Afry AB (AFRY) Earnings Call Transcript & Summary

So dear all, a warm welcome to this quarter 4 report from AFRY, including also the full year 2020. My name is Jonas Gustavsson, CEO of AFRY. I will do the first part of this presentation, but I also have our CFO, Juuso Pajunen, supporting me, and he will present a few slides, and Juuso is actually sitting in Helsinki. So warm welcome to all of you. And we will also have opportunity to ask questions in end of this presentation. So let's start and jump into the presentation then. And as you probably have seen then, we presented a report early this morning, and we are also proud that we have been able to strengthen the profitability, and we can also see a continued recovery compared to the third quarter across basically all segments. So the highlight of the report, of course, is that we have improved profitability. And of course, all the work we have done during 2020 have now yield effect basically across the whole business then. The balance sheet, we have a continued strong cash flow, meaning our net debt is going down and that balance sheet looks very good. And that means also that we are now ramping up our focus on acquisitions, besides, of course, focusing on getting organic growth back on track. We can actually notice now that we are starting now to be much more often seen in recruiting talents across the whole company. Of course, the growth was still impacted from the ongoing pandemic. It is very different between different segments. But also in the fourth quarter, we had a negative growth, as you have seen, equal to 5.5% if you take away the currency effect then. But I would say that in general, there is a stabilization now that we saw already in quarter 3, and we can see basically a continued recovery across all the segments, I will get back a bit more to each of the divisions just in shortly. What we are also happy with is that the long-term cost savings, we have now a run rate by end of this year, or last year then, quarter 4, of some SEK 210 million. If you remember, we set a target for SEK 120 million in beginning of the year. Of course then, we have worked extensively with all kinds of short-term cost savings to mitigate the COVID-19 effects. So we have had something like SEK 500 million effect for quarter 3, quarter 4 and quarter -- 2, 3 and 4. But on top of that, or as a part of that, we have also these long-term structural savings that we -- as now SEK 210 million when we end quarter 4. And as you also noticed, the Board of Directors then have made a proposal to -- of a dividend equal to SEK 5 per share. And also, if you look on the full year, that means that we ended up just short of SEK 20 million and EBITA of SEK 1.6 billion compared to SEK 1.7 billion 2019. And the EBITA margin is 8.6% then compared to 8.7% for the full year, which we think is good in a year when we have really a significant volume drop. So again, then, I would say that quarter 4 is a step in the right direction, especially on the margin side, on the profitability side. And of course, now all our focus is going to even drive the growth moving forward. 2020 then just before we go into the numbers for quarter 4. Of course, it's been a very different year to what we planned. It's been an eventful year, of course, to mitigate all the effects on the COVID-19. We started up the year then to basically take the whole organization from sitting in the office, at clients, at sites to find ways then to work from home using the digital platforms to be able to keep the service levels. And it's been, of course, very different, depending on what region or country we are operating in, different challenges. But I'm -- I said it before, I'm extremely impressed how the organization had been able to deliver high-quality solutions, service and projects in a very difficult year. So then, of course, we have revised our strategy. We presented that in the last year. It's more clear. We are focusing on our geographies, but also segments, sustainability and digitalization as part of that. A couple of things that is worth highlighting, the whole repositioning of Energy, if you go back a couple of years, before we joined forces with Pöyry, we really had a bit more challenge in the Energy Division, lower margins. Now they delivered double digit in the quarter 4, full year up to 9%. So the whole repositioning of Energy they have actually delivered really as we have planned. So it's a fantastic work. We also then have done the repositioning in automotive. We started that even