Earnings Call: Q1 2021

Apr 29, 2021

So dear all, a warm welcome to this webcast where we will present the 1st quarter report for AFRY. My name is Jonas Gustafsson, CEO of AFRY. And together with me, I also have, of course, Josep Pynnan, Our CFO, sitting in Helsinki, and Jussow will support me with a few financial slides as always. So again, warm welcome to this. We will run through the presentation rather quickly, and then we will have time for any question when we have presented A few slides to all of you. So I will start up then with the first slide, which is basically a summarizing slide where we Actually, it says that if you look on the Q1, we believe it's a stable result. We have delivered a margin of 8.6% EBITA margin compared to 9%, but you have all, I guess, noted that we had made a change in how we account for the salary costs. Adjusting for that, we would be on SEK 9,200,000,000. Jusser will take you through the details related to that. Sales came in basically on SEK 5,000,000,000 compared to SEK 5,200,000,000 But here we can also adjust for both One working day less and also quite negative currency effect. And if you adjust for that, we would be on 0.5% growth, which I think as a step forward, we are now showing growth again. And if you compare that number, 0.5% to quarter 4%, where we were at minus 6.5 So clearly, we see now that A3 is moving back to growth. And I would say that Across the whole all divisions, we continue to see a stabilization on the market. It differs, of course, between different segments. And yet, as you have seen, some of our divisions are really delivering good growth and also high EBITDA margin. I'm also happy with the fact that we have now ramped up the acquisition agenda. And so far this year, we have 7 acquisitions, some of them smaller, but they add up to more than SEK 200,000,000 in addition on our revenue. So I think we are getting back on organic growth and we are also starting now to ramp up the acquisition at the end. So There are things that we would have liked to have better as always, but it is clearly a step in the right direction for AFRY as a whole. And looking on the market then, it's fair to say that for sure we are still in the effects from the pandemic, A lot of fighting with the pandemic. But overall, we could also note that in the quarter, we have seen an improved utilization. So I think we started a bit slower, but we also picked up a bit better in end of the year. In infrastructure, big part of our business, Continuous stable demand in the transport segment, I would say that the real estate is still not back to track where we would have liked to have it. Okay. We have to take a 2 minute break because for some reason teams have gone down. I apologize for that. And Our Chief Technicians are trying to get teams back on track. Okay. I think we are back with the themes, with picture and sound. As you know, we are doing good with some teams, but also having a Q2 broadcast. And I just want to wait for a signal that this works. All right. We are back on track, and I hope that you followed me when I went through the summary and started to do a market update saying that For some reason, we have problem to get Teams to work. So we will now move fully over to using YouTube, And we want to have the team that was in Teams to link in on YouTube, and we will also Open up for sending questions to Katrin Sandigan, Head of Communication, and she will then read the questions and we will answer them to our So that's what we need to do, and we are so sorry for this. We will just wait for people to move from Teams to following us on YouTube. Jusser, are you still there? Yes, I am. I'm here, all All right. So we are back now, and we hope that you all have joined through the YouTube link because teams have been very unstable for us today. So I'm going back to the summary because I was also informed that you did not hear me. So I will start and again with the fact that we see quarter 1 as a positive Start of the year, stable result. We delivered 8.6% EBITA margin, but we also made changes in the salary accounting. Juss We'll take you through that. Adjusting for that, we would be on SEK 9,200,000,000 EBITDA then SEK 4.32 And sales, SEK 5,000,000,000. This is less than last year, but we have adjust for currency, and it's also one working day less this quarter, we would be on we are on adjusted organic growth of 0.5%. That number we can compare to minus 6.5% in 4th quarter. So we clearly see a sequential improvement. We are getting back to growth. We are also ramping up the acquisition agenda. We have announced 7 so far, Some of them smaller, but positioned in a way to support AFRY also our organic growth initiatives, adding some SEK 200,000,000 on our top line, and we start to have a good pipeline on potential acquisitions moving forward. I'm happy with that. The market is becoming more and more stable. Of course, it differs a bit, and we are still not out of the COVID, as you know. But I will say that in general, all segments start to have a feeling of positive