Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation for Etteplan's financial statements released for 2019. My name is Juha Nakki, I'm the President and CEO for the company. And at the end of the presentation, there will be a Q&A session, where you will also be able to ask questions from our CFO, Per-Anders Gadin. The contents of the presentation will be as follows: the highlights of 2019, then the financial development of Q4 2019, a little bit more in detail. And then we shall take a look at our targets and our revised targets a little bit. And then, of course, at the end of the session, there will be the Q&A. But if we first start with the full year highlights. So of course, this was a year of growth. We were growing for the 25th consecutive quarter in Q4 now. So the growth was continuing and was strong throughout the year. Revenue growth was 12% at comparable exchange rates, and organic growth was 4.1% at comparable exchange rates, and we were doing well. We also accelerated our international growth through 4 acquisitions, which I will talk about a little bit later. And overall, the growth performance was solid. However, the growth slowed down towards the end of the year. The share of Managed Services was also increasing throughout the year, and we managed to increase 60% level in Q3 for the first time ever. And for the whole year, we exceeded the 60% mark. But we're still quite far from our 65% target. Profitability was also very good. We were at our targeted levels, EBITDA of 9.9%. We also had excellent cash flow, record cash flow for this year. And during the -- or at the end of the year, we came to an end of our previous 3-year strategy period, and we updated our strategy a little bit and also our financial targets in December. Then on the negative side, the market situation was a little bit twofold during the year. First part was great, then the second half -- first, the demand growth started to slow down, and then towards the end of the year, the demand situation weakened, and of course, that had a little bit of an impact on our business. Also, we still continue to have challenges in Germany and this burdened our profitability. But now we have been able to -- through our actions, we have been able to take care of many of the issues, and now it's looking more promising going forward. And also, of course, the trade war was having an impact on our business in China. The demand, the local demand in China especially was dropping significantly and our sold to the Chinese market were declining throughout the year, which had an impact also on our business. But nevertheless, a great year in many accounts. We had the record revenues. We had the record profit. We had the record EPS and cash flow. So a good year. And through -- after the good year, the Board is proposing a dividend of EUR 0.35 per share. If we look a little bit more detail to the operating environment. So the demand situation was twofold, as I mentioned. So early part of the year, good, but then in Q3, the demand growth started to slow down, and in the fourth quarter, the demand situation was actually declining. No significant changes throughout our different customer industries. However, there the customer-specific differences were strong. And you could say that overall, in all the customer segments, the demand started to be a little bit weaker towards the end of the year. Still, investments are continuing in digitalization, and also, our customers are focusing on their core business, so outsourcing and centralizing services is continuing. And also the availability of specialized experts and the competition for employees is still ongoing, regardless of the slightly weaker market conditions. So these are affecting our business. If we look at the market development in the main markets for a country. So Finland was relatively good overall throughout the year. But of course, the situation in the Finnish labor market at the end of the year, and especially the strikes in December had a significant impact on our business in Q4 and especially in December, of course. In Sweden, Netherlands and Poland, so rest of Europe, the demand situation was slightly lower and maybe even slightly declined towards the end of the year. In Germany, the overall situation, mainly driven by the car industry, was not that great, but in the process industry, which our E&P -- acquired E&P business is mainly serving, there the situation remained quite strong. And in China, of course, the trade war had an impact. We still were winning new customers, and the opening up of the service market was continuing, but of course, the -- due to the trade war, the demand situation overall was lower and new investments were at the very, very low level throughout the year. If we look a little bit on the split of our revenues and employees per country. So Engineering Solutions was the largest at 56% of the revenues, Software and Embedded Solutions, 26% of the revenues and Technical Documentation Solutions, 18% of the revenue. So sort of similar to last year as well. Revenue by country: Finland, 65%; Sweden, 22%; China, 3%; and Central Europe, 10%. And then employees per country at the end of the period: Finland, 60%; Sweden, 19%; China, 10%; and Central Europe, 11%, increasing significantly due to the acquisitions as well as in Sweden. If we look at the revenue by customer segment. So for us, pulp and paper was the largest customer segment for us throughout the year. Industrial machinery and components, the second largest, and energy and power transmission, the third largest. But relatively same as before. Lifting and hoisting, perhaps dropping the furthest. And then also here, notable is that the others segment is increasing significantly. This is due to the fact that the acquired companies that are not in our operating systems yet are accounted for the others part, and that explains the significant increase there. But if we look at the key figures throughout the year. So revenue growth was 11.3%. Operating profit EBITDA was growing 15.1%. Operating profit, EBIT by 13.1%. EPS, 12.9%. So overall, solid performance throughout the year. And if we then look a little bit on the future, how does the market look like right now? So of course, currently, at the end of the year, especially in Finland with the strikes, and the situation in the labor market that is causing uncertainty. And also now the unfortunate epidemic with the coronavirus in China is having an impact, especially on our business in China. But it is also creating