Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation of Etteplan's Q2 results for 2020. My name is Juha Nakki, I'm the President and CEO. And after the presentation, there will be a Q&A session where also our CFO, Per-Anders Gadin, will be available to answer any questions that you may have. The contents of the presentation is similar to what we have had before. So we'll look at the Q2 highlights, the financial developments a little bit more in detail. We'll also reflect our performance this year towards our targets, talk a little bit about that, and then you will have the opportunity to ask the questions. But if I go straight into the Q2. So as an overall statement, I could start with saying that, of course, the pandemic that started already at the end of Q1 hit the businesses across the world hard. And for us, this meant that we had to move from an offensive game that we have been playing for the past years into a hard defensive battle. And we really needed to change the mode of operation, which we did very successfully and that brought forward quite decent results for us in Q2. If we look at the highlights, so of course, when the market demand was affected significantly in the quarter, many of our customers had to adapt their businesses and took different kind of saving measures. So of course, we needed to focus on sales and we needed to try to find all the new opportunities that we possibly can. And to some extent, we were also successful in finding new types of businesses and new business opportunities. Through the measures that we had to take, of course, we were also able to maintain a high profitability of 10% in EBITA. And this is mainly due to the all the saving measures that we took across our organization. Also, our operating cash flow was particularly strong in this quarter due to the fact that the costs went down almost immediately when we took the measures and the cash flow coming in from sales, now it drops a little bit later. So this was the prime result of this, but also, of course, a good management of the overall cash flow process. And also, we were pleased to see that after some quarters in China, our number of hours sold to the Chinese market has been declining. Now we saw the hours sold to Chinese market turned to growth again, and this was, of course, pleasing. And overall, in China, the effects of the pandemic were quite minimal actually for the second quarter. On the negative side, our revenue decreased year-on-year by 2.2% for the quarter. And this is, of course, the first time that our revenue has decreased since the second quarter of 2014. So naturally, we are not very pleased with this one, but there was absolutely nothing we can do due to the weakening demand in the COVID situation. And of course, on the negative side, we were then forced to adapt our organization and take different kind of saving measures in our organization, which resulted in the fact that some of our internal development programs and other things have had to be put on hold as well, which is slightly slowing down the progress from what we would have wanted. On the environment, of course, the pandemic was the main thing, changing the demand for us. Of course, hitting our customers' order intake mainly, and therefore, hitting also our demand. We saw that there were, again, quite a lot of differences in different customers. Some customers were hit very hard by the pandemic. Some customers were not affected at all, and everything in between. So there was a quite wide span of different types of hits and actions taken by our customers. Nevertheless, we did see during the quarter that for some of our customers, the new orders and the order intake bottomed out already in the second quarter. And for some customers, the trend was turning during the quarter. So some customers were actually receiving more orders already towards the end of Q2 than in the beginning of Q2, which is a little bit encouraging going forward. Of course, starting from the bottom level, but still. And also, we can see clearly that some of our customers are now investing slightly even more to their R&D to be -- had their products and their processes to be more competitive when the pandemic eases off a little bit. So some customers are taking the opportunity to be more competitive in the future and investing now into R&D. And especially digitalization-related investments are, to some extent, already starting. So that is, again, a little bit encouraging despite the quite weak demand situation at the moment. And if we look at the country-specific differences in this development. So naturally, everywhere, the pandemic was affecting. But there were differences clearly. In Finland, the general market demand weakened, and we do see that the Finnish market will also stay at the current levels, might even slightly come down due to the fact that many Finnish companies and industries are working with investment goods, and here, the lead times are slightly longer. And since their order intake is declining in Q2, so this might have an impact on the fall -- and will have an impact on the fall. And therefore, we anticipate that Finland will be through Q3 and maybe into Q4 on a lower level. And if we look at the rest of Europe, in our case, Sweden, Germany, Netherlands and Poland, the market conditions seems to be similar in these countries. And we can see that from the, let's say, weakest point of demand, there has already been a slight turn upwards. So many companies have started to invest into R&D and into different types of engineering projects, also some small investments have been taking place. So we have seen a slightly better demand situation already in Q2 or towards the end of Q2 in these countries compared to the sort of bottom level during Q2. So a little bit encouraging there. And in China, after the pandemic, of course, the market recovered surprisingly fast. Already in Q1, we said that we were back to our almost normal levels, which was the case in Q2. There was good business, and then we could also see opportunities. And this seems to be currently continuing. However, there is a hit on the global economy, and of course, it's completely impossible to predict what will happen in the future. And China is, of