Dear all, a warm welcome to this quarter two presentation from AFRY. My name is Jonas Gustavsson, the CEO of AFRY, and I will do part of the presentation, and joining me will, of course, Bo Sandström, our CFO. Again, welcome to this presentation. Starting up now with a summary of the quarter, and as the headline is saying, we had strong organic growth in a quite mixed market. Net sales ended up at SEK 6.8 billion, and we continued to see strong demand in the Energy and Industrial segments. What we saw also in the quarter, we saw for us a clear slowdown in the real estate segment.
Of course, the real estate segment had been a segment with uncertainty, for AFRY, we saw a clear slowdown in the quarter. Total growth of 15% and also strong adjusted organic growth of 10.8%. The order stock continued to be on a high level, and Bo will talk a bit more about that. In general, good and strong order stock. The result then was clearly impacted by lower utilization and also the negative calendar effect. The Infrastructure division, which really took the slowdown in the real estate segment, we saw the biggest impact on utilization. We delivered SEK 421 million in EBITDA, equal to 6.1% in EBITDA margin, and for sure, this was below our own expectation in the quarter. We'll get back to that later on.
When you look on our divisions, I also want to highlight that Process Industries, Energy, and Management Consulting, these three divisions all delivered solid and even good result in the quarter. We did one acquisition in the quarter, KSH. This is a Canadian-based company with an annual sales of CAD 180 million, adding up to our Process Industries division and strengthening our position in North America. We will now be able to combine South America and America, so North America in our Process Industries division, and we're really happy that we could close that acquisition. Just a few words about the first six months, from number wise, we ended up on sales on SEK 13.7 billion, total growth of 18% and 13% adjusted organic growth.
For sure, the first six months for us have been strong when it come to the top line. EBITDA on SEK 1.1 billion and EBITDA margin on 8%. We had a really good, strong Q1 , but of course, Q2 have been more challenged for us, both with the calendar effect but also utilization. I was into the market, and I think in general, we continue to see solid demand, and clearly, the industrial segment is driving that. We see a continued strong and even underlying demand in most industrial segments, Energy, of course, being strong, and sectors like metal and mining, and the energy transformation, and also electrification. I would also like to highlight that the automotive sector has also been strong and solid throughout the quarter for AFRY.
The industrial segment, including Energy, is strong. One part of the industrial segment, pulp and paper, we of course, follow and see that there is an increased uncertainty to CapEx investment moving forward. Q2 was strong for us, and, but of course, there is an increased uncertainty, that was also highlighted for many clients when it comes to the CapEx investment moving forward. On Infrastructure, we at AFRY, we took, you know, we saw a clear slowdown on the real estate segment, that was impacting our utilization. Finland was the, I would say, the one where we were fighting the most, but also in Sweden, we ended up with, you know, having also to take action in reducing number of employees to mitigate the slowdown in the real estate segment.
However, on the public transport infrastructure, it remains quite stable for us. We have been battling mostly into the real estate segment in the quarter. Looking on divisions, as I was into Infrastructure, being continued to grow, but for sure, the 4% in EBITDA margin was a disappointment for us. I mean, the big challenge we had was that we that the reduction in the real estate was. We had to take action to that, on that, so we reduced number of employees, took some one, of course, to do that, to mitigate capacity to demand. End of the day, this affected the margin on Infrastructure. This is one area that we will need to continue to work on, of course.
Process Industries, highlighting as the superstar in the portfolio, as you see, being able to grow close to 21% adjusted organic growth with a strong margin in the quarter. I think the development of Process Industries throughout the quarters and the years is really strong, and we have a very strong position, and we are really happy with that performance, and the order books looks very solid. AFRY X is another area where we had a disappointing quarter. You know, just 1.6% adjusted organic growth, and even though we have done the restructuring, taken out the software products, we had a quarter with low EBITDA margin.
Reason for this was that we, in the quarter, lost a couple of important contracts or assignments for us, and that ended up that we have people not utilized, and this really affected AFRY X in the quarter. Here, we need to continue to work to bring AFRY X to the level that we expect them to be. Industrial & Digital Solutions, solid growth. If you adjust for the calendar effect, I would also say that the margin is solid. We would expect more, but it's a solid quarter from Industrial & Digital Solutions. I also want to highlight that Automotive segment was also rather strong in the quarter. Energy, a bit lower on growth, but also here, the margin is solid in the quarter.
