Afry AB (AFRY) Earnings Call Transcript & Summary

Good morning, and welcome to AFRY's presentation of our results for the second quarter of 2026. I am Linda Palsson. I'm CEO of AFRY. And as always, I will begin by sharing my perspective on the quarter before handing over to our CFO, Bo Sandstrom, who will take you through the financial results in more detail. Following the presentation, we will open up for questions. So let's begin. In the second quarter, we have continued to make progress in the execution of our strategy. As a result, we strengthened the order backlog further. It increased 8% year-over-year and now amounts to SEK 22.4 billion. We also continue to improve the utilization rate. And after 14 consecutive quarters of decline, we have now delivered 3 quarters with consistent improvement. This is a strong validation of the actions we have taken. In the quarter, we completed our restructuring agenda aimed at optimizing our portfolio and adjust capacity. Total sales was minus 2.4%, and the organic sales growth adjusted for calendar effects was minus 5.3%. This reflects the strategic capacity adjustments we have implemented over the past year. The EBITDA margin, excluding the items affecting comparability, was in line with last year and amounted to 6.7%. It is evident that our progress is not yet reflected in our financial results. We are now shifting focus to organic growth to capture profitability uplift from the actions we have taken. And we have reached several important milestones during this quarter that will improve efficiency and support organic growth going forward. And I will come back to this later in the presentation. But first, let me take you through how our division performed during the quarter, and we will start with energy. The overall energy market remains strong. It's driven by the global energy transition and the increase in electrification of society. Reflecting the high level of demand and the strong offering that we have in all our segments, we reported a record high order backlog in Energy division this quarter. In light of the geopolitical developments, the focus on energy security and reducing dependence on fossil fuels continues, which further strengthen demand for our solutions. Profitability remained at solid high levels, while growth was impacted by the phasing of execution in larger projects. But it is encouraging to see the market momentum and order backlog that we have in this division. And our full focus going forward is on delivering on the backlog and to drive growth. If we then turn to industry. The market conditions here are broadly in line with the recent quarters. We see strong demand in areas such as defense, mining and metals, while sectors like pulp and paper and automotive are softer. We also see that a longer period of lower demand is contributing to weak price development in parts of the business, such as within the automotive industry. The acquisition of AMC within Mining and Metals segments, which I highlighted last quarter, contributed positively to sales this quarter. And it is encouraging to see how the addition of this type of high-quality business is already strengthening the division, enhancing our offering and reinforcing our position within this segment. The decrease in sales we saw was primarily a result of implemented capacity adjustments and profitability was impacted by the lower sales volumes, combined with weak price development in parts of the division. If we move to transportation and places. We continue to see solid demand in transport infrastructure. The real estate market continues to be challenging with weak price development, although we are seeing strong momentum in some of our selected focus areas such as data centers, defense and health care. The effects of the restructuring and other changes that we addressed in Q1 are starting to phase out. The EBITDA margin remained at a stable level year-over-year, while sales volumes are lower, much due to the strategic capacity adjustment. Then moving over to projects. And one example of the growth opportunity is in the infrastructure sector. I would like to highlight a key contract win during the quarter within our Places segment. It's the new hospital in Helsingor in Southern Sweden. This is one of the largest hospital projects in Sweden in decades, and AFRY has been entrusted with the key role. It's built on our expertise in complex health care environments. And health care infrastructure is a strategic growth area for us. We see significant market opportunities, and we hold a strong position here. We have also been selected by energy company Aslan Renewables to provide project services for its new biofuel plant in Brazil. The facility will produce renewable fuels, including green diesel and sustainable aviation fuel. So this is a great opportunity for AFRY to leverage on our chemical and biorefinery expertise, while supporting the decarbonization of transport and aviation sectors. And finally, we signed a framework agreement with Eleview, one of Sweden's largest power distributors. As demand for electrification continues to grow, significant investments are being made to strengthen and modernize the grid infrastructure. With our long track record in the energy sector, AFRY will provide technical consulting services across a wide range of disciplines to Eleview. I would now like to take a moment to highlight another area where we are currently seeing strong momentum and where AFRY has a competitive and comprehensive offering, naming data centers. The demand for data center is growing rapidly, driven by cloud adaptation, digitalization and investments in AI infrastructure around the world. And according to our estimates, the market for engineering, project management and advisory services that are related to data centers is expected to grow by more than 20% annually through 2030. What makes this particularly exciting for us is the breadth of our offering in this area, where we have the competence to support clients across the full data center life cycle. It draws on expertise from across AFRY, combining advisory, architecture, engineering and infrastructure capabilities. And with our new structure, and we are working across AFRY, we are very well positioned to deliver integrated data center solutions on a global scale and across the full life cycle. And I would like to highlight that our capabilities are particularly strong in areas such as site selection, localization, building design, combined with the deep expertise that we have in power supply and grid infrastructure. We also help clients to improve their sustainability performance through leading solutions for energy efficiency and for heat recovery. So to summarize, AFRY are well positioned to capture growth opportunities related to data centers going forward. It is a market with strong structural growth, and a clear strategic fit and one where we see opportunities to create value for our clients in the years ahead. And as I mentioned, the key driver behind data center expansion is the accelerating adaptation of AI. So let me give you a short update on our work in this area. Because for us, AI is not about isolated tools or initiatives. It's about systematically redesigning how we operate across the business. AFRY's strength lies in our deep sector expertise, our strong references and our proven project delivery capabilities. And when combining this strength with AI, we see significant potential to improve productivity, quality and speed now delivers. And our priorities are focused on 2 dimensions. It's the client delivery, and it's the internal efficiency. So in addition to supporting our clients to realize the value of AI and data in their businesses, we are designing an engineering delivery platform that connects our employees with tools and data to deliver projects more efficiently. Through standardized solutions and secure data architecture, we are establishing the foundation required to scale the adaptation of AI and future technologies. We are also working with selected partners to explore new delivery models for scalable productivity, and we have several pilot initiatives underway. Then when it comes to our own operation, we are increasingly using AI to improve efficiency in bid management as well as automating routine tasks through AI agents and self-service analytics. Because with the right implementation, AI can free up capacity from repetitive and low-risk work, enabling our engineers to focus more on advanced assessments, problem-solving and closer client dialogue. And as AI continues to evolve, we build the capabilities, platforms and way of working -- ways of working needed to capture the full potential over time. It's an important area for us. And with that, I would like to hand over to you, Bo, to take us through the financials.

