Afry AB

STO:AFRY

Earnings Call Transcript 2022-Q4

[Jonas Gustavsson, executive]

So dear all, a warm welcome to this year-end report presentation from Afry. My name is Jonas Gustavsson, CEO of Afry. And with me, I have also Bo Sandstrom, our CFO, who will join me in a minute. So again, thank you for being here. We will have some 20 minutes of presentation and then, of course, open up for any questions.

So I will start then with -- on the quarter 4. And of course, what we saw in quarter 4, you have seen it in report a continued strong demand, driven from the Industrial and Energy segment, I'll also say stable demand in the infrastructure. Of course, some pockets in the real estate where we saw some weaker demand, but I think overall good demand, and that was reflected in our growth. We delivered 20% growth in the quarter, 11% adjusted organic ending up at SEK 6.6 billion. I would say that's the highest level we have had in any quarter in this company. So that's a real highlight.

EBITA, SEK 578 million, which was 15% growth compared to last year. So a good development and the margin ended up at 8.8%. I would like to highlight that in AFRY X, we will come back to that. We have now, I would say, repositioned that business. So we did some write-offs of software products in the quarter, and we should now be finalizing AFRY X. And of course, we continue now to lever from the strong demand that we see and cost control and pricing will be key also moving forward. But in general, when you look on the demand side, it was a pretty strong quarter.

A few words about 2022. I would say 2022 was also a year with a lot of uncertainty, of course, but still we ended up with a year with very, very strong demand. And total growth rate was 17%, and adjusted organic growth ended up at just about 8%. So also when you look historically, that is probably the strongest we have had in 1 year. EBITA, SEK 1.8 billion, ending up at 8% in margin. And in the year, we have announced and concluded the cost-saving program, targeted a lot in Infrastructure division. We also concluded 4 acquisitions throughout the year, adding SEK 600 million on top line. And we have also then announced and agreed to divest our Russian operation, still waiting for approvals, but that process is ongoing. So a few highlights from 2022.

Then market, and I already mentioned the market, and you probably have seen it, that the market and the numbers we see are very strong. Again, coming back to 11% adjusted organic growth. Again, this big transformation, green transformation in the Industry, but also Energy drives a lot of demand for our services in Afry. But also in infrastructure, except a few pockets, we have seen a solid development. And that is also reflected. We will talk about it, but our order stocks are at all-time high levels.

Performance in our 6 divisions, I would like to start then with Process Industry, Energy and our Management Consulting business. They all delivered strong growth and good margins. Moving into infrastructure, I would say I'm pleased with the growth. But in infrastructure, we had a margin lower than what we hoped for. And there's a few explanations. In Finland, we did an acquisition last year. And just in the integration of that company in Finland, we had a significant cyber attack. We have been working with that throughout the fall, but that has affected us significantly during the quarter with really low utilization. So the delta in Finland is significant, affecting infrastructure. We also -- we are also using more subconsultants than normal in infrastructure, and that is also having an effect on the margin. With that said, we still have work to do to improve our margin. But these 2, especially the Finnish one, was one big explanation that we see in the performance in the fourth quarter.

And in the Industry & Digital Solutions, we had one project write-down in a bigger product that affected the performance. But here, the growth and the market is good. So we expect good development moving forward. And finally, AFRY X. We have now throughout, I would say, most of the second part of 2022 adjusted our position in AFRY X, and we have now cleaned out our software products. We had to do a write-down in the fourth quarter. We are now down. So moving forward, we will and we should expect good development on AFRY X.

So 3 divisions very good, and then we have had some quarter 4 effects in the other ones that we are not super pleased with. But in general, moving forward, I feel that we have also improved in many areas.

I want to highlight, as we have strong order books, order backlog, 3 projects that we received. One is actually in AFRY X. And here, we have, together with SL, we are then chosen to be the digital partner for building out a system for traffic information. So it's a really cool project, also in the core of what we as Afry can do with our infrastructure knowledge, but also the fact that we have a strong position in digital. So this one goes into AFRY X.

Second one, Liquid Wind. This is a project where we support the build-out of the factory in Sundsvall. And this is, of course, probably you will follow Liquid Wind, they are focusing on the shipping industry and where they will supply green electrofuel. So it's also a very interesting project for us moving forward.