development where demand is getting Maybe most of all driven from the overall industry segment. If you look on infrastructure, still stable, but we will say real estate, The big building projects still not back to track, so that's clearly an area where we see not as good development in the market as we would have hoped. Industry and Digital, Food and Life Science, we have highlighted for some quarters still very strong, and we can also see Automotive starting to pick up from lower levels though. Process Industry and Energy, stable and good. I would say the hard work we have done over the last years in energy starts to yield really good effect, and I think we have a very strong position in the evolving energy landscape And also process industry, which is, of course, then younger forces with Peoria and OF have proven to be very stable and strong. And we have a good pipeline, also solid margin and good growth. And the management consulting business that we have is really strong. So There are things that we would like to have better, but all over, it is a clear step in the right direction. We are, of course, Jussow will highlight the fact that our order backlog is as strong as ever. And we are starting, of course, we are booking a lot of interesting projects, highlighting a few here. For example, the frame agreement with Vattenfall, SEK 800,000,000 over 3 years, very important for us. We have a good agreement in Denmark for the Danish road direction and also project in Norway, etcetera. So I think when we look on our product portfolio and so project, it is as strong as ever. This is just highlighting the companies we have announced So far this year and there are, of course, a few small ones, but starting to get hold of really interesting Companies that adds on to our position then. And we have then last week, I think, announced the Evol, which is a digital company In Gothenburg, that adds up adds on to Eifry's total digital agenda. So I think we start to be happy with the pace. We are looking into interesting acquisitions. As you remember, 2019 after the acquisition of Peiry, We ramped down smaller acquisitions. 2020, of course, was all about meeting the COVID, and now we are ramping up acquisition again, which has been a part of the success story for our company. I'm really happy about that. Sustainability. It's clear that we see now in all customer segments the need for getting support to transform into sustainable solutions. We can see automotive, of course, going to full electrification. We can see initiatives into base industry like steel So it's fair to say now that all end segments, all our clients are finding ways to transform to sustainable business models. And of course, now we have great opportunities in AFRY, 16,000 experts, and we are also now pushing a lot to make sure that we can explain how we can help our clients to become more sustainable. We are focusing a lot also to move into the EU taxonomy. So we are working both front end and back end with our sustainability agenda. We have a lot of operations. We announced a few weeks back that we are joining forces with Nord Stream. Gapminder is another one. We have joined the 1.5 degree business playbook. We have a lot of activity in boosting diversity In Aifry, because we know that a more diverse company will perform better, it's part of our culture. So only in my 4 years in Aifry, I see now that also in the area of sustainability, we are moving in all areas, and I'm happy about that. Before I leave over to Jusso, also last year, we announced that we will ramp up our digital agenda. We have a long tradition of building digital competence in A3. But last year, we announced that we are also forming A3X as an accelerator. Together with all divisions and business units, we will jointly together triple, that's our ambition, to triple our digital revenue in the next 5 years. And we have now formed A3X. We are starting to bring people from all our divisions into A3X together with solutions, and we are also recruiting from outside. And we announced that we have hired Perklisten EXAT coming from Hitachi, With a long experience from both IBM and Hitachi in formulating and selling digital solutions, and we are very happy about that. Last Friday, we had a launch of our digital agenda together with Nord Stream, and we also highlighted a few solutions, we had a good discussion with Rafikverkte and Wattenfall as an example, who are, of course, looking to transform part of their business into Or they have a big need for digital transformation in each of those companies. So I'm happy what we have been doing. And of course, now we will push for a new business model, recurring revenue on top of pushing Digitization across the whole AFRY. So I would say sustainability and digitalization, 2 big things going across the full AFRY as a With that, Jusso, I will leave it to you to take us through the financial slides, and I will click on your mark, starting with the net sales. Thank you, Jonas. So when we talk about net sales development, we ended up pretty much SEK 