Etteplan Oyj

OMXH:ETTE

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Juha Näkki, executive]

Welcome to this webcast presentation for Etteplan's Q2 Results in '23. My name is Juha Nakki. I am the President and CEO. And after the presentation, there will be a Q&A session where you will be able to ask questions to myself and also our CFO, Helena Kukkonen, who will be online to answer any questions that you may have.The contents of the presentation will be similar to the ones we have had before. So we will start a little bit with the operating environment, which was clearly difficult for this particular quarter. Move on to the highlights, look a little bit more in detail to the financial development, look a little bit on our service areas in particular, and then to the end of the presentation, look at how we did against our targets and also our financial guidance for the full year. And of course, followed by the Q&A.But if I look at first the operating environment. So clearly, this quarter was difficult for us. The Russian aggression against Ukraine has had clear impacts on different things. Inflation is still high and consumer prices have risen and interests are high. So clearly, this is visible in consumer behavior. And especially from our customer side, mainly consumer-driven businesses are having a harder time with the order intakes, and there is more uncertainty. So with the geopolitical tensions and everything else, clearly, the investment activity of our customers has gone down and especially R&D investments in this quarter were very slow to start, and even some projects got canceled. So in this respect, we did have a difficult market condition for certain businesses of ours.That being said, there were still customer industries where the demand continued to be quite good. We still had quite a lot of order to delivery type of engineering. Our customers still have quite good order books and there is this type of activity continue to be fairly strong. And also, we can clearly see still that the investments related to defense industry, energy efficiency, and green transition overall have been on a high level already before and are still growing, which helped our situation during the quarter.If I look at a little bit at different countries and different markets where we operate. So in Europe, all the countries were fairly similar so clearly, a lower level of investment into new things, especially slower R&D development. Customers are still cautious with timing their investments. We see a lot of opportunity. We see a lot of projects are being planned but simply, they are not started and some projects have even been suspended or canceled, which has been a bit difficult. But the situation in different countries is fairly similar, a little bit depending on the customers and customer segments that we have in different countries, but fairly similar.In China, the market situation is and has been clearly difficult. We still see a movement from Western companies outside from China, and investments are mainly currently being targeted to other Asian countries rather than China. So this has had an impact on the demand and of course, this is due to the geopolitical tension there is between China and other countries. So the market in China has been difficult and has had a clear impact on our business.If we look at the highlights of the quarter. So cash flow was strong, which was very good. We had a slightly declining result and the revenue growth was slowing down, but still our cash flow was very strong in this quarter, which was helpful. Demand for Engineering-to-Order projects remain –[Audio Gap]-- have quite good order books, even if the new orders were slowing down a little bit, this type of engineering activity was –[Audio Gap] – still its area continued to grow and the profitability with the high operational efficiency was at a good level.It's a recovery, which was positive towards the end of the quarter, we did get some new orders at the end of the quarter, which was a positive signal. Of course, remains to be seen with the –[Audio Gap] -- signal and helpful for us towards the end of the quarter and let's say, end or let's say –[Audio Gap]Now we returned to the acquisition path and the maiden acquisition in Germany at the end of the quarter or actually very and this is, of course, a positive for us. Our position in Germany enhanced further, and we are now back out.On the negative side, of course, our growth slowed down and in particular, in the software-driven. We did have a hard time with the market demand. There were not enough projects. We did have cancellations of projects. Projects