And then finally, Stora Enso in Oulu in Finland. Of course, this is in the core of the core of Afry, where we will support Stora Enso in a conversion project where they will use the machines for renewable packaging. So all these 3 projects are, I would say, a symbol of digitalization, but also the green transformation that we are working on.

And just before handing over to Bo, just highlighting sustainability. And we as a company, we are ranked high or very high in many different sustainability rankings. And I would like to highlight the last one, CDP, where we as Afry really received the leadership score based on our climate work. We are really proud of this, and this is important for us moving forward.

So with that said, I will welcome Bo Sandstrom on stage to take us through the financial part. So it's all yours, Bo.

[Bo Sandstrom, executive]

Thank you, Jonas. So I will cover the main financials for the quarter, starting with sales. So total net sales in the quarter, SEK 6.6 billion, more than SEK 1 billion higher than Q4 last year. So this was then the second quarter in a row with a 20% total growth compared to last year and more than 10% adjusted organic growth this, time 11.3%. Growth was then driven across our segments, solid demand and it was supported by price increases. This quarter, we estimate price increases to be around 4%.

We see a continued very strong development of the order backlog just as we have seen last year, that continues in the quarter, and we finalized or we end the year on a record level in terms of order backlog.

On the EBITA side, as Jonas said, we came out at SEK 578 million for the quarter, 15% higher than last year and margin ended at 8.8%. Despite being marginally lower than last year, what we can see in the fourth quarter is that we managed to take sales growth to EBITA in a better way than we've seen in the previous quarters. We're still challenged in getting full scale effect of the growth, but better than what we've seen in the previous quarters.

Three highlights in the EBITA development for the quarter. As often in Q4 being a year-end, we have some items of one-off characteristics. From a group level, we see that they net out in terms of total EBITA, but they, of course, affect the divisional performance in the quarter. We have a positive in Group Common, that is netted out by negatives in IDS and AFRY X.

Second part is that, as Jonas described, we see continued increased use of subconsultants to, in a sense, facilitate or meet the high demand that we see and cover the high growth. That also this quarter pressured the margin development, and this is particular for Infra and IDS. And thirdly, also, like Jonas said, we have a weak performance in Infra Finland affecting utilization in the quarter.

So looking then at the development by division, as we've seen before, we see consistent strong growth across the divisions with AFRY X then as the exception. So AFRY X was affected in the quarter by the product portfolio revision that was finalized, resulting in a write-down of approximately SEK 11 million and a lower EBITA margin to follow.

Looking at the 2 biggest units, our biggest divisions, Infrastructure and IDS, they both delivered margins of approximately 8% in the quarter, both then affected by higher use of subconsultants. Then we have the weak EBITA margin in Infra Finland, which explains the deviation to last year fully from Infra. And we have the single project write-down in IDS.

Leaving those 3 or looking at the remaining 3, we then have process industries, energy and management consulting on very strong growth levels, but also on EBITA margins in the quarter of above 11%. We're very happy with their performance during the final part of 2022. In addition, you should consider a somewhat higher level of cost allocation from group to division than last year. And we expect Group Common now to be stabilizing at approximately 1% of net sales on an annual basis in net cost.

Finally then, looking at net debt development, we ended the year with a net debt of SEK 4.6 billion, sequentially down from SEK 5 billion in end of Q3. And with the positive development of the EBITDA, this then brought the net debt-to-EBITDA down to 2.3x, below our target level of 2.5x.

Operating cash flow in the quarter was positive, but not as strong as an exceptionally strong Q4 last year, primarily driven by then the -- or negative working capital effects for the very high growth that we have seen this year, both in Q4 and also in previous quarters.

Liquid assets and unused credit facilities totaled at about SEK 4 billion at year-end. Finally then, the Board proposed a dividend of SEK 5.5 per share to the AGM. And this would then correspond to approximately 0.3x time on net debt to EBITDA.

With that, I leave back to you, Jonas.

