Enento Group Oyj (ENENTO) Earnings Call Transcript & Summary

Good afternoon, and welcome to Enento's Q4 Financial Statements Release 2022 results webcast. My name is Arto Paukku, and I'm the Investor Relations Officer at Enento Group. With me here today, I have Jeanette Jager, CEO of Enento Group; as well as our CFO, Elina Strahlman. We will start with an earnings update from Jeanette and Elina, and then we will go over to your questions, which you can present either from the teleconference line or by using the webcast too. Now let's kick it off, and I'll hand it over to Jeanette. Go ahead.

Good afternoon to all of you, and welcome to this results pleasing from my part. Let's first briefly review the Q4 key developments and then reflect on what happened in 2022, both in terms of numbers, but also what we accomplished as a company. Regarding our Q4 development, our revenue grew in line with our expectations in the final quarter of 2022. The group's net sales amounted to EUR 42.9 million, representing year-on-year growth of 4.1% at comparable exchange rates. Yet again, the net sales development was particularly supported by the strong demand for consumer credit information services in Finland and Sweden. We saw positive development in Business Insight while Digital Processes was clearly below comparison period following the decline in housing markets in Finland and Sweden. Adjusted EBITDA increased by 13.4% at comparable exchange rates and amounted to EUR 16 million, meaning a margin of 37.2%. Our free cash flow was strong and increased to EUR 10.5 million. We also faced some challenges during the last quarter. One of our IT vendors in Sweden had an IT incident in December, which, unfortunately, impacted some of our online services for a brief period. However, we can be proud how hard we worked as a team to solve the incident and minimize any damage to our customers. On January 26, we announced an efficiency program. The efficiency program will improve the cost structure of the group and thereby provide a foundation for future growth. At the same time, we also made a write-down of EUR 10.9 million, that concerned IT platform development investments. To summarize, we continue to aim for profitable growth over time in accordance with our long-term financial targets and the announced efficiency program will be a key enabler for this ambition. Let's move to the key figures for 2022. In 2022, we continue to deliver growth and resilient results that were in line with our long-term financial targets. While we went through significant changes and the operating environment continued to be unpredictable. Our net sales increased by 5.1% at comparable exchange rate and our adjusted EBITDA reached a new record level of EUR 61.2 million and increased by nearly 6%. The margin improved to 36.6%. Thanks to our resilient and scalable business model. Our business has adapted well to the diverse impacts of the economic uncertainty around us. Now free cash flow improved significantly, while the net debt ratio was well below our set maximum level. The share of new services followed the recent development trend and was 4.6% during 2022. We did launch 6 new services during the fourth quarter and a total of 31 new services during the year. One interesting example from Q4 is the sales force plug-in from Business Insight. With the plug-in our customers can have high-quality up-to-date business information data in the CRMs with fully automated process. We also continue to develop services in the area of consumer marketing information, and we have launched a service called Consumer Check Search in Sweden. Another example from Consumer Credit Information in Sweden is the UC Risk Blanco, where we have built a value-added service, a scoring model, that is based on our daily updated positive credit register. The Board of Directors proposes to the Annual General Meeting that EUR 1 per share shall be distributed to our shareholders, which represents a yield of roughly 4.8%. The year 2022 started with the hope that the pandemic would finally be over and that we could start a new and lighter phase in the world. But unfortunately, the operating environment did not become easier. Despite the macroeconomic crisis, we are now facing, we have continued our journey to become the Nordic knowledge company. Some of our key accomplishments in the past year include launching several strategic services, such as the Daily Credit Register in Sweden and the new ESG report in Sweden and improved ESG offering in Finland. We have also increased our Nordic presence and customer base, especially in Norway and Denmark. Our customers are very satisfied with our products and services and the way we serve them. We have achieved excellent NPS scores from both B2C and B2B customers. NPLs from our strategic and large customers in Finland and Sweden was very strong and outperformed the finance industry peers with a score of 48. As we strive to achieve greater efficiency and productivity throughout our organization, we have continued investing in modern technologies and processes with the goal of realizing synergies of scale. Additionally, we are again certified as A Great Place To Work in Finland, Sweden and Norway. And we have implemented frequent Pulse Surveys and the