Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation for Etteplan's Half Year Results for 2021. My name is Juha Näkki, I'm the President and CEO. And at the end of the presentation, you will be able to also ask questions from myself and our CFO, Per-Anders Gådin. Looking at the contents of the presentation today, as per the previous ones, we will first look at the highlights of Q2 from '21. We will look a little bit more detailed on the financial development also look at our development against our targets. And after the presentation, there will be the Q&A session. If we start with the highlights, so this was, of course, a positive quarter for us, a very positive quarter for us, a little bit against us a slightly weaker comparison period. But nevertheless, the whole quarter went very solid forward. And the market situation and the demand situation continued to improve as we had anticipated, and the demand developed well in pretty much in all markets where we were operating. Our revenue was growing almost 20%. And for the first time ever, we exceeded EUR 75 million. So growth was close to 20% and also organic growth was above 10%, which was a great achievement and good sort of proof for our competitiveness in this kind of improving market situation. We were particularly pleased with our growth in the Software and Embedded Solutions service area which was above 30% and a clear indication of the direction in that service area, so strong performance there. On profitability side, we again exceeded our profitability target of 10% EBITA. And in all service areas, the profitability was on a good level. Particularly strong was Technical Documentation service area this time around where the profitability was above 12%. Also during the quarter, we accelerated our efforts in recruitment. We invested a little bit more on people, invested into the growth. And also, we now continued investing into our strategy execution. Many of our programs and investment programs have been halted for the COVID pandemic time. But now we see that the market is developing favorably. And now we have restarted most of our development programs and development activities, and we'll continue to develop our business going forward. Also during the acquisition, we continue -- sorry, during the period, we completed 2 acquisitions according to our growth strategy. So we acquired F.I.T in Germany in our Technical Documentation service area and SkyRise.tech in Poland in our Software and Embedded Solutions service area. Both these acquisitions are, of course, strengthening our capability to deliver services in the respective areas. On the negative side, the COVID pandemic still continued to have an impact on the market a little bit, especially the travel restrictions had a little bit of an impact on certain businesses of ours and certain businesses of our customers. And with the delta variant and other variants, the uncertainty in the market is still there. But we do see that our clientele has learned to cope with the situation and are able to move forward in their business. And for that reason, we expect the demand situation to remain solid for the remaining part of the year. If we look at the development of the operating environment, so basically, the market continued to improve despite the COVID pandemic and the uncertainty there. As said, travel restrictions have a little bit of an impact on our business and to our customers' business still, but no major impact anymore. If we look at our customers, the orders received during this quarter in the Q2 have grown significantly, and this gives us a good comfort in the quarters going forward, and also the investments in R&D and production are remaining at a fairly high level, and this indicates a quite solid demand situation for us for the second half of the year. Still, we have certain customer-specific differences with different customers. Some customers are still suffering a bit from the pandemic, and of course, in this situation, some customers are doing better than others. But overall, the market situation is quite solid. Market development in the different countries is a little bit similar. Pretty much all countries are developing well. China has not seen any impact from the COVID pandemic during this year. Now of course, there's a little bit of news on the pandemic spreading and new measures taken by the Chinese government, so we will see what happens there in the coming quarters, but we do anticipate that there will not be any major impacts on our business, at least in the near future. If we then look at a little bit development on service area. So the revenue by service area was, Engineering Solutions 57%; Software and Embedded Solutions growing in proportion to 26%; and Technical Documentation declining to 17%. Our revenue by country, Finland, 57%; Scandinavia, meaning Sweden and Denmark, in our case, 24%; Central Europe, 15%; and China, 4%; clearly growing in China. And personnel by country, slightly different splits, so Finland, 57%; Scandinavia, 18%; Central Europe, 14%; and China, 11% for the first half year. And if we look at the customer segments, so they are still staying relatively the same, the largest segment for us, industrial machinery and equipment. The second one, energy, and the third one, forest pulp and paper. And if you look at what was growing and what was declining. So here in the picture, you can see on the slightly green color are the ones that were growing. So industrial machinery, automotive and transportation, and medical technology going up in relative terms, and forest, pulp and paper, chemical industry, marine and offshore and metal industry