Sitowise Group Oyj (SITOWS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to fellow Sitowise's Half Year Results presentation. My name is Mari Reponen, and I'm Head of Investor Relations here in Sitowise. I have here with me our CEO, Heikki Haasmaa; and our CFO, Hanna Masala, who will shortly start the presentation. But before that, I will briefly give you some technical instructions. So here, you can see our agenda for today. So first, Heikki and Hanna will discuss our Q2 and half year performance. And after that, Heikki will go through our strategy execution and how it has progressed especially in Q2. [Operator Instructions] And now we will continue to the actual presentation and I will hand over the stage to Heikki and Hanna.

Thank you, Mari. So let's start with the second quarter, which is presented here in nutshell. So the market around us was very mixed between our business areas. But as a whole, we continued healthy growth during this second quarter. Our net sales increased by 9% year-on-year. And on constant currencies, the growth would have been 11%. What I'm very pleased is our organic growth that was 5% year-on-year including the downside from the buildings. So if we exclude the buildings, the organic growth for the other 3 business areas was double digit at 11%, which is actually a very good growth rate. Our order book was stable at EUR 175 million and that we consider to be on a good level. Our second quarter profitability declined as we expected and the adjusted EBITDA margin was 8%. We'll go through the factors behind this development in more detail shortly. Our operating profit increased year-on-year as we had a clearly smaller amount of items affecting the comparability than last year. In second quarter, we also see strong cash flow from operations, which had a positive impact on our leverage and I'm very pleased with these performances. We had our annual survey during the second quarter, and we could see also there the impact of the tougher market environment in its results, especially in the buildings business area. ENPS remained, however, on a good level at 18. In the second quarter, we also completed an important acquisition after the quarter. And next, Hanna will tell more about that.

Yes. Thanks, Heikki. I'll be happy to do that. Yes, the acquisition of Infrasuunnittelu Oy was announced in early May, as you might remember and the company provides expert services in environmental and civil engineering. It has 17 employees who are now part of our infra business area. Since the acquisition, we have started the common journey actively and we already are implementing 2 projects together, one being [indiscernible], a large forest industry client. We have received very good feedback from the clients, from the corporation, and these assignments are progressing well. What we have also done after the acquisition and during the summer is that we've combined our sales and bidding activities so that we are strong together for future orders. And we've been meeting clients, for example, in the mining industry together. It's been really nice to see that even if the company's Sitowise and Infrasuunnittelu Oy are very big -- different in size, the way of thinking and implementing projects is very similar, and we see the kind of similar opportunities and challenges. So it's a good path and we look forward to continuing the journey together. So Heikki, you can take it from here.

