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Edited Transcript of ETT1V.HE earnings conference call or presentation 13-Aug-19 11:30am GMT

Half Year 2019 Etteplan Oyj Earnings Call

Hollola Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Etteplan Oyj earnings conference call or presentation Tuesday, August 13, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Juha Näkki

Etteplan Oyj - President, CEO & Chairman of the Management Group

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Conference Call Participants

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* Joni Sandvall

Nordea Markets, Research Division - Analyst

* Juha Kinnunen

Inderes Oy - Senior Analyst & Strategist

* Pasi Väisänen

Nordea Markets, Research Division - Senior Analyst of Utilities and Energy

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Presentation

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [1]

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Welcome to this Webcast Presentation of Etteplan's Q2 Results for 2019. My name is Juha Näkki. I'm the President and CEO, and joining me for the session is our CFO, Per-Anders Gådin. At the end of the session, you will be able to ask questions from both of us. In the presentation, we will go through the highlights of our Q2. We'll look at -- a little bit on the financial development of the company. And through the end of the presentation, we'll look at our proceeding against our targets and our development overall.

But if we start with the highlights of Q2. So Q2 was operatively very good for us. We exceeded our target of profitability, and our EBITA margin was at 10.1%. Our share of managed services of revenue was growing, which boosted our profitability and helped us succeed in achieving the targeted levels. And especially in Engineering services -- service area, the profitability was particularly strong, and the operation overall was performing really well. Also our operating cash flow was strong, and the revenue growth was 4.1% with comparable exchange rate. Growth was slightly coming down compared to the previous quarters depending -- or due to the vacations related to Easter. But still, we saw that the market demand was good, and there were still good opportunities. Towards the end of the period, we accelerated our growth by 2 acquisitions and improved our position as an international operator in the engineering services market.

On the negative side, in Germany, our problems continued, and the German operation burdened our profitability. Still, there is some progress due to the actions that we have done on the Technical Documentation side. And of course now, with the other acquisition, we look forward to having much better business in Germany overall. Also, China was difficult. In the prevailing political situation related to the trade war, the demand was down and unfortunately, our hours sold to the Chinese market were declining by 4% in the quarter, which was the first time in a long time that this has happened. But the political situation, especially in China, is now affecting demand, and that was unfortunate. But we are finding new customers still and expecting to turn the tide in the coming quarters.

If we look at little bit on the acquisitions. First, we acquired Devex Mekatronik AB in Sweden, a company with 120 employees and revenue of EUR 9.2 million, focusing on mainly mechanical, electronical, software development, embedded systems and life sciences. And especially in life science, we improved our competence base in Sweden. Devex had operations in Stockholm, Uppsala, Linköping, Karlstad, Lund and Sundsvall. So fairly similar locations to where Etteplan is and, of course, similar business that we have, and therefore, we expect to have synergy benefits about EUR 400,000, starting from the beginning of next year. But clearly, boosting our position in Sweden and improving our market position, especially in life science.

Then after the review period, on 4th of July, we announced the acquisition of EMP Engineering Alliance in Germany, a company with approximately 130 employees operating in Leverkusen, Berlin, Bottrop and Frankfurt and a company specializing in industrial automation and process engineering, especially working with process business customers such as Bayer, Shell, ABB and others and very, very strong competence, clearly improves our position in Germany where we now have overall more than 170 employees. And of course, we also helped that -- through these customers that EMP has, that will also help us recover our business in Technical Documentation in Germany.

So overall, approximately 250 employees more after these acquisitions. And roundabout, we expect to have, on an annual basis, about EUR 30 million of revenue from these 2 acquisitions going forward.

If we then move to the market development and operating environment. So overall, our operating environment still continue to be developing positively. Demand growth was slightly slowing down due to the uncertainty in the markets, and especially the political situation has an impact on this. But still, the demand was at a good level. No significant changes as per customer industries, but of course, customer-specific differences were increasing and were again considerable. Investments. Still companies are directing the investments to digitalization and digitalization of services. And also the outsourcing trend seems to be continuing, and we have several outsourcing discussions, especially in Technical Documentation, ongoing at the moment. Still, competition for competent resources in certain competence areas was quite strong and did affect the growth in all the engineering companies.

