Welcome to the webcast for the third quarter financial report. Today's conference is being recorded. There will be a Q&A session towards the end of the session. Now I will hand over to Mr. Jonas Gustavsson, President and CEO for ÅF AB. Please go ahead, sir.
Good morning, everybody, welcome to this presentation of the quarter three results for the ÅF group. This is Jonas Gustavsson speaking, I'm here with Stefan Johansson, our CFO, who will also present a couple of the slides that we will present to you. Quarter three, I jump immediately into the highlights. The report was released yesterday, I'm sure that you have been able to look into the numbers. We ended up on the top line net sales on just about SEK 2.6 billion, which was 13% above last year on the same period. Quite a lot driven from acquisition, we also had a positive organic growth. We had an EBITDA ended up at SEK 184 million. That's up 8% compared to the same period last year.
EBITDA margin, excluding the one-off items related to our restructuring program, ended up at 6.9%, the margin obviously came in slightly lower than last year, we have some explanations related to that, mainly driven from a couple of areas within the infrastructure division that we will come back to. All over, I would say it's a stable quarter where we're also delivering a result, which I would say also slightly below our own expectations. We would have hoped for a bit more. We know where we are having our challenges, we are working on them then. Clearly also the restructuring program that we are launching is also related to ensuring that we will have a good EBITDA margin development moving forward.
Before jumping into the numbers again, I think looking at ÅF from more an overview, I would say that we are operating in a market that is still very favorable, I will get back to that. On top of that, we have some, I would say global international trends that really support the growth of our business. We are very much related to four of the trends. We see smart cities and infrastructure increasing, we see more and more questions related to that. Industrial digitalization is something that's been going on for a few years. I know that myself. As you know, I've been working in the industry for many years, I see that is something that is continuing to put a lot of demand on the knowledge we have at ÅF.
Future mobility, we see a big change in the whole automotive industry related to autonomous cars and also electrical cars, where we also have a lot of offers from work. Changing energy landscape. We have been operating in the energy field with a lot of changes related to the big scale energy in Europe, but we see more and more a new energy landscape evolving where we will take a strong position moving forward. Four interesting trends supporting the ÅF business. Next slide. This is an overview of the segments for ÅF. On the left side, you see the market segments. Clearly, we are quite exposed to infrastructure, real estate, rail, and road. As I mentioned, we have a big stake in automotive and vehicle, still a lot into the power and energy.
I would say in general, the portfolio of ÅF is quite, I would say distributed, which is good also because we see a kind of natural hedge in the segments we are focusing on. On the right side, you see the split between public and private clients. Clearly, we have a share of public, quite a lot related to our infrastructure business, two-thirds related to private. On the bottom, you see also the 10 largest clients we are working with, which as you see quite a few of the big international global Swedish companies, among others. A few highlights on the third quarter when you look on new projects, we are continuously, of course, filling up our order pipeline. A few examples here, we are implementing a complete new digital production system for a company, Millcon.
This is one example where we see an increased demand for connected and digital production systems. We see also on the second bullet, an increased willingness from many companies to give away packages or fixed projects related to product development. Here I would say that we see a trend that is continuing in a favorable way for ÅF. That means that the part of business that's been very much related to professional service starts to evolve towards more and more packaged projects, and I think this is very positive for us. We have examples of these kinds of projects for Scania, Saab, and BAE Systems that we are mentioning here. We have delivered an order for a turnkey testing facility for a front loader manufacturer.
In the infrastructure, we've been winning an assignment for a new city center here in Stockholm. We were winning a project management for a new district here in Stockholm, Hagastaden, and refurbishment of a thermal power plant in Czech Republic. Obviously, this is just a selection of all the orders and projects that we've been winning over the third quarter. When it comes to acquisitions, we have made three, the latest one in June, which is a very exciting one. It's a leading design and user experience agency with some 100 employees in Sweden. That will add on to the already strong position we are having at AFRY related to design and architectures. I would say that if you count the complete offer within these two areas, I think we are coming close to 600 employees working in this field.
