Etteplan Oyj (ETTE) Earnings Call Transcript

Welcome to this webcast presentation of Etteplan's Q2 results for '22. My name is Juha Nakki, I'm the President and CEO for Etteplan. And at the end of the presentation, there will be a Q&A session where you'll be able to ask questions to myself and also our CFO, Helena Kukkonen. If I look at a little bit the content, so we will start now with the operating environment for Q2. Then moving on to the highlights, a little bit more detailed on the financial development and our service areas for the quarter. And then to end the presentation, we'll look how we did against our targets. And at the end of the presentation, there will be a Q&A session. But if I start with the operating environment. So of course, there were many things affecting our business and the operating environment. And if we look at the demand in general in the quarter, so the demand situation remained quite good, but we did see fluctuations in demand with some customers, demand was increasing, with some customers decreasing and this depended quite a lot on which industries the customers were working with and also the customers' own decision to how to treat the uncertainty that is prevailing in the market currently. The pandemic continued to have an impact on the market, a little bit especially in the beginning of the quarter, we did have quite significant amount of sick leaves, which had some impact on our revenue and profit. But at the same time, we also were pleased with the fact that the restrictions in our business related to the pandemic were lifted in most of our countries, which meant that we were also able to invest into our people more than during the pandemic and this increased the cost for the quarter a little bit and also had some kind of an impact on the profitability. Of course, the war in Ukraine has had an impact on the market. And of course, the geopolitical tensions are on a high level. And also the rising inflation as a result of the war is causing uncertainty in the markets and affecting our customers' decision-making and also the market demand in that respect. Defense industry and green transition-related investments are growing, perhaps due to the situation. But of course, while the costs are rising, the willingness to invest into new projects, R&D and so on is a little bit impacted in some of our customer industries. In some industries, they're going still very strong. And with some industries, there is quite a lot of customer-specific variation. If we look a little bit on the country level development. So Europe, Finland, Sweden, Denmark, Germany, Netherlands follow a little bit the same pattern. So uncertainty is increasing and the inflation is affecting certain customer operations and having an impact on the decision making, but still no major decrease in the demand in Europe. If we look at China, of course, the shutdown due to the new wave of the pandemic had an impact in the beginning of the quarter, but then the impact was easing off towards the end of the quarter, and our business was starting to become a little bit more normal also in China, still some effects from COVID, but overall, demand situation was good, and we were able to continue our business pretty much as per normal. If we then look at the highlights of Q2. So definitely, growth was strong, and that was the highlight of the quarter. Also, organic growth was almost 10%. So very strong solid performance there. We also continue to invest into our service offering and our capabilities. We made an acquisition in the quarter for DDCom, and we also made a strategic investment into machine learning technology, which I will talk a little bit about later on. We also after -- right after the review period, we were able to move past one landmark of 4,000 employees, and this happened during July. And our employee number 4,000 is actually in Sweden. So this was a very good positive landmark that we reached and then hope to continue on our growth going forward. And then on the negative side, the uncertainty caused by the war in Ukraine postponed start of certain development projects and had a little bit of an impact on our operational efficiency in some of our units. And due to this and the increased cost levels and other factors, our profitability fell slightly short of our target level, was at 9.1%, so slightly off the 10% mark that we are used to. If we look at the revenue development, so growth was 19%. Organic growth at 9.7%, so very solid growth still. All of our service areas were growing with the highest growth in Tech Doc, the second highest in Software and Embedded and Engineering Solutions at 10% growth. And if we look at the operating profit, EBITA, so a slight drop compared to the growth rate, so 5% increase, but -- and strong performance in Engineering Solutions, but then slightly declining profitability in Software and Embedded Solutions and in Tech Doc or Technical Documentation Solutions as well. And if we look at the development of revenue and personnel by service area, so Engineering Solutions was at 52%, Software and Embedded Solutions at 28% and Technical Documentation Solutions at 20% of our revenues. Country-wise, Finland, 52%; Scandinavia, 25%; Central Europe, 19%; and China, 4% of the personnel -- revenue, sorry. And on the personnel side, 51% in Finland; 19% in Scandinavia; Central Europe, 20%; and China, 10%. So slightly different numbers compared to last year due to the acquisitions that we have completed during the review and the comparison period. If we look at the development on the customer segment, so this is a little bit affected by the add-ons, the acquisitions that we have made. So in that respect, there are changes to the customer segments, but I would say that the green transition-related investments were driving demand in the automotive and transportation area, which was growing and also in the general industry, where we have 18%. The other changes in this chart are more related to our mix, or let's say, the different customer mix with the added companies that we have acquired. And if we look at the financial guidance, so we keep our financial guidance intact. So we still expect the revenue to be between EUR 340 million and EUR 370 million and the operating profit, EBIT, to be between EUR 28 million and EUR 32 million, so intact. And on the market outlook, I guess, it is pretty much the same. Of course, the war has continued and now the sort of inflation, which has been rising, is starting to cause some delays in our customers' decision-making and projects. But still for this year, we see that our customers' orders received has developed fairly positively on most of our key customers. So with that, we do expect this year to remain with a fairly good demand level throughout the rest of the year. And if we then go more to -- in detail into the financial development. So revenue growth at 18.9%. All the other key figures growing as well. Operating profit, EBITA, not as strong growth, 4.6% and EBIT only 1.3%, so slightly disappointing there. And also cash flow was negatively developing compared to last year, but there was -- due