learning platform called Enento Academy. These achievements, along with others, have contributed to a strong financial outcome for the year as our profitability started to improve according to our plans during Q3 and continued now in Q4. On January 26, we made an announcement where we confirmed our long-term financial targets, made EUR 10.9 million write-down in connection to the platform development investment and launched an efficiency program. If we start with the efficiency program and what that is about, we are aiming for efficiencies of at least EUR 8 million in total during 2023 and 2024. Full amount of the estimated benefits will be realized in free cash flow from 2025 and onwards. More than half of the EUR 8 million benefits will result as permanent improvement in the adjusted EBITDA, whereas the remaining cash flow benefits materialized as reduced capitalized expenditure and facility costs. The largest efficiency measures are connected to a reduction of number of employees and improved IT efficiency and decommissioning of low profitability products and services. Unfortunately, as part of the program, we also started change negotiations in Finland, Sweden and Norway in accordance with the respective local legislations to reduce our staff by approximately 40 people. And the target is to conclude the negotiations by the end of Q1. As you know, in previous years, Enento has made significant investment into building new capabilities with expectations for substantial future benefits. With the current market outlook for the midterm being challenging and uncertain, we do not expect these benefits being realized as initially planned. As a result, we made a partial write-down of the investments made mainly to the platform development. The write-down had no effect on cash flow, adjusted EBIT or adjusted EBITDA. One very concrete and topical activity in the area of IT efficiency is the pre-study, we have just started. The focus is the application development and application maintenance in Sweden. And to be more precise, the current IT supplier as we are using in the area today. We are expecting a recommendation how we could operate more efficiently in these areas by using another IT supplier or suppliers. The analyzers will focus only on the situation in Sweden as we have there very high ratio of external contractors and vendors than in our other countries. Meaning that in Sweden, there is biggest need for improved efficiency and potential benefits connected. Our long-term growth strategy remains intact. We continue to aim for profitable growth over time in accordance with our financial targets and the efficiency program will be a key enabler for this ambition. The efficiency program will improve the cost structure of the growth and thereby provide the foundation for future growth. Now let's continue with the Nordic Business Platform, which we have mentioned that we are reviewing and called reshaped Nordic Business Platform. It has earlier been called the IT Platform Transformation, but that can be misleading why I prefer we stay with Nordic Business Platform or even Nordic Business Transformation. This Nordic Business Transformation is about how we gather, store, enhance and distribute data. That is our core. Our value to our customer lies in our ability to acquire unique data from different sources or to enhance and improve data in such a way that our customers are willing to pay a premium for that. The data can then be distributed in different channels, depending on type of customer use cases. This value chain can be applied to all our business lines, regardless of data, customers or use cases. It is, therefore, logical for us to use this joint value chain and to drive scale across the company. Given the previous slide, and that Enento shared, the same value chain across business lines, we have a vision of a Nordic scalable and simplified production factory or facility. This vision was presented in 2020. We still think it is very much valid and the right one for the company. This vision guides us in consolidating as much as possible of our production facility into the same Nordic structure to simplify, reduce cost and to drive scale. It is also necessary for a competitive speed in go-to-market and our ability to grow according to long-term plan. This does not mean that all the services only will be Nordic or that we will only work with Nordic data. But it means that we will work on producing our services in the same way, using the same internal capabilities regardless of market. This isn't only a platform change, but the business transformation in building a completely new facility redefining our services, migrate customers and consolidating as much as possible on the way. Last year, we reduced the scope of some and closed some projects that we found not to give the benefits that was initially expected. Our work done so far has resulted in the new platform, modernized approximately 60% of the mainframe based data, a brand-new Nordic Freemium system for our business information; new distribution channels, such as Nordic APIs, a developer portal, identity and access management solution. Some of the new services that are enabled by this are our ESG offering, daily credit register, e-commerce recheck, CI marketing