Tietoevry Oyj

OMXH:TIETO

Earnings Call Transcript 2020-Q1

[Tanja Lounevirta, Head of Financial Communications]

Good morning, ladies and gentlemen, and welcome to join us today in the discussion on our first quarter results. During these exceptional times, we also have a bit different setup. But as usual, we will start with the presentation by Kimmo Alkio, our President and CEO; and Tomi Hyryläinen, our CFO. We will then proceed to the Q&A session. To join the discussion, please dial into our conference call. I now hand over to Kimmo, please.

[Kimmo Alkio, CEO & President]

Thank you very much, Tanja, and a warm welcome also on my behalf and on behalf of the full management. I'm pleased to report on a good start for 2020, solid performance and our very important integration well on schedule. We will cover the usual sections with Tomi as our CFO during this presentation. To go into the main highlights of our first quarter, organic growth of 3%, supported especially by our software businesses and cloud services, adjusted operating margin improving to 10.5%, driven especially by the Cloud & Infrastructure business. We have active measures in place to mitigate potential impact of COVID-19. And furthermore, as we have our integration proceeding well on schedule, we are increasing our end-of-year synergy run rate to the range of EUR 45 million to EUR 55 million. And naturally, we'll add a great deal of depth into all of these components throughout the presentation. Let us first cover naturally our considerations on COVID 19, as it is a very big topic currently in every aspect of society and for every company. First of all, I'd like to begin by the whole value base, how we approach COVID-19 initially beginning significant measures to securing the health and safety of our employees and through these priorities also continuing to pay a great deal of attention around service continuity, quality and project completions towards our customers, and pleased to reflect that our teams have done good job, both in terms of quality and completing number of very interesting and important projects also during the first quarter. Furthermore, our perspective is that the market indicators currently imply in the range of minus 2% to minus 5% negative impact on full year revenues, specifically and naturally due to COVID-19. So currently, we are working on a range. And naturally, this is based on scenarios, and we expect to be continuing this scenario development until we get more clarity on the evolution of COVID-19. We have, in a determined manner, also initiated actually on a fast schedule, short-term cost-saving actions to mitigate potential financial impact. Furthermore, in the case of TietoEVRY, we do believe we have good elements of resilience in our total business mix when we consider the primary industries we serve, as an example, financial services and the public sector, which make up over half of our customer base, and furthermore, the type of businesses very specifically with the long-term nature of the contracts in the areas of infrastructure and application services as well as the significant proportion of software businesses we have. Furthermore, we are also somewhat optimistic that once the COVID-19 era becomes more stable, the world will be adapting to a new normal through digital services, as an example, around the public sector, citizen services, further transactions moving to online as well as the remote ways of working that will continue to open up also business opportunities for companies such as ourselves. So all in all, we take, like any company, COVID-19 era very humbly, so much is unknown. At the same time, the attention on employee health, customer obsession, taking care of our cost base and big time focus also in building a company profile that shall be competitive whenever the COVID-19 era becomes more stable. In parallel, I also wanted to briefly highlight some of the activities we are doing, naturally given the 24,000 colleagues in TietoEVRY servicing very significant industries that keeps society up and running. A couple of very interesting initiatives, maybe 1 to highlight, which is on the left-hand side of this page, we were able to join a consortium of Finnish companies supporting to actually double the COVID-19 testing capacity for the country of Finland. So these are important activities we are participating in. And naturally, through our long history and software businesses, consulting capabilities in the health care sector, there's quite advanced developments, as an example, utilizing artificial intelligence for potentially even faster detection of infected patients. So naturally, our teams are very active and doing things outside the normal day-to-day agenda if and when we can create additional value. Furthermore, it is good to give, as usual, a short update on how we read the total market behavior. 