Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation of Etteplan's Q3 results for '23. My name is Juha Nakki, and I will be joined by our CFO, Helena Kukkonen, for the Q&A session at the end of the presentation. The contents of the presentation will be as per the previous webcast. So we'll start with the operating environment, look at a little bit the highlights of the quarter, our financial development, a little bit on the service areas, look a little bit on how we did against our targets. And then at the end of the session, there will be the Q&A. But if I begin with the operating environment, so the market situation continues to be challenging. Of course, the war in Ukraine is still continuing and holding up the geopolitical tensions. And now recently, on top of that, the conflict in the Middle East has further elevated the tensions and increased uncertainty in the markets. So far, we have not seen major impacts of this conflict into the market, but the tension is rising, of course, an uncertainty is definitely there. And of course, uncertainty, the continued inflation and the high interest rates are having an impact on our customers' willingness to invest. And the decision-making from our customers is taking quite a lot of time. Our customers are cautious in deciding when to take investments. We see a lot of projects. We see a lot of opportunities out in the market, but the decision-making from our customers is taking quite a lot of time in most of our customers' industries. There are, however, still industries where the demand situation is strong in the green transition. Investments are strong. And of course, in the defense sector there is a heavy investment, and this is something that is then helping the demand situation for us a little bit. And we are trying to focus our efforts into these areas more. If we look at the different markets or market areas from our perspective. So in Europe, the situation is a little bit the same in all countries. Our customers' orders received have declined in the second quarter and towards the third quarter. And for this reason, the delivery volumes that our customers are delivering in Europe are declining, and this has an impact on the delivery-related engineering and the demand situation as such. And of course, still the willingness or the decision-making and the slowness in decision making due to inflation, interest rates, et cetera, continues to have a negative impact on the markets in Europe. Also, China is in a difficult situation. The demand situation is actually quite weak and the increased geopolitical tensions and of course, the low level of Western investment and international trade from China is creating issues for us in the market. And in China, we are more and more focusing on the business, the China-China business and customer segments that are strong in that particular area. And in this challenging market, we did do certain very good things. If we start on the positive things, so our cash flow was at a good level for the third quarter. This was a little bit supported by the downturn in the market and not tying that much capital into the growth. But still the cash flow was good and helping our financial position. Also our Software and Embedded Solutions service area improved in its profitability. The market continues to be challenging, but the efforts that we have taken and the measures that we have taken to improve the profitability are clearly working, and we have had a better quarter now since we had 2 slightly slower quarters in the beginning of the year. Also we saw in this service area, in particular, we did see some increased activity in the product development area. And there were some more activity and some more projects starting, which was encouraging for the market going forward. Also, we did see still some investment projects starting. So this was, of course, positive for the market development. And we did continue acquisitions during the quarter. So we acquired a German company, LAE Engineering to support our Engineering Solutions business, in particular, in automation, in Germany, and we acquired a High Vision Engineering in Sweden to support our transportation and car industry-related services. On the negative side, of course, the declining delivery volumes from our customers had a negative impact in demand, which is particularly visible in our Engineering Solutions business, but also in our Technical Communications Solutions business. And as a result, our Technical Communications Solutions service area did not develop as expected. The demand situation was weak and the profitability was weak for our standards. And especially Central Europe was problematic for us in the service area. And also, on the negative note, the growing uncertainty now in the market is making it really difficult to predict what will happen in the future, how demand will be impacting and what will happen related to the inflation and also interest rates. But still, we do see opportunities in the market, and this is what we are taking forward. If we look at the revenue and operating profit, so at comparable exchange rates, we were still growing by 2.1%, but if we look at the comparable rates -- sorry, the exchange rates as such, so we were declining by 0.4%. And on the operating profit side, we were declining by 10.6%, a slight decline in Engineering Solutions and also in software, but a big drop in Technical Communications Solutions service area. If we look at the split on the service area. So in revenue, by service area, Engineering Solutions was at 56%. Software Embedded at 24%, Technical Communications Solutions at 20%. Revenue by area, so Finland, 51%; Scandinavia, 24%; Central Europe, 22%, clearly growing, and China then 3%. Personnel, Finland, 50%; Scandinavia 19%; Central Europe, 22%; and China, 10%. And if we look at the customer split by customer segment, so energy, automotive transportion, growing industries where the green transition related investments and electrification, energy efficiency is a -- has a high impact, is growing basically. And also the defense sector is growing for us even if the percentage is still the same, but we have a lot more projects in this area, and we are confident that the revenues are also starting to pick up going forward. But we have a lot more activity in this area, and there is a lot of opportunity due to the situation in the world. Then there are industry declining, ICT, lifting and hoisting are declining for us, and there is -- decision-making from our customers is slow in certain areas, and that is having an impact on our business. If we then move on to the financial development. So overall, the trend is a little bit declining, which is not good. Most of the key figures are declining. Personnel was growing towards the end of the review period, and this is due to the acquisitions that we completed. And also the Managed Services Index is growing 70%, which is highest to date. And this is sort of proving the strength of the Managed Services business. It is still holding up, and we are also seeing quite positive demand for outsourcing resolutions. which are helping our customers to improve their business in the current prevailing uncertain markets. And this is then helping us to grow the MSI business, which is positive for our business overall. But on the other numbers, unfortunately, the direction is a little bit down. If we look at the revenues, so of course, the demand situation