Etteplan Oyj (ETTE) Earnings Call Transcript

Welcome to this webcast presentation of Etteplan's financial statements for 2020. My name is Juha Näkki. I'm the President and CEO for Etteplan. And after the presentation, there will be a Q&A session, where you will also be able to ask questions from myself and also from our CFO, Per-Anders Gådin. The presentation will follow the same lines as we have used in the prior presentation. So we will first look at the highlights of the full year 2020. We will also look at the financial development a little bit more in detail for the last quarter. And then take a little bit look on how we did against our targets. And then after that, there will be the Q&A session. If we first start with the highlights for the year, so I have to say that due to the pandemic, the year was an extraordinary one that we will always remember. We did have to do a lot of difficult -- even difficult decisions during the year. But overall, I would say that we were able to manage the situation really well. And with strong performance, we have been able to secure a very good position for ourselves for future growth going forward. But if we look at the highlights, so I said, despite the pandemic, we were able to adapt our operations through the means of different kind of cost savings and adapting the organization, et cetera. And we were able to maintain a very high profitability throughout the year. And the EBITA -- operating profit, EBITA, was at the end of the year at a record high level at EUR 26.2 million, and which was a remarkable achievement for us. Q4 was a really strong ending to the year and the results overall in Q4 were the best in the Group's history. So we finished with a flourish. Also, cash flow was strong throughout the year. Especially, in the second quarter when the pandemic hit, we adapted our organization and the costs were coming down faster than the actual invoicing or the rep money coming in. And for that reason, in particular, in Q2, we had an exceptionally strong cash flow. And in the other quarters, we had a sort of normal cash flow. So the full year was extremely strong. In the different markets, we, of course, saw the pandemic affecting demand. But in China, the recovery was surprisingly fast and rapid, and we were able to actually increase our business for the full year in China in terms of the hours sold to the Chinese market by 5.6%, and very, very strong in Q4, an increase of 33.2%. So a very solid performance, and the Chinese market also looks strong going forward. After the first half of the year, we were seeing that we are in a financially healthy position. We were able to secure our profitability. And then in the second half, we also started to invest a little bit more into our future. So we were developing our offering, and we are, in the springtime, coming up with new service products, for example, that we feel will be very, very helpful for our future growth. So this type of development was taking place. And also, we were able to continue our acquisition growth strategy, and we acquired -- even we had the pandemic ongoing. We acquired 2 companies, Tegema in Q3 2020. And then in the beginning of this year, so in Q1 2021, we acquired TekPartner in Denmark, which also represented the entry for us into Denmark. So overall, strong profitability, strong cash flow, in that respect, a good year. But of course, on the negative side, due to the pandemic, the revenue was declining by 1.4% year-on-year. And pandemic or no pandemic, of course, we cannot be happy with the fact that our revenue was declining. So this is something we need to work with going forward so that we can return to profitable growth again. And with these results, the Board of Directors is proposing a dividend of EUR 0.34 per share. If we then look a little bit more in detail into the market development for -- so of course, the pandemic dominated everything that happened during the year, basically. So in the different countries, of course, there was a different timing for the pandemic, and there was significant impact on demand. In China, the market weakened already in Q1 and then in Europe in Q2. In China, there was a very rapid recovery already in Q2 and going forward, Q3, Q4, the market situation was already quite strong. And in Europe, when the vaccinations had started and there was positive -- even when there was positive news about the vaccine itself, the market clearly picked up even more than we had anticipated, which resulted in us giving a positive profit warning in December. So the market was improving towards the end of the year all over. And -- but still, there are very strong customer-specific differences. And there are still businesses which are suffering from the pandemic and the current restrictions that different governments have, for example, in traveling and movement of personnel or people. If we look a little bit more in detail per country. So in Finland, as in the rest of Europe, the market started to go down in Q2. Maybe in Finland, it went down slightly slower than in the rest of Europe, but also it stayed down longer. So the pickup in Finland was evident only in the fourth quarter. If you look at the rest of Europe, the market was already -- it went down very fast in the second quarter, but already in the second quarter, in the end, there were signs that the market could slightly improve. And in the third and fourth quarter, this, in fact, happened, and we did see a better demand situation in most of our customers. And in China already, as mentioned, a very rapid decline in the first quarter, but also a very rapid recovery in the second quarter, and