Talenom Oyj (TNOM) Earnings Call Transcript & Summary

Good morning, everyone, here at the office and via video link. Welcome to follow up Talenom financial statement release. Today, we have some words from last year and our strategy. And of course, we will open more about the financial figures. And at the end of the presentation, we have this brand renewal topic. And of course, after the present, you can ask any questions. We have the Q&A possibilities. I'm as the CEO, Otto-Pekka Huhtala, and I have today here also 2 of my colleagues, Matti Eilonen, Chief Financial Officer; and Tuomas Iivanainen, Chief Marketing Officer, who will present later. First, we can start from the big picture. Our net sales growth continued as strong and internationalization progress in digitalizing Europe. Our net sales growth 23%, and we achieved over EUR 100 million revenue and EBITDA growth over 17% and EBIT also grew 3%. Some words of the environment. We have seen some decisions which have made in Europe regarding of e-invoicing. And it will be as a mandatory during next years, and this will transform our accounting industry from traditional accounting to the digital environment. And we believe that this will really boost our own business as well. Neither the COVID pandemic nor the Russian military aggression had significant impact on the businesses. And so far, dreaded major bankruptcy waves have been avoided and some business closures have been seen in some smaller customers. But this accounting industry is so defensive business, so we haven't seen any big impact for our own business. And some words from strategy. As we have renewed our brand here is also our new one-pager. There is the background is this European map. It's telling us that we are -- we have the business running in Europe, now in Sweden, Finland, Spain and also in Italy today. And these 3 things, easy, automate, care, these are our competitive advantage. And I try to explain by some words of this like law of nature that how this digital transformation will really happen. And first step is that our customer will start using our interfaces, digital interfaces, for their own easy routines. And this will standardize this method that how do we get the information to the bookkeeping process. And it's also structurized invoices and so on. So it helps us to automate our internal processes. And this means that this will save our time and we can spend more time with our customer, and it means to care. So these 3 things are our main competitive advantage. Our vision is unbeatable accounting and banking services for small and medium enterprises. Today, Tuomas will tell more about the banking services. And in the core of the picture, there is our values. Shortly, our strategy is more scalable product helps enter new markets quicker, and our growth is based on active sales, digital sales and acquisitions. We launched these medium-term financial targets last October, and we try to achieve over 30% growth rate for net sales and annual EBITDA growth over 15% and growing euro-denominated EBIT and increasing dividend per share also. This is our medium-term financial targets. So this means that we are now boosting our business, and we are prioritizing growth and we are making this growth possibilities just now. Okay. We have a proven strategy and strong track record, and what I just told regarding one-pager is that we developed our own digital platform during 2000, 2015 and 2016 to '20, we adapted this well also in Finnish, Finland market. And here, you can see how our EBIT margin has improved. So it has improved like -- it's like 3x higher than before adopting our whole Talenom bookkeeping production line. And this also means that at the same time when our financial figure has developed well, also our NPS has improved well. Our customer satisfaction has improved. And also, personnel satisfaction has improved well. So there's many benefits of the automation, what we have delivered for our personnel and also for our clients. And now we see that this digital transformation is just happening in new countries in Europe. So that's why we are like to duplicating our concept in new countries. And that's why we are delivering our own software also now in Sweden. Okay. Here, you can see revenue figure. And you can see that -- we are the growth company. But at the same time, we are going to be as a bigger player in the foreign countries. And the [ foreign ] countries, part of the revenue has increased very fast. Some words of strategy progress 2022, growth will base it for organic growth, maybe 1/3 comes from organic and the other part comes from the acquisitions. And as we have told, we are developing our business in Spain. We have very good basement now there. We have the own, this digital platform there. We acquired 1 company last summer, they're platform company. And we have our own service production there. And so we have very good basement for fast growth there. And from Spain, 1 topic is that the e-invoicing will be as a mandatory during next years '24 and '26. So it means that many of our potential clients have to choose some platform to use, and we want to be in this game. Okay. Third one, exploring new market areas. We went to the Italian market just beginning of this year, and now we are following that -- what kind of it really is. And what we have seen, so there is this e-invoicing penetration is very high because the e-invoicing has been as a mandatory many -- some years in Italian market. But the way of the new bookkeeping is so like old school way. So we see so huge potential for automation in Italian market. And -- now it looks like that we are going to grow there by organic way mostly. Maybe we will do some acquisition, but most of the growth should come from the organic growth. And fourth part, scaling the small customer concept, we have improved our digital sales channel. And also, we have developed this banking services, which has come from -- we are this small customer concept, and Tuomas will open more about that because we are now delivering it also to other clients. And the latest one, software implementation in Sweden. We started this software development in Sweden last autumn in 8 offices. And we started it from the smallest clients. And now we are boosting our focus more about a little bit bigger ones. So it means that we will start selling our Talenom Online to our clients in near future. Okay. Some priorities for this year is accelerating digital sales. We think about so that now we have the good basement for develop and accelerate digital sales. And the second priority is distribution of banking services. And third one software implementation in Sweden will continue. This is a big, big project for us. And -- but we really believe that we can do that. And it's so big gap between EBITDA level in Finland and Sweden. And implementing our software, we really believe that we can achieve the same level as we have Finland this EBIT level also in Sweden. And the fourth one is quick improvement of the profitability of acquisition targets. So now we have told that these 3 years is like what we have seen that when we are acquiring new company that we can achieve as the same level of EBITDA as we have in core business. And now we have ongoing also project that how we could make this in shorter time. And because -- so a big part of the growth comes from the acquisition. So that's why we also want to focus for this profitability of those offices. Yes. This was my presentation. Thank you, and Matti will continue.