uncertainty to the global market. So we are starting the year in a little bit uncertain conditions. However, if we look at the political situation, so the political uncertainty has eased off slightly due to the fact that Brexit has now happened. And also, there is some kind of a truce in the trade war between China and the U.S. So therefore, we expect that the demand situation will actually pick up at the early part of the year. And already in January, early February, we could see clear signs of that, that the level of investment in some of our customers is already increasing. Aided by the acquisitions, of course, from last year, we -- for the financial guidance, we expect that our revenue for 2020 will increase clearly. And the operating profit will be on the same level or improve compared to 2019. And it's -- right now, it's really difficult to estimate, for example, the effects of coronavirus. But of course, if the effects on the global scale will not be major, so of course, then, we expect to improve on last year. But right now, it's really difficult to say. If we then look a little bit more in detail to Q4. So in Q4, of course, we were disappointed a little bit with our performance, and revenue growth was still very good at 14.2%, but the strike did have, in Finland, an impact on this one. Operating profit EBITDA was still growing at 1.4% rate, but our operating profit EBIT was declining for the first time in 15 quarters by 3.1%. And naturally, we are disappointed with that. Earnings per share was also declining minus 11.1%, and operating cash flow was improving at 10.7%. So overall, not as good as we had hoped, but there were significant impacts through the strike and other things, which I will explain a little bit later. If we look at the revenue more in detail. So at comparable exchange rates, the growth for the quarter was 14.8%, and for the full year, 12%. And demand was weakening a little bit and the direct impact of the strikes in Finland for revenue was EUR 1.5 million. And of course, we also had indirect effects due to the fact that our customers were also impacted by the strikes, and they were more focusing on minimizing the strike effects rather than running normal business. So this had a clear impact on our demand, and no new investments were started during the month of December. We -- still, we managed to grow in the fourth quarter. We did well with our key accounts throughout the year. The key account growth was 4.8%. And even if the organic growth was declining in the fourth quarter and especially, in December, we still had organic growth even in the fourth quarter. So we have been able to do well in that respect. On the operating profit, of course, we were at -- EBITDA, we were at 9.0% for the Q4 and 9.9% for the full year, so we are pleased that we were able to meet our targeted level for the full year. But of course, disappointed that the EBITDA was dropping in the fourth quarter. And of course, the strikes in Finland had a significant impact on the profitability as well. On the operating profit EBIT, fourth quarter was at 7.7%, disappointing, and for the full year at 8.7%. The nonrecurring items for the fourth quarter were EUR 0.5 million. This included a correction or an adjustment in salary-related costs. We also had some costs related to reorganization in the Netherlands. And we did have our cost for acquisitions. Amortizations were at EUR 0.9 million for the fourth quarter and at EUR 3.1 million for the full year. If we then look at a little bit the development of different service areas. So Engineering Solutions was largest and also performing the best. So they represented even higher percent of the profit than of the revenue, so 58% of the profit. Embedded -- Software Embedded Solutions, 25% of the profit and Technical Documentation Solutions, 17% of the profit. And if we look a little bit more in detail to Engineering Solutions. So throughout the year, the service area continued to develop well. Growth was in the fourth quarter, 18.1%, supported by the acquisitions done during the year. And for the full year, 11.3%. And operating profit EBITDA at 8.7% for the fourth quarter and 9.8% for the full year. So strong, solid performance throughout the year. But of course, here again, the strike had an impact in December and Q4 was not as good as we had hoped. In Software and Embedded Solutions, the revenue growth in the fourth quarter was 6.9%, and for the full year, 12.4%. And the operating profit EBITDA was at -- fourth quarter at 8%, which was a little bit disappointing, and for the full year at 9.3%. In the fourth quarter, we had certain project write-offs in some projects. We also had certain projects in Sweden, which ended -- large projects that ended, which had an impact on our capacity utilization. And in a slightly weaker market condition, we had a little bit of slack in our invoicing rates and other things. And also the -- of course, the strike had an impact in Finland as well. So with all these things, we only came up with 8% of EBITDA for the fourth quarter, which was rather disappointing. Nevertheless, during the year, we were able to improve the profitability of our project business and our MSI Index was increasing clearly throughout the year, and at 58% of the revenues at the fourth quarter. In Technical Documentation Solutions, we had a fourth quarter -- in the fourth quarter, the revenue growth was 11.8%, and for the full year, the revenue growth was 8.8%. But for the operating profit for the fourth quarter was at 6.8% level, which was a disappointment, and for the full year at 8.5%. And here, of course, this demand situation was again lower as it was in the Engineering Solutions area. And here, the profitability was burdened by our operation in Germany. There, we have had a long-lasting project, which we are now delivering and the deliveries were done at -- due to a more expensive component at lower profitability as informed to the market earlier, and this burdened our result clearly. Also, we had some negative effects from our Software business, when we have moved our HyperSTE sales to a Software-as-a-Service model. Our customers have been waiting for the new model. And there, the revenue development is not as strong as in the license model in short term. But we have now gotten our first customers, and the interest towards our SaaS model seems to be quite good. So we are very excited to see that growing in the future. Also, in the Netherlands, we had some impact from the reorganization that we have