Good day, and welcome to the AFRY first quarter financial report conference call. Today's conference is being recorded. At this time, I would like to hand the conference over to Jonas Gustavsson, CEO. Please go ahead.
All right. Hello, Jonas Gustavsson here, CEO of AFRY, and I'm sitting here with Stefan Johansson, CFO. We will take you through the interim report for this quarter of 2018. Again, welcome to this conference call. I start off with the first summary slide of the first quarter, and as you see, it's been an improved result in a continued favorable market. What we have seen is that we have improved our margin, profit and margin, and basically, we say that we have a good order pipeline in all divisions. Our sales ended up at SEK 3.4 billion, which was up +4.6% compared to the last year. EBITDA ended up at SEK 325 million, which was actually an improvement of 13.5% compared to the same quarter last year.
The EBITDA margin ended up at 9.5%, and that should be compared to 8.8% last year at the same period, which was an improvement then. Overall, an improved result, and in a continued favorable market. The market itself continued to be strong. We have seen in the quarter that it is a challenge to drive organic growth due to the fact that it's a high competition for the best engineers. I would say that we could have had some stronger growth if we would have found the right people actually to us. Even though we are ranked as a top three company in Sweden, we are fighting today to get the best engineers to us. In general, solid results at the start of the first quarter this year. We are an engineering and design company.
This is 2017 numbers, where you see the share between each of our four divisions as we are now organized from 1st of January. Worth mentioning is that we have now passed 10,000 employees for the first time. We have been close to that number for quite some while, but now we are actually more than 10,000 very talented engineers in AFRY. The share of our business, one third approximately to public sector and two-thirds to private sector. As you know, we have a quite broad portfolio, which we see as a great asset moving into many of the new assignments, which actually goes across many different competence areas and divisions. The new organization that's effective from 1st of January is reflected on this slide, where we have four divisions: Infrastructure, Energy, Industry, and Digital Solutions. Beneath each division then, we have organized ourselves in business areas.
For example, in infrastructure, we have five business areas with full P&L, the same is valid for the other three divisions, it's up to 21 business areas. I think we have clarified our organization where each of the business areas have a clear focus on the respective target markets. That's the structure we are operating in as of 1st of January. We see a continued high demand related to many of the global trends, we have used these in our strategic work last year, we see that if you look on smart cities and the need for smart infrastructure solutions, it's increasing the mobility question with electrification and connectivity. It's one of the areas where we are working. The same is valid for the industrial digitalization and also the energy market that is changing.
These four kind of summarizes some of these trends that really affect and supports the AFRY journey going forward. The market in quarter one, we see the overall market is largely unchanged compared to the previous quarter, meaning that it is still a strong market. It is a strong market. Industrial market is strong in most of the sectors. We see a continued high rate of investment in the infrastructure market in Sweden and Norway, but actually, I would say Scandinavian. What we have seen, and we are connected that, is that we see a higher volume of small and medium-sized projects, I think infrastructure division has been very good in changing a bit the operation to operate in that kind of landscape.
In the market, we see it's stabilized but still weak in Europe, overall conversion to fossil-free production and increased need for energy storage and smart grids, of course, is a very interesting area for us, even though a lot of that growth is, I would say, ahead of us. Still, the energy market is a bit, how to say, it's not growing that much, but what we see more stabilization on the lower level then. Finally, the digitalization trend drives, of course, increasing demand in all markets and all segments. We have, during quarter one, gotten a lot of new assignments and projects. This is a selection of them. We had one big order for automation for Henriksdal wastewater treatment plant, Stockholm Vatten, around SEK 200 million.
It's a good order for us that will give us a good workload for quite some while in some of our industrial areas. We also went out this morning with a separate press release that we have actually booked the biggest order so far in the history of AFRY in the area of pulp and paper. This is an expansion of the world's largest dissolving pulp mill in South Africa. The company is Sappi, the estimated order value for AFRY is around SEK 175 million. It's a joint venture that we are doing together with another player, we are very happy for that. South Africa has been one of the core markets for AFRY in the area of pulp and paper. This has been a very good work, and I would say it's also a result of the new strategic direction.
