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Edited Transcript of AF B.ST earnings conference call or presentation 29-Oct-19 9:00am GMT

Q3 2019 AF Poyry AB Earnings Call

Stockholm Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of AF Poyry AB earnings conference call or presentation Tuesday, October 29, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jonas Gustavsson

ÅF Pöyry AB (publ) - President & CEO

* Juuso Pajunen

ÅF Pöyry AB (publ) - CFO

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Conference Call Participants

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* Dan Johansson

SEB, Research Division - Equity Research Analyst

* Erik Elander

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Johan Dahl

Danske Bank Markets Equity Research - Analyst

* Ola Soedermark

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 Report 2019 Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, 29th of October 2019.

I would now like to hand the conference over to your speaker today, CEO, Jonas Gustavsson. Please go ahead, sir.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [2]

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Thank you very much, and good morning, everybody, and welcome to this quarter 3 presentation of ÅF Pöyry. I'm here together with Juuso Pajunen, our CFO; and we will present a few slides for you. And then, of course, open for questions. So I hope you have received the presentation or you're able to look at it.

So I will immediately jump in to the presentation, starting with overall development. And what we have seen in the third quarter, in general, is a stable development in the third quarter. As you know, the joint company is growing, and we keep our margins stable. I also have to say that the strategic acquisition of Pöyry has created a leading engineering and design company in Nordics, and it has actually proven to be, if I would say anything, more strategic than we ever thought. It's a very good platform. Among others, we are strengthening the international platform, and the integration goes according to plan. We are where we hope to be. So that's really good news.

Then, moving over to the combined company. And again, I'm looking on the numbers as to combined company then. And then I would say that we have a stable performance, and there's, of course, a great focus on continued integration and driving efficiency. And as I'm sure you have seen in the numbers that we are growing roughly 4%, and the EBITA margin is stable at 7.6%, equal to SEK 345 million.

I will get back to the market, but we have seen, in general, that the market is stable. However, in a couple of industrial segments, we have faced a bit more weaker market in the third quarter. These ones related to the automotive industry. The integration and the cost synergies goes according to plan. I would even say that they are slightly ahead of plan. And -- but what we are doing now is that we are extending the cost synergy, and I would say, efficiency program into 2020. We will get back to that during the fourth quarter because we have not yet finalized the final number of the target for 2020. But that we will get back to -- through in quarter -- fourth quarter, but we are working heavily on that.

Next one, the reported numbers. Of course, this is when we see Pöyry as an acquisition, which has been done during the year. And then, of course, both growth and earnings is about 50% because it's been one of the -- I mean, the biggest acquisition in the history of ÅF and it's been really an important one. And I used to -- it will take us a bit longer to integrate fully the 2 companies, but we are well on the way.

Moving to market. As we said, our core markets show a continued solid demand even in Infrastructure. And of course, we are focusing on Sweden, Norway, Denmark, Finland, and we have Switzerland also. In all these 5 countries, we see an underlying strong demand, solid demand in Infrastructure.

We have seen in automotive and some related manufacturing industries a slower demand during the third quarter. But at the same time, we see other industrial segments like Defense Industries and Food & Pharma doing very good. But of course, Automotive and some manufacturing has been a bit weaker.

If you look on Process Industries, it goes very strong. We see a good demand in Nordics and Latin America. And as you also see in the number, we are growing and also the margin is good.

In the Energy sector, there is also overall good demand. However, we are seeing some larger projects globally that have been postponed in T&D and also in the hydro area. We have seen some of the projects, the decision is taking a bit longer.

So of course, today, we announced the fact that the market is a bit more uncertain, but we need to understand what is worked on. So Infrastructure is doing good, and there are a couple of industrial segments that we have seen done being a bit slower. And again, these are related to the automotive and related.

Next slide we really are putting up just to once again state the fact that we have a very diversified portfolio. We are organized in 5 divisions; Infrastructure, Industry & Digital, Process Industries, Energy, and Management Consulting; and you see the relation between them. So roughly 40% is Infrastructure, 30% is Industrial & Digital Solutions, and then 2 segments, Process Industries and Energy, 15% each and then a smaller business in Management Consulting.

