Earnings Call: Q4 2020

Feb 5, 2021

So dear all, a warm welcome to this quarter 4 report from Aifry, including also the full year 2020. My name is Jonas Gustafsson, CEO of A3. I will do the first part of this presentation, But I also have our CFO, Joosse Paionen, supporting me and he will present a few slides and Joosse is actually sitting in Helsinki. So warm welcome to all of you, and we will also have opportunity to ask questions in end of this presentation. So let's start and jump into the presentation then. And as you probably have seen then, we presented a report early this morning, and We are also proud that we have been able to strengthen the profitability, and we can also see a continued recovery compared to the Q3 across basically all segments. So the highlight of the report, of course, is that we have improved profitability. And of course, all the work we have done during 2020 have now yield effect basically across the whole business then. The balance sheet, we have a continued strong cash flow, meaning our net debt is going down and the balance sheet looks very good. And that means also that we are now ramping up our focus on acquisitions besides, of course, focusing on getting organic growth back on track. We can actually notice now that we are starting now to be much more offensive in recruiting talents across the whole company. Of course, the growth was still impacted from the ongoing pandemic. It is very different between different segments, but also in the Q4, We had a negative growth, as you have seen, equal to 5.5% if you take away the currency effect then. But I would say that in general, there is a stabilization now that we saw already in quarter 3, And we can see basically a continued recovery across all the segments. I will get back a bit more to each of the divisions, Justin, shortly. What we are also happy with is that the long term cost savings, we have now a run rate by end of this year or last year then quarter of some SEK 210,000,000. If you remember, we set a target for SEK120,000,000 beginning of the year. Of course, then we have worked extensively with all kinds of short term cost savings to mitigate the COVID-nineteen effects. So we have had something like SEK500 1,000,000 effects for quarter 3, quarter 4 and quarter 2, 3 and 4. But on top of that then or as a part of that, we have also this long term structural savings that we as now SEK 210,000,000 when we end quarter 4. And as you also noticed, the Board of Directors then have made a proposal to of a dividend equal to SEK 5 per share. And also, if you look on the full year, that means that we ended up just short of SEK20 1,000,000 and EBITDA SEK1.6 billion compared to SEK1.7 billion in 2019. And the EBITDA margin is 8.6% compared to 8.7 which we think is good in a year when we have really a significant volume drop. So again then, I would say that quarter 4 is a step in the right direction, especially on the margin side, on the profitability side. And of course, now all our focus is going to even drive the growth moving forward. 2020 then just before we go into the numbers for quarter 4, of course, it's been a very different year to what we planned. It's been an eventful year, Of course, to mitigate all the effect from the COVID-nineteen, we started up the year then to basically take the whole organization from sitting in the office, at clients, at sites to find ways then to work from home using the digital platforms to be able to keep the service levels. And it's been, of course, very different depending on what region or country we are operating in, different challenges. But I Said it before, I'm extremely impressed how the organization have been able to deliver high quality from service and projects in a very difficult year. So then, of course, we have revised our strategy. We presented that And the last year, it's more clear. We are focusing on our geographies, but also segments, Sustainability and digitalization as part of that. A couple of things that is worth highlighting, the whole repositioning of Energia. If you go back a couple of years before we joined forces with Peury, we really had a bit more challenge in the Energy Division, Lower margins. Now they delivered double digit in the quarter 4, full year up to 9%. So the whole repositioning They have actually delivered really as we have planned. So it's a fantastic work. We also then have done the repositioning in automotive. We started that even before 2020, and of course, due to the oil turmoil in the automotive segment during the spring, we have fast forward that. So that's we have done, and now we can actually see that, that segment for us is also stabilizing, But we see then also a gradual improvement in that segment. We are ramping up our acquisition focus for sure. So there's a lot of dialogues and the balance sheet again looks very good for us. So that will be a big part of our focus moving forward. And then we have also established the AFRY brand that we are continuing to brand and also then AFRY connected to the whole sustainability part, which is really the core of who we are. So we have entered a lot of new partnership in We have entered the 1.5 degree business playbook. We have a cooperation with Gapminder Foundation, And we have also joined the science based target initiative. And this is just the beginning on our work within the area of sustainability. So 2020, For sure, a very different eventful year, but the year has made us, I'm sure, a stronger company moving into 2021, even though we have faced a volume drop during the year. Well, when we look on the market, we can clearly see that we are still affected from COVID-nineteen. It's again very different between different segments