Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation of Etteplan's financial statements for Q4 2022. My name is Juha Nakki, I'm the President and CEO. And at the end of the session, there will be a Q&A session, where you will also be able to ask questions from our CFO, Helena Kukkonen. If we look at the contents of the presentation today, so similar to what we have had before, so I'll start with the highlights of the year '22. We look a little bit on overview of the whole year. Then we will go a little bit more into detail on the financial development for the Q4, the final quarter. We will look at how we did against our targets and, of course, look at our financial guidance, and then at the end of the presentation, there will be the Q&A session. But if I start with the highlights, so the year was, of course, very much around -- all the market development was around the war that was started by Russia in February. And that did have an impact on the whole year in many aspects. But nonetheless, we had quite good year. We had significant growth, and we were able to achieve a milestone of EUR 350 million for the full year. That was helped by 4 acquisitions that we completed during the year. And also, organically, we were able to grow, especially in the first half of the year on a very rapid pace. So organic growth was at 8.6% with comparable currencies. So quite strong organic growth, but slowing down towards the end of the year due to the fact that the market uncertainty and the discussion around recession, et cetera, started to do -- started to take place. And also, we were then slowing down our recruitment to some extent so that we would not have overcapacity if the market turns to worse. But overall, we did good. The growth was also very profitable despite the changes that were happening in the market. We were able to achieve high profitability for the full year, almost at our targeted levels and a strong solid finish for the Q4. And the good results were achieved in all of our businesses across the different service areas, so overall, a quite solid performance. Of course, on the negative side, the demand was impacted by the war in Ukraine. There were significant changes in demand between the different customer segments and even between different customers who reacted into the prevailing situation in different ways. We also had a slightly negative year for our Technical Documentation Solutions business, mainly driven by the acquisition of Cognitas, where we did have a lower profitability than what we are used to. And we also encountered certain issues, which we're not familiar with when we made the acquisition. So there are things to do for us still, but that burdened the whole year. We have taken measures and are continuing to take measures, and we are confident that this will be fixed. But that did have a burden on the profitability of Technical Documentation Solutions, and it fell short of our expectations. We also did a public tender offer of our competitor, Semcon, during the year, which did not go through. And that did have an impact on our costs, both on the sort of operative costs and also financing costs, which resulted then into a negative development for our EPS, which was, of course, disappointing. But nonetheless, a quite good year. Solid growth, good profitability. And at the end of the year, the Board's proposal for dividend is EUR 0.36 per share. If I then go to the operating environment, so of course, the war in Ukraine characterized the whole year. The demand situation remained at a fairly good level throughout the year, but fluctuations between different customer segments and between different customers was quite visible. The consumer-driven industries were impacted more towards the end of the year. And but then certain other industries were also increasing in their demand. Of course, the uncertainty is also high, and it was high throughout the year due to the war. And there were also geopolitical tensions that had impacts, for example, in China on our business. Then on the positive side, if there were on the consumer-driven businesses, there were negative signs to the demand. Then there were also some industries, where demand was increasing maybe due to the war. Defense industry-related investments were on a high level. Also energy efficiency-related investments were on a high level. And also, the green transition was clearly accelerated during the year which generated new types of demand. Also, we could see quite a lot of changes in the supply chains of our customer, which also meant new investments. So there were quite a few industries which were still running at a good pace, and we see that there will also be continuation going forward. If we look at the development by market, in Europe, the development was pretty similar in all the countries. So the rising inflation, the rising energy prices did have an impact on the willingness to invest in new things. And for that reason, impacted the demand situation a little bit. But the development here was quite similar in all the European countries, maybe closer to the Russian border. Impacts were slightly higher, but still relatively similar impacts. And in China, of course, the geopolitical tensions did have an impact on the overall demand. And then in China, where the COVID pandemic was still existing during last year, so in the beginning of the year, there were restrictions that stopped certain activities which had an impact in the second quarter. And then towards the end of the year, of course, when all these restrictions were released, then COVID-19 infections had a quite significant impact on the society in China and also for our business as the sickness-related illnesses were -- or illnesses and absences related to sickness were on a very high level. And overall, I would say the sickness rates and illness rates were quite high for the full year, having also an impact on our