And if we then look at little bit on the market development by country. In Finland, the general market demand was still good, but demand growth has slowed down slightly. Sweden, market demand was at good level. Germany, Netherlands, Poland, still at good level. And in China, the demand weakened due to the prevailing political situation and the trade war. Still, the opening up of the service market continued, and we continue to find new customers for all our businesses in China.

If we look at little bit on the revenue split: so Engineering Solutions at 55% in this quarter or for the first half year; Software and Embedded Solutions, 26%; and Technical Documentation Solutions, 19% of our revenues. Revenue by country: Finland, 69%; Sweden, 21%; China, 3%; and Central Europe, 7%. Personnel by country at the end of the period, changing slightly due to the acquisition in Sweden: so Finland, 63%; Sweden, 19%; China, 11%; and Central Europe, 7%.

And then if we look at the revenue split by customer segment: so forest and paper, now the biggest one at 14%; industrial machinery and general components at 13%; energy and power transmission coming slightly down to 12%; and mining industry remaining at 12%. We also saw a slight decline in ICT and in transportation and vehicle and medical technologies. Of course, taking into account that the Devex numbers are not in this comparison yet because the acquisition is recent, and they are not yet in our systems. So it cannot be measured in this respect.

Key figures. So revenue growth was 3.7% on absolute figures. Profit, EBITA, 3.8% and change, growing; EBIT growing 2.6%; and operating cash flow, very strong, growing by 96.8%. So overall, good development still but growth coming slightly down in this quarter compared to the previous ones.

If we look at the first half year: so revenue growth was 7.4%; operating profit, EBITA, 15.9% growing; operating profit, EBIT, 14.9%; and earnings per share by 12.9%. So solid development during this year.

And if we look at the outlook. So now clearly, the political situation across the world is having an impact on the demand. We still expect the operating environment to be quite good, but we do expect that the demand growth will slow down in Europe. And in Asia, the overall growth will slow down. But still, we see that there will be slight growth, and that gives us room to operate. And due to the still continuing good environment and also our first half year result and due to the acquisitions that we completed, we have now upgraded our financial guidance. And now we expect the revenue and operating profit to grow significantly compared to 2018.

If we look a little bit more in detail into the numbers. So our revenue growth was 4.1% at comparable exchange rates, again mainly the Swedish crown has an impact on this. Organic growth was 1.6% at the comparable exchange rate. And if we look at the first half year, then the growth was 7.4%; comparable exchange rates, 8.1%; and organic growth with comparable exchange rates was 4.7%. Revenue growth from key accounts was 6.4%, and generally, I can say that the demand growth was slightly slowing down, which had slight impact on our numbers, on growth. But especially Easter and the related vacations had an impact on the growth, which we estimate to be approximately 3% to 4% on the growth figures. This comes from the fact that the quarter was 1 day shorter in Finland, 2 days shorter in Sweden, and on top of that, the vacations held during the Easter time had an impact on the growth. And then at the end of the quarter, of course, with the 2 acquisitions, we boosted our growth again and expect to accelerate on the growth in the coming quarters.

Operating profit, EBITA, was at the good level, 10.1%, EUR 6.5 million. And the nonrecurring items were -- there were nonrecurring items, but the net effect was 0 in this quarter and EUR 0.2 million for the full year. Our good operating efficiency continued in all service areas, which boosted the result, also the rising MSI Index was helping our profitability in this respect.

Operating profit, EBIT, was at EUR 5.8 million, 9% of our revenues. Amortizations related to acquisitions were EUR 0.7 million in this quarter and EUR 1.3 million for the full year -- about half a year so far.

If we then move onto the service area development. So the revenue split, I already went through. But on operating profit, Engineering Solutions was clearly the best-performing service area for us, and therefore, the share of profit was 57%; Embedded, Software was at 25%; and Technical Documentation at 18% of the EBITA.

If we then look a little bit on more detail in Engineering Solutions. So the revenue was EUR 35.3 million, and the profit was very, very good, 10.9%, all-time high for this service area. And this was boosted by excellent operational efficiency in the operation and also successful projects in this service area. Uncertainty, of course, had an impact also here, especially in our business in China, and this service area was affected by the acquisition in Sweden, small impact for the month of June.