And you can also see the pie chart on the right side, how our business is split in different segments. And what we want to say with this is that our strong belief is that we are less cyclical joining together with Pöyry because the relation automotive now is less than it was before joining forces with Pöyry. At the same time, for Pöyry, they have the bigger share of Process Industries.

So together, we have an even more mixed portfolio and that we can actually see now that segments are balancing each other in an even better way and the same is valid for geographical footprint. Thus, we have a better geographical footprint.

So our company, I would say, is less cyclical, and we have a good diversified portfolio in our offering. There's a number of projects, of course, that we have been winning during the third quarter. I will not read through all of them. What we like is that we see a general pickup on digitalization, which is a big offering of us in all the industrial domain. So we are strengthening the fact that we have a lot of capacity in digital that we now are leveraging more and more into our different industrial demand. And that can be about digitalization in the Process Industries. It can be digitalization to a city, for example, then -- and this is something that we are seeing a continued good demand.

And then we have a lot of other interesting products. So the order intake, in general, has been good during the third quarter. For example, Process Industries and Pulp & Paper, we have a very, very strong order book moving forward.

Then, if you look on cost synergies and revenue synergies. As we have announced -- when we announced the deal with Pöyry, we said that we are targeting SEK 180 million run rate by end of 2019. And actually, we are delivering according to plan, even ahead. So we have a run rate of SEK 165 million, and we are following this really detailed on activity levels. And a part of that is supporting us in quarter 3, but not all of it, of course, because this is the run rate.

What we are doing now is that we will -- since the integration with Pöyry is a longer process, we are continuing with the integration cost synergy plan in 2020. On top of that, we will focus heavily on efficiency activities.

So that's kind of expanding the program into 2020. The amount -- the target we have for 2020, we are about yet to define and that we will announce during quarter 4. But this is not yet defined. But of course, we are looking for an ambitious target in 2020.

And basically, we are doing that for 3 reasons. One is to drive profitability as we are planning also, since we have seen a bit more uncertain market climate in some industrial segments, but also the fact that we are doing some investments in our IT platforms. We are looking to a joint ERP system and to get fully integrated in all the different business units we are updating the system landscape. And that's a lot of work, and there are investments related to that.

So there are 3 reasons. But this is something that we'll do moving into 2020. And then if you look on the revenue synergies, each division now after 6 months roughly together, have defined very concrete strategic plans, and we are now driving those into execution, and there are a lot of examples of interesting offers that we are doing jointly together between ÅF and Pöyry; increase transportation and building in Switzerland; the water offering; we have energy, we are leveraging from both the different companies; and again, we are taking larger products in Process Industries. We have digital offering and so on and so on.

So I see a lot of interesting activities on the front end towards the clients. At the same time, we are taking actions in 2020 on the back end and driving synergies together.

One year ago, we announced the fact that we have started repositioning of Energy business in the former ÅF company because we were not happy with mainly the global business, how the margin and top line developed. And we felt that we were a bit too fragmented. And then we made the acquisition with Pöyry, and we continue that work jointly together. And now we have -- now, we are basically in the end of that analyzation. We've worked quite heavily to find what is the position we should have on our Energy business. And that is something that we're about to close during quarter 4 now.

And it will be an enhanced strong business model based on, you could say, the maybe Pöyry global model and the ÅF local model. And this month, we are combining. This means that we are overlooking the complete global sales structure, we are addressing underperforming and subcritical units, and we are basically changing all those ones to a setup that we are sure will deliver an improved margin profitability moving forward.

This will have a negative impact that we have estimated to some SEK 130 million to SEK 150 million. And we will take that -- plan to take that in quarter 4 when we are done with the final analyze. The estimation is that it will be approximately 20% of that is cash. The remaining part is the balance sheet items, so goodwill that we will take. But that will actually create a platform that is setting the base for a long-term or midterm profitable growth in the Energy business.

So with that, I will leave it over to Juuso to talk a bit about the top line and the growth.

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [3]

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Thank you, Jonas. So when we are talking about the top line and the growth, first of all, if we take combined operations, we are now at SEK 21 billion last 12 months running, which is a new plateau for us, but also in the whole Nordic engineering setup.

