Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation of Etteplan's Q3 results for 2021. My name is Juha Nakki, I'm the President and CEO. And we will have a Q&A session after the presentation. And after the Q&A session, we will also have our new CFO, Helena Kukkonen, joining me here live on stage. But if we look at the first contents of the presentation, so first, we'll start with the highlights of Q3, look a little bit more in detail also on the financial development and then look how we did against our targets. And after the presentation, we will then have the Q&A session as we have normally had before as well. But if I go straight to the point, so the highlights for Q3. So in general, I would say that the market situation was not as good as we had expected. So there was a little bit of a slower start for the period. But, however, during the quarter, we were able to get projects underway and our running rate was improving continuously towards the end of the quarter. But in this kind of condition, we still received quite good results, and our growth rate remained good. Growth was over 20%. Organic growth close to 14%, so solid growth. We also invested during the period into our organic growth, but we established several teams in different businesses. And our headcount was growing quite significantly. The growth highlight was in the Software and Embedded Solutions service area, where the growth exceeded 30%. So strong growth continued. And also in China, we had a solid development, the hours sold to the Chinese market was increasing by 47%. So very good development there as well. On the profitability side, Technical Documentation Solutions reached an excellent profitability over 10% again. And in the prevailing market conditions, it was an excellent achievement. We also continued on our growth agenda with acquisitions. So we -- during the review period, we acquired 2 companies, Adina Solutions, a small tech company in Finland, mainly focusing on software-related and this -- the IT technology-related documentation. And also then we acquired BST in Germany, which is in the Northern part of Germany and strengthening our position there in the Engineering Solutions Service area. But on the negative side, of course, the period started slower or the projects were starting slower than we expected after the summer vacation and this slowed down our development to some extent. Also probably also due to the reason of the component shortage, this started to have impacts on engineering as well. And it clearly reflected demand as our customers had some problems to get their equipment delivered to their end customers. So this meant that some projects were actually delayed and we also saw some cancellations of projects. So this had clearly an impact. And, of course, with this impact, with the market hindrances and also the organic investments combined meant that we had a slightly lower operational efficiency and that had a small impact on our profitability for the quarter. If we then look a little bit more in detail on the operating environment, what happened. So in general, in the beginning of the quarter in July, maybe also in August, there was quite a lot of vacation. And our personnel had a lot of vacation after the tough first half of the year. And also, our customers had quite a bit of vacation, which meant that the projects were starting fairly slowly. And of course, the shortage of components and this having impacts on our customers' business also contributed to the sort of slow start of the quarter. The pandemic was still there. And of course, that had some impacts on the demand, especially the travel restrictions, which were still there to some extent, have had some kind of an impact, maybe on our software business, mainly in Denmark, where we have not been able to get our partners into Denmark, and this has had a small impact, but starting to be smaller as we go forward. And then, of course, the component shortage started to have an impact on our customers' business. Our customers were moving as they got a lot of orders during Q2, they were moving the balance of their work more towards deliveries. And as there were the component shortages, this had impact on the deliveries from our customers. So this, of course, naturally had an impact on engineering projects and software projects as well. So some projects were delayed considerably, some where also canceled. But this being said, this had mainly an impact in the beginning of the quarter. Towards the end of the quarter, we did get the projects up and running more and more. And overall, the demand situation still remains relatively good. If we look at the situation then by country. So in the European countries, the market situation was relatively the same. Same impact, a little bit slower start after the summer vacations. Component shortages had an impact on the engineering projects in basically all our European markets. In China, still the market was very, very good, and we had solid growth numbers in China. If we then look a little bit on the revenue split. So Engineering Solutions was 56%, Software and Embedded, 27%; and Technical Documentation Solutions, 17% for the first 3 quarters. Revenue by country, Finland, 57%; Scandinavia, meaning then Sweden and Denmark, in our case, at 23%; and Central Europe, 16%; China, 4%. And Personnel by country, Finland, 55%; Scandinavia, 18%; Central Europe, 15%; and China, 12%, so strong growth in Personnel in China. And then if we look a little bit on the Customer segment. So here in the picture, the green ones are the ones that are relatively growing. The orange ones are the ones that are relatively slightly declining. So we had growth in industrial machinery and equipment. Also automotive and medical technology were growing and slight relative declines on Energy, Forest Pulp and Paper, Chemical and then the smaller segments. But overall, still relatively balanced, no major changes here. If we then look at the key figures for the quarter, so growth was 21.1%. Operating profit EBITA was growing by 9.2% and operating profit EBIT by 7.6%. Earnings per share growing by 7.7% to EUR 0.14. And the headcount growth was very good. We had the highest headcount ever to date at 3,625 employees at the end of the period and solid growth during the quarter. For the full year, the growth was 13.4%. Operating profit, EBITA, 17.1% improvement. EBIT 17.2% and EPS at EUR 0.55 and 19.6% improvement compared to last year. So solid improvement throughout the year. And if we then look a little bit on the guidance, so we did specify our guidance in terms of revenue slightly, mainly due to the weaker start for the third quarter. So now we estimate that our revenue for '21 will be between to EUR 295 million and EUR 310 million. And we kept the operating profit guidance intact at EUR 25 million to EUR 28 million. And like I said, the main reason for the specification or clarification for the revenue guidance was the fact that our start for the third quarter was slower, slower than we had anticipated earlier and this has had an impact. But going forward, we do anticipate that the market situation will remain relatively good. There might be and will be some impacts of the component shortage. But already in September, we saw that the market situation was clearly improving. So we believe that we will be able to manage the situation very well during the rest of the year. If we then move on to the