This is hopefully a beginning of a new segment where we can be a bit more offensive. We're very proud of that order. We have also extended a strategic partnership with Electrolux. This is a business where we actually take over a team of engineers from Electrolux, and we are doing business with them moving forward. It's an interesting assignment together with a good industrial player in Sweden. A pre-study of extension of Arlanda Terminal 5 is another project. Green profile design assignment of a new biomass plant in Hamburg. This is also related to a new acquisition that we have done, Gottlieb, our design company or architecture company in Denmark. They have a very interesting profile into architecture design into industrial and infrastructure buildings, among others.
Our Swiss company have received a good order to a bridge in Switzerland, and we also booked a new hydro plant in South Asia. I would say that our order pipeline remains strong. Acquisition, we mentioned that during 2017, we have slowed down the number of acquisition a bit related to the fact that we went through a strategic direction, and also we needed and wanted to strengthen the balance sheet. I would say now we are clear with the strategic direction, and we will now, I would say, increase our activities into acquisitions. Still we did one good one here, Gottlieb Paludan Architects in Denmark, SEK 140 million in revenue, and two small ones on top of that. Again, we will increase the activity level related to acquisitions moving forward.
I leave over to Stefan Johansson to take you through a few slides related more to finance and our numbers. Stefan, please.
Thank you, Jonas. If you look at our net sales in the quarter amounted to SEK 3.4 billion, which means a growth rate of 4.6%. 4.3% were related to acquisitions, and as Jonas mentioned, we have slowed down the pace in acquisitions, but the pipeline is growing. In the coming years, we hopefully will be able to report a high number in this area. The reported organic growth was 0.3%, but if we adjust for a calendar effect, which means one less working day compared to quarter-over-quarter last year, and currency effect, the growth rate was 2%. That is not adjusted for the Easter effect. In 2017, the Easter was falling partly in March, whereas in 2017, two weeks fell during April. All in all, rather okay organic growth, even though we are not meeting our targets.
Infrastructure is the main contributor to the growth, we'll come back to each of the divisions. As Jonas also mentioned, one of the reason for the slightly lower organic growth is the supply chain. The demand is on the market, but the supply chain is our challenge at the moment. Margin-wise, we are pleased to report a 9.5% EBITDA margin, an increase versus last year. Especially Infra is increase in the margin, but three out of four divisions has a higher margin 2018 compared to last year's. We also see the savings from the restructuring program are kicking in. Two-thirds of the program has now been translated into cash and into EBITDA profits. Cash flow-wise, we had a good cash flow during the quarter, a good cash conversion rate.
We ended up the quarter with a net debt position of SEK 2.5 billion, which means a key ratio of 2.2 to be compared of the target of 2.5. We do have a strong balance sheet, now we do have ammunition to continue our acquired growth.
All right. Thank you, Stefan. I will take us through a short glance on each of the divisions, starting with Infrastructure, as you have seen, delivered a strong growth and also increased profitability. We are very pleased with the performance of Infrastructure. We said that the investment continues to be strong in both Norway and Sweden as our two key countries, but also in other areas like Switzerland, where we have a big operation, it's also doing very well. We also acquired, what I believe is a very strong company, Paludan Architects in Denmark. You see an Infra had a total growth of 10.8%, and again, ended up in organic 11.3%. That's a strong performance in a continued good market.
Industry Division, which was actually one of the divisions that did not end up to the same margin level compared to last year, 8.8%. It's a setback of 0.2 percentage unit, it's not a big drama. We have seen a stable profitability. We have had some slowed growth due to resource shortages. We see, of course, that many of our customers are doing very well. The climate in Sweden and in their area is very strong. Many of our customers are hiring people. It's a fight to get the best engineers, we see again then that the demand side, as Stefan mentioned, is still very strong.
We also feel that we have a strong order pipeline in the industry, and not the least we mentioned some assignments that we have taken in South Africa. The cooperation with Electrolux and so on shows that there's a good market on the industry side. It's a solid result from Industry division. We could wish more for the growth side, which we are working very hard with them, of course. Energy, again, smaller business for us. This is the new Energy division then where we have taken focusing on only energy. We could see that the whole European energy market is still weak. It is a market that is still in a change mode from the big scale energy towards smaller scale with smart grids and a lot of storage solutions with nuclear decommissioning and so on.