Thanks. Then H1. So it was clearly better than in the second quarter, thanks to our strong first quarter. In the first half, we saw 11.5% net sales growth or 13% growth in constant currencies, and our organic growth was at the level of the comparison period at 5%. And also our second quarter adjusted EBITDA margin was down year-on-year. The first half performance was closer to the comparison period totaling at 9.9%. So we clearly -- and we also clearly improved the operating profit compared to last year H1. Our operating cash flow increased both in the second quarter and then overall during the first half of the year. And thanks to the improved operating profit and cash flows, both our net debt and leverage declined. And earlier this spring in first quarter, we had our annual client survey. We were happy to see that the level has stayed on the same good level as year before. And so I really would like to just thank our clients for their trust. One of the highlights of the quarter was naturally also the launch of our updated strategy. And at the end of the presentation, we'll come back to how we are progressing. Let's go then through our performance business area by business area, starting with buildings. Buildings continues to suffer from the very difficult construction market in Finland and its net sales declined a bit. The organic growth was also negative, but the acquisitions, especially Rakennuttajakaari in June '22 contributed to the net sales. The increase in interest rates and the general real estate market development have slowed down the renovation market as well. It also mentioned that there was 1 working day less during the quarter, which impacted negatively by 2% in the growth. We also continued actions to adjust our capacity through different vacation arrangements and limited temporary layoffs. The effective management of work has led to buildings utilization remaining on a good level. I'm really thankful for that one. Pricing has developed well, ensuring long-term profitability instead of entering to the toughest price competition. We also still have a good order book for buildings and new orders are coming in from all of the business segments. Of course, then overall, in the construction industry -- or the weakness in the construction industry is impacting also now our business, and the outlook is weak for the coming quarters. It also mention that there is 1 working day less, both in the third quarter and fourth quarter, which in our business model have a clear impact on revenue and EBITA. Infra business. So there, the picture is very different. We are clearly outperforming the market, and I'm very pleased with this performance. Infra grew 13% year-on-year and this growth was almost entirely organic. Also in Infra, the market is mixed. There's a strong demand for energy and environmental projects related to the green transition but also weaker demand for projects related to municipal infrastructure design and groundworks for new buildings. This, of course, has a linkage to the weak construction market overall. There are several factors impacting Infra's great performance but I would say that, ultimately, the success is based on the work done in the past years and quarters so that we have really close client relationships and market position. We've also managed well with the pricing and then also the utilization rate improved clearly in second quarter after the temporary drop in first quarter. Order book also on a strong level. So as a whole, we see that the Infra is really well performing, there's also a stable good outlook for the Infra going further. In the Digital Solutions, the growth was really good. It was 69% compared to previous year. And that's to a large extent coming from the acquisition of the Bitcomp Company, which is a Software-as-a-Service provider in the [ forest rectory ], but also the organic growth was strong for the Digital Solution as a whole. Market was favorable in the public segment investments, the -- all the public segment investments were on a good level and also the renewable energy sector provides clearly new opportunities. On the other hand, the private sector investments slowed somewhat. Overall, we had a strong performance in Digi as a result of pricing successes, good utilization rate and then also the increase of the higher-margin SaaS business. Outlook is good. However, there are some signs of market slowing down in the private sector. During the H2, we don't also get that kind of tailwind from the last year acquisitions. But still, we see that the SaaS business itself continues to grow well. And then new leadership in Digi as Anna Wack started with Digi Business in May has been well received, and our strategic focus continues to be on high-growth and high-margin segments, streamlining product portfolio and further increasing the SaaS business. Our Swedish business grew also well and especially if we take into account the weakening of the Swedish krona. So with a constant currency, the growth would have been 16%, which is a very good achievement. It came both from the acquisitions and also from the organic development. In Sweden, we are also facing a mixed market that is affected by inflation and rising interest rates. So the local Infra market is growing fast. There is a good demand in the commercial, industrial and also the institutional building projects. However, the local housing market is very weak. But actually, the good thing for us is that Sitowise Building is not that exposed to the weakest market segment. Order book increased following Digital Services contract extension and utilization rate is also on a good level. And as a whole, the outlook for Sweden for our business remains good. However, there are some uncertainties related to the overall economic development in Sweden. When we look at the growth on the whole Sitowise level, then we are making good progress, especially considering the negative calendar effect of 1 working day less than in the comparison period. The challenges in the construction market and also the weakening of the Swedish krona. So we can be happy with the growth. In constant currency, we still had double-digit growth, which is in well in line with our financial growth target. And overall, we can be very satisfied with the 5% organic growth, considering that the buildings business area suffered from the market downturn and showed negative organic growth. In Infra, Digi and Sweden, our organic growth was driven both by pricing and also increased volumes. The order book for the whole Sitowise level was roughly at the level of the end of March. There was a small 1% decline in the order book due to the weak market situation in the buildings and a small decline in the Infra order book. The decline in Infra's order book was related to the parliamentary elections in spring as large Infra tenders tend to be put on hold as our clients wait for the national level decisions on the Infra investments. Despite the decline in Infra's order book, it is still at a very good level. In Digital Solutions, order book remained at the high level of the previous quarter. And in Sweden, the order book increased as a result of this Digital Solutions extension deal. Compared to the end of June, our order book was up by 4%, June last year. And then great to also share with you a couple of great wins. What we have had recently. The first example is from the Infra business area, which won a tender for the regional design of Helsinki West Harbour for the Port of Helsinki. The second example relates to the Digital Solutions who won traffic comps tender for the utilization of commercial mobile communication networks. And then the third example comes from Sweden where we received this repeat order, what I just mentioned for the maintenance and development of a national support system for road traffic. So great wins all. The 3 things that are important in analyzing our technical consulting business are presented here. So the -- more as a recap. So the first graph shows our headcount and FTE growth, which tells about our capacity to grow. Sickness, absences play a key role in the picture as tools reduce, the available capacity and then utilization rate in the third graph tells about our ability to deal available hours. During the second quarter, we had a small increase in the FTEs, and that had a minor positive impact on business. The sickness-absences were slightly up from the comparison level. And this had roughly like a EUR 200,000 negative EBITA impact. Second quarter utilization rate improved from the previous quarter, and this is mostly due to the improved utilization rate in Infra. Our buildings business area also succeeded fairly in the workload and workforce management, taking into account the tough circumstances. And now back to Hanna.