Thank you, Linda. So I will cover the financials for Q2 2026, and I'll start with the overview. Quarter 2 showed net sales of SEK 6.5 billion and EBITDA including -- excluding IAC of SEK 434 million. Adjusted organic growth remains in negative territory around minus 5%. On rolling 12 months, we're currently at SEK 25.2 billion on net sales. Rolling 12-month EBITDA margin remains at 7.3%. The order backlog continued to develop favorably and is reported at SEK 22.4 billion, an improvement of 8% to last year and 4.2% sequentially. Again, the order backlog is the highest ever reported. All divisions improved sequentially and year-over-year. The majority of the sequential improvement stems from the industry division with some good wins in the quarter and also supported by the AMC acquisition as their order backlog is now included in our reported numbers. The backlog for the Energy division now surpassed SEK 7 billion, leading to an 18% increase year-over-year. The division is now well set for increasing the growth pace in the upcoming quarters. In Q2, with a net sales of SEK 6.5 billion, we reported total growth of minus 2.4% and adjusted organic growth of negative 5.3%. Whereas the organic growth continues to be pressured by our restructuring agenda, total growth has turned the trend following the AMC acquisition. The market price pressure in some segments seen since the latter part of 2025 is still clearly visible in Q2. This is particularly evident for some segments within industry and transportation and places. Structural effects in Q2 related to the acquisitions of Reta during Q3 2025 and AMC completed in May 2026, net of smaller noncore divestments completed in the beginning of this year. The negative adjusted organic growth in Q2 was somewhat lower than last quarter's with small sequential movements in respective division. Global division energy again show low but positive organic growth. Adjusted organic growth for the industry division remain in the minus 6% to 8% territory, reflecting a continued challenging market in parts and capacity adjustments during the last 24 months. Total growth for the division is minus 2.1% with the AMC acquisition as the main structural contributor. Transportation & Places remained at minus 5.4% in Q2 as a consequence of capacity adjustments in the end of 2025, combined with a continued weak real estate market. We report a utilization of 73.5% for Q2, close to 1 percentage point higher than Q2 last year. Again, we see improved year-over-year utilizations for all divisions. This is then the third consecutive quarter where we report an improvement to last year, and that is a continued important step for our strategic efforts to improve operational efficiency in AFRY. We will continue our focus on improving this metric to be one of the main drivers of profitability improvement over time. Since the low mark of 72% on rolling 12 a year ago, we are now at 72.6% and well on our way to 74% being the set ambition in the 2028 road map. EBITDA, excluding IAC is reported at SEK 434 million, with positive calendar effects of SEK 27 million. The EBITDA margin was at 6.7%, reasonably in line with last year reported and calendar adjusted. With the business margin pressured by lower sales volumes, group costs were lower than last year as we're now starting to see effects of the restructuring efforts related to support functions. Looking at the EBITDA margin development by division, they are, in general, in line with last year. Energy, supported by improved utilization and strong backlog development continue to report a strong EBITDA margin. Global Division industry continued to improve utilization, but is pressured by significantly lower volumes and weak price development in some of its market segments. In addition, the division carried SEK 15 million of transaction costs for the AMC acquisition in the quarter. The margin in Transportation & Places remain pressured from restructuring effects and a soft real estate market. That said, in Q2, we clearly see the restructuring effects that we experienced in Q1 starts to fade out, and we expect those to be fully phased out in the second half of the year. We report SEK 54 million restructuring costs as items affecting comparability in Q2, and close our restructuring program fully in line with our guidance given throughout. During the program, we made significant progress in our efforts to reshape the portfolio, and we have, in addition, made good progress on addressing the cost base. This we will continue to do despite closing the program. We see effects of the increased cost effectiveness from the program on the group costs and increased utilization in accordance with our expectations. But from a full run rate perspective, effects are still offset by lower gross margin contribution, given the currently lower sales volumes. Following a moderate cash flow in Q1, the second quarter showed a very strong operational cash flow, close to SEK 500 million better than Q2 last year. We managed to release significant working capital outside what we normally experience in Q2. On a rolling 12-month perspective, the operational cash flow is exceptionally strong. As part of the strong cash collection seen in Q2 is normally seen in Q4. Available liquidity decreased to SEK 4.3 billion and net debt increased to SEK 4.7 billion as we distributed dividend and closed the AMC acquisition during Q2. Our financial position remains strong. With a strong operational cash flow in Q2, we managed to keep our leverage, including restructuring costs at 3x closing the restructuring program. We expect leverage to remain around this level for Q3, and then to close the year at or below our financial target as significant restructuring costs are phasing out of the EBITDA component, particularly in Q4. And with that, I leave back to you, Linda.