to growth, there was quite a lot of capital tied into the business and also our investments and increased costs were affecting this a little bit. If we look at revenue development, so growth at 18.9%, organic growth of 9.7%, which was a very solid performance for the quarter. Acquisitions, of course, had an impact on the growth. But also, we had impact from the sickness-related absences. There was more COVID-related sicknesses, especially in the beginning of the quarter. This had an impact, and also we did see more vacations during this quarter compared to last year. So this had a little bit of an impact on our revenue development and also, of course, the slightly weakening demand for certain customer industries and certain investment delays having an impact on the revenue accumulation. Revenue from key accounts was increasing by 6.9% in Q2. And the acquisitions affecting the numbers in this quarter and also the comparison periods are listed here. During the quarter, we acquired DDCom in the Netherlands, which strengthened our Technical Documentation offering, especially in the visualization area, 15 persons, and will be in our numbers since June 1. And then also after -- right after the comparison or the review period, we made a strategic investment into a Swedish start-up company, Ekkono, which is a machine learning technology company with an edge computing solution, which we believe is a very healthy addition to our offering in the digitalization area, and we will use this technology as a part of -- integral part of our -- certain parts of our offering and service solutions going forward. And we see this collaboration as a good potential for us to grow and really bringing new kind of value for our customers. EBITA was at EUR 8.1 million, 9.1% of the revenues and slightly disappointing, of course, dropping from our 10% target level. Profitability was affected by the cost increases. So now that we were finally able to get our people together, travel to, for example, the acquired companies, meet with our people, and also organize trainings, et cetera. So we made that investment for our personnel. It was important and needed. And during the pandemic, we had built up a sort of backlog for this kind of activity. So this was now relieved a little bit. And now going forward, we -- of course, the cost level will be on this kind of normalized new hybrid work model, but we don't expect such high costs to occur in the coming quarters as they were occurring in this quarter. There was about EUR 1 million more cost for the personnel and travel in this quarter compared to last year. And of course, this kind of trend should not continue. Also, there was some more holidays, sickness-related absences and some organizational restructuring in the software business, which caused a slight dip in the profitability. On EBIT, it was EUR 6.8 million or 7.6%, and amortizations related to acquisitions was also increasing to EUR 1.3 million. Earnings per share was at EUR 0.22 for the quarter and EUR 0.46 for the H1. And cash flow was EUR 4.4 million compared to EUR 12.4 million last year. So a clear drop, and this is mainly driven by the fact that we are growing and our business is tying a little bit more capital and the trade receivables was increasing and also some of our acquired companies are tying more capital, which we are currently working on. Of course, the cost levels had a little bit of an impact here as well. On the personnel side, we were at 3,993 employees at the end of the quarter, out of which 1,944 were outside Finland, so we are quite close to reaching our 50% target on the revenues as well. And we were very pleased that right after the review period, we were able to reach and exceed the 4,000-person mark, which has been some kind of a target for us internally, and we were happy that we were able to go over that number, and we will continue growing also going forward. If we look a little bit then in detail on the service areas. So we start with Engineering Solutions, so very solid performance. Revenue growing by 10% and EBITA of 10.6%, which was a great performance from the unit. The demand here was strong, especially driven by the engineer-to-order related to customer projects and -- or customers' investment -- not investment, but delivery projects. And here, we really had strong operational efficiency as well, which was then helping the result level. There was a change in one of our customer contracts, which had a slight positive impact. And then on the negative side, of course, the increased cost levels, sick leaves, et cetera, which I explained earlier, had a slight impact on this unit as well. In the Software and Embedded Solutions, the revenue growth was 26.5%, so still healthy levels, but the profitability was disappointing. It was 7.4% on EBITA. And here, we did see some effects from the -- or effects from our customers delaying mainly their R&D projects, not taking decisions to start the projects, and that did have an impact on our operational efficiency. And we also did have certain issues with some of the business units, and we have taken corrective measures. So we have done a little bit of restructuring in this unit. We've also done changes in the management. And we expect that with these changes, we will be able to correct the situation in the coming quarters. Of course, here as well, the nonrecurring costs related to sick leaves and training, et cetera, travel increase -- travel expenses did have an impact on the profitability as well, as it did in all the other businesses. And in Technical Documentation, very good growth of 36.4%, driven, of course, by acquisitions as well. And in the EBITA, slightly disappointing 8.7%. And mainly the profitability here was the effect of demand fluctuations between different units and then slightly weaker profitability in some of our Central European operations, Cognitas, which we expected and also in some other units there. But overall, still solid development, and we see positive opportunities here in the service area going forward. And again, some impacts from the sick leaves and travel and other personnel-related costs. So that had an impact on the profitability as well. If we then move on to our targets and how we did against the target setting. We have continued growth and the current run rate with the rolling 12 months is EUR 331 million. The target is EUR 500 million. So we are moving towards our target quarter by quarter. Revenue outside Finland was at 48%, so we are closing in on our 50% target fairly rapidly. And in the Managed Services share of revenue, we are at 65% for the first half year compared to our 75% target. So moving forward in this area as well, but, of course, we would hope to accelerate the pace in this area. And on the profitability, EBITA is now falling slightly behind our 10% target, so 9.6% for the first half year. So here, we have a little bit of work to do, but we have proven in the past that we are able to reach the 10% that we are working on it to be able -- to be on these levels going forward. At this point in time, I would like to move to the Q&A session. So operator, please.