going forward looks good as well. And then if we take a little bit more detailed look on what we did when the pandemic really hit the market. So of course, we needed to change our operations significantly. So we adopted to the weakening demand by adapting our own organization. And we also issued different kind of cost-saving measures to protect our profitability and our financial position, which we did really well. We also moved to protect our employees. We moved all our employees basically to work in remote conditions. And 85% -- 85% to 90% of our employees were working remotely since March and still are to the majority of the extent as the pandemic still continues to burden the market and have these kind of restrictions on our business. But the demand situation was clearly improving towards the end of the year 2020. And of course, with this strong improvement in the market, we were able to continue the investments in our future, as described earlier. And also, we were pleased that we could call back some of the employees that we have had on temporary layoffs in different countries. And at the end of the year, we had 165 employees temporarily laid off. And this includes also the partial temporary layoffs that we have had in Finland, Sweden and Germany. In Sweden, the law for temporary layoffs is now over. So there is no possibility for temporary layoffs anymore. But the market situation has also improved quite a lot. So these are not needed for the business in that respect either. And of course, the pandemic is still continuing. It's still with us, even if we do see that with the vaccination starting, the market is picking up, and we expect that to continue, but it's still with us, and it will have an impact on our demand, at least in the first half of the year next year. If we look a little bit more detailed on the revenue and personnel. So the revenue split by service area. So Engineering Solutions was 57% of the revenues; Software and Embedded Solutions, 25% of the revenues; and Technical Documentation at 18% of our revenue. Country-specific or country split. So Finland, 61%; Sweden, 22%; China, 3%; and Central Europe, 14%. So Central Europe and business outside Finland clearly growing during the year. And personnel by country: Finland, 59%; Sweden, 18%; China, 10%; and Central Europe, 13%. So that was the split for the full year. And if we look at the revenue by customer segment, so now the largest segment is the general Industrial Machinery and Equipment; Forest, Pulp and Paper, the second one; Energy at 13% being the third. If we look at the segments that were slightly growing proportionately. So Lifting and Hoisting was doing better; Chemical industry, especially with the acquisition of E&P, has grown with our business; and Medical Technology also growing. If we look at the ones declining, so metal industry, consumer industry, aerospace, defense, clearly going slightly down. Also mining down slightly in this year, but for the, let's say, fourth quarter and towards -- going towards next year, we see that there is a clear improvement in demand in the mining sector. And if we then look at the key figures for Q4. So still, revenue was slightly coming down by 2.1%, but the profitability was improving. First time ever, our EBITA was above EUR 8 million and increased by 24.9%. EBIT improving to 27.7%, and for the first time ever, was over EUR 7 million. And also earnings per share was at the new record of EUR 0.23 for a quarter. So very strong financial performance. And for the full year, the revenue declined by 1.4%. Operating profit, EBITA, increased slightly to a new record of 26.2%. Operating profit, EBIT, declined by 1.9% and earnings per share by 1.4%. The outlook for next year. So as I said earlier, the pandemic is still with us and continues to have an impact on demand. We still have people temporary laid off, which is the first target for us to get these people back into work. But we did see a clear improvement in the market demand in Q4, and we do believe that as the vaccinations progress in different parts of the world, so the demand situation will also improve during the year, and we expect that to continue. In terms of the financial guidance, we are now changing the way we give the financial guidance. So instead of this kind of verbal or wording, we are now giving a numerical range for our guidance, which we hope is helpful for the analysts and others to evaluate or estimate our future. So now we are estimating that the revenue for '21 will be between EUR 280 million and EUR 300 million. And the operating profit, EBIT, is estimated to be between EUR 23 million and EUR 26 million for the full year. And if we look at the financial development then in Q4 a little bit more in detail. So the revenue was at EUR 70.3 million, so a drop of 2.1%, and the organic drop was 6.3% for the quarter. But nevertheless, even the revenue was slightly declining, still the market situation was picking up, and we were able to call back to work some of our employees. And we have also started now recruitment for different markets and for different positions. And currently, we are having approximately 120 vacancies in our business. And of course, that is encouraging now that the market is picking up. Of course, the acquisitions completed in '19 and 20 have had an impact on the revenue for the fourth quarter and also for the full year. And the revenue for key accounts was still decreasing by 4.7%, but the drop was significantly lower than it was in the previous quarters of the year. And then if we look at the EBITA -- operating profit, EBITA, so this was a record high EBITA for us, EUR 8.1 