Etteplan Oyj

OMXH:ETTE

Earnings Call Transcript 2022-Q1

[Juha Näkki, executive]

Welcome to this webcast presentation of Etteplan's Q1 results for '22. My name is Juha Nakki. I'm the President and CEO. And at the end of the session, we will have a Q&A where you can ask questions to our CFO, Helena Kukkonen.

If I go to the content of the presentation, so we'll start now with the operating environment as a lot of things are happening. Of course, then the highlights of the quarter, financial development, a little bit on the service areas as well. And to end presentation, we'll look at how we did against our targets and then followed by the Q&A session.

But if I start with the operating environment, so basically, of course, there is still a lot of things happening. The pandemic is still with us. That still continues to have an impact on the market. And now this drastic attack by Russian to the Ukraine has had an impact on the market, albeit smaller than we have anticipated.

But in general, I would say that the demand situation for Q1 was still relatively good. And it has -- of course, the war has had an impact. We are fully compliant with all the sanctions and so on. But as we do not have any direct business in Russia or Belarus, so we are not directly affected by the war. But of course, our customers do have operations in Russia and do have projects in Russia. So some cancellations we have seen, and some impact from there, but still relatively small in this quarter.

A bigger impact we had from the pandemic, our customers are still adopting their business quite well into this situation. But of course, we had an impact from the sickness related -- or COVID-related sicknesses and also other sick leaves increasing after the measures have been taken away for COVID.

If we look at the different markets. So in Finland, the market situation was fairly good. We did have some of the customers who had an impact from the war and the sanctions. But still, we didn't get project cancellations that much, and the market was pretty good. In the other European markets, Sweden, Denmark, Netherlands, Germany and Poland, very small impact on demand from the war or from the pandemic.

In China, of course, the shutdown measures taken or adopted by several of the cities where we are operating had some kind of a small impact in Q1. But of course, then, going forward, we may see a little bit more of an impact in Q2. But it remains to be seen.

But overall, if we go to the highlights. So overall, our performance was solid, very strong growth supported by the acquisitions. But also the organic growth was very strong, close to 15%.

Profitability was in line with our target, 10% EBITA, and that was a solid performance from the organization. And also cash flow was at a good level, thanks to the strong ending to last year. And we had a good over EUR 8 million operating cash flow.

Then perhaps on the negative side, the prolongation of the pandemic had an impact, as I mentioned earlier. The sickness-related absences increased significantly. We had over 30,000 hours more sick leaves than we had last year, which, of course, had an impact on the revenue development and also on profitability, and that will still a little bit continue in Q2. But hopefully, after that, it will be substantially less.

And of course, the attack by Russians to Ukraine has had an impact, but so far, quite minor impacts to our business.

If we look at the revenue development overall, so growth was 23%, very strong, and organic growth was 14.1%. And we were also growing in all our service areas. The strongest growth we saw in Technical Documentation Solutions, which was then supported by the acquisition of Cognitas and also good organic development. And of course, then Software and Embedded Solutions also growing above 30%, which was very strong as well.

In the profitability side, the operating profit EBITA was growing at 17% and also growth in all the service areas. And again, in Technical Documentation Solutions, the growth was 32%, so the highest there. But also solid growth in the other 2 service areas.

If we look a little bit on the split of the business between the service areas and countries. So the revenue split was 52% in Engineering Solutions; and Software and Embedded Solutions 28%; and Technical Documentation Solutions 20%. And of course, the acquisitions that we completed last year and during this year as well have made this split a little bit more balanced. So the growth has been stronger in Software and Embedded and also in Technical Documentation Solutions, which has been also a target for us.

If we look at the revenue split by area. So Finland, 53%; Scandinavia, meaning Sweden and Denmark, 25%; Central Europe, 19%; and China, 3% of the revenues.

And then personnel, slightly different, Finland, 52%; Scandinavia, 17%; Central Europe, 20%, strong growth there; and also then China, 11%. So that is the split of revenue and personnel.