Thanks, Heikki. So we are obviously not fully satisfied with the adjusted EBITA margin as is 8%, and this is below our target level. However, when we look at the market around us, we still conclude that this is kind of okay, and we've been able to remain as the most profitable company in our industry. The biggest reason for the profitability decline is market driven, the weak performance in Buildings. There, both growth and profitability have taken hard hits, and we've been managing this with temporary layoffs and other efficiency measures. Heikki will soon come back to the further measures we are taking and have announced today. However, all of our business areas including Buildings still have clearly positive profit contribution. The second factor impacting the profitability in Q2 were the salary increases from the collective bargaining agreements that now came into force in this quarter. We already mentioned and talked about this in connection to our Q1 reporting and now we can see from the numbers that the personnel costs were up by 12% compared to the previous year during Q2, while the FTE was up by 6%. So the difference then reflects the impact of the salary increases. As mentioned earlier, we are mitigating this increase by focusing on pricing and our efficiency measures for example, cutting unutilized premises, streamlining IT purchases and so on. Third item, which Heikki already referred to was that the quarter had 1 working day less than last year. And this is obviously hitting our top line and bottom line. Then just as a reminder from a Q1 presentation, there will be also the similar negative calendar effects in Q3 and Q4 as both of them will have 1 working day less than the previous year. And this, obviously, is on top of the typical seasonality, activity level where the Q3 is typically the lowest as the summer vacations happened during that quarter. I already referred to the impact of the collective bargaining agreement negotiations. There, as a reminder, the increases in salary was roughly 4%. And then there was like this one-off payment in Finland, which also impacts the personnel costs in the rest of the year. As Heikki mentioned, the cash flow from our operating activities increased significantly and was at EUR 9.6 million in Q2, mainly as a result of the decrease in working capital as well as the higher operating profit. So very big improvement compared to the year before. Our net debt amount was slightly lower than at the end of March, probably at the same level and also the leverage remained below our long-term target level. As we mentioned already in the earlier reports this year, we extended our financing agreement in February with 2 years, and now we have a financing maturity until March '26 and the terms remain the same in this extension. So we are comfortable with the current balance sheet structure and the good operative cash flow gives us also possibilities to continue on the growth path. I think here, it's good to remind that overall, our risk profile, balance sheet, cash flows and so on, defer to a great extent from our clients in the construction industry and from the construction industry companies altogether. We are generating significant positive cash flows and have the capacity to continue growing. We've covered most of the contents of this page already. But maybe one thing worth highlighting is that we doubled our results and EPS for the first 6 months when comparing to year '22. Also, if we calculate the last 12 months figures, our adjusted EBITA was EUR 21.3 million and the reported or this kind of unadjusted EBITA was EUR 19.7 million. So this kind of indicates that the difference between these 2 roles, which are the kind of items affecting comparability also called one-offs is narrowing as we have had fewer items in this category. So then it's time to go back to Heikki.

Thank you. So the key drivers for the profitability improvement, they -- of course, we need to continue and want to continue the determined actions to improve the profitability. And we all made good progress under 4 main categories presented here and also in these quarterly calls earlier. So pricing excellence, cost awareness, billboard project work, smartest ways to work and then also having positive profitability contribution from the recent acquisitions. The positive thing is that we are working and progressing clearly with all of these ones, and they will be supporting our performance. Then in the Buildings business area, we'll take also additional actions to improve our competitiveness and profitability. So in practice, we'll reevaluate our Buildings organization and its operating models. And we aim at a leaner and a more agile organization that will be supporting efficient client and project work. Related to these plans, we have initiated change negotiations in our Buildings business area today, excluding its Special Services business segment and the support services in the Buildings area. And as a part of the change negotiations, there will be reductions of maximum 110 employees in the Buildings business. But of course, the negotiations are only now starting. We will increasingly focus on services with higher margins and this include Special Services, energy efficiency planning and also other services related to energy as well as security critical services. So they are clearly growing. And of course, as I said earlier, we've been well managing the utilization rate. And of course, that continues to be the focus area. Now with this change negotiation will also manage the fixed cost part of the business. Other focus areas in the business area includes further boosting the sales pricing and then further diversification of the client base. Then the market outlook and guidance. So the overall demand for our services is supported by the megatrends urbanization, renovation backlog, digitalization, climate change and also security. Then there are still several uncertainties in the market, which may continue to impact our clients' short-term decision-making but we don't see that they impact our business significantly. Outlook for the H2 in Buildings business is weak and that's why we are taking the actions as well. In Infra, Digi and Sweden, we see both areas of stronger and weaker demand, but overall, the outlook remains good. Then there are also other impacting factors in '23. So cost inflation, less working days in '22, potential currency fluctuations, higher interest expenses. Of course, we have also actions ongoing to mitigate many of these. And our guidance remains the same. So we are estimated that our net sales in euros will increase compared to last year and also that our adjusted EBITA margin will be broadly at the same level as the adjusted EBITA margin last year. Earlier this month, we shared that Timo Räikkönen will start to lead the Building business area at the latest February next year. He will join us from the position of Executive Vice President of Destia's Urban Development and Design Services. Timo has a really strong experience in business management and its development from a strategic perspective. And I'm really happy to welcome such a versatile and international expert as Timo to join our team. Then like a second part of the presentation, so sharing how we are progressing with our strategy. First, just recapping the main elements of our strategy. So our values and new purpose forming the culture, then our new revised vision strategic pillars and then also the strategic focus areas. And today, I'll focus on the strategic pillars and how we are progressing with them. Starting with the most innovative. So we've already revised our innovation model to be more focused and agile so that we can capture the best ideas that lead to like a significant commercial potential, then also supporting the strategic focus areas from the last page. There is a strong focus on building an innovation culture and like a truly understanding our clients' needs today and tomorrow. We also see a significant potential in using artificial intelligence in the more traditional design work that we have and then also a lot in the digital area of our business. So Software-as-a-Service maybe also data-as-a-service type of solutions that we can then bring in the future. We've also launched an innovation competition in the company to engage all Sitowise employees to innovate. That's really important. The most sustainable. So there we see a big potential in providing sustainability services to our clients. We've already had a sustainability tool and way of working in use for some time helping our experts to challenge our clients to make sustainable choices. And this has been progressing well and will also continue to develop the solution further. But in addition to that, we have identified areas with high growth and margin potential. And those are renewable energy, climate change mitigation and adaptation, biodiversity and then circular economy. And we have set clear targets for each one of these and also -- we've just lately revised our sales organization and also like management practices and are looking forward that they will be supporting us to reach these targets during the strategy period. Also, several things we're going to improve our own operations related sustainability. And then the most efficient, there, we have taken the first steps to find the smartest ways to work. This means improved processes, ways of working to help scaling our business and also further improving efficiency. We are also in the middle of renewing our ERP system and we'll also introduce CRM to help with increased customer activity and sales management. So a lot ongoing here with all the strategic pillars. And recapping also what we shared in our Capital Market Day in June. So there are 2 key strategic goals in addition to the financial targets, the first one being that we want to grow our recurring revenue to be 10% of our annual net sales by the end of '25. And the second one is that we want to double our sustainability services revenue to exceed EUR 10 million by the end of the strategy period. Then of course, there are also different measures on the clients' perception on us, which is naturally a backbone for the growth. And here is a summary once more of our strategy. But now I think it's time for the questions.