Finally, Management Consulting, as they have been over the quarters, strong on top line, also solid margin. Our challenge, and you have seen that, is, of course, Infrastructure, being a big part of AFRY, but also AFRY X, our two divisions that we need to continue and implement actions to bring them to levels where we want to be. With Infrastructure, we also now have a headwind affecting us on the real estate market. Just three assignments I want to highlight. To Fortum, we had an assignment for engineering assignment for hydrogen study. Super interesting. To Stena Recycling, it's a recycling plant for electrical car batteries. Finally, to Swedish Transport Administration, we are getting the assignment for project management for Södertörn Crosslink. Three good projects for AFRY, adding up to a good and solid order book.
With that, I'm leaving it to Bo, our CFO, to take you through the numbers.
Thank you, Jonas. I will cover the main financials for Q2, and I will start, as usual, with sales. Total net sales in the quarter was SEK 6.9 billion, some SEK 900 million higher than last year. On a rolling 12-month perspective, we are now surpassing SEK 25 billion. We report 15% total growth and 11% adjusted organic growth. Sequentially, a somewhat lower growth level, but still at a very high level. Growth was driven by high demand across most of our segments, supported by price increases again just north of 5%. Similar level as in the last quarter. We see a continued strong development of the order stock, which is now at SEK 21 billion, some 14% higher than last year, which is the same as it was in Q1.
EBITDA came in at SEK 421 million, 7% lower than last year. The EBITDA margin ended at 6.1%, a decline from 7.6% in the corresponding quarter last year. The decline in utilization and the negative calendar effect, which was estimated at 0.9 percentage points, more than explains the difference to last year. We see a continued strong recruitment pace in general, but with attrition coming down somewhat, and pockets of quickly changing market conditions, we didn't manage to strike the balance on utilization this quarter, whereas the level of sub-consultants in the quarter was stable. Some costs for early termination of office lease, office space leases is reported as items affecting comparability as we continue to optimize our cost base.
There are, for the group, no material project one-offs affecting the quarter. Looking at development by division, we see positive adjusted organic growth in all divisions, although sequentially, growth is coming down somewhat with Process Industries being the main or the clear exception to that. Margin development, however, was clearly mixed in the quarter. Process Industries, Energy, and Management Consulting all delivered strong results. For Process Industries, even a clear improvement, and yet another quarter with double-digit growth and EBITDA margin simultaneously. Industrial & Digital Solutions has a stable development adjusted for calendar effects. Continued strong pricing compensated for increased salary costs and a somewhat lower utilization in the division.
The infrastructure margin was down 3.6 percentage points compared to last year, half of it related to lower utilization, and the other half related to calendar and redundancy costs in the quarter. The vast majority of the non-calendar effects was related to the real estate segment in the division. AFRY X margin was significantly pressured by low utilization, and the effects thereof eliminated the positive effects from the restructuring of the project portfolio in Q4 last year. Some words on operating cash flow, financial net debt, and available liquidity. Cash flow from operating activities was clearly stronger than last year, and in the quarter, we maintained working capital at a stable level despite the strong growth. Financial net debt increased directly on the back of dividend payout and the acquisition of KSH in the quarter.
Available liquidity remained very strong, currently at SEK 4.1 billion. Before looking at our financial targets, want to stay a bit at our working capital development. This shows AFRY's net working capital ratio to net sales over the last five years, and the Q2 ratio is highlighted in the graph. In a consistent moderate growth environment, this KPI is rather stable year-over-year, although seasonality effects can be seen throughout the year, depending quarter. However, when ÅF acquired Pöyry in 2019, this normalized level was shifted downwards, given that a substantial large project business with different cash flow mechanics was integrated, and then it became AFRY from 2019 and onwards.
From this level, the ratio tend to contract in negative growth settings, the pandemic being the prime example, while it expands in strong organic growth settings, which we have been in the last number of quarters. In Q2, we see a slight improvement in this ratio sequentially, following Q4 with really strong growth. Finally, an update on the financial targets on a rolling 12 perspective. Growth remains rolling 12 on 19%, well above the 10% target. As calendar effects on the EBITDA margin, as calendar effects year to date is now close to zero compared to last year, EBITDA margin is back slightly above full year 2022. Improving the margin is our key focus area for this and upcoming years.