In Software and Embedded Solutions, the growth was still quite good, 8.5%, and the revenue was at EUR 17.1 million. EBITA percentage, profitability, was at 9.3% and this -- we had a small impact from the Software -- some Software projects where the start was delayed at the start of the year, and we also had some impact for the second quarter. Also, we had an issue with one major customer where the demand changed clearly in Poland, and that took the EBITA percentage slightly down. Otherwise, the demand situation in this service area remains to be good, and we hope to see a solid development going forward.

In the Technical Documentation Solutions service area, we also saw good development: revenue growth was 5.1%, revenue was $11.8 million for the quarter and the EBITA percent was 8.8%. We still had some difficulties in Germany, but now we have a solution for the long-term project that we have been reporting on. And now we have delivered the first test batch, and that has now been approved by the customers. So we expect these deliveries to start taking place in Q3 and Q4, and that will have an impact on the revenue. Also due to the actions that we have taken in Germany, we expect our business there to become healthier and to improve the performance there. So hopefully, we can develop the business going forward. Also here, we have continued to develop our service offering. And now in the coming quarters, we will also establish or go to the market with some new solutions, fully digitalized services. And either in Q3 or in Q4, we will introduce new service models to the market.

Earnings per share were at EUR 0.18 for the quarter and for the full year so far, EUR 0.35, so EUR 0.05 ahead of last year.

And cash flow was at -- operating cash flow was at EUR 8.8 million for this quarter, of course, slightly boosted by the IFRS 16, approximately by EUR 1.5 million, but also otherwise, very, very strong. So for the full year so far, H1 EUR 14.2 million operating cash flow, very strong.

Return on capital employed was 22.2%, and personnel at the end of the period was 3,301. And out of this, 1,206 employees were outside Finland. The employees of Devex Mekatronik are counted into this number. However, the employees of EMP Engineering Alliance are not. So in July, this number will be approximately 130 employees higher.

On the income statement, nothing major that has not been mentioned already earlier. Also on the balance sheet, small impacts from the acquisition of Devex, but nothing major in this one as well.

If we then move on to the targets. So now revenue growth on the full year basis for the H1 has been 7.4%, so we are lagging behind our target. But now with the 2 acquisitions, we are accelerating again, and hopefully, we will be able to close in on our targeted levels. And operating profit, EBITA, 10% target. So far, we are at 9.9% for the full year, so very, very close. And as said in Q2, we exceeded this target, which we are very happy about. Also now in the managed services share of revenue, we saw clear growth during this year and especially in Q2. And for the full year, MSI index is at 59%. Still some way to go to our 65% target, but we are progressing nevertheless. And equity ratio was at 40.1%, clearly, above the 30% target levels.

So our solid development continued in Q2, slightly slower growth mainly due to Easter and related vacations. But even if we see that there is slight slowdown in the demand, we still expect to see growth, and we expect that our operation will develop positively towards the end of the year.

Here are our investor contacts. So should you have any questions outside this webcast, feel free to contact us at any time.

But now, I would like to move to Q&A session. So myself and Per-Anders Gådin, our CFO, will be able to answer your questions, should you have any. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Pasi Väisänen of Nordea.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [2]

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This is Pasi from Nordea. So I have 3, 4 questions. If I may take those one by one.

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [3]

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Sure.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [4]

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Well, the first one, I mean what was the true underlying reason for your acquisitions? I mean did you want to get to customers, specific customers or more capacity for your projects or then a new offering for your portfolio? And that was the first one.

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [5]

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Well, basically, this follows our target of international growth. And in Sweden, we improved our market position clearly. We also improved our competence base, especially in the life science area, which is growing. And there was a good fit between the service offering from Devex and Etteplan, and we see clear synergies in this acquisition. So now we felt that the time was right to make such an acquisition.