So thank you, Heikki and Hanna. We have a couple of questions here. The first is related to Buildings. How much has the market outlook worsened during Q2 in Buildings? And how challenging do you see the year 2024 being in Buildings?

I would say that if we compare to the second quarter to the first quarter, no big change there in that sense. It's just been weak for the H1, which actually already started last year then. And now while we've also taken actions is that we see that, okay, this will continue at least for the H2 probably also the beginning of '24. So that's also probably answering the question, but that's why we see that this will be taking a bit longer than earlier thought.

And how much are you looking to save with the changed negotiations in the Buildings business? And which time frame are these negotiations going to take place?

Yes. So the change negotiations started today. And we are looking forward that the outcome of the negotiations will be clear in the beginning of October. And then what comes to the outcomes. So of course, it's actually too early to say. However, of course, we are looking at like meaningful impact on our Buildings business.

Okay. Thank you. Then how is the M&A market at the moment?

Yes. Still, we see that there's like a room for consolidation in the market overall, both in Finland and Sweden. And we are also managing our pipeline and there are attractive opportunities. Hanna, any more insights?

Yes. Maybe I can just comment that even if now there has been only one concluded transaction this year, we'll be working and continue to work on different projects. So we are active. Obviously, we continue to be selective, but there are opportunities. And I think also our very strong cash flow and kind of a leverage which is below the target give us ammunition to continue that. So yes, looks like we can continue on that path as well.

Okay. And then moving on to the -- more to the strategy side. Could you elaborate a bit how you are progressing with your aims to increase recurring revenue to 10% of our on-net sales and to double sustainability service-related revenues?

Yes. So both are progressing. As I shared today, they are the key priorities for us from like a strategic goal point of view. If I start with the sustainable services. So actually, we already have like a good basis there. So as we shared in the Capital Market Day. So we are like -- we are having a EUR 5 million business. So that's growing well. There's -- clearly booming that market and we want to capture that one, and we are also now having more like a targeted sales actions to improve that further. And then when it comes to the recurring revenue. So we said that we are at the level of 4%, and we are clearly progressing with that one as well. So of course, it's a Bitcomp Company, which we acquired 1 year ago. They have solid SaaS business and LeafPoint Solution. And now it's been basically rolled out, and we are seeing that, that will be also supporting well with our target. So that's also progressing well. At the same time, we also have some fresh ideas in the R&D pipeline. So we are progressing.

Sounds good. And then we have a question about the business area profitability, which we typically don't comment. But there is a question about Sweden and Digital Solutions, and there is their profitability at the moment. Is there anything?

Yes, we are not disclosing the business area profitabilities.

So there were the questions for today. I would like to thank Heikki and Hanna for the presentation, and the audience for watching and for the questions. And next time, we will meet you in connection of Q3 results in early November.