Etteplan Oyj

OMXH:ETTE

Earnings Call Transcript 2023-Q1

[Juha Näkki, executive]

Welcome to this webcast presentation for Etteplan's Q1 Results for '23. My name is Juha Nakki. I'm the President and CEO. And at the end of the presentation, there will be a Q&A session where you will be able to ask questions to myself or our CFO, Helena Kukkonen, -- just to look at the contents of the presentation, so I will start a little bit with the highlights of the quarter look a little bit on the operating environment, look more detailed into the financial development and also our service areas. And then to end the presentation, we'll have a look at our financial guidance and also our targets and how we did against target setting and then followed by, of course, the Q&A session. But if I start with the highlights of the quarter. So our growth continued. Our growth was 8% with comparable exchange rates and revenue was at EUR 95 million, which is a record for us. Our profitability, excluding exceptional items, was also good at targeted levels, but we did have quite a bit of exceptional items for the quarter, which I will come back to. Demand side, the demand continued to be strong in the delivery projects area and also in plant engineering, projects continued and there were even new projects starting. And in our Engineering Solutions service area, this good demand was shown and the service area performed really, really well. On the negative side, we had the significant exceptional items, which I will get back to, but they burdened clearly the otherwise good result. Also, the uncertainty in the market started to show a little bit, and this was impact in the system and R&D related investments that our customers are making for certain customer industries, which had a little bit of a negative impact, in particular to our Software and Embedded Solutions service area. Also, we had still a lower profitability on the technical Communication Solutions service area with our German business or the acquired company, Cognitas, but the -- our plans are moving forward, and we are expecting to improve going forward. But that's the highlights. If we look a little bit on the operating environment. So still, of course, the war in Ukraine, Ross invasion to Ukraine and the elevated geopolitical tensions have, of course, increased uncertainty in the world, which has an impact on the markets. Also, the high inflation, which continues, has changed the behavior of consumers, and there is less consumption in certain areas, which then has an impact on our customers' business and their cash flows. And this is hitting their willingness to invest into new things in certain areas. There is a lot of -- still a lot of fluctuation between different kinds of customers. But in certain areas, there is already now a clear drop -- and there are some reflections also to the sort of more general industries as well. But that being said, there are also industries where the development in demand has been strong. So defense industry, energy efficiency and green transition-related investments are growing. And this is, of course, then bringing a positive note to the market and to the market demand as well. If we then look a little bit on the different markets and the different countries where we operate. So in Europe, the development in different countries is relatively similar. Quite many European countries have fallen into a slight recession, which is then reflected into the industry and industrial investments and having an impact on demand. And also in China, it's clear that the war and the geopolitical tensions are having an impact on the sort of Western investments in China and also in international trade, which is then causing the demand to decrease a little bit in China. And this is visible also for us. If we then look a little bit on how we did in general, so the growth was 6%, 8% on comparable currencies and our engineering solutions and also our technical communications solutions, service areas were growing, whereas the Software and Embedded Solutions revenue was slightly falling behind last year. And on the profit side, Engineering Solutions was on the same level as previous year or the comparison period and then technical communication solutions and also Software and Embedded Solutions fell behind last year. But these -- all of these are, of course, heavily affected by the exceptional items that we had during this quarter. And if we look at the revenue split a little bit. So Engineering Solutions represented 54% of our revenue growing slightly and Software and Embedded, dropping slightly to 26%, and technical communication solutions are remaining at 20% of our revenues. Geographically, Finland was at 51%; Scandinavia, 25% and Central Europe, 21% of the revenues in China, 3% of our revenues. And then the personnel by area of Finland, 50%, Scandinavia, 18%; Central Europe, 21%; and China, 11%. So clear growth in outside Finland as per our target. If we then look a little bit on the revenue by customer segment. So energy was growing. Automotive also continued to grow where the sort of electrification of the whole transportation and car industry clearly shows here also chemical industry was growing Marine & Offshore slightly. Then this general industry machinery and equipment was dropping slightly; lifting hoisting equipment dropping slightly. ICT dropping slightly in relative terms for us. If we then move on a little bit to more detailed look on the numbers. So -- so overall, revenue growth was 6%. Revenue outside Finland was growing by 10%. Operating profit EBITA dropping by 15.4% and EBIT by 17.9%. Earnings per share was also dropping to $0.17 and equivalent of 26.1% drop. And of course, in all of these profitability-related figures, the exceptional items had a clear impact. If we look at the revenue growth a bit more in detail. So as already mentioned, at comparable exchange rates, growth was 8%, and organic growth at comparable exchange rates was 6.9%. For us, of course, the Swedish krona and some other currencies have the impact, but the Swedish krona is the biggest impact we had. We continue to grow. The market demand was slightly softer due to the reasons I explained in this quarter compared to the last quarter of last year, but still quite okay, quite heavy fluctuations between different customers and different customer segments, but overall, still relatively good demand situation so far. Revenue from key accounts was increasing by 1.2%. The main growth was coming from Central Europe and in Sweden from the sort of midsized and even large customers in these regions. EBITDA was at EUR 7.6 million, 