offering and our brand-new Business Insight API. All of these are brought to the market, except the e-commerce solution recheck that is planned to be launched during Q2. As said, we still hold on to the vision of closing legacy platforms, such as Mainframe and Oracle in the long term. But this must be carefully planned and executed. Our Mainframe platform has been integrated into our main customers since 40, 50 years. We are looking into different possibilities, which need to take commercial and financial aspects into account besides technical. We have built new capabilities to be shared between the Nordic countries, and we have started using these to both modernize our current services and innovating new services on top. This work will continue in the following years as part of our overall strategic agenda. We have new ideas how to consolidate platforms. I would like to come back to that as we have verified our thinking. The outcome of the project we are driving now, like APIs, new ways of data handling, value-added services for building intelligence, our new platform, et cetera, will be valuable no matter what final solution we execute on. If -- even if we have made good progress, we have not delivered the benefits according to earlier plans and targets. The challenge is in the initial plan were that the complexity of transformation journey was underestimated. It is not an IT project, but rather a business transformation. Heavy upfront investments in transformation pre-requisites were made that are building OpEx costs without benefit realization. The current macroeconomic effects were putting pressure on margins and investment capacity. The customer migration planning of large customers directly integrated to Enento Services is an obstacle to legacy platform decommissioning. So what will we then do differently? We will avoid larger infrastructure investments without obvious financial benefits, but rather invest where we see the most potential and pace road maps with agile product modernization, which leads to the transformation to be driven by the business. We are not aiming for legacy platform decommission in one big bang, but probably a step-by-step approach. We pursue consolidation opportunities and revenue generation in the midterm to secure profitability. We decommissioned applications in order to drive out costs through incremental consolidation efforts. We leverage partnerships to accelerate transformation. The pre-study I mentioned earlier, refers to this. We gradually migrate away from legacy. In addition, we are aiming for creating a solution for us to modernize our capabilities without customers needing to change or adapt their systems. This would enable us to start a customer migration planning and customer side integration earlier. Expected results from this are: Profitable growth in line with our long-term targets, which creates a possibility to invest and make room for new Nordic capabilities and services and also an extended, but de-risked and credible time plan for full value realization. We will also benefit of having a future-proof infrastructure with reduced operational risk level, enhanced security levels and overall modern IT environment. In summary, building a common Nordic scalable facility is a long-term initiative. We do it in order to reduce operational risk associated with our own legacy solutions, increased security levels at an acceptable cost, get access to modern technology, et cetera. We also see that by streamlining the factory, we will be able to have sustainable operational costs, not just the technical platform, but the number of vendors, the infrastructure, delivery models, et cetera. We do it in order to be able to continue modernizing our existing services, which is expected to drive growth and to be able to build new services. Growth wise, the benefits are coming gradually, but cost reductions are slower as it takes lots of effort to be able to close down legacy. As mentioned earlier, during 2020, 2022, we have had good results, building Nordic capabilities like the new platform and modernized data handling as examples. When we look at the future, we have identified a number of KPIs for the transformation forward to follow up the progress. We believe that 100% of the shared Nordic capabilities will be in place in 2025. That does not mean that the transformation is done, because we still need to modernize the products and services on top of the new assets, which is measured by the availability of modernized services. The next metric measures to what extent we have migrated customers from legacy environments and services into new as well as to what extent customers have been onboarded to the new services. This is measured through the revenue flowing through the new platform. When doing so, we can ramp down the customer-facing legacy environments and applications, which is measured by the decommissioning metric. We have identified about 200 applications that will be decommissioned. We are continuing this planning and we need to spend the time it requires since we are not talking about an IT project, but the Nordic Business Transformation Program. That concludes the first part of my presentation today. And I hand over to Elina to present the CFO highlights. Please, Elina.

