Etteplan Oyj

OMXH:ETTE

Earnings Call Transcript 2019-Q1

[Juha Näkki]

Welcome to this webcast presentation for Etteplan's Q1 results for 2019. My name is a Juha Näkki. I'm the President and CEO. And at the end of the presentation, we will have a Q&A session, where also our CFO, Per-Anders Gådin, will join me to answer any questions that you may have. The contents of the presentation are similar to the ones we have had before. So we'll look at the highlights of the quarter first. We will look at a little bit more in detail also the financial development of the company. And during the presentation, we will look at our targets and how we are doing against our targets. But if we start with highlights of the quarter. So we had a fantastic start for the year. The EBIT and the revenues were the highest ever in one single quarter for the company, which was an excellent development for the company. All 3 of our service areas were performing very well, and development was positive in all of them. And revenue growth was 12.2% with comparable exchange rates. And we won a lot of significant deals also during the quarter. So we see also good positive development going forward. At the beginning of the year, we also renewed our organization to boost the implementation of our strategy, especially the sales and development of our service solutions and introducing our new technologies into our offering. But also, we wanted to respond better to the changing global demand. Our customers are requesting for larger partners and larger deals, more global suppliers to help them grow and meet their engineering needs across the world. And we feel that with this organization, we are better geared to support this development with our customers. On the negative side, we still had issues in Germany mainly affecting our Technical Documentation business revenues. And also, the political situation related to the threat of the trade war between U.S. and China had an impact in our business in China. Basically, our existing customers their workload was coming down. And this is why the demand was slowing down a little bit. On the other hand, the market still continued to open up and we were winning new customers all the time. We have more customers now in China than we have ever had. But of course, the new customers are starting slower, and we're not able to compensate for the shortage of demand with our existing customers.If we look a little bit on the operating environment. So it continued relatively the same. Uncertainty is still there, and therefore, we expect demand growth to slow down slightly. But we still feel that the demand situation is quite good. Customer segments are relatively the same as they have been in the previous quarters, but of course, customer-specific changes are still there. Some customers are doing well, some customers not so well, and this of course creates some kind of difference between our different customers in different regions. Still, the investments are directed heavily to digitalization, and we see that demand growing further. Outsourcing and centralization of purchasing is still continuing. And we were also successful with the outsourcing business, especially now in technical documentation. And still in this market condition, the availability of qualified experts is a little bit affecting the growth of the whole industry. Certain sectors in particular, for example, software designers, are still hard to find. And this has a little bit of an impact on the whole industry. In the market development in specific countries. The situation remained relatively the same in Europe: Finland, good; Sweden, very good; Germany, Netherlands and Poland, demand remained at a good level. In China, of course, the opening up of the market continued, which presents us new opportunities, new customers, as explained earlier. But of course, the threat of trade war is affecting the investments of our existing customers. Our customers are hesitating to start new projects and new investments, which is taking the demand down. And of course, we hope that some kind of a solution to this situation will be found, and then the situation will become normal again. If we look a little bit on the revenue and personnel split. So the revenue split by service area was Engineering Solutions, 54%; Software and Embedded, 27%; and Technical Documentation Solutions, 19%. Finland still being dominant in the revenues, 69%; Sweden, 21%; Central Europe, 7%; and China 3%. And if we look at the personnel: Finland, 65%; Sweden, 16%; China, 12%; and Central Europe, 7% of our personnel. Revenue by customer segment remained relatively the same as well: industrial machinery and components, slightly up to 13%, but otherwise pretty much the same. Forest and paper being the largest customer segment for us in this quarter; industrial machinery and components, second; energy and power transmission, the third largest; mining, fourth; and so on. No significant changes in this one compared to last year. And if we look at the key figures. Growth was 11.3% at comparable currencies -- sorry, at the normal currencies. Operating profit EBITA was 31.4% increasing; EBIT, a 30.7% increase; earnings per share, 30.8% increase. So solid improvement throughout the numbers. Managed Services Index also increasing to 58%, which was good. It improved also in Engineering Solutions, and in particular, in Software and Embedded Solutions. I'll return to that later. And personnel at the end of the period was 3,150 employees. And the market outlook. The uncertainty in Europe is, of course, affecting the market slightly, and we do expect the market demand growth to slow down slightly. However, the demand situation is expected to still remain good. But in Asia, the political situation, and in particular in China, the demand will be coming slightly down