We are following that. We are setting up our new structure to meet that market. In this transition phase, it's still a kind of weak market, even though it's flattening out. We are taking some good orders on a more international base. One example here in Turkey, another is a hydropower plant in Asia. You could see that if you adjust for the working days, we ended up on a flat growth. We are not shrinking, which I think is for the first time for quite some time that this business is not shrinking. We also had an improvement of the margins. We ended up on the EBITDA on 4%, which compared to the same quarter last year then with the comparable unit was 2.4 then. Still work to do, but I think we are moving in the right direction in the Energy division.
Finally, on digital. Of course, here you can say that all our customers and clients in all industrial verticals or segments are wanting to have more digital support. Also here we see, of course, that there is a big fight for getting the best competence into our company then. The demand is very high, and then one of these cooperation with Electrolux is related to the Digital division then. We ended up at 10.2% EBITDA margin. It's strong, solid margin. Again then, we are not growing as we want, but we also have had some change of client structures. We had one client that reduced a bit in the southern part of Sweden. We are working very hard to strengthen the growth in this side. It's a very interesting area for us, the Digital area, of course then.
Some summary of the divisions then as we have talked about, where I would say Infrastructure is the one division that sticks out with very good numbers in all areas actually. Again, we see a continued good demand, basically for most of the segments related to business then. Just looking a bit on the fact that we last year released our revised structures. We have a new vision that we are working very much with. That gives us in AFRY, but also related to our customers, providing leading solutions for generations to come. It's been received very well in our company. We are now executing the strategy worth making future. I think it gives us a lot of fuel in discussions internally, but also with our clients, and the fact that we see ourself as a company creating sustainable engineering and design solutions.
I feel this is an excellent base we'll continue to develop going forward. The strategy we have talked about for quite some time, and now we are executing the work in how do we grow our business, the value creation, the fact that we are step by step shifting towards higher value, but also how can we further develop our service business then. We still have a big portion professional service. It's one of our key things. Operations, how to operate the company. Stefan mentioned the fact that we are working on executing our restructuring program, but also how can we optimize our sourcing. Of course, for us to find new ways to use offshore sourcing when there's a challenge to get capacity in-house is important for us. Of course, best-in-class people.
We are a company that is highly rated among engineers, and we need to continue to be one of the best companies to work in, and I think we have an excellent platform. If you look on the business model, we have formulated like that. We have one big leg which is service and another which is moving into project. Today, we can see that when we look deep into our numbers, 60% of the business is related to projects and some 40% to service. You can see on the service side, there is different way to develop that offer further. Professional service, which is more the hourly consultant we are doing, we see more and more demand on team delivery.
We can see that we can move up to aftermarket is one area that we have not penetrated fully, and also to operate satellites to our clients. On the right side, projects, the time and material project, fixed price, and even turnkey projects then. To climb the value chain and add more value to our clients, to have increased scalability and delivery, we leverage from our extensive competence portfolio across different divisions. We don't see a big risk increase in that because we will balance that to reduce risk in some other areas. We are doing a lot of projects today. It's more about where would we like to go into turnkey projects and bigger assignments.
We will claim that we have good experience and very good in running projects.
Yes.
We are mentioning in our report that we had a one hiccup. In general, we do have more positive variances on our projects than negatives. We have a long experience of doing projects. We feel that long term, that will contribute to the margin and to the top line.
We are currently also rolling out a state-of-the-art project model that we will use and are using for all the larger projects. We will also strengthen our tool base. I see ÅF as a company who knows doing project, and we will become even more professional because we believe that is one way to differentiate ourselves towards small custom companies that can offer a lot of hourly consultant. Still, we will have a big leg into the service model, and we believe there is a lot of different way to further develop that business. Of course, down we are looking for interesting top-end product, so to say, how can we conceptualize and drive solutions. Today it's 60/40. That's ongoing, and we are running the rollout in our company in a structured way, where the first step was to engage and involve a lot of people.