financial development a little bit more in detail what happened during the quarter. So first of all, on the revenue side, so the growth was 21.1%, and the revenue for the quarter was EUR 66.9 million. For the first 9 months, it was -- growth was 13.4% growth and revenue was EUR 215 million approximately. But overall, the organic development compared to a slightly weaker year last year, so it has been solid. So organic growth for the period was at 13.8% and for the full year so far, 6.7%. So very good organic development. And of course, during the review period, we did invest quite a lot into our organic growth. We established several teams in different businesses and this had a slight impact on our on our operational efficiency, but nevertheless, has a positive impact for our development going forward. Of course, the operational efficiency was impacted slightly due to the market hindrances, but this was still a quite solid performance here. Revenue from key accounts was growing by 12%. And of course, acquisitions had an impact here as well and also the outsourcing agreements that we have signed during the year in different businesses. If we look at the operating profit, EBITA then, so this had a slight impact from the slightly lower operational efficiency and on the organic investments that we did into our business, these combined in slightly weaker profitability. But as I said earlier, the situation has been improving already during the third quarter, so we expect the impact going forward to be smaller. And then the sort of transition for the new normal has begun. So our people are gradually returning to the offices. So this will have a little bit of an impact on our cost structure. But still for the third quarter, 8.5% EBITA margin is for the sort of summer quarter. It's still a relatively okay achievement despite the fact that it was slower and lower than we had anticipated. For the full year so far, for the first 9 months, the EBITA is at 9.9%, so very close to our targeted level of 10%. If we then look at the EBIT. So EBIT was at EUR 4.6 million, so 6.9%; and for the full year, EUR 17.9 million and 8.3%. And the amortizations related to acquisitions were EUR 1.1 million for the quarter and EUR 3.3 million for the first 3 quarters so far. If we then move on a little bit to the service area. So in Engineering Solutions, the growth was solid, 19%. Headcount was growing to 2,071 employees. And operating profit was at a slightly lower percent than we are used to at 8.2% due to the, of course, the summer quarter. But also here, the market situation was affected by the slower start of projects and also the component shortage had an impact. This, combined with the organic investments that we also did in the service area, meant slightly lower operational efficiency, and that was impacted in the EBITA percentage. But as I said earlier, we saw the situation improving during the quarter. So we expect to have a solid performance going forward. Here, also the outsourcing deals that we have signed during the year had an impact on the revenue. So the revenue development was solid, and we hope to keep it that way going forward as well. In the Software and Embedded Solutions, growth was strong, again, exceeding 30%, so 30.9% to be exact for the quarter. And today, we have 762 employees on the software side. On top of that, we have over 200 subcontractors and partners working in our projects. So all together, we start to be close to 1,000 employees on our software business. And with that, we start to be one of the largest Finnish software companies as well. Regarding the profitability, we had a 9.1% EBITA margin for the quarter. And here also, we have invested into organic development. So we have established new teams, for example, in Sweden. And also here, we had some impacts on the projects, mainly due to the summer vacation, but also probably due to the component shortage of some projects were starting at the delay, which had a little bit of an impact on our profitability. And also the use of subcontractors, of course, has a small impact on the profitability as the margins for subcontracted business is not as high for us as our own employees. But overall, solid development and we're particularly pleased to see that we have been able to grow very well, also organically in this business in a tough recruiting market. So the performance has been very, very good. If we move on to the Technical Documentation Solutions area. So here, yes, the summer had an impact, but -- and the component shortage had an impact on the business. But due to our managed services model and especially the continued services model, we did not see that much of an impact on the slower start-up projects. So our business model here, the outsourced services, the strong impact on the service area. And for this reason, we were able to maintain a very high profitability of 10.2% even for the summer quarter. So that was an excellent achievement. Growth was at 15.1% and personnel at the end of the period was 669 in the service area. So solid development overall. On the earnings per share, we are year-to-date at EUR 0.55 for the quarter, EPS was at EUR 0.14. And on cash flow, we were on the same level as last year, EUR 0.2 million on the operating cash flow and we expect, of course, for the fourth quarter, a stronger cash flow as we normally have. So this is the seasonally the lower quarter. On Personnel, the increase was 11%, and we are particularly pleased with the fact that our headcount outside Finland was growing at an even faster pace according to our targets, so 20.4% improvement. So we had 1,614 employees outside Finland and the total headcount stood at a record high at 3,625 employees, which is giving us a solid base going forward. On the income statement, nothing major compared to what has already been explained. On the balance sheet, no surprises there either. Of course, the acquired companies have been brought into the balance sheet. The total balance sheet was standing at EUR 223.8 million at the end of the quarter. And this, if we look a little bit to the end, I look a little bit on how we did against our targets. So our target of reaching EUR 500 million revenues by '24 is intact despite the COVID year last year. And the running rate for rolling 12 months is currently at EUR 285 million. So we are accelerating our growth through acquisitions. There's a lot of activity on that, and we are also investing into our organic growth to be able to reach our high target. On the revenue outside Finland, we are continuously developing. The first 3 quarters are at 43%, and the target is 50%. So we are coming closer to the target all the time. And on the Managed Services share of revenue, we were for the first 3 quarters at 63%, and the target is 75%. And here, we need to continuously work with our service solutions with our outsourced business models and our project business to be able to improve on this figure, which will then also have an impact on our profitability. On profitability for the full year, we are at a very close to our 10% target, almost there at 9.9%. So for the full year, we have been able to run our business at a very good efficiency. And with that, the profitability has been good. At this time, I would like to first invite our CFO, Helena Kukkonen, to join me here. So welcome, Helena. And then I would like to open the line for any questions that you may have from the audience. Thank you.