5,000,000,000 Mark, on the revenues, that amounts to minus 4.9% as a total growth. But then if we look a bit further, we had Quite significant FX impact rising. And then we have the one calendar day less. So all in all, we can say that adjusted organic growth was positive 0.5 percentage points, which I'm really happy about. At the same time, this is also excluding the M and A impact. We have roughly 0.3 percentage points On the M and A driven growth, so as you may have noticed, many of those announced M and A have happened at the latter part of Quarter or even after the quarter. So those start to contribute us only at a later stage once we have started to consolidate them. On the FX component then, it was SEK 208,000,000 negative. And our biggest exposures are in euro, Swiss francs, Norwegian krone, British pound and Brazilian real. And with that type of portfolio, you can expect still in the second quarter, especially The negative FX impact to continue. And then at the latter part of the year, in 2020, we started to see stabilization on the levels where we are today on those parts. It is very good to note that we have very strong development, especially in Process Industries, Energy and Management AFRY. The food and life sciences growing heavily. We still are burdened with the real estate. Real estate, especially the commercial part of that one and then automotive. But in all of those segments, we have A3. Also, sequential improvement during the quarter. So March was looking better than January February and so on. So, We are seeing positive on that side, too. At the same time, if we are looking our order stock and order intake, They are continued to be on stable levels, and we are happy to go forward with such an order stock. So then let's talk about EBITDA, if you can, Johannes, change the slides. On the EBITDA, basically, we amounted to SEK 432,000,000 Check compared to previous year, SEK474,000,000, it has been impacted by the change of salary accounting method. I will come back At a later stage on that one a bit what it means. But if we would adjust that SEK28 1,000,000, we would have been On a margin level at SEK 9,200,000,000, so SEK 460,000,000 set to a SEK 5,000,000,000 revenue. And that would have been better than previous year where we marked 9%. So all in all, I would say that from efficiency perspective, we have been faring quite well, especially when you compare delivering Improved margins on a pre COVID or materially pre COVID quarter to a now is it a middle COVID, hopefully late stage of COVID quarter with 1 working day less. And if we are looking on the underlying results, 4 out 5 divisions are delivering clear underlying improvements, while then 1, big infra, is rather stable If we adjust for the salary impact. So all in all, we can say that our operational performance is quite good. And obviously, then we see that we have a positive impact from the efficiency programs continued and cost savings arising both from measures we have taken, but then also underlying COVID impacts, no travel and such. So all in all, I would say that our EBITDA development, the 8.6% is quite solid in the Market conditions we are living today. Going forward, a couple of words on the salary accounting methodology. So just to clarify what does it mean. We have now gone live with our new ERP system in parts of the world And Sweden is the 1st place to be impacted on that one. At the same time, we have improved our back end in both HR and CRM systems. But basically, we have now capability to record salaries when they occur on a more Easier manner than earlier. So what we are basically doing comp differently compared to earlier. Earlier, if February had 19 working days and March had 23 working days. In February, we had 19 working days work on salaries and March 23 working day salaries. So February salaries were smaller and March salaries were higher during that period. And now as most of our employees, north of 90% are in fixed monthly salaries, We are showing the same salary amount both in February March. And that basically means that when we have a quarter like first one, which is shorter than the average quarter during the year, it has a negative impact. 2nd quarter has 66 working days. So It has, sorry, 60 working days or 60 point some working days, But it still has the same amount of salaries as in quarter 3 when we have 66 working days. And that creates volatility In the salaries, but in the full year basis, it is 0. So it is how we face the monthly salaries during the year. And once again to repeat that if we would have not taken this improvement in the salary accounting methodology, we would have recorded SEK28 1,000,000 better EBITDA in Q1 compared to old methodology. So When main of this one is coming from Sweden and that continues to impact then in Q3 and Q4 also. If we talk about the systems, I'm really happy to tell you a bit about the system landscape upgrade that is progressing according to plan. So Already in 2018, there was an initial decision to improve the system landscape and start working on