Afry AB

So, dear all, a warm welcome to this quarter two presentation from EIFRI. My name is Jonas Gustafsson, the CEO of EIFRI, and I will do part of the presentation, and joining me will, of course, Bo Sandström, our CFO. So again, welcome to this presentation. So, 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 6.8 billion, and we continue to see strong demand in the energy and industrial segments, but what we saw also in the quarter, we saw for us a clear slowdown in the real estate segment. And of course, the real estate segment had been a segment with uncertainty, but for EIFRI, 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. So in general, good and strong order stock. But the result then was clearly impacted by lower utilization and also the negative calendar effect, and the infrastructure division, which really took the slowdown in the real estate segment, we saw the biggest impact on utilization. So we delivered 421 million in EBITDA, equal to .1% in EBITDA margin, and for sure, this was below our own expectation in the quarter. We'll get back to that later on. But when you look on our divisions, I also want to highlight that process industry, 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 180 million, adding up to a process industry division and strengthening our position in North America. And we will now be able to combine South America and North America in our process industry 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 of 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 comes to the top line. EBITDA on 1.1 billion and EBITDA margin on 8%. We had a really good strong first quarter, but of course, second quarter have been more challenging 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. So we see a continued strong and even underlying demand in most industrial segments, energy of course being strong, and sectors like metal mining and the energy transformation and also electrification. So I would also like to highlight that the automotive sector has also been strong and solid throughout the quarter for AIFI. So 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. Quarter two was strong for us. 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 AIFI, we saw a clear slowdown on the real estate segment that was impacting our utilization. Finland was the one where we were fighting the most, but also in Sweden, we ended up with 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. So we have been battling mostly into the real estate segment in the quarter. Looking on the visions, as I was into, the infrastructure continued to grow, but for sure the 4% in EBITDA margin was a disappointment for us. The big challenge we had was that the reduction in the real estate was, we had to take action to that. So we reduced number of employees, took some one-off costs to do that, to mitigate capacity to demand. End of the day, this affected the margin on infrastructure. So this is one area that we will need to continue to work on, of course. Process industry, 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. So I think the development of process industry throughout the quarters and the years is really strong and we have a very, very strong position. And we are really happy with that performance and the order books looks very solid. A-frax is another area where we had a disappointing quarter. Just .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. And 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 A-frax in the quarter. So here we need to continue to work to bring A-frax to the level that we expect them to be. Industry and digital solution, solid growth. And if you had asked for the calendar effect, I would also say that the margin is solid. We would expect more, but it's a solid quarter from industry and digital solution. And 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. And finally management consulting, as they have been over the quarters, strong on top line, also solid margin. So our challenge and you have seen that is of course infrastructure being a big part of A-frax, but also A-frax are two divisions that we need to continue and implement actions to bring them to levels where we want to be. And 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. And finally to Swedish Transport Administration, we are getting the assignment for project management for Södertörn Crosslink. Three good projects for A-frax 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. So I will cover the main financials for Q2 and I will start as usual with sales. Total net sales in the quarter was 6.9 billion, some 900 million higher than last year. And on a rolling 12-month perspective, we are now surpassing 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%. So similar level as in the last quarter. We see a continuous strong development of the order stock, which is now at 21 billion. Some 14% higher than last year, which is the same as it was in Q1. EBITDA came in at 421 million, 7% lower than last year. The EBITDA margin ended at 6.1%, a decline from .6% in the corresponding quarter last year. The decline in utilization and the negative calendar effect, which was estimated at .9% 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-based 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 then 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 exception. 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 and digital solutions has a stable development adjusted for calendar effects, continued strong pricing compensated for increased salary costs and 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. A3X 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 and available liquidity remained very strong, currently at 4.1 billion. Before looking at our financial targets, we want to stay a bit at our working capital development. This shows AFRI's network and capital ratio to net sales over the last five years and the quarter two 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 OF 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 AFRI 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 to the Indris ratio sequentially, following four quarters 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. 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. And finally, the increase of net debt due to dividend acquisition payout increased our leverage to 2.6 times, marginally above our financial target. But being our weakest quarter in terms of leverage ratio due to dividends, we still expect good headroom to the target level at the end of year, providing some room for further acquisitions. And with that, I'll leave it back to you, Jonas.