If we take the combined growth in our third quarter, we are in 3.7%, where basically Infra contributed positively around 7% Process Industries around 9% and Management Consulting around 5%, while the Energy was stable and Industrial & Digital Solutions were slightly negative.

So if we take the portfolio view, I'm pretty happy to see that being in the middle of an integration, though very successful, we are still, within the combined operations, growing and reaching solid figures. We did have one working day more in the quarter, which has impacted roughly 1 percentage point to the growth numbers. But then when we are looking at the combined operation growth, we don't have any more that many other than Pöyry acquisitions in past being. So material part of that growth is one way or another organic.

So if we then take the numbers looking backwards, I'm pretty comfortable where we are. And if we are looking forward, we see the solid demand, as Jonas explained, in our core markets, despite also seeing some slower development in especially industrial segments of automotive and manufacturing.

Then going to earnings. We are also in here producing stable, solid earnings at 7.6% for third quarter. We need to always remember that the third quarter is the -- especially in Nordics, but also in European countries, the holiday period. So it is always involving first ramp down of operations and then a ramp-up of operations and thus, third quarter profitability is normally below the full year profitability; 7.6% EBITA margin during that period is solid and good.

At the same time, we are delivering SEK 345 million of EBITA, which is an increase from previous year on combined operations and obviously, then compared to reported numbers of SEK 220 million previous year.

We have had items affecting comparability in total of SEK 37 million and also relating to the integration costs.

We have delivered solid earnings across our businesses in our core markets, especially in such markets such as Buildings, Processing Industries, and Digital. But we also have our pain points, which we have been addressing already earlier and we continue to address, especially in infra, we have some struggles in Denmark. We have some components, especially in the Automotive and Industry & Digital Solutions. We are working on those ones, and we are confident that our actions will carry fruit when we are going forward.

Cash flow. This is the second part. We are stable on the net debt position, reaching 2.8 net debt-to-EBITDA multiple, if we take Pöyry acquisition rolling 12 months in there. What we have seen during the quarter is that we have normal seasonality for Q3, a bit of more build-up of working capital after summer than I would probably have liked to. But despite that one, we can see that we delivered SEK 190 million -- SEK 185 million cash flow from operating acquisitions -- from operating activities. And then if we put the share buyback that we have also consumed money in and the acquisitions and contingent considerations in total, we have delivered very solid, stable cash flow also during the quarter 3. But this is definitely a place that we will continue working on and also improving.

Then, if we take the IFRS 16 view, including the leasehold considerations, the picture is - the big picture is obviously the same, but then you see a bit of the distinguishing between the lease components and the operating activities, SEK 571 million from operating activities, but that includes SEK 386 million related to IFRS 16 considerations.

So the big picture still is exactly the same.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [4]

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All right. Thank you Juuso. Then, stepping back a bit to the divisions and starting with Infrastructure. And we already talked about the fact that we have seen a continued stable underlying need for investments in our core markets. And that's for all the segments that we are operating within Infrastructure. For example, we have seen a solid development in buildings. And then we have had, as Juuso also mentioned, a weak development in Denmark, and we also had a slightly lower utilization in part of transportation in the beginning of the quarter. We are taking actions, and we are addressing that. And we are happy that we are growing infrastructure compared to last year. And in general, the overall market is still solid. Of course, we can say private housing has gone down. We have a very small exposure to that. But I would say, in general, solid market in Infrastructure, and we are taking actions where we have not maybe delivered on the margin as we hoped for.

On the Industrial & Digital Solutions, we also talked about that, that in general, there is -- due to the fact that we are in these big transitions, where all segments are looking for sustainable solutions. On top of that, we have digitalization, electrification. The underlying demand in the industry is still there. Then, we have seen, as we said, in automotive and related manufacturing segments, a bit weaker activities in the third quarter. We are taking action in that.

So again, we have a confidence that we will have a good development in Industry & Digital moving forward because the underlying demand for our services are still good.

Process Industries, very happy with that. I mean we are delivering a strong combined growth, and we also have a solid and good margin. And I have to say that the order book we have is very solid, and this is one of the areas where we are world leading. And it's very good to see our combined operation, ÅF and Pöyry, joining forces together, meeting clients, offering fantastic projects actually across the world. And this is something that we really can be proud of. And it delivers what we hoped for.