before 2020. And of course, due to the oil turmoil in the automotive segment during the spring, we have fast forward that. So that's we have done. And now we can actually see that, that segment for us is also stabilizing, but on lower levels. But we see then also a gradual improvement in that segment. We are ramping up our acquisition focus, for sure. So there's a lot of dialogues. And the balance sheet, again, looks very good for us. So that will be a big part of our focus moving forward. And then we have also established the AFRY brand, that we are continuing to brand. And also then AFRY connected to the whole sustainability part, which is really the core of who we are. So we have entered a lot of new partnership in 2020. We have entered the 1.5°C Business Playbook. We have a cooperation with Gapminder Foundation, and we have also joined the Science Based Targets' Initiative. And this is just the beginning on our work within the area of sustainability. So 2020, for sure, a very different eventful year. But the year have made us, I'm sure, a stronger company moving into 2021, even though we have faced a volume drop during the year. Well, when we look on the market, we can clearly see that we are still affected from the COVID-19. It's again very different between different segments, as you have also seen in the report. We have segments like our Management Consulting business, the Process Industries are really delivering high -- good numbers also in -- on the top line. But -- and we can also see that, especially on the sequential level compared to quarter 3, we see a general stabilization. On Infrastructure, there is a healthy underlying demand even though we see that the private side of real estate are still affected. And of course, we are now working heavily to get Infrastructure back on organic growth. And there's a lot of focus on bringing in new talents into the Infrastructure Division. On the Industrial & Digital, as we have said, a lot of effect from the manufacturing and automotive business 2020. But we have also some really bright spots like Food & Life Science that has had a fantastic development throughout the year. And again, on both automotive and the manufacturing side, we have seen bottoming out, and we also see a recovery in that segment. Process Industries, I will say, stable. There was a period where some of the large CapEx projects, the decision took some longer time. We can still see that. But it's a very stable and good segment, and we have a fantastic position on that segment also globally. The Energy Division, there's a stable demand. And I will say the reposition we have done over the year, the profitability level we have, now moving full in to the clean part of energy, where there's a lot of repositioning and changes, I think that segment will be very interesting for us, and we will not push a lot on getting that back to growth. And then finally, Management Consulting, delivering a really great year. And they are, of course, focusing very much on the segments of Process Industries and/or Pulp & Paper-based Bioindustry and Energy. So market, in general, stabilizing and recovery across the whole -- all segments. Of course, we have taken a lot of projects. And I will say that the order backlog, and Juuso probably will talk about that, it is a solid ending 2020 as it was 1 year ago. So the order backlog looks very good for us. And we are taking a lot of projects in the Nordics, but also in the segments outside Sweden in the areas that we think is attractive. So I feel very good that we also have a lot of good dialogues with key clients across all segments. So it's been a good quarter also from getting good projects into our order backlog. Then these are just a few of smaller acquisitions that we have done during the quarter. And of course, now, as I said, we have started up even a bit before quarter 4 to look a bit more into the potential acquisition, what companies would fit AFRY. And we are very much focused on these transforming segments that we have communicated. And on top of that, also companies that helps us in digitalization, bringing us a strong position in that intersection, digitalization and where we have a strong domain expertise. And this is just a selection of a few smaller companies that we have added on during the quarter, and we are now spending quite some time in potential good companies that would fit AFRY moving forward. So with that said, let's see if the technology is supporting us. Juuso Pajunen, are you around in -- yes, I see Juuso.

