Sitowise Group Oyj (1FT.F) Earnings Call Transcript & Summary

Welcome all, and thank you for joining Sitowise's Q3 Results Webcast. My name is Mari Reponen. I'm Head of Investor Relations here at Sitowise. And today, I have here with me our CEO, Heikki Haasmaa; Interim CFO, Kim Stromberg. And they will begin shortly their presentation on our Q3 results, followed by outlook and growth priorities. As usual, you can submit questions via the chat below the presentation and please include your full name in presenting those. And Heikki and Kim will address those during the Q&A session after the presentations. I turn it over to Heikki and Kim now.

Thank you, Mari, and welcome, everyone, on my behalf as well. Let's start with the key highlights for the third quarter. Firstly, I'm very pleased with the continued strong performance of our Infra and also the Digital Solutions business. Both businesses delivered above target level profitability despite the mix in parts challenging market conditions. Then in the Digi part, one of the key drivers behind the strong performance was the increasing share of our Software-as-a-Service business. It grew by 15% year-on-year and represented approximately 1/3 of Digi's net sales during the quarter. Third event worth highlighting is the improving performance in our structural engineering business, both in Sweden and Finland. This has been the area of challenge for us some quarters, but now we are clearly seeing that we are on the right track with this discipline in both of our countries. And this is, of course, very promising. The Buildings business has actually also undergone a clear shift during this year, thanks to the all adjustment measures what we have been implementing earlier in this year. And also, there's a broad set of actions that have been implemented for Sweden, and I'll elaborate that a bit further. Overall, we also saw a clear improvement in the utilization rate for the whole group, and that's, of course, very important. And as a final element and an important one is that the order intake was a very good one for the third quarter, showing clear improvement compared to last year third quarter. And then also the order book increased from the second quarter level. So really happy about these achievements. And then the key figures still in brief. So the group net sales declined by 3%. Adjusted EBITA margin was 4.2%, heavily impacted by our business in Sweden. And in other words, I really want to highlight that our Finnish operations performed very well. And I'll come back to that one also together with Kim a bit later on. And overall, we feel that we are now better positioned for a turnaround in Sweden in '26. So a lot of achievements in that area. Then operating profit for the third quarter was better than last year. Then there are some seasonal factors, such as summer holidays and also the lower profitability affected cash flow and leverage. But overall, our financial position remains solid, and we'll also cover this part in more detail. And then as I said, already order intake, a very good one for the third quarter. Then we'll move on to the business areas, starting with the Infra. First, a major win, which we are very happy about. During the quarter, we won Lohja-Salo railway plan together with Sweco. And this project is part of The West Rail project and highlights again our Infra team's high expertise in this kind of rail project. So this is really great news. Then looking at numbers, net sales in Infra grew by a bit over 4%. And now Infra actually already represents 39% of the whole group net sales. The growth was very much driven by green transition and also industrial projects and the rail project that we won also earlier last year. After several also a bit quieter quarters, now the level of state investments seem to be gradually also improving with multiple midsized road design tenders presently underway. And then looking ahead, we expect the market still to remain mixed with modest public sector budgets in traditional infra spending also next year. However, then there are several growth drivers for us, again, green transition, environmental services, defense, security-related services, and we expect them to stay strong. And overall, the infra order book remained at a healthy level during the third quarter as well. And then when we look at the fourth quarter, and this same applies naturally to all of our business areas. So we have the 1 working day more compared to last year. However, we expect that the positive impact might be a bit subdued as we actually have 1 day less in November and 2 days more in December and now the Christmas timing is a bit challenging from the work point of view. Then moving on to buildings, starting again with the major win as well. So we were selected to design the building technology for so-called hospital or acute care hospital to be built in Pori. The value of design project is roughly EUR 1 million, and the new 4-story hospital is scheduled to be completed in '29. And overall, we see that our solid experience in building technology for this kind of hospital projects and our strong references from the past played a key role for us winning this project. So very proud of the team with this win. Then looking more to the substance, so buildings, net sales declined almost 8% and now represents 28% of the group sales. At the same time, the drop actually in the full-time employees year-on-year was 14%. So compared to that one, we are satisfied with the net sales performance. Still, what we see is that the overcapacity of resources in the market is quite high, and that also leads to intense price competition overall. But of course, where we focus is on further active sales work and then like further improving the utilization and of course, that we have -- we are mastering our core processes, meaning how we manage the projects. And overall, I'm pleased with the progress what we have done during the last quarter, but also during the whole year. And thus, we are now having like a third year -- third quarter in a row, a very promising result and seeing that the direction is very good for the Buildings business as well. Then a bit still commenting about the outlook for the market. So we see that the residential segment recovery still will be like further delayed. So we cannot rely on that one. However, we see that there are a lot of opportunities in the other business or customer segments, namely industry, defense, security, also energy and data centers, and we continue to focus on those ones. And that also then builds a good picture about the medium- and long-term view of our business. So we see that, that will be a bright one. Then moving to Digital Solutions. In Digi, we clearly strengthened our position as a leading service provider for the critical traffic infrastructure and won 2 major contracts, a 3-year agreement worth of EUR 2.7 million to serve as an expert supplier for the Finnish Transport Infrastructure Agency, RAIDE railway information system. And then over EUR 4 million contract awarded to the Infracontrol, which is our subsidiary in Sweden, so for the Swedish Transport Administration, Trafikverket, for the operation, maintenance and further development of the national lighting control and monitoring system. So great, great wins for Digi. And then overall, coming back to the key figures. So Digital Solutions delivered, again, a very strong performance overall, especially also compared to the relevant IT sector peers and also the quite tough market what we are still having there. So net sales grew slightly from last year. But what is really the highlight here is that our product business continued to grow really well with like a 15% increase compared to last year. And now this product business already accounts for 1/3 of the Digi net sales. And profitability, as I said, exceeded our target level for the third quarter. And of course, we are really happy about this one. And it was especially driven by this strong performance in the product business. Then what comes to the market, so an outlook, we see that the -- still the market is quite mixed and partially challenging as well. There has been postponement of some public sector investments and also pretty strong price competition in the public sector. Private sector demand has been quite cautious and might remain a bit like that, especially in the forest industry, which is important for us. But overall, taking into account all of this, the quarter was a very strong one for us and also the order book is now in a very good level. So that's, of course, very promising for the future. And naturally, now thinking about the way forward, so we continue to heavily focus on the product business and also to a certain extent to new geographies. And that's also helping us to even have like a wider addressable market in the future. Then Sweden, the picture here is from a project in Marievik, Stockholm, where Sitowise is responsible for the design and planning all piping and technical installations for the redevelopment of property in Marjavik 30. And the work includes creating system designs for HVAC and other building systems. Again, this is like a great win also for us and now strengthening our order book in Sweden. Then coming to the key figures. So net sales fell by almost 20% and now the Sweden business contributes to 12% of the group sales during the third quarter. And of course, now our focus is really much on sales and thus securing the workload for our people. What I already highlighted in the beginning was that I'm especially pleased with the improvement that we've had in the structural engineering team there. So there the utilization rate has been improving, and we are really well positioned there for the future, where we now have the -- most of our focus is the building engineering system, the second biggest discipline in our Swedish business, where we need to further improve our order book. And overall, the business is still loss-making, but we see that now we've really laid the groundwork for the improvement in 2026. And also what is supporting this one is that there's increased tender activity, also the order intake, strong order book and now also seeing that this is seen in the utilization rate. So that's, of course, all these are the key indicators also then for the future. Then I would like to hand over to Kim. So if you just like to briefly present yourself, and then let's go to the group figures.

