actually. I mean, attrition coming down is generically a positive thing, and we don't experience -- I mean, recruitment, as such has always been difficult in our line of business and that remains so. But we still believe that we can recruit in a good way. But of course, as we have discussed over the last few quarters, balancing growth with profitability development, also going into a more volatile market than we are determined to be a bit more cautious on the FTE side than we were in the last couple of years, I would say. And you should see that more as a kind of natural sequential effect rather than a long-term shift as such.

[Cathrine Sandegren, executive]

We have a follow-up question from Raymond.

[Raymond Ke, analyst]

Yes, just one more question that I came up with. So related to, for example, understanding what projects are not profitable and keeping small and medium-sized projects at a profitable level. I recall a year ago, there was still quite a lot of talk about the ERP system rollout and how this was supposed to help in this regard to have a better overview and compare project. Could you tell -- just remind us a bit where you are on that front? And how these 2 are connected at the current state of things?

[Bo Sandstrom, executive]

Yes. And I'll take that. Yes. I mean we have -- practically, we don't have any news, particularly on the ERP side, that implementation and that ambition is still ongoing, and it will continue for a number of years. But you're, in that sense, correct in most ways that with a non-unified ERP landscape, it's always extremely much more difficult for us to control and to steer in a unified way. So the entire ambition in that sense with the ERP journey that we embarked on a number of years back is to create a good foundation for us moving forward, allowing us to better steer and have a more transparency in the different parts of the business.

[Cathrine Sandegren, executive]

We also have a follow-up question from Fredrik Lithell.

[Fredrik Lithell, analyst]

Maybe one housekeeping. Should we expect more EO charges in 2024 on the second phase of the Infra sort of redundancies, you have 150 in Q3 and then 150 later on. Is there more EO to expect? That's the first one. The second is coming back to Johan's discussion on the backlog that is at standstill quarter-over-quarter, 4% growth if we exclude FX more or less year-over-year. Is that in line with what you sort of expected ahead of the quarter? That's the first one. And is it a normal seasonality? I mean, Q3 is a small quarter, and there is a lot of vacations. So should we see this as a seasonality behavior?

[Bo Sandstrom, executive]

I can start with the second one in a sense I would -- growth in all aspects in that sense, it is following an expected trend related to the season in that sense, I would say. And on the first one.

[Jonas Gustavsson, executive]

On the Infra and the first part.

[Bo Sandstrom, executive]

Yes. yes. I mean, of course, we're communicating our expectation on reductions also in first half of the year. I wouldn't say that there will not be any EO effects, but it's not entirely sure that they are similar in size and so for next year. So it's a bit kind of in between. We will be able to -- coming into those quarters, we will be able to be quite a bit more precise on how they will actually execute it. But I wouldn't disregard it for sure.

[Cathrine Sandegren, executive]

Yes, we don't have any more questions.

[Jonas Gustavsson, executive]

Okay. So then thank you from our side. Thank you for taking part of this webcast and looking forward to see you soon again, and have a nice Friday and a nice weekend. Thank you.

[Bo Sandstrom, executive]

Thank you.