got suspended during the measures to correct the situation and improve the operational efficiency. But this had a clear impact on our revenue development and –[Audio Gap]-- so the technical communications service area struggled with growth. So the growth stopped we have in these customers and why the Cognitas acquisition in the service area. However, the activities that we have taken and the measures that we are moving forward, and we are improving, but it is taking still a little bit of time. But that is, in short, the highlights.If we then look at the results so in percent in this particular quarter, the currency effects were almost 2.5% so that had a heavy impact. It was 8.9% declining, so that was not the goal going forward.If we look at the split of revenue and personnel. A little bit more in revenues, Software and Embedded Solutions, the share was declining to 24%; Technical Communications Solutions at 20%; Scandinavia 24%, Central Europe, 21%; and China, 3%. Personnel by area, geographies of Finland, 51%; Scandinavia, 18% of the split.And if we look at the revenue by customer segment. So still Industrial Machinery and Equipment –[Audio Gap] -- with the investments into green transition and energy efficiency, Pulp and Paper. We also see clear growth in the automotive and transportation area, which is driven by the green –[Audio Gap]-- showing it positively. Also, chemical industry has been a little bit. There is also a clear growth in the aerospace and defense sector, not showing here yet, but some of the projects there are a little bit slow to start, but we have had quite good order intake –[Audio Gap]-- so we expect that to start to show in these relative numbers going forward as well --[Audio Gap]-- coming clearly down with lower level of investment in some of our -- if we then look at a little bit more in detail the financial development. So with the key figures, recent growth, revenue outside Finland, slightly dropping operating profit EBIT dropping by 10.3%, EBITA by 8.9%, so slightly slower. We look at the revenue, so 0.7% growth at comparable exchange rate, the growth was 3.2%, –[Audio Gap]-- has had a big impact on this. Also, other currencies, but the Swedish Krone is the one that has the most impact; organic, 7%. For the full year, 3.3%, growth at comparable 5.5% and organic growth at comparable rates at 4.8%. So still growing, but clearly, market situation was difficult as mentioned, and in particular, R&D investment but the market uncertainty is hitting our customers' willingness to take the investment decisions and really move forward. We see a lot of even large orders in the R&D area so we are hopeful for the future, but then and a little bit challenging.Revenue from key accounts was also decreasing. There were some accounts that were clearly growing, especially in the energy sector and also the automotive and transportation sector were green –[Audio Gap]-- so 8.3%. It is a modest performance for us. We are not satisfied with that about several actions to correct the situation and low relative terms going forward.Nonrecurring items were at EUR 0.4 million for the quarter. The difficulties in the Software and Embedded Solutions service area. Also, we had some acquisition-related costs and also some, but it was a quite difficult market. And if we then look at the full year so in the year, we also had in Q1, in the full year figures or the year-to-date. EBIT was at 6.8%, so EUR 6.1 million so we cannot be satisfied with this, of course, but between EBITDA and EBIT were EUR 1.3 million for the quarter and EUR 2.6 million for the first.Per share were at EUR 0.15, so a clear drop, rising interest costs, of course, do have an impact on the -- we continue to see going forward and –[Audio Gap]Cash flow for the quarter was strong. So operating cash flow at EUR 8.9 million for the quarter and for the year, which was a positive. And of course, now when the growth has a little bit stalled or slowed down. So we have made the main reason for the improved cash flow –[Audio Gap]-- of 3,942, so 0.8% drop. We have been slightly slower in the recruitment has led to a slight drop, but we are still recruiting and we are monitoring the situation very carefully and whenever our recruitment engine is still ready and running at full speed whenever the opportunity presents itself by employees at the end of the period.The service areas. So in Engineering Solutions, we still hands in the operational efficiency and this led to still good growth. The demand situation was good in the engineering were continuing. There were no stops in these kinds of projects. We had a solid situation