We believe that user experience and service design is something that will increase in importance and also support our ability to take on bigger and bigger projects within both infrastructure, but also industry. Extremely exciting. Light Bureau, a small one related to lighting. As you know, we are step by step building a stronger lighting business. This is a, I would say, a smaller niche, but a quite successful niche for AFRY. In July, we were bringing in some four employees related to automation business within the industry division. Three quite important acquisitions made during the third quarter. Looking on the market, the general view on the market is that it's basically continuing to be a strong market within all our segments. The industry market in Sweden, we know is very strong.
We can see that key segments in automotive, food & pharma, pulp & paper are growing, so that's a good development. We see a continued trend within digitalization, where we see an increased demand for embedded systems and IT competence. We also see a continued rate of investment in the infrastructure market. We don't see any slowdown in that market. What we could see maybe is that, I think Stefan might come back to that, we see maybe that we are getting a portfolio with some more of medium-sized projects, where we, a couple of years back, had a few very big ones. That's also one of the explanations why we see that utilization in infra have taken a small hit during the quarter. We don't see this as any long-term issue. It's more that we are in this transition phase at the moment.
The energy market in Europe, it continue to change. But I would say for AFRY, I feel that we have bottomed out our kind of energy operation that you know, that we over some years have been changing focus from big-scale energy projects in Europe and more and more setting up energy business in Europe and Scandinavia, focusing on the energy part that is now evolving related to smart grids and so on. I think that's a very interesting business that we do more and more focus on. All over, I think we see a continued strong market that will continue to support the AFRY business moving forward. I will leave it to Stefan to take you through a couple of slides related to top line and profitability. Stefan, please.
Thank you, Jonas. The growth in the group continues. The total growth was 13.4% in the quarter, mainly driven by acquisitions, which was mainly related to acquisitions in the infrastructure business and in our core countries. Acquisition like Midtconsult and Toscano was a main part of the group. The underlying market, as Jonas mentioned, is very good, and we see strong demand from almost all segments, which also reflects in our organic growth, which was 3.6% if we adjust for the calendar effect and FX changes. That was a very high growth comparing to the previous quarters. Looking at year to date, we see a growth of 15.4% and an organic growth of 3%. We can also say, if you look at our numbers, we can also see a shift from having seen infrastructure as a locomotive in terms of growth during the last years.
We do see the industry division coming up in a growth rate close to 6%. We see a very strong market in the industry segment, which is also reflected in our numbers. Profitability. An EBIT margin of 6.9%, down slightly compared to last year, mainly driven by. The good thing is that we have identified the areas which we can see a slight downturn in the profitability. As we mentioned in our report, it's related to our infrastructure business in Norway, related to our recent acquisition of Ås-Reinertsen. Action is taken, is ongoing, and we hope that we can turn the numbers into black figures in the next coming quarters. It's also related, as Jonas mentioned, to that we have been running a number of large projects such as Västlänken and Gardermoen in recent years.
They are now phasing out and replaced by a number of mid-size projects. We have seen a slight gap in volumes or in the growth rate in the last quarter. We do hope we can come back and replace those large orders with mid-size and some other large orders, which also are reflected in our report, such as Nacka Center as a big project for us going forward. The good thing here is that we have identified our problems, and we are taking action. Another good thing is also that we have released our restructuring program. We take a hit of SEK 90 million in a quarter, and we expect yearly savings of approximately SEK 100 million going forward, with full effect from 2018. Another good thing here is that also the management is not satisfied with the profit.
We will take actions to make sure that we will get back on track. Cash flow. If you look at cash flow from operating activities and the key KPI cash conversion rate, which means that how much of the EBITDA is translated into cash, was 64% in the quarter compared to 72% last year. Q3 is normally a weak quarter when it comes to cash flow from operating activities, so that we do have to keep in mind. We also are in the project business, and the payment terms in projects also, of course, affects the cash flow for an individual quarter. Acquisition, SEK 300 million acquisition, as I mentioned, the main acquisition was Midtconsult and also Koncept, which is in the architecture business.
All in all, we ended up in SEK 2.8 billion in net debt, which is then translated into net debt to EBITDA of 2.6x, which is more or less in line with our targets.