as you have also seen in the report. We have segments like our management consulting business, Process industry are really delivering high good numbers also on the top line. But and we can also see that especially on the sequential level compared to quarter 3, we see a general stabilization. On infrastructure, there is a healthy underlying demand, even though we see that the private side of real estate are still affected. And of course, we are now working heavily to get infrastructure back on organic growth, and there is a lot of focusing on bringing in new talents into the Infrastructure division. On the Industry and Digital, as we have said, a lot of effect from the Manufacturing and Automotive Business 2020, But we have also some really great bright spots like Food and Life Science that has had a fantastic development throughout the year. And again, on both automotive and the manufacturing side, we have seen bottling out and we also see a recovery in that segment. Process Industries, I would say stable. There was a period where some of the large CapEx projects, the decision It took some longer time, we can still see that, but it's a very stable and good segment, and we have a fantastic position on that segment also globally. The Energy Division, there is a stable demand. And I would say the reposition we have done over the year, the profitability level we have Now moving full into the clean part of Energia, where there's a lot of repositioning and changes, I think that segment will be very interesting for us, and we will now push a lot on getting that back to growth. And then finally, management consulting delivering a really great year. And they are, of course, focusing very much on the segments of process industry and or pulp and paper based bioindustry and energy. So market in general stabilizing and recovery across the whole all segments. Of course, we have taken a lot of projects. And I will say that the order backlog, and also probably will talk about that, it is a solid ending 2020 as it was a year ago. So the order backlog looks very good for us. And we are taking a lot of projects in the Nordex, but also in the segments outside Sweden in the areas that we think is attractive. So I feel Very good that we also have a lot of good dialogues with key clients across all segments. So It's been a good quarter also from getting good products into our order backlog. Then these are just a few of smaller acquisitions that we have done during the quarter. And of course now, as I said, we have started up even A bit before quarter 4 to look a bit more into the potential acquisition, what companies would fit A3. And we are very much focused on these transforming segments that we have communicated and on top of that also companies that helps us In digitalization, bringing us a strong position in that intersection, digitalization and where we have a strong domain expertise. And this is just a selection of a few smaller companies that we have added on during the quarter, and we are now spending quite some time in a potential good company that would fit Aifry moving forward. So with that said, let's see if the technology is So supporting us, Jussup Paionon, are you around in yes, I see you, Jussup. Hello. I'm in Helsinki. Greetings from Winter Wonderland. Thank you, Usos. So will you take us a few through a Few of the financial slides, Jules. So starting with the net sales development throughout the quarter. Yes. So let's talk about the net sales. So obviously, We are slightly down compared to previous year. But at the same time, I have to say that we have some positive underlyings there. If we take the total growth minus 10 percent of growth, excluding FX impacts minus 5.5 This is something that we can't be entirely happy with. But if we dissect it into pieces, which we will do especially on the divisional slide, We learned that we have few pockets that have suffered quite a lot, but otherwise, we are in a solid positive level. We continue to have the impact in COVID-nineteen, especially in automotive and manufacturing and some impact in the real estate segment thereafter. Then if we see the positive parts, our order backlog is strong. It is At the same levels as previous year when we adjusted at the local currencies, meaning that when we have less And a year ago, we have more workload per employee than a year ago, which is obviously a good start for 2021. Otherwise, then if we look a bit underneath, we can see that from Q3 to Q4, we are actually increasing the average number of FTEs in most of the divisions, which is also positive when looking forward. Then if we take the next slide and we talk about Cost savings and the cost part the other part is that we have still been in a Good note on delivering the cost savings and mitigating the decrease in revenue. So we have continuously been able to Close the delta of revenue decline compared to cost decline, meaning that the relative profitability has been protected And then the other part that is good to note is that basically, we have accelerated cost savings from the indirect expenses So the ratio of indirect expense savings to direct profit expense savings is continuously increasing and highlighting That we have roughly SEK 210,000,000 of permanent savings. So all these put into the one, We have been very successful on protecting our margins, but obviously, now our eyes are in the growth and getting back on track on that. So going to EBITDA, we delivered 10%, which is within our long term goal. And we are doing that despite losing revenue roughly 10%. So all in all, it is a Positive delivery, and I'm quite happy where we are landing with the relative margin. At the same time, if we take 4 out