Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation of Etteplan's Q3 results for 2020. My name is Juha Näkki. I'm the President and CEO. And at the end of the presentation, we will have a Q&A session, where you will be able to ask questions from myself and also our CFO, Per-Anders Gådin, will be available for answering any questions that you may have. If we look at the contents of the presentation first. So highlights of Q3, financial development in Q3, we'll look a little bit on our targets, how we are doing against those, and then followed by the Q&A session. Well, first, if we go to the highlights of quarter 3. So first of all, of course, the market condition due to the pandemic was not good. The pandemic had an impact on our customers' business and of course, naturally, an impact on our business as well. So basically, we had to continue or we were forced to continue the sort of defensive mode that we had to take or into which we had to move in Q2, and we continued with a defensive approach throughout the third quarter. This mode of operation, however, produced good results. We were able to keep a very high profitability for the third quarter despite the declining revenue, which was very positive. So the measures we have taken to protect our profitability have really worked. We were also very pleased with development in China. The market in China has been fairly good. It turned better already in the second quarter. And in the third quarter, it has been solid, and the demand has been good. So we were able to increase the number of hours sold to the Chinese market by 12.1%, which was a good result. We also were able to due to the fact that we have been generating good healthy profit during the year, our cash flow has been very good, so we were able to also move forward with our investments for the future. And we made an acquisition in the Netherlands, acquired a company, Tegema, which is focusing mainly on production-related solutions. And this is a good new addition to the group. On the negative side, of course, revenue dropped due to the weak market conditions that we had in the third quarter, minus 10.3% quarter-to-quarter. And year-on-year, we also fell to negative, minus 1.1%. If we then look a little bit more closer to the acquisition. So Tegema in the Netherlands is focusing on production solutions, mainly to the high-tech industry. It deploys about 100 engineers, and the revenues last year were approximately EUR 11 million, 2 locations of operations, Eindhoven and Arn-hem in the Netherlands. And this was completed in September and in our numbers in the books from 1st of September onwards. So 1 month for the third quarter. But this is a little bit different to what we have done before. Tegema focuses on production solutions, where we have been active as well. But Tegema is also delivering production sales to the customers. And this is an interesting opportunity for Etteplan. As we see that the Industry 4.0 development is continuing, production solutions are becoming more and more complex, they are becoming more and more connected and so on. So integrators for production sales into the existing production lines are needed, and we have the right kind of competence to actually take this position. So it's an interesting area, an expansion in our competence base and gives us a much more focused effort towards production solutions, and we will continue to work with that throughout the group. If we then look at the operating environment a little bit more in detail. So of course, the demand has weakened due to the pandemic and the uncertainty in the market has increased also now that the second wave of the pandemic is affecting the markets where we are operating. It was clearly visible also in this quarter that after the summer vacations, when the second wave was sort of starting that the uncertainty caused our customers to delay projects and investment start-ups. And this had a little bit of an impact on our figures as well for the third quarter. Customer-specific differences were, again, considerable. Some customers are still doing relatively well, whereas others have genuine problems. And also, the investment decisions in digitalization seems to be the one that mainly all our customers are either continuing or they are the ones where they will continue to invest the first once they start to go more towards the sort of investment path. If we look a little bit on countries, so Finland, the market weakened, clearly in the second quarter. And on the third quarter, stayed at a quite low level of demand. In Central Europe and Sweden, we could see already in the second quarter, a slight turn for the better in demand in the market. And this, to some extent, continued in the third quarter as well. But of course, now with the second wave of the pandemic, increasing the uncertainty again, so now it's difficult to say what will happen. But a slight positive tone, I would say, is still there. And China, of course, the market has recovered. And as mentioned earlier, we were able to return to the growth path in China, and then we see that this will continue