2 main points we would have this time to confirm that the new digital services, business continuity and cost optimization are the primary drivers for companies' investments. Yes, there is some degree of variability, which industries are maintaining their investment patterns, which might be slowing down and happy to comment those through Q&A as well. Furthermore, it is fair to also confirm the market outlook by industry analysts, where the estimates range between minus 3% and minus 7%. And as you noted, some minutes ago, our management's perspective is that the impact and with the current understanding would be for TietoEVRY between minus 2% and minus 5%. So slightly, potentially less than the total industry perspective. Next, let us move into the actual first quarter performance. Total TietoEVRY, as commented earlier, 3% organic growth, revenues of EUR 744 million. The growth supported especially by the software businesses, and within software businesses, specifically payments and oil and gas, actually nearly 20% growth. Our cloud service is actually growing 19%. And we also had strong performance in Norway, supported in Norway, specifically by the Digital Consulting business. Negative currency impact naturally is significant in the current environment, impacting 3 percentage points of growth. And we had adjusted EBIT of 10.5% compared to 10.0% and significant support by the Cloud & Infrastructure business, which has been performing from the ex-Tieto side for a number of quarters in a very advantageous manner. Next, briefly on the Digital Experience side, actually negative 4% organic growth, and we have quite a similar message as we did in the fourth quarter of 2019, revenue impacted by 1 large customer in-sourcing which took place in the second quarter of 2019. So it's not new news. Furthermore, the contract transfer to a joint venture impacting by 1 percentage point. And to be fair, we are not satisfied with the profitability level. We continue to have 1 project with a significant cost overrun. The total project portfolio is being -- from a risk standpoint, is in a fairly good shape. But whenever you have even 1 or 2, in this case, 1 with significant overruns has continued to affect performance and not at the levels, as commented already one time, not at the level where our ambition will continue to be.Furthermore, on the hybrid infra business, good 6% organic growth driven by infrastructure cloud, as commented also earlier by the aforementioned 19%. And to be fair, also, the traditional infrastructure continues to perform fine, including the delivery of legacy infrastructures. And adjusted EBIT, 11.8%, and this clear improvement, to be fair, as fully anticipated by the management, supported by the combination of growth and the efficiency measures that were implemented throughout year 2019.Next on the industry software side, we are relatively satisfied with the industry software. Let me please explain on the growth side. We are pretty okay on the 7% organic growth. A couple of areas doing really well, specifically in the financial services, subsection on the payment side as well as the oil and gas side. Revenue is up in both of these over 20%. And furthermore, good continued development in the health care and welfare software business side, up by approximately 6%. Adjusted EBIT, 10.3%, this is the area where we are not yet satisfied as we continue to have additional investments taking place as visible in the P&L in the challenged Tieto SmartUtilities software suite and dialogue with customers as we have been delayed and needed to take additional cost dialogues per customer taking place exactly on the future ways forward. Product development services continue to deliver good performance, 5% organic growth. In the telecom sector, continued strong performance and continued, I would say, high activity level. We have actually gained a few new customers in the automotive sector. They begin small, usually takes quite some time to grow into larger areas, while we do see in the existing automotive segment. Naturally, this is an area where investments are easily being postponed. But good development, given the type of a customer mix we have and overall operational quality, operational efficiency, enabling the profitability of slightly over 12%.As we still report this quarter, the ex-Tieto and ex-EVRY sides, so the ex-EVRY performance on a fairly good level, 3% organic growth and good margin development. Very specifically, strong performance in Norway, as I referred to a bit earlier. The total ex-EVRY side adjusted EBIT, 10.5% compared to the 9.9% level Q1 of '19 and improvement taking place both in Norway and Sweden. As visible in the bottom left, to confirm good development in Norway, Sweden declining by 4%, while the profitability slightly up from the comparable period. Financial services growth of 1%, profitability at 8%. And here, we want to be open. This is one of the businesses, one of the very few businesses that were impacted already in the month of March due to COVID-19 impact very specifically in the cards business of Financial Services. Next, let us move over to the CFO report.