Okay, Stefan, thank you. We will also just flip through each of the divisions with a few more comments, starting with the Industry division. As we said, again, we see an overall strong market, and I would say, as you also know, my background is coming from the industry. I see the Industry division as an extremely interesting base for continued growth forward. We have very strong positions in a few key segments, such as automotive, food & pharma is another area. We are building our strong base in process industry and pulp & paper again, and as is also said, both on the automotive side when it comes to R&D, but also related to advanced manufacturing systems. On top of that, we have a very strong base in Sweden, both on product development and automation.
I think it's also related from the numbers that we were able to drive an organic growth of 5.6%, which is, as Stefan mentioned, very strong. Clearly, we expect also a good margin development for the Industry division. We came out slightly lower than last year. Clearly, we have areas to improve, but we also have a bit of a timing effect in the Industry division. Not according to our own expectation when it comes to the margin. We are working on that. In general, for the overall business as such, it looks quite good moving forward. Infrastructure, we talked about the fact that we are not happy, or we are not satisfied with the margin development, 6.5%. I think that's an area where we have the strongest focus on.
We have, as Stefan said, identified where we have the problems, a few of them related to Norway, and actions have been taken, and we expect that to improve gradually moving forward. The market as such is still very strong, we will continue to really focus on driving top line, take a stronger position in our core countries, but also, of course, to improve the margin moving forward. Clearly, we are fully aware of that. Again, we see the market very strong and our business is also strong position. International division, you know that we are changing our structure starting next year, but so far international today is a mixture of energy business and also the acquisition we made in infrastructure at Toscano. We see a stable margin of 7%, and we still feel that the businesses hit from the energy.
That's why we see a negative growth. I would say that the work to get back on track when it comes to margin in this business is yielding results. I think here we see a continued stability and improvement in this part of the business. The last division, technology, showing a very strong result. Organic growth also 7% and a stable EBITDA margin. This market is of course very interesting, clearly from a high demand from our customers. At the same time, it's of course, a market where we are fighting to find competencies, because here I would say that our growth ability is more restricted from our ability to find the best people on the market for this business.
I can say that after the six months in AFRY, looking on the strong competence base we have in this area, and to see that being used more and more into the infrastructure and industry, I think we have a fantastic position for growing the overall business for AFRY moving forward. If you look on that, I would say both technology and industry shows strong organic growth, and you could see it here on the summary slide. We have our challenges in the infrastructure when it comes to our margin, which we will of course correct.
All over, I would say that it's a quarter where we are not happy with the margin, but we feel kind of good when it comes to our market position then, and I think this is highlighted in the summary then that the result as such, you would say it's a stable result, and we delivered some SEK 184 million, 6.9%. Clearly, it was slightly below last year, mainly related to infra. Our top line ended up at SEK 2.6 billion, so we saw a 13% up and organic growth in both industry and technology. We have addressed the areas we have our challenge with. We see the market as such continue to be strong. The energy market in Europe, I think we will turn that into a favorable thing for AFRY because we are positioning ourselves into that energy market that will evolve.
Again, we are continuing to be very offensive, looking at potential acquisitions for AFRY. The restructuring program is very important. We know that we have opportunities to improve our margin. That is something that we will see starting to yield effect as of next year. I think the investment of SEK 90 million that we are doing, we will turn it into SEK 100 million saving then that will actually support the margin development moving forward. That's a commitment we are doing. On top of that, I'm very happy with the launch of our new strategic direction that we will also talk more about when we have our Capital Markets Day here in November. We are taking a stronger position in delivering solutions and packages to our customers.
We see that's something that will get more and more demand, not only on the operational production side of the business, but more and more also related to R&D. We have four areas that we are focusing on, which is international expansion. We are looking more and more how we can evolve and change our business model. Clearly, operational excellence is something that we are spending a lot of focuses now. The fact that we have our areas where we need to improve our margin shows that we have more to do when it comes to operations. If anybody followed my journey in Sandvik over the last year, if it's one area that I've been working very hard with, it's actually operational excellence. Then finally, best-in-class people practices. These are the four areas. The new strategy basically can also be viewed like this then.