8% of the revenues and exceptional items were at quite heavy EUR 2 million compared to EUR 0.3 million last year. There are 2 types of items. One of them is the nonrecurring items, which were EUR 0.9 million, which is mainly related to organizational restructuring and mainly management restructuring in different parts of our organization. And then also, there was the onetime salary payment related to the collective labor agreement in Finland, which we have taken as a one lump sum for this quarter, and that was in the amount of EUR 1.1 million, which was fully now booked for this quarter. If we take a look at the profitability, excluding these exceptional items, so then we would have been at 10% levels, which is according to our targets. So operatively, fairly strong, but with the exceptional items falling behind to the 8% mark. On EBIT, of course, the amortizations are burdening the EBIT compared to EBITDA at EUR 1.3 million for the same -- for this quarter, the same as last year and the EBIT was at EUR 6.3 million or 6.6% of the revenues. Earnings per share at EUR 0.17, so EUR 0.06 behind last year, so a 26.1% drop again due to the exceptional items. And operating cash flow at EUR 7.2 million compared to EUR 8.6 million last year. And again, here, the exceptional items had an impact for the sort of operative cash flow. We did not have acquisitions in this quarter. So therefore, the cash flow after investments was a lot better than last year when we had some acquisitions in the first quarter. Personnel at the end of the period was INR 3,949 million, so plus 1.9% compared to the previous year, out of which, at the end of the period, we had 1,966 people outside Finland, which was 50% of our personnel, so according to our target setting. And then if we look at the service areas, a little bit more in detail. So in Engineering Solutions, we had a great start for the year. Revenue was growing by 10.7%. And for the first time, we exceeded the EUR 50 million mark in terms of revenue. The operational efficiency was strong. The demand situation for the service area was quite good, but also operatively, we performed well. And therefore, we had a good operating result. The exceptional items burdened also Engineering Solutions and for this quarter, the exceptional items were EUR 0.9 million. So with that taken into account, the EBITA would have been above 11%, which is a very, very solid positive result for the quarter. And of course, we did sign a major deal for us when we signed an outsourcing agreement with Cognitas in Finland, and that had an impact on the growth numbers a little bit here but will affect our numbers positively in Finland for the coming quarters. In the Software and Embedded Solutions side, we did see a clear hesitation from our customers to start new R&D and system-related investments and new projects, and this had a little bit of an impact on our operational efficiency and the numbers. Also here, the exceptional items were heavy. So the profitability was burdened by EUR 0.5 million. And here, as well as in the Engineering Solutions side, the main item in the exceptional items was the salary -- onetime salary payment in Finland according to the collective agreement. But the revenue was dropping by 3%. We also had slightly lower number of subcontractors working in our projects, reflecting also the slightly weaker market situation here. And EBITA was at 6.8%, but if we take the take the exceptional items into account, then we would have been closer to 9%. So operatively still quite okay despite the slightly weaker market condition. If we then move on to Technical Communication Solutions, where we have changed the name of the service area as well to better represent and reflect what we are actually doing today. So the revenue growth was at 6%. EBITA was at 6.1%. So a little bit worse than what we are used to. But also here, -- the exceptional items were heavy, EUR 0.7 million. And in this service area, these were mainly related to management reorganization that burdened our results.We still continue to have slight issues with our German business with the acquired company, Congnitas, but we are now moving forward. We have taken action. We have taken initiatives, and we see that currently, the demand situation is okay, and we are working hard to improve our profitability. And we expect our efforts to have an impact on the business towards the end of the year so that we can return to normal healthy levels of profitability also in this service area. If we then look at our financial guidance and targets. So -- so our guidance remains intact. We are estimating that our revenue will be between EUR 360 million and EUR 390 million for the year. And our operating profit EBIT is expected to be between EUR 28 million and EUR 33 million. Of course, now we fell a little bit behind last year in the first quarter, but now that we have taken the costs, we have a little bit of savings going forward and feel confident that we will be able to meet the guidance.The market outlook is relatively similar to what it has been. So of course, the war is still having an impact and the geopolitical tensions are high, which are then causing the inflation and affecting consumer behavior, which is then reflected into the market and having an impact on the industrial investments with our customers. That being said, we still see that there are opportunities as explained earlier, so green transition, electrification related, energy efficiency rated and of course, defense industry-related industries are growing. And in that respect, we still expect that the demand situation would be fairly good throughout 2023. There can be some bumps on the road. But still, overall, we feel that for the full year, we expect the demand to be relatively good. Then a little bit on our financial targets. In the Annual General Meeting, we did raise our ambition levels a little bit. We have extended our normally 3-year strategy period to cover also the years '23 and '24. And due to the fact that we are already very close to our target in the revenue outside Finland target, which was previously 50%. We are currently at 49%. So we raised the ambition level for the running year and the next year to be at 55%. The same goes for our operating profit, EBITA target. We have consistently met our previous 10% target. And for that reason, it was now time to increase the ambition level and raise the target to above 10%, which we feel that we will be when moving forward with our strategy execution, we will be able to meet. And at this time, I would like to open the floor for questions. So thank you very much.