[Jonas Gustavsson, executive]

Thank you, Bo. And just to wrap it up, moving forward, of course, we see a continuous strong market. So for us is to take all advantage to strengthen our client offering and continue to work with interesting assignments and projects. So that's one thing. But of course, cost control and pricing because, as we said, we follow the market closely. And there are, of course, some clouds also out there. But in general, on the numbers now, they are strong.

And then, of course, to attract talent and continue to develop our employees, to be able to take on these super interesting assignments and products that we see coming up. And then we continue to do those focused investments that we need to work on our operational platform.

So with that said, I will just finally want to welcome you all to the Capital Markets for Afry. We will have that here in Solna in our head office on March 16. So you will get an invitation, and we hope to see you here.

So with that, we will move over to Q&A, and I will have Bo back with me here and answer any questions that you might have. So please, Ebba.

[Ebba Vassallo, executive]

We open up for questions. [Operator Instructions] And we take the first question from Johan Dahl at Danske Bank.

[Johan Dahl, analyst]

Can you hear me?

[Jonas Gustavsson, executive]

Yes.

[Bo Sandstrom, executive]

Yes.

[Johan Dahl, analyst]

Just a few questions. Starting on the -- you talked a lot about the increased use of subconsultants. We can see also that you clearly increased the number of FTEs year-over-year fairly well in line with your organic growth. What's the dynamics actually behind that happening in Q4?

[Jonas Gustavsson, executive]

Yes, I think one thing in infrastructure is that clearly, we have seen that the strong growth that we had, specifically now in infrastructure in quarter 4, led us to needing to use more subconsultants than we normally do because we are not scalable as big in some to handle this, so we have to bring in more subconsultants. And the same was valid for Industry & Digital Solutions. We always have a subconsultant structure we will work with. But in quarter 4, also based on slightly higher sick leave, more like we had last year and a bit higher attrition, Johan, led to for us that we had to use it a bit more than normal.

[Johan Dahl, analyst]

Attrition, is that increasing for you guys as you exit the year?

[Jonas Gustavsson, executive]

No, not increasing, Johan. I think it's still on high levels, potentially stabilizing going down, probably as an effect of the general, I don't know, market and so on, but it is still slightly higher than what we have if you look back a year or 2 years. So that together in December, a bit higher attrition, a bit higher than normal sick leave and a very strong sales led to those effects that we talked about.

[Johan Dahl, analyst]

Also on AFRY X, it sounds as if you're doing some efficiency initiatives here entering 2023 or how should we read it? Because the number of employees, I think it was up sequentially. I mean, usually, cost out is personnel to some extent. Can you just explain what your plans are here for 2023?

[Jonas Gustavsson, executive]

I will do it quickly, and then we will talk more about that when we meet here in Solna in March. But just to simplify it, we had an interesting product portfolio of software products that we have looked through and developed over the year. A couple of them, we will continue to work with Smart Forestry, but many of those product initiatives we have actually canceled because they -- we have had challenges to commercialize them.

So I would say, Johan, the simple explanation that AFRY X, that we are pushing for now is driven towards more a strong service offering business with a couple of software-related products that support. And we have actually done that clean out, you could say, throughout 2022 when we took the last write-off in quarter 4. So now we are done. And then we expect and we will push for good development moving forward.

[Ebba Vassallo, executive]

We take the next question from Johan Sundén at Carnegie.

[Johan Sundén, analyst]

Two questions from my side. First is just on the Finnish cyberattack. How come that you don't comment on it in the report?

[Jonas Gustavsson, executive]

Yes. I think we comment -- I mean, what we saw is that the attack happened during summer. And then we have been working with a lot of mitigations throughout the last 6 months. And I think right now, we commented the fact that we had problems with the utilization in Finland in the report, but we didn't go into the fact in the report that the original reason for that was a cyberattack that we have been fighting a bit with over the last 6 months. And now we had actually to redo some of the drawings due to that, and that came up now in the quarter 4. So that's the reason basically.

And what we see is now we will have a bit low utilization in the beginning, but then we will be out of that. That's the plan moving forward. So that's the reason why we have not specifically commented on, that it was an attack on one of the acquisition. It was publicly known during the summer, but then we have been struggling to get back with utilization in Finland.

