Sitowise Group Oyj (SITOWS) Earnings Call Transcript & Summary

Welcome to Sitowise's Q4 and Full Year 2023 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. Here, you can see our agenda for today. And as you can see, Heikki and Hanna will first discuss our Q4 performance and then our full year development. And after that, Heikki will go through our outlook and how we are progressing in strategy execution. [Operator Instructions] And now we continue to the presentation, and I will hand over the stage to Heikki and Hanna.

Thank you, Mari, and welcome all on my behalf as well. So let's start with the fourth quarter summary. Overall, the market environment was very much the same as in third quarter, so with a lot of variation within business areas. Infra and Digital business solutions showed very strong performance, which we are very happy about. In Sweden, we made progress towards the right direction after the challenges faced during the third quarter. In the Buildings business, the market environment continued to be very weak and that burned the performance. Our net sales were down by roughly 8% year-on-year and organic growth by minus 6% year-on-year, including the downside from Buildings. If we exclude the Buildings, the organic growth was plus 3.4%. Our profitability declined and adjusted EBITDA margin was 4.6%. This includes a significant impact from the implementation of the new ERP and CRM systems in Finland. And I will go through all this development in more detail shortly. The adjusted EBITDA decline was reflected also in our operating profit, which decreased and in our leverage, which increased slightly from the previous quarter end. Cash flow, on the other hand, remained at a good level. And our order book was quite stable in fourth quarter, totaling EUR 163 million at year-end. So looking at the adjusted EBITDA margin, it's good to see that there are three different factors impacting. So firstly, we completed a significant investment into modernizing our system landscape in Finland. Actually, the ERP project was originally started already in '21 and timing of the go-lives was confirmed during the third quarter last year. And why the new ERP and CRM systems will bring long-term benefits, their go-lives in Finland in fourth quarter affected both our net sales and profitability significantly. The impact was equivalent to the loss of approximated 2 working days on group level, which means roughly minus 2% in fourth quarter net sales and minus 2.5 percentage points in the fourth quarter EBITDA margin. Of course, now we have a solid platform to continue to grow our business, especially when the market starts to pick up. And this is also a reason why we completed the ERP implementation. Secondly, we had a calendar effect, so one working day less during the fourth quarter than the year earlier. And thirdly, our margin was challenged, especially by the weak environment in Buildings, which has led to a reduction in Buildings net sales. In addition, due to the general macroeconomic environment, we have faced tightening competition and price pressure in all business areas. However, we were still pretty successful in mitigating these impacts with our pricing and cost control initiatives and with the measures taken in Buildings business earlier last year to add up to the very weak market. So to conclude, our business has actually been quite resilient during the fourth quarter despite the headwinds gone through. In fourth quarter, we also announced two important acquisitions that strengthened our position in the growing area of sustainability-related services. In November, we acquired Positive Impact Finland whose services include, for example, carbon footprint calculations, handprint studies, sustainability programs, climate roadmaps and also software related to sustainability. In December, we announced the acquisition of Ahlman Group expert business that is specialized in nature services, including both diverse nature surveys and services that support biodiversity. So following this acquisition, all together, 27 experts have joined Sitowise, growing it now to over 250 sustainability experts. And our aim is to continue strengthening our sustainability services expertise to address the growing demand in this field. Then let's review the full year performance briefly. It was clearly better than the fourth quarter, thanks to the strong first half of the year. This overall -- a bit over 3% net sales growth in '23 or 5% growth in constant currencies. Organic growth was 1%. And when we exclude the Buildings, our net sales grew by 12%, which is actually a really, really good rate. Adjusted EBITDA margin was down year-on-year, totaling 8.1%. And I'll come back to this shortly as well. Operating profit declined from last year to EUR 11.7 million, mainly due to the fourth quarter performance. We continued to generate significant positive cash flow in '23 and operating cash flow was slightly ahead of the comparison year overall. And it's good to remember, still that our risk profile related to balance sheet and cash flow differs to a great extent from the construction industry companies that are important client segment in Buildings. Due to the lower profitability, our leverage increased from '22. In addition to the two acquisitions just discussed, we had one more during last year, so Infrasuunnittelu, which we completed in May. Earnings per share was EUR 0.16 in '23. And the Board of Sitowise proposes that no dividend would be paid. And here is the adjusted EBITDA margin bridge for the full year. The key drivers in '23, profitability decline were the same as in the fourth quarter, so ERP and CRM implementation and then the calendar effect. On an annual level, we were able to mitigate better the pressure caused by external factors. And in fourth quarter, and our determinate pricing and cost control initiatives were really successful, especially in the first half of the year. But towards the end of the year, market headwinds became harder to offset as seen from the fourth