[Operator]

[Operator Instructions]. The next question comes from Jerker Salokivi from Evli.

[Jerker Salokivi, analyst]

This is Jerker Salokivi -- can you hear me all right?

[Juha Näkki, executive]

Yes, I can hear you well.

[Jerker Salokivi, analyst]

Just maybe just a quick check regarding the one-offs relating to restructuring. Are you anticipating anything going forward in terms of actions or one-offs?

[Juha Näkki, executive]

Well, of course, you can never say no, there will not be anything because the business, of course, takes twists and turns. But right now, we have done the actions that we have planned so far. Should some businesses fall behind targets or we see the opportunity to do -- or we see that it's necessary for us to take further actions. So of course, then there may be some. But currently, there are no major plans to have any other restructurings. But we've taken now the actions that we needed to take. But of course, never say never, the market may change. There may be other turns that we need to do. But right now, there are no others planned at least. And as explained, I mean, we have now taken the Finnish collective agreement related onetime payment in the salaries, we have taken that into account in full, so there will not be any further bookings on that.

[Jerker Salokivi, analyst]

Okay. Then just a question regarding the recruitment. It kind of slowed it down already in Q2 last year. And I assume you're probably still on storms. I don't know maybe under what circumstances could we expect the recruitments and increase again?

[Juha Näkki, executive]

It's directly related to demand. So we would need to see some kind of positive light on demand side for us to really accelerate. And I would say that it's a little bit twofold here. I mean, we do see that there are certain industries where we have growing needs and where we are continuing to recruit. But at the same time, there are certain industries where the demand situation is a little bit down compared to where it was. So we need to manage the situation carefully. But in order for our headcount to really start growing organically, then the market situation needs to improve. There should be some kind of sort of light at the end of the tunnel, for example, for the war situation or some other clear sign, which would give better sort of trust for our customers to move forward with their investments. Once they start to do that, then we will continue to, of course, move forward and continue to recruit. We can change the mode fairly fast when the market situation changes.