Energy, we talked about that, and we are now repositioning the Energy and it looks very promising. And we have this business where we have strong businesses locally in Sweden and the related Nordic countries, including Switzerland. At the same time, we are now implementing the global model, you could say the one that Pöyry was driving, into all our markets globally, and that will actually create a very solid platform for our Energy business moving forward. And we can also see here with all the changes, transitions, we will see a continued underlying demand for our energy services.

And then finally, Management Consulting. This is our smallest business. But at the same time, maybe this is our high-end business we have. And we had fantastic consultants all over the world, focusing a lot on the Process Industries segment and on the Energy segment. And this one really gives us the full insight of those industries that we're also gaining for in our engineering business. And they are delivering solid results. It's a bit more volatile depending on the payment terms with our clients and success fees that we get, but it's really solid, and we are really happy to have this strong team in the group because they will actually pave the way in a lot of interesting engineering segments and business across the world.

So that's -- it's a bit mixed bag. But all over, we are confident that we are taking the actions, and we -- all the divisions are working hard to deliver on their strategic plans.

And then we have to finalize, we were very happy with the fact that our brand was now, this year, ranked as the second most attractive employer among young engineers. Last year, we rated down to #4. This year, we climbed up and we are the second, which is an improvement. But I have to say, we are never really happy with the second place. So we want to do our utmost to be the #1 most attractive employer. So that's a target that we have set. We will have a lot of branding activities moving forward to really show everybody what a fantastic company we are.

So to summarize, as Juuso mentioned, it's been a solid combined growth and stable earnings during the quarter. The overall market, if you look on the SEK 21 billion revenue, as Juuso mentioned, that we are meeting, there are a few segments weaker. But the general infrastructure and [sum] related is still very solid. The integration goes according to plan. We are where we hope to be. Of course, to integrate 2 large companies, which are -- will take some time. So we have more efficiency and cost synergies to take out, and that we will now formulate and present for 2020. And that will help us in many areas. And we need to understand one thing, we have IT investments and IT landscape, where we are now taking action to get joint IT platform system for the 2 companies. And this is something that we are working on. It will continue into 2020. It will require investments. And it -- but it will help us quickly in getting efficiency and transparency up in the company. And then, of course, we announced also the repositioning of division energy.

So with that said, I think it's, yes, fantastic. The fact that we have within short time integrated and we are integrating 2 really strong companies, 2 large companies. We are creating them a leading position in the Nordics, and we are strengthening our international platform.

So with that said, I would like to open up for questions, if anybody, so...

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is coming from the line of Johan Dahl from Danske Bank.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [2]

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It's interesting to hear about you are bullish around the combined entities in terms of selling new projects. I was just wondering, I mean, the figures are slightly bleak, however, just only 1% organic growth. Is this -- can you explain why that isn't higher? Are you seeing better figures on order intake? Or are we seeing negative effects on portfolio sort of pruning integration effects?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [3]

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Well, I think -- thank you for the question. Well, bullish, I think, when we looked on the Pöyry and ÅF combination, we knew where we were getting stronger and, for example, Process Industries is one strong evidence of that. Then, of course, what we have seen in the automotive and related manufacturing industry in Sweden has, of course, been a bit more negative, which has not so much to do with the Pöyry integration because that's actually former ÅF operations then.

Then, on the Infrastructure, I think, in general, Infrastructure is doing very good. We know that the Pöyry infrastructure business came in with slightly lower margin, and that we are working on. And then we have had some more challenging time in Denmark, which is also actually related to the former ÅF business.

Management Consulting, solid and the Energy, we are really gaining from the Pöyry business modeling in repositioning the ÅF business actually and they aren't offering.

So I think, yes, the numbers are maybe not as we hoped for in all areas, but our confidence build -- is built on the fact that we are building the strong platform moving forward, Johan. So even though the quarter 3 then that was not meeting -- we were a bit lower on the top line as we hoped for, still growing 4%. We know where we have the pain points and we are addressing them and then feeling confident that we will have a good story moving forward.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [4]

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Were orders higher or lower compared to sales in the quarter?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [5]

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Well, I will say, in many -- as we announced a bit, for example, Process Industries because part of our business is more transactional. But I can say that in general, we feel good where we have the larger products that we have had solid order intake. For example, Process Industries is one where we have a strong portfolio right now.