quarter bridge. Without the ERP and CRM implementation, the full year margin would have been approximately 8.7%. Let's then look at each business area more closely, starting with Buildings. So as already said, the underlying difficult construction market has had an impact on our Buildings business. And to add up to the market situation we had earlier last year, negotiations -- change negotiations. And following these negotiations, the number of personnel decreased by close to 80 employees in addition to some voluntary leavers. Buildings suffered also from the weakened utilization rate and the negative calendar effect, and its net sales declined by 24% from the comparison period. As a part of the change negotiations, we define measures to improve profitability and redirect our focus to growth segments. These actions have been progressing as planned, but the weakening market environment has delayed further the materialization of the positive impact of the change negotiations. The Buildings order book decreased from the comparison period and due to the insufficient workload, temporary layoffs were started in Structural Engineering segment in January. The market outlook in the Finnish construction industry continues to be quite weak, and we expect that the Buildings business will decrease its -- in net sales in the first half of '24 with a turn to growth starting only towards the end of this year. As a positive note, we are seeing already some signs, positive signs in the private segment renovation, construction, helping us to get to growth also in the Buildings business. Overall, we believe that we are now better positioned to seek the growth and performance when the markets turns and we will increasingly focus on services with higher margins and aim to broaden our client base and service offering to improve the resilience of our Buildings business further. The areas we are looking are commercial and also logistic buildings, automation and then smart services. Then moving to Infra. So Infra had a great quarter, again in fourth quarter with net sales growth outpacing the general infra market. Overall, I'm really, really pleased with the performance, especially as it's almost entirely organic. Infra accounted already for 1/3 of the Group consolidated net sales. The market environment in Infra continues to be mixed with very strong demand for energy and environmental projects related to the green transition as well for the security-related projects. Weaker demand is seen in projects related to municipal infrastructure design and groundworks for new buildings. Infra was also affected by the negative calendar effect and the decline in the utilization rate year-on-year, was mainly due to ERP implementation. Infra order book increased slightly during the quarter and is on a good level. And looking ahead, we expect the market environment for Infra to remain stable in '24. And Infra's outlook is overall good and solid. Infra's growth will be also supported by these recent acquisitions and Infra's team, strong expertise, close client relationships and a versatile customer base. All in all, we are in a strong position to continue profitable growth in Infra during this year. Digital Solutions had also a good quarter, ending the very strong year overall. During the quarter, Digi's growth rate slowed down as expected. And the key reason for that were a bit more challenging marketing environment and the completion of the SaaS service LeafPoint solution rollout. It's also worth mentioning that we had a change in subcontractor invoicing, which slowed the growth rate from 9% in comparable terms to the reported 2% growth year-on-year in the fourth quarter. Digital Solutions growth was supported by the very good development in the SaaS and product sales, successful pricing and utilization rate that remain at a good level considering the ERP impact. Overall, we see that the weaker macroeconomic situation in Finland has impacted also the Digi's private sector clients who have cut their investment budgets. However, there's one exception to this trend, and that is renewable energy sector where demand continues to grow rapidly. And also the public sector continues to invest in digital solutions. Digi outlook is overall good and our product business continues to grow well. So we expect Digi's organic growth overall to be at low single digits due to the market situation. And then finally, Sweden. So as I already said earlier, we've taken steps towards the right direction there. And the krona-euro exchange rate continued to impact our reported sales figures. So in constant currency, net sales were flat, but in reported euros, the net sales declined by 5%. The top line was also impacted by the negative calendar effect. The market environment for technical consulting in Sweden remained reasonably stable during the quarter. So the local infra market is growing fast and there's good demand in commercial, industrial and also institutional building projects. However, the local housing market, on the other hand, is very weak. But as I said earlier, Sitowise Sweden is not that exposed to the weakest market segment. Our order book remained at a good level during the quarter. In third quarter, the focus in Sweden was temporary on internal topics, such as merging the earlier acquired companies, which slowed down our growth during the third quarter. And I'm now very pleased to say that our Swedish team has made good progress in redirecting the focus back on proactive sales, pricing and also diligent project management as defined during the third quarter. And we expect to see the positive impacts during the first half of the year. Last time, we also mentioned about the challenging project that was to be finalized by the end of the year and in this case is now almost closed. The market environment in general is expected to remain unchanged in the coming months, but there are some signs indicated -- indicating a slight market pickup in '24. And now handing over to Hanna to share more about the Group financials.