business. If we look at the key figures briefly, so the revenue was at EUR 350.2 million, so 16.7% growth, solid growth. And as mentioned, the organic growth was at comparable exchange rates, 8.6%. EBITA of EUR 33.9 million, growth of 12.5% for the full year. EBIT, EUR 28.6 million, growth of 11.1%. And earnings per share, EUR 0.73, so a decline of 8.8%, which was related to the financing costs or the currency effects of the financing arrangements for the Semcon offer, which was, of course, negative. But it's a onetime effect, and now that is cleared. If we look at the revenue split per different areas, so revenues by service area, we still had Engineering Solutions at 52%. So clearly, the largest service area. Software and Embedded at 28% and Technical Documentation Solutions at 20% of the revenues. By area: Finland, 52%; Scandinavia, 25%; Central Europe, 19%; and China, 4%. And if we look at the personnel by area, so Finland, 51%; Scandinavia, 18%; Central Europe, surpassing Scandinavia for the first time, 20%; and then China, 11%. And if we look at the revenue per customer segment, so there the Industrial Machinery and Equipment also Automotive and Transportation, Chemical and Aerospace and Defense were growing, also relatively and also in absolute terms, quite significantly. Also energy was on a high level on absolute terms. And in the others, relatively the same. So no major drops in any of the industries that we are working with. If we then go more into detail into, specifically, Q4. So if we look at the key figures in Q4, the growth was slower than in the first part of the year, so 6.8% or 8.6% with the comparable currencies. EBITA of EUR 9.7 million, representing an EBITA percentage of 10.7%, which was very, very strong, and EBIT percentage at 9.2%. So overall, strong profitability, but due to the slower recruitment activity and also a high level of sick leaves that the growth was clearly, clearly slower. But still solid profitability and also throughout the year, as already mentioned. And on the revenue side, as I already mentioned, so quite solid development but growth slowing down towards the end of the year. And the main impacts here, of course, were slightly fluctuating demand. We also did see some of our customers closing down operations and for a couple of weeks or even 3 weeks at some customers during the Christmastime. So this had a little bit of an impact on the revenue generation. And also, as mentioned earlier, the sick leaves for the full year and also especially for the fourth quarter were having an impact. We actually had almost 93,000 hours more sick leaves during the whole year compared to the previous year. And in Q4, over 33,000 hours more sick leaves than in the comparison period. So this clearly had an impact on the revenue development and also on profitability then, or profit, absolute profit. If we look at the EBITA, so good solid end for the year at 10.7%. There were nonrecurring items. Positive 0.3 for the quarter, which had a small impact. This was mainly due to a revaluation of an earn-out payable. And then overall, the nonrecurring costs were at EUR 1 million. Of course, the major item there was the cost related to the Semcon bid that we did during Q3. But profitability was good for the full year. And if we would exclude the cost related to the Semcon bid, we would have been to our target level of 10%. So very solid profitability for the full year even in a changing market environment where there were fluctuations in demand. So it proves our resilience once again in our business. On EBIT, the amortizations related to acquisitions in the fourth quarter were at EUR 1.3 million. And for the full year, EUR 5.3 million. So having an impact, of course, growing slightly due to the 4 acquisitions that we made during the year and also then having an impact on the profitability or EBIT percentage. Earnings per share for the full year at 30 -- sorry, EUR 0.73, and for the fourth quarter, EUR 0.30. The end result of the currency hedge for the Semcon bid had a slight positive impact now on the fourth quarter, so we were able to recover some of the losses that we had in Q3. But nonetheless, it did have a major impact on EPS, around about EUR 0.20 or so, if we take a look at the full effects of this bid. But nonetheless, fairly solid. And after the year, the Board proposal, our Board's proposal for dividend is EUR 0.36 per share, as already mentioned. Cash flow was solid for the year at EUR 11 million for the fourth quarter and EUR 28.1 million for the full year. And personnel at the end of the year was at 3,951 people. Our personnel outside Finland increased during the year significantly and was at 1,963 persons. So solid growth in this respect, according to our targets. But of course, in the second quarter, as mentioned already earlier, we have slowed down recruitment a little bit to adapt to the market situation. So we have wanted to really protect our profitability and retain that at a high level. And then we are geared to increase the recruitment activity and start the organic growth again once or on a higher level again, once the market situation allows that. If we then look a little bit more in detail for the service areas, so we'll start with the Engineering Solutions where we had a really strong year. So revenue was at -- for the full year at EUR 183.7 million, so a solid growth of 9.7%. For the fourth quarter, EUR 48.9 million, so 3.8% growth. Clearly slowing down a bit for the same reasons as mentioned earlier, so sickness-related illnesses and some closures in the business from our customers. But nonetheless, solid development and extremely good profitability for the fourth quarter at 10.8% and also very strong performance throughout the year at the high levels of operational efficiency. Very solid performance for the full service area on the full year level. On the Software and Embedded Solutions side, we clearly had a