[Johan Sundén, analyst]

And how should we view the situation? Will -- is it all sold now? Or is this something that will be a drag also the first half of next year or?

[Jonas Gustavsson, executive]

I think we will probably see a bit low utilization maybe in the beginning of this quarter, but then we will work ourselves out of that problem. So it's not a drag on problem. We expect that in quarter 1, we will see an improvement in Finland moving forward.

[Johan Sundén, analyst]

Great. And a second question on the cash flow and working capital. Q4 usually are a good cash flow quarter for you. But now we're not seeing the natural kind of working capital swings as last few years. When I look into the balance sheet, we see that receivables rising quite -- more faster than current liabilities. Just to get the sense what's driving this? Because if you -- the growth -- organic growth is the reason for the working capital build out, then those 2 factors should kind of follow each other, right? Or how should we read?

[Jonas Gustavsson, executive]

Yes. I mean you should read it in -- I mean, it's always, of course, multiple things affecting the cash flow. What we did experience in Q4 was that we had a strong cash flow, also supported by operating cash flow, but not as strong as we saw an exceptionally strong Q4 last year. This is then driven primarily by the growth. But also if you look on the collection side, we can see that in comparison to last year, it was somewhat weaker but that is -- in that sense, that is not the driving factor. And that's something also that we can see in the beginning of January, that is only related to, in a sense, our collection numbers at year-end and not the driving factor for the cash flow as such.

[Johan Sundén, analyst]

And is that calendar driven? Or is it some specific client that has been slowing down their payments or...

[Jonas Gustavsson, executive]

No, it's not specific clients. It's in that sense, distributed.

[Ebba Vassallo, executive]

Next question from Dan Johansson at SEB.

[Dan Johansson, analyst]

I think a few of mine have been answered, but I had 2 more that I would like to ask. And first one on, how large was the price component out of the 10% organic growth here? And also a follow-up to that, how you think about price increases into this year and your feeling about clients' willingness to accept further price increases here? So that was my 2 questions.

[Jonas Gustavsson, executive]

Price increase in the quarter was approximately 4%, so in line or is marginally lower than what we saw in Q3, but still at a healthy level. And I think to your second question, we're, of course, anticipating a need for further price increases going into the next year. Our expectation is that we are very well prepared for it. But as always, it will be a challenge, in that sense, to continue price increases moving on. But we've prepared as good as possible to continue that positive development going into the next year.

[Ebba Vassallo, executive]

Next question Raymond Ke at Nordea.

[Raymond Ke, analyst]

Two questions from me. First one, last year, Omicron was negatively impacted sick leave, if I recall correctly, and capacity utilization was down this Q4. If we exclude Finland, is it still a positive development or negative development on capacity utilization?

[Jonas Gustavsson, executive]

You talk about Infrastructure division, I guess then.

[Raymond Ke, analyst]

No. Just overall on the group, like in total, if you exclude. Now we know that Finland, of course, was impacted.

[Bo Sandstrom, executive]

Yes. If you exclude Infra Finland and the fact thereof, utilization is in line with what we saw last year.

[Raymond Ke, analyst]

Great. And could you talk a bit about the cloud computing investments now going into 2023, as it continued now in Q4? What should we expect there?

[Jonas Gustavsson, executive]

We should expect -- I mean, this is then related primarily to our ERP implementation. We should expect similar levels going into 2023 as we've seen throughout 2022.

[Ebba Vassallo, executive]

Okay. We take the next question from Stefan Knutsson at ABG.

[Stefan Knutsson, analyst]

I have a question regarding the write-downs in IDS and AFRY X. Can you put into perspective versus the positive effect you had from the sales in Vietnam?

[Jonas Gustavsson, executive]

Yes, I can provide overview. And I think you can find a lot of it in the notes in the report. The revenue effect from the sales in Vietnam is approximately SEK 30 million and the write-down in AFRY X is approximately SEK 11 million. And as I said, they all net out in total. So approximately SEK 20 million is a fair estimate for the project write-down in IDS.

[Stefan Knutsson, analyst]

Perfect. Very clear answer. And then also a follow-up on the price increases that was talked about earlier. I mean, 4% in the quarter, do you think that is enough to offset inflationary pressure next year? I suspect that wages will increase more than they have done so far in 2022, next year?