Thanks, Heikki. So as a recap, our net sales during the quarter were down by 8.3% from the comparison period. But they would have -- it would have been flat development if we exclude the quite sharp decline in Buildings. To be able better show the different components, we have now also given the adjusted organic growth figures by business area. The adjusted organic growth takes into account the impact of acquisitions, the number of the working days and also the exchange rate difference. So this describes the underlying sales evolution quite well compared to the previous year. As you can see, net sales growth was driven by Infra and Digi business areas, which both grew and where the demand from green transition and the security-related services continue to be among the key drivers for growth. However, the growth was adversely impacted by the continued weak market in buildings, as Heikki mentioned, the implementations of the new ERP system in Finland that had roughly 2% impact on our top line growth, the negative calendar effect and also the weakening of the Swedish krona. Organic growth was minus 6%. And as you can see from the graph in the middle, the growth rate has varied a lot between the business areas. The decline in recent quarters has mainly been driven by the Buildings business. If we would exclude our Buildings business, the adjusted organic growth was 3.4% in Q4 and 9% in the full year. As Heikki mentioned, the Group's order book was fairly stable in Q4, being down 2% from the previous quarter. And we had a record high order book a year ago, EUR 181 million. And obviously, the decline compared to that was bigger. At the end of the year, we considered that the order books were at a good level in Infra, Digital Solutions and Sweden, whereas in Buildings, we had insufficient workload. In any case, we've had very successful tenders in all of our business areas. And here are some examples of our wins. In the Buildings business area, we won the renovation project of a prime property owned by Sponda in Helsinki City Center. This covers broad spectrum of areas, HVAC, automation, energy, extinguishing devices and electrical design. Secondly, in Infra, we won a tender for the rock structure design of the Laakso Hospital in Helsinki. Thirdly, in the Digi business area, we signed a significant 5-year agreement for the next term of the Finnish Transport Infrastructure Agency's spatial information services platform, which is called PTP. And in Sweden, we won a contract for the parts of the second phase of the Tvärbanan Kistagrenen in Stockholm, as an example. All very interesting projects where we can help our clients to create value also for the society at large. This slide is familiar from previous presentations and showing 3 components -- key components when analyzing our technical consulting business. The first graph on the left shows our headcount and FTE development, and this tells about our capacity to perform our daily work. This time, as you can see, there is a clear decline in the number of FTEs, and this is very much linked to the reductions in the Buildings business area that we've already mentioned. At the same time, the number of FTEs grew in Infra and were fairly stable in Digi and Sweden. The second graph shows the sickness absences, which have played a key role in the picture as those reduced the available capacity. And the last couple of years, we've had quite high level of sickness absences. That still remains to be so, but there was a slight decline from the previous year's same period. And this had some small positive EBITDA impact compared to the last -- the year '22 fourth quarter. The third graph shows our utilization rate, and this obviously tells about our ability to build the available hours. The utilization rate in Q4 declined from the previous quarter, and a lot of this comes from the ERP implementation in Finland as the experts have needed to take some time to learn to use the new systems. Our liquidity remained good in the fourth quarter. As mentioned already many times, we had the ERP rollout in Finland. But apart from the slight delays and time spent for training and learning of the new system, this caused no problems on our daily operations, invoicing or such. So overall, we are very happy with how the rollout went. Cash flow from operating activities was close to EUR 12 million, slightly down from the comparison period, but very strong. From a cash flow perspective, the clearly lower operating profit in the fourth quarter was offset by lower working capital level tied into our operations. Net debt was slightly lower due to the higher cash position, but the lower adjusted EBITDA level year-on-year caused the net debt to EBITDA to increase slightly nevertheless. As mentioned earlier, our financing contract is still valid for 2 years as it was extended roughly a year ago. As already discussed, the full year performance was clearly better than Q4 on EBITDA level. The higher financing costs driven by the increased interest rate environment burdened our profitability in the lower P&L rows. Equity ratio was slightly ahead of last year. Our Board of Directors have today made a proposal to the Annual General Meeting, which will take place in early April, that there would be no dividend payment for the year '23. This is based on the considerations regarding the current market environment and to preserve capital for future growth initiatives. The Board will consider using the authorization for share buybacks during the year. Now shifting back to Heikki.