at least throughout the year. And if we look at the revenue split, then Engineering Solutions represented 57% of the revenues in the third quarter -- sorry, for the first 3 quarters of the year; Software and Embedded Solutions, 24%; and Technical Documentation Solutions, 19%. Revenue by country was Finland, 62%; Sweden, 22%; China, 3%; and Central Europe, 13%. And then personnel by country, Finland 59%; Sweden, 18%; China, 10%; and Central Europe, 13%. The changes are, of course, due to the fact -- in the headcount and also the revenue are due to the fact that we have made acquisitions, mainly outside Finland in the last year and also now with the Tegema one. Revenue by customer segment. Forest, Pulp and Paper, still the biggest one; general industrial machinery and equipment, also 14%; energy is dropping slightly; mining, dropping slightly; lifting and hoisting, slight increase; and in the chemical industry, where especially our German acquisition of last year, E&P is working, a clear increase, but otherwise, no major changes in the customer segments. And in the key figures, revenue came down 10.3%. Operating profit EBITA by 20.7% and EBIT by 24.9% in the quarter. Of course, the comparison quarter did have a fairly large onetime -- positive onetime effects, which are affecting comparability here. On other figures. Earnings per share, down by 31.6% and cash flow by 81.9%. But I would say that after a very strong cash flow in the second quarter, this is a sort of more normalized level. For the full year, the revenue is down by 1.1%; EBITA, 7.2%; EBIT, 11.4%; and earnings per share by 14.8% so far. And if we look at the market outlook, so it remains relatively the same. Of course, the pandemic has now developed more, but still, when we have the pandemic with us, so the uncertainty is clearly there, and the uncertainty will have a negative impact on our business. On the financial guidance. We updated the guidance and clarified our guidance for the operating profit part, EBIT part. So now we expect the revenue to decrease slightly or be at the same year's level, while operating profit, EBIT will decrease clearly compared to 2019. Basically, revenue is a little bit hard to predict right now because of the -- we don't really know how the second wave of the pandemic will be impacting our customers' decisions to start new investments and so on. But I guess, we currently think that the revenue development will be similar to Q3, maybe slightly positive. But then on the profit side, when we had Q2, we were uncertain where we could develop with the profit. Now with the market not turning for the better, we see that the operating profit will drop clearly, but it will not drop significantly due to the fact that we expect to be able to maintain a high profitability level also in the weaker demand going forward. If we then look a little bit more in detail on the impacts of the COVID. So of course, our customers' declining demand has a direct impact on us. We can see clearly that our customers' order intakes and order books are at a lower level than they were a year before. However, there are some customers where the order intakes are improving against quarter 2 this year. So that is a little bit encouraging, of course. But when this situation is what it is, it stays the same, so we will need to continue the defensive approach. And so far, the measures that we have taken to adapt our organization and the cost-saving programs that we have had during the year, we have had good profitability during the year. We have had temporary layoffs, unfortunately, during the year. And at the end of September, a total of 286 employees were temporarily laid off, either part-time or full-time, in Finland and in Sweden and in Germany. And of course, also, we have had to cut down on the spend and especially the external spend. So our strategy execution has been slower this year than what we would have wanted and what we anticipated in the beginning of the year. But we are -- due to the good profitability, we are able to transform back to the more investment- and growth-driven mode as soon as the market recovers for the better. And we will be able to do that very rapidly. Currently, of course, we are still working remotely. And over 85% of our personnel is working from different kind of remote locations, and we have been very successful with this operating mode as well. If we then look at a little bit more detail on the financial development for the quarter. So revenue was EUR 55.2 million, so a drop of 10.3%. And of course, due to the weaker market condition. Organic growth -- or organic decline was minus 13.3%, so even higher. And of course, we did see a decline of 14% from our key account customers, which had an impact to this. Due to the market situation, we have also been a little bit more cautious with our recruitment. So the number of personnel has come down in this market situation. But we are looking to improve on that as soon as the market develops for the better. And I said earlier, also the summer vacation period and the start of the second wave of pandemic had a little bit