Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation for Etteplan's financial statements for '21. My name is Juha Nakki. I'm the President and CEO for Etteplan. And after the presentation, there will be a Q&A session where you will be able to also ask questions to myself and also our CFO, Helena Kukkonen. Looking at the contents of the presentation first. So as usual, we will go through the highlights of the year a little bit also on Q4 on the financial development there. We will look how we did against our targets. And after that, there will be the Q&A session. So this is how we will proceed. But moving on straight to the highlights of the year. So this was, of course, a year after the pandemic year of '20 when we were able to really return to a strong growth path. And for the first time, we were able to be above EUR 300 million in revenues, which was one of the landmarks for us on our growth path. And of course, also profitability-wise, we entered a new area where we exceeded the EBITA profitability of EUR 30 million for the first time. So overall, a very, very solid year. Growth was -- on the fourth quarter was strong, over 20% and also for the full year at 15.6%, out of which organic growth was 8.9%, of course, against a COVID year of '20, but still strong growth overall. In particular, the growth in Software and Embedded Solutions was strong for the full year, above 25%, and we even exceeded 30% for some quarters. And also in China, the market was very good throughout the year, and we were able to increase the hours sold to the Chinese local market and local customers there by more than 55% in the full year, which was a good achievement from our Chinese organization. We also made several investments into growth. We invested in organic growth. We started out several new teams in different locations. We also made 5 acquisitions during the year, which were taking us towards our strategic goals. On the profitability side, we, again, reached our target level of 10% for the full year on the final quarter. We were above, again, as we were last year. And on our profitability, our Technical Documentation Solutions business was particularly strong, with 2 quarters exceeding or at 12% EBITA margin. So very, very solid. On the negative side, of course, the strong growth had a slight impact on profitability and also a tight capital. So the operating cash flow was slightly lower than what we are used to and what it was last year, but still on a very, very solid level. And also, the pandemic continued to have an impact on our business and our customers' business. And in Q4, the latter part of the year, we also saw a little bit more sick leaves coming in first through the sort of releasing some of the restrictions and people going out and more sick leaves coming in from that. And then in December, in particular, more COVID cases coming in with our personnel, which had an impact on our revenues and also a slight effect on the profitability. But overall, a very solid year, returning to very healthy growth again. And with these results, the Board of Directors is proposing a dividend of EUR 0.40 per share. And if we look a little bit on the operating environment for the year. So the demand situation was quite good throughout the year in all our markets. In the third quarter, after the summer vacation and perhaps due to the component issues that some of our customers had, we had a slight slowdown in the demand, but that recovered fairly fast in the beginning of the -- or actually at the end of the third quarter already. And then in the fourth quarter, the demand was strong again. So overall, a quite good demand situation for the year. Pandemic, of course, continued to have an impact. So still travel restrictions continued, especially the international travel, travel to Asia, et cetera, which clearly had an impact on our customers' business and also our own business. So this had some impact. And also now in Q4, as mentioned earlier, the sick leaves started to have an impact also on our business, but also our customers' business, as more and more people were at home. So this had a little bit of a negative impact, which we anticipate to be temporary as the things are now progressing. But nonetheless, the pandemic was still there. And of course, it's still there, but I think our customers have adapted to the situation very well and our customers' business is currently developing very positively, so we have a high hope that next year will be quite good in terms of demand again. If we look at the development in different markets where we operate. So in Europe, the situation was relatively similar in all the countries. So overall, the market situation remained fairly good in all the countries where we operate in Europe. And in China, the demand situation was very good or good for the full year. No major differences between the different countries. Of course, different restrictions related to COVID having a little bit different kind of impacts in different markets. But overall, fairly solid in Europe, China, really good for the full year. And if we then look a little bit on the split of revenue by service area first. So Engineering Solutions was at 56%. Software and Embedded Solutions at 27% and Technical Documentation Solutions at 17%. And by country, Finland was 57% of the revenue. Scandinavia 23% of the revenue, meaning basically then Sweden and Denmark, which was a new country for us from the beginning of last year. And