Afry AB (AFRY) Earnings Call Transcript & Summary

Hello, everyone, and a warm welcome to AFRY's presentation of the Q1 results for 2025. I am Linda Palsson. I'm the CEO of AFRY, and I will present the quarter here today, together with our CFO, Bo Sandstrom. After the call, we will, as always, open up for questions. So make sure to join us in the call. Okay. To summarize then the first quarter, we had a rather modest start to the year, with a slight decline in sales and profitability that was pressured in some of our divisions. These results reflects the market we experienced, but it also underline the need for structural measures going forward. The slight decline in sales was mainly due to weak market in parts of our division, Industrial & Digital Solutions and Process Industries. This was partly offset by a strong growth in the Energy division, where we continue to see good demand driven by the energy transition. The order backlog was solid, and it increased by 4% sequentially adjusted for currency effect. And I am very glad to see that we continue to win important client projects and build backlog in our core segments. Profitability was pressured by a slow ramp-up in the beginning of the quarter as well as the challenging market we see in some of our segments. We also had a negative calendar effect of 4 hours in the quarter, which impacted the EBITA by around minus SEK 37 million. At the same time, the global business environment was impacted by increased uncertainty as a result of the global tariff situation. At AFRY, we see a limited direct impact from this. However, we are, of course, closely monitoring the situation and the potential effects it can have on our clients and their investment decision and activity going forward. In the quarter, we also continued our efforts to pave the way for profitable growth. And as one important step on that journey, we are today announcing a new group structure and changes to the executive team. I will come back to that later in the presentation. If we take a look at the market, we see that uncertainty has increased in some segments as a result of the tariff situation. Aside from that, we don't see any major shifts in our view on the market since last quarter. If you look at the industrial sector, the market remains mixed. We see a growing demand in defense, while the demand in pulp & paper and for IT consultants still is low. In the energy sector, demand remains on a high level across segment. And one area I would like to highlight is the transmission and distribution of electricity, where we see a lot of initiatives and opportunities related both to connecting new energy production as well as strengthening of the existing networks grids. In the infrastructure sector, the real estate market continued to be weak, while demand for transport infrastructure was solid and supported by governmental initiatives to strengthen infrastructure resilience. I would also like to comment on the divisions' performance in the quarter, starting out with Infrastructure. They delivered a slight growth driven by higher average fees and attendance rates in the quarter. And despite a challenging market in the real estate market, they continue to show progress in the improvement program, leading to improved margins. We move on to Industrial & Digital Solutions. They are still experiencing a mixed market in the industry sector. Profitability was also impacted by a slow ramp-up in the beginning of the quarter. In our Process Industries division, the low demand in pulp & paper impacted performance. While we see signs of increased market activity in some regions, such as Latin America, profitability was impacted by ongoing actions to mitigate the weaker market, including capacity adjustments. Energy showed good growth across the segments with high demand related to the energy transition. Profitability was also improved driven by solid project performance and supported by a favorable market. That also reflected in the Management Consulting division, which saw high demand for its energy offering as well as a growing interest for sustainability consulting. However, this was offset by the weaker demand in bio-based materials. Moving on to new client projects because, as I mentioned, we have a strong focus on building our order backlog that supports the execution of our strategic ambitions. In the quarter, we won several new client projects in core segments. One very interesting example is the development of an automated forest plant production factory for SweTree Technologies. This project aims to enable efficient production of fast-growing and resistant forest plants, which strengthen the bioeconomy and reduces carbon emissions. In this project, AFRY will contribute with deep sector expertise in areas such as automation and process equipment, which will support our clients in taking the pilot plant to full-scale production. We also signed a design contract for an offshore wind farm in Estonia. Offshore wind energy is a key component of Estonia's strategy to expand its share of renewable energy and strengthening energy independence. And once this project is completed, it could cover half of Estonia's current electricity consumption. So that's another good example of how AFRY contributes to clean energy transition. And finally, I would like to highlight a contract that we won in the infrastructure sector for Tram-Treno tunnel in Lugano, Switzerland. The tunnel is a key element in the redesign of the public transport network, and the project will support the expansion of sustainable transportation in the region. So really cool projects, I have to say. And with that, let's dive into the financials, and I would like to hand over the word to you, Bo.