of 5 divisions, They have an improved margin compared to previous year quarter 4. And then if we take sequential development, we can say that all divisions sequentially improving. So that is also a positive note. Then we need to remember that in the numbers, but also a bit in the relative numbers, we are losing on the FX impact roughly SEK20 1,000,000. So all in all, we would be more or less on the same absolute numbers without the translation differences impacting us compared to previous year. So all in all, happy with the 10%, happy with the underlying positive note and the direction of the divisions. So as said, now the eyes are on the graph. If we then take a bit of the look underneath where the delivery is coming and how the SEK 490 1,000,000 is building up. We see that in absolute terms, infrastructure is losing SEK8 1,000,000 on relative terms, they are actually gaining. Here we say that the slowness in commercial real estate has impacted us. Then the biggest impact is actually coming from Industrial Solutions and especially from the automotive and manufacturing, which we have been highlighting throughout the year As a difficult segment, but also in there, we see the bottoming out and we see the continuously improved results. And now actually, the delta compared to previous year is continuously closing if you take the relative margins. Process Industries is a flat 0 On absolute ones, on relative margin, they are improving, but Process Industries is one of those places where the absolute loss Of EBITDA due to FX translations is highlighted due to solid and strong offering in Brazil, which unfortunately then with the Brazilian real The devaluation is converted into lower amount of Swedish krona. Energy, both operationally and However, you want to look at positive delivery, double digit numbers, also in absolute terms, despite losing quite a lot of volume, Still on green. Management consulting, also strong one. Absolute numbers above relative margin, 17%, I would call that on a successful quarter, but at the same time, it is a volatile business with success fees and so on. So those have definitely impacted. Then group common, slightly negative, mainly due to decline in the revenue. So then we are not In a position to burden divisions too much on the expenses. So all in all, 9.5 percent, SEK516 1,000,000 ends up into 10% and SEK 490,000,000. Then a bit on the divisional part. We see that infrastructure adjusted organic growth at minus 4%, obviously not where we would like to see it in totals. This is coming Basically, mainly from the real estate segment and in geographical perspective, it is a bit more in the Central Europe part. At the same time, if you take a bit deeper look under the hood, we can see that the average number of FTEs In Q4, it was higher than average number of FTEs in Q3. So we have a solid way forward, and we are implementing that way forward. So I'm Quite confident on that part. Industry and Digital Solutions impacted by the automotive, like explained earlier. Then we have the positive organic growth in Process Industries and in Management Consulting, heavily supported by Recruiting and positive market environment. Energy, the repositioning, which I would say is now complete, is still on organic perspective, Losing it, but at the same time, with the complicated positioning, I'm quite optimistic on what comes to 2021. And then as I said, if you take the relative margins, all divisions are improving. Then Another place where we should be happy and proud of is the cash flow. We are now at net debt to EBITDA at 1.6 Excluding IFRS 16 range, that's a solid position. And if you take the view on 2017, 2018, 2019, we are actually below those ones. So From balance sheet perspective, we are in a position to take whichever moves and capture whichever opportunities we see in the markets. This has been supported by strong operating cash flow. But at the same time, if you see the net working capital development, It is like a school book example of how it should behave when you lose volume. So then you recover money home. And obviously, when going back to growth, then you start Dying again to net working capital. Board of Directors proposes dividend of SEK5 per share, which Obviously, it's a positive for our shareholders. So with these words, handing back to you, Jonas. Thank you so much, Jussu. And again, you will have chance to ask both me and Jussu questions. I will just wrap it up now with just Talking about the future then, we are really happy that we have now closed quarter 4. Of course, we are in 2021. And for us, it will all be about executing our strategy based on the platform that we have now. So we have updated that and you all know that. We like so much our mission, we accelerate the transition towards a sustainable society. That's really who we are, And that's where we can help our clients to go through all this transition that is ahead of us. We have set a clear ambition and that's to be a European leader in sustainable engineering, design and advisory, also with a global reach because we have some really good position, for example, in pulp and bioindustry and Ennure, for example. We're based that on 5 areas to really on the countries where we are operating to drive organic and so acquired growth. We have highlighted 4 clear segments. Of course, infra is a big one where we will spend more interest in driving growth. Both digitalization, to do that in a more scalable way, it will affect the whole company and sustainability. On top of that, what you So presented all the work we have done, and we still have work ahead of us in looking on the cost structure, making us leaner. On top of that, we are continuing to implement