The customer segments in this quarter were quite heavily affected by the acquisitions that we completed. So therefore, there are quite big changes. But overall, the general industrial machinery and equipment are growing fastest. And also the growth in automotive and transportation has been quite good. This also was the acquisition of Cognitas was contributing to this growth. And also we see that the investments in aerospace and defense are growing. And there, the revenues are growing.

Then the other service areas were not really declining that much. They were fairly stable. But of course, the percentages are slightly lower because of the acquisitions and the split from those.

And with this result, we keep our financial guidance intact. We expect the revenue to be between EUR 340 million and EUR 370 million this year, and the operating profit EUR 28 million to EUR 32 million. And of course, in the operating environment, there's a lot of things happening. Pandemic is still there, but our customers are coping quite well with this. And as I said, sickness-related absences were increasing. But hopefully, during Q2, this will go away.

But then, of course, the war and the attack to Ukraine has increased uncertainty in the market and the demand situation. It's difficult to estimate what the overall impact will be, but we can clearly see that the rising costs, rising inflation will have some kind of an impact on demand as our customers will be impacted by the heavier prices for raw materials, et cetera, energy, et cetera. But on the other hand, the investments into the defense industry and also green transition are growing and accelerated due to the war.

And the overall balance, we -- let's say, it's really difficult to estimate what it will be. But still, we think that the demand situation will remain fairly good throughout '22. There can be some ups and downs, of course, when different industries are impacted in different ways due to these unusual events and the war, but we still see that the demand situation should be fairly solid for the year throughout.

If we look at the financial development then a little bit more in detail for the quarter. So in all the key figures that we are reporting, we saw good development. Perhaps, the revenue outside Finland growing fastest, 34.4%, which is, of course, supported by the acquisitions where we have mainly been acquiring companies in Central Europe and Sweden. But also in all the other key figures, we had healthy development for the quarter.

If we first look at the revenue a little bit more in detail. So 22.8% growth, out of which organic was 14.1%. And of course, the organic investments that we completed last year and also the success in our outsourcing business has contributed heavily to the organic growth. The sickness leaves -- or sick leaves had an impact on the revenue development, a little bit negative impact. But still, the growth figures were very solid.

Revenue from key accounts were growing by 9.8%. And the overall revenue was EUR 89.6 million, so very close to EUR 90 million mark.

Acquisitions, of course, contributed to the growth that we had. During the review period or the comparison period in '21 and '22, we have completed 8 acquisitions. And the ones that we completed in Q1 were Syncore Technologies in Sweden, an embedded software company, and also Cognitas, a technical documentation company in Germany. Then after the quarter in May, we have completed another acquisition, LCA Consulting in Finland. It's a relatively small company, only 11 personnel, but still a very important acquisition for us as this is a clear investment into the sort of sustainability and our sustainability related offering.

So with LCA, it's a Life Cycle Assessment Company that is helping customers to define their carbon footprint. And in the future, together with LCA and the personnel there, we will be able to help our customers to identify where our customers are in the sort of carbon footprint areas and in their sustainability areas. And then we will be able to run projects and help our customers to develop their products and their production facilities to actually be more sustainable and to meet their sustainability goals.

And we have already now -- it's only been 2 days since we announced this acquisition, we have already now started to see very positive movement and inquiries from our customers from this side. So clearly, the demand is high, as of course, the sustainability agenda is very high on all our customers and with our company as well.

On the profitability EBITA that amounting to EUR 9 million, so a growth of 16.6%. The margin was 10%, so slightly down from last year. And of course, here, the sick leaves had a slight effect or impact on the profitability as well.

We had nonrecurring items of EUR 0.3 million, some organizational issues and some acquisition-related costs, but nothing major. And overall, we still continued in Q1 in the remote working mode, but the transition into this kind of hybrid mode of working has started. So the costs have already started to increase. And in Q2, Q3, we expect the cost structures to normalize into the new sort of hybrid mode of operating, which we will then continue to run in the future.