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [6]

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Yes, definitely. So if we take the project part where we can -- the biggest part then is Process Industries and Energy, we are seeing solid order intake and especially in Process Industries, our book-to-bill ratios are very healthy and very high. Then, on the more transactional part, especially in the Industry & Digital Solutions, we feel and see the automotive part, but we also see that one stabilizing. So all in all, from order intake perspective, we are pretty comfortable where we are standing.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [7]

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So the fact that we delivered 7.6%, I think, is solid, as Juuso said. If you look back the quarter, it is actually a solid quarter. And then the actions we are taking, pointing on a more uncertain market climate. These are as much preventive actions moving into 2020 because we don't see really maybe that the market is going down right now. But we will take those actions, both to be prepared if that happens. At the same time, we will gain for that, of course, to build the story moving forward and drive profitability.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [8]

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Okay. Just before getting back in line, I mean, there are a lot of programs, it seems now, looking into 2020. You've got the synergies, a new cost-out program. You've got the energy restructuring. What sort of numbers, can you give any guidance about cost-out impact next year versus '19 in very round figures to get a sense of the frame of all these activities?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [9]

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Well, a lot of programs, I would say that we have 2, Johan, that's maybe a lot. We have the cost and efficiency program that we announced this year, that should meet SEK 180 million by end of the year. It will do that. And we will expand that into 2020. We will get back with a number on that. On top of that, we are then taking this frame, as we've announced in Energy that we are confident will improve the margin. But we will get back with those numbers later this year or during quarter 4, Johan. So we are, at this point, just about finalizing all our thoughts and views on the 2020, and that's why we are not yet prepared to see how far are we looking into. We want to have a number that we really feel is the right number.

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [10]

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And then we -- what comes to energy, it is very important to understand that this is not as such a program. It is a repositioning of our portfolio. So what we are doing is that we are basically exiting some markets. We are talking about what kind of offerings we will have in the future, which may then include closure of units or divestment of units. So this is a different dialogue than when we are talking about cost and efficiency program or synergies. We are revamping our portfolio so that we have an offering that can be sustainably in the benchmark profit corridors as we have disclosed during, for example, Capital Markets Day. That's where our ambition is. So this is different compared to an efficiency program. It's really about stocking our portfolio.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [11]

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So you could say that our end, again, if you look on what have always been a bit slower the last years. But now, the target is to meet, as Richard Pinnock pointed out, we want to be solid in the corridor 8% to 10%. That's the target and it has to deliver.

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Operator [12]

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Your next question is coming from the line of Ola Soedermark from Kepler Cheuvreux.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [13]

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If you could give some more color on the Infrastructure Division. I mean the growth rate was quite good, but the margins were at least a little bit lower or quite a bit lower than at least we had expected. Can you give some color on the development during the quarter and the measures you are taking? And how we should see it going forward?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [14]

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Yes. Yes, you're right. First starting, we started up after the summer a bit slower than we hoped for, and that we're hitting a bit on utilization. And then I would say that we have at least a couple of areas where we have not been that successful. I think Denmark is one, and this is related to businesses that ÅF was acquiring a couple of years ago, where we have the product portfolio that has not been as good as we hoped for and we are taking actions on them, and that affected the quarter.

We have also seen that, in general, the Architecture business is still doing okay, but maybe not as good as it did a year back, and that affected us a bit. And then we have a big part of the Transportation business that was also taking a bit -- had a bit of a low utilization. A lot of it is -- we saw a bit of a mixed picture being a bit lower in the beginning of the quarter and getting a bit better by end of the quarter. But those are the areas that we have been facing during the quarter affecting the margin.

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [15]

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So basically, like we take kind of a mental bridge from previously combined operations to Q3 this year. We can say that the positive contributors have -- we have one working day more, we have a solid growth number. Those are bringing more EBIT compared to previous year. And then we have had the Danish items, which is roughly 2/3 of the problem. And then we have everything else, which includes the slower start, some minor utilization gaps in transportation. And then the Architecture business that has had some struggles like we communicated already in Q2, and that one is then 1/3 of the problem. And all of these ones we are addressing, and we are progressing in our approach. But that's, in a nutshell, what has been happening in the Infrastructure.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [16]

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Yes, then I have to do a follow-up. If you're saying the Danish problem is roughly 2/3 of the problem, is it possible to quantify just the kind of range?

