Afry Q2 earnings fall short as sales decline, calendar impacts margin

Afry reported a challenging second quarter, with net sales declining 7.2% to SEK 6.67 billion and adjusted EBITA dropping 23.4% to SEK 438 million, significantly missing consensus estimates. While calendar effects notably impacted profitability, the underlying EBITA margin remained stable year-over-year when adjusted for these factors. Despite the weak performance and a decline in EPS to SEK 1.71, the company's order backlog increased 3.8% to SEK 20.7 billion, and Afry booked SEK 91 million in restructuring costs as part of ongoing reorganization efforts.

Analysis

Afry reported a challenging second quarter, with key metrics falling short of consensus expectations as noted by Jefferies analysts. Net sales declined 7.2% year-over-year to SEK 6.67 billion, while adjusted EBITA fell 23.4% to SEK 438 million, compressing the margin to 6.6% from 8.0%. However, these figures were significantly skewed by calendar effects, which accounted for a SEK 104 million reduction in EBITA; excluding this impact, the underlying profit margin was stable year-over-year. The performance was uneven across segments, with a severe downturn in Management Consulting, where EBITA halved and the margin contracted from 15.7% to 9.4%. In contrast, the Process Industries division demonstrated resilience by expanding its margin to 10% from 9.3%, and the Energy segment posted a positive 4.2% in adjusted organic growth. Despite the weak earnings and a rise in net debt to SEK 5.13 billion, forward-looking indicators provide a more optimistic view. The company's order backlog grew 3.8% to SEK 20.7 billion, bolstered by significant new contracts in nuclear decommissioning and infrastructure. Afry is also actively addressing its performance issues through a restructuring program, booking SEK 91 million in costs in the quarter and flagging an additional SEK 200-300 million in charges with a targeted one-year payback.

Key Decisions for Investors

• Investors should weigh the significant Q2 earnings miss and broad-based sales decline against the positive counter-signal of a 3.8% year-over-year increase in the order backlog.
• Carefully monitor the progress of the company's restructuring program, as the ability to realize the targeted one-year payback on up to SEK 300 million in future costs will be critical for margin recovery.
• Differentiate between the severely underperforming Management Consulting division and the resilient segments like Process Industries and Energy, as their relative performance could dictate the pace of a potential turnaround.
• Given the impact of calendar effects on reported earnings, focus on underlying profitability and adjusted organic growth metrics in future reports to assess the core operational health of the business.