AFRY Hit by Collapse in Automotive Engineering Demand in Q2

/ July 14, 2020/ ÅF Pöyry / AFRY, Financials, Finland, Sweden

Revenues from Automotive Engineering Collapsed in Q2

No surprise. AFRY had a terrible Q2 2020: revenues were down by 9.2% yoy at CC/CS. The Industry and Digital Solutions Division led the decline (with revenues down yoy at 16.3% at CC/CS). The Division suffered in the automotive sector, whose revenues collapsed by 40% during the quarter. Automotive underwent order cancellations from its three largest clients (Scania, Volvo Cars, Volvo Trucks). The impact was severe with automotive only representing 7% of revenues, down from 10% in Q2 2019.

AFRY had laid off 200 automotive employees and thinks it has hit the bottom although visibility remains limited. The company is now reconsidering its capabilities away from staffing and from mechanical engineering. The transition will take some time and AFRY wants to have a leaner automotive engineering unit positioned on high-growth offerings.

AFRY also struggled in its Energy Division, whose revenues were down by 11.1%. Like in Q1, Energy Division suffered from the end of a large EPC contract in the Philippines. The Division continues to shift its portfolio towards renewables, grid and transmission, and hydro.

Infrastructure Was Flat

The largest Division of AFRY, Infrastructure Division, had a flat quarter (-0.2% yoy at CC/CS). The Division experienced a decline in the the residential sector in Nordics and its Central European operations (DACH and the Czech Republic), where it does not have the scale and portfolio it wants to. The company highlights it did well in Nordics (which represented ~75% of the revenues of Infrastructure Division) so we assume the drop in Central Europe is significant. AFRY seemed confident about the mid-term potential of the Division, although, in the short-term, the future looks mixed.

Finally, the Process Industries Division, slowed down considerably in Q2, to +0.7% you at CC, from +13.0% in Q1. The Division suffered from its exposure to professional services (i.e., staffing) and long decision-making cycles. This performance is truly a disappointment as the Process Industries Division was AFRY’s growth engine.

Reshaping the Service Portfolio to Sustainability

The good news is that AFRY is accelerating its service portfolio refresh: the company has worked on it in its Energy Division for several years, with tangible effects on the profitability but not yet on revenue growth. AFRY is now working on its automotive engineering capabilities. Across the firm, the company is putting more emphasis on sustainability as an offering across its various Divisions, e.g., fiber replacing plastics in the Process Industries Division, renewables, and clean energy in its Energy and Management Consulting Divisions, smart cities in Infrastructure Division. This is great news. The company is using its Nordics heritage and the importance of the environment to reshape its portfolio and make it more attractive. However, the impact of the portfolio reshape will take time.

AFRY Is Financially-Sound

AFRY is no longer a growth story. The company is, however, managing its bottom line. The EBITA margin was unchanged yoy (7.5% in Q2 2020) despite the crisis. AFRY reacted quickly to the crisis and its EBIT margin was only down by 40 bps to the quarter, to 6.8%. The company is managing FCF well too: its net debt was down 30% to SEK 3,586m (~USD 390m). AFRY remains a financially-sound firm with a solid balance sheet. We just wished it could accelerate its portfolio transformation faster.

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