course, affected by the global economy heavily. So hard to tell what will happen in the future. But so far, it looks quite good. And as I said earlier, hours sold to the Chinese market turned to an increase now after some quarters of getting down. So this is, again, a little bit encouraging. If we then look at the revenue split in different terms. So by service area, Engineering Solutions was 58%; Software and Embedded, 24%; and Technical Documentation, 18% of revenues. Revenue by country, Finland, 63%; Sweden, 23%; China, 2%; and Central Europe, 12%. So this was -- Central Europe clearly growing due to the acquisitions completed last year. And Personnel by country, Finland, 60%; Sweden, 19%; China, 10%; and Central Europe, 11%. So again, here, an increase in Central Europe compared to last year due to the acquisitions. And on the revenue split by customer segment, we have now made some changes and through these changes, we have been able to get the Other's segment a little bit down. Still the Forest, Pulp and Paper is the largest one at 14%; Energy, second, 14% as well; Industrial Machinery and Equipment, still 14%; Mining, 10%; and Lifting and Hoisting, 10%. So those were the biggest ones. Then the new ones that we have now introduced is Chemical, which is 5%, which is some customers in Finland. And then quite large customer base of the acquired company, EMP in Germany. And also Marine and Offshore has been now split into a separate, which is now 3%, and Chemical was at 5%. So these are changes in the segments that we are now reporting. On the key figures, of course, revenue dropped with 2.2%, EBITA dropped by 3.1%, and EBIT dropped by 7.6%. So a slightly declining result overall, but cash flow was exceptionally strong at EUR 18 million, growth by 105%. So very strong cash flow in this quarter, giving, of course, us a very, very healthy financial situation going forward. And if we look at the full year, we still were growing for the full year by 3.3%. Operating profit, EBITA was relatively on the same level, only 0.3% drop for last year. But EBIT dropping then 4.8%, mainly due to the amortizations of the acquired businesses that we have. And the earnings per share was at EUR 0.33 compared to EUR 0.35 last year. So a drop of 5.7% for this year. And the market outlook, of course, the pandemic has most significant impact on our demand situation right now. And in our case, the global machinery and metals industry is the one that is driving our performance the most. And here, we see that the demand is lower. And the -- also the prolongation of the COVID pandemic will have a negative impact on our business going forward. Q3, we anticipate after the summer vacations to be a quite difficult one. But still, as I said earlier, we do see also some opportunities. So it's hard to say how the demand situation will play out going forward. But still, we withdrew our financial guidance in -- or right after Q1. And now we have, after the first half of the year, we are now confident enough to give a financial guidance for our business for this year. So the new guidance is that our revenue for 2020 will decrease slightly or be at the same level as in the previous year, and our operating profit, EBIT will decrease compared to 2019. Of course, how much the EBIT will decrease? It's really difficult to estimate at this point since we do not know how the new -- possible new wave of the pandemic will impact our business. And therefore, we are not comfortable in giving any kind of further guidance on that one. If we then look clearly at the -- just the impact of the COVID pandemic. So of course, through the negative demand and the declining revenue. So we needed to take action, and we have adapted our operations in many places and all of our countries. And we have also had to take saving measures. But we were strong in moving our personnel to work remotely, which is currently the safest mode of operation. And 85% of our employees are still working remotely from home offices. We had, in June 30, we had 335 employees temporary laid off in different countries, and the number is relatively the same now after the vacation period is ending. These temporary layoffs are possible in Sweden and Finland and Germany. And in Netherlands and in Poland, there is no such possibility to arrange temporary layoffs. There are some other support measures taken in the Netherlands, but temporary layoffs are not possible there. And of course, due to the actions that we had to take, we were able to remain at a healthy profitability level, which is important for us because this allows us to transition back to the implementation of our growth strategy, once the market is getting slightly better. And we want to return to the growth path as fast as possible. If we then take a little bit more detailed look on the numbers. So the financial development in Q2. So revenue, as said, decreased, and organically, the revenue decrease is comparable to the number of temporary laid off people. So the organic change was minus 11.3% at comparable exchange rate 11% or minus 11%. And of course, the pandemic had an impact. And also, we have been now very careful with our new recruitments due to the market situation and the pandemic. On the positive side, the acquired companies that we have completed last year have had a positive impact on revenue, and on the key accounts, the revenue decreased by 10.6%. So that is the overall situation for the quarter. However, for the first-half, we were still growing with comparable exchange rates by 3.7%, which in the current conditions, in my view, is still quite okay. Operating profit EBITA was strong at 10-point -- or sorry, 10% level and EUR 6.3 million. We also had nonrecurring items of EUR 0.3 million, which were related to restructurings in the organization. And also, we had some credit losses, again, due to the pandemic situation and of course, the weakening demand has had an impact. On the first half-year, the EBITA percent was 9.6%, and we are at EUR 12.9 million. Operating profit, EBIT was EUR 5.4 million at 8.5% of the revenues, and the amortizations related to acquisitions were EUR 0.9 million for the second quarter and EUR 1.9 million for the first half-year. And if we look a little bit more