Thank you, Jeanette. Let's focus on the financial outcome of Q4 and go through the numbers in a bit more detail. As Jeanette already mentioned, we had a good year and also a good last quarter, and we can be proud of what we have achieved. Despite uncertainties in the market environment and declining real estate volumes, we delivered according to our long-term financial targets and get the profitability development back on the right track. I think we now deep dive into Q4. So good development continued both on growth and profitability side. Growth was at 4.1% and revenue reached EUR 42.9 million, despite heavy decline of real estate revenues. The key reason behind the good revenue development continued to be strong performance in consumer credit business in both markets, while also demand for Business Information Services continued on a good level. Even more positively, adjusted EBITDA grew significantly faster than revenue with 13.4% rate, reaching EUR 16 million and adjusted EBITDA margin expanded by 3.2 percentage points to 37.2%. This profitability development was thanks to successful savings and cost optimization actions and was also supported by more favorable sales mix. But then continuing with a bit more detailed with the revenue development. So we continue to see a strong growth in Consumer Insight with 7.1% increase year-on-year. High growth in Consumer Credit Business in Sweden continued. Also, Finnish business continued to grow with higher rates despite the fact that we already had tough comparisons and normalized interest rate gap to compare against. The growth in both markets continued to be driven by increased unsecured lending volumes. The development in the smaller business lines, however, under Consumer Insight, in direct-to-consumer and consumer marketing was weak and continued to be negatively impacted by the macroeconomic situation. But then moving on to the positives. So what was also very positive was that in Business Insight, good growth continued at 4.2% level and all business lines were growing. Modest but positive trend with enterprise businesses continued while Premium Business for SMEs grew very strongly, especially in Sweden and Norway. Thanks to successful sales measures. In Norway, the business was also supported by successful risk management offering launch for SMEs that took place earlier this year. Also the Premium Business, meaning company visibility type of services continue to develop wealth despite the macro challenges, especially in the Norwegian market. The decline then in the Digital Processes Business, on the other hand, accelerated and business area ended the year with 12.3% decrease in the last quarter. This was obviously following the very weak situation and low transaction levels in the housing markets in both Finland and Sweden. The strong continued growth in compliance services was not unfortunately able to fully offset that decline. Now let's then continue with the profitability. Adjusted EBITDA development continued on the strong positive track that started in Q3, and we continue to see significant margin improvement also in Q4. The main drivers behind the strong development were scalable growth and favorable sales mix as well as successful profitability improvement action stake. The favorable sales mix that is visible obviously in the revenue growth as well as then in materials and services. Our data acquisition costs on the materials and services decreased by EUR 400,000. And that was following the revenue and respective data cost decline in Finnish Real Estate and Consumer Marketing businesses. These revenue declines were obviously then offset by growth in areas with higher scalability. Personnel costs, on the other hand, increased by EUR 700,000 despite the flat development in the number of FTEs. Salary inflation, of course, impacted the cost somewhat, but the main reason behind the large cost increase is actually the changed Collective Labor Agreement in Sweden that impacted pension costs growingly. The impact that was now realized in the last quarter applies to the full year '22. The successful saving actions and cost optimization measures. Those are then very much visible in our other operating expenses that declined by EUR 400,000. Behind this EUR 400,000 figure, sales commissions actually continue to increase, in line with strong sales development and also IT costs increased to the platform and Tambur related costs. However, IT cost increase was with somewhat more moderate pace than what we have seen in previous quarters. The IT incident that we had in December didn't impact our costs too much. As those were mostly offset by compensations we've seen it from the ID vendor whose environment was attacked in this incident. But despite these cost increases in IT and commissions, the other operating expenses has total decreased and this was thanks to successful savings measures and cost optimization actions. We saw significantly decreasing consultancy costs following both the lower level of free-studies compared to prior year, but also following the successful cost optimization measures taken to lean our operations. Also marketing costs decreased following the optimization measure stake. On top of that, we also took a lot of actions to decrease any other adjustable costs to secure the profitability development. And then finally, production for on-use that remained on flat level, and then what comes with the reported figures, the weak Swedish krona obviously impacted the reporting figures negatively. Then moving on to the free cash flow. So free cash flow development was also on good level. Free cash flow was EUR 10.5 million and increased slightly compared to prior year. Positive profitability development and lower level of investments supported the free cash flow but those positive impacts were largely then offset by negative impacts from change in working capital following the timing of invoicing. Cash conversion on full year scale improved and reached good level of 56%. And finally, our financial position that remains strong and by refinancing our EUR 180 million credit facilities earlier this year, we have secured our financing for the next 3 plus 2 years. We have around EUR 20 million of cash at our hands and net debt-to-EBITDA remains well behind defined maximum level of 3 at 2.2x. Gross investments, those were somewhat lower than prior year, and that's mainly related to more focused investment activity, lower level of hardware investments and relatively high activity in the comparison period in relation to Tambur development. That has now discontinued. But now let's then invite Jeanette back on stage and continue with the way forward and our '23 guidance.

