Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation of Etteplan's Q3 results for '24. I'm Juha Nakki, I'm the President and CEO. And after the presentation, there will be a Q&A session where you will be able to ask your questions from myself and also from our CFO, Helena Kukkonen. Looking at the contents of the presentation, we'll go through in a similar manner as before. We'll look at the highlights of the quarter, operating environment, financial development, look at how we did against our targets and then conclude with the financial guidance for the year and the Q&A session. But starting with the highlights of the quarter or low lights, if you would like to call them that. So, this was a very difficult quarter for us. We had difficulty in estimating the market demand. And as a result of that, we had to lower our guidance for this quarter twice, which was not good and very, very difficult to really see what is happening. But overall, the market conditions were difficult and extremely difficult to predict. On the positive note, we did manage to retain the same level of revenue as we saw last year. This was, of course, helped by acquisitions. But still in the difficult situation, we were able to get to the same levels, which we think is still an okay achievement. We also continued our investments into our business. Despite the fact that the market is difficult, we do need to continue to develop and renew our service offering. And for example, related to AI, we did win new business again, and there seems to be good demand for these types of services, and we are making continuous progress in this front. Also, out of our market areas, China was the one that was developing quite favorably in Q3, not necessarily the Chinese market in total, but the market seems to be the trend of purchasing services or using partners is developing favorably and thus increasing the need for different kinds of services, which drove the demand during the quarter. And also, we managed to increase our number of hours that we sold to the Chinese local market significantly. Then on the negative side, of course, the market situation was very challenging and even more challenging than we had anticipated, which led to the 2 profit warnings that we had to give in the market, which was very, very, very unfortunate, of course. Due to the difficult situation, our efficiency was not as good as we had hoped and would have liked. So, of course, then we needed to continue with different kinds of adaptation measures to get our organization and our operations in balance with the current demand. And this, of course, had an impact on our business, and it also had impact on our finances as there were significant costs related to these activities that take place. We also are seeing that the market is not going to be developing favorably even during the rest of the year, unfortunately, with the current turbulence in the world with the sort of geopolitical tension that is increasing all the time. We do not believe that the market will develop positively anymore for the rest of the year. And, of course, next year, we are hopeful still but during this year, we don't expect to see any positive development. And again, as I said, the guidance was lowered. If we look a bit more detail into the operating environment, of course, the conflict in the Middle East and the sort of increase or, let's say, the escalation of the crisis there has increased the geopolitical tension and created even more uncertainty to the market, which is then affecting our customers' decision-making and then the markets overall. We have been earlier talking about the interest rates, and we had been hoping that with the decrease of the lowering interest rates, our customers would start to have the courage to invest more into their business going forward. But this, unfortunately, has not happened even if the interest rates have started to decline, but the pace of decline is slower than expected. And, as of yet, our customers do not have the confidence to really start investments at the top of the time being. And also, if we look at the order backlogs of our customers. Our customers are not getting as much orders in as they are delivering. So, the order backlogs are declining for the majority of our customers today, and that is also having an impact on their willingness to invest going forward. So, right now, there's very little activity on the investment front in many, many industries. The positive industry today and at this time is the defense sector. And there, we still see very, very good demand, and there is also increased, let's say, opportunities to increase our business, and we have been able to capitalize on that opportunity. But unfortunately, the volumes are not big enough to compensate for the sort of organic loss on the other side. We have been talking about positive and good development in the energy sector. This continues, but not as strong as it has been. And green transition, which we have been seeing positive development earlier, is a little bit on hold as well. So, sustainability continues to be important but the investments related to these areas are a little bit on hold at the moment as well. So, very little positive sort of sentiments in the market currently. If we then look at the country level aspects or different operating markets where we are, in Europe, it has been particularly difficult and the market demand has declined during the third quarter, Finland and Germany being the most difficult markets for us, maybe due to the industrial structure of these 2 countries. And, as I mentioned earlier, China has been the one market where we have seen clearly positive development, not necessarily driven by the market demand itself, there are still quite low investment levels from Western companies operating in China which has been our traditional sort of customer base. But now the trend of purchasing services is continuing and it's developing favorably. And we are seeing a lot more Chinese customers also starting to buy more services, and this is helping us to grow our business in China. And I said, we were able to increase the hours that we sold to the Chinese market