In the EMP Engineering Alliance case, we have said that we want to put all -- or have all our service offering available in all the markets where we operate. And in Germany, we only had a very small operation in Technical Documentation, and now we had a really great opportunity to acquire EMP. And this, of course, boosts our market position in Germany considerably and improves our position in Central Europe overall. Also the competence area of process automation, automation and industry 4.0-related software is particularly strong for us, and we feel that this competence area is a good investment. So these were the basic reasons.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [6]

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Yes. Okay. When looking at actually the guidance, you are guiding to reported growth figure. But when kind of looking at the organic underlying growth, did I actually understood right that you're actually speaking down slightly the organic growth expectations for the rest of the year or for the full year '19? Or can you give any color for the organic growth guidance, please?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [7]

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Well, as seen in Q2, so our organic growth was coming down even if it was impacted by Easter. But of course, in the current political environment, there is -- our customers are hesitating slightly with their investments. We don't see anything stopping fully, and we don't see a massive change. But we do anticipate that the demand growth will slow down slightly, which will also have an impact on us. So yes, we do think that the organic growth will be really tough to reach the levels that we have had before. But still, we do expect to have organic growth. So this is what we think right now.

But it's really, really hard to say how the prevailing political situation is affecting the decisions of our customers. Will they start the waiting mode or not? And this is very, very hard to predict.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [8]

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Yes. So then like in a base case, that the figures were still positive when looking at the organic growth.

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [9]

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That is what we expect. But it's -- of course, as I said, it's really, really hard to say. But so far, we haven't seen any signs that the demand would start to decline. We still see growth. We see still opportunities. We are still winning great cases, and there are definitely opportunities. So therefore, we expect that there is still growth. Demand will be okay. But will it grow as fast as it has? That we don't expect due to the political environment.

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Pasi Väisänen, Nordea Markets, Research Division - Senior Analyst of Utilities and Energy [10]

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Yes. Especially then looking into China, I mean, if you reported 4% decline and if that goes to 10%. So I -- if I -- so right, the China is only 3% from your reported sales. But what's the true figure, I mean, the China-related business from your top line?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [11]

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Well, I guess the -- if you look at the number of personnel, it's giving a more, let's say, a better picture of the impact of China on our business. And the number of personnel China has 11% of our personnel. So that we have a much more or bigger impact from China, and this is due to the offshoring business model that we have. Offshoring has still continued to be strong. And normally, if times are getting slightly worse, the offshoring model will be even more important. So we see that the offshoring business will still be strong.

But the local demand in China is, right now -- when there is the turbulence is, right now, slightly declining. And we are having a slightly more difficult time, especially in the car industry-related engineering. But we do think that China will make a decision on which way to go, whether they will try to come to terms with the U.S. or then they will make some other kind of decision. But we have -- we don't know that Chinese would wait for a long time. They will decide which way to go, and then they will go. And then I think that we might see a better demand going forward, and I don't think that they will play this waiting game for very long. So hopefully in China also, we will see decisions and, therefore, increasing demand going forward. But for the time being, it's not going to be very easy on the local market.

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Operator [12]

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Our next question comes from the line of Juha Kinnunen of Inderes.

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Juha Kinnunen, Inderes Oy - Senior Analyst & Strategist [13]

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This is Juha from Inderes. Maybe I will just continue from China a little bit. I just wanted to make sure that you haven't lost any clients during this period.

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [14]

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No. On the contrary, we have been continuing to win new customers, but where we have lost is the large customers, which are -- we haven't lost the customers but the volumes, especially the investment-related projects, has come considerably down, and we have not been able to compensate the drop of certain large customers by new customers. But we have not lost customers. On the contrary, we have won still new customers. But the volumes of certain -- mainly investment-related customers have come down, and that is the reason for the decline.

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Juha Kinnunen, Inderes Oy - Senior Analyst & Strategist [15]

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All right. That's what I thought. And then I was hoping for some additional information about acquisitions. What is the current profitability of Devex and EMP? And how is it compared to Etteplan group?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [16]

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Well, we haven't disclosed those numbers. But as we are in the webcast, so I could say that in Devex, it was slightly below Etteplan. But with the synergies, we expect it to be at the targeted levels. And of course, that will take some time. But for -- from beginning of next year or Q1/Q2 next year, we expect it to be there.

And EMP was very profitable and higher profitability, slightly higher profitability than Etteplan's business. So this is the expectation going forward.

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Juha Kinnunen, Inderes Oy - Senior Analyst & Strategist [17]

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All right. Very good. And also about the acquisitions, how is the revenue going to be divided into your business segments?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [18]

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Well, EMP will be fully in Engineering Solutions, and Devex is currently split. About 15% to 20% is in Software and Embedded Solutions, and the rest is in Engineering Solutions. When we do the integration, of course, these might change slightly, but that is roughly the split.