[Operator Instructions]

This is Pasi from Nordea Bank. And to start with, I would like to actually ask regarding the development in China. So I guess you have seen all the kind of news and stories related to construction sector in China. So what is your view regarding the construction sector? And will there be any side effects to other sectors if the plan is currently active in the country? And maybe secondly, well, this kind of -- when speaking about the component pricing and the kind of raw material pressure your customers have been facing recently, how do you see it? Would it be possible that the pricing for service offering or subcontracting will be under pressure because the customers want to reach savings to kind of complement raw material input cost pressure because there is enough capacity, I guess, in the service and subcontracting offering, I guess, kind of offering in the component or raw material markets? So what is your view for the China and for the pricing, especially?

Thank you very much for the questions. I would say in China, overall, the situation for us has not changed at least yet. Of course, there will be some kind of an impact for -- I mean, this will have an impact on the construction sector and that will be most probably reflected into our customers who are serving that sector in China. But so far, the demand has been very solid in all the sectors that we have been working with. And -- of course, the market is so big and huge actually, that we are a tiny player still, and we will find other opportunities to replace that. So I don't see this having a major impact on our business, but we do need to -- maybe some customers will be going slightly down. So we need to be extremely active in our sales efforts. But I see that we have still plenty of opportunities, and our growth currently is restricted by our ability to recruit. So I would not say that this would have major impact on our business, maybe some but not major. And then on the pricing question, I would -- of course, this is natural that if there is pressure on the pricing for our customers, this will be rolled down towards our type of companies and other suppliers as well. But fortunately, we do have quite long-term contracts with our customers, which, in these kind of cases, is working for our benefit. Maybe it goes the other way around. It might be a hindrance for us, but our prices are agreed on a yearly basis. So this kind of short-term things do not have that big of an impact. And also there is still a shortage of engineers in the market in very many areas. And for this reason, there is no reason for us to actually accept any lower prices. So I wouldn't say that our margins are under pressure due to these reasons.

Okay. That's understood. I hear you. Maybe lastly, if I may, regarding utilization ratios. And I know that you are not going to kind of offer the exact figure for utilization ratios. But when looking at the kind of third quarter would you say that utilization ratios were up or down in Q-on-Q or in a year-on-year basis? And what should we expect from the fourth quarter in that sense?