slightly worse second quarter. When the war started, there were clearly -- some customers were slowing down their investments into R&D, which did have an impact on our demand. And for that reason, we had a slightly weaker operational efficiency at that point and the growth was not as good as it could have been. So in the second quarter, there was a clear dip. But we took measures and we have now been able to recover the profitability in Q4. We reached an EBITA margin of 11.6%, which is a very solid improvement for the full year. And now going forward, we hope to retain these kinds of levels in the future. In Technical Documentation Solutions, of course, as mentioned earlier, we are disappointed with the end result here. So we are not used to these kinds of profitability levels, 7.7% for the fourth quarter. There was 1 write-off or revenue recognition correction that we made in the fourth quarter, which had a onetime negative impact on the fourth quarter profitability. But overall, for the year, with the impact of Cognitas, we were at 8.7%. The profitability side, which is not according to what we wanted to be or where we want it to be, not according to our targets. So here, we have clearly work to do. We have now taken measures to improve the profitability of the business in Cognitas and certain other areas. And we are confident we will, of course, continue with measures throughout the next year and in the beginning of next year, and we are confident that the business will recover. But clearly, this was a disappointment and below our expectations. But the actions that we have taken are there, and we will continue on other activities so that we will be able to recover the profitability to the levels, which we are used to and where it's really supposed to be. If we then look at how we did against our targets and the financial guidance. So against the targets, our revenue now for the full year was EUR 350 million. The target is hefty, EUR 500 million by '24, and we are working hard to accelerate the growth and are looking for also acquisition opportunities, which would help us to reach this target. It's a tough target, but we are doing our best to reach it, and it's still very possible, so we will see where we will end up. But still reaching EUR 350 million is a landmark for us for the year. Then revenue outside Finland, we are closing in on the 50% target. For the full year, we were at 48%, so, and fairly close to the 50% mark in the fourth quarter and the end of the year. So this is developing well according to our strategic plans. The Managed Services share of revenue target of 75%. We were improving during '22. So now we are at 66%. And still have a way to go, but we are working on developing our offering, working with our strategy to move forward towards our pretty tough 75% target. And then, of course, the operating profit EBITA target of 10%. We have reached 9.7% last year, but without the onetime costs related to the Semcon bid, we would have been on our targeted level of 10%, so quite solid performance, profitability wise, and we expect to continue on that going forward as well. I'm going towards our targets during next year. We are then having a financial guidance on the revenue side. We estimate the revenue to be between EUR 360 million to EUR 390 million, and the operating profit EBIT to be between EUR 28 million and EUR 33 million for the full year. Of course, now in the beginning of the year, after a lot of sick leaves at the beginning of the year, has started a little bit slower, but we expect that the pace will pick up. And also in the first quarter in Finland, there will be onetime salary payments related to the collective agreements that are currently being agreed. So that will have an impact on Q1. But from there on, we anticipate that we will be able to move forward with high profitability again. If we look at the market, so of course, the market is still very heavily -- the market development is very heavily dependent on the war and the development of the war. There is still tension. Inflation is still high and energy prices are fluctuating. So these do have an impact on our customers' willingness to invest. And as said earlier, consumer-driven businesses are currently -- from our customers, are currently in a slightly worse situation. But then there are other areas, where investment levels and the willingness to invest into, for example, green transition or the defense sector or some other sectors is already quite high. So the balance here, we feel that will be, overall, still quite good. So we think that the market will remain at a fairly good level and the demand will remain fairly good throughout the year. If we look at the market right now, the demand situation is not changing that much, but there is a kind of positive sentiment currently in the market. Our customers are still having quite good orders received, et cetera. So we expect that after maybe a slightly slower start of the year, there will be a decent demand situation, which will allow us to maneuver and move forward again during the year. COVID is still with us, hopefully not having a major impact for the full year. But in the beginning of the year, especially in China, the number of infections is still relatively high and will have some kind of an impact on our business in the first part of the year. So that is a fact and something we cannot avoid. But we already now see that the impact is getting slower. So overall, I would say that we are expecting the year to be fairly good demand-wise, there will be still fluctuations. And of course, uncertainty is high. So anything can happen depending on what happens with the war et cetera. But we are fairly confident that there will not be a significant drop in demand, and we will then be able to go forward towards our targets during next year. So that completes the presentation so far, and now it's time for questions. So, please.