detailed in the different service areas, so Engineering Solutions, of course, here as well, the pandemic had an impact on the demand. And organically, the revenue was declining. But we still had growth of 1.9% due to the acquisitions that we completed in this service area last year. We did have a -- through the measures that we took in the operations, we did have a very high operational efficiency in the quarter and also the savings measures that we took in different parts of the business had a clear impact, and we remained at a healthy 10.3% EBITA level for this service area. In Software and Embedded Solutions, the revenue declined by 10.9%, and this is sort of similar as the organic development in the whole company was. And here, we were also suffering a little bit from in-sourcing recruitment that some of our customers did in Q1. So that impacted the revenue development. But we have also found new opportunities in this area, and we have found a new digitalization projects. So we anticipate that the pandemic will have the smallest impact on this service area and the demand will recover the fastest, once companies start to invest again into their business. But our service offering fits the market really well. For example, our offering related to 5G technologies has had very wide interest. I know we have several interesting discussions ongoing, for example, in this area. Profitability was healthy, of course, also here impacted by the savings measures that we were forced to take. But still, operational efficiency wasn't good, and we had a healthy 11.1% EBITA margin in this service area. In Technical Documentation, a sort of similar story to the other service areas. Revenue declined by 2%. Here, also, we had impacts on the revenue side from the acquisitions that we had completed last year. And here, our Service Solutions business has had a crucial impact, the MSI number is relatively high, 79% for this quarter now. And clearly, our service solutions are working well for us even in this declining market situation. And the profitability here was also on a quite good level. The impact of the Netherlands and not having the possibility to adapt through temporary layoffs, of course, had a slight impact on the profitability here. So therefore, this service area was a little bit weaker than the other 2. But other than that, I would say that solid performance in the prevailing market conditions. Earnings per share for the quarter were EUR 0.16 and for the first half-year, EUR 0.35 -- I'm sorry, EUR 0.33 compared to EUR 0.35 last year. Or fairly close still. And cash flow, as said, was exceptionally strong here, and this is due to the fact that when we have taken the savings measures, we -- the cost side stops immediately. And then on the revenue side, still the sales or revenue or cash flow coming in from sales still comes in at a slight delay due to the payment terms of our customers. And therefore, we had a lot of cash coming in and costs were cut faster, and therefore, we had a surprisingly good cash flow for this quarter. Of course, when we reverse the situation. So when we will -- when the temporary layoffs will be ending, and we will also start to return to normal business, so of course, then this impact will be a little bit reversed. Costs will increase faster than the sales coming in. And then overall, in the long run, cash flow should reflect our operating performance and EBITA levels. But of course, here, once we have had to adapt to this kind of a mode of operation, so we have also learned a little bit on how to develop our operations and how to maybe operate slightly differently going forward. So hopefully, we can then save some of the positive impact from here also into the future. Return on capital employed was at 14.6%, of course, following the slightly lower EBIT and then the result. Personnel decreased by 0.1% year-on-year. And here, of course, the slower recruitment had an impact in the market situation. Current market situation, we have not been as active in the recruitment side as we would have been normally, and this has had an impact, of course. At the end of the review period, we had 1,303 employees outside Finland, which were growing clearly compared to last year, which is, of course, one of our targets as well to increase our business outside Finland. And this is, of course, good development. In the income statement, there is no surprises or no major changes compared to what has already been said. On the balance sheet, maybe a notable difference is in the Trade and Other receivables, which are declining as our revenues are dropping. And also in the Cash and Cash Equivalents, so there is a quite significant change, which is, of course, due to the extremely good operating cash flow that we had and also then the loan arrangement that we completed in Q2 to secure our financing going forward when we were not that secure about how the future would turn out facing the pandemic. If we then look a little bit on our targets and reflect how we are doing against the targets. So of course, the revenue target of EUR 500 million in '24, is now looking a little bit far but -- due to the fact that now the revenue was slightly declining due to the pandemic. But the target is still there. And now after the pandemic, it is off a little bit. So we just need to work harder to get to this target. 50% revenue outside Finland, currently, we are at 37%, and the development in this has been quite good. And we will continue to work on this one so that we can have more legs to stand on and the emphasis of Finland will be slightly lower going forward. Managed share -- share of Managed Services of revenue, 60% currently. The target was increased to 75%, and we are working with new service solutions all the time. We are building our service solutions portfolio, and we're confident that with the new offering that we are building, we will be able to increase in this area as well. And on the operating profit target, we are quite close even in these difficult conditions. So we are improving our -- the resilience of our business and the resilience of our business model even in these types of conditions. At this point, I would like to thank you for listening and move into the Q&A session. So please.