until the political situation is resolved. But based on the good year and based on the good situation and the orders that we have received during the first part of the year, we updated our guidance, upgraded our guidance, and now we expect our operating profit and revenue to grow clearly compared to last year. If we look a little bit more in detail into the financial development of the company, starting with revenue. So revenue was at all-time high for a single quarter, EUR 65.6 million; growth was 12.2% at comparable exchange rates, and organic growth was 7.9% at comparable exchange rates. Revenue from key accounts was growing by 9.1%, so solid development there as well. Easter holidays, which were this year -- or were in Q2 had a slightly positive impact on the growth, as last year Easter was between Q1 and Q2. So this will affect Q2 this year. And now on EBITA. Our EBITA was EUR 6.4 million, representing 9.8% of our revenue, which was fairly close to our 10% target. The nonrecurring items, which were mainly related to the organizational change that we did at the first part of the year, were EUR 0.2 million. And EBIT was at EUR 5.8 million or 8.8% of the revenues. Amortizations related to acquisitions were at EUR 0.7 million. And now since all the service areas were developing quite well and they all were at the similar profitability levels, so the share of revenue represents also fairly well the share of profit that we had for the company. If we look first in Engineering Solutions. So again, we exceeded our 10% profitability target, and the revenue percent -- or the EBITA percent was 10.3%. Revenue growth was 5.8%, and the operational efficiency was very high in this service area. The level of investments in Finland and Sweden was also quite good, and we see good development also going forward. In Software and Embedded Solutions. The development was also solid. Revenue growth was 22.8%, and the margin was 9.8%. So solid development. In the software area, we had certain projects where the start was a little bit slow at the beginning of the year, which slightly burdened the result. Also in Poland, a demand with 1 significant customer was coming down, and that had a little bit of an impact on our profitability. But overall, the situation for this service area is good, and the demand situation for our services is high. In Technical Documentation. We were able to grow again, accelerate the growth, which was very, very good. There was positive development in the demand, especially in the development projects with our outsourcing solutions and also our demand for the software solutions, particularly our HyperSTE software, was picking up, which had an impact on the growth but also the profitability. Profitability was at 9.9% of the revenues, so very close to our 10% target.The problematic area still was Germany, and now we have taken measures. We have replaced the management and the sales management in Germany. We've also implemented new activities to improve the project business in Germany, and I believe that with the new management coming in we will be able to turn the situation. Also, the one large project delivery that has been pending in Germany is still pending. But now we have finally gotten the verbal approval at least for the component, which has been the problem. And now we expect the deliveries for this project to start in Q2, and we expect to deliver the project in full during this year. The component that we are now using is slightly more expensive. So unfortunately, the profitability of the project will not be as high as we anticipated. But nevertheless, we expect the project now to continue and contribute to our revenue development.Earnings per share were EUR 0.17 for the quarter, so significantly higher than last year. And cash flow was at EUR 5.4 million operating cash flow. Cash flow was, of course, impacted by the adaptation of the IFRS 16 standard and improved the cash flow by approximately -- operating cash flow by approximately EUR 1.6 million. Return on capital employed was 21.3%, so better than the 20% level that we are -- or wish to have. And the personnel at the end of the year was 3,150, 9.8% growth year-on-year. And we had a 1,104 employees outside Finland.On the income statement. Nothing major that has not already been mentioned. Slightly higher taxes due to better profit, but no major issues here. And on the balance sheet, the total balance sheet was growing by approximately EUR 12 million due to the adaptation of the IFRS 16 standard. And if we then look a little bit on our targets. Still, we have the 15% growth target, and now the growth was 11.3%. Good growth, but still lagging behind the 15% target. So we need to take action to accelerate the growth, and we look positively on this development.EBITA, 10%, the profitability target. We were very close at 9.8%, and we look forward to actually reaching the 10% target during the year. Managed Services Index, 65%. Now we were going again to the right direction of 58%. The best improvement we saw in Software and Embedded Solutions, where our project business has clearly healed. And now that we are selling more projects with good profitability, we are able to increase the Managed Services Index to create more value for our customers.And equity ratio was at a 41.2%. We had an approximately 3% impact from the IFRS 16 standard.And to conclude. We had a great start for the year, had the highest profit and highest revenue in a single quarter for the company. So that's a very, very positive way to start the year. And now we have been growing consecutively for 5.5 years, and we have been improving our profitability for 3 years consecutively every quarter. So that's a good point to continue this development and a good way to start the year. Thank you very much. And now it would be time for the Q&A session.