completed in Tech Doc, and this should also be improving our profitability going forward. So many things happening at the end of the year, but hopefully, with the corrections that we have done, now we will be healing during next year in the Tech Doc area. If we look at the earnings per share. The earnings per share for the full year was at 70%. We had a slight impact of the currency effects from the balance sheet item, which is visible in the fourth quarter financial items. Therefore, the EPS for the fourth quarter was EUR 0.02 lower than last year. But still a solid performance, a solid increase for the full year. And as said, the dividend proposal from the Board of Directors is at EUR 0.35 per share. Cash flow was strong throughout the year. Operating cash flow was nearly EUR 33 million for the full year, of course, the IFRS 16 had approximately EUR 7 million impact on operating cash flow, but nevertheless, a strong, solid performance and our financial situation is good. Return on capital employed dropped under our 20% target line, but still strong at 19.1%. And the personnel growth for year-on-year was at 12.8%, and outside Finland, we had 1,382 employees at the end of the year, which represents approximately 30% growth outside Finland in the number of personnel, which is in line with our target setting and our strategy. On the income statement, nothing major, perhaps on the other operating expenses and the depreciations row, the IFRS 16 impact is visible. So EUR 7 million, approximately EUR 7 million going from other operating expenses to depreciations, explains the differences there. So the depreciation and amortization growing by, well, more than EUR 7 million, but there, you can see the clear difference in the income statement. On the balance sheet. The total balance sheet stands at EUR 202.9 million at the end of the year. Major impacts here, of course, are from the acquisitions completed during the year. When we acquired Devex in Sweden in June, E&P in Germany in July, Triview in the Netherlands and also Teknifo in Sweden. And these are the acquisitions that are having an impact on our balance sheet. If we look a little bit on our targets then. So against our target setting, which was valid until the end of 2019, we had a target of growing by 15% per year. Last year, the growth was 11.3%, 12% at comparable exchange rates. And of course, we cannot be happy with this sort of growth, of course, rather good growth, but still falling behind our target. So we need to continue working hard so that we can catch up this level of growth. Operating profit. There we are at 9.9%, so on the levels of our target, and this has been pleasing for the year. In the share of Managed Services of revenue, we were at 60% compared to our 65% target. So still a little bit of work to do in this respect, but still we have been, during the year, improving on this figure quite nicely. On equity ratios, we have been -- our balance sheet is strong. We have been way higher than the 30% mark for a considerable period of time. So overall, a solid performance, but not quite where we would have wanted to be on all the targets. But looking forward then a little bit. So now at the end of 2019, we ended our previous strategy period of 3 years. And now going forward, we have revised our strategy. And if we look at the megatrends or the industry trends that we have that we see are having the biggest impact on our business, they are digitalization overall, accelerating technological development and lack of engineering resources. These are, in our view, the 3 most important factors affecting our business going forward. And of course, we have defined our purpose in the company in a certain way. We help our customers to create a better world through engineering, innovation and digitalization. So this is what we try to do. This is why we are here. And in this kind of megatrends, in this kind of prevailing market, our strategy, how we're going to win in the market has now been defined -- has now been named, increasing value for our customers. And in the strategy, we have 3 elements. The first one being customer value. So we continuously want to improve our business and help our customers to improve by understanding their business well and proposing solutions that will help our customers to improve their business. This is in the heart of everything that we do. We will achieve this by working with the service solutions in the company. This, of course, we have been doing earlier. But now going forward, we also want to add more and more new technologies and new technology components into our offering. And by doing that, we intend to increase the value that we are generating for our customers. And that's the third element. We will succeed in this with our people. We have great experts in the company, excellent talent and going forward, we want to develop our talent in the company even further and of course, attract new talent into the company. And by -- with a talented team working together in an engaged way, we will be able to succeed in our strategy, implementation and move forward as a company. Our values: customer-oriented, proactive, attractive are well representing the revised strategy as well. And with these values, with these cornerstones, we can continue implementing our brand promise, engineering with a difference. We also, in connection to revising our strategy, we revised our financial targets. And now we have, again, 4 targets, but slightly revised from the previous levels. So in terms of revenue growth, we want to be a EUR 500 million or above EUR 500 million company by 2024, which is pretty much the same thing, as we said before, 15% annually will lead to this type of revenue in '24, but perhaps this is a slightly stronger statement of what we want to accomplish. On the revenue side, we want to grow more internationally. We have previously said that we want to grow more in Central Europe and in Asia. And now the target is to have 50% of our revenues outside Finland by 2024. Also, we want to continue to increase the share of Managed Services of our revenue and the new target is 75% by '24. And we want to continue to do all this in a profitable manner. So our operating profit target EBITDA remains at 10% levels. So these are the targets that we have been now given from the Board of Directors, and we will continue working with our new strategy to achieve these targets and goals. At this point, I want to thank you very much for your attention, and now it's time for questions.