[Jerker Salokivi, analyst]

Okay. Then maybe a final question to get back to another topic. Maybe regarding the geopolitical tensions that have been going on, it's been already a longer time, there's been talks about potentially moving production to other countries. Maybe a -- with your visibility, are you kind of seeing any of that at the moment?

[Juha Näkki, executive]

I mean, it's quite clear that our customers are changing their sort of supply chain in such a way that they are not dependent on a single location or a single country. So there is movement and there are new sort of delivery chains being built. And clearly, the geopolitical tensions have an impact, for example, to investments in China currently. And that's having also an impact on the demand situation for us in China. But it's quite clear that companies are rethinking their supply chain strategies, and it is very clear that this kind of single source strategies are being abandoned currently and changes are to be expected in my view.

[Jerker Salokivi, analyst]

Just to further quick ask about that is this something that you could see as a potential new geographical expansion opportunity for you?

[Juha Näkki, executive]

Well, we are, of course, we have the Production Solutions business, and we have the plant engineering business within Etteplan. So these are areas where we can also contribute to our customers' supply chain plans and we are currently engaged in some assignments with our customers to design new factories, design new production lines, et cetera. So hopefully, this will also be bringing us opportunities, and we see some opportunities already now. Hopefully, that will be accelerating in the future.

[Operator]

The next question comes from Vincent Normant from Denso Capital. Please go ahead

[Vincent Normant, analyst]

Can you hear me?

[Juha Näkki, executive]

Yes, I can hear you well.

[Vincent Normant, analyst]

Great. And one question, additional to the recruitment, it's about the attrition. So if you could comment, first, the decrease in trend that you are currently seeing?

[Juha Näkki, executive]

On the sort of attrition... You mean?

[Vincent Normant, analyst]

Yes, exactly.

[Juha Näkki, executive]

I would say it's -- I mean, of course, there is in our line of business in our industry, there is a certain kind of personnel turnover always, and it's also okay that there is certain kind of movement. Now that the market is slightly down. So we can see that in certain areas, it's slightly easier to maybe recruit and maybe there are not that many opportunities for the personnel. But there is no major change in that, I would say, so far. But on the recruitment side, it's quite clear that it's easier to recruit in certain areas currently than it was maybe 3 months ago or 5 months ago or even a year ago. But we will see how that develops. In the long run, we still expect that there's a shortage of talent, and it will be difficult to or not difficult, but you need to really take action to be able to recruit the right kind of people for our needs.

[Vincent Normant, analyst]

Okay. The second question is around the subcontracting, which was fairly high in the software and embed solution in the past. So I was wondering if you see more weakness is on this side on the segment, how does it under the -- of this subcontracting activity.

[Juha Näkki, executive]

Well, I guess, in our numbers, you can also see that there is slightly less subcontracting for us, and that is reflected to the demand situation. And for that reason, we have cut down a little bit the number of partners that we have. But -- but going forward, when the demand situation develops, hopefully, favorably, very soon. So then, of course, we will use also partners to manage the growth and the expectations we have from our customers. So we will continue with that. But of course, now right now when the market is slightly down, so it is helping us to adjust our capacity to fit the current market need.

[Vincent Normant, analyst]

Okay. So presumably, in the next quarters, you should see an improvement in the margin, thanks to having less subcontracting as a percentage of sales.

[Juha Näkki, executive]

It has a slight impact, yes, through that and also through the sort of operational efficiency impact, so we should be able to have some kind of an impact from there. But of course, if the demand situation is weakening, so then, of course, that may have an impact as well, but we will see how things turn out.

[Vincent Normant, analyst]

And last question is about the price effect. So if you could elaborate a bit on the pricing you intend to push for this year and what you did in Q1? And what should we expect for the full year, let's say, percentage?

[Juha Näkki, executive]

Well, the percentage, they are between us and our customers, and we are not allowed to reveal that, but of course, in putting the sort of cost increases into our prices. We have had some price increases going forward already in Q1. So that has had a little bit of an impact, which we also commented in the Engineering Solutions area. So we have had already from the beginning of the year, certain increases and the salaries, for example, here in Finland, are increased only in the beginning of April. So there, we have had a slight positive impact. But overall, if we look at the full year, so I would say that we have been able to cover the sort of cost increases with the price increases quite well.