million, representing 11.5% of the revenues, which was a record level for us. And this was basically the result of excellent operational efficiency throughout the organization, in all the businesses that we had, and in the sort of improving market condition with the low-cost structures that we still have, this was possible, and we are very, very pleased with this result, of course. And also the full year EBITA was at the record high level of EUR 26.2 million, as mentioned earlier. In the result, there is -- for the fourth quarter, there is one booking related to a government subsidy that got secured in the latter part of the year, that represented a small amount for this result. But nevertheless, the result is very, very strong. The nonrecurring items were minus EUR 0.3 million compared to last year when we had positive bookings in these nonrecurring items. And the operating profit, EBIT, was at EUR 7.1 million, again, a new record for us, and the amortizations related to acquisitions in the fourth quarter was EUR 1 million. And for the full year, EUR 3.8 million for the full year. And then if we look at different service areas a little bit more in detail. So in each and every one, the demand situation was improving. In Engineering Solutions, the revenue was relatively flat to the comparison year. Very strong performance, very strong operational efficiency. But of course, we did have a lower head count due to the pandemic. And in that respect, we were not able to grow. But we have completed also the acquisitions, and those had a slightly positive impact here. Profitability was excellent at 10.5% of the revenues for the quarter and 9.9% for the full year. So a very strong performance overall. In the Software and Embedded Solutions, we also had relatively flat or exactly flat, actually, revenue developments of EUR 17.7 million. But for the full year, the revenue was dropping by 5.6%. On the operating profit side, an extremely strong fourth quarter due to the fact that our customers were clearly investing into new digitalization-related projects and the demand for different type of software services was very high. This combined with our excellent operating efficiency generated a very high 13.8% EBITA. And for the full year, we were at 11.1%. So extremely strong performance from this service area. And we see that going forward, the demand situation continues to be good. So we expect to have a solid performance also here going forward. In Technical Documentation, we also had a great fourth quarter. The revenue was 11.9%, a drop of 9.3%. But on the operating profit side, we had a strong EBITA of 11% for the fourth quarter with very high operating efficiency. And of course, for the full year, here and also in the other service areas, the different kind of cost-saving measures and adaptation measures to the market demand situation did have an impact, and we were able to generate also here a strong operating margin of 9.8%. So very strong performance also in this service area. And with these results, the EPS for the fourth quarter was EUR 0.23, and for the full year, EUR 0.69. And the Board's dividend proposal is EUR 0.34 per share. Cash flow was at a record high level of EUR 38 million for the full year; the fourth quarter, EUR 17.5 million, so the same kind of cash flow as we had last year. And of course, as mentioned earlier here, so the second quarter, especially with our costs dropping faster than our receivables. So that contributed to the high cash flow in this year. When we will start growing, when we will get our temporary laid off people back to work, this will have an effect to the other side. So then we expect to see a slightly lower cash flow when this starts to happen. But overall, we still expect the cash flow to be solid. Return on capital employed was again over 20% at 20.3%. And personnel at the end of the period was at 3,267. So a drop of 5.2%, mainly due to the pandemic and the demand situation. We were not recruiting people as actively during the year due to the different kind of measures that we had taken, and also due to the market situation. But as mentioned, we have now started recruitment again and expect to have solid growth in the number of people going forward. There were 1,351 employees outside Finland and this, in proportion of the revenue, was growing. On the income statement, materials and services and other operating expenses were dropping clearly, which shows the impact of our savings programs during the year. Staff costs increasing. No other major points here to be raised. On the balance sheet, we are, of course, pleased that we were able to reduce the trade and other receivables by working with our working capital and getting the overdue receivables down. So strong work there. No other major items here either. And then if we look at, a little bit, our targets and how did we do against our targets. So revenue target for us is EUR 500 million by the end of '24. And of course, with the pandemic, we were not able to grow. In fact, our revenues slightly declined. So we have a little bit more work to do to reach our targets. But what we are continuing are our growth strategy with the service development with the acquisitions and so on. And I expect to be able to meet our targets going forward. Revenue outside Finland was at 39%, slightly growing. And also the Managed Services share of revenue was 61%. So far from our target, but still slightly improving compared to last year. And on the profitability, we actually beat our target of 10% by just 0.1%. So there, we are on a solid position for the year. Now it is time for the questions and answers session. So please.