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [17]

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Well, you can do your own mathematics on that one, but we still need to see that we are talking about SEK 13 million in pro forma numbers, negative deviation compared to previous year. And then depending how you have or what the calendar impact and growth profitability you get kind of the total operation from there, you can calculate what is your gut feeling on that one. But we normally don't talk about country-level results as such.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [18]

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What we can say is that and I agree with you that we had hoped for more in the Infra business. The thing that we have now is that the market is, in general, solid. Denmark has been maybe the market where it's been a bit more weaker also not only are problems that we have had, but also the market as such.

Moving into quarter 4, we see a solid market in Infrastructure across. There's a lot of spending in public infrastructure projects in the Nordics, but also in Switzerland, where we are large. So of course, now with actions that we are taking in the Infrastructure division, we expect a solid development moving forward.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [19]

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So you can say that you have seen a clear improvement during the quarter? Or is it too much early?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [20]

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Yes, I mean -- again, we have seen an improvement during the quarter, yes. But then it's -- but yes, we have seen an improvement during the quarter.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [21]

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Okay. And just a follow-up question on the industrial and digitalization area. How is -- I mean it has been a -- when the market maybe was a little bit better, the personal turnover has been quite high. How do you see the development here?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [22]

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Well, I think we are able to find the people we need, and we are also seeing a good development in keeping people. So of course, the whole industry, if we think of Gothenburg as a super-strong automotive with a lot of businesses. Right now, there is maybe a lower kind of turnover since the market, in general, is a bit more weaker and uncertain in those areas. So -- but I will say that maybe a year ago, we had that as a challenge, but it's been -- we are far behind having that as our kind of problem. I think the fact that we are strengthening our brand more and more is also enabling us to keep and retain and get the best people on board. So right now, that is not our problem, so to say. And again, if anything, I want to say about automotive manufacturing is that, well, let's see now, because we don't know what happens in 2020, but we feel that we are taking actions on those segments that will help us in 2020.

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Ola Soedermark, Kepler Cheuvreux, Research Division - Equity Research Analyst [23]

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Okay. And my question was actually the other way around, if it's a problem that you have really big organization for recruitment and now you maybe don't need such a filling.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [24]

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No, no, no. That's a clear no. We are not overstaffed if that's -- not at all. There are tough projects. There are some areas where we need to reposition. So if we're fully into one of the big automotive players in Gothenburg area, they are reducing, it will take a bit time to reposition those services to other clients, and that will create some gaps in the utilization, but we are not overstaffed in that sense, no.

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Operator [25]

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Your next question is coming from the line of Dan Johansson from SEB.

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Dan Johansson, SEB, Research Division - Equity Research Analyst [26]

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A couple of questions from my side as well. First, on the cost synergies. Your run rate was roughly SEK 100 million at the end of Q2. Is it possible to sort of quantify how much rolled into the actual Q3 figures? Is anything more than SEK 25 million realized in Q3 or is it roughly around that number?

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [27]

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Well, basically, we can talk about in the ballpark of SEK 30 million. So it's SEK 25 million from the first half and then part from the actions on the SEK 65 million that we have gained during Q3 is -- has already had an impact in Q3 results. So we are in the ballpark of SEK 30 million.

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Dan Johansson, SEB, Research Division - Equity Research Analyst [28]

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Very clear. And last one for me on Energy, the measures you're taking now, how far do you expect it to take here, you're slightly below 7% margin now? Is it a fair assumption that it can come to be somewhere in the 8% to 10% margin corridor that you talked about during the Capital Markets Day? Is that a fair assumption?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [29]

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Yes. Yes, it is. And this is absolutely what we are targeting in that division. We will -- and that's a dialogue we have had also before we joined forces with Pöyry is that we have not been super happy with thought of the -- especially the international energy business been too fragmented to kind of under critical. And now we are tightening that together. As Juuso said, it will be a combination of looking over the full sale structure, divestments, et cetera, et cetera, to set a structure that should deliver a solid 8% to 10% margin and growth moving forward. We are asked to finalize the plans into quarter 4. And then, we will see the improvement kicking in during 2020, that we are confident on.