Finally, the increase of net debt, due to, dividend and acquisition payout increased our leverage to 2.6 times, marginally above our financial target. Being our weakest quarter in terms of leverage ratio due to dividends, we still expect good headroom to the target level at end of year, providing some room for further acquisitions. With that, I'll leave back to you, Jonas.
Thank you, Bo. Just quickly wrapping up before, I'm also inviting Bo, and we will be open for question. Of course, focus going forward, as we have seen in our portfolio and divisions, it's a mix. In one hand, we will continue to leverage from the strong position we have and good demand on the industrial and the segment. For four of our divisions, the market, the order stocks are good, so continue to push. On the other hand, of course, we have now two divisions where we need to take more actions, and we also need to mitigate the short-term effects, that we have done in the quarter, and Bo said it, that we have done actions, taken actions in the quarter.
We were not fully able to balance it, that it also affect the utilization, the real estate slowed down. That's absolutely something that we will be very close now to the market and see where the real estate market continues for AFRY. End of the day, we continue to work on the infrastructure plan that we also presented earlier this year, where the clear ambition and target and plan is to improve the underlying profitability for infrastructure. It's just that now we also need to battle for AFRY, a short-term effect from the real estate market. That's our absolutely clear priority moving forward. With that, inviting Bo again, and we will open up for questions that might be.
Yes, let's open for questions, and as you know, please use the function raise your hand if you have a question. Let's start with Daniel Djurberg at Handelsbanken. Please go ahead.
Thank you. Good morning, and hello, Jonas and Bo. I am coming back to, you mentioned Finland, and especially a drag in real estate and Infrastructure, and that was also a drag in Sweden. You also talk about some measures taken on downsizing a little bit of employees. Is it possible to give any more, you know, color on the magnitude of these adjustments in terms of, you know, annual cost saving, number of employees, or anything for, to hold on to?
Absolutely. I think, as you're right, I mean, what we saw, and you know, that we acquired a company called Vahanen some time ago, and combining our offering in Finland, where we have now an exposure to the real estate segment. We have now reduced just about 120-ish employees when you look on Finland and Sweden together as a first step throughout the quarter. As I said, I think Bo is right. We were not able to mitigate demand and capacity as fast as we thought because we had a reduction during the quarter. That's the magnitude we are on today, and we will see if we need to take more actions, depending on where the market is going moving forward.
Thank you. If I may also ask you on the group organic growth, close to 11% calendar adjusted. Can you give us ballpark the how much comes from pricing and which is more about, you know, volume mix-
Mm.
in the quarter?
Yeah.
Yeah. Out of the 11% adjusted organic, we see that right above 5% is related to pricing, and the remainder then is more regularly related to volume effects.
Perfect. Thank you so much. The last question from me would be, you mentioned a little bit of CapEx uncertainty within customers in pulp and paper, still a strong quarter. How worried should we be about this? When do you think this could start to hit the performance in the Process?
First of all, we have a very good order stock in Process Industries. I mean, we know that many of the pulp and paper company have announced that due to pulp price and others, they are looking over the CapEx spending, even though going from very high level, still having good CapEx plans. Difficult to say, we know there are good products out there, since we also have a very strong position also internationally. At the same time, I also want to highlight for our division with that competence, we are looking on everything into the green transformation: so recycling, hydrogen, green steel making.
I think our Process Industries division are also broadening the offer to other verticals that, you know, compensate the pulp and paper segment, still being an important segment for AFRY. I wouldn't say that we are super worried. We follow it very closely, and of course, these clients, since, you know, Pöyry and all came together to AFRY, we know them very well, and we are very close to them. We're not super worried, it's just that there is an increased uncertainty. Order stock is solid, order intake has been good, and we have a good mix of products in the division, so we're not super worried.
Okay, thank you, gentlemen. Have a great summer.
Thank you.
Thanks.
Thank you. Thank you. You, too.
Okay, we take the next question from Raymond Ke at Nordea. Please, go ahead.