systematic platforms Like CRM system, HR system, we are in the ERP implementation that will also support our operational performance moving forward. So with that said, moving into 2021, even though the pandemic is still very much around us, we have a good Optimistic positive momentum. We see that the market is recovered slowly. We have a stronger balance sheet. We are focusing a lot on growth. And I think as Jussus said, the average number of employees is normally something that is very interesting in a company like ours. And we can see that, for example, in infrastructure, It goes up between Q3 and Q4. Before we see that in the number, there is a time lag, but that's a very strong and positive KPI for us. We are developing our digital platform and we are accelerating all the work within sustainability and we have some very interesting partnership coming up. And I also would say that we have started up 2021 with a strong platform and a positive momentum. So with that said, I would like to invite you all for questions, and I will leave it over to Katrin Sandgren, Head of Communication, to facilitate the Q and A session. So please, Katrin. Yes. Thank you so much, Jonas. So if you would like to ask a question, please use the And I can see we have the first question here from Erik Paulsson. Please go ahead. This is Erik Possen at Nordea. I have one question relating to the infrastructure and real estate. Can you break that down The development in the quarter, how was real estate going and how was infrastructure And I believe that real estate is like a third of the segment, right? Yes. Hi, Erik. Yes, you're right. I mean if you look on the infrastructure as a big umbrella for Eifry, it's, as you say, big part is into The transport part, rail and road. Then we have the, as we said, the real estate part. And then, of course, we also have part ways more project management. We have, for example, a company in Norway called Adansia. And we also have water environment and architecture. So that's basically frames infrastructure. And I would say and also compliment me that also on the real estate segment, we have seen a stabilization and slight improvement Also in that one, even from lower level obviously, because I think that sector is still affected. So If you take the hotels, for example, where we have some architecture work, etcetera, it's been slower than normal. So what would you say, Jussi, complementing that question? No, I would say that you are absolutely spot on. So we have had issues in the real estate. We have seen it at least what it looks to us So bottoming out and basically when you then take the numbers between buildings for real estate and transportation, obviously, then in relative terms, transportation has been Station has been burning better than the other segment. I would say, Erik, that right now we feel also here there is a positive And we are gearing up to take that both because our building or real estate part is very both local business, but also some of the bigger projects. So we can also see there are some bigger projects coming up as well as we are now trying to really support our organization to go for growth again, to capture the opportunities that start to come up again. But it has clearly been, of all the Segments that we have gathered under the umbrella infrastructure, that has been the one where we have seen the biggest slowdown throughout the year effective from COVID-nineteen. Understood. Is it possible to break down the hotel business, what it has been historically in the business segment of whole infrastructure? Now I can't give you that number right here. And obviously, it is in the total not the biggest segment, but I think it's an example of Our products that we had in the pipeline that was obviously stopped, but we have other segments where we have been operating on building out airport, But obviously also being stopped. So when you break down the real estate, now that's not a private one, but when you break that down, there are some sub segments under the real estate That has been more affected. But I can't give you those details right here now. We could take maybe take that in a separate discussion if you want to take. Sure. Sure. Sounds good. All right. Thank you very much. Thank you. Jirik. And the next question is from Dan Johansson. Please go ahead. Hi, Jonas and Jussum. A couple of questions from my side as well. Is it possible to share Some insights about how you feel about the order book now moving into 2021? And also, if possible, how is the general pricing level on new orders compared to previously? Are they stable or do you feel some pressure now due to the slightly slower market? Thank you for those questions. And again, I will do it like before. I have a start and use So as we said before is that the order backlog looks very stable and good and even as strong as we had 1 year back. So I think In especially large order in Process Industry and Energy, but also in our whole company, we have been good in getting in an order at the same level as last year. So that feels good. From that side, I will say that we have gone through 2020 It's very stable. When it comes to pricing, it's always of course when you're going through a situation like Now there is, of course, in different areas, price pressure. We have a pretty clear view on keeping our price levels on a good level. So we cannot say that we have seen big price decreases where we're operating. What do you say, So when you look on the whole structure. I'm happy on the levels. They are through auctions more or less stable. At the same time, all the talking about order stock, it's important to understand what is underneath. We have process industries