going slightly down, but no major changes in the relative distribution. And if we look at the key figures for the quarter, so growth of 19.3%. Operating profit, EBITA, growing by 24%. EBIT growing by 25.6%. EPS by 25%. So solid development in the quarter against a slightly weaker comparison quarter, but still solid development overall. And for the first half of year, revenue growing by 10.3%. Operating profit, EBITA growing by 20.3%. EBIT growing by 21%, EPS by 24.2%. So solid development in the first half of year, which gives us good comfort in going forward for the second half. And with a solid first half of year and the market outlook being such that small impacts of the COVID are still there. But as I said, we feel that our clientele has learned to cope with the pandemic. And we see that clearly, our customers' orders received is growing substantially, especially in the second quarter, and the order books are growing. So for this reason, we believe that the demand situation will remain good for the year. Also the investment levels on R&D and production remain high at the moment. So we are confident that the demand situation will remain good throughout the year for us. And that being the case after the first half year, we are upgrading our financial guidance regarding revenue and the new guideline is EUR 295 million to EUR 315 million. And we will continue to investing into the growth. We will continue investments in recruitment and our management and sales, et cetera. And this will have a slight impact on our cost structure. And also, we expect that our cost structure will be normalizing a little bit going forward. It's hard to say when the normalization will happen and what exactly will happen, but for this reason, we are keeping our operating profit EBIT estimate intact at EUR 25 million to EUR 28 million. And if we then look a little bit in more detail on the financial development. So on the revenue side, growth was 19.3%. And for the first time, we exceeded EUR 75 million. Organic growth was also strong at 12.4%. And for the first half year, growth was 10.3%. And an organic growth 3.7%, which we consider to be a very good achievement considering the fact that we have started the year with approximately 10% less personnel of working in projects than in last year. So we've changed the tide and now we are clearly, clearly growing. The demand situation was good, which, of course, supported our growth. We were able to call back most of the temporary laid-off people that we have had during last year and in the beginning of the year. Travel restrictions having still some impact on our business and slowing down some projects, but no major setbacks there. Also the outsourcing deals that we have completed during the year and also the acquisitions that have supported our revenue development positively. And if we look at the key accounts, there we are slightly behind our average growth overall, so key accounts growing at 8.8%. But it's also notable that there have been quite many changes within our key accounts, companies merging and selling businesses, et cetera. So it's not exactly fully comparable in that respect. If you look at the profitability, operating profit EBITA, so very good healthy 10.4% margin for Q2. So EBITA was EUR 7.8 million. Nonrecurring items were EUR 0.4 million, which were mainly related to acquisition-related costs, but also some organizational or restructuring costs were included. If we look at the first half year, so EBITA was EUR 15.5 million and 10% -- 10.5% of the revenues. And very good profitability due to good operational efficiency throughout the organization and of course, a slight temporary change to the cost structure resulting from pandemic, some costs for example, travel are still down, which has a slightly positive impact on the profitability side. But now going forward, we expect that our cost structure will normalize to a new normal level. It will not be the same as it was before the pandemic as we will continue to work more remotely. But we will see what the new normal level is during the second half of the year. When the cost structure is normalizing, it's a little bit difficult to say with the current COVID situation. But we still expect that we will be able to get some people back into the office and to some extent, we will continue the remote working mode, which is a natural way of working for us as we have the possibility to offer our employees, this kind of flexibility in their working life. Operating profit EBIT for the period was at EUR 6.7 million, so 9%, and for the first half year at EUR 13.3 million at 9%. And amortizations related to acquisitions were for the first half of year at EUR 2.2 million and for the second quarter at EUR 1.1 million. So substantial amounts. If we then go to a little bit more in detail into the service areas. So Engineering Solutions was having solid growth of 17% and for the quarter and a solid profitability EBITA of 9.9%. So solid performance. Demand situation remained good or was good in the quarter. The success in different outsourcing solutions continued, and we have signed several outsourcing agreements during the review period. Profitability was a good -- at a good level due to good operational efficiency. So overall, the performance was solid. And at the end of the period, we had 1,995 employees in the area. There was 1 project which had some challenges, which had a slight impact on the profitability in this service area, but nothing major, and we expect that to be corrected in the third quarter or latest in the fourth quarter. In the Software and Embedded Solutions, we had especially high growth, which