Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation of Etteplan's Q3 results for '22. My name is Juha Nakki. I'm the President and CEO. And at the end of the session here, we will have a Q&A, and there you will also be able to ask questions from myself and also from our CFO, Helena Kukkonen. If we look at the contents of the presentation today, so we'll first start with the highlights of the quarter, and look a little bit on the operating environment, financial development more in detail and then a little bit also on the service areas, how they did in Q3. And then to end the presentation, we'll look at how we did against our targets and where we are. But if I start with the highlights of the quarter, so the best part of the quarter was the operating performance. We still had a quite good solid market condition and we were able to execute very well on our projects. So the operating performance was strong. Our revenue growth continued to be on a high level, exceeding 20% again. Our profitability was strong for a third quarter, at least on the operative side and also our cash flow was strong. Then, of course, the important offer that we made for Semcon did not go through. So that had a little bit of a negative effect on our figures. We did have nonrecurring costs related to the transaction, which burdened the result a little bit, and also the fair value of the currency hedge that we made related to the project had a negative impact on the financing items and therefore took the earnings per share to a negative, which was, of course, disappointing. But if we move forward to the operating environment, so operating environment remained good despite everything that is going on, despite the war in Ukraine, and despite the geopolitical uncertainty, still the underlying demand was quite good. Our customers have been doing relatively well. There are new orders received and there are certain industries that are still continuing to invest. So we see a lot of investment in the sort of energy efficiency, also the green transition and defense industries are investing heavily. Process industries are doing relatively well as well. Mining sector seems to be doing quite well. So there are quite a lot of positives also continuing in the market. But of course certain industries are affected by the war, by the inflation, by the raising costs and perhaps the willingness to invest in certain customer industries is lower than it used to be. And for that reason, the sort of demand situation is fluctuating between the customers and between different customer segments. Perhaps the customer industries, which are directly related to consumers and consumer consumption are the ones that are hit the first in this crisis. And in those areas, we see a slightly weaker position. If we look at the demand in the different markets, so in Europe, all the markets were relatively the same. There were no specific differences between the countries. So pretty good demand situation still continued in all the countries. And if you look at China, so in China, the demand situation has become slightly weaker. COVID still impacting a little bit due to the measures that have been taken by China, and also the geopolitical tension. And for that reason the market seems to be slightly weaker at the moment, so a slightly weaker demand in China. But our demand is really driven by the sort of development of the whole services industry. So we don't see any major issues in China currently either. If we then look a little bit on the numbers, so growth was strong, over 20% and organic growth was equally strong, 11.2% in the absolute terms. Engineering Solutions was growing 13%, Software and Embedded 21%, and Technical Documentation by 39%, so solid development in all the service areas in terms of revenue. In the operating profit, also, we improved on all the areas on the whole group level, 24%, so a clear improvement from last year when we had a slightly weaker Q3. And then on the service areas, Engineering Solutions 42%, Software Embedded 33% and Technical Documentation Solutions 11% improvement, so really solid performance in all the 3 areas. If we look a little bit on the revenue and personnel spilt, so Engineering Solutions was 52% of the revenue, Software and Embedded 28%, Technical Documentation 20% of the revenues. By area, Finland was 52% of the revenue, Scandinavia 25%, and Central Europe 19%, China remaining at 4% of the revenues. And personnel by service -- by area, sorry, so 50% in Finland, Scandinavia 18%, Central Europe 21%, and China 11%, so fairly similar figures to what we've seen in the earlier quarters. No specific changes in the customer segments still. General machinery and automotive and transportation clearly growing, also chemical industry growing while others are staying on a relatively similar level or slightly relative terms, slightly dropping. And then if we look at the financial guidance, so we have now specified our financial guidance for the full year within the range that we gave before. So now we expect the revenue to be EUR 345 million to EUR 360 million, whereas previously we had EUR 340 million to EUR 370 million. And we expect the operating profit EBIT to be between EUR 28 million and EUR 31 million, where previously it was EUR 28 million to EUR 32 million. We basically see that for the last quarter, of course, the range can be narrowed down a little bit as we are having a more clearer view on how the situation is developing. And also, well, we have all the actions are -- that we have put in place have materialized or we know better what is going to happen. So for that reason, we are specifying within the range, but no dramatic change here either. The market outlook remains relatively the same. Energy, of course, having maybe a higher impact right now. Energy efficiency seems to be an area where everyone is concentrating the efforts, so quite a lot of things happening in that area. Otherwise we still see the effects of the war. We still see a little bit of COVID impacts, especially in China. Now maybe slightly more sick leaves again, but no major impact from COVID. And then on the demand side, as said before, energy efficiency, defense industry, also maybe changes in the production chains as companies start to be moving production and production chains closer to the end markets, maybe back to Europe, et cetera. So this is creating a little bit more demand. But overall we don't see any major changes in the market and we expect -- for the rest of the year, we expect the demand situation to be fairly good for the whole '22. But of course, the uncertainty is there, and it's difficult to estimate what will happen in the future with all the geopolitical tension and the war going on. So it's really hard to say what will happen after this final quarter of the year, but for the '22 year, we expect it to be fairly solid. If we then go more to the financial development in detail, so in Q3, the -- overall, the numbers were pretty good. Revenue development over 20% growth, outside Finland 33.7% growth, so very good. Operating profit EBITA growing by 24.3%, operating profit EBIT by 25.4%, et cetera. So very good development in terms of numbers. If we look at revenue development, more so demand situation remained good and we were able to improve quite a bit from previous year. So growth was at comparable exchange rates, 21%, for the quarter. Organic growth was also strong at 12% in comparable exchange rates. And also the full year growth numbers are relatively the same, so it was all really good. Key accounts and acquisitions supported the growth and key account growth was 8.8% in Q3. EBITA development was good. The EBITA was at EUR 7.1 million, growing by 24.3% for the quarter. And still it was burdened by EUR 0.7 million of nonrecurring costs, which were mainly related to the Semcon bid that we made during the quarter. There were also some other impacts, some organizational restructuring, some small impact from there. And also there was a positive revaluation of an earn-out in our business, which had a small positive impact. But overall quite heavy burden, EUR 0.7 million, mainly related to the transaction costs on the Semcon bid. If we look at EBIT then, 25.4% improvement, so EUR 5.8 million for the quarter, and the amortizations related to acquisitions were growing compared to last year as well. They were at EUR 1.3 million for the quarter and EUR 4 million for the full year so far. If we look at then earnings per share. So here, of course, we had a significant impact from the currency hedge related to the Semcon deal. And this actually dropped the earnings per share to negative, so EUR 0.03 negative for the quarter. So this was a clear impact from the deal. This is of course an evaluation so far, and the final outcome of this will be determined in Q4. So then we will know exactly what the amount will be. But still this was a heavy impact on our earnings per share for the quarter. So we are now slightly behind last year at EUR 0.43 for the full year so far. Cash flow for the quarter was strong, EUR 4.1 million of operating cash flow compared to last year's EUR 0.2 million, so very strong cash flow. And this was a result of good operating performance in the quarter and also strong performance in the summertime, so this was the reason. Personnel, at 4,001 employees, so we hit more than 4,000 employees during the summertime. And also the number of employees outside Finland has been growing, so 1,988 employees outside Finland in the group, which is developing into the right direction, into the direction we have wanted it to be. Headcount growth was 10.4%. But now looking at the future quarters, so now due to the fact that the market situation is uncertain, we have slowed down our recruitment efforts a little bit to be able to adjust our capacity to the potential market changes that there may be. And with this we, of course, want to protect our high operating profit and our profitability and wish to retain that on a high level despite the market uncertainty and any fluctuations in demand that there may be. If we then go more into the service areas a little bit. So in Engineering Solutions, we had a very strong development, also excellent profitability, so our revenue growth was at 13.4% for the quarter. And the EBITA percentage was at 10.3%, which is excellent for our third quarter. This was due to excellent performance overall in the unit and high operational efficiency in the whole business. In Software and Embedded Solutions, we had a slightly weaker Q2, and we took measures to improve the profitability, and they have now worked. So our profitability was now at 9.9%. Still we have some issues in the operational efficiency, so it could have been better. But still we have been able to improve the situation quite significantly. And also in the quarter, we were fairly successful in our project, so this had a positive impact on the profitability. Also revenue growth was strong at 21.4% of the revenues. In Technical Documentation, we had high growth of 38.8%, and that was very good. Overall the business situation was pretty okay. But we did have certain issues in our business in Germany and especially with the Cognitas acquisition, where our operating efficiency has not been as strong as we had hoped. And also we still suffer from certain customer agreements where the profitability or, let's say, pricing is rather low. And this is something that we are currently working on. We have also taken corrective measures to improve the situation in Germany. So we expect this to have a positive impact going forward. If we then look a little bit on how we did against our targets. So on revenue, we are currently with the rolling 12 months, we are at EUR 344 million, and of course, against the EUR 500 million target. So we still have quite a way to go, but we are working on it and are confident that we will be able to reach the target. Revenue outside Finland, we are closing in on our 50% target, so currently at 48%. And in the managed services share of revenue, slight development to 66% in this quarter. And then operating profit, we are now slightly down on our 10% target for the year, 9.3%, but expect to improve on that in the final quarter. And at this time I would like to welcome questions from the audience. So thank you very much.