Thank you, Linda. So I will, as usual, cover the main financials for Q1 2025. If we start with the financial overview, quarter 1 showed net sales of SEK 6.7 billion and EBITA of SEK 490 million. On rolling 12 months, we remain at SEK 27 billion on net sales and stay right above SEK 2 billion on EBITA, close to SEK 100 million above last year. Despite the weaker Q1 result than last year, we remain ahead of last year on rolling 12 basis, also adjusted for calendar effects. In the quarter, with a net sales of SEK 6.7 billion, adjusted organic growth came in at negative 0.9%, where the continued negative volume was largely compensated with positive pricing of close to 5%, which is in line with what we saw during 2024. Total growth is reported at negative 2%, affected also by a negative calendar and FX effects from a strengthened SEK in the end of the quarter. In Q1, we again report slightly negative organic growth. Divisional growth is driven largely by the Energy division now at double-digit organic growth. Industrial & Digital Solutions and Infrastructure were the most affected by the slow ramp-up, and both of these divisions report sequentially lower growth, primarily then due to that. Process Industries remain in negative growth, but at a lower level than seen during 2024. Order backlog increased sequentially to SEK 20.2 billion, largely in line with last year and last quarter. However, FX impact in the quarter from revaluation of the order book -- order backlog contribute negatively, 4% on the comparisons. Thus, year-over-year and sequential increase are positive 3% and 4%, respectively. Currency adjusted, Process Industries continued to strengthen the order backlog and now report an improvement year-over-year for the first time in 6 quarters. EBITA came in at SEK 490 million, and the EBITA margin was at 7.3%. Calendar effects affect EBITA margin with approximately negative 0.5% to last year so that calendar adjusted margin was negative to last year following 5 quarters with a small but positive development. The trend shift was largely driven by a slow ramp-up of the quarter, most clearly experienced in Industrial & Digital Solutions as well as Infrastructure. In addition, continued capacity adjustments in several divisions affected the year-over-year comparison negatively by approximately SEK 20 million in total, mainly in Process Industries and Industrial & Digital Solutions. As seen throughout 2024, divisions Infrastructure and Energy continue to support the margin development of the group. Industrial & Digital Solutions report a clear decline in Q1, pressured by utilization and a mixed market situation. Process Industries is again reporting a higher than group average margin, but still carry a decline compared to last year, although smaller than seen throughout 2024. Utilization remained lower than last year, and year-over-year decline was higher in Q1 given the slow ramp-up in the quarter. With 4 out of 5 divisions with negative year-over-year development in Q1, utilization is a clear focus for AFRY when looking into our next chapter. We have some effects remaining related to the Agency Work Act, but we reiterate that we expect those to fade out over the next quarters. We report SEK 30 million as items affecting comparability related to the final salary payment of the outgoing CEO. Following the very strong cash flow generation in Q4, cash flow from operating activities in Q1 was in line with last year, seasonably low. Available liquidity remain at -- remain around SEK 4 billion, and movement on net debt follow similar seasonal movements as seen historically in the first quarter of the year. Thus, on net debt to EBITDA, we remain well below our financial target of 2.5x. And with that, I leave back to you, Linda.