was very, very pleasing to see. So the growth in the second quarter amounted to 30.3%. And the revenue was at EUR 19.9 million. And for the first half year, change was -- our growth was 20.1% and the revenues EUR 38.7 million. So very solid development and great progress in the revenue side. On operating profit, the EBITA was EUR 2.2 million or 10.9% of the revenue for the first -- for the second quarter and for the first half of year at EUR 4.3 million and 11%, respectively. Very good growth and the number of personnel was at 721 employees in the service area. We have invested quite a lot in the recruitment, but we have also increased the number of subcontractors and partners in our business. And currently, we have over 200 subcontractors and partners working for us in the Software and Embedded Solutions service area. So the total number of people are working in our project is approximately 950 people at the moment. So it starting to be a substantial part of our operation and of course we are aiming to grow and aiming to have more than a 1,000 people in near coming future. Profitability was good here, slightly impacted by the investments in recruitment and also the growing number of partners. But nevertheless, a solid performance overall, and we were especially pleased with the growth. And hopefully, we can continue on that path. In the Technical Documentation Solutions side, we had a good quarter. So revenue was growing by 11.8% at EUR 13 million. And for the first half of year, EUR 25.5 million and growing by 4.4%. For the first half of year, then the numbers were 12 -- sorry, it's a bit mixed. But for the first half year, it was EUR 25.5 million revenues and then 11.8% profit. The demand situation was good here. Profitability was excellent, especially in the second quarter. And here, we acquired a company in Germany called F.I.T., which strengthened our services, especially towards the military and strengthened our operations locally in core brands. After the period, we also announced an acquisition of Adina Solutions in Q3, which will then be in our numbers from the 1st of August. And also, I forgot to mention, so I will go back to the Software and Embedded Solutions, where we also made an acquisition. We acquired a Polish software development company in the cloud and applications business called SkyRise.tech, which is significantly strengthening our ability to deliver cloud and application solutions to our customers and increasing the capability and also the volume on this side. And this was a great addition to us substantially increasing our position in Poland and also in the cloud and applications business. And this acquisition was in the numbers from the 1st of June, and it had a small impact on this quarter, but of course, we'll have a stronger impact going forward in the Software and Embedded Solutions side. And then if we look at the earnings per share and dividends. So of course, earnings per share were EUR 0.20 for the period and for the full year at EUR 0.41. So solid improvement for the year. And of course, with these numbers and also going forward with the improving results, we expect to have a clearly higher dividend and growing dividend for the year. On cash flow. Cash flow was EUR 12.4 million for the second quarter, clearly weaker than it was in the previous year. This was, of course, expected. In the previous year, we had a decline in revenue. And there, the costs were cut faster than the money coming in from the receivables. But now as we are growing. So there is more working capital tied into the growth. And for this reason, the cash flow was slightly lower than last year, but still solid at EUR 12.4 million. And for the first half year, EUR 13.7 million in total. So personnel at the end of the period was 3,491 employees, has been growing. So the personnel count increased by 5.9% compared to June 30 of last year. And at the end of the review period, we had 1,510 employees outside Finland. So solid growth outside Finland. And already at this point in time, I can say that we have continued the recruitments and investments into our business and the number of personnel has already exceeded 3,500 employees. So we are continuing on a solid growth path. In the income statement, nothing major. Of course, the business is growing. So basically, costs are growing at the same pace basically nothing major here. On the balance sheet, of course, due to the growth, trade and other receivables growing notably, but otherwise, no major changes here either. And then if we look at the targets and how we are doing against the target. So here on the revenue side, the rolling 12 months revenue is currently EUR 274 million, and improving quarter-by-quarter. But of course, we have a quite a long way to go to the EUR 500 million. So for this reason, we have now invested into our organization and are focusing more on also on organic growth activity to help us get to where we want to be in '24. Revenue outside Finland has been growing consistently We are currently at 43%. The target is 50%. So we are closing in on the target. Managed services share of revenue was at 63%, and the target is 75%. So closing in, but slightly now with the growth starting with other types of business. So now staying on the same level as in Q1, but we are working with improving on this figure as well. And operating profit, we are delighted that it is above our target level of 10%. So for the first half year at 10.5% of the revenue. So very good development in the profitability area. So with that, I would like to move into the Q&A session. So at this point in time, questions are welcome. Thank you very much.