We are, as we speak now, setting a strong performance program related to these four areas within each of the divisions then, having a clear commitment to both grow our business but also improve our margin going forward. As you know, we also have launched adjusted, you could say, financial targets. We are committing ourselves to a 10% organic growth, including add-on acquisitions. We also made it clear that on top of that, we will have platform acquisitions. I think our ambition in general is not that different towards the ambition we had before that is closer to a 15% growth. It's more that we are a bit more clear how to reach this 15%. Again, EBITDA margin, 10% over a business cycle, and this is clear now that we know that we have homework to do. No question about that.
We are fully committed to deliver the 10% EBITDA, but we know that we have some work to do before we are getting there. Next up, I think Stefan mentioned that we have a new target also here to be on 2.5. All over, it's a quarter where we had some disappointments on the margin, but we have actions taken on that. We are seeing a continued growth in our business, both organic and related to acquisition then. I think with that said, I would just want to highlight before we open up for questions that you're all extremely invited to a capital markets day here in Solna, in Stockholm on November 8th. I know that we will present a very interesting program. We will obviously look on our operational part, related to how we'll improve our EBITDA and so forth.
We will also take you through some very interesting growth areas like smart cities, automotive, how we think of the end of the market, why do we invest in design. I think it will be a very interesting day. I'm happy to welcome you to Stockholm at that day. I think with that said, we will open up for any questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please ensure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will take our first question from Johan Dahl from SEB. Please go ahead.
Hi, Johan Dahl at SEB. Just a question on infrastructure. Could you just address, you talked about the slowdown in growth in your infrastructure division. To what extent is that sort of market related, and to what extent is it your ability to supply? Arguably, investments in this area is growing significantly faster than what you're delivering in terms of turnover growth. Also in this respect, explain a little bit what's happening in Reinertsen. Is it project losses that you account for in this quarter, or is it normal operations? Thanks.
I think in general, we don't see any slowdown on the market when it comes to infrastructure. I see that we have this transition, that's clear, that we have had a few quite big projects related to the Swedish business, like Förbifart Stockholm and Västlänken, and we had also Gardermoen in Norway. Now we see a more medium-sized projects that we are managing them, and that of course puts another view on how you operate them, and here we saw some slight reduction of the utilization during the quarter. Stefan might comment more on that. When it comes to Reinertsen in Norway, I think we have a strong program how to get that business back on track, delivering supportive margin. We have our challenges with that business, but we have a strong program in getting back on track on that one.
Stefan, any more comment from you?
I think the company itself, the employees, the engineering Reinertsen is very skilled and have a high confidence level. It's more how we run the operations. It's more into what Jonas discussed earlier, operational excellence rather than individual projects.
Yes.
Is there any cost out activities in Reinertsen that should sort of fix results, or is it sort of the same message would you convey to the market like nine months ago?
I think we also have a cost out, of course, clearly. I think as always, it's not just one thing that will fix it. We are looking on the portfolio as such. What kind of business are we doing? How do we get up? How do we utilize our position in Norway in a better way to get better projects, better contracts, better prices? On top of that, obviously, we are looking on the cost side, how to really drive out synergies in a much better way between the Norwegian and the Swedish business. I think it's crossed the line, and we see, of course, that we already see results in that business, it takes a while then. The program is in place.
Okay. Just you talked about timing effects on your industry division. What did you mean by that, Jonas?
What I mean is that we have this share of six projects within the industry division, and we are closing these projects in a quarter by quarter. As it is in a project business, you might have some effect on the EBIT margin related to this project in a quarter. We saw some projects that did not deliver the same profitability as we expected, having a slight negative impact on the margin. For us, it's no issue from that side. I would say compared to the infra business where we see clearly identified business units, in industry, we don't see that. It's more that we saw some of the projects coming out slightly lower than we expected.
I would say there's no real issue in the underlying performance of the units, more than obviously we need to work on cost and make sure that we have a high performance in operation, but not in the same way as we saw in the infrastructure where we have more units that we need to address.
All right. I'll get back in line. Thanks.
Thank you.
As a reminder, please press star one to ask a question. We will take our next question from Viktor Lindeberg from Carnegie. Please go ahead.
Morning, thank you. Can you specify more on the activities that should lead to the cost savings of SEK 100 million from Q1 next year? Also should there be a gradual effect coming in already in Q4?