Thank you, Bo. So let me now provide you with an update on our strategy execution. Our unlocking AFRY strategy sets the direction towards our 2028 targets with a focus on leading position in selected segments, deeper client relationships across the full life cycle, expand our presence also beyond the Nordics and an improved efficiency through harmonization and simplification. And over this past year, we have been driving significant change at a high pace to position AFRY for profitable growth and long-term competitiveness. As you know, we have introduced a new group structure. It's supported by a clear road map with concrete initiatives and actions. We have executed an extensive restructuring agenda, which we now have completed. We have divested or exited noncore business, and we have completed 2 strategic acquisitions in Mining and Metals, one of our key growth areas, and we are well underway with the integration. And in addition, we have launched a new resource management platform. As we now move forward, we shift focus to organic growth, combined with cost discipline to capture the profitability uplift from the measures already implemented. Our priorities also include further implementation of the resource management platform towards a more consistent, transparent and connected way of working across the group. We are also gradually scaling our global delivery center capabilities to strengthen project execution, improve access to skilled resource and enable greater cost efficiency. These efforts will be key to realizing the full benefits of our strategy and to drive profitable growth towards our 2028 targets. And with that, we would like to open up for questions.

Great. Thank you. Linda and Bo. We will now open up the Q&A session. [Operator Instructions] And first in line, we have Don Heimer from ESB.