Thank you, Bo. So then, just quickly wrapping up before I'm also inviting Bo and we will be open for questions. Of course, focus going forward, as you have seen in our portfolio and divisions, it's a mix. So in one hand, we will continue to leverage from the strong position we have and good demand on the industrial energy segment. So for four of our divisions, the market and order stocks are good, so continue to push. And the other hand, of course, we have not 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 affected utilization, the real estate slowed down. So that's absolutely something that we will be very close now to the market and see where the real estate market continues for A3. And at the end of the day, we continue to work on the infrastructure plan that we also presented earlier this year with a 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 A3, a short-term effect from the real estate market. So that's our absolutely clear priority moving forward. And with that, inviting Bo again, we will open up for questions that might be.

For questions and as you know, please use the function raise your hand if you have a question. And let's start with Daniel Jureberg at Handelsbanken. Please go ahead.

Thank you. Good morning and hello Jonas and Bo. Coming back to you mentioned Finland, especially a dragon real estate in infrastructure and that was also Dragon Sweden. And you also talk about some measures taken on downsizing a little bit of employees. Is it possible to give any more color on the magnitude of these adjustments in terms of annual cost saving, number of employees or anything 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 Vanen 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. And 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. But 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 and moving forward.

Thank you and if I may also ask you on the group organic growth, close to 11% calendar adjusted. Can you give us Boalpark how much comes from pricing and which is more about volume mix in the quarter?

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. And the last question for 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 and 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 the process industry and we know that many of the pulp and paper companies have announced that due to pulp prices and others, they are looking over the capex spending even though going from a very high level, still having good capex plans. So, difficult to say. We know there are good products out there since we also have a very strong position internationally. And 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. So I think our process industry division are also broadening the offer to other verticals that compensate the pulp and paper segment still being an important segment for A3. So I won't say that we are super worried. We follow it very closely and of course, these clients since Pei and OF came together to A3, we know them very well and we are very close to them. So we're not super worried. It's just that there is an increased uncertainty, but order stock is solid, order intake has been good and we have a good mix of projects in the division. So we're not super worried.

Okay, thank you gentlemen. Have a great summer and thanks. Thank

you. Thank you. You too.

Okay, we take the next question from Raymond K at Nordia. Please go ahead.

Yes. Hi, Bo and Jonas. So 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 increasing turnover in basically all parts of A3. But we have seen since the last six months that it starts to go down to, I would call it very close to normalized levels for A3 as a total.

Great. And 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, etc.?

No, 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 direct price negotiations, first half of the year, although some are remaining. And I think we're happy with the level of price increases that we have been able to achieve. And then, 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 Knudson at ABG.

Good 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 A3X. And that was unfortunately the division that underperformed here in Q2. I'm curious to what might have changed in such a 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 uncertainty for us. We have an exposure in Finland and we have exposure in Sweden, so roughly 40% of infrastructure. I think over the last quarters, we have been able to mitigate moving to do part of the real estate segment being still strong. But 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 Eifredan. So that's one thing 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 have taken with 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 taking further actions. So that's when it comes 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 then with our position a bit faster than we could adjust to. When it comes to A4X, you are right. We still believe that 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. So we're not happy with that. We need to look on the utilization. But we do believe that the whole, the story around A4X bringing it back on healthy levels still remains. But that's the two things that clearly came, partly surprising for us in the quarter. So the story remains, but of course we have more work to do when we are coming into the second half year.

Perfect. And 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 shorter?

Yeah, I mean the market is clearly separate and the increase in the order book is then related to other segments in infra where we still see 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. And 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 than 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. And we have now, with Q2, we have completed the salary revision cycle for this year. So 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, you too.

Now we take questions from Johan Sundén at Carnegie. Please go ahead.

Thank you. A few questions from my side as well. And I think we should go back towards the kind of CMD comments and the infrastructure margin. You were pretty clear four months ago regarding a clear step up in margins year of year already 2023. Has the development seen in the last few months changed your view on being able to see a step up already in 2023? Or how should you 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. Q1 was still solid. So of course now there are some on Q32 where the real estate segment, where we see the slant down, will go in the third quarter as we are already in the third quarter. So it's not super easy to say, but for sure we will take the needed actions to 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.

And 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 utilization in the infrastructure business to bounce back quite quickly or is there more restructuring to be needed ahead or how should we do that?

I think what we did in the quarter is clearly impacting the second half year. But then the question again is that will it be enough? What we have done, what we believe now is the right thing, it's all based on where the market is heading. But the way we can address the direct cost in the front end, we can do it rather quickly. So basically we will have a clear effect from that in the second half 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 finding more assignments in the industrial area or in the commercial area. But for sure what we did will impact the second half year.