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

This is Juha from Inderes. A couple of questions from me to start. I guess the organic growth slowed down quite significantly in the end of the year. Could you comment on areas where the market is down in your portfolio? And have you been able to defend the profitability there?

I would say that the major reasons for the slowing down were basically 1 day less major impact from the sick leaves and then, yes, I would say that there is no single area where the demand is down, but maybe the sort of consumer-driven industries, which we also have as customers. So those are the ones where investment levels have gone down. That has had an impact that we have needed to then switch assignments from, from those industries to other industries. And while this kind of activity is taking place, so there is always a little bit of slack time, et cetera, that has had some kind of an impact on the revenue development. There were also certain customers, especially during the Christmastime, which had a shutdown of 2 or 3 weeks for their operations and that had an impact as well. I would not say that there is a profitability impact. We have been fairly good at defending the profitability levels in all the businesses. But of course, there are certain units, which are affected by a certain customer having a change in their investment portfolio. So certain smaller units have been affected by the changes. But overall, I would say that our profitability position has been solid And we have been resilient and able to really move forward with the high profitability across the businesses.

You slowed down recruitment already earlier last year. What's the situation now? You said that there are some promising signs in the market. But I guess, the beginning of the year has been still somewhat in defensive position.

Well, the beginning of the year is in certain industries, still a little bit on sort of defensive side, that is correct. But there are also industries which are having a high level of investment driven by, well, defense, green transition, energy efficiency, for example. Certain other industries, mining industry seems to be doing strong, chemical industries are doing strong, maybe due to the high prices. But we want to focus very heavily on the opportunities in the industries where we see continuation on demand. We are lucky to have our customers in these segments, and we are working hard to maximize the opportunities in these customers and these customer segments, and that will provide opportunities to grow. So this is where we want to really move forward and we need to move forward so that we are able to continue growing. But then we do need to be a bit cautious in some of the other industries and the overall situation that we want to manage in such a way that we retain high profitability at all times.

I guess this is relating to your longer-term targets. Should we assume that profitability is the #1 priority and growth comes only second? If you can -- if the market is not cooperating with you, you will defend profitability and you will grow later if it has to be like that?

Well, if it has to be like that, of course, we will make investments and we can, of course, invest into our business and into our people, so that there may be a slightly weaker profitability for a period of time due to the investments that we make. But then we would really need to see that there is continuation on the good demand cycle and in the current environment where the uncertainty has been quite high. So we have chosen to defend the profitability we feel that's more important for us at the moment. But of course, if the market situation changes, and we believe that there will be growing opportunities, growing number of opportunities in the market and that will also be sustainable for a longer period of time, then, of course, we are willing to invest more into growth which may then have a slight impact on the profitability. But that time is not right now. Right now, we need to secure that we have a good solid operations. So we have assignments for all the people that we have, and we have high efficiency and through that, good operating profit. So that has been the choice right now. But if the market develops positively, and we see that there will be a trend that the market will stay on a better level in certain customers, in certain customer segments or overall, so then naturally, we need to accelerate. We want to reach all our targets. And by far, the toughest target is the revenue target. So we cannot just wait and see if we need to invest where we see the possibility. But we will not do it so that we will have a low profitability. That is not our thinking.