of an impact on the project starts and therefore, also the revenue development. If we look at the operating profit EBITA. So we were able to hold high profitability for the third quarter, which was very, very good for a third quarter. So the EBITA percentage was 9.5%. We compare it to last year's 10.7%. So there were quite different nonrecurring items. So this year, we had a slightly negative figure, whereas last year, we had EUR 0.8 million positive, which was due to an earn-out revaluation. So if you look at the comparative numbers, we are fairly close to last year, which is fairly good, I would say, in this kind of market. And if we look at the EBIT. So the EBIT percent was 7.7%. EBIT was at EUR 4.3 million and the same onetime effects, of course, having an impact on this one. Amortizations related to acquisitions were $0.9 million for the quarter and EUR 2.8 million for the full year so far. If we then look a little bit more detail on the different service areas. So in Engineering Solutions, the revenue was EUR 31 million and dropped by 12.1%. And of course, here, the market demand has had a big impact on our revenue development. And of course, the summer vacation effect that I mentioned earlier was affecting this service area as well. We have had to, of course, do our best in the sales to find new opportunities, and we have done whatever we can in the market. And doing that, we have been able to remain or have still a very high operating efficiency, and that has enabled still strong operating profit percent. In the Software and Embedded Solutions side. This is the service area where we have seen that investments have continued to some extent. There are still customers where the investments are down, and this has had an impact on our revenues. But here, we have clearly been able to improve our operating efficiency and therefore, maintain a very high profit level, and the profit level here was affected also by one customer write-down due to a customer bankruptcy. So without that, it could have been even better. But of course, here, the pandemic having an impact and also the same comment on the summer vacation and the second wave of the pandemic impact the demand there. And in Technical Documentation Solutions, also a solid performance. The revenue was EUR 10.2 million, dropping the least, so minus 4.5%. And also the profitability was strong. So a good performance, good operating efficiency here in this service area as well, but of course, affected by the market and the same summer vacation comment as well. On the software sales for HyperSTE. These type of investments are clearly down from our customers. Decisions are clearly not taken. So the level of software sales has been low throughout the year and continued still in the third quarter. Earnings per share, EUR 0.13 for the third quarter and $0.46 so far for the full year. And cash flow at -- operating cash flow at EUR 0.2 million in the third quarter, which is sort of normalized level. We had exceptionally strong cash flow in Q2 due to the fact that our costs were coming down faster than the revenues. Now the situation is quite normal. And when we will start to grow again, then the cost will increase faster and the cash flow. So then we are -- on the average, we will be back on the normal levels, and we believe that the cash flow will reflect our operating performance over a certain cycle. Return on capital employed, dropping still, 12.6%. And here, of course, having an impact from the IFRS 16 decision. So our interest-bearing liabilities are higher for that reason. And also, we have some more loans, which are affecting this figure. On the personnel. We had, at the end of the period, 3,291 employees, so a drop of 4.3%. Employees outside Finland were at 1,340, so a slight drop there as well. But we believe that now with the market turning in China, we will be able to improve on these numbers. On the income statement, nothing major, but the clear, clear difference compared to last year is in the other operating expenses. So our cost-saving programs this year have had a clear impact on our performance on the cost side. So we have been able to react to the changing market conditions very well. And on the balance sheet. Of course, Tegema has been brought into the balance sheet, so slight changes in the goodwill and assets and other things, but no major changes in the balance sheet either. And then if we still look on the targets. So revenue target is EUR 500 million by '24. And of course, now with the COVID year, we will be relatively on the same as last year or drop slightly. On rolling figures, we are at EUR 261 million. So you could say that 1 year we have had to sort of cut from our target setting, but this just means that we will need to work harder in the coming years to reach our targets. Revenue outside Finland is slightly growing, so 38% now for the first 9 months, the share of managed services at 60% and operating profit at 9.5% so far. So this is where we are. And now it's time for the Q&A session. So I would please -- warmly welcome any questions that you may have. So please, operator.