And the trend shift that you referred to during the second quarter this year, how quick was that impacting it? Because we have discussed a weaker construction market

for

many two years now.

You are right. I think we have to remember when we talk about the real estate market, we talk very much for us, for Eifred and about Finland and Sweden as being the two biggest markets where we have a consultant into that market. And I think what we have been good at over the last quarter is to shifting to the healthy part of the real estate market. And we, I think when we went into the quarter, believed that it would remain rather okay solid on that level. But I think it went for us at Eifred rather fast in the quarter. And as Bo said, we were not able to maybe quickly enough adjust capacity to the demand in the quarter. So for sure, and if that's a market or if it's more on where Eifred'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, but absolutely we will be very, very close on any tendency to take actions and try to do them then ahead of the drop.

And

just as an additional comment, I mean, in Q2 was the first time we saw tendencies for changes also in public real estate in these markets. 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. Whereas the industrial side is still fairly strong in a sense, although very crowded, as Jonas mentioned.

And the big shift, did it happen early in the quarter or late in the quarter?

I would say more on the later part of the quarter than the early in the quarter, if you have to decide.

Perfect. I had a question on Eifred X as well. You highlighted that you saw a drop in utilization during the quarter due to a few projects that was cancelled or postponed. 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 Eifred X?

I think the fair is that what we saw actually, because Eifred X is not a global division, is actually a Swedish main focus with some parts in Finland and in Norway. But we saw actually the Stockholm area for Eifred being a bit softer with its assignments that ended up in causing lower utilization. So what I think is that with that division's DNA, it can ramp up as fast as it is ramping down. So I think we have good hope that we can find assignments in the second half year for these people not being utilized when we move into the summer. So for sure there is a clear focus on bringing utilization up. There is a need for digitization, but we have also seen that part of the analytics team that we have for different reasons were not able to get out on getting good assignments. But I do believe that we have a good chance of course to improve Eifred X moving forward. But 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 has softened in quite too much in the quarter, ending up in a poor result. But that we can twist it upwards we believe in the second half year.

Do you expect the utilization of the Eifred X to be at the low trend in Q3 as well?

I think Q3 will be 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. But we will do what we know and I know the sales team are working actively to find new assignments. Because at the end of the day of course there is a need for digitization across many of our clients. But for different reasons we lost a couple of important ones in the quarter. Since the division is quite small that affected the utilization of the result pretty quickly.

Perfect, thank you. I get back in line.

Thank you.

Then we have a question from Johan Dahl at Danske Bank. Please go ahead.

Yes, good morning everyone. Good morning. Just wondering, at the capital markets day I presume you had 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 went to that? And 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 you've changed your assessment in taking orders in that business area?

Yes, 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 talked about the effects we are doing now is basically only to mitigate the market slowdown. So if anything Johan it will speed up the other parts of the plan that we have in infra. So I think when we went into the CMD we have a plan what to do. And of course when you end up in this slower market with the utilization clear effecting 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.

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 AFRE as a whole still remains. But short term of course it becomes more challenging with a quarter like this in that sense. But to your second question to understand that a bit better in relation to profitability on the order backlog related to infra structure. Then you could think of it that 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 in relation to that step up. And then of course we start the journey with the order backlog with different type perspective. Some new, some older and some more longer term. But gradually we are building in a higher profitability requirement into that order backlog also for infra or specifically for infra.

Okay, so you can validate that on a group level that when you build the order book that's with better profitability. Because that's not really what you're hearing from the rest of the sector that you get this huge shift in profitability in new orders from public buyers.

No, I mean it is in that sense. It is case by case. It's not easier in that perspective. But we're quite diligent when we process these cases to secure that we have a better profitability in the cases.

Got you. Just on this real estate issue, Finland, Sweden. Do you expect that to swiftly recover in Q3 or do you expect it to continue to be weak and weak and further? For

sure we are planning for the reverse you always say. But we are not planning that it will recover Johan. So 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 in for us 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. So 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.

Finally we have a follow up question from Johan Sundén. Please go ahead if that's the case.

No, I forgot to take down my arm. No follow up here.

Okay. Then we don't have any more questions.

Okay. Then we just want to wish everyone a nice summer and hope to see you soon. Take care. Thank you.