and are driven by larger CapEx Projects in price living on the CapEx from public sector, so it is market perspective slightly different. And then Industry and Digital Solutions have been making a transformation from professional services to projects, but all of these ones Positive in the order stock, the distribution is, as always, quite okay, but The devil is in the details in there. I'm happy on the position and happy on the stability on that part. And as said, we have less people for Slightly higher amount of order stock compared to local currency. So that's a good position to start the year. And then what comes to pricing, I've Many times reiterated that there is not a single pricing for Apri. But if we take a big view on that one, As normal, segments that are under pressure from demand perspective have a price Pressure in those segments, and that is normal. At the same time, in places where we are strong, we have a good position and the underlying demand is strong. Obviously, then We have pricing power towards the clients, and that has not changed materially during Q4. You're right, Juss, and just to complement, I think as you say, So first of all, it's all about presenting the value to our clients and making sure that we really have a good value. But then, of course, as leaner we are becoming, We want to be competitive. So as lean our cost structure is, as more often we can go for growth. But So I think right now it feels good with the journey we had in 2020 moving in now in 2021 and be really competitive on projects that we can go after to drive the growth part. Is that okay, Dan? Yes, sounds good. Thank you. One more question from my side, if I may. On traveling restrictions, how did that In this quarter compared to Q2 and Q3, I'm thinking primarily in terms of your more international business with But it's still very restricted. And of course, every quarter we go in this lockdown, it's because at a certain point, we need to meet our clients face to face. But I'm also surprised in we have had commissioning, digital commissioning, we have sales working more digital. So For sure, we are finding together with our clients fantastic tools to operate digitally. So I would say that it is still more or less on the same level as we had. It's not restricting us Right now, we are finding ways. But of course, we are now hoping and betting that by late spring, hopefully, we will be able to travel selectively where we need to do it. But more or less the same level because I mean the pandemic as you know then With the different lockdown rules in different countries, we are more or less in the same stage as it was in quarter 3. And maybe to complement a bit that one. We have different business models that are impacted differently by the travel. So if you, for example, look to 17% profitability in management consulting, which is heavy on the travel part and to certain type of seminars and sales efforts. They are now actually benefiting from that cost structure a bit. While then if we take in energy, for example, hydropower plants, which are highly international and requiring combination of several international expertise Little by little, they have been suffering on that one. So as we see in other places in the world or other Sectors of living, COVID has different impacts on different segments like we are having. But from absolute volumes perspective, it's exactly like Jonas says, It is on the same level as it has been now for the past 9 months since the restrictions have been Exposed throughout the countries. Okay, Don? Thank you. Yeah. So one final question, if I may, follow-up on Erik's question on the infrastructure market. I understand the parts of real estate remain impacted. At the same time, you said that you're starting recruiting again. And there's quite a lot of positive data points supporting The recovery in infrastructure generally, I would say, I'm thinking housing crisis, potential public stimulus coming into play this year. So how do you see the recovery now going into 2021? No, I think we see it as you see it. And of course, I mean throughout 2020, we decided and due to the situation and the drop we had throughout the company to take a lot of actions to support our balance sheet and to take cost measures. And I would say that also made us focusing a lot on And of course, that costed probably a bit on growth. But now we are offensive internally also to drive recruitment and going out and take all the opportunities. There is a time lag in that, but we truly believe there will be a steady recovery. Of course, again, it's not over with the pandemic, but we see the same data as you do. So we are also believing that there will be in most of the segment recovery. So we are focusing quite heavily because we feel that the cost base and the efficiency part is now starting to sit quite implemented. And now we are talking a lot about how to get focusing on all the opportunities we have on the market. Thank you. I'll jump back into the line. Thank you. Thank you so much. And the next question comes from Johan Sundin. Please go ahead. Iwan? Hi, everybody. Thank you for taking my questions. First one is on the automotive business. You sent out a press release, I think it was a few days ago, regarding new contract with Scania. Can you please elaborate a bit on how your repositioning of your Automotive business has changed and How the negotiation has developed with, for example, Skolnia and the 2 other big automotive companies in Gothenburg? And how big part of your old offering can be replaced with this kind of new bundled offering Where you take out the complete work packages and so on. Thank you. Some questions. But I mean, First of all, as