Yes. Hi, Bo and Jonas. First question from me, could you comment a bit on perhaps the staff turnover you see right now compared to maybe a year ago, and if you see any difference, or if it remains high?
It's going down. I think, as you indicate, we peaked a year ago. I think there was this post, pandemic, and we had a increasing turnover in basically all parts of AFRY. We have seen since the, I would say, the last six months, that this started to go down to, I would call it, very close to normalized levels for AFRY as a total.
Great, if we could, when it comes to the price hike trends, do you see more friction in sort of implementing, price hike across Q2 as, when you talk with clients, et cetera?
No, we don't, we don't see a specific change in that. I mean, it's always a negotiation in each of those situations. I think in general, we've been through the biggest portion of, you know, direct price negotiations, H1 of the year, although some are remaining. We're happy with the level of price increases that we have been able to achieve. Also, of course, it's always a negotiation, but we don't see a big change in the sentiment in the market in that dialogue.
Okay, great. Thanks. That's all for me. I'll get back in line. Thank you.
Thank you.
Thank you.
Let's take the next question from Stefan Knutsson at ABG.
Morning, gentlemen. My first question is regarding the outlook here. four months ago, you held your CMD, and two of the largest drivers to reach the margin targets were improvements within Infra and AFRY X, and that was unfortunately the division that underperformed here in Q2. I'm curious to what might have changed in such a period, short period of time, and, like, what you didn't expect back then?
Yeah, it's a valid question. Starting with Infrastructure, I think, I mean, we have known that the real estate segment have been having an uncertainty for us. We have an exposure in Finland, and now we have exposure in Sweden, so roughly 40% of Infrastructure. I think over the last quarters, we have been able to mitigate, moving to those part of the real estate segment being still strong. What we saw that was also for us, I think we were a bit late in adjusting, is that we saw a slowdown in the quarter that affected mainly Finland, but also the Swedish part of the real estate-driven, including architectures at Infrastructure. That's one thing that we...
That was affecting us more than we thought when we had the CMD a couple of months ago. Still, the plan with the Infrastructure, the actions we are taking, the others, we continue to do them. We continue to have a clear ambition that we will, and we need to improve the profitability for Infrastructure. For sure now, the urgency to take actions, driven from the slower market affecting us with utilization is, of course, just increasing the need of, you know, taking further actions. That's when it come to Infrastructure, we knew that the market were potentially becoming slower, but I think we were also caught with a bit of surprise that it went down in the quarter for us, than with our position, a bit faster than we could adjust to.
When it come to AFRY X, you are right. We still believe that we have a, you know. We have taken this restructuring, taking our software products that didn't have the position that we hoped for. What we have now is that we ended up with lower utilization in our service business in the quarter. Since it's a very, you know, a bit smaller division, that affected the result quickly. We're not happy with that, we need to look on the utilization, but we do believe that the whole. With the story around AFRY X, bringing it back on healthy levels, still remains. That's the two things that clearly came partly surprising for us in the quarter.
The story remains, but of course, we have more work to do, when we are coming into the H2 year.
Perfect, also to follow up on the infra business, because I noticed that you booked a 10% increase in the order book from what you reported in Q1. Can you talk a little bit about what has driven that, and if you see improvement short term?
Yeah, I mean, the market is clearly separate. The increase in the order book is then related to other segments in Infrastructure, where we still see a continuous demand from the customers, you know, related to transportation segments mainly, not being from real estate, where it's more flattening out in terms of order book perspective.
Okay, perfect. Then my last question is just regarding the balance between price and wage. It looks solid to slightly positive here, if I have calculated it correctly. Any further comments on that, then where you are in the cycle of annual wage increases for the group?
No, you're correct. I mean, we of course address different markets, but it's a fair assumption that with a 5% price increase, we strike the balance to compensate for the salary increases that we've seen throughout the year. We have now, with Q2, we have completed the salary revision cycle for this year. We're done with that, and live with the salary increases that we saw during the quarter.
Okay, thank you very much for the clarifications, and have a nice summer.
Thank you.
Thank you. You too.
Now we take questions from Johan Sundén at Carnegie. Please go ahead.