[Jonas Gustavsson, executive]

I think that standalone, I think if we can continue at a 4%, 5% level, I think that will be sufficient, then, of course, doing that quarter-by-quarter going on, that is the challenge that we're facing.

[Ebba Vassallo, executive]

Okay. Next question from Fredrik Lithell at Handelsbanken.

[Fredrik Lithell, analyst]

On the other side of pricing increases, you also then have salary increases. So if you could describe the wage drift that you have experienced, if it has turned more elevated? That's the first one. And secondly, do you feel that it's moderating due to maybe that consultants are sitting more still in the boat that they are not moving around as much, so your personnel turnover is coming down. People are watching the news, as I am, I guess? So 2 questions in 1 maybe.

[Jonas Gustavsson, executive]

No, a relevant question. Thank you. Well, as we have seen throughout the year, we have seen an increase in the turnover, and that leads to the salary drift, if you want to call it, or salary inflation. So you lose an employee and rehiring as normally, you need to pay a bit more. So that is really one reason why we have seen throughout the year salary inflation because, of course, now -- so that has affected the salary cost more in 2022 than we have seen in many, many years. Of course, now as we said, we push a lot for pricing or increasing the fees to our clients. And it's all about selling value.

So right now, I feel that we are netting out a lot of that with pricing roughly. But moving into this year, or we are already, of course, the kind of salary agreements in the Nordics, Sweden and Finland will be very, very important for us, of course. So it is something that we are watching very closely because that's really when the salary starts to move, that affects us, of course, a lot then. Right now, we are kind of balancing it out, pushing prices, but it will be very, very important moving forward, how the salary agreement process in the first quarter will turn out in Sweden and Finland as an example.

[Fredrik Lithell, analyst]

Maybe just a follow-up on that. I guess you can't give us sort of a hint on where these negotiations are moving, but do you expect that the salary agreements will be shorter in length compared to the old one that was, I think, 2.5, 3 years?

[Jonas Gustavsson, executive]

Now you are moving into speculations. And of course, I'm very much following that. So I can't say. I mean there are different -- I mean the different parties have started to kind of put different on the table, and we're just -- so it's very difficult to say. But it is something -- one thing is, it's not only the consultant businesses, like us or people-driven service company, but also the industrial companies have a really close eye on that one. So it will be very important that we are coming out of that in a good way. But how it will be, I wish I would know.

[Ebba Vassallo, executive]

I think we have a follow-up question from Johan Sundén at Carnegie.

[Johan Sundén, analyst]

Johan, just going back to the cyberattack, you maybe mentioned it, but please repeat it so. Was it present in the Vahanen acquisition? Or is it wider in the entire Finnish group?

[Jonas Gustavsson, executive]

No, it was the Vahanen. And the unfortunate thing is that it was just in that intersection when we were about to integrate the company into their framework. And that created that problem. So it's very isolated. And Vahanen, since that's a significant part, it affected the Infrastructure division. So it was not wider spread, but it was related to the Vahanen acquisition.

[Ebba Vassallo, executive]

Okay. We might have a follow-up question from Raymond Ke at Nordea. If that's so, please go ahead.

[Raymond Ke, analyst]

Sorry, I forgot to lower my hand. I didn't have a follow-up question.

[Jonas Gustavsson, executive]

It happens all the time.

[Ebba Vassallo, executive]

Okay. So Stefan Knutsson at ABG, do you have a follow-up question?

[Stefan Knutsson, analyst]

Actually, I don't. But I can just ask a question regarding costs, other than salaries. Is there some efficiency gains there? We saw, for example, Sweco yesterday decreasing their rental costs. Do you have similar projects that you can execute?

[Jonas Gustavsson, executive]

Yes. I believe we can. And as you indicate, typically, outside of salaries, real estate or lease cost is, of course, a big factor for us. Then those are long-term agreements, but we have a wide network of leases, and we focus on working with that portfolio all the time. It's a big factor for us. And I believe there are opportunities, but they will come at a point of time where we can execute that on a lease perspective on those long-term leases.

