Tieto Oyj (TIETO) Earnings Call Transcript & Summary

So now the clock is 11:00 a.m. Central European Time.

Hello. It's Tomi Hyryläinen.

Hi, Tomi. Most welcome to the call. And we also move work well on [indiscernible] on the call. And everybody else is also very welcome. [Operator Instructions] [Audio Gap] Just to recall, Tom has been with Tieto for [ some ] 20 months and was previously e Finland after long tenures and authorized public accountant. [indiscernible] has worked with you EVRY since 2019 after a long career at [indicernible] as a treasury manager and Head of Treasury. Myself has been technology analysts for some 20 years, 5 years with Hannes Bank. And we actually covered yet. So [indiscernible] close to 20 years. I've seen many shapes and forms to develop. Also, I would like to -- we'll have a start of this session with barely 10, 15 minutes with [indiscernible], a bit of Q2 and integration and so on. And then I will start off the Q&A session before letting you all in with your questions. [Operator Instructions] So with no further ado, Tomi and [indiscernible], the line is yours.

Thank you, and good afternoon, everyone. So I'll do 10 to 15 minutes, as mentioned, and then we'll move into Q&A and have a -- and so overall, Q2 was a good quarter for us. It was a very dynamic and demanding, and I'll explain you why. There are 4 key messages from Q2. Now I assume that everyone received a summary slides that we sent. So I'll start from the first stage Q2 in brief. So 4 key messages from Q2. So first of all, solid underlying operational performance in all businesses, delivering an 11.7% adjusted profit. We demonstrated good resilience towards COVID as we anticipated, and I'll talk about that later on more. The second one, integration. Of course, this is a year of integration following the merger. So integration is well on schedule. The other one -- the other point is the delivery against the merger business case. So we delivered well. We reached a run rate synergies of EUR 45 million by end of Q2 and increased merger business case from EUR 75 million to EUR 100 million of synergy targets. Thirdly, we did book large onetime items in Q2, which I'll cover later on as well for future profit contribution and derisking the company as well. We also opened up the full view of the onetime items for 2020 and 2021 to make sure that the picture of high onetime -- or large onetime items in 2020. And then for 2021, back to normal with synergy onetime items and the noncash PPA, the only ones remaining. Then the fourth component would be dividends. So there was a decision to pay out 50% of the AGM mandate for dividend. Drivers being, and this is, of course, important. Drivers being the COVID uncertainty is expected to continue. A strong operational performance that we have demonstrated for the first half of the year in Q1 and Q2. Our integration, which is on schedule and the good progress there with the synergy targets already or synergy run rate being achieved and the target increased, and then the large onetime items, which we booked in Q2 and for the full year of 2020. So those who are the 4 main messages from Q2. Now I move in to the next page and a brief comment on the Cobi. So this is the page which continues adapting to COVID. So we keep our market outlook as it relates to COVID, unchanged. So we expect the COVID impact to be minus 2% to minus 5% for the full year revenues. As you recall, we estimated Q2 impact to be roughly minus 2%, which was, I think, demonstrating the resilience that we thought to have against the COVID. And then again, the profitability, we were able to mitigate the negative profit impact of this top line, COVID minus 2%. The short-term saving actions, we will continue throughout 2020. Of course, as we all know, no one knows what will happen with the COVID for the rest of the year or even '21. But we see that the short-term saving actions, which we have started, will be able and will continue throughout 2020. Then let's move on to the next page, which is the summary financial base for the group. So Q2 organic growth, minus 1%. Adjusted EBIT, as I mentioned, strong 11.7% to EUR 80.4 million. So strong performance in all of our businesses. Reported EBIT, minus EUR 9.8 million. So negative due to the onetime items, which I'll briefly cover as well. They account -- amounted to EUR 90 million in Q2. Good growth in our software businesses of 6% and 3%. In our industry software, primarily driven by health care, welfare and our public sector software and in FSS by our card services. COVID impact, as mentioned, fully litigated in Q2. And as I reflected in the earnings call as well, if we turn that into euros, it's roughly EUR 12 million to EUR 30 million cost savings being taken during Q2. And the majority of those cost savings were cutting the external cost and only minor part less than 1% of our workforce in FTE terms were impacted by our temporary layoffs during the Q2. Then I will move into the next page. So this is the building the foundation for future so I'll talk about briefly the large onetime items. So in practice, there are 3 areas which are listed in here, first one being the integration now integration-related onetime items. These are the merger-related items, and they are as fully as we planned. So the only thing here is that they are slightly accelerated due to the good progress that we have made with the merger integration. So the total integration cost, we keep the EUR 120 million to EUR 140 million. So conceptually, no change in here, just a slight acceleration due to the good progress being made. Then the 2 next ones, so redefined IBM partnership. So this was to do with resolving the dysfunctional relationship, which we had, which did not function for us, not for IBM