regarding demand and also our operational efficiency and operations were performing –[Audio Gap]-- it was growing at a 4%, and EBITA was at 10.3% level, which was strong. Change between this Software and Embedded service area so there were about 33 employees moved and approximately EUR 5 million in Software and Embedded solutions service area in the beginning of the year, but this is the end result of it. So this move took place, which is affecting a little bit the Software and Embedded Solutions service area.Of course, a problem for us in this quarter. We clearly had issues with the demand. We did see a –[Audio Gap]-- the whole quarter was a bit shorter for all the service areas but here, in particular, in this service area, we did have a lower number of R&D projects starting, especially end of the quarter, we did see a little bit better situation, and we did have and get several large orders for the second half. But clearly, the profitability was not what and we expect things to improve and pick up towards the end of the year.And also on the revenue side –[Audio Gap]and are ready to accelerate again once we see a better market. It is, of course, we have a little bit more customers that are directly affected by the consumer demand, and this led to customers, which basically then stalled our revenue growth. So our revenue was slightly dropping by 1 point over the quarter and vacations had an impact here as well. But nonetheless, the revenue growth was stopping and stalling to 8.1%. So not where it should be, but slightly declining demand –[Audio Gap]Here in China, we did have a little bit of issues with this service area with the lower demand and with the lower on this service area. Cognitas still –[Audio Gap]-- to improve the situation and the improvement activities are going as planned. They are progressing a very low profitability level, and this is something we are continuing to work with.Official guidance for the full year and due to the slightly weaker Q2, we are now specifying our guidance within –[Audio Gap]-- in our revenue to be between EUR 360 million to EUR 380 million. Previously, the higher mark was – [Audio Gap]-- and in the operating profit EBIT, we are estimating that to be between EUR 28 million and EUR 31 million for the full year and previously, it was between EUR 28 million and EUR 33 million. So we are now reaching EUR 33 million this year so we have specified the guidance a little bit. The outlook –[Audio Gap]There is uncertainty clearly due to the war in Ukraine. Interests are still high and inflation is coming down in certain countries, it already has a little bit, and there is a downward trend. And the expectation that if that trend continues and the interest do not continue to rise, this will lead to a situation again and this will improve the market situation, and this can happen quite rapidly for us as we have seen in the past.And we have not seen a significant improvement in the market conditions with the measures that we have taken now to meet the numbers that we are giving here. And we expect that, of course, the investments in green transition, defense industry will be growing and that will also support our progress – [Audio Gap]Look at the financial targets and our results against the target. So the revenue target is still at EUR 500 million for next year, so EUR 356 million. We are now trying to accelerate the revenue development with acquisitions, and we completed now LAE. There are other things that we are looking at as well about the situation clearly and make wise decisions related to acquisitions so that we don't end up in over payer holders immediately once the deals are signed.Revenue outside Finland at 48%, –[Audio Gap]-- on Denmark, which slowed the development here down, but we do expect to improve on this situation we have taken. So we do expect to reach the previous target of 50% in the near future and then move forward towards the recent –[Audio Gap]Managed Services share of revenue, slight growth to 6%[Audio Gap]-- to come up with new solutions with new technologies to generate more value for our customers and with that, drive the – [Audio Gap]In operating profit, EBITDA, we were at 8.1% for the full year. This is, of course, not where we should be, and we are now working hard to improve the profitability of onetime [sali] payment, which we took in one basically booking in the first quarter, so more so it should also help a little bit. But with the operational improve the profitability going forward towards the end of the year. [Audio Gap]We are now open for questions to myself or our CFO, Helena Kukkonen, so please go ahead.