then Central Europe, 16%, and China 4% of the revenues. Personnel-wise, slightly different split due to the fact that we are utilizing offshoring from China and also nearshoring operations from Poland and also cross-selling across the country. So that's slightly different to the revenue distribution. Finland was 55% of the personnel; Scandinavia 18%; Central Europe 15%; and China 12% of the personnel at the end of the year. And if we then look a little bit on revenue by customers. So there were no major differences between the customer segments. Almost all customer segments were doing relatively well. Industrial Machinery and Equipment growing still being the largest one for us at 16%. And then Automotive and Transportation growing slightly, Medical Technology growing slightly, but all the others are remaining relatively the same. So Industrial Machinery and Equipment, the largest one; Energy, the second one at 13%; Forest, Pulp and Paper, the third one at 13% as well. But no major changes in the sort of customer segment split either. And then on the key figures, our revenue growth was 21.3% for the fourth quarter. So very, very strong quarter. For the first time ever, we exceeded EUR 80 million and exceeded it by over EUR 5 million. So that was a very good performance. Operating profit, EBITA increasing by 10.9%; EBIT increasing by 10.5%; and EPS by 13%. So very solid development overall. And for the full year, the revenue growth was 15.6%. Operating profit, EBITA at 15% -- 15.2% increase; EBIT increasing 15.1%; EPS 15.9%. So solid improvement throughout the year as well. And after a strong year last year, when we were growing in all our businesses, we have also started this year quite strongly with investing into 2 new acquisitions: And the first one being Cognitas in Germany, and this is a technical information life cycle management company, which will fall under our Technical Documentation Solutions service area. Approximately 200 professionals, about EUR 15 million revenues and a very solid market position in Germany. With Cognitas on board, we will be a leading company in Technical Documentation Solutions in Germany as well. Cognitas does have some effects from certain customer contracts from last year. They had a little bit of a hard time during the COVID period, and there will be a little bit of spillover from that effect to our Technical Documentation Solutions, mainly profitability aspect in the first part of the year, but we expect this to then recover to the normal healthy profitability level similar as ours is in the rest of the businesses during the year. And then from then on move forward as the rest of our businesses. And Syncore, we acquired a very strong embedded company in Sweden, which will significantly strengthen our ability to deliver embedded solutions and systems and projects in the Swedish market. And with this company, we are about 150 people in the Embedded business in Sweden. The company had approximately 50 employees and approximately EUR 5 million revenue. So this will be adding to our Software and Embedded Solutions service area. And with these additions, then we have made the financial guidance for the running year with the numerical guidance that we introduced last year. So now we estimate that our revenue for '22 will be between EUR 340 million and EUR 370 million. And the operating profit EBIT will be between EUR 28 million and EUR 32 million. We see the market starting off quite strong, quite strong demand situation right now. There are implications of the COVID-related sick leaves that has a little bit of an effect in the beginning of the year. And of course, there is uncertainty how the pandemic develops. On the financial situation currently with the inflation rating and potential interest raises, et cetera, there may be some impact to the development of the demand with our customers. But still, nonetheless, we think that -- and expect that the demand situation will remain fairly good throughout next year. So with a good strong demand situation, we anticipate to get to these kind of numbers. If we then look at a bit more in detail into the financial development. So in Q4, in particular, so revenue was at EUR 85.3 million, very strong growth of 21.3%. And of course, the demand situation returned to a good level after a slight downturn in Q3. As mentioned earlier, holidays and especially sick leaves, did have a little bit of an effect in the latter part of Q4 to the revenue accruals. Revenue from key accounts was increasing by 13%. And for the full year, of course, as mentioned, the development was strong, and we exceeded the EUR 300 million mark for the first time. If we then look on the profitability side, so 10.5% profitability on EBITA margin for the fourth quarter and 10% for the full year, so solid performance overall. For the first time, our EBITA was at EUR 9 million. So that was again a new landmark and, of course, over EUR 30 million for the full year, which was a good landmark for us and so on. And of course, we did see some quarters that were lower than last year in terms of profitability. But the investments into growth, of course, had a slight impact on the profitability numbers. Operating profit EBIT was at EUR 7.8 million or 9.2%, respectively, for the fourth quarter. And for the full year, at EUR 25.8 million or 8.6%. So -- and the acquisition-related amortizations were, for the full year, at EUR 4.4 million. And the nonrecurring items affecting the