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Juha Kinnunen, Inderes Oy - Senior Analyst & Strategist [19]

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All right. And also kind of a detailed question. But how much do the amortizations related to acquisitions rise when they are -- also including EMP? As far as I know, they're both included in Q2.

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [20]

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Well, the -- I would say that I would like to answer this question in Q2. We haven't -- we have, of course, the preliminary PPAs, but they are still to be reviewed with our auditors. So I would like to maybe answer this question slightly later, maybe in the Q3 report.

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Juha Kinnunen, Inderes Oy - Senior Analyst & Strategist [21]

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All right. And final question from me about market demand. Just because uncertainty at this, wanted to make sure that since the end of the period, the reporting period, you haven't seen any significant changes in the demand.

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [22]

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Well, no. I mean the demand remains okay, and there is still projects. There are still investments. Especially the digitalization-related investments are still strong. But of course, since the uncertainty is there, so customers will start to or already perhaps, to some extent, started and will start going forward, unless there is an ease to the situation, we'll start to wait to make the investments because they simply don't know where to invest. So this kind of hesitation is there. It has not taken the market down yet, and we don't expect it to happen during this year. But I would say that the demand growth is not as high as it used to be due to this hesitation.

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Operator [23]

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Our next question comes from the line of Joni Sandvall of Nordea.

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Joni Sandvall, Nordea Markets, Research Division - Analyst [24]

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Sorry. Coming back from (inaudible) line, but my phone jammed. So I did still have a few questions. And well -- I mean the last 20 years, if I remember right, Etteplan has been a kind of late cyclical company anyway, and you have now actually been able to reach your 10% final target and looking at the EBITA margin. So is this assumption of the late cyclicality still there? Or when looking at the overall kind of a macroeconomic environment, is there any direction for the margin then to come down from the current levels?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [25]

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Well, of course, our -- if we compare Etteplan 20 years ago and now, so our service offering is completely different. We also have different types of services, which are not that heavily tied to these cycles. For example, in this environment, the Software business is -- we don't expect to see any decline in that. On the contrary, we expect companies to accelerate their investment into digitalization. So this does have an impact.

And of course, on the margin, we are heavily working with new technologies, taking new technologies as a part of our offering. And in this respect, when we are able to do that, we will be able to provide more value to our customers and hopefully then we are able to also capitalize on that ourself and still further improve margins on certain businesses. But of course, if the market environment comes down, so on the more basic engineering, detailed engineering, for example, then of course the margins will be under pressure. And the demand, if it declines, so then therefore, the margins will be under pressure.

But we do have businesses where we can actually improve the margins well above our 10% target levels. And we are continuously working on developing our service offering, taking technology solutions as a part of our offering, thus increasing the value add for our customers. And therefore, we think that there are possibilities for us to further improve the margins in certain businesses.

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Joni Sandvall, Nordea Markets, Research Division - Analyst [26]

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Yes. Yes. That's understood. And the last one, regarding the current kind of status in utilization ratios. Would you actually say that they are high or normal or in a low level and what you expect to happen in the next winter for the utilization ratios for your (inaudible)?

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [27]

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Well, I think that the utilization rates are on a fairly high level right now, depending a little bit on the business. On certain businesses, we can still further improve. But in, for example, Engineering Solutions, it is very, very high. Going forward, if the demand situations remains good, so I don't see any reason why it should be lower. But if the demand starts to decline at some point, so then, of course, there will be a little bit more pressure. But I think that we are having an excellent operating efficiency right now. And I see no reason, when the demand is not declining, why that should change.

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Operator [28]

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(Operator Instructions) And there are no further questions at this time. Please go ahead, speakers.

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Juha Näkki, Etteplan Oyj - President, CEO & Chairman of the Management Group [29]

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Okay. Thank you very much. Yes. I mean this was a solid quarter for us: good profitability, strong cash flow, slightly slower growth but mainly attributable to Easter. Of course, going forward, the uncertainty has increased, and it will affect demand. But for the rest of the year, we still feel that we will be able to operate well in this environment. And with the acquisitions, we were able to also upgrade our financial guidance, so we expect to have a very good year.

Thank you very much, and we'll return in the Q3.