We are looking now very much how can we further drive cross or solutions in business and teams. Smart city is one very interesting area. Few of the assignments that we have been taking has been related to the fact that we are more and more cooperating between divisions, and we will also step by step strengthen the tools to our different managers, not the least related to how we drive projects. I'm very proud of the fact that we are a people business. We have done quite some changes, we are delivering a strong quarter one, also in a period when we have done some changes and are operating in a new organization. The platform that we have created with a strong vision, value, and mission, the growth drivers is clear there, we have our four pillars in the strategy.
It's a good foundation for continue to develop what we have done. Sustainability is something that we see is more and more an integrated part of our business. We see that our clients and customers are extremely interested to understand how can our competence support them in developing new sustainable solutions, if it's in the R&D side, but also related to their operation. We're very happy to have that DNA in us. We have ourselves developed different tool that we are supporting and helping with. We have Sustainable Business Performance Index that we are actually working, SBPI. I also would like to mention one initiative that we have been very successful for quite some years, that we have assigned persons, diversity coach, who works full time in how can we at ÅF bring in new immigrated engineers.
We have today more than 70 engineers at ÅF that have been coming to Sweden then, and that's been quite some success and I'm very proud of the fact that we take that responsibility, but it also is driving business for ÅF then. That's something that we should be very proud of, and I think it's a part of the DNA of ÅF then. Again, we are ranked as a top player. We are in this from Universum Young Professionals at doing engineering study. Here we are competing two other good companies, IKEA and Google. I think you heard about them too. We are on second place in this. This is very important for us, and we will continue to strengthen our brand. The targets you know about, and as Stefan said, we have the slower organic growth in quarter one.
We are working very hard on that, and we will give up the acquired growth because we feel now that the balance sheet also very solid. Summary then, repeating what I already said, we came up at +4.6% on the net sales, strengthened the EBITDA and also the margin, which we are proud of. In general, the market is good and divisions are doing very well. We are fighting to get the best talent start at AFRY, and we are continuing to deliver on our strategic agenda. With that said, I will leave over to you operator, and any questions that you might have from the people who have called in.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off, allow a signal to reach our equipment. If you find your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We'll now take our first question from Johan Dahl from SEB.
Yes. Hi, Stefan. Also hi, Jonas. I was wondering, do you have a number for the sick leave in the first quarter? Was a problem for you due to the intense flu season or?
Yeah, you could say that we were affected, as I think the most Swedish companies, I think, were affected to a bit higher ceiling from the flu in Q1, actually. I heard that many in the business that relate to people had an effect from that. Clearly, we could feel that we had a lot of people that were home due to sick leave in Q1. We do not have a number that we would like to disclose at this time. I can assure it didn't help our number of hours in the first quarter. It had some effect. I can't say exactly how much it was, but it was clearly affecting us a bit.
Okay. In this environment you're describing with strong demand and lack of resources, what sort of impact is that having on your organization? We see that the organic growth is weak, but what other things are you seeing out there that's a result of this?
Well, I think we are working on two sides, actually. One is to continue to be a very attractive company to start to work with. We are also working very hard to make sure that we are a very attractive company to stay in. We have a lot of things that we can improve internally, because we have a lot of interesting assignments. I believe that the new strategy that we have rolled out will be one of the best tools, because with that, we will have more and more interesting assignments and cross projects. In general, I would say that the ambition and the dynamic in the company are very good. I don't see an immediate effect related to that, more than its effect that we have a more competitive environment to hire people.
Not the least because many of our clients, especially the industrial companies, are also very keen on hiring people in the different areas. If you go back, like where I'm coming from, Sandvik myself, and for many years we had, as you know, then a tough environment. Over the last one and a half, two years, it's full steam ahead. I think we will need to be even better in hiring and finding the best people, and we need to be better to keep the best people in AFRY by having the most interesting assignments.
All right. Now it doesn't seem far-fetched that you can build order book more and perhaps be a bit picky on which orders you take, but that doesn't appear to be on the priority list.