[Tomi Hyryläinen, Chief Financial Officer]

Thank you, Kimmo. Good morning, everyone. I'm very pleased with our Q1 performance, which was the first full quarter as combined TietoEVRY. Delivering 3% of organic growth and continued profit improvement during the period of integration was a good achievement. As Kimmo mentioned, we have initiated short-term measures to mitigate the financial impacts of COVID-19. I'll talk about more later on those. Merger integration is progressing well, and we are able to increase our target run rate synergies at the end of 2020 to EUR 45 million to EUR 55 million from EUR 30 million to EUR 40 million. During Q1, we have experienced significant currency headwinds with NOK and SEK depreciating some 7% and 2% against prior year, respectively. This impacted our reported growth and profit significantly in Q1 and is anticipated to impact our full year numbers as well.Our financial integration has progressed well, and we currently aim to publish new external segments in our Q2 report with restated 2019 and Q1 2020 provided during July prior to the Q2 report. And with new segments estimated to be reported in Q2, we aim to arrange CMD in Q2 2020 -- Q4 2020, sorry.Then to our cost savings programs. It's important to understand that we run 2 separate cost programs simultaneously. One, to address the short-term impact of COVID-19; and the other one to deliver on the EUR 75 million of merger-related efficiencies. The nature and scope of these programs are different as one is designed to address the short-term cost saving needs and the other one to ensure longer-term competitiveness of the company.Our temporary cost-saving measures related to COVID-19 can be divided into 2 categories. First, measures to mitigate the impact on cost of goods sold. This is done by optimizing or stopping the use of subcontractors, optimizing internal salary cost through usage of annual holidays or flex time and by temporary laying off personnel.Secondly, we cut our operative cost in cost categories that allow immediate savings such as travel cost, facility cost and postponing office equipment purchases to name few of the main categories. These measures allow us to flexibly mitigate negative financial impact in different revenue decline scenarios. If the COVID-19 outlook changes, we make necessary adjustments in the scope, magnitude and length of our planned actions to address the changed circumstances. The merger efficiency program is, by nature, more static, and its scope covers the whole company with an aim to build a competitive cost structure for the new operating model that supports the long-term profitability ambitions of the company. On financing and liquidity on COVID-19. Our current liquidity situation is good with an unused EUR 250 million credit facility to serve as a backup for short-term funding needs in case of corporate paper market is not providing sufficient liquidity. Currently, we have approximately EUR 50 million of corporate papers in the market. From the financing side, our long-term debt matures mainly in 2024 and with our EUR 300 million bridge loan, we have a 6-month extension available until March 2020.From the cash flow perspective, we did not see an impact from COVID-19 in Q1, and our AR collection at quarter end was normal. Our AR has high relative exposure towards public and financial services sectors as well as large corporations where the resilience towards COVID-19 is higher. We have also made analysis on our balance sheet items specifically on goodwill and intangible assets and do not assume any impairment due to adequate headroom with the current outlook. Integration planning is progressing well, and our plans confirm the EUR 75 million of merger efficiencies. Our current estimate is that we will be reaching a synergy run rate of EUR 45 million to EUR 55 million by the end of 2020. This is an increase of EUR 15 million to our earlier estimations, as mentioned before. Quite practically, we have nominated all leadership positions in the company. And with the unified organization now being established, we have started restructuring activities, which will impact 570 roles in the company.In addition, we have internally finalized our premises consolidation road map for most important locations, which is expected to deliver SEK 5 million to SEK 6 million run rate synergies by 2022. The merger efficiency levers are consistent with earlier communications, however, now categorized differently to reflect the areas of efficiency in line with how we internally run the program. Services and go-to-market is expected to deliver EUR 30 million to EUR 40 million of efficiencies; support functions, EUR 20 million to EUR 30 million; and external cost, EUR 20 million to EUR 30 million; adding up to EUR 75 million achieved by 2022. Back to you, Kimmo.

[Kimmo Alkio, CEO & President]