[Operator]

[Operator Instructions] [Audio Gap]-- from Juha Kinnunen from Inderes. Please go ahead.

[Juha Kinnunen, analyst]

Hello, this is Juha from Inderes. I'm struggling with the outlook here because a significant drop in net sales now and a slightly positive outlook on the R&D investments for the rest of the year. So maybe you could open up how this all play out in your own mind, maybe comment on the growth expectations of the business in the coming quarter?

[Juha Näkki, executive]

Second quarter. So we did have a very -- there were cancellations of large projects, a few of them, and it was very short. We had lots of vacations. So the first month of the –[Audio Gap]-- any basically new R&D projects coming up from our customers so the situation was worrying at that point. But then towards accommodate for this situation. But we also did see a little bit better activity on investments, a little bit better. And then at the end of the quarter, we were able to finalize and close some of the bigger or the defense sector and we did see a little bit of activity on the other sectors as well. So these were encouraging signs that there –[Audio Gap]-- and this is what we are hoping for. But even without that, we have now taken measures, we have changed our organization -- to correct the operational efficiency and we believe that even in a slightly weaker condition, we will be able to improve on –[Audio Gap]For that service area, we're not really used to these kinds of numbers. And we need -- the level of investment at least showed signs of recovery. And normally, in our business, when things start to – [Audio Gap]-- that the future might be a little bit better, then they will gradually start the R&D investments at first so that they would be ready for any kind of positive turn –[Audio Gap]-- back on our demand situation quite fast with development of the demand situation. And this is what we are hoping for. But even if there wouldn't be a rapid improvement, we have now taken or even a slightly weaker market that we were able to stop the –

[Juha Kinnunen, analyst]

All right. Understood. One detailed question, you told how exceptional is this? And is there any kind of sanction for clients who do this?

[Juha Näkki, executive]

Well, some rules and sanctions how these can be canceled but unfortunately, this happens –[Audio Gap]-- been highly unusual, so customers have not really stopped. If they have stopped projects, they have stopped in other areas as usual. And this now happened with several or a couple of large projects and in this particular market, especially in the beginning of the quarter, it was really the –[Audio Gap]-- others to find new assignments because the level of investment just was simply low. And this really had an impact but a – [Audio Gap]-- things and of course, if they are large and got canceled, so it will have some impact. But we hope that these kinds of things –[Audio Gap]-- at that, and I would say that these are quite exceptional for this particular service area.

[Juha Kinnunen, analyst]

Then about guidance. I guess I'm going to just reiterate what you already said. But if I understood correctly, you believe that you will reach your guidance in the market demand.

[Juha Näkki, executive]

This is the case. We don't see -- yes, we do see that some of our customers have – [Audio Gap]-- some customers, the order intake is a bit lower. But then on the other hand, there are customers in other segments, which are doing rather improve our business in these customers, and that has also paid off to a certain extent. So if the market situation does not get worse with the activity and we'll improve our profitability and region worse and level of investment goes even down further, then it will be difficult, not impossible, but difficult to believe that the situation either stays the same or improves a little bit towards the end of the year. This is our assumption, and this is what we are currently believing --

[Juha Kinnunen, analyst]

Understood. Final question about strategic options –[Audio Gap]-- struck our real estate business in the long run because currently, you are not really heavily there. Anything tight seems to be quite difficult there and maybe there could be some M&A opportunities in these areas if you would like to expand the...

[Juha Näkki, executive]

Well –[Audio Gap]-- our strategic plans. But I would say that one of the core strengths of Etteplan has been that we have been focused –[Audio Gap]-- truly know, understand, and can really understand our value for the customer. And we're focused on industrial products and plants and done a very –[Audio Gap]-- strengths and one of the best strategic choices that we have made so far. But of course, with the growth ambitions –[Audio Gap]-- for these things. But currently, we have been thinking and working with the business in such a way that our plans and anything around those. And of course, but still, this has been a clear focus for us, and I don't see that we would be changing that soon, but I cannot say that this is going forward.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference –[Audio Gap]

[Juha Näkki, executive]

Okay. Thank you very much. Yes, I mean this was a difficult quarter for us and the growth –[Audio Gap]-- war and the related impacts have started to have an impact also on our demand situation, and we have had going. We still kept growing even if it was only a bit, but we have now made activities, acquisitions, to accelerate our profitability. So I am confident that going forward this quarter, and we will still have a good and decent year, providing that the market doesn't really turn bad. But we are confident that we will be able to move forward in a positive mask.Questions to us. We are always available for you. So you can contact myself; our CFO, Helena Kukkonen; or our SVP for more comments that you may have. But thank you very much for listening at this time, and we will return in Q3. Thanks.