it. And then The Peru merger came in, in 2019, which basically put the system upgrade Process and project into reassessment period. And after being reassessed, we have then gone forward with the whole integrated system landscape where ERP is one component, but then we have a global CRM system, Global Employee Systems and also some other components in the background. We have now gone live globally In the CRM and in HR systems during Q4 2020, Q1 2021, and we are happy on that development. And now we have So started the ERP system go live entity by entity. So far, everything has gone as planned, and We are very happy with this progress and at the same time looking forward for the next steps. So, so far so good and Definitely seeing improvements throughout our organization. Then talking about the EBITDA bridge. So basically, if we compare to previous year, we have the calendar impact approximately 9 hours. Then you can evaluate a bit what it means. You take our number of FTGs, you take our utilization, you take Whatever you guess for our fee per hour, but you would end up into having an impact somewhere around SEK 70,000,000. And so it is a Material impact on the top line and then obviously flowing to bottom line. Then the salary accounting change means that the full Calendar impact is always making our top line volatile, and it's not adjusted on the cost level. If we look then a bit on divisions, infrastructure is facing the issues on the dampened real estate market. Industry and Digital Solutions actually quite a good performance remembering that the automotive issues started to materially impact only 4th quarter. So it was like 27th, 28th, 29th March previous year when the bigger impact started to be visible. Process Industries, Energy Management Consulting, very solid development despite being impacted by the Negative translation differences, those ones amounted on group level, a total SEK 25,000,000 downwards. I need to remind that it's a translation difference. So it has we are hedging the projects, but when you translate euro revenues and euro profits into Swedish krona, They are translated on a smaller nominal amount when March 2020, euros was roughly SEK 11 point some And today, it's €10,100,000,000 So it comes at an impact. If we then go to the next slide and look a bit deeper On growth and profitability per division, first, we have the very solid performance, what comes to process industries, energy management consulting, All 3 in double digit profitability, all 3 on solid adjusted organic growth numbers, 7% and 7.1% in Process Industries and Energy and Management Consulting, 16.6 AFRIM. Energy, 10.7 percent Management Consulting, 14.6 percent and Process Industries, 13 point I would say that this is a very solid performance compared to previous year. And once again, remembering with the translation differences, with one working day less. So very happy on that one. Industry and Digital Solutions delivering 7.3% compared to 7 point -1.2 percent adjusted organic growth, pre COVID, late COVID. So also in the very solid consistent sequential improvement quarter by quarter. Then we have infrastructure Minus 1.0 in adjusted organic growth being impacted by especially the commercial real estate segment. Profitability, 7.6% compared to 9.1% previous year. This is something that has room to improve. But once again, if We look those numbers a bit deeper. We take the salary accounting impact, roughly SEK13 1,000,000 in infrastructure, we take that one into account and the one working day less. It is Still a solid performance, but not maybe a great performance. And all of that one Combined then amounts to the group performance, which once again I would say that it is, given the market conditions, quite okay. So then if we talk about couple of words on the balance sheet. We continue to have strong liquidity. We recorded net debt of SEK2.9 billion Compared to SEK2.8 billion to SEK2.8 billion previous quarter or SEK4.4 billion a year ago. So we are quite steady, 1.7 net debt to EBITDA when taking the items affecting comparability Into account, we saw positive operating cash flow, but there has been normal seasonality in net working capital. So we have tied up a bit more capital and especially when you compare to previous year Q1 where we released net working capital, It has been not as strong, but still, I would say, quite positive quarter in total. It is in our business quite typical that in normal seasonality, you tie net working capital in Q1 and then you in the second half start to release it with being peaking in the Q4. So all in all, solid balance sheet, happy to take the M and A slide we have now announced 7 and continue forward with this balance sheet looking for the growth. Then to send questions to Catherine Sandgren, and she will read it, and we will do our utmost to answer your questions. But looking forward, and of course, Where we are now, we will push for growth. It's clear that we have growth opportunities across the whole company, Organic, but also supported now from the acquisitions, to