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

This is Pasi from Nordea. Well, I do have even 4 questions. So maybe it makes sense to take those one by one. And if I start with the first one regarding the utilization ratios. I do know that you don't actually give a figure for utilization ratios, but could you somehow kind of highlight or elaborate what were the utilization ratios in the second quarter compared to the ordinary level? And what's going to be the expectations for the utilization ratios for the remaining part of this year?

Well, there was a slight difference in the utilization ratios between different businesses. So in the Engineering Solutions service area, the utilization ratios continued to be our normal level and are very healthy. And this was mainly driven by the fact that there was still lot of demand and good demand from especially the order to delivery type of work for our customers. And still, our customers are having quite good order levels. So we expect this to continue and also our management in this area was very solid. In the other 2 service areas, the fluctuations in demand, meaning that in certain customers where we have assignments, the demand was dropping slightly and then we needed to move our people and the projects into other customers where the demand was increasing. So these kind of changes and fluctuations in demand do have a slight impact in the utilization ratio. And that is visible in the Tech Doc area and also in the Software and Embedded service area. Also in the Software and Embedded service area, we did see some R&D projects being postponed and some being delayed and that has an impact -- slight impact on the utilization ratio. So I would say that in these 2 service areas, the fluctuations will continue. We will do our best to manage that in the best possible way, and we expect to be able to improve on the utilization, especially in the Software and Embedded area where we clearly had issues in certain units. But we have taken measures. We have done actions, and we will try to keep the utilization rates as high as possible.