Of course. I would say in infrastructure, I would say that we see that. I would say that a bit on the improvements that we clearly see in infrastructure is related to the fact that we are also turning down orders. Yes, that's one thing. Of course, we are now, as you see on this South Africa project, which is an order that we would probably not have been taking just a couple of years ago. Clearly we see in some of the segments, we are able to be more picky on the orders we are saying yes to.
Thank you.
As all industries, when you have a strong position in a niche, you can be picky. Of course, we also have areas where we are not so strong.
Johan, one of the reasons why we have been running at close to 10% margin, even historically, is that we are saying no to orders that are not having a decent margins. We are not hunting top line as a full priority. That's nothing new, Johan. We are picky, and we'll continue to be picky.
Okay. Were you happy with the billing ratio in Q1? Anything in particular that impacted that number?
No, we have a stable billing ratio.
Yeah.
Okay, thanks.
Thank you.
We'll now take the next question from Predrag Savinovic from Nordea. Please go ahead.
Yes, thank you very much. Could you comment a bit on the labor side, and could labor shortage hamper your organic growth like it has done for some of your peers, at least in last year?
Yes. We feel that if you look especially at digital solution, which is one of the very interesting area, where you see a high demand from industrial customers, but also governmental, public, look on data security and so on. There is a high demand from all actors, but of course, many are investing in digital solutions. Here we see a competitive environment to get the best engineers. I think we can further look on how can we attract the best people. Again, we also are working very hard, which is a part of the new strategy, how do we make sure that we keep people staying at AFRY, and see AFRY as being a great company to do a long career and having a lot of different assignments. We have the quarter one that was affected.
We had an Easter effect also that affected us, so people took out some extra day, and we had the flu season. Of course, it was a quarter where we had some effects. On top of that, we had a high market. Still coming up on organic growth that was, for example, infrastructure up to 4%-5%. It is not that it has been very bad. It is more the fact that we feel that with the high demand, we could have delivered more.
Then a follow-up on that last comment as well. You mentioned that the order pipeline is good in all divisions. Could you maybe quantify this in any way?
Well, we are actually looking on how we are quantifying. Of course, we can see the fixed orders. When we book an order, as we went out this morning to South Africa, and we have order value, and then we have more and more frame agreement. We talked about Electrolux. Of course, we see more and more that we are able to follow the order backlog. Of course, a part of our business is service related. At this point, we are not able to disclose any numbers. In general, we feel that we are strengthening the order backlog, so to say.
That is right. We have to remember, our average project is between SEK 300,000 and SEK 400,000. The backlog is very short. What we can see is that after having doing the reorganization, especially in industry, where we focus on each industry, we see that the business area managers are now loading their backlogs and loading their prospects backlog. We can clearly see that the indications of an increased demand and backlogs. We are not releasing that numbers. That is what I am trying to say.
Yeah. Not considering the cost savings program that you say you've come pretty far with, what would the EBITDA or the EBITDA margin be at then in order to get a feel for the profitability?
What we have stated is that we have benefited from two-third of the program. Two-third of the program has been implemented and reported into the EBITDA. The rest will kick in during Q2, and a minor part could come in Q3 as well.
Okay. The final one from me, you state that a driving force is the increased demand for smart solutions and smart cities. You also mentioned that in the call. Could you just add some more flavor, some examples to this so we better understand what kind of project this is?
I would say all projects that we are involved in sizable, there is a discussion from also the clients about how can we make this a state-of-the-art business. If you look on, for example, the new automation order for Henriksdal wastewater treatment plant in Stockholm Vatten, which is a project that will go over many years, I would say that is a digital or digital solution. There is a lot of automation and smartness in that solution. Then, of course, when you go into a city, if you look on the infrastructure side, we have small projects with smart solutions. What we see more and more is a larger interest in how can you connect different industry disciplines to solve some of the challenges that is around them.
All project that we are delivering, we are always confronted with how can you make it more sustainable, and how can we deliver a higher value? How can we use more of your knowledge into digital? I would say all assignments today have that flavor in it. smart city as one concept, it's something that's been growing over many years. We believe that AFRY have a strong position because we are one of the few who knows a lot of different disciplines. Step by step, we will be a bit more vocal on how we can play in that segment when it comes to multidisciplinary solutions into different kind of city solutions, for example.