Well, the program is related mainly or 100% to unutilized engineers. We have reviewed all employees within the group, looking at people having a low utilization rate during a rather long period of time. We really would like to take action on increasing the utilization rate. That's one part. The other part is sales and general administration. We are not happy with the development in our SG&A. That's the reason why we're also taking big efforts to reduce administration costs. That's the second part of the program. Those two parts are now being implemented in all divisions. All divisions are a part of the programs. That's the overall concept for the project, for the program.
Okay. That's helpful. Is it roughly a 50/50 split here, or should we expect that the better part is coming from improving utilization rates?
We will not release that number, a big portion is coming from both. We will not give a number.
All right. You mentioned utilization rate, you are actually operating, I think, close to all-time high levels now on billing ratios, and fairly flat year-over-year as well. The margin is not really coming along. Can you help us understand the correlation that longer term, I guess, should be there? Is it salary increases that you cannot really compensate for, or is it simply just a poorer mix on the business mix? Would be helpful to understand that.
The Q3 result is mainly related to the areas we addressed in our discussion. In general terms, yes, we have been able to compensate the salary increases by price increases in general. Of course, there are competition in the market. In general terms, yes. Regarding utilization rates, there are areas that we know that we can improve. If you look at the infrastructure division, we have seen a drop in utilization rates during the quarter. There are room for improvements, I think, in all areas, especially when we have identified those people that don't really are utilized to that extent we need them to be. If that will answer, Viktor?
Yeah. That's fine. Continuing on the organic growth now, closer to, well, maybe 3.5% if you adjust for calendar. Can you try to quantify how much of this is price increases versus volume increases when we look year-over-year?
It's not true that we are giving that.
We don't do that. What we are stating that we are able to cover the wage increases. That gives you an indication.
Okay. All right. Maybe looking at my last question before I get back in line. I've been seeing a lot of insider selling in the past three, four quarters, both managers, top managers selling shares quite a lot. Just to understand, Jonas, you're now new into the company. You've made your strategic overview. It would be interesting to hear your thoughts on the kind of pilot program that many companies have, and I think especially in light of being in a transitional period now, what is your goal? Is it to increase your holdings in AFRY shares, or how should we think about that going forward?
No, absolutely. I was not aware that there have been insider selling. In general, from my point of view, we have a strong focus on making AFRY a stronger and successful company. That's why I joined AFRY. We have a program today, a convertible program within AFRY. On top of that, I have also invested my shares, and will continue to see what is very interesting to invest in. I think the strategy that we are putting in place, where we more and more will focus on delivering complete solutions and projects related to fixed price and different kinds of models will also be the way forward to not only have utilization as the big lever for driving profitability.
We see that trend in general, that both on the manufacturing side, as we also mentioned on the product development side, that companies are more and more willing to give away complete fixed projects. I think with our knowhow base, we can also offer even more than selling ours. I feel extremely optimistic in the work, of course.
Okay. That's all from me now. I'll get back in there. Thanks.
Again, please press star one to ask a question. We will take our next question from Johan Dahl from SEB. Please go ahead.
Yes, thanks. I was just wondering, Jonas, I think the strategy which you laid out it's fairly clear, but just want to press more philosophical note. In order to realize this plan in a three to five-year time horizon, what are you willing to invest in to reach these leading platform positions which you're talking about to achieve growth? I'm just wondering how we should view that. Are you willing to invest and take extra cost in the short term to achieve this in the long term, or are you foreseeing fairly smooth progression to achieve these positions in the market?
No, I think we need to invest, but clearly we will put ourself into a focus to do that in a smooth way. I don't see any reason to have a hiccup on the curves, because I think that's not what we want to do. I think if you see how we operate today, I'm sure that by being a bit more focused and gathering that together, I think we have room to do that also within the current business. I think it's more about how we do it, how we use our internal resources, et cetera, more than setting up big investment program that will take a hit on our results, because that would never be the way forward.
We know that we need to invest in platforms, in concepts, I think it's much more related to how we operate today than that we need to put big programs in place. Clearly we will have a smart, structured way in building up our competence base, and use that more and more for the platforms moving forward.
Okay. Do you think there will be emphasis on acquisitions in creating these islands of expertise, or will the emphasis be on organic? Of course, difficult to answer at this stage, just your view on it.