On EBIT, EBIT amounted to EUR 7.6 million for the quarter, a growth of 15.6%. And the amortizations related to acquisitions were EUR 1.3 million now, slightly growing from last year due to the acquisitions of Cognitas and Syncore.

And earnings per share at EUR 0.23, and of course, an increase of 9.5%. And of course, in April, we paid out the dividend of EUR 0.40 for the performance of last year.

Cash flow, as I mentioned earlier, was strong for the quarter, so EUR 8.6 million operating cash flow for the first quarter, which is a particularly strong quarter for -- let's say, particularly strong cash flow for the first quarter for us. Last year, the cash flow was EUR 1.3 million. And of course, this was -- had an impact from last year's strong performance in the last quarter. So long December, et cetera, contributed to this well and also the payments made by our customers had an impact on this one.

Cash flow after investments was minus EUR 10.3 million. Here, of course, the investments were mainly related to acquisitions that we completed during the quarter.

Personnel at the end of the period was 3,877 and growth of 16.4% overall. And we are very pleased that the personnel outside Finland was growing faster according to our targets, and we had 1,865 people outside Finland at the end of the quarter.

If we then take a little bit more detailed look on the service areas, so starting with Engineering Solutions. So again, solid growth of 12.8% and a very healthy margin of 10.6% for the quarter. Very good operational efficiency overall in the service area. And basically, the interest for outsourcing solutions has remained high, has contributed well to our growth in this service area. It has remained high now with the uncertainty in the market, so we expect to see good solid performance here going forward as well.

In the Software and Embedded Solutions side, growth was very strong, 30.8% growth and revenue of EUR 24.6 million, and very good demand situation overall. Acquisitions had an impact on the revenue. And also we increased again our subcontracting. We have more than 250 subcontractors working in our projects with this business. Syncore acquisition, of course, contributing to the revenue development here. And the integration is going according to plan, so far.

Operating profit EBITA was growing, but our profitability was slightly lower than we have expected, and this was due to the reasons that we had some units where our operational efficiency was weak. And there were some delays in starting some projects, and we had a little bit of softness in some operations. But we have already started actions and measures to manage the situation and expect that to improve going forward.

Also the -- of course, the increased subcontracting had a slight impact on the profitability, as we have slightly lower margins on the subcontracting. But of course, then, the flexibility is better when we run our business through this kind of models.

Then on the Technical Documentation Solutions, growth was extremely strong, 44.3%. Of course, the acquisition of Cognitas contributed heavily to the growth here. But of course, the organic investments that we completed during last year also had a good impact on our growth. Demand situation was good, and we had a fairly good operational efficiency in the business as well.

In Cognitas, we had a slightly weaker profitability in Q1, as expected. But going forward, we expect the situation there as well to normalize, and we expect to return to higher levels of profitability, again, of course, providing that the market conditions stay relatively good.

And then to end the presentation, just a quick look at our targets and how we are doing against our targets. So we have a revenue target in '24 to be at EUR 500 million, and that has not changed due to pandemic or the war. We still have the target, and we are driving towards it. Now we are -- on the rolling 12-month figures, we are at EUR 317 million, but we have been able to accelerate the growth, and we are looking to do that also going forward to reach our target.

In revenue outside Finland, we are progressing nicely towards our target. We had a target of 50%. And currently, with the acquisitions of Syncore and Cognitas in Germany, so we have currently 47% of our businesses outside Finland. And we are closing in on the target very nicely.

On the Managed Services share of revenue, we are gradually increasing, currently at 65%. And of course, here, a little bit, the acquisitions contributing as well, but also the success of our outsourcing business is contributing to the increase in this figure.

And then on the profitability target, we are, again, at the 10% levels according to our targets, so healthy profitability again.

So that's the end of the presentation, and now we can move to the Q&A part of the webcast.

[Operator]

[Operator Instructions] Our first question comes from Pasi Väisänen, Nordea.

[Pasi Väisänen, analyst]

Great. This is Pasi from Nordea. Firstly, I mean, regarding to organic growth, which has been actually quite good, roughly about 14% last 4 quarters in the line. So my question is that, would it be actually possible that now we have actually seen already the pent-up demand after the pandemic? And then this kind of extra demand will roll over, would it be possible that your organic growth actually is coming down close to 5% for the coming quarters, instead of 15%?