I hope you can hear me well. It seems like it. So that's good. Maybe start with a question on profitability, and you're taking now close to SEK 300 million restructuring cost. I think you said 12 months payback on that and your billing rate is up. But the EBITDA margin, just 7.3% now on a LTM basis only marginally up versus a year ago. So help me first to understand why it's not following the improvements in the efficiency where you sort of the slack in the system, so to speak.

Yes. I think it's, of course, the multifaceted question and the answer to that. I think the simple answer is that with quite pressured organic growth that we see, the decline in the sensing gross margin contribution from that volume that we have, in a sense, deliberately taken out is done in a sense, compensating for the efficiency effects that we see, both on the utilization effect and as a consequence of the restructuring program. I think that's the simple answer to the question. Then of course, it's not easier kind of experiencing a bit of market pressure -- price pressure on top of that, also kind of affecting it. But the main aspect is practically the very suppressed organic growth.

Understand. And maybe a follow-up on that since now you seem to have a plan to accelerate organic growth from these levels at least, and you have the order book in place. So just how do you ensure that sort of the ramp-up in organic growth led to the anticipated improvements in profitability because looking at '21 to '23, it was a special period, but you had a relatively high organic growth back then and your margins did not follow. So yes. just help me to understand why it's different this time when you probably need to ramp up recruitment as well, which initially could be margin dilutive, so.

No, but exactly, as you said, historically, our growth has always come with higher costs. So we haven't sort of fully get the benefit of scale through AFRY. Now with the very sort of necessary and structured approach that we have had, we have deliberately taken out volume. We have done a lot of cost implemented measures, very structured. But I suppose that we do need now the organic growth to get the full benefit. So we have pushed down costs. We will continue to push down cost. But now we have a systematic approach of keeping it that when we have the growth then coming here on top. And as you said, I mean we are -- the growth is supported by the strong order backlog. The timing, of course, of the projects in the backlog is a bit different. It varies from very small to extremely long projects over a period of maybe 10 years. So it will be a bit of a different phasing in this, but we do see within our strong areas such as energy, defense, on part metals and mining that the growth will come towards the end of this period.

And I'll add to that since you also referred to the '21 to '23 in a sense, growth that we had. That growth was primarily then driven by acquired growth and then not in the same -- not to the same efficient platform that we are currently kind of moving into a much more harmonized and efficient platform to add the organic growth to also reaping the benefits of that growth from scale.

Okay. Perfect. Makes sense. And maybe just 2 clarification questions from my side as well. But the phasing and energy of larger projects, are you referring to a negative impact in this quarter that you expect to catch up? Or how should I comment? And also the SEK 50 million transaction cost in -- for the AMC, that's not included in items affecting comparability, right?

I'll start with the last. No, it's not included in items affecting comparability. It's included in the industry division's EBITDA for the quarter. And to your first question, yes, in that sense, negative phasing effects on the sales side, also the -- looking at the relative low growth in the specific quarter for the energy division.

Then we have the next question from Adela Dashian from Jefferies.

Firstly, on the pricing pressure that you're experiencing. Do you see any signs that this is stabilizing anytime soon? Or do you have any proactive measures to, I guess, get past that?

Should I start?

Yes.

Yes. As we reported now, we have seen some of the parts of the market where we have had pressure over a long time or a softer market over a long time, leading to overcapacity in general. And we see that in the price development, especially in automotive and to some extent also in the building part. To address that, we are going into pockets where we see growth, and we see where we have a strong position. And for -- to be concrete when it comes to the places and buildings, for us, that means going even more into the hospital side of it, going even more into data centers, going more into defense-related buildings. So we are going to the parts of the building business, where we are relevant and where we can find the right margins for AFRY going forward.

Okay. And then on the backlog. Nice to see the improvement in the quarter, and you did mention that you have a combination of larger and smaller orders. But does it differ a lot from previous cycles? I think one of the efforts earlier on when you joined was to some extent, increase your visibility with the orders. So is it still very similar? Or have we seen somewhat of a change to it?

Yes, we have seen some changes. We have seen a larger part of sizable projects in our backlog which is good, but they are also converted over a longer period of time. But we do see a shift towards even more projects and more sizable projects in our backlog, and we're very comfortable with the margins of those projects.

That's good to hear. And then lastly, on industry in Pulp and Paper, what -- can we get a market update on that specifically?