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

Great. This is Pasi Väisänen from Nordea Bank. Well, I have 3 questions to start with, and then if I may, a couple of more also after the first round. So I mean looking at the kind of the temporary layoffs currently, I mean, has there been any changes in that in October? Or are we going to have kind of same kind of capacity in the fourth quarter than already seen in the third quarter? Then when looking at the customer segments, secondly, I mean, what is the most weakest customer segment for you when looking at the kind of third quarter or even fourth quarter? And would it be the mining sector, if I may give kind of some guesses there? And then the last one from the first round is the guidance, I mean, it seems to me that you acted this one clearly down wording for your guidance, so it's the leading instructions for this guidance. But the EBIT is down slightly more than 10% on year-on-year basis. This is the first 3 ones.

Okay. I'll try to remember them. So basically, what was the first one? We start with that.

Yes. I mean the layoffs and the situation in October and what's the capacity in the fourth quarter against third quarter?

Yes. Sorry, Pasi. Yes, I mean the temporary layoff situation is relatively the same as it was at the end of Q2. Of course, it's changing from customer to customer. So it's not the same people that are temporarily laid off. But unfortunately, our customers are having different kind of situation. And now with the market's uncertainty increasing, so we are uncertain of how the situation will develop. It's hard to say -- now with the second wave, you see different kind of measures taken by different countries. It's hard to say how this will impact the industries and how this may impact the saving programs from our customers. But we believe that it will be relatively the same unless there is a clear change in the market, either for the better or for the worse. And it's hard to predict how it goes. Unfortunately, I'm not able to give a more detailed answer on that one. Then the second question was about the customer segments. So I guess that the automotive segment was -- which is not that big for us, but that segment has been clearly down, and we have had a weaker demand there. Also, we could see that in the mining segment, the situation has been slightly down. There are some okay projects, and there is investment into new products and so on with some of our customers. So more R&D-related work, but the level of project type of work is, of course, down in this segment. Overall, I would say, segments are down, some slightly more than others, if that's the right kind of interpretation. And then the third one on the guidance. So yes, we did clarify. We have not given the exact percentages on the wording. But of course, clearly, is less than significantly, which is the sort of most extreme word that we use. Basically, the reason for having -- before, we said that it will -- the profitability or EBIT will drop, but we were not specifying how much, due to the fact that if the market had turned better, we could have been fairly close to maybe last year; if the market had gone significantly worse, it could have been worse. But now as we see that things are around the same as they are and we expect it to be throughout the year, so then we specified it clearly. So it's not the worst one we have, but it will not be as last year. That's what I can say.

I hear you. And then if I may, a couple of questions still regarding kind of the capacity and current run rate at the personnel level and capacity. So would it be even possible that you're actually going to run your business with 15% off from normal level, at least next 2 quarters? So I mean, looking at the kind of environment and customers, definitely, I'd sort of expect that it's fair assumption that nothing is going to happen to a positive territory or to the positive direction before the year-end. And then practically, regarding the kind of the remote work-at-home working, if it could happen that something, 75%, 85% of your all workers would actually be at home or remotely working, were there any kind of changes in the offices or premises? Or would you be able to save kind of rents or other expenses on annual basis? And what would be the amounts in that sense?

Yes. Well, first of all, the operating efficiency, we were extremely good in transitioning into this kind of remote working mode. We have not lost any momentum on the operating efficiency due to this, and we expect to be able to manage that also going forward. We have proven in the previous quarters our resilience in our business and in the model. And of course, that has some also tough decisions that we have had to make during the years, which is not nice. But with this, we have been able to manage, and we expect to have the same kind of operating efficiency and therefore, similar profitability levels. Of course, there may be variations, but we expect to be able to continue running at the high efficiency, unless something dramatic happens in the market. And then on the remote working mode, so basically, you are correct. I mean if you look at our operating -- other operating expenses, so part of the savings there is, of course, traveling and other stuff related to that; but part is, of course, savings from the operating expenses, offices and so on. I would not say rents because these are not very short contracts. And right now, we don't really know how the -- how fast the situation will change and how it will change. But we do see that the remote working mode, to some extent, is here to stay. We are also continuously working to develop that because in our line of business, we have the opportunity to work remotely from wherever. We don't have any production, we only have computers. And as long as you're connected, you can do your job as planned. So this is an opportunity that we can offer our employees. And going forward, we will, of course, look at optimizing our premises and optimizing our other ways of working so that we can also generate cost savings in the future. How much? That's too early to tell, but this is something that we are continuously looking at and trying to develop.