was having an impact. And as a result, we have had declining businesses in certain parts of our market, and the growth has stopped. If we look at the revenue from key accounts, it decreased by 5.8% in Q3. So clearly showing lower levels of demand from these particular accounts. If we look at the profitability, so clearly, the weaker demand situation had an impact on our operational efficiency, which was slightly lower and especially in the Technical Communications Solutions service area, and this had an impact on our profitability. The nonrecurring items for this particular quarter were at EUR 0.2 million. And overall, the profitability was at 7.9% for the quarter and we are at 8.1% for the full year, which is a little bit modest for us for what we are used to. EBIT was at 6.2% or EUR 5 million for the quarter and EUR 17.3 million for the full year so far. The amortizations related to acquisitions have been growing slightly for the quarter, so EUR 1.4 million for the quarter and EUR 4 million so far for year-to-date. Earnings per share were growing EUR 0.10 compared to minus EUR 0.03 last year. Last year was, of course, heavily affected by the negative effects of our Semicon bid last year. So therefore, last year, the comparison period was quite weak. And also, if we look at the earnings per share, so there is an impact from the higher financial expenses that we have with the higher interest rates on our loans today, and that has a clear impact on the earnings per share this year. Cash flow was positive for the quarter. As I said earlier, less capital was tied into the operation as the growth was not there and this supported cash flow for the time being. And also, we have been taking different kinds of saving measures to safeguard our profitability and help our cash flow in the business, which has paid off in the prevailing market situation. So operating cash flow was at EUR 7.1 million for the quarter and EUR 23 million for the year so far. Personnel exceeded 4,000 people again, so helped by the 2 acquisitions. So these accounted for approximately 110, 120 people. and this helped us to climb above 4,000 people again. And 50% of our people were outside Finland, which is according to our strategic targets. If we then look a little bit more in detail into the service area. So in Engineering Solutions, we still continue growing, of course, the acquisition of LAE Engineering, which has an impact in this service area that supported the growth. But still, we had a growing business. Profitability was coming down slightly compared to the previous quarter, which was rather the comparison quarter, which was particularly strong for a Q3 and here, we did have certain -- in certain projects in Central Europe, in particular in Germany, we had some issues and also the weak market situation in China had an impact on this service area. However, even if the demand, especially in the customer project, our customer delivery project-related engineering has started to come down. We have taken measures, and we have been able to keep the operational efficiency on a good level in the service area, and this has supported the profitability. Also, we have won during the quarter, we have won several outsourcing deals and also in the previous quarters, we have won certain outsourcing deals, which is helping our business situation and of course, proving as well the strength of our offering even in weaker market conditions. If we then move on to the Software and Embedded Solutions side. So here, the revenue was dropping by 12.5%. The market conditions have been difficult in the first half of the year and still continue to be difficult. But now with the measures that we have taken to improve our operational efficiency, and also restructure the organization. We have been able to improve the profitability clearly to above 10% levels, which was encouraging. We have also seen a little bit better activity in the product development-related activities, and there has been a little bit more projects starting which is, of course, encouraging. But still, the market situation remains challenging, and we will need to see how this continues, especially now with the uncertainty in the markets and the world increasing. But still, this is a positive sign and a clear sign of our actions clearly working for the business as we're able to improve the profitability above the 10% mark. In the Technical Communication Solutions side, we had issues with the demand, our customers weaker orders or weaker deliveries were impacting the demand situation. And especially in Central Europe, where we have more consumer related, directly, consumer-related customers, we had a fairly difficult market situation, and thus, the operational efficiency was weak. In Finland and Sweden, we have been able to manage the situation quite well. But in Central Europe, we have had a more difficult situation. And in Central Europe and in particular, in the Netherlands, we have also had certain issues with the sickness-related absences, which has not really helped the profitability situation either. We have taken corrective measures, and we see opportunities. We are developing AI-related offering in this service area, and we see a lot of opportunities going forward. But right now, the market situation is difficult, and we need to implement measures to correct the operational efficiency of the business and then continue driving forward. And then after all this, the financial guidance, we did take the financial guidance down during the quarter. And currently, the estimated revenues between EUR 355 million and EUR 370 million and the operating profit, EUR 26 million to EUR 28.5 million. For this report, we are keeping the lower guidance intact. The market situation, of course, continues to be challenging. And the new conflict in the Middle East is, of course, increasing uncertainty. But we still believe that working and focusing more on the customer industries where we have strong demand being energy efficiency-related investments, energy in general, demand in defense industry, et cetera. So focusing into these areas, we do believe that the overall demand for us is still on a moderate level. And we do believe that we will be able to reach the guidance that we have given. Looking at the targets that we have, EUR 500 million, of course, is still the target seems quite difficult to reach at this point in time when the target was set we didn't know of COVID. We didn't know of the war in Ukraine. We didn't know of the conflict in the Middle East. So of course, this is a little bit tough for the moment, but we still haven't given up on it. It will require a large acquisition, but we are still seeing possibilities and we will see how it goes. If we look at the revenue outside Finland, we are currently at 49%. And for the third quarter, we were first time above 50%. So here, we are progressing according to our targets. And also the Managed Services share of revenue is currently at 68% and 70% for the quarter. So we are progressing into the right direction. And I do believe that currently, in the current uncertain market situation our Managed Services business is proving its value as more sustainable demand is there. But of course, still difficult even in this area. And on operating profit, EBITA, we are this year falling behind a little bit. So now currently at 8.1%. And at this point in time, I would like to open the session for questions that you may have.

