Afry AB

ending.

Dear all, a warm welcome to this quarter one report, the presentation from AFRI. My name is Jonas Gustafsson, CEO of the company, and I will start to cover the overall for quarter one, and then I will invite Bo Sandström, our CFO, to go through the finances. And then, as always, we will have time for Q&As after our presentation. So again, a warm welcome. Starting with the summary of quarter one, and you have probably seen the numbers, but in general, it's a stable report for us. If you start on the top line, we ended up on sales of 6.9 billion with a total growth of 0.4%. But when adjusting for the calendar effect, we had 0.5% adjusted organic growth. I have a slide on the market, but in general, a bit mixed market, some very strong subsegments. And then we have seen in larger capex product and pulp and paper a lower volume in the quarter. What is very positive is that the order stock, we had some good growth of the order stock compared to last year, but also sequentially. And the energy division have an all time high order stock development. And we also saw a stable development in process industry. So the order stock development was very good in the quarter. Looking on the result, we ended up in an EBITDA of 590 million and EBITDA margin of 8.6%. Lower than last year, but when adjusting for the big calendar effect we had, we were even slightly ahead. And last year was a good start of the year. We had more challenges in the second and third quarter. So when we look on the margin on 8.6%, we are quite pleased that we have been able to stabilize the margin on good levels. And the cash flow, and Bo will come to that, was slightly better than last year. And of course, we continue now to work with improvement, driving, focusing on the margin, as we have said, the profitability margin. And I would say the infrastructure program goes according to plan. We started up that, ramped up the infrastructure program last fall. The big thing in the beginning was to come in balance when it comes to capacity. We have done that and now we continue to have a very clear focus on improving the margin and that program delivers according to plan. We are doing capacity adjustment now in process industry, because if you look on the report, that's the I would say the thing that varies from last year, that we have lower volume in larger capex project in pulp and paper that is affecting process industry. And of course, we are now taking actions to to balance capacity in process industries. And then in general, we will end with that flexibility is the key because we have some really strong sub segment and some segments where we need to act and reduce in capacity, but all over a stable result in the quarter. So the market and I touched upon that to say on the industrial side, it's a bit mixed. So we have some very strong segment automotive with the whole electrification and software development. We see strong development. Defense industry is another very strong segment where we are getting a lot of good orders. While, for example, then pulp and paper in the CapEx project, we have seen a reduction in the quarter. So it's a bit mixed in the industrial side, while on NURI it's very strong. I would say crossover in all sub-segment, and here AFRI have a very strong position. And if you look on the order stock, I would say NURI have an all time high order stock, and we were able to bring in some very good orders in the quarter. And infrastructure, the real estate continue to be weak. And we have adjusted and continue to adjust. But it's pretty weak in Sweden and in Finland, for example. But we are more in balance now than we were last spring, for example. And then public investment in infrastructure remains stable. So it's a bit mixed market with some very strong segment and some segment where we need to take action and adjust. So if you look on the divisional overview, and Bo will cover that. And of course, we always need to bear in mind that we have this big calendar effect. We saw then process industry coming down from high levels. So ended up at double digits, still 10.4% in a week calendar quarter. But you see the growth and minus 3.9%. So actually, that's where we saw the top line coming down. And this is purely driven of CapEx project in pulp and paper. We still see a lot of other interesting segment, of course, the green industrial in batteries, hydrogen mining, et cetera, et cetera. But of course, pulp and paper is a big part of our business. And that's why we saw the reduction of the top line in the quarter. But still, I would say keeping margin in a weaker calendar quarter about 10%. Energy, a slight growth, but margin stable around 10%. And again, the market in energy looking forward is very strong, and we had a good development on the order stock. management consulting slightly lower than last year more timing effects good growth and in general market is solid and it's been very solid over the last years as well so if you take away the fact that we had this reduction of volume in capex pulp and paper this cluster is still very robust for a3 On the infra side, and here I'm pleased to see that we are now remaining our EBITDA margin compared to last year when we had made a good quarter. We ended up at 8.1% and with 3.2% growth. And we are implementing all activities that we have talked about to step by step improve the margin of infrastructure moving forward. So I'm quite pleased with the progress we are doing under Robert Larsson's leadership in infrastructure. And then finally, industry and digital solutions ended up at just above 9%, slight growth, and we have a bit mixed market, as we said, some very strong verticals like defense and automotive, and then there are others with a bit less like IT and telecom. So it's a bit mixed market, but all over, I would say, compared to last year, including the calendar that Bo will talk more about, a stable quarter when you look on the margin. And when you look at orders, as we said, we were pleased with the fact that we had a solid order stock growth. These are three very interesting projects. One is an EPCM project, which is actually in Finland, and that's also more than one division at AFRI included. And we are then involved delivering an EPCM product for the largest current terminal energy storage in Finland. Super interesting project, of course, exactly in our home market in Finland. Very proud of that project. We also received a big order over several years, an assignment to increase the capacity in the transmission grid for Svenska Kraftnät, also a project that involves more than one division for AFRI, also a good project with a good load for AFRI that goes over several years. Finally, not the biggest order, but a very interesting study that we have done looking at the forest impact on Europe and all the positive aspects we have from the forest industry. This assignment we did for FAM. and the report was released this spring and we are very proud of that because also it cements AFRI as a thought leader into bio industry and the forest industry. So these are three examples of very good orders that we brought in over the quarter that also are exactly in the core of AFRI's capability. So with that said, I will leave it over to Bo who will take you through the finances.