Okay. Great. I hear you. Well, secondly, when looking at your biggest customers. So -- well, I would like to know that what's the main driver you are actually looking at inside your customer in terms of kind of medium-term demand outlook? So is it the kind of order book or order intake or book-to-bill ratio or even these R&D investments or maybe even kind of sector-specific macroeconomic indicators then? So what I'm kind of trying to find out is that would it be impossible to see a kind of negative organic growth ratios in the future if these order books are not going to hold up well.

Well, of course, we are, as everybody else is subject to the market demand. So if the market demand starts to go very much down. So then we will need to work extremely hard to keep up organic growth, but I think our offering is very strong. We are continuously building up new solutions, which will help us to win market share. The investment in Ekkono just as an example, is one of them. So we, of course, try to keep our organic growth up. What we're looking at in our customers is, of course, the order book development, which gives some kind of a view on the overall economic situation, but then we are quite extensively and intensively discussing with our customers. So what is driving their own activity and what kind of investments and especially R&D investments and other kind of operative investments they are planning on making. And there is a clear trend that this kind of cost reductions are being worked on, green transition-related investments are strong and these kinds of things we are looking at in our customers. So we are trying to balance our efforts towards the customers that are working in these areas and really try to increase the value of our offering towards these segments so that we can really maintain a strong position within our customers and even grow further when we see opportunities. But -- I mean even in a declining market or a stable market, there are still opportunities because our customers are also having to rethink how they are operating and what do they do themselves, where do they utilize partners. And for example, outsourcing discussions are part of this equation in a weakening market. And I think our offering in that area in particular is exceptionally strong, and we have great value that we can add to our customers in this respect. So with these measures, we hope to keep up our work and continue growing also organically.

Yes. And then thirdly, regarding the cash flow. I mean it was, obviously, quite weak in the second quarter. So what are the main reasons here? Because I do assume that like the inventories or working capital should not be a problem for a company like Etteplan and especially what will happen to the cash flow in the third quarter or fourth quarter on this year?

Well, this quarter, of course, was a little bit shorter than the previous one, and we also had more vacation in this quarter. So these had a little bit of an impact on the cash flow, but also strong organic growth is tying capital. So there is more trade receivables, and there is more capital tied into the company when we are growing like this. So that is the main reason behind the weaker cash flow here. We expect the cash flow to normalize and reflect our EBITA performance going forward. So I would say that there is no major issue here. We've also seen some customers postponing their payments a little bit, but we do not have any write-offs or anything else like this related to bad debt. So we are not that worried about the situation.

And lastly, regarding the kind of acquisitions. So in the case we are going to see kind of a weaker market environment or kind of decline in demand, are you still going to kind of continue with the current speed of acquisitions we have seen recently going forward to the 2023, next year?

Well, of course, I mean this is a consolidating industry, and we will continue. But at the same time, we need to be very, very careful with the acquisitions so that we only make deals that will create shareholder value immediately once we are making the acquisition. But in order for us to reach our targets, we do need to continue, and the market is consolidating. So we will continue to be one of the players consolidating the market and look for opportunities, which will really benefit the company and especially benefit our customers in terms of offering development -- market position, development, et cetera. So yes, we will continue, but we will need to be, of course, very cautious in this respect. But I think that the prevailing market and the situation is also affecting the acquisition-related activities with the expected valuations, et cetera, and so on. So I think there still will be opportunities, but we need to carefully [ review each of ] them very carefully as we have always done. So we will continue in that respect.

Our next question comes from the line of Jerker Salokivi of Evli.

I've just one question. You noted that the kind of increase in personnel event-related costs and travel were EUR 1 million in this quarter. Now kind of assuming that roughly split based on employees, I'm just looking at Engineering Solutions, that would be roughly EUR 0.5 million. So kind of just excluding -- or including this impact, the kind of performance would have been exceptionally good, like over 1% EBITA margins both quarter-on-quarter and year-on-year. So are you seeing kind of a level shift in profitability? Or is this kind of exceptional for this quarter?