Thank you, Hanna. Yes. With the updated fourth quarter figures, the shift in the business mix has become also more clear, both in terms of net sales and the share of the FTEs. So both Infra and Digi has been increasing while Buildings has declined clearly. And also, we expect to see this trend continue in the near future as well with the current market environment. In '24, our priority is to improve profitability. This year, we see several external and also internal factors impacting. And they are, firstly, the market environment remains mixed. So we continue to face headwinds from the construction market downturn and the slowing demand in some other parts of the business, driven by the general macroeconomic environment. At the same time, demand for the services related to green transition, security and also digitalization of the building environment is at a high level, providing growth opportunities in all our business areas. Secondly, a key factor impacting our market environment will be the timing of the anticipated Central Bank's decisions to lower interest rates and whether those will be sufficient to drive increasing demand for new construction and investment projects and thereby technical consulting services as well. In addition to external factors, we expect to see some tail effect from the ERP implementations during the first quarter, which may have an impact on utilization rates in Finland. In the first quarter, we also complete the merger of the Bitcomp company, which we acquired 1.5 years ago and is part or will be part of the Digital Solutions business. And this might also have a small impact on the utilization. But as you saw from the EBITDA margin bridge earlier, we've been successfully mitigating the margin pressure caused by the external factors and we are very determined to continue on this path. So we focus on the following categories. So sales and pricing excellence, cost containment and awareness, overall billable project work and then focusing on these identified growth sectors such as renewable energy, industrial clients and also sustainability services and then continue to make progress with our smartest ways to work, including overall sales and also focus on the artificial intelligence and then [ fast ] gaining efficiencies. We also expect to have positive profitability contribution from the recent acquisitions. And here, you can see some details on the differences between the first quarter and the rest of the quarters of the year regarding number of working days and also the wage inflation. So we will have 1 working day less in the first quarter than last year. And in Sweden, actually 1.5 days less. In the following quarters, there will be 1 working day, more -- both in second and third quarter in both countries. And in the fourth quarter, an equal number of working days in Finland and minus 0.5 in Sweden. So on an annual level, we will have roughly 1 working day more than last year. The wage increase is negotiated in the collective bargaining agreement negotiations last year. We'll have a big impact in Finland in the first quarter. The increases started last year in April, but this year already in February. This means that in first quarter, we have roughly 6% wage increases for February and March compared to '23. In '23, we also had some onetime payments that impacted our cash flow. However, we don't have any similar ones for this year. In Sweden, the negotiated salary increases are 3.1% for this year, and they start from April onward. So from the second quarter onwards, the full impact of all the increases will be visible. And then market outlook and guidance. We have basically already covered the outlook but -- so we can skip that one. But then the guidance for this year is the following. So our net sales is expected to slightly decline in '24 driven by the Buildings business decline. Adjusted EBITDA margin is expected to be at last year level or above in '24. And then we'll move to the strategy part. So see -- recapping