Hello, everybody. My name is Matti Eilonen, and I'm the CFO of Talenom, and welcome to follow this presentation of financial figures. Let's start with the revenue. The growth was 23%, ending up to EUR 102 million. And as Otto told you, 1/3 came from the organic growth, and 2/3 came from the acquisitions. And we made altogether 16 acquisitions, and most of them were in Sweden and in Spain. And the organic growth was driven by the increased customer number and also good development in value-added services. The net sales slowed down a little bit on the last quarter, 20%, and it was 1/5 from the organic growth and rest from the acquisitions. Then about the profitability. The EBITDA was on a good level and it went up almost EUR 5 million. The relative profitability slightly came down, and that's because of investment in the platform business in Spain and also implementing of our own software and strengthening the organization in Sweden. Also a little impact from the brand renewal and developing of banking services and increase in depreciation level had the impact on the profitability, relative profitability. Operating profit was 15%, ending up to EUR 15.3 million. And it came down a little bit on the last quarter, and that's because of a higher depreciation level and most importantly, the platform business in Spain is at the moment, nonprofitable. However, this nonprofitable platform business, we still think definitely that this was the fastest and the best way to go to the market to get our own software there and user interface. Business development in Finland was yet again strong and steady. It grew about 13%, and 1 quarter was from organic acquisitions and rest from the organic growth. And it was driven by the increased customer number and good development in the value-added services. However, we faced a little drop in our volume-based business and in consulting revenue. And this had a little bit negative impact on the growth rate. We think that the economic situation has impacted in this kind of a field of our business. In Finland, EBITDA is on an excellent level, almost 40%. And this gives you the image and view that what kind of profitability we can achieve when we have highly automated and highly efficient processes. And business development in Sweden. We had fast growth there, 82% the whole year and almost 100% on the last quarter. The relative profitability measured by EBITDA is still quite on a low level if we, for example, compare it to Finland, 88.4%. This relative profitability has been pressured down by the sales investment, building supporting functions and developing management structures and introducing our own software. However, we saw a little bit improvement there because of this supporting functions and developing management structures. The software itself didn't have any positive impact on the relative profitability. Actually, it is slowing down at the moment our businesses there or this developing profitability. We have started this implementation of our own software, autumn 2022, and now it's ongoing in 40% of our offices. And of course, not all of the customers are in this new system. Then a little bit about our investments and depreciation level. We are investing to getting new customers, of course. And alongside that investment, quite significant investment is to our own software and digital services, which was EUR 12 million last year, and year before, it was almost EUR 12 million as well. We are focusing on our customer interfaces and developing automated internal processes. We basically doubled our investment during '19 and '20 years'. And of course, this had an great impact on our depreciation level. If we, for example, look at the last year, it went up. Our depreciation level went up almost a little bit over EUR 4 million, and most of it came from the software investment depreciation. Then we started to do more acquisitions heavily on '21 and '22. We made almost 25 of investment on acquisitions, and year before, it was 21. But these acquisitions doesn't have that much impact on the depreciation level as the software investment has. Depreciation level will continue to increase in 2023 as the investment level increased at that time '19 and '20. But if we manage to keep our investment growing more moderate way, the depreciation level increase will also create -- develop moderate level. And about dividend proposal. We had EUR 0.27 of earnings per share. And year before, it was EUR 0.25. And our Board is proposing to have EUR 0.18 of dividend and year before, it was EUR 0.17. We have roughly EUR 27.5 million of operating cash flow, and we spent about EUR 7.5 million on dividend last year, and our Board thinks that this is on a good balance between the operating cash flow and the dividend. Then finally, outlook and the guidance for 2023. We are expecting to have net sales between EUR 120 million and EUR 130 million. And this includes the existing business, the estimation of organic growth and the made acquisitions and also the estimation of upcoming acquisitions. At the moment, we are -- and we have had quite a lot investments and efforts in the international businesses and also growing fast there, and we are preferring the fast growth in this international businesses. And in this international businesses, the profitability is not on the same level as in Finland. So we are expecting to have a growing EBITDA in euros and growing EBIT in euros. Thank you. Now it's Tuomas Iivanainen.