[Operator Instructions] The next question comes from Juha Kinnunen from Inderes.

This is Juha from Inderes. First of all, could you kind of quantify the financial cost coming from Swedish krona in the fourth quarter? If you would assume that the exchange rate would be the same, how much further cost there would be?

Well, of course, this is an evaluation that was made on the, basically, end of September numbers and the exchange rate, and that was round about 10.90. So with that -- with those levels, there will be no further, if it goes down, there will be some further, and if it improves, then there will be a positive impact. But the currency is really hard to predict. The overall impact from the currency and also the financial arrangements that we made was round about EUR 6 million. So that's relatively the amount.

And is the whole position is still open, you haven't closed it?

We have closed a bit, but a significant portion of it is open. So we will see how things develop and then we will, during the quarter, close it.

Another question. I'm just wondering how large is the energy efficiency trend for you? Because of course it concerns a very wide area and it's not necessarily only those that are really energy-intensive. So are you seeing new design work coming from sectors that are very wide? Or is it concentrated on some certain sectors?

Well, I think that initially in the beginning, of course, it started with the products that are directly related to energy consumption and then the sort of energy creation and so on. But I think that this is a wider trend right now and any product that is using electricity, so their companies are looking for savings measures and taking action to improve on this aspect. So at the end of -- it starts with the sort of directly energy-related companies that are working with that. But then I think it's a wider trend that will go throughout the industry. So it may have a quite good positive impact on the demand.

But so far you have seen only the kind of directly linked to energy sector?

Yes, I would say that direct -- the companies that are directly working with the sort of electrical components, electrical motors, et cetera, those companies currently are having with their portfolio of more efficient products, they are having quite good business at the moment. So we see that. But we do see that this will also -- the situation will lead to a situation where many companies will start to have new investments in the area to be more energy efficient and to be able to, by doing that, be more cost competitive in the future. So that's what we expect to see and to some extent have already seen.

And about recruiting, you are slowing down, at least somewhat. But could you comment on what business areas or sectors does it concern?