substantially during the quarter. We then look at a little bit the figures. So, as mentioned, the revenue stayed the same. We saw the biggest drop in Engineering Solutions. The other 2 were growing a little bit, but not enough to make the whole company grow. So, we were in par with last year. If we look at the EBITDA, of course, there was a significant drop, the biggest drop in Engineering Solutions but all the service areas dropping and significant costs were affecting the result in this quarter. I'll return to that later on in the presentation. If we look at the revenue and personnel split. So, Engineering Solutions was at 52% and Software and Embedded, 27%; Technical Communications Solutions at 20% of our revenues. Revenue by area of Finland, 47%; Scandinavia, 26%, so increasing compared to last year mainly due to the Strongest acquisition that we did in the beginning of the year in Denmark. Central Europe, 23%; and then China, 4%. And personnel by area, so Finland, 50%; Scandinavia, 19%; Central Europe, 21%; and China, 10%. And if we look at the revenue by customer segment, so Energy still growing proportionately a little bit and still quite decent demand, not as good as we've seen earlier. So, the investment levels are lower also here, but still relative terms, a good development. Also, automotive still continues with the electrification as a strong trend in the car industry. So, there is still demand and we see that the car industry and the car manufacturers really do need to invest into this area. And for that reason, this sort of development activity remains on a fairly high level. But then the sort of more traditional industries, industrial machinery, forest industry, metal and mining, there the orders are down and also as a proportion of our business, the volumes are coming down. Of course, on a positive note, defense industry now at 5%. Aerospace is actually lower compared to the previous year, but defense is quite strong. So, the overall aerospace and defense segment is growing, and we see still a lot of potential in this area, and we're working hard to capitalize on this opportunity. If we then look at the financials more in detail for Q3. So, overall, the development was quite negative, and we are very disappointed with these kinds of results. But we decided in the quarter that with the kind of weak outlook, we will do reorganizations, and we will do things to secure that our business will be improving going forward, and this is also very visible in these numbers. But all the key figures are declining compared to last year, and this is disappointing. On the revenue side, EUR 80 million, so in par with last year, but still organic growth was minus 4.2% and at comparable exchange rate at minus 4.5%. So not good, reflecting the current market situation. And for the first half year, slight growth, so plus 1.9%, but still organic minus 3.8% or at comparable exchange rates, minus 4% down from last year. And, of course, difficult market has resulted into these figures. Revenue from key accounts has decreased by more than 10%, and this kind of also shows where our customers are currently. Demand weakened, of course, during the quarter, very slow decision-making and very, very few new investments starting. And this was, of course, the story for most of our operations during this quarter. Acquisitions, of course, helped to maintain the same level of revenue, but overall, the development was very, very negative. In EBITDA, we had a much weaker result than last year, so at EUR 2.9 million and 3.7%, which is very, very disappointing for us, minus 53.8% compared to last year. But, of course, there were significant costs in this quarter. We had restructuring and other onetime nonrecurring costs of about EUR 1.4 million. And then on top of that, we had a very unfortunate error in our accounting in Sweden related to salaries, which had an effect of EUR 0.8 million. So overall, EUR 2.2 million burden from these kind of one-offs for this particular quarter. That on top of the weaker market conditions led to these kind of results. And, of course, we cannot be happy with this. EBIT was at EUR 1.4 million and amortizations were at EUR 1.5 million for the quarter and the amortizations for the full year were at EUR 4.5 million, so increasing slightly compared to last year due to the recent acquisitions that we have made. Earnings per share and dividends. So, earnings per share was at 0 for the quarter, which is extremely disappointing and for last year, it was better. And for the full year at 0.29, 32.6% down from last year. So again, a disappointing figure. Of course, we had higher or still high financial expenses for this quarter, which is having an impact on EPS. Cash flow was also weak in this quarter. Of course, we did have quite a lot of these kind of non-recurring costs, which had a burden on the cash flow. But also our accounts receivables were increasing, and we did see a little bit of a change in our customers' paying behavior, and this had led to a decreasing cash flow, operating cash flow for the quarter and an increase then on our account receivables, which I will show you later. Personnel was at 3,870 and on average, 3,871. And compared to the end of September '23, the number is down by 3.5%. Of course, in this kind of prevailing market conditions, we have slowed down our recruitment and also then we have had to take measures to adapt our capacity to the prevailing market conditions, which has had an impact on these figures as well. With the restructuring, we have also been using the temporary layoffs in Finland and currently or at the end of the quarter, we had a total of 158 employees temporary laid off in Finland. If we look at the income statement a bit, so the financial expenses at EUR 1.4 million, slightly better than last year, but still high and having a burden on our EPS. And if we look at the balance sheet, so here, the trade and other receivables increased by almost EUR 5 million is one of the explanations to the weaker cash flow. So, clearly, our trade and other receivables are increasing despite the fact that our revenue has stayed the same. A little bit of impact from the customer mix, but