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

Great. This is Pasi from Nordea. Well, a couple of questions from my side. I mean, firstly, have you actually received some compensation or subsidies from the state when looking at the second quarter? And then when looking at the third quarter in terms of costs, I mean, is there going to be something very special in the personnel cost bookings like holiday provisions or the social security payments or probably even these compensations or subsidies? And I can start with these 2 ones and then continue.

Yes. Well, of course, now in this market condition, different governments have issued different kind of support to companies so that they can get over this situation as smoothly as possible and to avoid layoffs for -- permanent layoffs for people. And I think that's the right policy. And naturally, we have received some grants from different countries in China, in Sweden and also others. Here in Finland, the pension payment was dropped for this year, for the rest of the year. And it will increase. We will need to pay that back. So that's not a sort of grant, but it's a sort of delayed payment of this money. So these types of effects are in the results, but I would say that they are not representing a significant part of the profitability. I would say that the significant part comes from our own actions, the saving measures that we have taken. But of course, we have, of course, applied for and used all the possible support that there is from different markets, and we are grateful for that. If you look at going forward, there is no special bookings or anything else like that, that we would have in Q3. There is the vacation period. We have reserved for the vacation money as per normal. So there is no special things regarding Q3. Of course, there are certain evaluations that we do. For example, regarding earn-outs and other things, which we have ongoing. But there shouldn't be anything too special in Q3. Of course, it's the holiday quarter. So it will be revenue-wise lower, and the cash flow will also be impacted, but there are no special bookings for Q3.

Great. That was very helpful. And when looking at the second quarter, again, I mean, would it be a fair assumption that you actually -- you had a kind of a very good utilization ratios for your personnel because of these layoffs, even better kind of interest in restorations than on ordinary kind of market environment. And then looking at these kind of temporary layoffs, are there going to be kind of -- are they going to end in the third quarter or in the fourth quarter? Or how long you are going to kind of keep up that kind of reserve for the cost base there?

Well, I would say that certainly, our operating efficiency has not been -- we are quite good, frankly speaking. We are quite good in managing the business very efficiently. And we have been able to maintain high efficiency also in these conditions. I would say that it's not increasing due to these measures, but we have been able to maintain high efficiency in the operations. And regarding the layoffs. So the temporary layoffs, so we have had union negotiations in the company twice for the entire Finland and also in Sweden and also in Germany, where these are possible. And right now, it is possible for us to utilize daily temporary layoffs for the time being for our personnel until the end of the year. And that is the way it goes. And we don't know what utilization will be. We would very much like to have everyone back on board as soon as possible. But of course, we do not know which way the market turns. So it's very, very difficult to estimate how this will turn out.

Yes, I see. But when looking at the third quarter, still, I mean, would it be a fair assumption that your organic growth is going to be a bit weaker even in the third quarter than now reported for the second quarter?

Well, it's difficult to say. We are still back from -- we are not still fully back from vacations. People are still returning. And our customers are starting to look at how their business will develop and starting to implement actions right now. So we don't have that good visibility yet to how the market is developing. But I would say that as we were saying in the report as well, the market situation slightly improved at the end of Q2 for other countries in Europe, except for Finland. And in Finland, it seemed to stay at the same levels due to the different type of industry structure here in Finland. And right now, we see that, that, those trends are there. However, there are certain companies where the order intakes in Finland have been dropping significantly, and that may have an impact going forward. But what that will be, how it will impact Q3, it's too early to tell, really. But it might go, as you have assumed. And again, it might be not worse than the organic growth in Q2.