And maybe secondly, regarding the salaries and cost inflation, I mean, if it happens, and I guess it's going to happen that salaries will be up, are you still able to keep profit -- the same profitability as we have seen kind of in past quarters or past years? Or is there some kind of delay mechanism on your kind of pricing to end customers regarding to kind of wage inflation?

[Juha Näkki, executive]

Yes. Well, first, if we take the organic growth, so, of course, you are right there. I mean, there has been -- after the pandemic, there has been investments and perhaps delayed investments that have started now, which has contributed to the growth.

But we have also done quite a lot of actions and activities to increase our presence for certain service areas in different markets. We have made investments into organic growth by starting up new teams in new areas and in new countries. And I think that is -- that has contributed to the growth very nicely.

Of course, if the market situation goes down, if the demand situation starts to weaken, of course, then, it will be hard to retain similar percentages. Now there is uncertainty in the market, so we -- it remains to be seen how good organic growth we will be able to achieve.

But certainly, we will do our best to continue the organic growth as well, and we will continue to invest in organic growth wherever we see it possible. And hopefully, we are able to maintain a high organic growth level as well, maybe not 14%, but at least way higher than the 5% that you were mentioning.

And then on the margins and the salary inflation and these things, of course, costs are rising overall. The salary inflation is also there. We have seen quite a lot of salary increases in our company and across other companies as well. But currently, in the current market, we have been quite successful in transferring the increased costs into our prices, and the sort of pricing power at this point has been fairly good. So we have not seen too big deterioration of the margins.

But of course, that is difficult to say also what will happen in this respect. If the demand stays high, we expect to have also high margins going forward. And we are working according to our strategy to renew our services to provide higher value add of our services to our customers. And of course, with that, we will be able to have higher margins as well.

And also we will be able to -- as we are growing very fast with the organic growth currently and also through acquisitions, the volume will, to some extent, compensate for the margins -- or let's say, the sales margins that we have. And the overall sort of efficiency of the operation will improve. So we expect to be able to retain the sort of profitability levels that we have now also going forward.

[Pasi Väisänen, analyst]

Great. I hear you. And maybe lastly, if I may, regarding the China demand situation into country. I mean, you actually highlighted the chance that there would be some problems in growth or demand in the second quarter, which actually might be related then to this kind of restrictions coming from COVID-19.

But by excluding these restrictions from pandemic-related issues, how do you see the underlying kind of economic situation or the demand situation in the country, especially when looking at the kind of the engineering sector or the housing, where [indiscernible] sector in the country?

[Juha Näkki, executive]

I would say that the underlying demand is still very good. Of course, one area is the overall economic development in China, how is that going, that has an impact on the demand. But even bigger impact than that, we have from the fact that the market is changing and the way customers are working with partners is changing.

So in China, the level of utilizing partners is increasing constantly, and that is driving our development, perhaps even more than the sort of growth of the overall market. And we expect that trend to continue.

So overall, the underlying opportunities are still there, and I think that it will continue to be there. But right now, we have a little bit of a rough ride in some cities due to the fact that there are these restrictions related to COVID.

We are able to work remotely. But now, for example, in Shanghai, the lockdown has continued for about 40 days. And it's been difficult to get new assignments from customers, get new sales going when you can't go anywhere or meet anyone or go and pick up the computer or train a person to do new work for new customers.

So these things are having an impact currently. But in the underlying demand, I would say that there is no major change. The demand situation is good. And for us, it's driven by the transition to actually utilize more partners in China as well.

[Operator]

Our next question comes from Jerker Salokivi, Evli Bank.

[Jerker Salokivi, analyst]

This is Jerker from Evli. Maybe just a question regarding the margins from a different perspective. I mean, looking at the kind of inflationary pressure on your customers and how that will affect their end customers. So do you see kind of the risk coming from that point, for instance, in light increased in-sourcing or erosion of pricing power from your point?