what we have been achieving last year and then also what is the direction going further. So our strategy picture, probably already familiar. So on the left-hand side, our cultural elements, our values, purpose and our vision. On the right hand also where we are heading and the strategic pillars, how we are also measuring then, how we are progressing and then our focus areas there on the bottom. But now let's go through these strategic pillars one by one, starting with the most innovative. So our innovation model was updated last year to be more focused and customer centric. And as a result of this, each business area have now new smart services maturing towards commercialization and first sales, so we have been clearly progressing here. We also continued to strengthen our data and analytics capabilities with focused efforts and especially AI has been in a big part here. And then thinking about where we are heading. So we continue to further develop the innovative culture that enables us to generate ideas and then especially also select the ones with the biggest commercial potential and also scale them. Also, we will continue building scalable SaaS business, leveraging our broad expertise throughout the life cycle and then also enriching design environments and processes with new solutions. The most sustainable. So in '23, we have organized around the sustainability services to drive further the development and sales in the recognized areas. Two acquisitions were completed as already shared, so a positive impact on also Ahlman Group. And we are committed to frameworks such as science-based targets, EcoVadis, Global Compact and also preparing reporting based on the new sustainability standards. This year, our direction is to bring sustainability further as an integral part of all our projects, developing existing expertise and further understanding our client needs today and tomorrow. And then specific focus is to further expand our data-based strategic sustainability services for the built environment, where we have already made clear and significant progress. And then also develop our own operations to be carbon neutral. And the most efficient in '23. We have set a new sales organization with specific sales groups and -- for the strategic sales areas. So energy, industry and then also sustainability services and are much focusing on creating a culture of sales. We've already mentioned several times, the ERP and CRM implementations in Finland, which were, of course, a big highlight of the year and succeeding well with those ones. And then we'll be focusing on developing and implementing the best practices throughout the organization. And this relates to our focus area, smartest ways to work. This year, there's a heavy focus on sales pricing also further creating the competitive advantage through right processes, tools, data. And use of artificial intelligence plays a key role here and we are progressing fast with experimenting AI. And we want to be the most profitable company in our industry to be able to grow and develop. And of course, as shared already earlier, we have focused actions to continue on that path. As already shared last summer in our Capital Market Day, we have set also clear goals and KPIs to monitor our progress in each strategic area. We have 2 KPIs. So first one is that our recurring revenue will be 10% of our annual revenue by the end of the strategic period, and I'm very pleased to show that we have made clear progress being at 6% at the end of last year. And then the second KPI is about doubling our sustainability services revenue to exceed EUR 10 million. And there also, we've made significant progress, ending the year with EUR 8 million sustainable services revenue. So we are progressing well with both of these strategic KPIs. And then finally, the invitation to our Annual General Meeting was also published today. So if you are a shareholder, you can register to the meeting starting from tomorrow. Now it's time for questions.

