Etteplan Oyj (ETTE) Earnings Call Transcript & Summary

Welcome to this webcast presentation for Etteplan's Q2 results for '26. My name is Juha Nakki. I'm the CEO of the company. And at the end of the session, there will be a Q&A session where you will also be able to ask questions from our CFO, Helena Kukkonen. As we have got a news to, this is the agenda for the presentation. So we look at the Q2 highlights and overview first, a little bit more in detail to the financial development. We will have a look at our service areas of performance there. And then to end the presentation, we'll look at our strategy, how we did on our strategic targets and also give out the financial guidance. And then after the presentation, there will be the Q&A session. But if I start with the highlights of Q2. So it was still a difficult quarter for us after a really bad Q1 and all the events that took place during Q1. Q2 took off especially towards the end of the quarter, there was clearly an improving demand situation. We could see clearly that especially R&D activity picked up and that is, of course, an encouraging sign and the first time in a long time when the market has actually started to recover for us. And this is, of course, extremely pleasing, and we certainly hope that it will continue. If we look at the different markets, China was stronger than Europe. And in China, we had a good run in Q2. So the hours sold to the Chinese market increased by 16%. And which is a good number. And over the full year, also the development was solid. We also used a lot of effort as per the previous quarters and year. We use a lot of effort to develop our offering and include AI into our different service solutions. We have updated our existing offering with different kinds of AI applications, making them more efficient and more appealing to our customers. And also, we introduced during H1, we introduced new offerings to the market, which we feel is in a good manner and bringing significant value to our customers. So we are -- there seems to be a good interest to these new solutions and updated solutions, and we are confident we will be able to return to our growth path again. We also, during the quarter, we signed some new agreements with, for example, Patria, which are clear indications that our new offering is working. And if we look at all the new agreements that we are signing or the major offers that we are making today, all of them are including our AI offering. So it seems to be a -- on the negative side, of course, then the market uncertainty continues while in the second quarter, the demand situation started to pick up. The events during the geopolitical events during the summer are still keeping the market risks high, and it's difficult to predict what will happen. But still, after the good development in the demand, we are hopeful that the situation will continue good. And with our own efforts, we can then continue to develop our business favorably. But in the -- where they should be. So due to the market conditions and our revenue declined and our profitability was clearly below our expectation levels. And for this reason and also for -- due to the weak first quarter and also the risks that there are apparent in the markets, we did a small adjustment in our financial guidance downwards from the top levels. And if I look a little bit more in detail to the operating environment. So generally, the geopolitical tensions were high. And as said, the events during July are keeping the risks up. But overall, we did see a positive momentum especially in the R&D investments during Q2, and this is in a long time. This was particularly perhaps visible in Finland, but also in other European countries and also in China, as I said. At the same time, there were still quite significant differences between different customers and different segments and there were cost segments where the market declined clearly. And also, there were projects still postponed and delayed, and this had a negative impact, of course, on the demand situation overall. If we then look at a little bit more in detail to the country. So as I said, Europe was weaker than China, but gradually improving towards the end of the quarter. In Finland, we had a fairly good situation at the end of the quarter. In Sweden and Germany, we have a quite strong business in the car industry. The car industry, we're still struggling quite well toward the automotive industry overall. It was struggling during the quarter and the demand declined there. So we had a little bit of an issue with Sweden and Germany with the demand. In China, as I said earlier, the demand situation remained strong. Our business was developing favorably, and we foresee that, that will continue for the year. If we look at the key figures, so our revenue declined by 2.7%. Operating profit EBITA was at EUR 5.5 million or operating profit EBIT at EUR 4.2 million, so 4.7% of the revenue and EPS at $0.10. And if we look at the revenue split and personnel split in Q2. So Engineering Solutions was at 58% of the revenue, software and embedded at 22%, that Technical Communication and Data Solutions at 20% of the revenues. If we look at the revenue by countries, so Finland was 45%, Scandinavia, 27%; Central Europe 25% and China 3%. And personnel by country of Finland, China, 11%. If we look at the segments, so Energy segment still continued to be solid and was the highest segment for -- for us, Automotive declined by 2 percentage points, which was, of course, a disappointment, but this was particularly visible for our business in Germany and in Sweden. Metal and Mining was increasing. And this is, of course, an encouraging sign since we do see that in the past, when the market has started to change and pick up Metal and Mining has been the segment where it all starts. So this is an encouraging sign, and we hope that it will continue. Aerospace and there are good inroads and new deals in this area, so we expect it to grow further going forward. And forest industry is still quite a lot down and 9% of our total revenue. If we then go into a little bit more detail to the financial development. So on the key figures, unfortunately, most of the key figures are down, EPS on par with Q2 last year. But on the other notes, we are still struggling with the weaker market conditions and the key figures are down. If we look at the revenue, so 2.7% down for the quarter and 3.7% for the first half year. Revenue from key accounts was dropping by 1% and for the first half, 0.7%. But the direction during the quarter was shifting. And in April, May, we still had a negative balance. But in June, we actually were growing already. So the slightly better demand situation actually produced growth in June, which is an encouraging sign, and we certainly hope that the market will support us and this development will continue. And organic revenue growth was minus 3.5%. And overall, the weak situation has had a negative impact. But now I said, it looks a bit more promising. EBIT was at EUR 5.5 million for the quarter, so 6.1% compared to 6.6% last year. Nonrecurring items were 0.3, so normalizing a bit from the Q1 level, which was fairly high. And EBITDA for the first half was at EUR 9.2 million and EBITDA 5.1% for the half year. Basically, the nonrecurring items, as said, normalized during Q2. In Q1, there was a fairly high number. And if we exclude the onetime items from the first half, then our EBITDA would have been