[Vincent Normant, analyst]

So we shouldn't expect more positive impact from pricing from Q2 to Q4. you would say that the price increases were already incurring in Q1...

[Juha Näkki, executive]

Some of them were implemented in Q1, but some of them are, of course, implemented only from the beginning of April when the salaries are actually increasing here in Finland. Some of them are implemented even later. So hopefully, we will see some price increases also in Q2. And so I want to cover for the cost increases that we have had and which other companies have also had, but we -- I think we shouldn't have any major impacts there, but still some.

[Vincent Normant, analyst]

Okay. And the last question about Cognitas. So once again, you have a significant nonrecurring items linked to this acquisition. So you say that now you've taken all the measures you have to do. What should be the development from now on for this business? And what exactly did you fix?

[Juha Näkki, executive]

Well, we are working with basically 2 things. One is pricing. The second is then the operating model. And both of which we know how to fix and we know what to do, but they are not sort of easy fixes that we can just do something now and tomorrow, it will be better. This will take time, but we are implementing the plans. We are renegotiating with certain customers and also transferring certain businesses to more profitable sort of businesses and areas. And with these actions, we are confident that we will be able to reach similar levels of profitability in this service area as we have been seeing before and we expect that to happen during the course of this year. However, there is no single quick fix that we can just do today so that tomorrow, it will all be better. But the major actions have been taken and planned, and we expect that our actions will convert into positive things also regarding the profitability during the year.

[Vincent Normant, analyst]

So you would say you've taken the hit from, let's say, nonperforming contracts which is... Some of the... Into this...

[Juha Näkki, executive]

Some of them continue still for some period of time, but we are working hard on it and expect to see positive development during the year.

[Operator]

The next question comes from Juha Kinnunen from India.

[Juha Kinnunen, analyst]

This is Juha from Inderes. Many of my questions have been asked and answered, but I have a couple of more. First of all, about the overall market trend, which is slightly negative as far as I understand in the first quarter. But could you comment whether there has been a negative trend in monthly basis. So we are already in May was January, of course, seasonally adjusted better or worse.

[Juha Näkki, executive]

Compared to January last year, you mean -- or compared to...

[Juha Kinnunen, analyst]

Yes. I mean, like seasonally adjusted trend, if you can provide something like that.

[Juha Näkki, executive]

Well, I would say that we've seen a slightly softer market in Q1. So it's been slightly coming down from the sort of investment side. Some of our customers are a little bit more careful with their investment decisions. So things are being slightly postponed and new investments are not started. But there's quite a lot of activity. There's a lot of inquiries. There's a lot of quotations out. But it's just now taking quite a bit of time for our customers to have enough confidence for the future to actually take the decision to invest. And this is the current situation we are seeing. It, of course, can change very rapidly if and when our customers start to believe that the market situation will improve, maybe the geopolitical tensions will somehow decrease or the sort of inflation will start to be more under control. I don't know exactly what would be the trigger for different customers to take the investment decisions. Some are investing now. Some are delaying. But clearly, there is a little bit now more hesitation in the current environment. However, if we look at what the economists are saying and so on. So the expectation is that this situation would not last that long, difficult to tell, but we would expect things to somehow normalize during the year. So that's perhaps the analysis I could give at this point.

[Juha Kinnunen, analyst]

All right, fair enough. I understand that the overall market is difficult to kind of explain when there are so many different areas. But maybe I could ask a similar question about software and embedded solutions because there the net sales were actually down, then I guess, R&D is a big thing, of course, there. So I'm wondering whether you are already seeing some positive signs or is this at least going to continue for a while in a lower kind of momentum?