[Juha Näkki, executive]

Well, of course, if the market situation will be tougher, and there will be less opportunities for companies, so, of course, there will be pressure on the prices. But for this year, the prices are with -- most of our major customers, we have this kind of annual price list, and the prices have been agreed.

So for this year, I think we should be fairly safe. And still, I would say that in certain areas, the demand is still really high. It's difficult to get resources and so on. So I expect us to have a quite good pricing power in these areas.

But it's normal that in -- if the market situation gets tougher, then the price pressure will also be higher. So we just need to continue working with our service offering and provide more value to our customers. And through that, it's justified for us also in difficult market conditions to have higher margins.

[Jerker Salokivi, analyst]

Okay. Then just maybe a second question. You noted some kind of direct impact due to the Russia, but maybe are you in discussions with your maybe key accounts? Have you seen kind of any change in their sentiment, in new orders or any kind of lead indicators of change in demand in certain sectors?

[Juha Näkki, executive]

Well, of course, we have seen some of our customers and some of our key customers have had operations in Russia. And of course now, most of them have stopped that business. So there, we see an impact. But for us, it's been still relatively small. How that will impact demand for them going forward, difficult to estimate, but some kind of an impact at some point, of course, there may be.

But if we're looking at, for example, the orders received from our customers and their performance from the first quarter, many of them have already reported. So that is still surprisingly good, and the impacts are still relatively small.

So it's really difficult to estimate. We see that in some areas, in some sectors, the costs will hit a little bit harder. And let's say, the willingness to invest is going to slightly go down. But then there are also other areas, like the green transition or the defense industry where there will be more investments due to the war. So the overall impact is really difficult to estimate at this point.

[Operator]

Our next question comes from Juha Kinnunen, Inderes.

[Juha Kinnunen, analyst]

This is Juha from Inderes. I will be going back to China. I was just wondering, because you also do offshoring from there, and if the lockdowns continue, is it possible that it will spill over to European customers, not just the local customers in China?

[Juha Näkki, executive]

That is possible, yes. Most of our offshoring customers are long-term customers where we have a working model that we have already trained our people. So the offshoring business has actually had very limited impact because that we can do also remotely. And there, we have the working models in place.

So the offshoring business is still strong. But today, over half of the Chinese hours sold are to the local market. And the local market is the one where we have the impact, if any. But I'm sure that in Q2, we will see some impacts.

[Juha Kinnunen, analyst]

All right. Fair enough. Excellent result again, and the demand seems to be strong, but you are still somewhat cautious in the outlook. I understand that there are uncertainties, but are you seeing any signs of weakness or clear weakness in some sectors that we are perhaps unaware of?

[Juha Näkki, executive]

Currently, actually not. We don't see, at the moment, major issues with any of our customer segments. So still, orders are strong. Deliveries are continuing. We haven't seen project cancellations or decisions postponed, which is quite normal when this kind of a crisis starts. But with the war, we haven't seen that impact.

So right now, it's still strong. But of course, going forward, if the costs continue to rise at some point, they will have an impact on our customers' cost structures and, therefore, profitability. So that may cause some slowdown of investments. Or it may not. It's really hard to say. But so far, no clear visible impacts.

[Operator]

[Operator Instructions] We have no further questions. Dear speakers, back to you.

[Juha Näkki, executive]

Okay. Well, of course, it was a good strong start for the year for us. And if we look at the trends, so we have been able to now accelerate the growth after the pandemic last year. And we have done acquisitions and strong organic growth in the Q1, so we expect to be moving forward also this year.

So we expect that, despite the uncertainties in the market, we still think that the market will remain fairly good throughout the year, and we expect to have a strong solid growth year with a healthy profitability for the full year as well.

And should you have any questions outside this conference call, so here are the contact persons for you. So Outi Torniainen, our SVP for Marketing and Communications; Helena Kukkonen, our CFO, or myself will be available to answer any questions at any time that you may have.

But at this time, thank you very much for listening in, and have a great day.