Thank you so much, Bo. Let's see then. As you all know, we are now opening the next chapter of AFRY. And I would like to round off our presentation here today by talking a bit more about the changes that we also announced today. Passing my first 100 days as CEO of AFRY, I am impressed by all the great colleagues that I meet on a daily basis. Over the last 130 years, AFRY has successfully evolved in times of change and disruption. And today, we stand strong with a great future ahead of us, and I am proud to lead AFRY into the next chapter. As I presented already during the fourth quarter presentation, we are looking at 3 things: the focus of AFRY's core business, how we can enhance client value and how to secure a fit-for-purpose operational structure. AFRY has built a strong base and gained a leading position in key segments through high growth and global expansion. However, in the light of the ongoing portfolio review, it is evident there is untapped potential, both relating to our operating model with room to simplify, harmonize, take out cost and improve utilization. And the challenges are evident in our financial performance. Our EBITA margin as well as utilization levels have deteriorated over time. And even though efforts have been made to improve our profitability, previous actions have not been enough. So now it's time to focus and to simplify. To support our journey ahead, we, today, announced a new group structure and changes to the executive team. The new structure will help us focus on AFRY's core as well as simplifying our structures. Lastly, the new structure will enable us to structurally address our cost base over time and improve profitability. We take pride in being a leading partner to our clients in the green energy industrial transition, and our core segments represent industries with large transformation needs where AFRY is in a strong position to be a partner and provide advanced engineering, project management and advisory services. Going forward, we will report through 3 global divisions: Energy, Industry and Transportation & Places. We will focus AFRY's capabilities and streamline our operation towards 14 business segments. This enable us to better serve our clients while also playing a key role in driving sustainable and resilient growth for the future. As you can see here on this slide, Management Consulting will become a part of the global division Energy and will continue to work across segments included in the other global divisions. Process Industries, Industrial & Digital Solutions as well as the industrial building offering within current Infrastructure division will become a part of the new global division Industry. At the same time, we will now have a more focused, clear offering within the global division Transportation & Places. The new group structure will come into effect 1st of July this year, and AFRY will report in 3 global divisions from the interim report in the third quarter of 2025. And as a consequence of these changes, I have decided to make changes to AFRY's executive team to represent 3 global divisions and 5 group functions. Together, we are committed to drive our journey forward to accelerate profitable growth. And as you can see here, Elon Hägg will lead the new global division Energy; Nicholas Oksanen will lead the new global division Industry; and Robert Larsson will lead the new division Transportation & Places. Bo Sandstrom continues as CFO; and Henrik Tegnér will be leading our Commercial and Communication; and Susan Gustafsson continues as General Counsel; and Sara Klingenborg as Head of People and Culture. And Daniela Spetz is a new member of AFRY's executive team as Head of Corporate Development and M&A. Daniela joined AFRY in September 2023 and has most recently held the position as Head of Group M&A here at AFRY. After my first 100 days as CFO -- CEO here at AFRY, I'm more confident than ever in the immense potential we have at AFRY. With this renewed focus and clear direction, I am certain that these initial steps will enable us to make significant progress and accelerate profitable growth. Together with my new executive team, we will continue our work towards launching AFRY's updated strategy in the second half of 2025. And with that part, we will open up for questions. So maybe, Bo, you will join me here.

[Operator Instructions] And we will start with Adela Dashian from Jefferies.

My first question relates to the quite elevated cost base that you have now in Q1 associated with the capacity adjustments. Could you be a bit more specific about where you decided to take cost out and what your vision is for the remainder of the year if weaker momentum persists?

Yes. Thank you. There are 2 things to consider. I mean, of course, looking at our cost base, it always fluctuates quite a bit, but there are 2 things in a sense standing out. One is what I mentioned earlier, we have taken restructuring costs in the divisions of approximately SEK 20 million in the quarter, which we didn't have in the comparative quarter last year. Those relate then primarily into Process Industries and Industrial & Digital Solutions. And you can also see that those are 2 of the divisions where we have decreased the FTEs sequentially. The other thing is then on the group cost side that are somewhat elevated compared to last year quarter by quarter, if you then adjust for the [ IAC ] post that we record. So that elevation is primarily then related to IT licensing costs, which are, to some extent, sequential and doesn't affect our expectations for the full year. So some quite specific items to consider, but nothing that changes our cost expectations for the full year.

That's good color. And then maybe also on the new group structure. I think I read that there's going to be some restructuring costs associated with that now in the second quarter. Could you elaborate on the size of those?

Yes. I mean, as we said, we will return in the report for the second quarter with any restructuring costs associated with the -- going into the new structure. The new group structure is launched now, and we see some parts of it, but it's still a bit of implementation to go until 1st of July when the new group structure comes live also reporting-wise. So we will have to come back to sizing and specifics of that restructuring in Q2.