[Operator Instructions] And our first question comes from the line of Pasi Väisänen of Nordea.

Great. It is Pasi from Nordea. Well, just to cross check. So would it be okay if we continue in Finnish? Or should we actually still going forward with English regarding the questions?

Well, if we could please continue in English, we have our CFO, who is Swedish, so he would then understand better if we continue in English, thanks.

Yes. Well, I do have quite many of those questions here. But to start with, actually, when looking at your profitability, I mean especially the last quarter, should we expect that this is going to be the case also going forward for the first half or even the full year 2021? When you are actually going back to the growth mode again, so are you able to keep still the same profitability? And then what are the utilization ratios for the people currently? I mean I saw that you have a 5% less workers on year-on-year basis at the year-end. And does, actually, that already include the people which are actually laid off permanently -- or temporarily laid off? So kind of -- have you already gained back that 5% decline on a year-on-year basis on January, February? And on top of that, what are the utilization ratios for the current people you are running at your businesses? Is it close to 90% or even over 90%? So where the next growth is coming from? But -- probably, we can start with these 2 one, and then I have a couple of more still.

Okay. Yes. First, on the profitability. So of course, fourth quarter was a long quarter for us. There was a bit of actually more vacations than we anticipated. So people were on vacation also in December between Christmas and New Year's. But overall, the market was improving. There were more projects coming in. So we were able to hold a very high operating efficiency. And with people still working remotely, we've maintained a very low-cost structure. So going forward, I would expect that we will still be able to retain a high profitability as we did throughout last year. But going forward, we will also invest into our growth and into our business. And at some point during the year, our cost structure will start to normalize. So then the margins will probably be coming back closer to our targeted levels, but not -- it should not be under that. Of course, we will plan the investments carefully so that we will be able to hold high profitability also going forward. And the number of people, which you were asking about, that is the total number of people. That includes the temporary laid off people. So that is the people that are employed by at the plant. And yes, the utilization ratios were very high in the Q4, as they have been throughout the year due to the measures that we have taken, but we expect to be able to -- of course, when you are growing, when you are recruiting, especially, so then there will be some slack time and so on. So maybe that will have a slight impact, but we are traditionally very good in managing our workforce, and I don't expect any major drops on the utilization.

Yes. That's clear. Coming back to this kind of the COVID issue and -- this year and probably coming year, so what is your opinion on -- which point from the economic cycle we are currently -- so would it be possible that this very good demand situation is going to last 2, 3, 4 years? Or is it still the big picture -- do you see that the big picture is still kind of downwards and we are going to see a kind of recession -- investment recession, which actually would somehow affect your customer base and also your demand for your services? And so how do you see the big picture here in terms of economical cycle?

Well, I think that overall, the demand -- if we look at the overall demand, it's still down compared to 2019. It was an improving situation in Q4, which helped us in achieving the results, but we are still down on the demand compared to 2019 where the number of temporary laid off that we still had kind of reflects that as well. But the investment levels were going up in Q4. And as the sort of markets normalize when the vaccinations are proceeding, when we are getting people back to work normally and the travel restrictions at some point will be lifted. So I do think that there is a need for investment in several companies and several businesses. So I do think that there is a possibility that for this year, at least, the market situation will continue improving. From there, really hard to say what will happen. But throughout this year, we do expect that the demand situation will continue to pick up. Of course, depending on how the pandemic is moving and proceeding, we will have some impact of the pandemic in the first half. But that really depends on how well these vaccinations are progressing and what kind of measures different governments are taking to protect the people. So hard to say exactly, but overall, this year, we do feel that the demand situation will continue to improve. And after that, we don't know.

Yes, yes. And then looking at the kind of the news and media, I guess it's fair to say that we have seen a very huge multibillion investment decisions or at least plans into the Nordic area or to the Finland directly. So do you see that there would be a kind of enough projects? Or what's your -- what's Etteplan's kind of role in these multibillion projects we are going to see in a Forest or in the Chemical or in Energy sector in Finland going forward?

Well, we are -- of course, in these kind of investments, we are not the main contractor, but we will have our share, hopefully, a fair share of the business there. So they will, of course, help our demand situation as well. So these kind of investments into Finland are, of course, more than welcome. And we will work in the market and try to get the best possible share out of those.

Yes. But could you give us some example, if Neste builds EUR 1.5 billion factory to Porvoo, so are you going to get EUR 5 million, EUR 15 million or -- EUR 50 million from the project?

I'm not really sure if Neste would be very happy in me answering that question. But it's hard to say what kind of a proportion we would get. These types of projects are typically such that everybody is a contender and the best ones win. And we may win a big proportion or we may not win. But for sure, we will win some of it. So the more investment there will be, the more business we will have as well.

Our next question comes from the line of Juha Kinnunen of Inderes.

This is Juha from Inderes. I guess I'm continuing with the same line of questioning, but perhaps in a different angle. I'm wondering about the expected seasonality on your guidance and kind of what is expected in the lower range and higher range. And let's start with that.

In the guidance, you mean?

Yes.

Well, of course, we do not know the full effects of the pandemic. We do not know how fast the market will pick up. And also our own -- how fast our own cost structure will be changing. So that gives us still quite a lot of uncertainty in estimating the exact results. But still, we see that the market is improving, and we should be able to, first of all, grow, but we should also be able to grow profitably. So our operating profit, EBIT, should grow. And it really depends on how the market goes. If the market goes very well, hopefully, we could then be in the sort of top of our range. But if the market, for some reason, is not growing that well, so then we might look at being closer to the lower end. But it really depends on how the market develops, how this whole pandemic situation will develop, how fast will different companies and, let's say, societies be able to operate in a normal way. So that's the biggest uncertainty at the moment.

Yes. If I just continue a little bit, if the market demand would continue to be at the same level than it was in the fourth quarter or it is now pretty much the same, would the guidance range still be valid? Or are you kind of expecting or, I guess, assuming that the market situation will improve when the vaccinations come in?

Well, I said in our market outlook, we do expect the market to continue to improve. And in that respect, we do think that the demand situation will be better during the year. But how fast, in what way, where, these are still question marks. So we need to wait and see. But overall, we do think that it will improve to allow us to grow and improve.