Here we go. Hello. Good morning. My name is Tuomas Iivanainen. I work as the CMO. I also have the responsibility for data-based business, where banking is our core thing today. Brand renewal. Yes. I will now talk through our brand renewal to make you understand what it means to us. We have not only work with the brand. We also work with our product offering. And in this slide, I want to explain why, how and what we actually have done. During about 2020, we sort of revised our strategy towards internationalization. This meant actually that our organization started growing really fast. So very big proportion of our employees have are sort of very new in the organization. We wanted to get them involved in the core of what we are. At the same time, we were entering into the bigger markets. We need scalability. So one brand and a consistent product offering is a key to be successful in this kind of environment. How did we do it? Well, very much surveys. Deep dive surveys is a key tool which we work with. We had numerous brand clinics together with external experts to sort of understand what our identity really is and what is relevant to our customers. We had a core team of representatives of all the countries, all the business areas to work throughout the whole project. And of course, in the end, very much AB testing to make sort of the right and correct decisions. What, of course, audience is key. We need to know our target group. We need to know who do we speak to. We created a narrative, the story. We created a identity who we really are, and then some concrete stuff the visuals and of course, a very, very, very big project, the new talenom.com website, you will see a fast glimpse of that in the end of this presentation. So the narrative and identity. What do we talk about? We talk about numbers. We talk about numbers to be accounted for. We will never ever run out of numbers. They measure the world, but it is us who give meaning and value to them. When we talk about numbers, we talk also about our experts and their accountability. Our experts are accountable for their clients business as if it was their own. Our pursuit is to make the world run better with better numbers. We talk about values. We trust in willpower and persistent entrepreneurship. We are human but geniun and caring shines through all in our work. We dare to challenge and use courage as our daily asset. By living our values, we inspire our clients to do so also. We define the audience, entrepreneurship, entrepreneurs. The entrepreneurial heart and mind is in the core of the community. A freshly started entrepreneur has a special place in our heart. We want entrepreneurship to be the first choice of young talents in Europe. We grow as our customers grow. We become the trusted advisers and provide structure and proactive recommendations. We do understand that the change starts from us. Our people are our backbone. We craft our mission with our people and enable rewarding growth with inspiring clients. We talk about empathy. Empathy is the starting point. empathy makes it possible to care. It makes it possible to understand. Understanding creates trust, and through trust, we create a relationship and can provide freedom for entrepreneurs, freedom to be an entrepreneur, freedom to try their wings. This is the core. The rest is basically implications of all this, of going to bigger markets, of providing services to entrepreneurs throughout Europe. Like I said, not only the brand is renewed. We have very much worked on the product offering. So we talk about unbeatable accounting and banking services. In the next slide, I will explain more about the banking services, but it is key to understand that banking services is a unanimous part of our offering. We have now developed 3 service lines. The first Talenom is a financial software for your business. So there is a self-service, self-onboarding possibility, a very, very low entering