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

This is Pasi from Nordea. Well, I mean the downturn and more and demand has been very strong. So what is the message your customers are giving related to next year. So is the consensus expectation still that this is going to very strong demand, this is going to be there also next year? And if so, what would be the highest or the peak operating profit margin for Etteplan? Are you able to read if this positive cycle is actually keep on going -- And maybe then looking at the kind of the possible problems this kind of cycle would actually bring to you. So what would be the next problem area with Etteplan? Would it be kind of a lack of resources or maybe a salary costs or -- Is there something else we should actually keep on looking at if the business cycle keeps on going? And maybe lastly, related to these acquisitions. What are the valuation multiples you are using? And do you have a some kind of early hurdle in EBIT or PE or figures when you are not anymore able to make acquisition in valuation basis. But I guess these were my questions.

Thank you very much. I may have to pass return to the questions as there were quite many. But if start I'll with the next year question. So basically, it's really hard to say at the moment how the cycle will continue for next year. The visibility right now through the -- mainly through the orders received by our customers and from the governments is for the next half year. And there, we expect the demand situation to remain solid. There was most probably there was a little bit of a demand peak due to the pandemic because then investments were not made and some things were lagging behind. So there was a little bit of an investment peak now. And we can see that also in the demand or started to see that already in the, let's say, end of last year. But once that peak is gone, where will the market settle and what kind of a demand situation will we see next year is still a little bit hard to predict. And the pandemic, the delta variant and potential other variants are not making the visibility for next year easier. We are currently hearing discussion from China that there might be additional shutdowns due to the fact that the pandemic seems to be a little bit spreading again in China or at least they have some cases. So it's really hard to say. We do expect that things would continue to improve, but how well, how much that is really hard to say, unfortunately. Then if I move to the sort of profitability. So basically, we are growing and, of course, the economy of scale helps us in profitability. But of course, now when we are moving into the new normal. So there is a clear need to have social events with our staff, which we are more than delighted to have once we have the possibility and also trainings, et cetera, there will need to be more trainings for our personnel, et cetera, because we simply have not had the opportunity to make those things during the pandemic. So these costs will rise. But of course, then with solid good growth, we are aiming to manage to keep our margins on our targeted levels. or even above. But it's certain that certain costs will rise. And we will need to see then when it happens. And also we will need to see what is the new normal level. It's a little bit difficult to predict right now. The potential problem area, which you also asked about relates to basically the availability of competent engineers, and that might the area which could hinder our possibility to grow. And that is something that we need to constantly work with. We are already investing heavily into recruitment and we'll most probably invest more into that. We are also building our employer brand, and I think we are doing a good job with that one, and we are becoming more attractive in the market. So we are doing what we can, also our delivery models where we can deliver from across the organization anywhere in the world basically to our customers is helping us with the resourcing, resourcing issue, because it's in some areas, it's easier to recruit than some others. So we are doing these kinds of things to mitigate this risk. But it is clear that there is a lack of demand or lack of supply in certain competencies already now, for example, in software. So it's hard to get new competent people into the organization. And that is perhaps the biggest risk that we see. And then last, if I answered the previous questions. So lastly, on the acquisition. So yes, you could say that to some extent, the market was overheated in terms of valuations for acquisitions. But I think that what we are seeing now is decent levels. We are still able to make deals, which are generating value for the business and for our shareholders immediately. And I think we will be able to continue on that path. But I will not talk about multiples as this is something that we are not openly discussing. I think I covered all, but was there something missing still?

No, I'm happy with this one. I hear you.

And we have 1 further question in the queue. That's from the line of Juha Kinnunen of Inderes.

Juha from Inderes. Actually, I have quite a similar questions than Pasi, but I guess I will ask it a slightly different way. How has the -- what has been the development of the market situation, the overall demand during this year? Because I guess there was a slight peak at some point when everything was coming up. And you said that was already in the end of last year when it comes to investments? So I'm just wondering if you have seen some peaks and values perhaps when this year has been going on and how has it been after the period ended?