also a heavy impact from our customers delaying payments. We do not see a risk that our customers will not pay. Our customer base is very solid, big customers, known customers and leaders in their own field. So, we don't see a credit risk increasing. But still with this kind of change in the purchasing behavior, this number has changed and impacted our cash flow a little bit, unfortunately. If we then look a little bit more on the service areas more in detail. So, starting with the Engineering Solutions. Here, clearly, the sort of order volumes for investments and also the lowering demand for the project deliveries as our customers' order books are declining started to show in the revenue development and revenue was decreasing by 6.9%. Within the difficult market conditions and particularly in Germany, we also did restructuring measures and continued with restructuring measures. And also, we decided to discontinue the Building Technologies business in Germany, which also then resulted in certain nonrecurring items or nonrecurring costs for this service area. Under that, all the activity, all the measures taken, plus then the portion of the accounting error in Sweden, the service area was burdened by EUR 1.7 million of different kinds of nonrecurring costs and items. If we then move to Software and Embedded Solutions. So here, we did have growth of 13%. The revenue was at EUR 21.7 million, but this is mainly related to the acquisitions completed. So AFFRA in Sweden and also STRONGIT in Denmark, having a positive impact on the revenue. But organically, the development was negative also in this service area. This service area is, of course, more heavily impacted by the R&D investment decisions of our customers. And still today, we see very little activity or very low levels activity in R&D within our customers. So, we had a difficult market situation. And also here, we needed to do some more adaptation measures to adapt to the weak market conditions. The nonrecurring costs in this service area, which were similar to the Engineering Solutions by nature, they had an impact of EUR 0.2 million. And in the Technical Communication Solutions side, we had a slight growth of 4.6%, but against the quite weak comparison period last year but profitability was still low-ish, and there was a EUR 0.3 million burden on the result by the nonrecurring items. And also here, due to the weaker market, we did need to do more adaptation measures, and that had a little bit of an impact on the business as well. On the positive side, this is the service area where we have been continuing to or on all areas, we have continued to develop our offering, but this is the service area where we have seen the first deals coming out of our AI development. And this is, of course, very promising. So, this is something that we will continue to invest in. And now that we are working with our strategy for next year, we will also see some new things in this service area when we are introducing the service area strategy as well. So, this will be out in December this year. And if we then look at how we did against our financial targets for this year, so, of course, revenue, we had the target of EUR 500 million. Already in Q2, we said that we will not meet this target. And in the prevailing market conditions, it is impossible to grow like this. Of course, now we have one quarter left, so we will be behind. Currently, the rolling 12 months is at EUR 365 million. Revenue outside Finland, this is something that we have progressed against our target. The target is 55%. We're currently at 54%. So, this is according to our strategy. We have been able to grow outside Finland and reduce the sort of risk of Finland as a country, and this is positive. We do want to continue growing in Finland as well, but we do want to accelerate our growth more in the other countries. So, this is a positive development and we feel that we are in a good position here. Managed Services revenue, slightly lower now, 65%, but right now, in the prevailing market conditions, there are very few bigger projects and also our sort of outsourcing model businesses are a little bit down on revenue as our customers have lower levels of deliveries. And then whatever new we come up with is very small assignments and some of it is more consultancy mode. So, for this reason, this has been also slightly dropping in the current market conditions. And on the operating profit EBITDA side, 6.6% for the year, now burdened heavily by this particular quarter. And, of course, this is a level that we cannot be happy with and are very much working hard to improve on that going forward already in the fourth quarter, but then in particular, next year and onwards. And, of course, the financial guidance, unfortunately, we did need to lower that twice during the quarter. So, now we expect the revenue to be between EUR 355 million to EUR 370 million and the EBITDA to be between EUR 18 million and EUR 22 million. And well, the outlook we have already discussed. It is difficult out there currently. It's very difficult to predict the changes in the demand due to the uncertainty that is there. The increasing geopolitical tension is really not helping currently to make decisions at our customer side. And for this reason, we do see now that during the rest of the year, the market will remain challenging, and we just need to battle hard and fight it out in the market to win whatever opportunities we can to come out with a decent sort of ending for the year. But it will be difficult during this year. Hopefully, next year, then the market will start to change for the better. And some signs of that we have seen, but we don't have any confidence that there would be any major improvement during this year. So that is, concludes the report for the time being. So, not very positive at the moment, and the result is disappointing for us. But in a difficult market, in a difficult situation, we have now taken measures to make sure that we can be back at better levels going forward, and that shows now in this particular quarter. But now is the time for questions. So, I would open the lines for any questions that you may have. Thank you.