point to start working with us. In most of the markets, some of the parts and some of the functionalities will be for free. But it will grow the service offering within the software program and it is a comprehensive solution. Talenom One is the package where we combine the platform and the service and the banking. So in Talenom One, we do and we provide the services regarding accounting, closing of books and so on, but also we can provide the banking solution to be used from the same application as all the rest of the functionalities. So from the Talenom platform. Talenom Pro, that is a comprehensive solution. There the service packages go up to a level of a CFO level service, where monthly meetings with a predetermined agenda is a part of the solution. So for entrepreneurs and need of a high-value service, we can absolutely provide them with that. We can help them do the right decisions and use the right data for their decision making. Like I said, we have worked very much with the banking because that is a key component. We have seen in the markets very many successful companies providing expense management, simply expense management, showing and issuing credit cards, and giving a possibility to manage the expenses, put some limits through all that exposed to the credit cards. What we can do is we can provide the same kind of service level but adding on to all costs and all revenue. So the same kind of visibility not only to the usage of the credit cards, but also to the whole financials of our clients' organization. As many of you may know, we started a project with Fellow Bank in the end of the summer. And now we are already in the phase of internal piloting, and we will be providing our Finnish clients with the possibility of taking a Talenom account, which is a bank account with an FI IBAN offered by Fellow Bank. Also Talenom card, which is a Visa credit card issued by Enfuce and granted by Fellow Bank. These will be visible and used from the same application as all the other functionalities that we provide in Talenom. There is a waiting list opened when we opened the website, which is basically a week from now, about a week from now. And start-up service will be during the first quarter. Now let's go back to the start. Revise of strategy around '20 entering into new markets. Now if we look at today, we are operating in markets, which totally comprise of about EUR 25 billion. Finland being just over EUR 1 billion -- Finland being slightly over EUR 2 billion, Spain being around EUR 10 billion and Italy being about EUR 11 billion, EUR 12 billion. We have stated that we can enter into a market with a time frame of 3.5 to 4.5 years. That will be evident in Sweden. What we're seeing now is that we can reduce that time in the Spanish market to by 2.5 to 3 years. So meaning that the experience that we have gained on our journey towards an international organization is now giving us results in the time to market with our products and service offerings in the new markets. When this is combined with this change of the infrastructure in Europe. So the infrastructure that we have in Finland, which enables us to develop all our systems and services will be implemented in Europe with a similarity level around 95%. There will be some changes, of course, not 100% the same, but the changes are minor. So this is a possibility for us to move fast with a more scalable product to a much bigger market area that what we have ever seen. And giving a service offering where accounting, banking, tax advisory services, all is packaged in one application, makes it very relevant. And the target group we are talking with comprises of about 95% of the companies in these market areas. So let's say we are looking at a very, very interesting few years to work with, and we hope to tell you some nice figures and results very soon. Thank you. Thank you all. And now I believe it is time for questions, if you may have so.