Thank you, Jonas. So I will, as usual, cover the main financials for Q1 2024. Starting with an overview, quarter one showed net sales of 6.9 billion and EBITDA of 590 million. In comparison to last year, the quarter was heavily affected by calendar effects on EBITDA more than the absolute deviation to last year. On rolling 12 months, we remain at 27 billion on net sales while decreasing to 1.9 billion on EBITDA. Noteworthy is that in the rolling 12 comparison to Q1 2023, We now have negative 31 hours in the base in calendar effect, corresponding to more than 300 million in EBITDA. Next two quarters will both have significant positive calendars. The negative calendar made the total growth negative in the quarter. Adjusted organic growth stayed on positive terms, 0.5%, supported by continued positive pricing at 4%. Thus, given FTE reductions in several divisions during the last quarters, we have negative volume in the quarter. A sequential view on adjusted organic growth shows the continuation of the declining trend since the peak in the beginning of 2023. The sequential decline of five percentage points is driven in equal terms from divisions infrastructure and process industries, both with segments facing significant market headwind, where we have made structural FTE reductions during the last quarters. All divisions except process industries show positive single-digit growth numbers. Order stock is reported at 20.4 billion, 2% higher than last year and 5% higher than last quarter. The year-over-year development turned back positive in the quarter, driven in particular from the energy division. This was the first quarter where energy order stocks surpassed 5 billion, and we continue to increase divisional FTEs to meet the high demand. The order stock for process industries remained significantly below last year's level, but now sequentially flat. EBITDA then came in at 590 million, and the EBITDA margin was at 8.6%, as in Q4, well in line with last year's calendar adjusted. On a divisional level, the calendar effect is the main driver on year-over-year Evita margin development. Divisions are in line or slightly ahead of last year adjusted for calendar, with the exception of process industries that report a continued strong margin, but a decline of approximately two percentage points on adjusted margin. Utilisation remained lower than last year, but the vast driver of the negative 0.7 percentage point decline relate to process industries. Infrastructure, industrial and digital solutions and energy all have utilisation levels in line or slightly above last year. We have no material project write downs in the quarter and only a minor restructuring cost reported as IIC. Cash flow from operating activities was stronger than last year in the seasonally weak Q1, which was particularly comforting on the back of a really strong Q4. Nonetheless, working capital development and cash flow generation continue to be a focus area for us. Available liquidity strengthened further and financial net debt increased somewhat to 5 billion. Given the net debt increase and the negative calendar effects on EBITDA, leverage increased to 2.6 times in the quarter. But except for the dividend payout in Q2, we are expecting to deleverage during the next quarters, supported also by the strong calendars. And with that, I leave back to you, Jonas.