Hello, I'm in Helsinki. Greetings from winter wonderland.

Thank you, Juuso. So will you take us a few -- through a few of the financial slides, Juuso, starting with the net sales development throughout the quarter.

Yes. So let's talk about the net sales. So obviously, we are slightly down compared to previous year, but at the same time, I have to say that we have some positive underlyings there. If we take the total growth minus 10% of growth, excluding FX impacts, minus 5.5%, this is something that we can't be entirely happy with. But if we dissect it into pieces, which we will do, especially on the divisional slide, we learn that we have few pockets that have suffered quite a lot, but otherwise, we are in solid positive level. We continue to have the impact in COVID-19, especially in automotive and manufacturing and some impact in the real estate segment thereafter. Then if we see the positive part, our order backlog is strong. It is at the same levels as previous year when we adjusted at the local currencies. Meaning that when we have less FTEs than 1 year ago, we have more workload per employee than 1 year ago, which is obviously a good start for 2021. Otherwise, then if we look a bit underneath, we can see that from Q3 to Q4, we are actually increasing the average number of FTEs in most of the divisions, which is also positive when looking forward. Then if we take the next slide and we talk about cost savings and the cost part. The other part is that we have still been in a good note on delivering the cost savings and mitigating the decrease in revenue. So we have continuously been able to close the delta of revenue decline compared to cost decline, meaning that the relative profitability has been protected well. And then the other part that is good to note is that basically, we have accelerated cost savings from the indirect expenses part. So the ratio of indirect expense savings to direct project expense savings is continuously increasing and highlighting that we have the roughly SEK 210 million of permanent savings. So all these put into the one we have been very successful on protecting our margins. But obviously, now our eyes are in the growth and getting back on track on that. So going to EBITA, we delivered 10%, which is within our long-term goal. And we are doing that despite losing revenue, roughly 10%. So all in all, it is a positive -- positive delivery, and I'm quite happy where we are landing with the relative margin. At the same time, if we take 4 out of 5 divisions, they have an improved margin compared to previous year quarter 4. And then if we take sequential development, we can say that all divisions are sequentially improving. So that is also a positive note. Then we need to remember that in the absolute numbers but also a bit in the relative numbers, we are losing on the FX impact, roughly SEK 20 million. So all in all, we would be more or less on the same absolute numbers without the translation differences impacting us compared to previous year. So all in all, happy with the 10%, happy with the underlying positive note and the direction of the divisions. So as said, now the eyes are on the growth. If we then take a bit of the look underneath, where the delivery is coming and how the SEK 490 million is building up, we see that in absolute terms, Infrastructure is losing SEK 8 million. On relative terms, they are actually gaining here. Slowness in commercial real estate has impacted us. Then the biggest impact is actually on the [ Industrial & Digital ] Solutions and especially from the automotive and manufacturing, which we have been highlighting throughout the year as a difficult segment. But also in there, we see the bottoming out and we see the continuously improved results. And now actually, the delta compared to previous year is continuously closing if you take the relative margins. Process Industries is a flat 0 on absolute ones. On relative margin, they are improving. But Process Industries is one of those places where the absolute loss of EBITA due to FX translation is highlighted due to solid and strong offering in Brazil, which unfortunately then with the Brazilian real devaluation is converted into lower amount of Swedish crowns. Energy, both operationally and however you want to look at, positive delivery, double-digit numbers, also in absolute terms, despite losing quite a lot of volume, still on green. Management Consulting, also strong one. Absolute numbers, above relative margin, north of 17%. I would call that one a successful quarter, but at the same time, it is a volatile business with success fees and so on, so those have definitely impacted. Then group Common slightly negative, mainly due to decline in the revenues. So then we are not in a position to burden divisions too much on the expenses. So all in all, 9.5%, SEK 516 million ends up into 10% and SEK 490 million. Then a bit on the divisional part. We see that Infrastructure adjusted organic growth at minus 4%. Obviously not where we would like to see it in total. This is coming basically mainly from the real estate segment. And in geographical perspective, it is a bit more in the Central Europe part. At the same time, if you take a bit deeper look under the hood, we can see that the average number of FTEs in Q4 was higher than average number of FTEs in Q3. So we have a solid way forward, and we are implementing that way forward, so I'm quite confident on that part. Industrial & Digital Solutions, impacted by the automotive, like I explained earlier. Then we have the positive organic growth in Process Industries and in Management Consulting, heavily supported by recruiting and positive market environment. Energy, the repositioning, which I would say is now complete, is still on, organic perspective, losing it. But at the same time, it's complicated decisioning, I'm quite optimistic on what comes to '21. And then as I said, if you take the relative margins, all divisions are improving. Then another place where we should be happy and proud of is the cash flow. We are now at net debt-to-EBITDA at 1.6 excluding IFRS 16 rents. That's a solid position. And if you take the view on '17, '18, '19, we're actually below those ones. So from a balance sheet perspective, behind the position, to take whichever moves and capture whichever opportunities we see in the markets. This has been supported by strong operating cash flow. But at the same time, if you see the net working capital development, it is like a school book example of how it should behave when you lose volume. So then you recover money home. And obviously, when going back to growth, then you start tying again the net working capital. Board of Directors proposes a dividend of SEK 5 per share, which obviously is a positive for our shareholders. So with these words, handing back to you, Jonas.