Okay. Here you are. You can ask in Finnish also and as well in English.

Daniel Lepistö from Danske Bank. I guess I have a couple of questions. My first is about the organic growth, which was somewhat sluggish in the Q4. Can you comment a bit about the volume-based growth and the consulting revenue outlook maybe going into 2023? How confident are you in terms of the state of the economy of -- to what direction of this type of sales and volumes are going?

Our volume-based business is about 30% of the whole business and the recurring revenue, there hasn't been any changes. So we are quite confident. Of course, there might be a little bit decline on the volumes and also the consulting 2023. But it's really speculative as we don't know how the economic situation because all of the crisis and so on, how it's going to develop and how the interest rate is going to behave so. But anyway, quite confident with the recurring revenue for the next year.

Okay. And if I continue on that. I guess you conducted some price hikes quite recently, if I understand correctly. So how broad these price hikes were? And what is your expectation of these contributing to your organic growth this year?

Okay. Yes, we made -- we raised our prices just that it will be effective in the 1st of March. And of course, it will have the boost for our organic growth. But the reason why we made so high -- high raise for our prices is that the inflation is going so fast, as you saw just from our figures, and our fixed costs are improving. And -- but the bigger reason is that this salary competition in accounting industry is just now very high in experts level, and the biggest reason is that we want to react proactively and we want to rise salaries. And we want to keep our expertise with us. And there is also a big effect for our customer satisfaction because customers are happy with our experts. So that's why we want to keep also our experts happy, and maybe this is the biggest reason behind the price rises.

And finally, on this topic, can you give any color on your expectation of churn this year, both counting in potential bankruptcies and I guess, the natural churn?

Yes. At the moment, we see a little bit signs of more bankruptcies and ending up businesses and so on. But nothing like really significant. But yes, there is a difference if we compare it to the past.

The next topic is about the software localization in Sweden. I guess you commented that you have started processing around 40% of your offices there. So how many local clients have you transferred to the full Talenom Online offering? And what are your first impressions with these new clients there?

Good. I can answer. We started in 8 offices, and from the smallest clients, and we started to do the bookkeeping first. And after that, we focus more about the monthly clients and for the clients which are really using Talenom Online, of our customer interfaces. And we have transformed over 800 clients to Talenom accounting systems. And now we are turning those, that they will start using Talenom Online. And the situation is just now that we are testing our payment services in Talenom Online, and it will be the biggest asset for us to deliver something new to Swedish clients. And that's why it's very important for us that we can really deliver the payment services. And after that, we will start selling also to new clients, Talenom Online. And this spring, we will -- okay, we have the season just ongoing and coming. So we will ensure that this customer interface that there is all features in places, and we will boost transformation next fall to all offices, I think.

Can you give any sort of rough time line when you can start the proactive sales with the full software offering in Sweden?

I hope that it will start Q2.

Sorry, can you repeat?

It will start Q2.

Q2. Yes. Okay. And my final question is about the integration of the new acquisitions. You briefly talked about the timeline, the traditional 3 years, what it takes to get the new acquisition profitability on the level of the core business. But you mentioned that you could be doing this faster in the future. So how fast are we talking about here?

Yes, we have the huge target for that. Cut it half is a little slower, but we have tested this transformation and in Finland, we have piloted it, and it's possible to transform from the technical point of view in 3 months to our concept. But the benefit comes when we can transfer clients to start using Talenom interfaces, and this will take time. And because when they really use our applications, then we can get -- then we have easier to automate our software. And after that, we can get more clients per accountant and then -- and after that, we have possibilities for care services. So this upselling part is the most important, but it takes time because the customer behavior have to change. Yes. Next one.

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Questions from the online webcast platform. A few questions from Juha Kinnunen, analyst at Inderes. I'll go through them one by one. The first question is about growth. If only 1/5 of the growth was organic in Q4, organic growth was slightly above 4%. Has the amount of paying customers actually grown at all because I guess the prices have also risen? Has there been an outflow of clients in Sweden after the acquisitions?

Okay. There's many questions. But yes, Matti told earlier this that how this revenue has developed. And we can see that this recurring revenue, we -- I'm now speaking of this fixed price. 70% of revenue comes from fixed price. This recurring revenue is improving well, and our sales is continuing as well as earlier. And of course, in this acquisition, when we do the acquisition and we change some internal things, so this turnover level of customer is a little bit higher, but there is not like any big impact there. And we have seen this also in Finland. And yes, maybe there was all answers.

And also the currency rate of -- in krones is much higher. It's above 11, and it used to be near to 10. So it has an influence on that as well, especially on the last quarters.

Yes, that's true.

And then a question about profitability. Are you happy with the progress outside of Finland, especially in Sweden? I understand there's seasonality, but Q4 earnings in Sweden seem sluggish. Also how do you see the profitability in Spain going forward?