[Juha Näkki, executive]

Well, there's a lot of activity. There's a lot of quotations out, but there are still hesitations to start new R&D and you're right in commenting that this service area is more sort of more R&D driven and also system investment-driven. And there are currently less projects are started. There's a lot of activity, there's a lot of plans and there's good prospects. But what is currently missing is the sort of decision that yes, now we will move forward. And how long this situation continues that I cannot say. But there's a lot of activity. There's a lot of good plans. There's a lot of opportunity. It's just the timing of the decision that yes, now we will go. How long the situation will last. It's hard to tell.

[Juha Kinnunen, analyst]

All right. Final question also in software and embedded hunters. Wondering whether you can be certain that this is market or clients are hesitating and it's not that you are losing kind of market share. I know that it's difficult to say what is the market share there? But so you know that the clients are not progressing without you.

[Juha Näkki, executive]

Well, of course, I cannot be absolutely certain, but if I look at some of the other reports and if I look at what the situation with our partners, if I look at the situation in different markets, for example, in recruitment, so recruitment in this area has eased quite a lot. So there's a lot of people available. There's a lot of great competencies available, which was not the case half a year ago or 1 year ago. And that would indicate that there is less work for others as well. So I would assume, and I would trust that we are not losing our market share or position -- but of course, this is just my estimate. I may be wrong.

[Juha Kinnunen, analyst]

Yes. There used to be a huge lack of coders and seems to be a lack of projects. Final question. Second one, I know, but you said that you are expecting improvement by the end of the year. I'm just wondering, is this something that is based on the macroeconomic estimates or is it something that you are hearing from your customers?

[Juha Näkki, executive]

Well, it's pretty much both of that. We see that there is quite a lot of plans. Our customers have great plans to do move forward and great investment plans, which will have good paybacks for them, providing that the market is helping them out. So there is quite a lot of activity. There are opportunities. We see that there's plenty of things that we could be doing -- but then they are just not starting. But if we look at the sort of macroeconomic situation and the sort of forecasts that have been given, so that would sort of lead to think that the market situation can improve during the latter part of the year. We know for a fact that there are good plans, there are possibilities. But what would be required is our customers to take the decision to move forward with their investments. And for this sort of mental change to happen, there should be some positive signs in the macroeconomic outlook and in their particular field of business. And we are expecting that to happen during the course of the year. So that's how we see it. But it's, of course, really difficult to tell with all the things happening currently in the world.

[Operator]

Thank you. As a reminder [Operator Instructions]. So I hand the conference back to the speakers for any closing comments. The next question comes from Vincent Normant from Denso Capital.

[Vincent Normant, analyst]

Hello... Just for a question, if you can hear me?

[Juha Näkki, executive]

Yes. Yes.

[Vincent Normant, analyst]

It's about the Scania business that you took -- the teams that you took over in Q1. What's the magnitude, the sales magnitude or the business that we should expect for this year that will be taken over from Scania and that you will recognize?

[Juha Näkki, executive]

Well, it's a question that is between us and Scania. So I'm not able to reveal that, but it was about 30 people, 29 to be exact, if I remember correctly. So that's round about the level, the pricing and the other financial parts. I cannot comment. But about 30 people -- so a good deal for us and great competence that these people have a very welcome part for Etteplan and we are confident that this expertise on buses and electrical vehicles can also be utilized with other customers that we have. So we are very much looking forward to working with the team, which has already started and also utilizing the great competencies that we got to other customers that we have.Okay. So it seems that this was the last question. So just to finish up. So of course, we had a slightly softer market in Q1, and it's difficult to say when the market will improve due to the sort of macroeconomic situation. But still operatively, we had a solid performance, excluding the sort of non -- or the exceptional items that we had. We would have been on our target levels in profitability, and we still were able to grow by 8% on comparable currencies. So still a solid start for the year. And now moving forward, of course, our success heavily depends on the market development. But we are still confident that for the full year, the market demand will be relatively good. And also, we will be able to do other things so that we will move closer to reaching our growth targets and also maintaining high profitability. Should you have any questions, so please feel free to contact us at any time. So myself or our CFO, Helena Kukkonen, our SVP for Marketing and Communications, Outi Torniainen, we are always happy to answer any questions that you may have. But at this time, I want to thank you for listening in, and have a nice afternoon. Thank you very much.