Final question from me is about interest-bearing debt. Is it variable or fixed rates, and if variable when should we expect a rise in financing costs?

Well, of course, it's variable, of course. So we are tied to certain indexes. And of course, if you look at the Euribor, so they are increasing and of course, that will have an impact going forward. Not a major impact this year yet, but some kind of an impact. But going forward, there will be an impact, but the sort of margins on top of the Euribor are fixed for us currently, may change when we move forward. But currently, they are fixed.

[Operator Instructions] The next question comes from [ Vincent Normant ] from [ Denso Capital. ]

Maybe first 2 questions about growth. The first one is could you come back on the large account sales development in Q4 and maybe over the year? Because you signaled in the press release that is negative in Q4, I think. That's the first one. And the second one about growth is about what you expect for Q1. If I understood correctly what you said during the call, you expect a slow development in Q1, so maybe a small organic decline for sales. Is that what we should understand? I have additional questions after.

Yes. Yes, the large customers are, of course, there are certain customers. And in some customers, there has been a decline in that. And in some customers, there has been, of course, growth. And in that respect, there has been, now in Q4, a slight decline. And that is unfortunate, but we are working hard to develop that. On the other hand, while we are making acquisitions, so the portion or the proportion of revenue coming from the large accounts or the key accounts, which we have currently defined is getting smaller. So it does not have that big of an impact. We have more customers through the acquisitions and more of these kind of midsized or growing customers, and those are a great source of growth for us. So that's how it works. And for the beginning of the year, there is still some COVID impact. And in this kind of uncertain market, certain customer industries are starting a little bit slower. So we do have a quite good running rate. We do have much more people than we had in the beginning of next year. So hopefully, the organic growth will not be negative, but we are working hard to then accelerate the organic growth where we can. And in certain customer industries, it will be dropping. But in certain customer industries, we do have the opportunities. And overall, I think that we should be able to reach positive organic growth also. But the start has been slow. It is quite normal in certain markets and certain countries that there is a little bit of a period once the year has been sort of closed, then the second one starts a bit slow, especially in uncertain times as we are having right now. So that's quite normal in the markets.

Okay, great. Maybe additional question about the growth prospects. If you could elaborate a bit on the price effect you had in 2022 and how you see pricing for 2023 so far. You mentioned additional payments to Finnish employees in Q1. So I assume you have to have some price increases to cover that. And if you could elaborate a bit on the outsourcing rate especially at Software and Embedded Solutions. So do you see less outsourcing coming in 2023 compared to 2022?

Well, on the prices, I think we have been last year quite good in getting -- there were significant cost increases due to the salary inflation as well. We were quite good in getting the raising salary costs into the prices during last year, so which is then also visible in the margins. So that was quite good. This year, of course, there is a different kind of negotiation situation. But still, there is a lack of competent people still in the market. And due to that, I do believe that if we are going to have the people that our customers want to have in their projects, we do need to increase the salaries and the overall collective agreement increases are fairly high. And for that reason, we do need to increase the prices, and I'm fairly confident that we will be successful in that also during this year. So there will be an impact on the sort of growth from that end. On the sort of outsourcing level and the sort of MSI level or project business level in the Software and Embedded side, I think there are opportunities. Last year, we could clearly see, especially in Q2 that the level of investment was lower from certain customers. They were hesitating in the sort of when the war started. They were hesitating to see where the market is going and would this be the right time to invest and so on. We have seen positive development for the latter part of the year and hope that there will be a good level in investment and this kind of outsourced projects and other types of outsourcing available in the beginning of the year. But of course, it is heavily depending on the sort of market situation and how the world develops, if there is new uncertainties coming up. So it's heavily dependent on that. But so far, what we've seen is that there's quite a lot of opportunities in certain industries, and there are opportunities to move forward.