We are happy with those profitability in Spain and in Sweden as well because we have invested heavily, adopting our software in Sweden. And it means that let's put this in the right context. I hope that we will have like EUR 30 million revenue this year in Sweden. And if we could improve 30% of EBITDA margin, it means EUR 9 million. So that's why we are investing to adapting software that we could really achieve the new level of EBIT. And in Spain, we have investment for the platform. As you'll see from the figure, there was negative impact for our profitable level. Without that, it will be close to 0, maybe a little positive. And the recurring business, this accounting business is still good enough. And now we are investing for the people, as we discussed earlier, and we try to put things together, like platform and accounting business. And as Tuomas told that we are improving this low-hanging fruit. So we have their one guy, robot guy, who is just now adopting robots for key processes. So we are happy with the figures, yes.

And then a question about guidance. Most of total net sales growth in 2023 is expected to come from acquisitions. Could you comment this a bit further open up your expectations for organic growth in different markets? In Finland, you have made a significant price increase that should provide organic growth automatically if successful. Have you made similar increases in other countries? And do you expect significant organic growth in Sweden?

Yes. Okay. Yes, we discussed it earlier, this Finnish rise in price. And in Sweden, there is still a little bit different environment. We have just acquired some companies there and there have been some politics regarding of raising the prices. And -- but there is also inflation ongoing, and the rising level is like 4% to 7%, 4% to 8%. It depends on the offices. And what was other questions?

Do you expect a significant organic growth in Sweden? And then -- but in Finland, you have made significant -- yes, that was the price increase question. Yes.

Yes, our sales -- active sales organization is ongoing well. Also in Sweden, and we are hiring more sales guys also, the city office in Sweden, yes.

And then there's a question about the international growth. Could you discuss your growth strategy in different markets? It's somewhat unclear whether we should expect a Sweden strategy, a platform model or some kind of a digital-lite model in new countries? What's the plan in Spain now?

Yes, we will boost our Spain business via acquisitions. But at the same time, okay, in long term, we boost our growth via acquisition in Spain and in Sweden. And at the same time, as we today released these new products, we try to change our -- we try to move our focus more from the acquisition in long -- medium term from acquisition to more to organic growth. And this will happen in all markets in Finland, Sweden and Spain.

Yes, perhaps to continue with that, I would say the approach is a product-led growth. So there's not a Sweden approach. There is not a Spanish approach. There is not a Finnish approach. There is a Talenom approach, which will address all the markets where we are, all the target groups, which are relevant for us, starting with the smallest of the entrepreneurs up to the Talenom Pro sort of high-level services. And these are organizations who do not have internal resources working for their financial administration. And this will be led by having authority in the digital space. That will support the active sales of our active sales teams that have their feet on the ground in several places. That will support our self-onboarding and self-service organic growth, which by taking volume-wise counting the customers will be the biggest. That will also support our acquisition growth because we have a story to tell. So it's a product-led growth approach, which will be implemented in all the market areas where we are.

Yes. And the last question from Juha Kinnunen on acquisitions. Where is your focus in 2023, still Sweden or shifting to Spain, Italy or new countries?

As we told our priorities, there's this -- we want to accelerate this digital sales channel, adopting software in Spain, deliver banking services and this productivity of acquired offices. These are our main priorities. And yes, maybe deliver to markets, and we are exploring new markets all the time, but maybe those are the main priorities for this year.

And then a question from Emil Immonen of Carnegie. Approximately, what multiples do you expect to be able to acquire companies abroad?

If we're talking about EBITDA multipliers, we are still expecting in the smaller 1 to be around 4 and the bigger ones may be up to 6. But that, of course, varies a lot. And of course, in these acquired businesses, they have some other benefits as well and maybe different market areas and so on. But around there, yes, 4 to 6.

Okay. No more questions online.

Okay. Thank you for questions. Thank you for hearing us. So short summary, we are the growth company. We are preferring growth. This EU digitalization is just now happening in accounting industry, and we have very good assets to be a part of that. Thank you.

Thanks.