or our customers. So this was to build a foundation for future business with high quality and flown acceleration and these onetime costs, which we booked in through both settling of the old agreement and transition into the new setup. Good to understand that those were separately also discussed in the call and in our slides. And in Q2, we booked all the old agreement-related onetime costs. The third component being the [indiscernible] of PSU. So this was the right decision. Of course, a difficult one. This resulted in EUR 41 million of bookings in Q2, where we booked all the risks. Now EUR 9 million of this was noncash booking the existing asset from the balance sheet, and rest relates to settlements and restructuring of that business. Rationale of the PSU being, the program was delayed. It would have needed additional investments, and we had customer cancellations. So the resulting future financial outlook was not attractive. So the right division, as I mentioned at this point in time. Then I'll move into the next slide, which details the large onetime items. And I guess the point thing here that I want to just emphasize this that in Q2, we booked EUR 90 million. For the full year, we estimate EUR 200 million to EUR 210 million, of which the cash impact would be EUR 105 million and EUR 215 million. Now important to note that then in 2021 is less than half. So EUR 85 million to EUR 100 million with cash flow impact, EUR 45 million to EUR 55 million. So the integration costs will continue in '21 as planned, as I mentioned before. And then the PPA noncash of EUR 43 million, which will be an annual out onetime item. And then I put just for the completeness of this picture, some estimate of few millions, whether it's M&A-related or other onetime costs. For EUR 5 million to EUR 10 million. Then moving into the next slide, which talks about the merger efficiency target increasing to EUR 100 million. So this is expanding the merger business case from EUR 75 million of synergies, EUR 100 million. And the estimated run rate for the end of the year 2020, being EUR 70 million to EUR 80 million, with EUR 45 million, as I mentioned, already executed by Q2. Now the year-end run rate, that was up from EUR 45 million to EUR 55 million to EUR 70 million to EUR 80 million. Again, highlighting the good progress being made in that front. There is no change as mentioned as it relates to integration cost, only the slight acceleration, as I mentioned before. Then the following page, it's derisking the integrated company. So I think it's important to highlight this aspect of what did we do during Q2. So delivering and expanding on the merger business case with the EUR 100 million, EUR 45 million run rate delivered against that plan. We did demonstrate relatively good resilience on top line to COVID and that we were able to mitigate the negative profit impact at these revenue decline levels. The third component being completing our financing arrangements from the merger and our liquidity situation, which currently stands relatively good with EUR 250 million revolving facility untouched. And the corporate paper market, providing sufficient liquidity short-term for us, currently. We only have EUR 40 million-ish corporate papers out in the market. The fourth component, as we discussed earlier, so agreeing with the new partnership set up with IBM, where all the past disputes were settled. Again, derisking the company. End of lighting TSU, the decision, again, booking all the risks and eliminating future potential profit leakage. If we would have continued. That page, which I cover, the performance drivers now for the remaining of the year. So COVID -- so we continue to believe in the 2% to 5%, as mentioned, and we continue with our cost-saving measures. The synergy acceleration, quite practically the run rate achieved by now will deliver roughly EUR 23 million of profit improvement for the remainder -- for the rest of the year. And then the negative FX impact from NOK and SEK, quite [ tactically ] EUR 80 million on top line and roughly EUR 30 million at the adjusted EBIT level. Now as I looked at the last month rates, it's slightly less than still roughly at those levels. In view of the other performance drivers to comment, overall, we think that we enter the H2 with healthy business momentum with many of the risks being mitigated during Q2, as discussed. We see a slight cost base increase in Cloud & Infra during H2 due to the IBM transition and the earlier discussed, expiring customer contracts. So this was discussed 2019 will have a negative impact of approximately 3% on Cloud & Infra revenues during H2. These were the performance drivers, and this concludes my opening. So now we can move into Q&A.

Thank you very much, Tomi. This is [indiscernible], again. I will start off the Q&A. [Operator Instructions] But I would like to start just to understand the underlying result in Q2 [indiscernible]. You mentioned the EUR 12 million cost savings and a bit less than 1% of employees were impacted by temporary layoffs. But does this EUR 12 million also include lower social insurance costs, for example, in Sweden, [ 10% ] taxes instead of like [ 33% ] or something. And so if we could have at least a ballpark on the underlying adjusted, the EBIT would be great.

So if I understood that the question correctly, does that include all the cost saving actions, the [ EUR 12 million ], which we did.

Yes. Or do you have also benefits from lower social insurance costs, et cetera, in the quarter on top of this EUR 12 million [indiscernible]

No. Those are included there. So those -- there is a few million of contribution from those, right? Yes. And that's sort of embedded in that number of mitigating the COVID impact by reducing the cost levels.