EBIT as well as they affected the EBITA were, for the full year, at EUR 0.7 million, slightly less than in the previous year. If we then look a little bit on the profitability and the development of the different service areas. So in Engineering Solutions, the development was solid throughout the year. The demand situation was quite good throughout the year, and our operating efficiency was at a good level for the whole year. We had quite good success in our outsourcing business and this contributed well to the numbers. So growth in this service area, for the last quarter, was 16% and for the full year, a solid 12.5%. And the margins were 10.6% for the last quarter and 9.9% for the full year, so very solid performance in this service area overall. And then moving on to the Software and Embedded Solutions. So here, the demand situation was really good for the full year, and we saw that continuing also in Q4. Of course, here, the reduced availability of competent professionals, especially software developers is affecting the business for us and all our customers and competitors as well. So this is something that has an impact on the way we run the business and the way we can grow. But nonetheless, we were able to really accelerate this year on growth, and the growth was very strong for the fourth quarter, over 30% -- 32.2% to be exact. And also for the full year, very solid 25.8%, of course, supported by the 2 acquisitions that we completed during the year. But nonetheless, very strong growth organically as well. Here in the profitability, especially in the latter part of the year in Q4, we did make quite a bit of investments into establishing new teams and especially in Sweden, we did increase the number of teams and made a lot of investments organically. This had a little bit of an impact on the profitability and also our utilization of subcontractors in the business is increasing. We had more than 250 subcontractors in the fourth quarter, which is, of course, contributing well to our business, but still burdening slightly the margin. So this is why the margins are slightly lower than what we had last year. But overall, very solid growth, very solid development in the service area as well. In the Technical Documentation Solutions, again, very good growth in the fourth quarter, 20.8% and also for the full year at 11%. And the operating profit, especially strong, very high, good operational efficiency and also our MSI increasing to 82% even and having an impact on the profitability. So very, very good profitability at 12% for the final quarter, and exceeding 12% or at 12% for the second quarter during the year. And also for the full year, the profitability was at an excellent 11.4% level. So it's a good starting point for us to continue for next year. And with these results, the earnings per share was, for the fourth quarter, EUR 0.26 and for the full year, EUR 0.80. And again, the Board is proposing a dividend of EUR 0.40 per share. Cash flow was at EUR 13.2 million for the final quarter and EUR 27.1 million for the full year, slightly weaker than last year, which was exceptionally strong. So here, when we were growing, especially organically, the business was tying a little bit more capital, and therefore, the cash flow was slightly weaker than what it was last year and in the previous year, but nonetheless, very solid for the growth business that we had. Personnel, at the end of the period, was 3,629, so a clear improvement, 11.1% more than at the beginning of the year -- last year. And outside Finland, we had 1,624 employees, which was also a very good improvement compared to the previous year. And here, of course, now we need to remember that with the additions of Cognitas and also Syncore, so we are now currently running at close to 3,900 employees in the company. And we expect to grow and exceed 4,000 employees during H1 this year, and we are working towards that goal. In the income statement, nothing major to what I have already mentioned. And on the balance sheet, nothing major either. Of course, the acquired companies coming into the balance sheet are expanding the balance sheet a little bit and also the loan that we took for the acquisition of Cognitas, which was drawn prior to the year-end, had a slight impact. And the total assets were at EUR 253 million, total balance sheet at EUR 253 million at the end of the year. And looking at how we did against our targets, then so -- on the growth, our target is at EUR 500 million by '24 or in '24. And of course, we are far from it still, but now we returned to a very strong solid growth path, and we are at EUR 300 million currently. A long way to go to EUR 500 million, but we are working hard to get towards that direction and are confident that we are able to get there at '24. On the revenue outside Finland, 43% for '21. But now with the addition of Cognitas and Syncore. So we are already at 46%, 47% and closing in on the 50% target quite well. On the managed services share of revenue, we were at 63%. And on the profitability target of 10%, we were matching again, so solid development in that area. So a solid year and a good performance returning to the growth path, exceeding EUR 300 million in revenues, exceeding EUR 30 million in EBITA. We are happy to return to those levels or get to those kind of levels and work on it to move further next year or in the current year. But now it's time for questions. So please, operator, if you can take it from here.