you all know then, the position we have had in automotive throughout many years has been a mixture of, let's say, more professional service like business all the way up to taking on bigger projects involved in really the high level design, etcetera, And also more and more into digitalization, connected product, etcetera. And of course, in that turmoil during the spring when basically it was a full stop, Our view was that the automotive or the especially the big companies, they overlooked a bit the R and D portfolio Because we have to be clear, they are also maneuvering now how much to invest in the old technology to keep the current product portfolio how much are they really stepping into electrification. So I think they overlooked. And with that, we also So let's also use the opportunity when we see volume going down to think where do we want to play on a longer part. And then we had that dialogue and clearly, our ambition is to be supporting these great companies with delivering value. And that's where we are walking discussing now. So I would not say that we are not running after the same kind of volume as we have because now we have taken that hit during 2020. So I know Robert Larsen and the team in Automotive are clearly looking in together with our clients where can we as A3 offer true value over the next coming years. And our ambition is to take more working packages, but also have good frame agreement to support these companies in the big transition they're doing. That means that for quite some time, we will have a lower volume in A3 on Automotive. But of course, we Rightly positioned with the fantastic competent base we have, we can also grow that business. Because you have to remember that over many years, OOF and now Aifry have invested in a really good position. We acquired a company called the Nova, which is really the core of Saab Automotive R and D team in total, Hetan and they have a fantastic competence. We also know that we can offer great, great competence and value to the clients. So I think that we will see also in that area growth, but we will be a bit careful because we don't want to end up in every time when the market goes down that we are seeing as somebody that you can just send home. We want to be there for long term partnership with our automotive clients And that's the most important. I think the frame agreement with Skane is an evidence that we can we are an important partner to these companies. And of course, in Sweden, the whole automotive industry is a big part of the industry in Sweden. But I think we have a good plan moving forward in automotive. Perfect. Another question, I think that's probably better for you, Su. It's regarding the cost savings that you announced today. How ballpark, how big part of this SEK120 million should you say are already realized during this year. I guess as you upgraded your kind of guidance from Q3 Quite substantially until Q4, the great part should come in the next year. These are all run rate savings. So we would expect to see them in 2021 in full. So they have been achieved by end of Q4. At the same time, we still need to remember that the €120,000,000 target was given out in a totally different world. So also the SEK 210,000,000 achievement should be compared to the world we are living today and not to the world we were living a year ago. But that SEK210 1,000,000 is in our pocket. And at the same time, as we have communicated when announcing the SEK120 million, we have the Investment pipeline still in front of us, which we are implementing. But it's I have to complement and even if it was Question to you. So I think clearly we have that in us. And then the question that we will maneuver in now, if you look on sales and administration costs with all the travelings that you talked about, We don't really know to what level we will get back because clearly we will use opportunities jointly now to find ways to be more efficient in traveling, in meetings, etcetera. So some of these learnings we have done will probably be long term learnings, Maybe not the full of course, because we need to start to travel. At the same thing with the office and the facility structure, which is a much longer cycle. So what does that mean when we will have more flexibility in workplaces, how big should offices be? So there are some interesting more structural savings also ahead of us. Perfect. That was all from my side. Thank you. Thank you. Thank you so much, Johan. And there are no further questions. So back to you, Jonas, for some final words. Okay. I would like to thank all of you for taking the time today and joining this presentation. It feels good for us to close 2020 with a solid margin and also what we see the signs of The pandemic, so for example, here in the head office in Solna in Stockholm, it's very empty. And of course, we are still Maneuvering in that with a lot of people sitting at home, keeping the social distance, different lockdowns, But in general, there is a strong optimism also inside AFRY. We have done some employee service Lately, trying to feel the temperature of the organization, and it feels positive. And again, then of course, we hope now for the vaccines And getting back to some normality, we believe that we have a good position in sustainability, all the trends that we have We are in the middle of. So even if last year then from sales was a disappointment with the drop we have had, All the work we have done to improve and mitigate that, we will bring Innos in this year and now it's full speed ahead focusing on growing this fantastic company. So again, thank you so much for spending the time with us, and I wish you all a good Friday and a good weekend. Thank you.