Next up is Fredrik Lithell from Handelsbanken.

I was thinking maybe when you do this portfolio review and evaluation in Q1, do you also then adjust or take any project adjustments that are underneath the surface that we don't see? I mean it could be one or plenty of projects that are not running accordingly to plan. Are you adjusting accordingly for that? So that's one question. And then I also had a -- I saw that on IDS, you mentioned the Agency Work Act as a factor that impacted your sort of profitability. I had the intention that it shouldn't really impact the consulting segment. So could you please elaborate a little bit on that as well?

Yes. I can start with the second one. And we do say -- we do notice that the Agency Work Act still affects us somewhat in Q1. It's less elevated than we saw in Q4. In Q4, we did report and talk a bit about the Agency Work Act and the effect that it has on us, primarily then in the introduction of the Agency Work Act creating a lot of insecurities in some of our clients' relationships, causing a bit of damage to the utilization and primarily then affecting IDS. But we reiterate that we do expect that to fade out over the next quarters, but we see in Q1 that it's not completely faded out where we are right now. Back to your first question. Sorry, could you just repeat that in short, Fredrik?

Yes, project adjustments, if you have sort of projects that are not aligned to the project plan, if you adjust for that.

Sorry. No, there's nothing material on that aspect, Fredrik, in the Q1. There's always adjustments, but there's nothing material to point out.

Okay. And could I just have a follow-up on the Agency Work Act. What is it specifically that turns into trouble? Is it that your clients want to send back your consultants and thereby your utilization gets problematic because they are afraid of having consultants too long? Or what is taking place there?

No, it's the clients being -- and then particularly then, that was clear in Q4 when it was introduced. But the clients being insecure on how to actually treat the Agency Work Act and whether that causes a responsibility for them to hire our employees in that specific situation. And to some extent, that actually causes them to stop a project just for not coming into a situation that they don't have full control of. So it's indirect effects in that sense but causing a bit of insecurity and then particularly being then affected in the professional services part of our business, then being most present in IDS.

The next question is from Stefan Knutsson from ABG.

I have 2 questions. First, it seems that demand within the IDS division is where you have the largest deviation versus Q4. What is the main cause of the negative development there? Is it delayed investment decisions or something else that is causing it?

Do you want to -- if you like.

Yes. I can start and you can follow. I mean I think what we see is 3 effects in 1 in a sense relating to IDS. First, we had the Agency Work Act that we talked about just now. And there, we don't see elevated effects, but we do notice that we still have some effects of that also slipping into Q1. Then very clearly, we see in -- particularly in IDS, we had a very slow ramp-up, the first weeks practically of the quarter hitting us on utilization going through to net sales and then all the way to bottom line for that division. That was very pointed at the first few weeks of the quarter with, from our perspective, a tricky calendar to handle. And we did not manage that to the extent that we would have liked to. The third aspect is, of course, the market situation for IDS. But I don't want to start with that, explaining the full picture. Of course, it is more and more uncertain rather than being more certain, but it's not a dramatic shift in Q1 compared to previous quarters that we experienced for that division.

Okay. Perfect. And going on with -- you say that you don't have any direct exposure to all of the tariff discussions. But like I think that, obviously, it creates uncertainty as you speak of. Are you, like, worried that large clients are delaying their investment decision in regards to all of the uncertainty that is going on?

Yes. Of course, this is something that we monitor closely. As we said, we have small direct impact from the tariffs as we have quite limited operation in the U.S. and being a consulting company. But yes, our clients, of course, we monitor closely their development if there are any delays or postponements of investment decisions that can then in the next sort of round impact us. So we are in close contact with our clients regarding this. We haven't actually seen it yet in the pipeline or something like that. But of course, we monitor this closely. On the other hand, I mean -- which we don't either see in the pipeline, but there are some opportunities connected to this as well, where companies and countries are looking into more investment in their domestic market to strengthen their own capabilities in Europe and European countries. So we see a potential upside from this as well. But we haven't seen it in the pipeline yet, both the potential downside or the potential upside. So we are quite neutral as of today.