[Operator]

[Operator Instructions] Our first question is from Juha Kinnunen from Inderes.

[Juha Kinnunen, Senior Analyst & Strategist]

Congratulations on a great result. About growth drivers, I was just wondering whether the growth is now mainly coming from order delivery volumes that the clients are seeing. Or is it coming from your -- are you gaining market share? And have you been able to make new offerings to the clients?

[Juha Näkki]

Well, I would say that the order to delivery has been growing, but also the services that we have for our customers in R&D are equally growing. So I would say that the growth is coming from all parts of the operation and all parts of the organization. We have been successful in selling our new offering that we have been developing, and we hope that the share of the new offering, for example, additive manufacturing, digital prints, et cetera, they will grow. But I would say that the market demand overall has been quite good, and with our solutions business, we've been able to win market share all over. There is no single thing that has been the source of growth for us.

[Juha Kinnunen, Senior Analyst & Strategist]

All right. That's good to hear. Could you comment on the utilization rate now and possible changes in recruitment? I know that it's tight to [ hire ] in the software side. But is it perhaps getting more difficult in other areas? Or is it actually easing?

[Juha Näkki]

Well, I would say that the software automation maybe are the ones that are the hardest at the moment. It is difficult to find competent people in other areas as well. But so far, I mean we have been working quite a lot with our employer brand. And since the company has been successful, we have been fairly successful in recruiting. But it is getting harder in different areas as well.

[Juha Kinnunen, Senior Analyst & Strategist]

And the utilization rate, do you want to comment anything on that?

[Juha Näkki]

Well, the utilization rate, I mean, we have said that the operational efficiency is high at the moment. So the utilization rates are high, and we are pleased with that. That is providing the result.

[Juha Kinnunen, Senior Analyst & Strategist]

All right. Finally, the Managed Services Index rose quite sharply this quarter. So I was just wondering if there are anything else behind it. Any changes in categories or -- that you now manage to get acquisition in or something like that? Or is it just driven by good business development?

[Juha Näkki]

Well, basically, it's driven by business development. There are no new acquisitions that we got in, in this quarter. So we have had -- last year, it was becoming lower for 2 reasons. One of them was the market situation as our customers were ordering more manpower than projects, for example. And then the other part was that we also worked on the project profitability in the Software and Embedded site ourselves. And if we look at the different service areas now. So in Engineering Services, we had slightly more project business, and that increased for that reason. But in Software and Embedded Solutions, we have now been -- through the measures taken, we have been able to improve the profitability of the project business; and therefore, we have been more confident in selling new projects. And there, the increase in MSI index was significant for the service area but also visible on the group level.

[Juha Kinnunen, Senior Analyst & Strategist]

All right. Very well. Final question for me is about Finland's new government. I don't know if you want to comment on this, but some might say that this would create some more rates pressure during the year when the negotiations start. If it happens that there is a general rate in Finland, are you going to be able to move this through the prices of the clients? And how will -- how do you see the situation?

[Juha Näkki]

Well, it's quite early days, and we need to see how -- what kind of policies are applied and so on. But of course, when there are cost increases, so then we will -- of course, it's known for us. It's known for our customers. It's an understandable cost increase. So in this respect, we have always been able to get these cost increases into the prices. And we will see. We will need to wait and see what happens and then see how we can adapt to this. Of course, we have other ways of working with the costs. We have the offshoring and nearshoring models, which we can utilize to improve our profitability. So we have tools to work around it.

[Operator]

[Operator Instructions] And there seem to be no further questions at this time. So I will hand the word back to the speakers for any final comments.

[Juha Näkki]

Yes, I said this was a great start for the year. We did -- based on the good result and based on the major deals that we have made, we were confident enough to raise our guidance. And despite the situation in the markets, the uncertainty, we feel that the demand situation will be good, and we will have a good year coming -- going forward. Should you have any other questions, so of course, we are able to -- myself; our CFO, Per-Anders Gådin; or our SVP of Communication and Marketing, Outi Torniainen, will be happy to answer at any time. Thank you very much for your listening in.