Yes. Let us then look ahead and focus on the future outlook and guidance and the Board's proposal distribution of funds. Looking ahead, we anticipate that 2023 will be a challenging year in terms of both growth and profitability. Our financial guidance for 2023 considers the continuing uncertainty in the operating environment. But our long-term financial targets remain unchanged. Clearly, in our offering, we have both cyclical and countercyclical services, and we have several exciting strategic launches coming during next year, that we expect to support growth both during '23 but also in the longer term. We have specifically highlighted the impact of Tambur handover from Q2 onwards, impacting the growth net sales up to 1.5%. We also believe that there is cost pressure through salary and cost inflation. While the efficiency program is aiming to mitigate that impact. So based on these consideration, we expect the net sales in 2023 to grow between 0% and 5% with comparable FX rates, excluding the Tambur impact. On the profitability side, we expect our adjusted EBITDA margin to be between 36% and 37%. According to Enento's official dividend policy, our aim is to pay at least 70% of earnings per share as dividend, and we want to retain a stable dividend track. We see that our financial position and ability to generate cash flows continue to be strong and enables us to keep the dividend on the same level as last year. The Board of Directors is thus proposing a distribution of funds of EUR 1 per share and that funds will be paid in April. Even if we expect 2023 to be challenging, we are excited about the year ahead of us. We announced an efficiency program to strengthen the long-term value creation, the execution of the transformation program and to secure profitability development in the coming years. This initiative, together with the reshaped Nordic Business Platform Program is driving for permanent improvements in our cost structure, which are necessary for us to strengthen the foundation for future growth. Still maintaining stability and availability of our services is of paramount importance to us, and we are committed to ensure the security of our services. Besides activities around operational excellence, our priority during 2023 is to have customers first in everything we do as we aim for superior customer experience. We are about to launch exciting new services. For example, now in February in Sweden, the Business Insight API will enable easy consumption of non-credit business information. And in Finland, we are renewing the Alpha Credit Rating. Our ability to reach scale on the Nordic level will improve as we are focused on developing our Nordic company culture, integration and offering as one Enento. We also prioritized the development and growth of our employees, aiming to foster a culture of learning and innovation within the organization. Now, this was the summary of our Q4 and 2022 performance. Thank you. On my behalf and now we have time for some questions. So Arto please. And Elina, please join me here.