[Ebba Vassallo, executive]

Okay. Fredrik Lithell at Handelsbanken, if you have a follow-up question, please go ahead.

[Fredrik Lithell, analyst]

Yes, I actually did have a follow-up. I was -- maybe if you could have put a few words on your balance sheet situation and the gearing that came down a little bit from Q3? If you have any refinancing schedule for coming up for this year? And how you -- when are you prepared to sort of turn more active on M&A given that you have a roof of 2.5 on your gearing and so on. So just if you could color it a little bit would be interesting.

[Jonas Gustavsson, executive]

Yes. I mean we -- as I said, we have a clear target level of 2.5. And right now, we are a little bit below, which is always nice. That is providing room for us to be active in the M&A arena, which we always are. Currently, there's no strategy for us by itself to move lower than our target level. But of course, it's always nice to build up some headroom to the target level to make us even more able, in a sense to be active in the M&A arena.

[Ebba Vassallo, executive]

Okay. We take the next question from Johan Dahl at Danske Bank. If you have a follow-up question, please go ahead.

[Johan Dahl, analyst]

Yes. Just to understand your mindset heading into 2023 here because I mean you were fairly clear on the fact you were discontent with profitability in the first half of '22. And I think you came up with some tangible measures to drive efficiency in the group. Sort of what we've seen so far is, clearly, you've delivered on those savings, but efficiency in terms of billing ratio have continued to slide. And you're meeting a fairly tough situation now going into '23 here on leasing cost on calendar, et cetera. I'm just curious, what levers are you pulling and what new initiatives have you produced to actually get margins to improve because they've slided for a couple of years now in Afry.

[Jonas Gustavsson, executive]

Well, you're right. And I think in 2022, we concluded that cost program, and it was actually effective in Infrastructure, we reduced FTEs on the indirect side. We have also had AFRY X in '22 that have actually burdened off with this [Audio Gap]. We are working with a lot of levers into 2023. Because you are right, if you look on the margin development for the last couple of years, it's been slipping. We know where it is because we also have part of our business that is actually strong and healthy. So I can say it's not -- we are not launching a cost program today, but we have a lot of activities to drive margin development across the group, specifically in the Infrastructure division, where we have been on too low levels for some time.

[Johan Dahl, analyst]

But is there a discussion in the group? I mean growth is strong, right? There's always -- those are way growth against margins. Is that a discussion that's on the management agenda at all? Or how do you look on that?

[Jonas Gustavsson, executive]

No, of course, it is on the management agenda for sure. And as Bo said, I mean, the growth is really strong. And we will our outmost to turn that growth also to margin leverage. We see an effect on the EBITA in absolute terms, but we are not satisfied with the effect it helps on the margin. So yes, it is under discussion because, of course, the good thing is that with that strong growth, we need to find ways to tweak the offerings, the execution, the bidding process to margin development. So for sure, it is on our agenda.

And when you look on 8.8% in the fourth quarter as a solid number, it's a stable number, slightly lower than last year. Infra was a bit of a disappointment. We know where we had the problem. Finland is one explanation, but it is -- it will be a strong focus in 2023 for sure. You're right that we are meeting inflation and cost increases. We talked about the lease agreement for our offices. So of course, we are trying to pull every lever we can moving forward.

[Johan Dahl, analyst]

From one thing to another, what do you estimate the calendar effect? How negative was that in Q4 in your books?

[Bo Sandstrom, executive]

I think we did disclose it in the notes. So it's somewhat negative.

[Johan Dahl, analyst]

I will take it from the notes.

[Ebba Vassallo, executive]

So we have one hand left and it's Stefan Knutsson at ABG. If you have a follow-up question, please go ahead.

[Stefan Knutsson, analyst]

No, sorry. I don't.

[Ebba Vassallo, executive]

So we don't have any more questions.

[Jonas Gustavsson, executive]

All right. But then again, thank you for taking the time to listen. We hope to see you here in Solna on March 16, and then we will continue to discuss many of the questions that you have asked and hopefully, give you some more light into it. But again, have a great Friday, good weekend, and thank you for listening.

[Bo Sandstrom, executive]

Thank you.

[Jonas Gustavsson, executive]

Bye.