[Operator Instructions] Our next question is from Juha Kinnunen from Inderes.

This is Juha from Inderes. I think, I have to continue with the last question and ask what is the current level of activity compared to the same time 1 year ago, year-on-year change? Could you comment on that? And perhaps we can get a better picture about the demand situation now?

Yes. It's, of course, as I said, it's now when people are -- the uncertainty is definitely there. Now there is the second wave of the pandemic potentially coming, and therefore, the uncertainty is high. So it's quite difficult to say how this will turn out. But if we look at the number of temporary laid off people, so we have about 10% of our employees, temporarily laid off. We had that before -- or at the end of Q2. I would say that nothing has dramatically changed since then. So this is the sort of drop that we see in the demand. However, as I said, there are certain areas where we do see investments also starting and especially in this digitalization area, software investments and these types of things. So we have had quite good order intake in Q2 and we see that there might be quite good opportunities also going forward. But it really depends on how the pandemic continues, will there be new saving measures issued by the different customers? And it's really hard to tell. But now I think that societies, governments, countries have been able to sort of find a way how to live with the pandemic and we don't believe in these kind of lockdowns anymore. And therefore, we were also able to give our guidance.

All right, fair enough. About the profitability. I'm just wondering if there are some elements that are going to change when we are going forward? So you talked that there are some development projects that you have canceled and these are affecting the profitability, but -- and also the support from the government. So are some of these going to change in the third quarter or fourth quarter? And how should we be looking at this?

There's no major -- there are slight changes in the different government supports. But as I said, they do not represent a major part of our result. They are a small support for us, which we are grateful for. But a small change is there, not having a big impact. Of course, at some point in time, we do need to continue investing into our future and investing into our growth and investing into our people even more than we are doing even right now. And therefore, the cost structure or the costs will increase to some extent at some point in time. But of course, as we have been doing, we have been managing our costs extremely carefully now. For this quarter, we were very quick to adapt, and with timely measures, we were able to create this kind of profitability. And we will also be very careful in managing the cost going forward. But once we do see that the market, there is opportunity and there is way forward for us and the market starts to turn, then we will definitely continue investing into our business. So that we will be even stronger as a company going forward. So at some point, yes, we will increase the cost levels a little bit, but we will be very cautious so that we can remain at the high profitability levels.

All right. So you are still defensive. One...

So far, forced to, yes.

All right. One final question for me is that do you see some permanent changes due to this pandemic to the whole industry? And if there are some, maybe you could open up the possible effects on -- at the plan?

Well, I think that it's, of course, very early to tell. But what we see is that this kind of remote work, which is, of course, being discussed quite a lot in different countries that will remain to some extent. So now that our customers are also seeing that work can be done at home and so on. So -- and we have also learned quite a lot in this process. So I think that when we go forward so we will be able to offer our employees more opportunities to work remotely and we have learned now how to manage that and how to deal with that. And our infrastructure and our way of running the business is supporting this. So I think that going forward, we will be able to offer more of these types of possibilities for our employees. And through this learning experience, we are, of course, also hopeful that our customers recognize that more work can be done from Etteplan offices and -- but managed by Etteplan and for this, we have the Managed Services, and we have the processes and tools and know-how, how to do this. So we feel that this may -- pandemic may even at the end of the day, support our strategic target of increasing the Managed Services business at Etteplan, which is also then supporting our profitability going forward. So this is something that we are definitely hoping for. How that will play out, difficult to say. Maybe these are the most important changes, yes.

[Operator Instructions] And there seem to be no further audio questions. I will hand the word back to speakers for any final comments.

Yes. Thank you very much. So if I conclude, so of course, now we have been growing nicely for a long period of time. The last quarter when we actually were decreasing in revenues was in 2014, the second quarter, as I said earlier. So this was a little bit of a new situation for us. But as said, we moved into a defensive battle. I think we are strong in that. We were able to prove the resilience of our business and our business model. We had exceptionally good cash flow and this will support us -- we are in a -- going forward. We are financially in a good position. And once the market turns, we are eagerly waiting to get back to the sort of implementation of our aggressive growth strategy again. So we will play the defensive game for us as long as we have to, but then we are, of course, more than eager to move back to our growth plan. And of course, should you have any questions after the presentation or at any time, so here are our investor contacts: so myself; our SVP for Marketing And Communications Outi Torniainen; or our CFO, Per-Anders Gadin. So feel free to contact us at any time. Thank you very much for listening. Thanks.