Yes, we have quite a few questions. And there are a couple ones that relate to interest rates and financing costs. So let's start with those. So are you expecting higher financing costs for 2024, as you say, in the market outlook? Downward pressures on yields but don't have effect on you or how is it?

Yes, I can take that. Well, as we've said in the financial statements, we have part of our interest costs hedged or fixed through interest rate swap but quite a bit is still kind of based on fluctuating or variable interest rates. So obviously, we are exposed to the general interest rate environment. If the interest rates go down, that is a benefit. If they go up, that's a disadvantage. So there is an exposure to the general interest rate level.

So there is another question related to this. If the interest rate level stays stable, will there be an upward or downward impact on Sitowise's financing costs this year or next year?

Well, for this year, well, obviously, if it's -- if the average interest rate would be the same as in '23, we will be roughly at the same level. Obviously, our -- assuming that our debt level stays the same, comparing to the situation of the moment, then it kind of really depends on the profile during the year.

Okay. Thank you. Then we have a question about M&A. It seems that if you look at the general macroeconomic environment that this might be the right time to make acquisitions. So the question goes that, do you have any plans for a public share raise this year or raising money from the markets?

No. No plans currently. And of course, we keep our eyes open for the M&A opportunities going further.

Then a couple of questions about the business. So do you have any possibilities or plans to expand your digital offering outside the Nordic countries?

Yes, we have actually and that's clearly like one strategic direction. So we have been really successful in Finland, as seen and have been progressing well and internal expansion is the next step. And of course, we have already taken actually some of the steps. So we have -- one of our solutions is already sold outside of Finland as well. So we'll continue with that path.

Okay. And then what about Northern Sweden? The market there is booming. Are you active there or any plans to go there?

So currently, we are not so much present there. Again, of course, we are following up the market environment and seeing what kind of opportunities they provide for us as well.

Okay. Then about the outlook or how much do you think your margins can improve in 2024? Is the base case even level with 2023?

Yes. So of course, just maybe more restating our guidance here. So we expect the margin or adjusted EBITDA margin to be at the last year level or above. So of course, we have seen clearly also drivers, therefore, the profitability growth as listed, these 5 different ones. And again, as said, they are providing us significant opportunities.

Okay. And how well are you able to raise prices in the current environment?

Yes. So I would say that overall, we have been really successful, also last year. And of course, it's a key focus area for us. There may be -- yes, in several segments and projects, we have been able to do it in a very good level or good level. There are a couple of maybe cases where it hasn't been so easy. First one is the Buildings business like more overall because the market is so weak, there is quite a lot of price pressure overall. It's tough to increase prices. And then second one is more related to like in the Infra business, the frame agreements where the prices have been quite stable already for some time.

Okay. Another question about the guidance. Are you able to give a number on what slight decline in net sales means?

It means a slight one. No, no, we are not disclosing the numbers here.

Okay. Then about leverage. It seems that your leverage might be increasing to 3.5 by summer. How do you comment on this?

Well, we obviously don't provide any leverage guidance. So I'm not going to comment on that number. As said, our cash flow is -- has remained strong and obviously, kind of -- that's a good basis, but no guidance on leverage.

Okay. Question about the buildings market environment. Has there -- existing market environment had an impact on voluntary employee turnover? Have you seen a lot of leavers -- voluntary leavers?

There -- actually, the voluntary leavers have been pretty much in line with what it has been earlier or even like a bit actually lower. So no, in that sense.

Okay. Then a question about costs. How large extraordinary costs are you expecting for 2024 as they were quite large in the last quarter?

Yes. Well, it's not something that we can really guide on. As many of you know, the extraordinary costs typically are related to M&A, so integrations or if there are some personnel restructurings or such. So it will really depend on how much of these kind of events there are during the year. So we can't sort of give much more clarity on that at this point of time.

Okay. Thank you. And then we have a final question about future growth opportunities. So what are those? If you could go those through once more like where you intend to grow going forward?

Yes, there are several ones. So again, as said, like overall, the Digital business and there the SaaS business growth is something and also the international expansion, like as one area. And then overall, that should be also leading to more like a recurring revenue, which is one of our strategic KPIs. And then the second, strategic KPI, the sustainability services revenue, there is a strong demand and we are also seeing that it's providing significant opportunities. Then maybe on top of these ones, more like a business as usual, I would say it's about in our Buildings business, of course, now we're also looking at more of these kind of markets which are growing, like as said, commercial, logistics, automation, also like the smart services related services. So we are also shifting a bit more focus from the market. We have been so much more in the like residential housing market, and that's not really going well today. So those are providing opportunities. And then maybe still the fourth angle, a little bit putting together all of this, but in the sales, we have also set clearly strategic growth areas, so energy, industry, sustainability services. So that's a mix of like from the business area perspective, but also what are the common initiatives for the whole company.

Okay. Thank you, Heikki and Hanna. This concludes our Q&A session and the webcast for today, and we hope to see you again in early May on the 8th when we publish our Q1 results.