Thank you. A few questions from my side as well. I think we should go back towards the kind of CMD comments on the infrastructure margin. You were pretty clear four months ago regarding a clear step-up in margins year-over-year already 2023. Has the development seen in the last few months changed your view on be able to see a step-up already in 2023? Or how should we view that comment in the light of this report today?
Well, I think it made the journey slightly more challenging, that's for sure, because, of course, now we have the 4% in the pockets for Q2 . I mean, quarter one was still solid. Of course, now there are some uncertainty where the real estate segment, where we see this slowdown, will go in the Q3 , as we are already in the Q3 . So it's not super easy to say. But for sure, we will take the needed actions to, one, mitigate the short-term effects from lower utilization, and at the same time, continue to drive the improvements that we have in the whole Infrastructure division, with still the ambition to improve.
going back to the restructuring initiatives that you made in this quarter, how quick of an impact can that have positively on the utilizations for the second half? Should we expect the utilization in the Infrastructure business to bounce back quite quickly, or, is there more restructuring?
Uh
... to be needed ahead, or how should we view that?
I think what we did in the quarter is clearly impacting the H2 year. The question again is that, you know, will it be enough? What we have done, what we believe now is the right thing, is all based on where the market is heading. The way we can address the direct cost in the front end, we can do it rather quickly. Basically, we will have a clear effect from that in the H2 year. The question remains still for us, will it be enough, depending on where the market is heading? For sure, now we will hunt for, you know, finding more assignments in the industrial area or in the commercial area. For sure, what we did will impact H2 year.
The trend shift that you referred to during the Q2 this year, how quick was that impacting? Because we have discussed.
Yeah
construction market.
Yeah
for many, two years now.
Yeah, you're right, and I think we have to remember, when we talk about the real estate market, we talk very much for us, for AFRY, then about Finland and Sweden as being the two biggest markets, where we have, we have a consultant into that market. I think what we have been good at over the last quarters is shifting to the healthier part of the real estate market. I think when we went into the quarter, believed that it would remain rather okay, solid on that level. I think we were. It went for us at AFRY, rather fast in the quarter.
As Bo said, we were not able to maybe, you know, quickly enough adjust demand, capacity to the demand in the quarter. For sure, if that's a market, or if it's more on where AFRY's position, where we are positioned with our offering, difficult to say, but clearly Finland became much softer in the quarter, and we also saw that Sweden ended up softer in the quarter. Now we have taken actions that we believe are enough. Absolutely we will be very close on any tendency to take actions and try to do them ahead of the drop.
Just as an additional comment, I mean, in Q2 was the first time where we saw, tendencies for changes also in public-.
Mm
real estate.
Mm
in these markets.
Mm.
Not only related to residential, but also on the public side. Even though it's not a super clear trend, but the first tendencies during the quarter. The industrial side is still fairly strong, in a sense, although very crowded, as Johan has mentioned.
The kind of big shift, where did it happen early in the quarter or late in the quarter?
I would say more on the later part of the quarter than early in the quarter, if you have to decide, so.
Perfect. Had a question on the, AFRY X as well.
Mm.
You highlight that you saw a drop in utilization during the quarter due to a few project that was canceled or postponed.
Mm.
How should we view that impact going into second half? Are those two projects that should be in work during the entire second half, or was those totally isolated to Q2, or how should we view utilization in AFRY X?
I think the fair is that, what we saw actually, because AFRY X is not a global division, it's actually a Swedish main focus with some parts in Finland and in Norway. We saw actually the Stockholm area for AFRY being a bit softer with assignments that ended up being causing lower utilization. What I think is that, with that division's DNA, it can ramp up as fast as it's ramping down. I think we have good hope that we can, you know, find assignments in the H2 year for these people not being utilized when we moved into the summer. For sure, there is a clear, you know, focus on bringing utilization up.
There is a need for digitalization, we have also seen that part of the analytics team that we have, for different reason, we're not able to get out on getting good assignments. I do believe that we have a good chance, of course, to improve AFRY X moving forward. It was a disappointment for us because we have to... I mean, the restructuring we have done, taking out the products that we have done, this is actually where the service business have softened in quite, you know, too much in the quarter, ending up in a poor result. That we can twist it upwards, we believe, in the H2 year.