Thanks, Heikki. Happy to be here today. I've been working with Sitowise now for 1.5 years, leading the business controlling function and now then having the pleasure of acting as the interim CFO until Sanna Sormaala is joining us then in the beginning of January.

Great that you are here.

Glad to be. And if we dive into the numbers, our order intake showed a healthy growth in Q3 being up by 3.2% from the previous quarter and 22.3% year-on-year. All in all, order intake totaled at EUR 41.7 million, and it was driven by significant wins in Digital Solutions, as Heikki mentioned, and supported by order intakes in Infra, Buildings and Sweden. The order book, on the other hand, increased slightly quarter-on-quarter to EUR 149 million. Overall, Q3 order intake and rising tender activity give us confidence even as the order book needs further strengthening to support future growth. And as mentioned, we keep our focus on active sales in all business areas. On group level, our net sales declined by 3% in Q3 year-on-year. And as already discussed, our Finnish operations performed very well and in line with our top peers, supported by strong Infra and Digital Solutions growth and continuous improvement in buildings. Sweden, on the other hand, continues to weigh on group results, like Heikki already mentioned, and it's actually more than halving the group profitability. This quarter, in all business areas, positive contributions came from improved utilization, project management and cost efficiency actions, while prolonged weak market conditions and fierce price competition remains challenges. On this slide, the first graph illustrates our headcount and FTE development, reflecting operational capacity. FTEs declined year-on-year, mainly due to fewer full-time employees in Sweden and the Buildings business. In contrast, Digital Solutions and Infra saw an upward trend, supporting over 5% organic growth in these businesses in January to September. In Q3, net sales declined less than FTEs, which is then indicating a stronger sales per employee and growth in the product business also. The second graph shows the utilization rate, which tells about our ability to use the available hours in projects. On group level, utilization improved slightly from the comparison period and the improvement gains in Finland, especially in Digi and parts of Building business were unfortunately offset by Sweden, which, despite its improving trend, lowered the group rate by about 1 percentage point. Improving the utilization remains a key focus item across all the business areas. Similarly to the previous quarters, our liquidity remained good in the third quarter. Due to seasonalities, meaning that the holiday period usually indicates lower invoicing, while salaries and other costs are running normally, the Q3 is typically having a low cash flow. This year reflects a typical Q3 cash flow level, whereas last year, we saw actually a higher invoicing due to the VAT changes implemented by the Finnish government in the beginning of September. Naturally, the weaker profitability also caused pressure on the cash flow. Therefore, the cash flow from the operating activities before financial items and taxes was negative. And then the leverage was up and as the rolling 12 months EBITDA weakened somewhat. Pushing leverage down is one more reason for us to put full focus and all of our aim into improving profitability in the future. As a reminder, our financing facility was extended in March this year, and we continued with our 2 relationship banks. The extension was for 15 months from the previous maturity, i.e., the package is now valid until summer '27. Then lastly, this slide pretty much summarizes our key financial and other metrics. And I think we have more or less covered all of these points already. So heading then back to Heikki.