Got you. Just maybe a final one here. You said you wanted to increase the pace on acquisitive growth. Could you give us some more hints on the magnitude here and what we should expect in terms of added sales for the next year?
I think it's very difficult to do that. The only thing we've said is that you can of course see that 2016, there was a lot of acquisitions, that put a bit pressure on the balance sheet. We slow down a bit we have done a few, we see that the balance sheet is stronger, we are increasing our own pace and looking on both bolt-on, as we said, we will also always look for platform acquisitions that are on the larger scale. Of course, you need to be a bit selective because we know with today's business climate, there's a quite high value for many of the companies. Clearly our ambition is to increase the organic growth. We want to be very selective and buy companies that really add value and actually support our journey on the strategic side.
I can't, I don't want to disclose any numbers because, for example, a platform, they can happen, but they cannot happen. The only thing I can say is that we are driving a lot of ongoing discussions, we and myself is increasing the focus in that area after spending quite some time in looking how can we set up our structure then.
Thank you very much.
Thank you.
The next question comes from Viktor Lindeberg from Carnegie.
Yes. Thank you. Maybe just wonder if you can comment on the acquired growth contribution in the quarter. I was a bit behind on my numbers. I think you added close to SEK 140 million in revenue from acquisitions, and we know the bigger ones being ITERA, Koncept Stockholm, Gottlieb, and inUse. So four fairly significant ones. Is there another or a couple of smaller companies adding more beyond that? Maybe I have missed one bigger one.
Viktor, it's very hard to get into the details and compare your calculation with ours, the phone call. We have a number of SEK 140 million as an acquired growth rate. I think we need to take a look at and compare our numbers after this call, if it's okay with you.
All right. Yeah. That's fine. Wondering about the slide where you provided the projects relative to the service model. Can you just help us sort out what kind of average size of these projects that you have in the project service delivery versus the service model delivery? I know the average for the group is just below SEK 500,000.
That's what we say is that we tend to talk a lot about the big SEK 200 million project or so on. Of course, as Stefan said, the average size on our project is two or SEK 300,000 maybe then because in buildings, I think we have a number of 10,000 projects per year. I'm a strong believer that we will well manage, not increase the risks, but well manage, we will increase the value to our clients then. It's everything from a small local project towards this bigger complex project, then we use the full power of ÅF now.
As you can see, even before I go and before we started to talk about this, ÅF always talked about we want to increase the value, climb the value chain, because that's really how we can use ÅF in a much more clear way than a local consulting company. We believe that we can also develop the service model further. We see an increased need of team delivery, for example, where we are not just, so to say, delivering one person sitting at the client's office and helping them, but we actually deliver a full team. That's something that we will further explore because there you have another leverage on your pricing model and also how you can get some more leverage into that. Aftermarket is another area.
I believe that we towards the market, we also will be a bit more precise in the shares between the different worlds. Us, it is also continued analyzing our own business model and developing this further. Today we can say that 40% is related to service and 60% is related to project. Then we see, for example, in infrastructure, the majority of project is time and material project, meaning not fixed price project. With very low risk. Then we have, of course, a share where we take on the full risk with turnkey assignments. This is really a way forward, and I would not today say that one is maybe better than the other. Clearly, what I believe is that both the service model and the project model, we can increase the value.
By that part, get away from the fact that we are so hindered from organic growth due to capacity shortages. Now, I believe that offshore sourcing is one area where many companies looked at it as local sourcing. Now with the constraints we have on the market, it will not just be local sourcing, it is another way to get capacity. I also will say that we will increase the pace in setting up more clearly structure for offshore sourcing because it is not just the cost margin help, it will also be a capacity support. We will get back to you guys being more and more clear about this model that we have shown here, and we are using it a lot internally.
One rollout of our strategy is that each unit, even if they are on the service level, on the project model, thinks about how can we further develop ourselves and increase the value that we deliver to our customers. It is an interesting model to work with, both internally and in discussions with our customers.