Thank you, Bo. And I will just close and then invite Bo again. So moving ahead, it's clear that our continued work to improve our margin continues. We have already installed the programming infrastructure and we will of course focus a lot on executing on that. And now of course we are adjusting capacity in process industry to mitigate the lower volume. So to drive improvement across A3 since improving the margin is the key and we are of course picking now in what order we are bringing in to support the EBITDA margin focus. Second one is, of course, to be active and take position where we see strong demand. We talked about energy and both said we have a very strong order stock. So for sure, where we see strong demand and we see the market is improving, we will also be very active in driving growth. And then the third one, since there is, of course, volatility on the market, we need to be flexible and fast in adjusting. We have learned that last year we saw the real estate coming down. Now we are facing lower volume in capex product and pulp and paper. So we just need to be very fast in adjusting our structure when the demand changes. So these are the three priorities. Driving improvement, taking position in growth, but also be very fast in adjusting moving forward. With that, I invite Bo again on stage and we will open up for Q&As.

Yes, we will now open up for questions. And if you do have a question, please use the raise hand function in teams. And we will start with Raymond Key from Nordea. Welcome.

Yes. Hi, good morning. So first question for me, I saw that your order book here in process industries, for example, is up sequentially. Just if you could provide a bit more color, would you say the situation now is somehow better than Q4, or how should we view that?

Well, as you say, Dan, we are happy to see that we are now having a flat dish development and stability in the order book. So I think we knew already during, because we have pretty good track on all the larger CapEx products, and we knew that we were coming down in that one. And of course, we are targeting to a lot of other sub segments. So from that sense, we are not speculating too much about what is coming, but it was good to see that the order backlog stabilized quarter four to quarter one and even improved. Yes.

Second one, you say infrastructure with Robert heading that is sort of on track. Could you give us a bit more flavor on where you're looking at It ending up, what are you sort of targeting in terms of margin by the end of this year, for example, or next year?

Well, I think we have communicated, if you go back a year or so from a capital markets data, that we have a corridor that we are targeting to bring infrastructure in and to be a strong contributor to AFRI reaching 10%. and of course last year we had two very challenging quarter quarter two and quarter three where the real estate volume uh did hit us and we were late in adjusting but i would say now the target is for us to step by step improve and climb the profitability letter with all the calendar effects so i will not set an end target we have communicated that in a couple of years we should be in in a in a in a in a corridor that contributes to a free But that we should see a step-by-step improvement, that's absolutely our target.

Yeah, got it. And final one, before I get back in line, utilization was lower year over year. When can we sort of expect to see a turn in that trend?

Yeah, I mean, what you see from the whole group is then a decline. As you said, it's on the levels that we saw decline at the end of last year. But within the divisions and within the businesses, we've seen a clear trend shift in terms of utilization. So in quarter one, actually, all the divisions are in line with last year's performance or even slightly ahead with the exception of process industries. So back to your question, it's a matter of actually turning the recent trend in process industries. At that point of time, we can also expect the group as a whole to continue or to move into positive territory in terms of utilization.

Very helpful. Thank you very much. I'll get back in line.

Okay, thank you.

We now welcome Johan Dahl from Danske Bank.

Yes, good morning. Just on the order intake, you talked, Jonas, about the stricter tendering practices. To what extent did that impact order intake? How material is that for the group? And that's presumably also affecting infra mostly, I guess.

Yeah, I'll take that. I mean, it's of course a contributing factor and we've talked about, you know, being stricter in the tendering process since the fall, since fall in that sense. And you've seen also us taking Sequential steps also in adjusting capacity, practically reducing FTEs also to stay in demand. But of course, us being more selective, of course, that has a contributing factor. Difficult to quantify how big it is, but of course, it's a part of the reason why we are now moving into much more moderate growth levels.

And on the restructuring initiatives you took late last year, would you say that I appreciate it's an ongoing process, but did you get the full benefits of that in the first quarter or was it still cost associated with that in Q1?

I would say that the immediate thing that we did late last year, rebalancing capacity primarily in infrastructure, that we have full effect of in quarter one. That said, that's not the full scope of the improvement program in infrastructure. And that is, as Jonas also mentioned, you know, that is more seen as continuous effects expected over the next couple of years.

Got you. Just finally, in real estate, the most sort of early cyclical part of it, would it be architects or whatever, but what are we actually seeing here now in terms of energy efficiency program, I mean, real estate owners, you know, ramping up possibly their activities in the space. It just seems very, you're saying it's stabilized, but are you seeing any improvement?

I would say at this point, it's more stabilized. I don't think we, of course, we follow it a lot. And if you look on industrial buildings connected to the big investment, of course, there we see a demand. But in general, I would say that it's more flattish than that we see any clear pickups at this point.