[Operator Instructions] Our first question comes from Juha Kinnunen with Inderes.

Congrats on another solid performance. I was wondering about growth that goes forward thinking about payback time for equity in [indiscernible] organic growth. So maybe you could shed some light on that. What is the more decent way to grow? And how are the profitability impact that is in your experience?

Having a bit of problem in hearing and understanding the line is somehow bad. Could you please repeat the question?

I can definitely try, but if the line is bad then might be a significant problem. But I'm asking about payback time with acquisitions for organic growth.

Basically, of course, organic growth is, of course, that payback time is quicker. Of course, depending on the success of the organic investments. But of course, if you look at the payback for acquisitions, so they are, of course, depending on -- there are, of course, different valuations to different kind of companies. Smaller ones are slightly cheaper in terms of valuation, larger ones are bit -- are then more expensive. But they are all riding on the fact how well do we get the synergies that we have planned. So it's a really tough question to answer. In general, I would say that, of course, organic growth is coming at a faster pace with the returns, but also in acquisitions when we are really able to work with the synergies, et cetera, so we can accelerate the payback times quite nicely and really generate value for our shareholders. Unfortunately, I cannot give you a more detailed answer on it, but it really depends on the case. So that's how it is.

Yes. That's very understandable. Perhaps you could comment on that, whether the payback times for acquisitions have actually kind of longer because of the valuations going out or is it still the same as in the past?

I would say that -- well, at least the asking prices are going quite significantly up at the time. But still, I mean, overall, maybe the trend is a little bit upwards in the valuations. But still, I think you can find really good deals with valuations that will still generate value for our current shareholders. And I think that still this is a good momentum to still make very good acquisitions that are creating value. So the trend is at slightly higher valuations, but still you can find good deals where you are able to generate value immediately.

Fair enough. Final question also regarding profitability. I would wonder if there is still a significant [indiscernible] profitability in Finland and abroad. Also Sweden and Europe would be separated here. So basically what I'm thinking about whether the [indiscernible] kind of lagging in profitability because you're a smaller and not such a strong player in this month, so -- and whether you see [indiscernible]

Well, of course, when you are in a country, so of course, you need to have certain kind of structures and certain kind of financial organizations and other types of supporting organizations in place. And when the businesses are smaller, so of course, the burden of the structure is a little bit heavier. So I would say that in smaller countries, it is burdening the profitability slightly. But now that we have been able to grow to a fairly sizable organizations in different countries, so I would say that the potential to reach similar profitability levels or even above, in certain businesses in also other countries, is possible. So there is not any more a big difference between the profitability of Finland and the other countries. It really depends on our own performance and how we are able to sell, what kind of services we are able to sell, et cetera. But if there would be very small countries, so of course, in those countries, it might be the structures and the reporting, et cetera. These are burdening the profitability levels to some extent.

Our next question comes from [ Vincent Armed with Tensile Capital ].

Can you hear me?

Yes, I can hear you, yes.

Yes. Okay. Perfect. I have several questions, maybe. The first one is about the negative impact of sick leaves in Q4, if you could size it?

Basically, we have not disclosed how much the impact is. But of course, in some of the countries, we are paying full salary. So there is full cost without any revenue for people that are on sick leaves. So of course, that does have an impact on the profitability. There was about -- in the fourth quarter compared to the other quarters of the year, so there was about maybe 20%, 30% more sick leaves than in the previous quarters during the year and also the last quarter of 2019. So the increase was fairly substantial, but the full impact on profitability that we have, of course, to some extent, calculated, but have not disclosed. But hopefully, this gives you a picture of it.

Okay. Great. And about Q1 2022 because obviously, you will have, again, some sick leaves impacting your sales and profitability. How is the situation now compared to last year? Would you say it's already returned to normal? Or do you have more sick leaves compared to last year, again in February?

Well, I would say that currently, unfortunately, I'm writing a little bit on feelings, I don't have data for that yet. So -- but I would guess that in January, the situation was fairly similar to December, but then it would be easing out as we move forward. This is at least my anticipation, but it's really hard to tell how the pandemic has acted and whether people have worked or not. It seems that with the Omicron virus, some people don't have any symptoms. So they can actually work remotely. Some people do that, some people don't. So it's hard to predict.

Okay. Okay. Great. About acquisitions, you just could help us with the contribution to sales you expect in 2022? I calculated roughly EUR 30 million. Would you say it's the right assumption? Or is it too much?

If you take into account the fact that the acquisitions that we completed in '21. So I would say that -- I mean they were already in -- most of the acquisitions were in for at least the part of the year. So I would say that EUR 30 million is maybe from the acquisition so far completed. EUR 30 million is maybe slightly on the excessive side, maybe EUR 25 million would be closer to the right number or right level? So most of the acquisitions tech partner was in for the full year, FIT for 3 quarters, et cetera. So quite many of the acquisitions completed last year already had an impact on '21 figure. So maybe EUR 25 million is the right level.