Thank you very much, Tomi, for the CFO perspective. Let us next go into a short update on the full integration. So naturally, the first quarter, fully as anticipated, has been a very active one. All major milestones actually have been completed according to our schedule. We have implemented a new organization, new operating model for the combined TietoEVRY, and the leadership appointments have been concluded to all essential businesses, all functions and the levels of -- including levels of managerial appointments that we are, to a very large extent, done with all key appointments. And naturally, already starting the type of tools, processes, development in the first quarter, certain collaboration tools were launched already actually in January for the benefit of the 24,000 employees. And the actions we continue to be determined to keep building the company's competitiveness, including a competitive cost structure and ensuring that we do deliver on the planned merger efficiencies. I think these would be the main highlights. As we did also in the prior interim report, I'll add a little bit more context into each one of these areas. When we think about the integrated structure and leadership, as commented earlier, managerial and senior leader appointments to very far extent completed. And for this bar to be 100% done, of course, we will -- shall be making sure that all functions, all units have become a fully merged one all across the company, but this is moving at a good velocity and very much according to the original time line we have had. Common processes and systems, by nature, will take us more time. Initial decisions done. Both the process development, process consistency, the tools and systems, road maps shall be taking a bit of time. And again, we made a good progress during also the first quarter. Now naturally, the era we live in, the development around the financial systems, forecasting, reporting that is currently and has been very, very active on the table and really important in a merger environment. Integrated go-to-market and service portfolio, we are actually really far in the integrated go-to-market as the go-to-market is through the managing partners of the country teams, service lines embedded into the function -- into the functionality of the full country operation. And naturally, the service portfolio unification, by nature, will take a bit more time. So when we see this bar moving even further, we'll have more consistency on integrated services. Employee engagement and cultural integration, good development, we also look at them several times a month on the pulse surveys, very specific feedback from employees. And we can see that the activity and energy level and the belief of the value prop and potential of the combined company actually continues to be at a healthy level. And we shall be always mindful, humble, very important how 24,000 colleagues feel about the potential of the company. And furthermore, synergy planning and realization, synergy planning overall, I'd say, fully on schedule. And when this bar moves further to the right, it means that we have actually delivered the realization through the P&L, but we are well on schedule. And the big time focus in the combination of employee care and attention customer engagement. To be fair, I'd say, especially in this era of COVID-19, there is an opportunity to be even closer to our customers and gain the type of trust in an environment, which is an inch more fragile than usually. And to be fair, so far in the midst of COVID-19, so far, all essential components of the merger, we can say, we are fully on schedule. We say this very humbly in a very determined way. This will take 18 to 24 months. Up to now, we are in a good shape. Furthermore and towards the completion of the CEO and CFO summary this time, I'd like to go to the guidance part. As you recall, guidance was, in our case, withdrawn on the 27th of March due to COVID-19. The uncertainties are out there, and we do not wish to make guesses on the impact of COVID-19. You gotten also reflections that we are super mindful on taking precautionary actions and cost-saving activities on the potential impact we see. And by nature, we also believe that further guidance is relevant to issue once the visibility, the market outlook has improved, and the current uncertainties are becoming clear. So just to be 100% clear, only reason we are drawing guidance is COVID-19, and we come back once the market uncertainties become more clear. Also, I think, important in this era to confirm our performance drivers, 3 specific ones for this fiscal year. COVID-19, we talked about that. Indicators imply a 2% to 5% negative full year revenue impact. Any potential impact are being actively mitigated in the cost structure. Performance drivers that are merger specific, the run rate of synergies uplifted to EUR 45 million to EUR 55 million, while the onetime integration cost expected to be in the range of EUR 50 million to EUR 60 million. And the current estimate that we would have very significant currency impact, revenue in the range of EUR 50 million in the Q2 and over EUR 150 million level for the full year. Let me also please confirm our long-term ambition to grow above the market, increase our competitiveness and absolutely to maintain attractive total financial performance. And once the uncertainties of COVID-19 become more clear, I hope we are able to confirm, as Tomi mentioned earlier, our aim of conducting the Capital Markets Day in the fourth quarter of this year. So this would conclude the part from the CEO and CFO, and this would be a good time to go into Q&A. Thank you.

[Operator]

[Operator Instructions] And our first question comes from the line of Christoffer Bjørnsen from DNB Markets.

[Christoffer Wang Bjørnsen, Analyst]

I was just wondering on the revenues guidance or not the guidance, but the implication that you're seeing from COVID-19 of 2% to 5% downwards relative to what you previously communicated. Could you just give a kind of estimate on how much you would be able to cut costs in that kind of scenario? Of course, just hypothetical. And then on CapEx, there seems like -- there've been an increase in capitalized development level costs. And then on the other hand, the quite significant decrease in investments in infrastructure and data center related, the hardware compared to the kind of comparable figures for Tieto and EVRY separately last year. So should we read anything into that, that that's kind of a shift in your investment strategy? Or is that just because of COVID-19 or anything like that?

[Kimmo Alkio, CEO & President]

Okay. Thank you for the question. I'm more than happy to take this. So naturally, we'll answer at the level specificity without now speculating of potential impacts of COVID-19. So I've reflected earlier, the 2% to 5% type of a range, we, as you would expect, do have estimates by business more likely in the Digital Consulting side can be impacted. This would be industry-wide, not just for us. So there, the impact could be somewhat more significant. And naturally, in that type of business through short term, to the temporary layoffs, one would be usually able to offset the profitability impact to a larger extent. And the more resilience would be in the long-term infrastructure application services and software type of businesses. Naturally, it's fair to anticipate that when we are in the lower impact of this COVID-19 implications, the likelihood of being able to offset through the cost-saving measures is clearly higher. But if I may, I feel we are doing, at this point in time, this is the level we can be. We cannot say that scenario A B C exactly what happens, the COVID-19 uncertainties are significant. We are very determined of continuously maintaining and coming out after COVID-19 with a well-competitive cost structure. Time will, of course, tell then exactly how fast we are able to do this offsetting activity level to actually deliver the offsetting is well in place. Short comment on the CapEx side, nothing unusual in the strategy or the overarching levels of capital expenditures, so no strategic shift as such in that. That was one of your high-level perspectives on CapEx.