at 5.7%. So not a the level of where it should be, but still starting to improve and definitely an improvement to the weak first quarter. EBIT was at EUR 4.2 million, so slightly below last year and 4.7%. The amortizations regarding or amortizations related to acquisitions mainly was at EUR 1.3 million compared to EUR 1.6 million last year. For the first half, EUR 6.4 million and 3.5% after the weak first quarter. Earnings per share at $0.10, so on par with last year, but for the first half due to the first quarter at EUR 0.14, so clearly below 26.3% below last year. And operating cash flow reflecting the weaker performance, especially in Q1 and also the nonrecurring items had an impact on cash flow also in the second quarter. And cash flow -- operating cash flow was at EUR 3.7 million compared to EUR 6.9 million last year. And for the first half, EUR 7.8 million compared to EUR 12 million last year. Personnel, number of personnel was also dropping. It is encouraging to see that especially in Finland now where we do have the temporary layoffs. Now in the second quarter, the temporary layoff numbers started to drop towards the end of the quarter and was actually, at the end of the quarter lower than it was at the end of Q1, which is an encouraging sign of the market picking up again. On the income statement, nothing major that has not already been mentioned and total balance sheet standing at EUR 294.2 million at the end of June. If we then go a little bit more into detail with the service areas for Q2. So starting with Engineering Solutions. So revenue was slightly up EUR 51.7 million and EBITDA at EUR 7.2 million 3%, so not good, but improving clearly after the weak first quarter. And here, with the improving situation in R&D towards the end of the quarter supported the situation. However, the larger investments are still pending. There are projects ongoing. There are quotes, but decisions are -- there are very few decisions on larger investments still on the operational efficiency. Also, the weaker situation in Germany, especially regarding the car industry, and also in Sweden has an impact on the profitability and on the operational efficiency of the unit. EBIT for the full year was at 6%. And in the service area, we have had nonrecurring items of EUR 0.5 million. If we exclude those for the first half, then the profitability in the service area would have been 6.5%. So not where it should be, but still going into the right direction, and we are hoping to improve and looking to improve going forward. In the Software and Embedded Solutions area, we have had a turnaround program launched already during last year. And in the first quarter, of course, we had significant onetime costs in this unit. But overall, the market is still difficult for the software business. But our performance has improved in most of the units -- we still struggle a little bit in our business in Sweden, somewhat related to the car industry as well. But overall, the efforts that we have taken to improve the performance of the service area are working, and the direction is going to the right one. If we exclude the EBITDA for H1 was at 2.8%, if we exclude the fairly high onetime $0.7 million for the service area, then the January-June performance would have been 4.4% EBITDA, which is, of course, not where it should be and clearly below last year. But still the direction is the right one. And with the continued effort in the restructuring and the continued effort in the turnaround for the unit -- we are now starting to build up new pipeline with the new offering that we have introduced, and we're confident that during the year -- later part of the year, we will be able to improve also in this business. In Technical Communications and Data Solutions, we had a slightly lower revenue, so 3.8% down from last year. Lower number of deliveries had an impact on this one. And of course, the weaker situation in the car industry and especially in Germany, had clearly an impact here in the service area. But we have developed our offering further. We have very strong AI-driven offering here in the service area, and there's lots of good discussions out there with the customers. We have signed certain deals with new customers, and we have increased our market share -- and with the new offering that we are now in the process of introducing, we feel confident that we will be able to continue winning market share and improve the business situation here. EBIT for H1 was 4.8%, and there was nonrecurring items of EUR 4.4 million in January-June. So without the nonrecurring, it would have been 5.7% EBITDA which is nowhere near where it should be, but still there is room to improve and the efforts that we are taking and the AI-driven solutions that we have developed are improving our profitability. And also here, we are expecting to improve in H2. If we then move on to our strategy and our financial guidance. So the strategy is, of course, very heavily riding on AI and AI-driven solutions. And we are now making inroads. We are getting more and more business through our AI-driven solutions. Unfortunately, it was not visible in the numbers. So the AI-driven revenue was at 6%, but there were certain projects that were actually stopped, which had a negative impact, but the number of projects is still increasing, and there is high interest for our solutions. So we are confident that we continue to work with the strategy, continued solid execution of our strategy. We will be able to start to get back to the growth path again. And also, we will be able to improve our profitability. If we look at the strategic targets, so 35% revenue from AI-driven Service Solutions currently at 6%. So we have a long way to go. But as I said, there's a lot of new stuff out there now and there seems to be quite good interest from our customers. So we expect this number to pick up during the latter part of the year. MSI, 75% of the revenues is the target. We are currently at 66%, stalling a little bit. We have new MSI deals, but 1 unfortunately, the volumes of the existing ones are dropping. And for this reason, it remains a little bit flat for the previous quarters. On the revenue development, the target is EUR 500 million, and we are fairly a lot behind we are expected to improve, but the EUR 500 million is clearly a very tough target for '27. And operating profit, EBITDA at 5.1% for H1. Not happy with that at all in the difficult market conditions. This is what we have been able to do. But now with the efforts that we have taken with the new offering hopefully, the improving market conditions, we expect this to improve significantly in H2. And if we look at the market outlook, there are positive signs now in the market. Clearly, certain activity has picked up. We are seeing quite good numbers and good forecasts in different countries. And with this development, we expect that the demand situation will improve. However, the risks are still high due to the geopolitical events, the recent events. And it's difficult to estimate what will happen, how our customers will react to these changes and to these kind of events. And for this reason, we updated our financial guidance slightly. And now we estimate that the revenue will be between EUR 360 million and EUR 375 million. And the EBIT will be between EUR 19 million and EUR 22 million. So a slight drop on the upper end of the range. And that completes the presentation. So now it's time for the Q&A session.