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Operator [30]

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Your next question is coming from the line of Erik Elander from Handelsbanken.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [31]

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So I have 3 questions. First of all, given the weaker demand in the automotive and industry segment within Industry & Digital Solutions, should we expect you focusing more on margins rather than growth in the next quarters that are upcoming?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [32]

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Thank you for the question, Erik. Well, I think we will focus on both. But clearly, when you see a couple of segments going a bit slower, we are focusing on taking actions to defend and strengthen the margin, that's for sure. But at the same time, as we have announced, I mean, there's been a very strong focus now on those segments in industry, but there are other segments that actually shows good growth, like Food & Pharma has been good, and Defense Industries and others. So it's more a question about how can we gear up and target even more those segments where we see a strong underlying demand. And then I have to say that we don't for a second believe that the automotive industry will not -- it will be good because the need for the whole transition in automotive, also in R&D, is to electrification, autonomous car, et cetera, is not stopping because we have seen now a short-term dip. And we have to remember that we are not exposed to, if you look on car sales. We are more exposed to the fact that we are involved in a lot of this change that's going on in the industry. So short answer, Erik, we will focus on margin for sure, taking actions, but we will also target growth in that division.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [33]

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Very clear. And the second one for me, also related to the Industry & Digital Solutions segment. I mean this segment is actually a consolidation of the former Industry segment and the Digital Solutions segment in former ÅF. How is it possible to get a split in terms of growth between those segments now in ÅF Pöyry?

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [34]

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Well, first of all, there's a reason why we have merged these divisions and that is to increase the cooperation and to make sure that we have a joint offer in tackling the market demand. And part of that merger, we have made a true integration of the services. So we don't feel comfortable in talking about those 2 separately. But then, obviously, if you think about the markets where we are operating and how we are operating, the Digital Solutions and the demand for IT-related services, embedded solutions and such, continues to be strong and has been favorable. While in the Automotive, which also includes an IT part of the offering, it has been more difficult. So from those points, you can fairly well jump to conclusions on how it could have happened. But that said, we are talking about one division with shared offering, with shared base of working. So we don't feel comfortable splitting those two into 2 different bags.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [35]

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And the last one for me. Also -- actually related to the Energy segment. When do you actually expect to have the platform in place in Energy and what -- in terms of your transitions that you're going to do here? And what will that mean for margins?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [36]

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Well, yes to start and then I will -- but we expect that, I would say, to be full in place, I would say, during next year if everything works out, I mean, the majority of those actions. And I think, we already have seen -- just to point on, we have already seen that improvements are kicking in, in that division. But to be fully implement, I expect those to be finalized during 2020.

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [37]

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Yes. But then we need to understand also that what we are saying that, once again, the key in here is not necessarily the platform. We have functional base of working. We have functional platforms. We need to integrate them deeper and make them a bit more robust. But the key in here is that we are taking portfolio decisions on what type of work we want to do, what kind of markets we want to cooperate, and in which kind of -- which types of projects and markets we are not comfortable on operating or we don't see that our business model is fit-for-purpose for those market needs. So this is more about a dialogue on the portfolio than on integration and synergies and platforms.

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Operator [38]

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We have no questions at this time. (Operator Instructions) And we have another question coming from Johan Dahl from Danske Bank.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [39]

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On the topic of prices, I mean, you're claiming market leadership in the Nordics with another well-known peer. And I guess they're, they are having a great tailwind, sort of, 4% on pricing. Can you just explain why your pricing performance appeared to be significantly worse?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [40]

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Well, I will prefer to talk about us than maybe not in comparison to the other peers that you referred to. So I think we are, of course, pushing prices in all the segments as we can. And of course, if you would look on an automotive-related manufacturing industry that is kind of being in a tougher situation, maybe it's a bit tougher to get through price increases in those segments. But in general, I would say that all our business units, Johan, are pushing on prices wherever we have the position as such. I mean if you take Process Industries as one example and others where we have a strong position and a strong demand, we are getting prices pushed through.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [41]