[Tomi Hyryläinen, Chief Financial Officer]

Yes. No COVID impact, as you were referring to. So none of that is in the numbers.

[Christoffer Wang Bjørnsen, Analyst]

Sure. Okay. And then just a quick last one, and I'll jump back into the queue. On the working capital, there seem like there was a significant increase in working capital during the quarter, compared to revenues development of -- I mean, any comments there? Is this going to normalize or?

[Tomi Hyryläinen, Chief Financial Officer]

Yes. So when you look at the cash flow, and yes, the main component, which has changed now when you do comparisons is the working capital. And the main driver there is the accounts payable, which was roughly EUR 50 million lower than your comparable period, and that drive the main change. In addition, you should note that during Q1, the bonuses are paid. So that is a movement, but that's from the comparison perspective, that should be the same for the prior year. Then we had slightly over EUR 10 million of hedge-related payments out in Q1, which were booked in Q4, and those related to the merger cash payment of the EUR 200 million, which was hedged and booked in Q4 but paid in Q1. Those are the main drivers.

[Operator]

Our next question comes from the line of Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, Research Analyst]

Congratulation on a solid report. Also, thank you for trying to put numbers on the COVID-19 impact. That's very helpful. I just would like to pose Q1, first a housekeeping question. On Slide 18, you mentioned that [ EVRY ] EUR 5 million to EUR 6 million run rate in premises consolidation synergies. Is this within the EUR 75 million or on top of the EUR 75 million?

[Tomi Hyryläinen, Chief Financial Officer]

Yes, thank you for the question. So they are included in the EUR 75 million.

[Daniel Djurberg, Research Analyst]

Perfect. And also, if I may ask you a little bit into my view, at least the large enterprises and public sectors, as you mentioned, is quite good to have in times like this. And I believe EVRY had some 33% of revenues in '18 tilted toward SMEs, according to the Capital Markets Day. And I was wondering if you have an exposure to SMEs for the joint group ballpark range, 10%, 15% or any other range will be helpful as well.

[Kimmo Alkio, CEO & President]

Yes. So a very...

[Daniel Djurberg, Research Analyst]

Very good to see that as a higher risk.

[Kimmo Alkio, CEO & President]

Absolutely. So 2 reflections. So indeed, now with the combined TietoEVRY, I think this -- the element of resilience is a few inches stronger, given that both have had significant history in financial services and public sector and overall servicing the larger enterprises. And it is, of course, somewhat speculative, but I also see it likely that the SMB sector likely will be more impacted our exposure as the combined TietoEVRY is clearly less. And currently, we believe that the market segmentation is recognized in our current estimates of COVID-19 impact. And to be fair, we shall be looking into continuously, how will this impact -- how might this impact evolve, but that would be our current consideration.

[Daniel Djurberg, Research Analyst]

Yes. And do you have a range, the total towards the SMB or SME sector? Or is it -- am I totally wrong with 10% to 15%?

[Kimmo Alkio, CEO & President]

Sorry, the line is a bit breaking. So what's your question? What's the question?

[Daniel Djurberg, Research Analyst]

So if you could give a percentage of sales to SMEs, sorry.

[Kimmo Alkio, CEO & President]

Yes, that's a fair assumption.

[Operator]

Our next question comes from the line of Panu Laitinmäki from Danske Bank.

[Panu Laitinmäki, Senior Analyst]

I had 3 questions. First one is on the increased synergy target. Just curious, where did it come from? Does it kind of imply that the original estimate was a bit conservative? Or is there a specific source for the increased synergy estimate?

[Tomi Hyryläinen, Chief Financial Officer]

Really good question. Thank you. So there is no specific reason for this. This is an outcome of our continuous planning procedures and execution and you must remember that the prior number, of course, was from last summer. So there's some time in between as well. This is...

[Kimmo Alkio, CEO & President]

Lower synergy target has not changed. This is about run rate of 2020.

[Tomi Hyryläinen, Chief Financial Officer]

Yes.

[Panu Laitinmäki, Senior Analyst]

Okay. Secondly, on this 2% to 5% revenue impact, just to clarify, did you mean kind of the full year impact to 2020 like after the Q1, which was better? So that kind of translates to a bit more in Q2 to Q4, if that kind of materializes?