integrate them in a good way. And together with The acquired companies, we will push even more than and also keep good pace on the M and A agenda. I also showed you we have room on the balance sheet to continue to be offensive on M and A's. And I think the digital agenda. I mean, over the last years, There has been a continuous digitalization across all segments, also on our client side. So clearly, digitalization is nothing new. But we can also see now with the transition in many segments with new business model, new offering, there There is an increased need of digitalization also in some of the segments being a bit more later in the whole digitalization process. Clearly, some segments like automotive and banking sector are very advanced, but Utilities, energy, process industries, more in the beginning, and that's also where we have a deep industrial knowledge. So increase our digital agenda using our vertical or sector knowledge together, we believe, is something we will push even more moving forward. And to scale A3X, also finding new business model, being even more professional in developing platform system where we can use our expertise to support our client in improving their operations. That's what we are looking for. Sustainability, we have said this several times, both in the back end, EU taxonomy, but also in the front end, to be even more sharp how we can help our clients becoming more sustainable. Jusser mentioned that over the last year, we have been working quite heavily in improving our system landscape. And we took decisions already in 2018. And then, of course, we joined forces with Peury. But we are super happy and I'm impressed what our organization have been able to cope with at the same time as the pandemic, At the same time as integrating Peury, to integrate and put new systems in operations, HR system, state of the art, a new global CRM system that will improve our work together with the clients in operation. And as Jussuf said, we are now step by step starting to take the ERP system in operation. So It puts a lot of pressure on us, but so far, I think the organization have been able to do this in a fantastic good way. And then with all of that, we will continue to push for growth, but also keep a good eye on, I would say, the operational platform. We have been working quite heavily also 2020 to optimize and find a cost effective platform. And we mentioned also last year, now when we are getting back to growth, we need to make sure that we now can get the full benefit from growth and not growing our cost base in the same pace as our top line. And that's, of course, something that we will now look very closely into. But clearly, using the momentum the positive momentum we have now across Aifry to focus a lot on going back to growth. And quarter 1 was one step in the right direction. So with that said, I will now Apologize again for Teams. I guess Teams, the system Teams is as tired as we are on having Teams meetings, But we have now tried to maneuver with YouTube. And I think, Katrin, maybe leaving it to you that you have a few questions that you picked up that we will Try to answer. Yes. Thank you, Jonas. So if you have any questions, please send me an e mail on kathryn. Sandergren at afry.com. And we have the first four questions actually from, Let me see from Johan Sundien. So the first one, why was group cost SEK 36,000,000 higher In Q1 than previous year? Jussi, did you pick up that? I think that's a question that fits well to your profile. Good. Thank you, Johan. I think that's a valid and good question. When we look about our cost structure in general, we have been progressing a lot. So if we take the total impact, it's highly positive. At the same time, when we are working with the group common, that is always residual and AFRY. So today, for example, our last 12 months revenue is SEK 18,800,000,000 give or take, And that doesn't satisfy our ambitions on that level. And we have set our group cost structure from Perspective where we can allocate when we grow further. So this is more or less in residual, and I wouldn't take it as an Indication on how we look in total. So going forward, I would say that We have room to improve there. And the further we go to growth, we need to remember that how we have phrased our efficiency program is That we want to have a continuous margin improvement, meaning that the top line needs to grow quicker than the expenses grow, and that will bring the margin improvement. Obviously, then if we would not see top line growth, then we have our ways to go deeper into our platform. And I think we have shown that we have all the capability to do that one, like only. Thanks, Jussum. That was question number 1. Kathleen? Yes. And the next one. Why did we see so big swings in the net working capital during Q2. There's basically if we take couple of different views, You always need to put the cash generation into a wider perspective than 1 quarter. Within 1 quarter, you are highly impacted on How quickly your clients pay your pay their invoices, whether