[Operator Instructions] The next question comes from Atte Jortikka from Evli.

This is Atte from Evli. I was just wondering that -- we see now the organic growth declining in Q3, it's flat year-to-date. How would you describe the development of your market share during 2020 and Q3?

Well, I would say that the -- our market share development is actually positive. There has been a drop in demand. We see clearly lower level of deliveries from our customers. So I believe that with our outsourcing solutions and with the sort of concentrating the services more towards us, I actually believe that our market share has slightly increased, not decreased, but this is, of course, a guess. And I cannot verify that, but we do see that there is a clear decline in the market, and thus, our revenue has stopped growing.

Okay. Then another one on -- you saw signs of recovery in product development towards the end of the review period, did you secure any major deals like you did at the end of Q2?

We have had sort of a constant order flow coming in. And towards the end of the quarter, there was clearly more activity. We had quite a lot of quotations, and there were some very positive orders as well. But clearly, there seems to be more activity and especially for us in the sort of Embedded Solutions area, still the sort of software and system-related investments are on a low level. But in the sort of product development area, meaning basically for us the Embedded Solutions side there, we did see better activity levels and more quotations, et cetera. But of course, will that last? That's a big question. And we, of course, hope that it does, but it is very difficult to say at this point in time. But still it was encouraging that there was clearly better activity levels.

Okay. Then has there been any further cancellations of projects during Q3, like you saw earlier in Q2?

Not major ones. In Q2, there were clear cutbacks. And when the market situation was weakening, now it's been sort of stable. New projects are not really started and a bigger -- this kind of system-related investment projects are not started in the software side. And I would not -- I don't remember that we would have had any major cancellations of orders. It has remained at this kind of slightly lower level a little bit of pickup in the sort of embedded side. And then if we look at the other service areas, so the projects that we have are still continuing. There have even been some new projects and some new investments and so on and so there is some demand that there are certain projects starting, especially in certain customer segments. But overall, it's a slightly more difficult market.

Okay. Then last one from me. Are you expecting kind of similar improvements in profitability now for Engineering Solutions and Technical Communications as we saw with software embedded this quarter as you are kind of implementing this adaptation measures for these segments?

Well, we, of course, have Q4 coming up. Q4 is normally the best quarter for us, and there are long months starting or we are running in October. So it's a long months. And we do see possibilities, and we are looking to improve the profitability in the service areas. But in Technical Communications side, we do expect improvement, but perhaps not to the sort of 10% levels that we saw in the software side there due to certain issues in Central Europe and the lack of possibilities to impact the operational efficiency, no possibility for temporary layoffs, et cetera. So it will take a little bit more time to get those kind of profitability levels.

The next question comes from Juha Kinnunen from Inderes.

This is Juha from Inderes. Couple of questions from me. Let's start with pricing, which is always interesting when the demand is getting weaker. Have you or your competitors pushed down the prices? Could that could be behind this lag in growth?