Yes. And out of the total EUR 12 million, how much would we say is internal savings and how -- or savings from less traveling and temporary cost reductions? And how much is from governmental support?

Most of it is, it's internal cost control or saving and less from the governmental.

Perfect. And then I would like to ask a little bit on -- you mentioned that you continue with this short-term saving actions to mitigate COVID-19 impact and for the second half as well. Is it possible to give any targeted magnitude of these, again, perhaps versus EUR 12 million you mentioned in Q2 for the second half? So if it [indiscernible] so...

We can increase some of those. But maybe it would be good to sort of about these in 3 different categories. One would be where we get savings like all the companies, no matter what it's due to COVID. No one is traveling, full stop. So that sort of comes automatically. Then there's a second bucket, which is due to, let's say, the goodness of us, which is managing the external cost which doesn't automatically come as a result of COVID. And then the third category is the cost, which is more in the longer-term variable. And those impacts are not yet visible or they are not yet -- we cannot get those yet. So if we talk about these 3 different buckets. So for example, travel, there's relatively [indiscernible] any company can do to still lower, though. So it is roughly at the level rate plans. And some of the other costs come into that bucket as well like some of the external trainings or representation and things like that. Then the second bucket is where we can have more flexibility and work more with -- still with the cost. And in that bucket, there are various, various costs like external of course, subcontracting is one. So balancing that with our own employees versus external consultants for any projects and postponing those. Then there is, let's say, a -- I talked about laptops and PCs and the replacement cycles for those sort of various different elements that we can impact and influence. And those we can still get more savings. Then the third category, if this one prolongs, then we will try to get some of those, let's say, more fixed cost as well on the lost [Audio Gap] we need as much facility space as we have used the lead, how will people work in the future and want to work. Hopefully that answered your question.

Yes. It did. So it's really great that you identify a temporary process that are going to be long-term [indiscernible] out also post COVID 19. I was thinking your first slide, it was about in a very calm thing. And I asked myself the any hidden messages there, i.e., is the market very home or is it more like steady as she goes or that you're trying to show us?

That's an excellent question that Shelan picks these pictures. And I like the sort of when everything around us sort of is very hectic and dynamic. This is sort of the state of mind that we need to have in order to navigate well in this environment.

Sounds wet. Great. So it's not the market total [indiscernible], I guess.

This is our internal mindset.

Yes. Perfect. And a couple of words on your business segment would be great, I think. To me, the digital consulting, obviously, holds the largest risk stake due to COVID-19, it would be great to understand some how the end of summer, the pickup in August in the utilization and perhaps the outlook on the extremely important month of September looks like for the consulting, if you have any comments there.

Yes. So digital consulting, of course, as we have discussed. So this is sort of less resilient to COVID. There is the application services part in the digital consulting, where there are longer-term contracts. But then this sort of time and material-based consulting work, whether it's customer experience or a business consulting. That get -- it is more impacted by COVID. As commented earlier as well, we see some pipeline improvement across all our markets. So there is sort of, I think, slight in the turnover but of course, that's something we look at very carefully, and it would not be fair to say that our billing and utilization rates are as normal. No, they're not. And we, of course, our mind also to make sure that we, let's say, manage those well and as well as we can. As you saw, the organic growth was minus 6%. So of course, it's a practice which has been hit. And hopefully, then now towards the end of the year and beginning of next year, we see a pickup in that one as well.

And then industry software, the public sector and healthcare and welfare are growing with like 10% or more in Q2. I was wondering if this had to do with any project-related benefits in the quarter or if you should expect this strong momentum for this sector to continue also in the second half?

Yes. So this was kind of -- of course, we hope that this -- let's say, what I would at least classify as more resilient markets in the COVID era would perform well, but this was, of course, a positive good surprise for us as well that this did so good over 10% growth. It's really difficult now to say whether it will continue towards the end of the year. I mean if one would be thinking that how to keep the society up and running and invest into the right areas, now I know we invest in roads and infrastructure, but sort of it would be wise for our public sector, governments to invest into IT and digitalizing the societies. So I would tend to be hopeful that there would still be money in the future and even more than what we have seen in the past, but really, really difficult to give any sort of firm answer on that question.

Perfect. Now I think it's time to pellet some of the external calling participants to ask questions. [Operator Instructions] So who will be first? Okay. While you are thinking, I will continue with another question then. And that is on the Financial Services solutions. Also a solid Q2, I would say, despite some growth investments. You have taken some efficiency measures is [indiscernible] that will contribute you to profitability already in the second half just ambitiously. Can you give some more color on this? And also perhaps on your internal midterm margins for this segment would be great to just understand a little more how you're thinking is also if possible to give some color on the EVRY model, how it look like [indiscernible]. Please also [indiscernible]

Yes. That's a really good question. And I think to open up in more detail, the longer meter -- longer-term view of these businesses, we will have to wait until the CMD. Now quite practically, of course, the FS is a combination of [indiscernible] payment software and -- and core and payment software and every FS software unit. So of course, we're doing now the integration and the longer term plans. But it would be premature to now talk about it in this call. We will be open this up in our CMD, which we hope to keep in the Q4. Now when it relates to the efficiency improvement actions and the merger efficiencies. Of course, we are looking to build a competitive cost structure for the whole company what is the right level, of course, that this company needs to run considering our strategic ambitions. And then it has to do with all of our service lines, including Financial Services Solutions.