Do you expect the utilization in the AFRY X to be at below trend in Q3 as well?
I think Q3 will be a hopefully a step upwards, but for sure, with the low utilization we went in now, it will probably take some time before we are on the levels that we expect. That's for sure. We will, you know, we do what we know, and I know the sales team are working actively to find new assignment. End of the day, of course, there is a need for digitalization across many of our clients, but for different reason, we lost a couple of important ones in the quarter. Since the division is quite small, that affected the utilization result pretty quickly.
Perfect. Thank you. I get back in line.
Thank you. Thank you.
We have a question from Johan Dahl at Danske Bank. Please go ahead.
Yes, good morning, everyone.
Morning.
Just wondering, at the Capital Markets Day, you know, you, I presume you have a backed up plan in Infrastructure, how to achieve that double-digit margin. Can you just talk about how that plan has changed compared to when you entered that? Secondly, also in terms of in time perspective, how much delayed it's been? Also, on that topic, the order book that you built in Infra, can you talk about the profitability requirements on those new orders that you've taken, and how have you changed your assessment in taking orders in that business area?
I think when you look on the overall plan, Johan, of course, when you have this short term or the utilization challenge that we now had, as we said, it came even through the quarter, it will not speed up our getting back on the margin because we just, we talked about the effects we are doing now is basically only to mitigate the market slowdown. If anything, Johan, it will speed up the other parts of the plan that we have in Infra. I think when we went into the CMD, you know, we have a plan, we... What to do.
Of course, when you end up in this slower market with the utilization clearly affecting us in the margin of 4%, it will, if anything, increase the need of taking actions in other areas, too. How quickly will we be back to where we were? Coming to the question we had earlier in the call, difficult to say, but we will clearly give it a fight, both to mitigate any more short-term effects, being a bit ahead of the curve, and on top of that, implement the needed actions to bring Infra to where it should be.
Yeah.
And to, not to repeat too much, but the plan presented at CMD was a midterm plan. That hasn't changed. The underlying ambition, in terms of margin for Infra and for AFRY as a whole still remains. Short term, of course, it becomes more challenging, you know, with a quarter like this, in that sense. To your second question, to understand that a bit better, in relation to the, in relation to profitability on the order backlog, related to infrastructure, then you could think of it as, at the CMD, we presented a 2-plus percentage point margin step up for Infra as a whole.
It's fair to assume that orders built into the order backlog has a higher profitability requirement.
Mm.
in relation to that step up. Of course, we start the journey with the order backlog of different, with different time perspective, some new, some older, and some, you know, more longer term. Gradually, you know, we're building in a higher profitability requirement into that order backlog also for Infra or specifically for Infra.
... Okay, you can validate that on a group level, that...
Yeah.
when you build the order book, that's with better profitability?
Yeah.
That's not really what you're hearing from the rest of the sector, that, you know, you get this huge shift in profitability, new orders from public buyers.
No, I mean, it is, in that sense, it is case by case, and it's not-
Mm
... it's not easier.
Uh
In that perspective, but we're quite diligent, you know.
Yeah
...when we process these cases to secure that we have a better profitability in the cases.
Gotcha. just on this real estate issue-
Mm
... Finland, Sweden.
Mm.
Do you expect that to swiftly recover in Q3, or do you expect it to continue to be weak and weaken further?
For sure, we are planning, we are planning for the, you know, planning for the worst, you always say, but we are not planning that it will recover, Johan. In that sense, we have taken the actions that we believe for now is okay. Will we need to take more actions? Maybe, and then we will do it, hopefully ahead of the curve, but we are not building in any fast recovery plan in our current plans. Coming back to the infrastructure, as we have talked about, the bringing infra to the levels, I think we have built in the fact that the real estate segment will remain a tougher one and uncertain one for a while. It's not based on a scenario where we will have a quick recovery.
If it comes, it will help us for sure, but we are not building it into our current plans.
Thank you.
Thank you.
Yeah. Finally, we have, I think, a follow-up question from Johan Sundén. Please go ahead if that's the case.
No, I just forgot to take down my arm, so no follow-up here.
Okay. we don't have any more questions.
Okay.
Okay.
We just want to wish everyone a nice summer, and hope to see you soon, and take care. Thank you.
Thank you.