[Operator Instructions] So I could start the questions, Roni Perm from Inderes. You mentioned about the positive signs in demand. Are you able to quantify in any way how big improvement was this compared to, for example, end of Q1 when you also mentioned that there are some positive signs. And maybe talk about the industry since I think you only mentioned about the clear improvement in mining, so in which industry is just getting better.

Yes, I would say that there are industries where it's still difficult, car industry or automotive industry is clearly the 1 where it is difficult. And there are some other industries and certain customers, which are large for us that are still struggling. Perhaps pulp and paper is still struggling and some other industries. But of course, clearly, the defense sector is strong, and also energy sector is solid. Mining sector clearly has started to improve. And overall, I would say that we are seeing companies starting to engage our type of partners more into, for example, R&D activity and companies that we have been working with for a long time where we haven't done that much recently or in the last couple of years have started to activate. So there a range of customers that is actually starting to invest more into R&D. We haven't seen large investments yet large factories. There is, of course, the data center investments ongoing. This is an area where everybody is investing overall, large factory investments are still pending. But R&D activity on a quite wide scale in different industries is slightly improving and it's not growing fast yet, but there are clear signs that something is starting to happen, and this is encouraging.

Then about the guidance. So you're expecting quite a steep improvement especially in earnings. So is the required demand for this currently in the beginning of August on a level you can reach? Or is it still expecting a clear improvement in demand during H2? Do you have any numbers from, for example, July?

Well, July is still -- we don't have any numbers from July, so this is that is still pending. But I would say that if the situation is similar to June or improved slightly really then we should be on a solid ground. And of course, if it improves more than that, of course, we are happy. If the market conditions, if customers start to wait after the recent geopolitical events, which has unfortunately quite normally taken place, that will not be good. But if the demand stays on the level where it was at the end of June or even improves on that, then we have a solid ground to work with.

All right. Then 1 question about the productized AI solutions. So -- how has your original thesis that these can be used to improve profitability in the long run, played out so far in the customer relationship that have taken these solutions some time ago already.

It is -- the theory is proving to be right. So where we are developing our own AI-driven model that they are getting. So our profitability is improved moving. We have invested quite a lot of money into developing our AI offering, but where we have been able to utilize this -- it's clearly showing value for the customer, but it's also clearly showing value for Etteplan. So the theory that we have had seems to be right, and we just simply need to continue working with it, get more customers engaged with these kinds of solutions. And now with the new offering that we have developed during H1, we feel that there's lots of potential, but we have to be strong in selling these solutions out to the customers, and we need to engage more and more customers with these types of new things. But the theory is working, and we just need to get more volume for it.

The next question comes from Anil menin from DNB Carnegie.

Could continue on the guidance because it looks quite tough to reach in my view. So like in already mentioned. -- quite a pickup to happen. Could you describe is this across all the business segments or because software and solutions, I mean, that is looking very weak still at this point?