[Tomi Hyryläinen, Chief Financial Officer]

Yes. So we mean the 2020 as reported, Q1 included.

[Panu Laitinmäki, Senior Analyst]

Yes. And then finally, just to clarify to a previous question. So do you see us -- like in a scenario of minus 2% revenue growth, do you really expect to be able to compensate that almost in full with temporary layoffs, for example, in the consulting?

[Kimmo Alkio, CEO & President]

So we understand that this is an area that everybody would like to have insight on. We would -- we do not believe it is fair to speculate what percentage of the offsetting will happen at different levels of COVID-19 impact. We are hopeful that the audience today will see that the determination of driving the competitive cost structure and cost-saving activities also short term. We are conducting -- we do not wish, and I don't think any company would offer scenarios at different levels of COVID-19 impact. This is the level we would leave it today.

[Panu Laitinmäki, Senior Analyst]

Yes, I understand. But can I ask, as a follow-up, do you have, from the history of both of these companies, similar situations where the demand would have changed so substantially? Again, of course, look at 2009, but you had a different reporting structure. So do you have any kind of prior examples where you have responded to demand shocks with temporary layoffs? And how successful has it been?

[Kimmo Alkio, CEO & President]

I think that, if I may, it's very difficult to try to offer a very specific view of kind of comparable nature to COVID-19. But what we have seen, and some of us have lived through is the previous cycles, '08, '09 and what happens in the tech sector in different types of businesses, and actually in the early '90s as well. So I think this logic that we so far have on elements of resilience, which businesses might be more resilient, what proportions can be offset, and then what happens if the duration of the economic impact becomes larger, what might move into permanent cost structure reshaping. But if I may, I think that would too speculative to comment purely on the short-term temporary actions compared to potential long term. It's so dependent on how -- as commented, the duration of COVID-19.

[Operator]

Our next question comes from the line of Sami Sarkamies from Nordea Markets.

[Sami Sarkamies, Senior Analyst of TMT]

I would have 3 questions. Firstly, starting from the top line guidance you're providing, the 2% to 5% decline. Should we think that in a reported basis or on an organic basis?

[Tomi Hyryläinen, Chief Financial Officer]

So this is purely COVID impact. This negative 2% to 5%. So pure COVID.

[Sami Sarkamies, Senior Analyst of TMT]

Okay, excluding any FX impacts?

[Tomi Hyryläinen, Chief Financial Officer]

Exactly.

[Sami Sarkamies, Senior Analyst of TMT]

Yes. Then I would have a question on capitalized R&D. It was EUR 16.7 million in Q1. Could you provide us a breakdown between Tieto and EVRY? And then, could you also provide the sort of pro forma comparable from last year?

[Tomi Hyryläinen, Chief Financial Officer]

So we haven't done that now, and we tend to report this as one company. I do have those numbers, so that we rather talk about the overall level of investment into CapEx as a whole TietoEVRY and not continue in talking about different companies from the past.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. Can you provide any directional guidance on whether this amount is higher than a year ago?

[Tomi Hyryläinen, Chief Financial Officer]

The amount is actually at the same level. And we continue -- as Kimmo mentioned before, we expect to be investing at the same level in 2020 as comparable in '19.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. And then my last question would be on dividend. The AGM decided sort of not to go after immediate distributions. What would be the triggers for the Board to decide on dividend distribution for last year? Is that related to COVID-19 impacts, or for example, your balance sheet, thinking of this EUR 300 million bridge loan you need to renegotiate?

[Kimmo Alkio, CEO & President]

So just to confirm, so the proposal from the -- from our Board of Directors is for the AGM, which is tomorrow to indeed postpone that decision and grant that authority to the Board and the reason being purely due to COVID-19.

[Sami Sarkamies, Senior Analyst of TMT]

Yes. Can you provide any thinking behind that proposal that -- what are the main reservations? And in what circumstances should you see dividend distribution for last year?

[Kimmo Alkio, CEO & President]

If I may, I think that would be a bit too speculative to offer scenarios. I think the world cannot predict on the magnitude and duration of impact of COVID-19 and the more insight we gain, that clarity we are able to then add. And naturally, we expect that to provide -- to be providing that view as we all learn more about COVID-19.

[Operator]

Our next question comes from the line of Michael Briest from UBS.

[Michael Briest]

I apologize. I missed the beginning of the call as another company's sort of overrunning. But just in terms of the 2% to 5%, specifically, are you assuming that things normalize in the second half, that there's no -- this sort of impact, there's no economic consequence, it's purely around the virus and the lockdown. So if the economy is slower in the second half of the year, that would be an incremental drag?