the last day of the month Put hits a weekday or weekend and so on. So looking 1 quarter's cash flow is a bit shortsighted. You need to always look a longer perspective. Last year in Q1, we were benefiting from 2019 Sluggish networking capital development. And in 2020, in general, we were able to Release net working capital partly because of our own actions and partly because of the decline in revenues. Now we are converting back to growth, which starts to tie with net working capital. And then the second part is just normal seasonality. Sometimes you have a strong Q4 like we had Yes. And then you have a bit of lash back in Q1. So I wouldn't draw too many conclusions. I would keep my eye on 12, 18, 24 months rolling EBITDA, rolling net working capital, and I would just make sure that it is aligned with the development in total. So that is inherent in our business have a bit volatility in the net working capital. Thank you, Joao. Question number 3, Katyn? Yes. And it's regarding the Process Industries segment. So Q1 is usually a quarter with lower margins for the Process Industries segments, but still you managed to report margins about 13 Percentage in the segment same as in Q4 2020. How much of that improvement can be extrapolate? I can start there and maybe to make it quick. I think we have a fantastic position in Process Industries with the combined OFM period. We talked about that over the last 2 years. We also see that the bio industry segment as such are tremendously interesting. We are very strong in CapEx, But we are also improving our operational focus, meaning that besides big CapEx projects, we will also be a partner for our clients in operational improvement. If you then add digitalization and sustainability, I think the process industry as such, where we also include Mining and Metals, it's a very interesting segment to be in. So I think we can just leave it with that. And then, of course, we will push Nikolas Oksanen and the AFRY. The segment the vision to continue to perform high margins. And if you go back even to the joining force of the Peoria, it's been very stable and solid, And we will continue to push on high levels. Next question? Yes. And the final question from Johan Sundien. It's regarding the Energy segment. You have earlier mentioned the EBITDA margin in Energy segment should be 8% to 10%. For 2 quarters in a row, you have been about 10%. Have you reached a new level? Or should that still return to 8% to 10%? Well, as you know then, I would say that segments related to CapEx projects and especially energy with a big transition going on, I think it's fair to say that we are still keeping the 8% to 10%. But we have also said internally, I know Richard Pinnock and the guys are pushing a lot that With the interesting development in Enerdy right now, there are tremendously interesting business opportunities, And I think we are well positioned to grasp some of them. And I think the team have worked a lot with efficiency and also the position on the end market. So let's see if we can push them to stay on over 10%. But I think it's fair to say that we still have that 8% to 10% margin corridor. But let's see, I don't know what you say, Jose, but they have started in a very good way, Internal performance, but also the market sentiment? Yes, I would say that's absolutely correct. At the same time, we need to Remember in energy that it is a large project business and sometimes you have several large projects at a very hectic stage at the same time And that can yield you for momentarily excess profitability. So this is something that is good to note and currently see in our nuclear operating, especially this type of situation. That also in a way when The previous question was on Process Industries that sometimes also in there, you have multiple large projects as a in a hectic Implementation phase and that creates a bit of the volatility in the profitability. So taking 2 or jumping to 2 big conclusions From one quarter, I would avoid that one, both in both Industries and Energy. I fully agree with you, Juss, but I also believe that if look on over now many quarters, there's a strong stability, and I think that's good. And then you will always have some variations on the margins. But if you look on our energy Eifry versus 3 years back, I mean, it's a different game. So we are very happy about that. Absolutely very happy and saying that have 8% to 10% corridor, like you said, and then upgrading that to higher numbers would merit a couple of more data points. We'll get back to that hopefully. Okay, Catherine, more questions. There are actually no further questions. There are no further questions. It probably means that we have been very clear as always. I'm again apologizing for the teams Not supporting us, this presentation, I hope you were able to come through using the YouTube broadcast, And we will try to improve for the next quarter. But with that, I would like to thank all of you for taking the time to listen to us And looking forward to meet you soon again. Thank you so much.