Perfect. Good answer. I would also like to talk about a little bit about the dividend, you have the quarters decided now to pay out 50% of the original proposed [ 1 27 ] for 2019. But just to get your thinking, as a shareholder, given if you would have financial room and market stability and so forth in the end of this year or starting next year, would it be fair to think that the remaining 50% could be paid as an extraordinary dividend for 2020? Or should we forget about the last 50% from 2019?

So of course, really, really good question. So now it was decided to pay the 50%. And one should look at this as an, let's say, abnormal year, and we would get back to the normal attractive dividend levels in 2021.

Okay. And then I think I will open up again for questions from the audience. [Operator Instructions] Do you have any questions?

Yes. It's [indiscernible] from [indiscernible]. Just a question on the increased synergy target where you find another EUR 25 million. Can you talk a little bit about where those kind of EUR 25 million popped open? And how easy they are to achieve? And if it's more -- even more to come?

Yes. Really a relevant, a good question. So the way we have run this project overall, as I mentioned, we started from -- let's look at the company and the overall, i.e., direct synergies, what could those be with? But essentially, the program is about finding the right cost base for the new integrated company. And when we look at it through those lenses, and this is, of course, an iterative process, which we work on every day and my [indiscernible] i.e. do you think and some targets, of course, for ourselves, [indiscernible] target. But time is different. So this additional EUR 25 million is from no specific area. And it would be more [indiscernible] for me an externally talk about any specific area. But it was mainly from all the areas when we make better progress with our work then we found more possibility to streamline the cost structure of the company.

Does that mean that -- just a follow-up, does that mean, for instance, for digital consulting that you say, okay, for this part of the business, the right cost structure is x, which yield kind of a margin of 30%, for instance? Or is that kind of the way of thinking that you kind of have a target profitability target or EBIT target in minded and interest in that cost base to get there? Or...

That's 1 stream of the thinking as we would expect, of course. Not largely that's direct [indiscernible] way. But of course, I mean we look at -- of course, at what levels of profit growing we should be doing from these sort of different types of businesses and services. And then we look at how to get there. But it's -- as I mentioned, of course, there are a lot of other considerations in, as just mentioned.

Another one, if I might ask you. If you kind of think about the overall, let's say, growth profile of TietoEVRY. Do you think that will be served by this? Just excluding the revenue synergies, sorry, but just from the cost synergies that, are you kind of hoping the long-term or the medium-term growth rate.

So I think we should be looking at this year now desperately. So this is the year of integration in 2020. And of course, now when we got coking on top of that. So we were expecting to grow this year organically, either we are integrating the company, setting ourselves a -- let's say, fit the future growth and the future profits delivery. So finding the right cost structure for the new company and integrating the company. And then as it relates to the need and long-term growth ambitions, we will talk about those in later. But of course, we will not expect to grow less than the market. So we will -- going forward grow higher than the market, and then we'll sort of really say that what does that mean then for the individual service lines, once we have the CMD.

And other question is on [indiscernible]

It's Bill from [indiscernible] Asset Management. I've got 3 quick questions, if that's okay. The first question is, could you talk a little bit about please, about the trends you're seeing in underlying staff turnover and wage inflation?

Yes. Thank you for a really good question. And I'm happy to tell you that actually our rotation attrition levels are even lower than what they were pre COVID. So we are not actually seeing any attrition increase. Now it's, of course, as you would understand, it's slightly difficult to put that [indiscernible] together, what is the impact of COVID because -- like everyone, I think that during the time of COVID, the attrition probably goes down. But then there's the other component of the integration and the merger, I think in general public would take that the attrition goes up. We did not believe that either prior to COVID. And now during COVID, we don't see a big swing either way, slightly less attrition than before. Now as it relates to inflation rate, which, of course, as you know, that we track it very carefully, and that's one of the, I would say, production or profit element for us to mitigate every year. I would -- if I don't go through country by country, I would, in general say that the inflation is probably slightly less than what we have experienced earlier, which would be the general assumption as well.

Okay. And could you just maybe quantify the attrition that you were seeing before COVID? So I'm not sure what that number is.

Our attrition.

Yes. What was it before the start of COVID.

[indiscernible], do you have that number? It was in the range of EUR 11 million.

Yes. Something on that level. I don't have the specific number in that area, yes.