Thanks.

Thanks a lot. Thank you.

Thank you, Johan. Moving on to Johan Sundén from Carnegie.

Good afternoon. Thank you for taking my question. So two from my side. First one is on process industries. We touched upon it already, but just to hear your view on the kind of margin profile looking forward. You were a little bit reactive when the weakness hit you on the infra side last year. Should we expect you to be a little bit more quick-footed this time and be able to safeguard more in a better way than last time around?

You should expect us to be a bit quicker. Yes. Then, of course, this is a different business than we are coming from. If I remember correctly, we did over 14% margin in quarter one last year with a good calendar effect. Now we are down to 10. So we are adjusting as we speak. We are doing it in South America and we are doing it also in Finland. And But still, the margin level on those projects are so high, so even if we adjust, we see it. But I think we always knew that we would have a corridor in this capex-dependent business. And I think 10% with a negative calendar is stable. But for sure, I feel that we have better control in adjusting capacity in a process industry also driven from the fact that we know pretty well the big products when they are coming or not them. So we will we will do our utmost to be in balance all the way in moving forward. And then, of course, What we are doing is that we are ramping up sales initiatives in other segments that we know are strong. We talked about mining and metals. We talked about the steel business in general with a lot of investment in Sweden and also these new verticals like battery factories and all of that in the Nordics, but also in Europe where process industry is really strong.

But if we look at the initiatives you did in Q1, are those enough or will you do more in say Q2, Q3 or?

I think we will continue to adjust capacity and we are also looking on creating flexibility moving forward. So I know that we are doing a lot of initiatives to be both flexible, being able to adjust quickly, but for sure we will continue to adjust capacity to meet demand in process industry.

And has there been any restructuring costs associated with the initiatives done in Q1.

Only marginal in process industries.

Perfect. The second topic I wanted to discuss are pricing. And if you go back to Q1 last year, we saw The kind of inflation kick in the economy impacted you quite strongly in the beginning of 2023 with index losses impacting many contracts. And then you had salary revisions in, say, April, at least in Swedish part of the business. How should we think about this kind of thing in 2024? Have your margins been boosted somewhat in Q1 due to this topic and we should be a little bit more conservative for the rest of the year when salaries kick in? Or is it just the same kind of year-over-year trend that we're going from?

I mean, I think you should look at last year as a rather exceptional year with fairly high inflation in the base. And we had really strong price revisions. And we also took, as you said, a high salary increase, hitting us in different parts of the business in different parts of the year. But as you said, for the Swedish base, typically from Q2. Going into this year, I think we in general expect a more moderated ability to increase prices than last year, and also a somewhat lower salary increase. And given that we had that effect in last year, I think the effect kind of spilling over to this year should be much more limited than what we saw last year. That would be my expectation.

Perfect. Very clear. I get back in line. Thank you. Thank you.

Thank you, Johan. We now welcome Stefan Knutsson from ABG.

Thank you. Hello, Jonas and Bo. Just to follow up on the process industries, we have talked quite a lot, but in your opinion, what will be needed in order to turn the capex cycle positive again from a client perspective?

Good question. I think I think there are several reasons why some CapEx products are postponed. We know that the pulp and paper sector with lower pulp prices for a while and of course, inflation, the interest rates are impacting. So we know that some products are delayed. At the same time, there are quite a lot of a lot of products discussed as we speak, both in pulp and paper segment, but in others. So I mean, I'm not on the client side, but what I can tell you is that we are very, very close to clients in our key sectors and very active in being able to grab those investment, those product when they will be there will be up for bids. And that's why we also have stick to our, you know, sales capacity in in process industry, because we know that we are able to deliver very strong margin and growth when the market is strong. So right now we are adjusting to a bit of lower volume. We don't see that dramatic because we think we will, of course, do our utmost to defend a good margin. But let's see then down the road when these projects will come on the market again.

Perfect. And then a follow up for Bo on was there any significant FX effect in the order book here in Q1? And also I saw that net financials was a bit lower this quarter. Was there any temporary things in there?

There was no significant FX effect in the order book. But I think on the net financials, I think you had a positive sequential FX effect in the net financials for the quarter.

Okay, perfect. Thank you very much.

Thank you, Stefan. We now welcome Tom Gynchard from Pareto.