No, I think we need both. We have a hell of a platform internally when it comes to competencies, I also know that if you look on the infra side, moving towards the core countries, we need to look for platforms or niche-related acquisitions as we have done also in the past. I think it will be a combination, if you just look on this inUse company, that it's not the biggest company, some 100 employees, when you look on the competence base they have been related to service design and user experience, to add that on to our already strong base in design, which adds on to the strong base we have industry and in infrastructure. When we get that kind of release, that knowhow across our business, we have a very strong position, that I'm sure of.
On top of that, we will of course be aggressive on finding acquisitions. Absolutely.
All right. Thanks.
Thank you.
As a reminder, please press star one to ask a question. We will take our next question from Viktor Lindeberg from Carnegie. Please go ahead.
Yeah, thanks. Thinking about how you monitor and track the business, I guess you do this on a weekly, monthly and also quarterly basis, but can you share with us how rapidly you did discover Q3 was trending in the wrong, or at least below your expectations? Thereby how we also could get some confidence and comfort in that Q4 is starting on a better note than you actually ended Q3.
The Q3 result was not a surprise. We are monitoring our business very closely, and have weekly and monthly follow-up, doing forecast every month. We had indication on that. We had a quarter that didn't reach up to last year and our internal expectations rather early. That's the reason why we also have taken actions, been able to take actions. Actions are ongoing. It was not a surprise that we came out on this level.
Okay. All right. Looking at the cash flow generation, I think you have been, the past two and a half years, building up working capital of close to SEK 650 million over the cash flow statement. You have been generating an EBITDA of close to SEK 2.5 billion in the meantime. Just to see how the working capital build up, looking at cash conversion being at close to 55% only, is this in line with your expectations or are you addressing this actively? I think you are underperforming at least peers, it could obviously be business mix as well. Would be interesting to hear your thoughts about this.
Well, okay. You put a number on the table, Viktor. I have looked at in comparing with peers.
We are not underperforming. Okay, we are slightly above. If you look at our working capital in relation to sales, we are around 10%, our peers are in the same range. On the other hand, we are more into project business, if you are into project business, you are more working capital intensive because, especially when you are into automotive business, you have payment terms that are negative for working capital and cash flow. Viktor, in general terms, we are in line with peers.
To add on to that, I think in the general performance program, we will of course address and do everything we can then moving into perfect business to see prepayment terms and things like that to do everything we can to improve.
You shouldn't expect If we go into project business, we have to make a trade-off of EBIT margins versus cash flow, slightly. That's the reason why we are slightly above peers, but it's not that much.
Okay. Should we expect a seasonally good quarter in Q4 in terms of capital release as well, do you think?
Yes. As the calendar effect is positive in Q4, we will get a very nice cash flow. I expect a very good, nice cash flow in Q4.
Okay, that's good. Also finalizing on that note, we saw some media articles this past week on big incumbent industry companies being more inclined to actually improve the number of DSO at the benefit of, let's say, subcontractors, I guess that would also benefit us. Is this something that we shouldn't pay too much attention to?
I will wait to make that conclusion, Viktor.
Okay. All right. Final from me. Looking at the quarter as such, is it fair to say that earnings were partly hampered by you having an elevated level of internal focus on this strategic overview in the quarter? Is that something that you more top management spent time on?
I'm 100% convinced that it's more related to the second part. I don't see any correlation. As you know also then, Viktor, that we have clearly identified where we have the problems, as we said, Reinertsen Norway, and I would say the transition from big to medium-sized project. I don't really see the correlation between the strategic review that we have done on the management side and Reinertsen and the big projects.
Okay. Yep. That's comforting. That's good.
Yeah, pretty clear. In the opposite, I think the strategy we are releasing and the direction should support the business, and it will. I don't see the drama. I'm 100% confident that we will address the areas where we are not performing according to plan. I think we have a super strong base. We know where we have our problems, and again, we will address them.
All right. Okay. Thank you.
Thank you.
Bye.
Please press star one to ask a question. There are no questions at the moment.
Thank you all for calling in. You are all very welcome to our Capital Markets Day in November 8th, here in Stockholm, Solna. Thank you very much for listening in, and have a great day. Thank you.
That will conclude today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.