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So is it that the weak sort of pockets that you're talking about are sort of offsetting those price initiatives? And also, looking into next year, what sort of milestones or sort of follow-up points are you setting in terms of pricing? Is that sort of more reactive from sort of group management or is it something that is diligently pushed?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [42]

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No, we are talking frequently about pricing, Johan, and we are following it up also. But of course, I mean, to be clear, if you have part of the business where you see a lower demand, competition tend to increase, and we then need to be very balanced in when do we step in and take a project to secure volume and to what price and what margin and when do we actually step out because we are focusing on kind of value-based pricing. So it's a very balancing act, Johan. But of course, when you refer to the, I guess, you referred to the Infrastructure business in general, where you see this solid underlying demand. And of course, here, we are also pushing prices as much as everybody else. But then we are a company with a slightly different portfolio than some others. We have a more international exposure to Energy and Process Industries. We have a bigger port to the industry segment. That's who we are. I believe then that, yes, right now, we have a tougher time, but we believe that the diverse portfolio moving forward will be a benefit for us. So we'll not quantify the pricing right now, Johan. But I can assure you that, of course, right now, the message to all our [members] is to push on prices wherever we have a position that justifies that.

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [43]

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And then just to highlight, we are operating in exactly the same market in many corners as the peers you may refer to, and there's a continuous market pricing on every tender you go out. And especially when it comes to public sector, we have full visibility, who wins, why wins, what are the prices. So on that part, I'm feeling very comfortable that we are at least as good as anyone in the market.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [44]

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And I think it's very good also for us, the way we see the market now and even announcing that in some industrial segments, we are seeing high uncertainty. That also enables us to take actions in them, and that I think will benefit us into 2020.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [45]

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Okay. On the big ERP project, can you just mention time frame, investment frame? What are the -- sort of what would you capitalize from this, just to get the figures right?

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [46]

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So basically, we have not disclosed the full values and full numbers based on kind of agreements with the vendors. As such, I don't feel comfortable on giving all of that one. But we are talking about an implementation where we are renewing the ERPs of the full financial backbone of the total corporation. Normally, those projects tend to last 3-plus years, and this is also the time frame for us. But then, obviously, when we go core country to core country, we penetrate the [material part] so majority of businesses quite quickly. And then we are talking about -- well, ERP life cycle is normally average 11 years. So then we are talking about the depreciation periods on that ballpark and the investment rate is several hundred millions in total.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [47]

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How much again, Juuso?

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Juuso Pajunen, ÅF Pöyry AB (publ) - CFO [48]

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It is in several hundred million SEKs in total. But as I said, we will come probably on -- back on that one also in the Q4 when we are talking about the efficiency program.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [49]

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Yes, because the fact is that even, Johan -- even before we joined forces with Pöyry, we had a very fragmented system landscape in former ÅF and there was a need to actually renew or modernize a lot of systems. The really good part is now that the efficiency gain and structural gains and the transparency that we will get from these are -- will be substantial, even though we have a heavy year ahead of us with changes and integration related to the IT platform. So what we are seeing the SEK 165 million we are delivering now, I would call that the low-hanging fruits, very much people-related that we have been able to merge function between ÅF and Pöyry. The gains and efficiency and platform gains to system, they are still ahead of us, which is a good thing for us. So there are more to get from that. But that we will see starting picking up in 2020 and actually also the year after.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [50]

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Okay, it's SEK 130 million to SEK 151 million of cost in Energy. I mean, clearly a lot of this is write-downs. So what are you actually writing off? Is it goodwill? Or is it projects? And secondly, the cashout, is that redundancy? Is that a fairly good assumption on it?

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [51]

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So basically, yes, we are writing down goodwill and some other balance sheet items, which normally then in our business relates to projects. And then, basically, the cash out is expected to be a various different kind of cash-out payments related on exiting certain projects or markets.

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Operator [52]

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We have no further questions at this time. Please continue.

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Jonas Gustavsson, ÅF Pöyry AB (publ) - President & CEO [53]

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Okay. But then I would like to thank everybody for listening in. And I will probably hear and talk to you soon again. And I wish you all a fantastic good day. Thank you so much from our side. Thank you.

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Operator [54]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.