Then we will go to Raymond Ke from Nordea.

Two questions, starting with utilization, 71.1%. This is sort of close to 2008 financial crisis levels. I haven't seen this in any of your quarters in the past, say, 15 years. So just trying to understand, is there something about the market? Or is there anything structural maybe related to your hybrid work strategy? Anything that you can give us to help us understand the utilization here?

Yes, I can start. I mean, I think you're right. You have to go quite a bit back to find those type of utilization levels in Q1. I think on one end, it's something that we have been more and more looked at over the last few years since we have had a continuous decline over several years. And that's one aspect of it. And the other aspect of it is then particularly the extremely weak ramp-up that we had in this specific quarter, putting additional pressure on utilization, making the year-over-year decline actually even bigger than what we saw typically then throughout 2024 for the specific quarter. We didn't necessarily see that for the full quarter or for all parts of the quarter, but the beginning of the quarter, did impact it as such. And then I would link in a sense to what we also said, this will be a focus for us in the next chapter of AFRY.

Yes, and maybe I can comment -- yes, because, of course, we are worried about the development of the utilization level over time. It has continued to deteriorate. And it's a bit frustrating, I would say. We are doing a lot of action. It doesn't have the impact that we are aiming for. So now in this next chapter, of course, we try to do things a bit differently going forward. With simplifying everything from our divisions to our segments, but also ways of working, we hope to address that issue of the utilization rate and that inefficiency that has been there. So it is evident that we are now needed to do these things, and we will continue our efforts here. So I'm very happy that we are now in the middle of this process addressing these things because we are not happy with the development.

That makes sense. And just on the second question, regarding the new structure that you're introducing here. Does this introduce a new layer on top of sort of the old? Because I'm curious mainly about, for example, what -- Martin Öman was heading IDS or Roland Lorenz. Are they a layer below? Or how does this work?

Yes. So we are simplifying, again, then from 5 to 3 on the division levels and on the BA level or segment level from 31 to 14. And Roland and Martin will take on positions on the segment level going forward, driving, in Roland's case, the advisory services across, but MCD will be a segment under Energy going forward.

But just to point out that you don't misinterpret it, we're not introducing a new layer into it. Rather, the opposite in that sense, even though it's not a 1:1. It's not a clear layer as such, but it's rather a reduction of layers than an increase.

Then we have Johan Sundén from Carnegie.

I think I'll start off on the utilization side as well. And just to -- would be good to get some more color on kind of how much of the drop and slow ramp-up was purely due to the kind of bank holidays beginning of January and how the kind of utilization progressed throughout the quarter where you ended the quarter. And a little bit also interested to hear about what you think are -- should be the normalized level of utilization level in, say, 2- to 3-year period.

Yes. I mean I can start with the beginning, then the tricky part is, of course, your second part of the question. But I would say that, I mean, we were typically in the -- between 0.5% and 1% decline year-over-year throughout last year. And this -- we -- this quarter, we were 1.5 percentage behind. So -- and most of the answer on that kind of shift in development to what we saw in 2024 was explained by the beginning of the quarter. So a bit more than 0.5 percentage point is a fair -- on a group total, is a fair estimate of what that would actually be. But then even adjusted for that, then it's still a decline, right? So it is something that, of course, is a bit different story in the different divisions because they are developing differently with different market situations. But in a quarter like this where we actually have negative development in all of the engineering divisions, then, of course, it is something that we need to structurally address a bit stronger than we have been able to do historically.

Just to clarify there, Bo, 0.5 percentage point was mainly related to the slow start-up, you can say? Or...

Yes, simplified, that's a fair assumption. And it relates back to what we have seen very consistent trends back over the -- during 2024. Primary explanation also, not only on utilization, but also on EBITA and EBITA margin level, was the slow ramp-up of the quarter. That is the primary driver to the trend, deviation that we experienced in the quarter.

And a little bit on the kind of longer-term positives from the new company structure. I guess going from 31 to 14 units should bring some cost savings. Possible to give any kind of indication of what that could mean?