Yes. On Pulp and Paper, we have reported also that it has been a weak global market, and especially Europe has been weak. We don't see any big shifts on the CapEx side on the European market. We do see continuous improvement of the operation on the existing facilities. And there, we continue to be very well positioned. But we don't see the big volume uptick on Pulp and Paper, especially not in Europe yet.

Next question is from Julia Sundvall from ABG.

Just a first question on the order book again. We see the revenues falling, but how should we think about the timing in the order backlog as it is growing that much as 8%? You say it's longer than before, but is it like 2027 heavy or 2028? Or just some more flavor how we should think about the order backlog and revenue together?

Yes, I can start with the backlog development. So yes, you are right. It is spread in time more than maybe we have seen before. That means that the impact is still ahead of us. We do see parts of the backlog already in position to start to accelerate. We find them within energy. We find them within specialty transmission and distribution part of energy. We do find it within mining metals, and we do find it within defense. So the sequence is a bit different for our different segments, but we do have a couple that are ready to start converting this year, but then the majority you will see going forward.

And to build on that, on the latter part of your question. The phasing is then of the backlog is very different by division. Some being much more kind of long cycle in nature. But as a rule of thumb, if you look at AFRY overall, you could estimate that in the next 12 months, then we will carry approximately 50% of the backlog as revenue. And it can differ a bit between the divisions. So the majority of the backlog is to be delivered before end of 2027 from where we are then with the continuous fill up and take out of the -- from the backlog.

Yes, perfect. That's a good answer. And on the organic growth or decline, could you give us some flavor how much of the decline is due to capacity reductions and how much is like end market softness? Or -- yes, I think you understand the question.

Yes. I'll start on that. If you look at the negative organic so 5% in the quarter. The vast majority of that is volume driven. So we don't have a positive effect from pricing in the quarter. So the vast majority of the decline is volume driven. Then I would say that the volume -- the volume reduction that we've done is practically a part of the strategic reductions that we've done throughout the last year. The big majority of that is related to our own decided efforts. They are, of course, looking at the different segments on our attractiveness in relation to it. So there's a market relation to it, but it's still kind of a conscious choice of reducing our capacity in those segments. So it's difficult to kind of distinguish between, in a sense, market-driven and strategic capacity because they go into each other.

Yes, yes. Yes, I see. And a follow-up on that one. The number of FTEs is still down quarter-over-quarter, mostly in the corporate and support function but also some in transportation and places. How should we think about net recruitment from now on? You say you want to focus on the organic growth. But how should we think about net recruitment?

Yes. So we are now shifting focus even more on the organic growth part. And with that comes naturally also a higher recruitment pace. Just want to emphasize that we have welcomed 1,500 new AFRY employees this year, and we will increase that pace even further going forward. So you're fully right. We are now accelerating our initiatives to recruit.

And from a divisional perspective, I mean I would not expect the group functions FTE to increase, but I would -- rather to decrease. But then from a divisional perspective, typically, the Energy division is the division which is the most geared for growth in a sense. So in terms of distribution between the divisions, that's where I would expect the most ramp-up over the upcoming year.

Then we have Johan Sunden from DNB Carnegie.

Stop a little bit on the kind of organic growth discussion we have had here. Can you just help us bridge how long it will take for you to start to grow organically again? Because if you just look at the number of that you report here at the end of Q2 and compared to what you had in H2 last year, you are still at some 4% -- 3%, 4% below that level. When in, say, 2027, will you be able to start growing organically? Is it before mid-summer '27? Or is it earlier than that?

I mean it's a good observation, Johan. And of course, looking at the -- in a sense, the phasing of the FTE development over the last 18 months or so, then you see that the biggest decline was at the later part of 2025. in a sense. So from that perspective, we will throughout this year, always meet, in a sense, a bit higher comparables from a year-over-year perspective. Then going into next year, then we won't have that comparison in a sense anymore. Of course, organic growth would then be a combination of being successful in the market on pricing, but also then just putting the capacity there from a year-over-year perspective in terms of FTEs because of the order backlog we have in that sense. So already going into next year, we have much a better starting point for actually being in positive territory next year, but it will be much more difficult throughout this year just based on the phasing of the structural takeouts that we've done.