Thanks. That is quite clear. Then thinking about this model and also relating to what you have been commenting on the shortage on finding the right people. Going back to the Epsilon acquisition, along with that, there came this network of professionals that you could utilize almost like sub-suppliers to you in the delivery. Is this something that you utilize today? Is it something that you scrapped because it was not a core element of the new strategy?
No, we use it is an integrated part of our model, you're absolutely clear that it's a great model and we are using our extensive network all the time. Of course, as a part of the strategy, we have been more clear how and where to use it because as coming from the industry, when you have the same, you're using a sub-supplier network. You do not want to end up that you are depending in core areas on sub-suppliers. We need to be sure when do we hire in expertise, in what area, and when do we use it more for capacity? That's what we have been. We are absolutely clear on using that, maybe we are step by step becoming more clear how and when to use it. It's an absolutely integrated part of our model today too.
A very important part. We are utilizing that.
Got it. On maybe a question for you, Stefan, more on cost savings. The run rate you're mentioning is just above SEK 60 million and SEK 16 million in the quarter now. Is that an average number or the run rate by the end of the quarter? Looking into Q2, maybe you start off at a higher level than SEK 16 million actually.
That's right. That's an average number for the quarter. You're right. The run rate is higher when we are going into the Q2.
Got it. Can you comment on the distribution? I think you've done that in the past, but maybe can you help us out on where have you seen the most realization so far in the divisions?
Yeah. I would say that energy division has concluded their program. That's done. The rest of the division is in progress.
Okay. I think that's all for me. Thanks, guys.
Thank you.
As a reminder to ask a question, please press star one. We'll now take our next question from Ole Sodemark from Kepler Cheuvreux.
Yes, hello. Good afternoon. Just a short follow-up on the industry division. You mentioned that you have some impairments there, project impairment. Is it possible to quantify them? Because I can't really see you have done it.
No, we don't. We don't quantify that. We normally don't, I would say, blame bad projects for lowering our margins. In this case, we did an acquisition and acquired a project related to that in the very past. That has not been running according to estimates and forecasts. All in all, our positive variance is ahead of the negatives. We wanted to comment on that because we are happy with the margins in the division, but we are stating that we are expecting more, and they could have been higher if not for that project.
One way to think about it is if had it been really material, then they had quantified it. It's not really material, but it's worth a highlight. It's about SEK 5 million or so.
We will not quantify the amount, but it's not material. If it
Okay
very material, then we have been forced to quantify it.
Yes. Stefan is right. At the same time, it's a project that is kind of affecting a bit. We have to fight with it, but you're right, it's not material on that.
Another negative side is, of course, that there are a number of resources. We are tying up resources into that project, so we're also losing out slightly on the top line because those resources have been used to other projects because the demand is there, and then our challenge is the supply chain.
You could put it that we'd rather use our people on good projects than bad projects.
It's kind of way to say that you have an improvement potential after this.
Correct.
Thank you.
We'll now take our next question from Erik Nylander from Handelsbanken.
Okay. Thank you very much. Obviously we have talked about the staff shortage being quite obvious here for consultancy companies. We're talking about it in a quite negative term. Would it be possible to compensate the volume part of the organic growth by increasing prices instead? The demand for the customer is still quite high. The organic mix growth will be different between volume and price.
I think you're right. Normally it is like that. If the demand is higher than the capacity, you get an increase. You could say that we talked a bit about infrastructure that is doing very well. Here you can say that the infrastructure is also managing, I would say, a bit of operative change, handling more small and medium-sized projects. We used to have Gatwick Airport and Stockholm Bypass, two really large projects that we're able to continue to have a lot of people in. In one way, we have been able to change a bit that model into the market demand, which is very good, at the same time increasing our margin. I could say there you can also see effects on the fact that we are doing exactly what you say.
We have also areas where we have a lower position, where we maybe are not able to do it even though the market is good. There's a drag in how do we see ourselves and so on. Step by step, we will even highlight that as a support to our strategy to be more clear on pricing. How can we, in these times, be more clear on where do we say no to orders? As you know, the AFRY model, which is very good, it's a very decentralized model. When it comes to pricing, I think we have also some room to improve moving forward. We are on top of it on all the projects that we are booking, the sizable projects that we have looked on, I can tell you, we are very much on top of it.