I think this will be a key topic for us in the second half of the year when we present the updated strategy, for sure, utilization as a theme, but also what is a realistic way to look at movements going forward.

The next question comes from Johan Dahl from Danske Bank.

Just 2 questions. Firstly, on this -- I guess the big thing is putting together the Process Industries and the IDS, Linda. I'm just curious to hear exactly what you aim to achieve by doing this. It's a global project business combined with a somewhat domestic sort of recurring business, it seems. And are there any units that doesn't really fit in that picture in your view? Really interested to hear your comments there.

Well, we are doing this, again, then to simplify and harmonize. We are also doing some adjustments within the segments to have a clearer offering within the industrial subsegments going forward. So we also have looked very much on the market potential and what elements that it's connected to the energy and industrial transformation, addressing clients with big transformational needs and so on. So I think all of these have come through in this combination of segments under Industry. So we believe that this will be easier to navigate, both internally and externally. It's too early to say, actually, if we are leaving something on the table, so to say, but we are aiming now to have a more focused and clearer segment organization going forward.

All right. And on what we talk about Process Industries today then, but given the order intake there, are you able to see today some sort of inflection point where you can report growth in that area? I'm not expecting any sort of guidance, but just if you are able to sort of see that turning point at the moment.

Absolutely. Well, of course, there are a couple of -- today's Process Industries division is a couple of elements. One big area in the metal and mining subsegment that we have. And here, of course, driven again by the global energy transition that tracks -- needs a lot of minerals to come through. Here, we see actually positive signs in that one. When it comes to the other big one, the pulp & paper, it's still, I would say -- it's still a weak market. We do see some early signs in the tender pipeline, especially directed towards the Latin American market. So we see actually the turning point coming closer to us at least.

We're talking quarters or years, do you think?

Yes. A couple of quarters.

Then we'll have Tom Guinchard from Pareto.

Just a follow-up to Johan's question on Process Industries. If you could sort of give us any indications on the recruitment pace here moving forward. It's still negative net recruitment in Q1. Should we expect continued negative pace throughout the coming 2 to 3 quarters? Or should we start seeing positive net recruitment again in the near term?

Yes, very good question. Of course, this is also a part now when we are harmonizing our businesses, putting it together to make sure that we have the most efficient operating model, that we have full control of what type of resources we have and where we have them. So we expect to get that one done first before we kick off the growth element. So first, harmonize, control that we have an improved utilization rate and then we kick off the growth pace.

[Audio Gap] for the coming 2 quarters and then maybe a slight increase throughout the end of the year.

Yes. Realistic, yes.

I think that's a realistic approach. I mean I think it is -- I think given the market situation that we experience now, it's -- from our perspective, it's a quarter by quarter game. But then, as you said -- so likely, quite cautious still upcoming quarters. And then it's a matter of kind of where are we in the -- where are we in our journey and where is the market at that point of time.

Perfect. And just wondering if you can sort of give any more details on the utilization drop here, it's IDS and Process Industries. Is that 70%, 80% of the drop in utilization? Or how is the split between the divisions?

It's actually split between all the 4 engineering. They contributed in different parts. But I would say both Infrastructure, IDS and Process Industries are the biggest contributor to the drop. Energy does also have a deterioration of the utilization that we have also seen in the -- during last year, but as a contributor to the overall decline, that's much more limited. So it's actually both Infrastructure and IDS, to a large extent, also then fueled by the slow ramp-up and then Process Industries, which has had a decline for about 6 quarters now into utilization, those 3.

And just a final one on the sort of momentum -- slow start to the year. Is there any risk that we see a slow start to the second quarter? Or how is the business pace here moving into the summer months?

We clearly see that we started off with a pace that we don't see at the end of the quarter in that sense. Then we are -- as you're all aware, we are in a bit of market uncertainty. But then actually, from a currency-adjusted perspective, strengthening our order backlog gives us good comfort that we want to experience the same thing going into the next quarter.

And by that, we will end the Q&A session for today.

Yes, because we have quite a tight schedule here today. So I want to say thank you, everybody, for listening in, and we'll talk to you again in Q2.

Thank you.

Thank you.