Thank you, Kim. Well done. So as a reminder, then this slide, you'll see it soon, shows how our business mix has been changing over the past year. And I already highlighted a bit about the key figures about the net sales or what is a part of a different business area there. But of course, the key point here is that the well-performing businesses are further growing, and that's the goal here. And of course, this is also like a change, which is driven by our own actions and also our decision to focus on areas of sustainability, energy, industry, defense, security and then also the products, but also about the market dynamics, especially the weak construction markets in Finland and Sweden, so thus burdening the share of businesses of -- like Buildings business and then also our business in Sweden, which is mostly about Buildings-related business. And then as we have been showing it earlier also, this then summarizes the percentage of sales of each business area, and I already went through that one. Then looking at the market, we overall expect the market in Infra and Digi to remain mixed but stable. And then what comes to Buildings and -- Buildings business and Sweden business, we expect still them to remain weak. But when we look at the next 12 months, we see that they will be improving from the existing low levels. And then looking at the profitability, I already shared that one, Infra and also now Digi being above that 12% target level what we have for the different businesses. Buildings below target. And then Sweden, clearly negative. And that's, of course, then the area of focus for us now going forward. Then if we still a bit further elaborate on the outlook. So when we look overall at the technical consulting market, we expect that to be quite mixed, but there continues to be very good demand for the green transition, security, defense and also overall on the digitalization of the business environment. And that will be supporting -- or this will be supporting, especially then the Infra and Digital Solutions business areas. In the Buildings business area, there have been signs of moderate recovery, still like further saying that the market -- we've seen the bottom of the market. We are seeing that, okay, there is a recovery, but it's probably quite still low -- slow and like materialize then on a larger scale only in 2027. And in what comes to the business in Sweden, we see that it's quite similar to what I just said for the Buildings, especially as majority of our business there in Sweden is related to more like a Buildings type of business area. But then, of course, we see that in Sweden, we have like businesses like infra and project management services where we continue to focus. And there, the demand is overall much better. And this is a familiar slide then summarizing where our focus is. So firstly, really want to capture the growth from the growth spearheads. So sustainability, energy, industry, security and also the product business. And then we've been now well succeeding with the turnaround in Buildings and positioned us for a turnaround in Sweden for next year as well. And -- but that, of course, continues to be the high priority item for us. And then, of course, we also seek for the further efficiencies, especially with the help of the AI and also computational design. And then naturally, the basic processes have to be well in control and those we are naturally monitoring on a daily basis. And all this then leading to better profitability and also cash flow position. And of course, as you saw during the presentation, we are then diversificating our offering. Then I think we are actually ready for questions. So Mari, come back.

Yes. Thank you. Let's start with Sweden. That's, of course, an interesting topic. Can you comment on how large the negative effect from Sweden was to the whole group in euros?

Unfortunately, I'm not able to disclose that information, but that's basically something that at least the ballpark can be quite easily calculated based on what we already shared.

And what makes you so confident that you can turn around the business in Sweden?

Actually, firstly, the team in Sweden has been doing very good work. Of course, the situation has been a challenging one. It's for sure. But then several now also leading indicators are showing that we are on the right track. And maybe starting with the most important, which is the order intake and then also the order book. So we see there like a continuous improvement. So that will be, of course, a key element. And then naturally, like a result of this one is that we are then able to improve the utilization rate. And also there, we are already seeing now increase from the levels where we have been. So that's really promising. And maybe I'll still highlight also this structural engineering that was like the biggest concern a couple of quarters ago. And there, we have already clearly made that turnaround. Now we just need to also apply same kind of good focus on the building engineering systems.

Okay. Thank you. You mentioned about the Finnish business that its profitability is at the level of the peers. But what is your analysis of the market more generally? Are you losing market share to peers? It seems that at least Sweco seems to be growing faster than Sitowise in these markets.