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

Gentlemen, this Juha Kinnunen from Inderes. I will start with a question that is probably quite similar to the last one. And I will just form it like this: How sustainable is your profitability currently? I'm wondering about if there are some special elements that will go away, let's say, at the year-end or something like that. Is this sustainable level if you don't see any recovery on the demand? And I'm talking about the whole year, not the Q3 seasonal effect.

Well, I would say that we have now proven that the model is resilient, and I'm confident that we will be able to maintain high profitability. There are, of course, certain government supports, which are playing a minor role, and perhaps one issue, which is the sort of possibility for temporary layoffs in Sweden, may have an impact. The law there is changing at the end of November. So after that, you will not be able to have these kind of temporary layoffs anymore in Sweden. That may have a small impact. But we have been able to improve our business in Sweden. And also, we see that there is a slightly better market recovery in Sweden compared to Finland. So we believe that this will not have a dramatic impact for us going forward, but a slight impact maybe in December onwards. But no other things, and we do expect that we will be able to maintain good profitability.

All right. Fair enough. Also about the second wave of pandemic. I'm wondering if you see a clear correlation or negative correlation between the client demand and activity and the case numbers that we are seeing when they are rising and falling.

Yes. So far, not yet, actually. So we see that the cases are growing and more and more restrictions are set by different governments. But so far, they have not been set towards the working condition or factories and so on. So the businesses continue to run. It's more restaurants, nightlife, these sorts of things, which don't have an impact for us so far. But it's, of course, really difficult to say what may happen in the future. But somehow we believe that societies will continue to run, businesses will continue to run, and for that reason, we don't expect to see a huge drop in demand. But of course, this is something where I can be also totally wrong. But this is how we see it right now.

All right. Fair enough. Finally, any kind of outline or outlook for the next year would be very useful. So any chance you would give us something to go on regarding year 2021?

Well, it's, of course, very early to tell. But we do believe that a major turning point for demand, and especially for investments, is the time when a vaccination is coming to the market. So I think that, that is required for our customers and their customers to actually see the sort of end of this pandemic. And once that is there, then I believe that our customers will start to invest more. So the sooner that happens, the sooner the market recovery will start. How swift that is depends on very many things, but we do believe that somewhere next year, this will happen. And you probably know the medical industry better than I do, so you might be better to predict when this could happen. But we see that as a sort of turning point for investments.

Our next question comes from Jerker Salokivi from Evli.

This is Jerker Salokivi from Evli. Both Pasi and Juha already kind of touched upon the subject I was going to ask first, but -- regarding this profitability sustainability, but you essentially were looking at adjusted figures on EBIT. You've kind of actually managed to keep the margins on essentially unchanged levels, but you've probably also cut quite a lot of costs. But I was just wondering if the activity were to decline now, how -- would it mean that the margins would be taking a more substantial hit now? Or do you still have kind of room to improve on costs in that aspect?

Well, of course, we have done everything we can to save costs, and we have had very limited investments. So naturally, if the market were to decline rapidly, then, of course, our fixed cost will start to hit us a little bit. So if there is a clear drop in the demand for us, so of course, then our margins will be slightly under pressure. We don't have that much more to save. But we don't believe that, that will happen. But should that happen, then of course, also our margins would be slightly under pressure. We will have a future [indiscernible] still. And we have now, during this quarter, we have continued investments to some extent. We also acquired a company and so on and these kinds of activities there. We might have some savings, but you are right in the sense that if there is more drop in the revenues, so then our fixed costs will hit us a bit harder and the margins will drop. But if it stays on the same level, as we now believe, for the remaining part of the year, we should be fine with a healthy profitability.