Of course, when you look on all these, we talked about tens of thousands of projects in one of the business areas. Of course, here it will take some time before we maybe are able to implement that. You are absolutely right. I think it's one of the potentials we have moving forward.
Okay, great. Just talking about the impairments as well within the industry division. Is this something we can expect to see also in the coming quarters, the impairment continues, in other words?
It's a project that does not contribute, I would say, to the margin. The plan is to conclude the project during Q2.
Okay. It was still this project.
It's an individual project that is estimated to be finalized during Q2. Q2 will also be impacted.
Okay. Because this was the main reason for the margin decline within the industry, right?
Well, there are a number of reasons, ups and downs, but we wanted to highlight at least one.
Yeah. Okay.
Yes.
Perfect. I also had a question regarding your corporate costs, because it has been fluctuating quite much during the past quarters due to restructurings in line with the new strategy and so on. In this quarter, you have SEK 10 million, so a run rate of SEK 40 million per year. Is this a good estimate also for the quarters going forward? Or how should you look at the corporate cost?
That's maybe a little bit too less. If you compare with 2017, I think you get a good guidance. Out of the corporate cost 2017, SEK 90 was related to the restructuring program. My estimate is that we will be in line with 2017.
Okay, thank you. If we just go back to project versus services, what is the margin difference for selling project versus services? How do you see this mix changing going forward, like the coming two years or something?
Well, I think, of course, when you move up in the chain and take on assignments with higher risk, you should also have a higher margin to be compensated for that. At the same time, I see us becoming better and better, just in this year I've been in the company, to develop our service model. I see more and more. I came from the industry, I felt that I had a view on the project, when we delivered a turnkey automated robot line to a client of SEK 100 million. I really see the value of AFRY. I also see now that the service that we are delivering, first of all, looking into teams, if you add on an aftermarket 24/7 support and so on, it's also a high value to many clients. If you add a bit digitalization on top of that.
Clearly we see projects when we take it to 15-plus% margin, I also see that we can further develop our service model. I can't give you a number. What I can say is that I believe both the service and the project business can be improved when we are becoming more professional to add more value. End of the day, the way to improve margin is the way we can add more value to our customers and get away from a cost-plus model. When we talk about salary cost and plus with a client, that's the worst negotiation position you can have then. When we can talk about the real added value that we deliver, then it's a different position.
Let us get back to that when we meet. We can further elaborate on potential margin increase related to the two different business models.
Okay. Also just a last question regarding staff turnover. I guess it's around 15% right now, but you talked about when you implemented the new strategy, you wanted people to stay more or longer in ÅF. Have you seen, or maybe it's too short of a time to comment on that, but have you seen any changes in personnel turnover since you implemented the new strategy as of 1st January 2018?
I see. I would say that we are basically three months, a quarter into the new strategy and the organization. At the same time, we have a higher external market than we have ever seen before. What is the net of that? Very difficult to see. We have not seen a super pickup on the turnover, which I'm very happy with. With all the changes we have done internally in the people business, we have been able to keep good track on our business, delivering to our customers with some quite changes. I think that's an evidence that people are very supportive and very curious on what this journey will lead to. Me meeting a lot of our employees, I feel that they have a good traction. The market is tougher now than half a year ago.
I think there's a higher demand for engineering resources now than it's ever been before for a long period now. I feel optimistic, and I believe that we, if anything, will improve ÅF, make it an even more interesting company to work in. To give you an example, we have had very clear career models for managers, of course. We start to be very clear also on project career models. Now we will further also look into the area of specialists, meaning that when you start at ÅF and you want to continue to be a specialist in some area, how can we make sure that these people also see a possibility to increase their competence level but also have a career path in that area? We are looking many different areas to become an even more interesting company to stay at also.
Okay. Thank you very much to both of you, and I'll get back in line.
All right. Thank you.
As there are no further questions, I'll hand the call back over to your hosts.
Okay. With that said, I would like to thank you all for calling in, and I wish you a continued excellent day in a sunny Stockholm, where finally the spring have arrived. Thank you, and looking forward to meet you and hear you soon again. Thank you very much.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.