Thank you. Just a bit on recruitment. You've seen a quite significant decline, especially in process industries. What sort of levels can we expect here, especially in Q3 moving forward? Sort of flat net recruitment, or are you still cutting on personnel here?

It's difficult to say how it will play out. I think when you look at quarter two, I think, as we said, that we will continue to adjust capacity if needed. We have created ourself flexibility, meaning that we might not need to lay off. We can also find other flexible solution that some countries offers. And as we said, also that the order stock is now stabilized. So exactly how that will play in is not so easy to see when we look into quarter three, but we will be prepared in both directions. And again, when you look on South America, but also what we can do in the Nordics, We are creating flexibility, both going down, but also ramping up without needing to let go of the strong, competent people that we have in our organization. So that's the key, that we can be very quick in adjusting upwards, but also being able to adjust downwards without losing our key competence, of course.

All right, thanks. And secondly, sort of the long-term margin targets. What do you see as the key drivers? Is it the billing ratio in general or the structural improvement of new projects or margins in the new projects? We touched upon it before a bit as well.

I think we stick to what we said a year ago. I mean, it's a mixture of we talked a bit about the kind of effect that we get from the mix effect. For example, now we see energy with a very strong order book. And so I think mix is one thing. But then I think in general, we talked about utilization now for a while that, of course, for us to continue to optimize utilization across a free. infrastructure, we have a clear program and we know that we have a margin gap to where we want to be and we have a clear program with that. So it is a bit mix of everything, I would say. But in general, what Bo said, When we look on order intake, we are running, I would say, the ship tighter, focusing a lot on the margin. And all of that together will, as the plan is, drive us towards a 10% EBITDA margin target. So we have a tighter governance right now, focusing a lot on improving the margin.

All right, thanks.

Thank you.

Thank you, Tom. Moving on to Jesper Stugemo from Handelsbanken.

Hello and thank you. You mentioned healthy demand from the defense sector. Could you maybe give some more comments around this sector and your ability to grow here and some around the competition and main hurdles to grow if there are any?

Thank you. Yeah, of course, you saw in quarter earlier this year that we announced a bigger project to BOE Hägglunds, which was for us actually based on our strong competence in vehicle and actually automotive position, we were able to take that assignment to Hägglunds. then if we have been involved in the defense sector for many, many, many years, and of course now we see an increasing demand in many, many areas. So based on our competence, based on our position since earlier, close relationship with many of these clients, we will of course do our utmost to grow. Then as for everyone, it will end of the day be a lot about being able to attract competence. So a lot of these projects are highly advanced with software development, etc. So for us to able to attract and have really strong competence will be one of the drivers. But we have good relations, a good history, and we had some really good orders in beginning of the year. That is a good platform for us to continue to grow into to to the defense sector.

Thank you. Jump back in.

Thank you, Jesper. Now, Ebba Björklid from DNB.

Good afternoon and thank you for taking my questions. I have two questions. The first one is on capacity utilization that improved year over year in infrastructure. And I would like to know whether this was also a sequential improvement quarter on quarter.

um the typically typically we don't we don't relate the sequential development since the quarters are you know the quarters are quite different i believe that actually we we have we have a utilization for infrastructure in line with what we saw in in q4 at least from from general terms So no big movement in a sense. And I think that goes for the general aspect of infrastructure development. What we saw in Q1 was very much in line with what we saw in Q4 in that sense. So no big movement. And following the weakness that we saw very clearly in Q2 and Q3 last year, then we've had a stable, reasonable utilization performance in infrastructure over the last couple of quarters.

Thank you for that answer. And then the second question, in terms of the weakness in the underlying market in process industries, how was the development during the quarter? Did it get progressively weaker?

I would say that it was very consistent throughout the quarter. And these are, you know, particularly for that division, these are, it's typically very long, it's typically very long trends. And the CapEx projects are, they're big in volume and they're long in time. So you would not expect a big change within a quarter for that. And we didn't see that either during Q1.

Thank you. That was all for me.

Thank you, Ebba.

Thank you, Ebba. Are there any more questions before we close down for today?

No more? All right. But then from my side and Bo, thank you. Thank you all for listening in. And we wish you a continued good day and looking forward to see you soon again. Thank you for listening. Thank you. Bye. Bye.