[Kimmo Alkio, CEO & President]

Yes. Thank you for the question, Michael. So currently, of course, I'm sure we also, like most companies, have a few scenarios. So we are currently anticipating that, first of all, a degree of prudency. With that in mind, we don't think it's just a purely Q2, Q3 and Q4 rebounds. I think we have to be very mindful, it could drag on longer. We do believe that initial implications will be second quarter, likely more in the third quarter, and then time will tell what happens in the fourth quarter. And the more that time surpasses naturally as reflected a few times during this call, the more we learn that then we shall be updating on our perspectives.

[Michael Briest]

Can you talk about how you came to the 200 to 500 basis points? Is it looking at your split of sales and deciding which parts will be more impacted?

[Kimmo Alkio, CEO & President]

So we look at it very practically in our normal business outlook and forecasting normal operational sessions with all businesses, kind of cross checking the outlook, the perspectives, both from the go-to markets, the country perspectives and the service lines and that is very much an ongoing process now. It is not any more like forecasting would have been once a month. It's much more of a continuous process now.

[Michael Briest]

Okay. And then just moving on to the cash flow. Can you sort of talk about what it was within accruals? Was it perhaps the bonus accrual for the year that was reduced, understandably given the more challenging outlook? Or what caused that weakness? We know a lot of customers are trying to get cash and asking for extended payment terms. What would you expect for the full year in terms of operating cash flow conversion or free cash flow? Should it be better than the pro forma 2019 or worse?

[Tomi Hyryläinen, Chief Financial Officer]

Okay, Michael. So the cash flow per se, so the main, let's say, negative contributor was the working capital. So quite practically, accounts payable was roughly EUR 50 million lower. So that was the main driver. On the bonuses, that's just a normal sort of payment of the bonuses, which were accrued at year-end. So that has no specific on anything related to COVID, and this was done prior to COVID was impacting the Nordics and the world. So then there is one component, which I mentioned as well previously, was the payment of the hedging loss that related to the purchase price of the cash component, which was paid in January and booked in Q4. Those are the main components.

[Michael Briest]

But why is accounts payable down EUR 50 million? That's a big amount. I mean...

[Tomi Hyryläinen, Chief Financial Officer]

Yes, it time to time happens. And yes, it's a timing question. There is no structural there.

[Michael Briest]

So Q2 will be better because it will just move from Q2 into Q1?

[Tomi Hyryläinen, Chief Financial Officer]

Well, we will have to see.

[Michael Briest]

And then just finally, can you talk a bit about the Product Development Services business and the duration of contracts there and whether the -- you're seeing rapid sort of downturn in demand because that's the shortest duration activity? And then also, I recall EVRY had a -- within its sort of offshore operations and subcontractor activity, where it worked for non-EVRY clients, how that's performing?

[Kimmo Alkio, CEO & President]

Okay. So first of all, on the PDS side, so PDS, the customer relationships, as we have seen in -- or over the years, the relationships tend to be long term. While the contractual periods of specific projects, they tend to be short. And then we've discussed that in prior years as well and quarters, so that -- these are the dynamics. The notion that we are -- we have extensive footprint in the Product Development Services in the telecom sector and the largest customers are well recognized. So there, the full momentum has continued to be good. And with the customer base we have on the PDS side, it is currently looking well resilient. Then regarding the question of the -- from the ex-EVRY side, on the R&D or software development capabilities from especially the India operations outside of Europe, we have not seen really any significant impact so far.

[Operator]

The next question is a follow-up question from the line of Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, Research Analyst]

I have a question on the -- Hybrid Infra was very strong in the quarter, up 90%, some 6% organic. Can you comment on how resilient this is to COVID-19 looking ahead for Q2? Can we expect similar growth rates in this segment based on already -- order intake already seen in Q1? And previously, based on this. That's my first question. And then I have another follow-up.

[Kimmo Alkio, CEO & President]

So traditionally, the Infrastructure business would be one of the more resilient ones. And of course, now we are being mindful that if we think about the industry dynamics of infrastructure, in parallel to COVID-19, we have a very strong foothold in managing the traditional IT infrastructures. We are -- we have been active for a 6-year period in providing private cloud technologies and have well gotten on to the market of the public cloud integration. So this total momentum of being a highly-trusted, high-quality infrastructure partner for the public sector and large enterprises, this has been the drive that has existed for quite some time. With this consideration, we do believe this will be one of the more resilient sectors. Again, I do not wish to speculate all the different scenarios of COVID-19, but so far, believe, as commented a few times, that this is clearly more resilient.