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

First, could you give us a bit more information on what was behind the salary entry-related accounting in Sweden?

Well, basically we have booked 2 little salaries during the year, unfortunate mistake, which was done in our Swedish accounting team. And as a result, now we have booked the correct balance of salaries and what we have paid out. So, unfortunately, this is what happened and unfortunate error but had a major impact in this particular quarter. Now it's on the right level. But, of course, if we would have known that this is the case, of course, some of the decisions that we have taken during the year would have been completely different. But unfortunately, this is the case, unfortunately, it happened, but now it's correct, and now we know what to do.

Then on the key accounts, the revenues were down 10% year-on-year in Q3, and it has been down the whole year. Could you bring us a bit more color on the kind of number of accounts that you include in this key account group? And has the revenue decline been steady across different sectors in there or has it focused on certain industries or companies?

Well, there are, of course, some customers that are really down, and we are not disclosing the exact number of key accounts, but it's a substantial part of our revenue. And I would say that some key accounts that we have in the defense sector are really strong. But then in the sort of rest of the industries, it is a little bit the same story all over. So, energy sector, a little bit better, so there, we have positive inroads and there, the demand situation and level of investment has been, during the year, a little bit better. But then if you look at all the other industries, so really, the investment levels are low, which is then visible in our development there as well. We have not lost any major key account or we have not had forced to change any of these key accounts during the year. So, it's a relatively comparable figure but I guess it just shows how our bigger customers are doing and then also has this kind of an impact on our business.

Then you noted on the market outlook that investments related to energy efficiency and green transition are also now slightly down. Do you see this as a kind of part of this demand decrease across the sectors or do you see that there has been some overinvestments in the sectors?

No, I wouldn't say that there has been over investments. I would just say that our customers, when they have declining order books, which goes, well, not for everyone, but across the majority of our key customers and main customers. So, then they are just cautious for the time being. They are doing efforts to protect their own results, which most of our customers have done fairly successfully. But this also means that they are reducing their investment levels and doing all kinds of different similar measures that we are taking to adjust the organizations to fit the current market. And in these kind of conditions, certain investments are, even if there is a genuine interest to invest more into sustainability, somehow these investments are not moving forward and the investment decisions are postponed. I wouldn't say that they will be stopping. I just think that they are on hold for the time being until our customers start to have a sort of better belief in the market developing favorably in the future.