[Operator Instructions] Our first question is from the line of Pasi Vaisanen of Nordea.

This is Pasi from Nordea. Well, I have several questions. And to start with, can I actually ask, what is the -- could you actually kind of elaborate what's the range for the clear growth guidance for this year? So is it to 5% or to 10% or over 10%? And when looking at kind of the current market environment. I guess, it's a kind of realistic approach that the sales growth could be negative in -- on inorganic basis in the first half of 2020 because of this coronavirus. So does your current, actually full year growth guidance include some weakness already coming from this corona or not? And these were the first ones. And then if I may continue with EBIT later on?

Yes. Okay. If I can start with this -- the guidance, clearly, we have not given out the exact numbers of what is clearly, what is significantly. But I would say that your range that you described is fairly in line with what we are thinking. If we look at the uncertainty, so the uncertainty is already baked in into our financial guidance. We do see that there is already now, we did say that the year has started slowly and that it has in January. But we have already seen that the market -- there is signs that the market is a little bit picking up, and there is already slightly better demand from some of our customers. So we do expect that the demand should improve throughout the year. But of course, the impact of the coronavirus is completely impossible to estimate. As it looks right now, we have been impacted in Q1, but what kind of an impact that may have going forward in the world economy relating to the level of investment and so on, so that is very, very hard to estimate.

Okay. That's clear. But if I actually may continue regarding the full year guidance. So what is the reason that you're actually now guiding EBIT regardless, you actually finance your targets on the EBITDA level? So that's a bit amazing. And when looking at the kind of, for example, China, I do understand that there has been kind of a dissent not that it's related to trade war and corona. But would it be so that there is actually something even stronger movements going on in China, for example, that they are more hostile to watch the western companies than before. Have you seen this kind of effect at all in the country?

Well, if we first start with the EBITDA question. So I understand the question, and it may seem a little bit strange. But if we look at clear IFRS numbers. So EBIT is a clear IFRS measure, whereas EBITDA is not, and that is the reason why we chose to have EBIT as a financial guidance. However, when we are going forward and when we have been going forward in the past, we do have acquisitions as a part of our plan in the future as well. And when we are doing acquisitions, so then we feel that EBITDA is representing better our operative performance than EBIT is, because there is a difference on the amortization level. And therefore, we are setting the target for the operative business in EBITDA and feel that, that is a better measure. Right or wrong, but these, I think, are the reasons behind our decisions. And regarding China, we have not seen any kind of hostility towards western companies or companies coming from -- or outside China in the market at the point, and right now, of course, we don't know how this will develop, but it's unlikely, I would say. But right now, it's quite uncertain. Our people have been now on vacation for 2 weeks. This week, some people have returned, but it depends on the local authorities, how and when and how this can return. But at this point in time, we are mainly concerned about the health and safety of our people. And in due time, we will manage to get back up and running, and hopefully, then continue a good business also in China.

Yes. Yes, that's clear. And lastly, if I actually may ask regarding the acquisitions. So I guess it's a fair assumption that you're going to make a deals also on that front. And -- or is there chance that this kind of uncertainty, probably actually kind of -- does it kind of increase or decrease your kind of M&A appetite? Or is there a chance that the prices are then a bit lower even during the uncertainty? Or are the sellers still there in this kind of market environment when looking at the M&A?