Sorry, if I was not clear about outsourcing, I was more thinking about your outsourcing rates to people that...

You mean the subcontractors that we are using.

Exactly.

Sorry, then on that side, now when the market has been slightly slower, slightly slowing down and we have been a bit more cautious, we have not recruited as actively. So that also, of course, goes with our subcontractors. So we have slightly less subcontractors right now. But going forward, I think that we should be where the market is allowing and where the demand is continuing, I think that we will be increasing on those levels back to where we were and then also continuing recruitment when the market recovers. But this is a means for us to adapt to -- also to adapt to different market changes and still maintain higher efficiency on our own workforce and our operations and retain higher profitability with that.

If I may, two final questions. The first one is about Cognitas. So maybe it's twofold. It's about the impact you had in Q4, if you could give us a rough estimate of the impact. And was it noncash or if, in fact, cash? And the second one, obviously, is the plan you have to improve profitability in this area. And final question is about working capital because it was a drag on free cash flow generation for this year. So just to understand if you have some special effect end of last year, that dragged on the free cash flow generation. And if you expect to come back to, let's say, 100% free cash flow to net income conversion rate next year.

Yes. If I start with Cognitas, so in Q4, it was not a cash item. It was more of a revaluation of the sort of revenue recognition model. We integrated our ROI in the process of integrating Cognitas. So now we are also changing the way the revenues are recognized and looked at. And this had an impact where we now took sort of our view of things and put that in place, which had a negative impact on the profitability in Q4. We are still not fully integrated, so there may be something, but we are now more confident that this is done in the proper way and it's done in the same way as in the plan overall. So we don't expect major deviations like this anymore going forward. We have not given any exact figures, but if we look at the Q4 profitability level of 7.7% and then take the full year of 8.7%, so you can clearly see from there that there is a onetime impact. Overall, full year 8.7% is the level which we had and that kind of shows you the impact of Cognitas. Of course, there were also some other businesses that were not performing as well as we would have hoped. But the major impact there from our normal levels is coming from Cognitas. So maybe that -- about that. On the cash flow side, of course, when we are growing, the sort of 100% rate that you are referring to, when we are growing, we do tie more capital into our business, so 100% conversion. When we are growing organically is not really possible. But there were certain impacts from Cognitas' business model on our cash flow generation. And then there were certain payment-related issues at the end of the year. So our account receivables is on a fairly high level. So there were certain projects where we did not get payments, and there were certain customers which are paying late. So that did have some kind of an impact on top of the other things.

Just about Cognitas, if you could elaborate a bit on the measures. So you expect to go back to, let's say, a 10% more normative margin for this division as soon as 2023? Or will it take time? Do you think, let's say, the nonperforming contracts, they are now behind you or...

We are -- there are certain nonperforming contracts still, but we are renegotiating those and we are getting new ones so that we expect that during the next year, it will heal to our sort of usual profitability levels. And then we should be also able to, through our new offering, et cetera, going forward after next year, we should be able to increase the profitability level of this business overall. So we are confident that the measures taken will take us to the right direction. We know where the problem is. We are taking measures to fix it, and we are confident that we will be able to do that during next year.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. Thank you very much. And maybe to conclude, I mean, it was, of course, due to the war, it was another strange year. In the beginning of the year, we thought that this might be -- after the COVID year, this might be a first sort of a normal year. Turned out to be quite completely different to what we anticipated. But nonetheless, again, we reacted very well to the changes in the market and to the development in the market. We were able to adapt to the changes in the market demand. We once again proved our resilience in our business, and we were able to achieve high levels of profitability. So overall, I would say that we had a good year, and we retained a good profitability, and we are in a strong position to move forward now, hopefully, with the market improving during next year. So with that, I would just like to leave you with the investor contacts that we have. So we are, of course, available for any comments or questions that you may have at any time. So myself, Outi Torniainen, our SVP for Marketing and Communications; and our CFO, Helena Kukkonen, will be able to assist you at any time. Thank you very much for listening in, and have a great day.