Let's try to fit in. So this way. Okay, good. And now it's time for the questions, and we will start with the questions from the teleconference line. So operator, please go ahead.

[Operator Instructions] We will take the first question from line Daniel Lepistö from Danske Bank.

It's Daniel Lepistö from Danske Bank. I have a couple of questions. So I guess the first is about the Nordic business platform time line and bespoke update. So can you give some more color on what this means for this IT-related double costs that have been growing over the past year. So are we going to see these for the foreseeable future? Or can you elaborate a bit more?

Yes. We see -- at the moment, we see that we will have double cost for a number of years forward. We do have indications that we could probably decrease those after '25 forward. But I would like us to come back to that when we can see that we have confirmed the numbers that we are now working with as it is updated the program and how we are prioritizing and re-phasing the activities.

Yes. And obviously, to keep the sustainable profitability development we are taking then other efficiency actions to mitigate these double costs and impact of those in connection with IT efficiency.

So there, you also see how and why we have also focused on efficiency because we see that the investments we are doing and the costs that are coming with those, those are, I would say, crucial for our production facility for the future. At the same time, what we also see is that we can take efficiency measures on other areas in the company in the meantime. But of course, we are also coming to the commission side, not only did the commission we have talked about now, the commission of low profitable products and services, but also coming into the commission of applications.

All right. Maybe if I continue on the topic. I guess this sort of progress update, it shows quite clearly that you haven't done much progress in terms of the customer migrations and so on. And this has been a difficult topic for you. So how are you going to tackle this, I mean, issue going into the future, especially with the migrations of the key customers?

I would like to say a couple of different things. Partly what we have in the program does not include customer migrations because it happens behind the scenes, so to say. Partly, of course, you are quite right. When it comes to customer migrations connected to, for example, the platforms, then we have the upper scales, which I also told you about that we have actually customers who have been integrated 40, 50 years and into very many parts of their organization. And these kind of integrations we need to find another way forward. We think we have some ideas how we could actually do this in a phased way which we would like to come back to when we have verified those. In addition to that, of course, the migration is always where -- when you -- you need to agree with the customer in and on how and when, but what we are thriving to look for now is something where we decrease the customer effect as much as possible in order for us to proceed without actually taking the customer time and money into accounts, but that will not be fully possible. So that will be a part of it moving forward to clarify that as well.

All right. Maybe one question about the business. You know that demand is weakening on the sales and marketing and at consumer-related services, that will be causing headwinds this year. So can you give us an estimate how many percentages of your sales base business lines represent currently?

Well, as you know, we don't disclose that. But it is somewhere around 20% of our banks.

Okay. That's helpful. My final question is regarding this good momentum in the Business Insight and I guess, especially in the Enterprise Solutions, where we once again saw this moderate growth. So have you seen this demand levels sort of normalized yet? Or are we still behind the volumes that you would otherwise expect in to see in this current macro environment?

This is difficult. I mean, we have seen the volumes being on a lower level coming to the pandemic earlier as we could see that there was a caution among the customers to consume costs connected this. Now we can see that there is a, let's say, a moderate positive development, which we could expect to continue. So far, I think that is a very cautious answer, but we don't have that much time frame to go through until yet. So that is why I'm also a bit cautious. But I would say that if you see this moderate positive development, and in addition to what we see in the macroeconomic around us, it could be a natural development, yes.

We'll take the next question from line Jaakko Tyrväinen from SEB.

Jaakko from SEB. About the improvement gross margin. I understood that largely came thanks to the service mix, could you repeat which were the service lines driving this improvement? And should we expect also favorable service mix going towards -- going to '23 as well?

I can just start and then maybe you can cut in. Yes. I mean, we see -- we continue to see consumer credit information being strong. And in addition to that, we also now mentioned that we could see a slight improvement in BI enterprise as well. So -- those are a few of those, I would say, when we say a positive service mix. But please add to the picture, Elina.

Yes. So as you said, the enterprise business overall, that is one of our most scalable businesses. Same applies to the -- especially to the Swedish consumer credit business that continued to grow with higher rates. Then as said, where we saw decline was in real estate, Finnish real estate services as well as the consumer marketing services where we have much less scalability and much higher variable data acquisition costs connected.

Okay. Then regarding price units. Last time I recall you said that you are evaluating opportunities, the high prices in certain categories. What has been the outcome of this assessment and have you implemented prices for '23?

Actually, just to start with a little bit of background. We do actually work with our prices every year, yes to state that. Then in addition to 2023, we are and have raised price announced from January, though also, if we now take into consideration inflation, which, of course, brings this to table, then we don't see that those price increases can fully mitigate the inflation from salary costs mainly. So we actually have to work with the cost structure on that one. But the price is and will remain an important question for us now forward. So we are actually inserting this into all our contracts.

Okay. And again finally, a bit of technical one on the interest rate in your credit facility. Is it variable or have you picked up?

Variable.

Sorry, I missed that. Variable and if so...