Clearly, due to the fact that we have recruited, we have invested into our organic growth. The head count has been clearly growing. And then this kind of unexpected turbulences in the market caused some issues for us in the beginning of the third quarter. So yes, the utilization ratios were down a little bit from what we are used to in the beginning of the third quarter. So they were lower, but then we took strong action when when we saw this. And then we were able to recover fairly fast already in September. So we see that going forward, we should be running at full speed, and we see that the overall demand is still relatively good despite the fact that the component issues are having some kind of an impact, but we think that we can overcome that with the present work.

We'll take the next question.

This is Juha from Inderes. I will continue asking about the demand because I was kind of surprised that demand was a problem, and I would not expect it that you have problem with resources. But are you seeing this kind of change in customer behavior where they are perhaps cutting on R&D cost and focusing on deliveries as they are? I guess they are very busy right now, are you seeing something like this?

Well, we were surprised as well. I mean, we were expecting the market to remain solid as we communicated in Q2. But maybe it's a combination of the fact that our customers were clearly moving their balance from R&D to deliveries. And then when they had some issues with the component problems, so then things got a little bit stopped. So some projects were stalled a little bit and even some projects we saw that were canceled. And this was unexpected for us as well. We don't see a major impact. We did get -- during the quarter and our customers' transition was sort of already done, we did see continuation of projects and projects did get underway. So we don't expect this kind of a situation to continue. So we expect the demand situation to be relatively good going forward, but some hindrances from the sort of component shortage, there still might be. But it was a surprise to us as well that things didn't start as well after the summer as they -- as we expected. Maybe also due to the fact that there was a lot of vacation for us, for our customers as well after the very busy first half of the year. And when people were getting back, so then the ramp-up of projects just was simply slower than we had anticipated.

All right. Understood. One question about your cost structure. You said that you are getting -- there is a transition to the new normal and it will affect your cost structure. So could you elaborate on this? How much should we expect the costs to rise when people are coming back to the office and perhaps even traveling to begin again?

Well, we don't really -- of course, we have our calculations and our thoughts on that, but we don't really know how much the cost structure will rise because we don't really know how our customers will behave in this situation. Will they ask the people to be back in the office in full? Or will they allow people to work remotely or how will this be? So we need to a little bit wait and see. But it is clear that there will be some impacts on traveling. So there is a requirement to travel a little bit for us. For example, visiting the new companies that we have acquired during the COVID period. So these types of traveling will increase to some extent, also the traveling by our employees to the customers and traveling in projects, this will increase, but we do not expect the traveling to increase to the levels that we have seen before. So it will be somewhere between last year and the year 2019. Where exactly? That we don't know. And also then now on the personnel-related costs, these will increase now that people are back. There is a need for social events, different type of things now that people are finally able to meet and get together. So these kind of costs will increase a little bit. But of course, then this cost impact, we will then try to mitigate with stronger growth and higher margins in that respect.

All right. Fair enough. I will make my own estimates. Final question about the Software and Embedded Solutions. You said that you had a team to Sweden and you have been making acquisitions also to support the -- in terms of growth. So could you give us a personnel by country with the Software and Embedded Solutions?

Well, currently, we are operating -- we don't give the split out, but the main operation is in Finland, and then we start to be also fairly sizable in Poland. And then we have a slightly smaller operation in Sweden. And then, of course, the acquisition of tech partner in Denmark is software. And then in China, we have also -- during this year, we have established new team of software people and that we are starting the service area also in China. So these are the countries where we're active. Finland, the largest one, Poland, the second largest, Sweden, then a slightly smaller one so far and Denmark with the acquisition of tech partner, small in Personnel, but of course, through the partners, a bigger business as well. And in China, an organic start, which has been fairly good this year. So that's the split. We don't give out the exact numbers.

Thank you so much. It appears there are no further questions at this time. I would like to hand over back to Mr. Juha Nakki.

Okay. Thank you very much. So of course, slightly slower quarter than we had expected due to some hindrances from the market. But already for the end of the quarter, we saw things picking up, and we are expecting that year to continue with a good pace in a relatively good demand environment despite the fact that there are some component issues still in the market. So we expect to finish the year strong and are very much looking forward to continuing the profitable growth that we have had during the year. And of course, we have a hefty target of reaching EUR 500 million, and we will do what we have to do to get there as well. So thank you very much for listening, and have a great week.