I think the sellers will be there. There are plenty of companies. This is a very heavily consolidating industry, and there are plenty of companies, plenty of acquisitions happening. We just need to find the right deals, and we will. Sooner or later, we will find the right deals and continue with our acquisition strategy. Too early to tell whether the coronavirus and the uncertainty related to that would have impact on this kind of activity in the market. But we will still go forward with our acquisition processes. And we will continue acquisitions. Acquisitions will be required for us to reach our EUR 500 million revenue target. So that is clear.

Our next question is from the line of Juha Kinnunen at Inderes.

This is Juha from Inderes. I was just -- I have to go back to the financial guidance and ask one more thing. You said earlier that you expect to improve EBIT, to improve if this coronavirus doesn't affect the global economies, most significantly. So is it the right understanding, if I'd say that the first quarter will be hit, but you expect demand to pick up in the second quarter? And rest of the year should be smooth sailing in this estimate?

I would say that looking at the world from the past 2 years, you cannot really think that there will be smooth sailing. There will be some things happening all the time. But yes, if you look at the economist's assumptions of the market, so growth is expected to continue during this year or was expected to continue during this year, if the unfortunate coronavirus situation would not have happened. And our assumption now is that there will be some disturbance, of course, in the market during the first half of the year. How long that will continue? We don't really know. But we do anticipate that the market will get better towards the second half of the year and then for the end of the year. This is our expectation currently. But it's very, very difficult to estimate how the things will turn out right now. And therefore, we have a little bit more, let's say, open guidance in terms of the EBIT.

All right. I understand that. If I continue still, your Service business, of course, do you expect to see kind of a delay on the services and see a pickup more than they would have in the second quarter, if everything goes according to current estimates? Or is the first quarter sales kind of -- is it just lost?

Well, I think that there is still activity. It's not totally gone. It's not totally lost, but there is still activity. And as I said earlier, we have seen certain companies already in late January or early February starting to pick up a little bit. So I wouldn't say it's totally lost. But we start from a weaker level and the uncertainties are there. In Finland, the situation with the labor markets, hopefully, that is now shortly behind us with some of the deals that have been recently made and so on. And then, of course, with the coronavirus situation. So these are creating uncertainties. But as we see it right now, there is already some -- in some areas, some companies, there is already increased level of activity. So it is possible that in the second quarter, the demand should be also picking up slightly. So this is how it could go. But it's really difficult to say.

All right. Then more specific questions, a couple, if I may. The Software and Embedded systems. There were certain projects that gone wrong, and profitability was somewhat sluggish in this -- in the fourth quarter. Are these projects finished? And is this all that there is? You haven't seen any increasing competition in this area?

Well, the competition is, of course, very strong in this area and has been all the time. But we had some problems in our project business 2 years ago. We have taken measures with establishing project offices and improving our processes around selling projects. So I would say that there is no -- the projects that we have now wrote-down or written down in the fourth quarter, they have ended. And we don't foresee that this type of project problems will continue. Of course, there will be -- when you do things, so sometimes something will go wrong. So there will be some projects going wrong in the future as well. But I don't see that our profitability in the project business is getting bad. Quite the contrary, we have been able to improve our way of running projects significantly during the years, and I think we are in a much better position. It was unfortunate that many things happened at the same time in Q4, and therefore, the numbers are what they are.

All right. Fair enough. Finally, I want to also ask about Technical Documentation that has been -- the profitability isn't bad, but it could be much higher in our opinion. So this has been going on for years. So is it just Germany? Or is there something else going on? And are you satisfied with the current level? Or is it going to improve in 2020?

Well, I think you know the answer for the question you asked on my satisfaction level. Of course, we are not happy at all with this level of performance. We had the large project, delivery project, which has been long delayed. Now in Q4, there was a large number of deliveries, and there we knew in advance, and which we also reported that it will be delivered at a lower profitability. Overall, the total project should be okay-ish. But unfortunately, this one component ruined the show for us in the latter part of the year and the deliveries, and that brought it down significantly. Also, the drop in software sales has had an impact on the profitability. We now have started with the SaaS model. It's looking good, that the pipeline is promising. But right now, we have individual users, some tens of users, which we are trying the system with, and it seems to be working well. And going forward, we anticipate that there will be corporate customers starting with it, and then that can start to grow and have a better impact on our revenues and also profitability. So that will have a better impact. Also here in the fourth quarter, we did some restructurings in the Netherlands, partially related to the acquisitions that we had. So I would say that certainly, our expectation is that now this profitability is the low point, and then we will start to move upwards. And I have said previously that this is one of the service areas where we have the best service offering in the market. There is no reason whatsoever why this should be at any lower profitability than the others, maybe even the contrary. So we will continue to work with it, and I'm confident that we will be able to improve the profitability going forward.