[Daniel Djurberg, Research Analyst]

So you haven't seen any major cancellations on the pipeline for new deals that was signed in '19 and Q1 as yet?

[Kimmo Alkio, CEO & President]

Sorry, we could not hear the question. Could you please repeat?

[Daniel Djurberg, Research Analyst]

It was, if you have seen any larger cancellation in Hybrid Infra from previous orders that was going to the P&L in Q2 and so on back of this? And a big delays due to COVID-19, on Hybrid Infra?

[Kimmo Alkio, CEO & President]

So far, the type of postponement -- I answer from a slightly different angle. I will do my best to answer, of course, that the postponements, as would be expected, would be more from the highly innovative data-rich data platform, cloud-native application development side of the Digital Consulting side. And no, there has not been sort of cancellations on your question. Now will there be postponements on the infrastructure side likely? Yes. And again, what is the magnitude? Time will tell. But we are so far made our considerations that there will be slight deviation of the impact between the different businesses, the average being, as we have commented number of times, average for the company being the impact of negative minus -- negative 2% to negative 5%.

[Daniel Djurberg, Research Analyst]

And also, if I may, my last question would be on the employee turnover and the unwanted part. I guess COVID-19 is shaping the market and taking down FTE turnover. That would normally be quite high on this kind of merger situation. And if you go like 1 or years back, I guess, would be really high, a turnover for any company. But what do you see right now? Is this helping to some extent that cooling off the unwanted level of employee turnover?

[Kimmo Alkio, CEO & President]

Indeed. So naturally, in the midst of a merger, we need to be very mindful of this topic of attrition. So as we -- I think we briefly reflected as part of the fourth quarter report that we experienced our attrition to be lower in the fourth quarter. And in this pre-COVID-19, we've been in good shape from that standpoint. We have continued. So number of the signals of the full integration and our companies' joining forces have continued to work favorably. And naturally, as commented, this is 18 to 24 month duration of full integration. So far, looks okay.

[Operator]

Our next question comes from the line of Christoffer Bjørnsen from DNB.

[Christoffer Wang Bjørnsen, Analyst]

So first question is on Digital Experience. I mean, it seems like the underlying trend is still negative even if you exclude the big in-sourcing from one client and the other negative effects there. So could you just comment a bit why -- what part of Digital Experience is driving that softness during Q1? And then another one is a follow-up on the capitalized development cost. It just seems to me that, that figure is significantly up year-on-year, if you just add the numbers from EVRY's and Tieto's respective Q1 reports. So am I missing something there? Or is it something making [ this tough ] I'm not seeing? Or it just seems like [ insignificant one for you] ?

[Kimmo Alkio, CEO & President]

Sure. So if I first kind of expand a bit on the Digital Experience, very fair question there. So we -- so it's a bit of a mixed bag. So Digital Experience in the Finnish market, we had some ending contracts towards the end of last year, and we have been winning new projects, not at the similar levels that value of the ending ones and, of course, that initiative is ongoing to make sure that we keep on gaining market share. Somewhat similar challenges in Sweden, which is now reported still in this whole structure under DX, meaning the old ex-Tieto side. In parallel, just a reflection that, which we commented earlier, Norway growth from the former EVRY side really well supported by good development on Digital Consulting in Norway. And to be fair, also the ex-Tieto side on the Digital Consulting side, also good Q1. So slightly different dynamics per market. And to be very clear, our ambition is clearly higher. And naturally, it is our duty to make sure we get the higher performance, and it hasn't happened yet.

[Tomi Hyryläinen, Chief Financial Officer]

On the capital expenditure. So you need to probably work with the numbers. The CapEx, including fixed assets and in-house developed software, that's roughly at the same level as Q1 last year when you combine the companies.

[Operator]

[Operator Instructions] And as we have no more questions registered, I hand back to our speakers for any closing comments.

[Kimmo Alkio, CEO & President]

So thank you very much for joining today. We've had a very exciting first quarter, the combination of COVID-19, a very important integration continuing at our end; spirits are good, and we take it very humbly, the uncertainty in the market; the determination for driving long-term value creation; higher competitiveness. We are firm in our minds, it's going to be, over time, continue to be a good market and look forward to providing next reflections to you after the second quarter.Thank you very much for joining today.