Okay. Great. Now about the margin guidance for 2022. So it's a bit -- it's a wide range, and I assume you are conservative. Just to have the negative and positive contributors to these margins. So subcontracting you expect it to remain high or at the same level in 2022? That's the first one. Second one is about acquisitions. So you said, it could be a bit dilutive in H1. That's for the negative. For the positive, could you elaborate a bit on pricing and obviously, leverage from the organic growth?

Yes. Well, if I start with the sort of pricing impact. So the pricing is -- in the current environment, there's a shortage of employees. And therefore, it's -- the pricing environment is fairly good. So we are able to increase the prices. Of course, I mentioned the acquisition of Cognitas, where we had some spillover from customer contracts from last year, so that will have a slight impact, but not major. And all the other ones would not have any negative impact at all. So that's how it goes. And then on the overall margin. So of course, this is a quite sensitive business in this sense. So if there are market disturbances. For example, if the COVID continues or, let's say, the inflation raises prices to the extent that our customers actually have to start cutting cost, so then the demand situation can be hit fairly fast. And if that happens, then, of course, it's quite difficult for us to remain on the very high margin levels. But we don't see things like that, but that's a possibility. That's why we have a slightly wider range. On the positive side, of course, there are still things to improve. We could have done still better in some businesses in last -- during last year. And there is still room to improve on certain things. When we are able to generate a new kind of services for our customers with new kind of added value, we are, of course, able to have higher margins. And if we can move forward with this, so then there is the potential upside as well. But this is, of course, it requires a very, very good performance overall, and it requires the market to stay very, very good throughout the year. So that's how it is.

Okay. And maybe two last questions. The first one is about the streamlining you disclosed. I think it's in Germany. So maybe have less entities, so maybe generate a bit of synergies between the different businesses you acquired there. So is that some savings that we could expect for 2022? That's the first one. And the second one is more about the higher range of the guidance. So as you said EUR 370 million, minus EUR 25 million, which is acquisitions. So it would mean EUR 345 million. EUR 345 million, it would mean more than 10% organic growth. So are you confident you can find enough people in terms of recruitment to achieve that kind of organic growth?

Well, if I start with the growth. So we do have -- we have built a very good solid recruitment process and a very strong recruitment engine. So we were able to find a substantial number of people during last year. So we believe that if the market is strong and we make a really good effort, we believe that, that is possible, but it's going to be extremely difficult and it's going to take a really -- a lot of effort to really get there. So that's how we see the growth path in that. I'm sorry, the first question was about...

Yes, the streamlining in Germany.

Right. Yes, Germany. Yes, I mean, of course, in these kind of cases, so we, of course, look for synergies, especially in the support functions and also in the business functions. And yes, we do see that there are synergies with the fact that without the acquisition, we would have needed -- as we are growing also organically, we would have needed to invest into our operations in a certain way. Now perhaps we can combining the operations to this a little bit smarter, and find synergies from that angle. So this is, of course, something that we are looking at and we'll most probably be able to find as well.

Okay. Just one last, if I may. If I already -- if I understood correctly, you said you have already drawn the debt for the Cognitas acquisition by year-end, right? So it's already in the balance sheet?

Correct, yes. It was -- the loan was drawn before the year-end due to certain agreements. And then, of course, it was paid out when the acquisition was completed. So that's how it was.

[Operator Instructions] At this time, we have no further questions. I will now hand back to our speakers for any final remarks.

Okay. And yes, I think that we did really well in the whole pandemic time. So in 2020, we, of course, were not able to grow, but we were able to defend our position with the customers and really also worked with our offering development so that we would be able to accelerate when the market returns. And now in '21, we did exactly that. So we were able to accelerate on our growth. So we exceeded the 15% -- former 15% growth target. And now we are very much looking forward to continuing on a very strong solid growth path and returning to -- or moving past, again, towards our EUR 500 million target. So working hard towards that. And of course, if you wish to ask any questions to us, so feel free to get in contact with myself, our CFO, Helena Kukkonen or our SVP of Marketing Communications, Outi Torniainen, so please feel free. But at this time, I want to thank you very much for listening and let's see how this '22 turns out, but we are working hard to get to our target levels and really return on a strong growth path.