Okay. And I was just wondering, maybe just looking back at to post -- or since the start of the coronavirus, you've probably been doing quite a lot of own estimates and kind of scenarios for what will happen. But has the kind of development so far been in line with your expectations? Or has there been kind of any sort of instance now during the second wave, was that kind of already in your plans? Or has there been looking worse than you were expecting or anything in that aspect?

Well, as I mentioned in the presentation, we did see that in the sort of -- at the summer vacations when the sort of second wave was a little bit starting, so then we could clearly see that it's quite typical in our business that our customer projects don't start after the summer vacations that fast. So there is normally a small delay. This time around, there was the increasing uncertainty related to the second wave of the pandemic on top of that. So we had a little bit more, let's say, waiting time there, and some projects were canceled and some were starting late and so on. So there was a little bit of an impact. But other than that, I would say that there -- it has been going relatively as we have anticipated. And we have been able to take measures to defend our business and our profitability, and we are doing everything we can to find new opportunities. So I would say that so far, it's gone as planned. But of course, it's hard to tell what will happen, but I don't believe in these kind of massive lockdowns on businesses and these kind of massive restrictions where people are not able to move at all due to the fact that there is -- I mean there is already too much debt in the societies around the world. So I don't believe that will happen. Maybe wrong, as I stated earlier.

Okay. I'll just maybe still ask about the Software and Embedded Solutions. You commented earlier, but kind of looking at the start of the pandemic, it was kind of -- or maybe my expectation was only about that, that area of business would be kind of more resilient given the kind of investment or investment tendencies, but it's still been -- well, sales have declined quite in line with the Engineering Solutions as well. So could you maybe just comment briefly about what's been, like, the factors there? And what's the outlook?

Yes. Well, there was one certain incident in the first quarter where one of our customers in-sourced a substantial amount of people, which had an impact on our business, which was very unfortunate, but that is what happened. That had an impact. And then we have seen that some of our customers have taken measures all over the different service areas and all over the different competencies. So there have been some customers that have just cut everything and reduced spending on everything, not specified that we will continue this and not continue that. And that has had an impact on this service area. And we have had to act on it. And of course, that has had an impact on our organic development as well. But still I would say that our operating efficiency has been good and even improving during the year. And this is the area where I do see that our customers will continue to invest in first when they start to invest into their business again more. So I believe that there are significant opportunities there going forward. But it's also a little bit of a surprise for me that also this area has been under cuts from our customers.

[Operator Instructions] Okay. Since we don't have any more questions at this time, speakers, please go ahead with your closing comments.

Okay. Thank you very much. So basically, this year has been totally different than what we anticipated, of course, due to the pandemic. And as said, we were forced to move into this kind of defensive mode of operation in the second quarter and continue throughout the third quarter as well and most probably also in the fourth quarter. So the year will turn out to be weaker than we anticipated. And most probably, our revenue will decline for the third time during this curve has been made. So that is unfortunate. But still, I think that the defensive game that we have played has been extremely strong. The transition into that one has been very swift, and we have been delivering healthy profitability despite the conditions. And we have also been able to invest into our future by acquisitions and also in internal development now in the third quarter. So I believe that after a difficult year, we will be able to -- during next year when the market recovers a little bit, so we will be able to move forward, once again, and move back to this kind of profitable growth mode that we have had in the past. Should you have any more questions, feel free to contact us at any time. So myself; our CFO, Per-Anders Gådin; and our SVP for Marketing and Communications, Outi Torniainen, will be happy to answer any questions that you may have at any time. Thank you very much for watching, and have a nice day.