Thank you so much, Juuso. And again, you will have a chance to ask both me and Juuso questions. I will just wrap it up now with just talking about the future then. We are really happy that we have now closed quarter 4. Of course, we are in 2021. And for us, it will all be about executing our strategy based on the platform that we have now. So we have updated that, and you all know that. We like so much our mission. We accelerate the transition towards a sustainable society, that's really who we are and that's where we can help our clients, to go through all this transition that is ahead of us. We have set a clear ambition, and that's to be a European leader in sustainable engineering, design and advisory. Also with a global reach because we have some really good position, for example, in pulp -- Bioindustry and Energy, for example. We are based at 5 areas to really own the countries where we are operating to drive organic and also acquired growth. We have highlighted 4 clear segments. Of course, Infra is a big one, where we will spend more interest in driving growth. Both digitalization to do that in a more scalable way, it will affect the whole company. And sustainability. On top of that, what Juuso presented, all the work we have done, and we still have work ahead of us in looking on the cost structure, making us leaner. On top of that, we are continuing to implement systematic platforms like CRM system, HR system, we are in the ERP implementation, that will also support our operational performance moving forward. So with that said, moving into 2021, even though the pandemic is still very much around us, we have a good optimistic, positive momentum. We see that the market is recovered slowly. We have a stronger balance sheet. We are focusing a lot on growth. And I think, as Juuso said, the average number of employees is normally something that is very interesting in a company like ours. And we can see that, for example, in Infrastructure, it goes up between quarter 3 and quarter 4. Before we see that in the number, there is a time lag, but that's a very strong and positive KPI for us. We are developing our digital platform, and we are accelerating all the work within sustainability. And we have some very interesting partnerships coming up. And I also would say that we have started up 2021 with a strong platform and a positive momentum. So with that said, I would like to invite you all for questions, and I will leave it over to Cathrine Sandegren, Head of Communication, to facilitate the Q&A session. So please, Cathrine.

Yes. Thank you so much, Jonas. [Operator Instructions] And I can see we have the first question here from Erik Paulsson.

This is Erik Paulsson at Nordea. I have one question relating to the Infrastructure and real estate. Can you break that down into development in the quarter? How was real estate going? And how was Infrastructure going? And I believe that real estate is like 1/3 of the segment, right?

Yes. Erik, thank you for the question. Yes, you're right. I mean, if you look on the Infrastructure is a big umbrella for AFRY, as you say. Big part is into the transport part, rail and road. Then we have, as we said, the real estate part. And then, of course, we also have pathways, more project management. We have, for example, a company in Norway called Advansia. And we also have water environment and architecture. So that's basically frames Infrastructure. And I could -- I would say, and, Juuso, complement me, that also on the real estate segment, we have seen a stabilization and slight improvement also in that one, even from lower level, obviously. Because I think that sector is still affected. So if you take the hotels, for example, where we have some architecture work, et cetera, it's been slower than normal. So what would you say, Juuso, complementing that question?

No. I would say that you're absolutely spot on. So we have had issues in the real estate. We have seen it, at least what it looks to us, as a bottoming out. And basically when you take the numbers between buildings or real estate and transportation, obviously then in relative terms transportation has been faring better than the other segment.

I would say, Erik, that right now, we feel also here, there is a positive momentum into it. And we are gearing up to take that both. Because our building or real estate part is very -- both local business, but also some of the bigger projects. So we can also see there are some bigger projects coming up as well as we are now trying to really support our organization to go for growth again, to capture the opportunities that start to come up again. But it has clearly been, of all the segments that we have gathered under the umbrella Infrastructure, that has been the one where we have seen the biggest slowdown throughout the year effective from COVID-19.

Understood. Is it possible to break down the hotel business, what it has been historically in the business segment of whole Infrastructure?

No. I can't give you that number right here. And obviously, it is, in the total, not the biggest segment, but I think is an example of products that we had in the pipeline that was obviously stopped. But we have other segments where we have been operating on building out airport, for example, obviously, also been stopped. So when you break down the real estate, now that's not a private one. But when you break that down, there are some subsegments under the real estate that has been more affected. But I can't give you those details right here now. We could take -- maybe take that in a separate discussion, if you want to take.

And the next question is from Dan Johansson.

Jonas and Juuso, a couple of questions from my side as well. Is it possible to share some insights about how you feel about the order book now moving into 2021? And also if possible, how is the general pricing level on new orders compared to previously? Are they stable? Or do you feel some pressure now due to the slightly slower market?

Thank you for those questions. And again, we'll do it like before, I will start and Juuso to support. As we said before is that the order backlog looks very stable and good and even as strong as we had 1 year back. So I think in -- especially large order in Process Industries and Energy, but also in our whole company. We have been good in getting in an order at the same level as last year, so that feels good. From that side, I will say that we have gone through 2020 very stable. When it comes to pricing, it's always, of course, when you're going through a situation right now, there is, of course, in different areas, price pressure. We are -- we have a pretty clear view on keeping our price levels on a good level. So we cannot say that we have seen big price decreases where we are operating. What do you say, Juuso, when you look on the whole structure?