Then final from me. How has the competitive landscape and pricing environment evolved during the quarter as the market environment has been so difficult?

Well, of course, when you have projects and when there are quotations, of course, there is pricing pressure and our customers are, of course, having this kind of competition around for any of their purchases. But I would say that we have been doing relatively well in this respect. And I would say that our near-shoring solutions from Poland, our offshoring solutions from China are really helping us to win the little business that is out there. So, I would say that these sort of strategic investments that we have made in the past and the operating model where we are able to cross utilize resources from different parts of the world to create a little bit lower cost level. So, this has paid off well for us in this kind of difficult market. And this is also a means for us to work with this kind of price competition that there is currently in the market.

The next question comes from Juha Kinnunen.

Yes. This is Juha Kinnunen from Inderes. I will start with the question. Etteplan has been behind the curve this year in estimating the demand. Could you just analyze a little bit what went wrong? Is that the clients were too optimistic on their own demand and that's why you were lagging and relying on them? Or did something else happen that explains this?

Well, I guess that we were fair to say that we were sort of overoptimistic. We were hoping that this market would change for the better. We had hoped that according to the sort of financial sectors' estimates, the sort of basically the interest rates starting to decline, the inflation getting lower would then sort of accelerate the businesses and accelerate the willingness to invest into new things and new businesses but this has not happened. We have had this dialogue with our customers, and they have also been anticipating that things would turn better. At which pace? Has been a big question mark for everyone but I guess, we have overestimated the sort of development in the market. In our line of business, when the market starts to turn for the better, then normally, these investments start from R&D. So, our customers prepare themselves for the future and for future demand by improving their products and improving their competitiveness by investing into different things. And when this happens, then our business actually develops normally fairly favorably in the beginning. So, we have a good acceleration in the beginning as our customers are normally not investing into their own organization but they rather use partners in the beginning when the sort of upturn starts to come. So, our business normally benefits fairly fast from this kind of market shift. And we had hoped that this market shift happens first in the second quarter, then during the third quarter, but now we have sort of recognized and realized the fact that it's not really happening, and we don't believe that it will happen during the rest of the year. So, I guess that to summarize, we were over optimistic, and that's very, very unfortunate, but that's how it is and we just need to be sure that we are more sort of to the point in the future going forward.

And you were not the only one who was too optimistic, so no blame there. But a question about relating the same issue, kind of what kind of market environment are you preparing now? I mean, do you expect it to be at least steady and then start improving or do you think that this level will continue for a longer while?

Well, we think that currently see that there are certain areas where we still see customers dropping and certain areas where we see still decline. But then there are also other areas where we see a little bit of positive signs. So, we are hopeful that the market would stay on this kind of low level of demand, but not decreasing further during this year. So, we hope that we are hitting now sort of the bottom. And if that is the case, then with the measures that we've taken, maybe we do need to take some and we are prepared to take additional measures as well if needed, but still with the measures taken and maybe some further actions, so we would be able to manage the situation with this demand. And now we see that the consumption is starting to increase with the lowering interest rates and with the lower inflation, people have a bit more money at hand to spend on buying goods or traveling or whatever. When the consumption starts to increase further, investments will have to start at some point. And for that reason, we believe that there would be some kind of positive development during next year. But when exactly that will be, that is, of course, as difficult a question as this year has been.

And finally, have you seen some kind of a change in customer behavior, meaning that maybe because I think that the outsourcing levels have come up in general during the past decade or so. Do you think that it's possible that they kind of use that buffer more nowadays and kind of because we haven't seen major layoffs for a while, I think, in your customer segment. And so, they are defending very well their profitabilities in general, but your demand is really lacking. So, I'm wondering if you have seen some kind of change in customer behavior in general?