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Good morning, ladies and gentlemen, and welcome to discuss our first quarter results. Here in the studio, we have Kimmo Alkio, our President and CEO; and Tomi Hyryläinen, our CFO. My name is Tanja Lounevirta. I'm Head of Investor Relations.You can follow the presentation on Internet, and to join the discussion, please dial in to our conference call. Now we move on to the presentation. Kimmo, please.
Thank you very much, Tanja, and a warm welcome also on my behalf and greetings from our Vartan office in Stockholm where we are hosting today's conference call.First of all, I [indiscernible] we are really pleased to report on a good start for the year 2019, giving us a nice degree of momentum as we look into executing the recently launched strategy. And towards the end of the presentation I'll talk and summarize more of the implications and next steps to be taken regarding the strategic intent.In summary, the first quarter and main highlights being healthy margin of 10% driven especially by the performance in our software businesses. And I'll talk more in detail when I get to the software business side. Strong growth and profitability in product development services. Another stellar quarter overall for PDS. Growth in local currencies was 2%, supported actually by a really strong order intake across a multitude of businesses. And furthermore, our strategy implementation is fully on schedule including the planned efficiency measures. So these would be the highlights. And now I'll go into as usual going through the most important components that have delivered this performance.As usual, I will also just take a very brief moment here in the beginning to reflect on the market dynamics. There is nothing fundamental or no fundamental change to report regarding how the market is developing and behaving. Market continues to be actually really interesting, very dynamic, very competitive. And we see that the type of choices and investments we have made as Tieto fully align to the way the market is developing, the interest for investing into data-rich services by actually all customers across all industries, activity level continues to become healthier and healthier.On the other hand in the infrastructure side as we have predicted over the last roughly 5-year time frame, certain degree of price erosion will continue. So these are kind of the factors that create an interesting balance which all vendors including Tieto, we are kind of maximizing the growth potential and driving efficiency and automation in regards to areas which are becoming a bit more commoditized. We see no reason to change the macroeconomic outlook in relation to what we looked at before. And we continue to predict the market to be growing between 2% and 3%. So really regarding market dynamics as commented already, no reason to change the overall outlook.Going into the total performance for the first quarter. Revenues of EUR 408 million, reported growth of 1%, organic growth in local currencies of 2%. As usual, the beginning of year tends to be impacted by agreements in continuous services for certain price reductions that kick in early in the fiscal year. And this is something we have adjusted to well also in prior year. And that is also one factor regarding the growth profile of the first quarter.Profitability, reported EBIT of EUR 36.8 million, adjusted EBIT nearly EUR 41 million. Our adjusted EBIT very much in alignment with our own expectations, a bit on the upper end given the solid performance. Actually in profit terms of more or less all our businesses, I would like to furthermore highlight that the capitalization of offering development and the IFRS 16 impact was fully as predicted. And furthermore, negative currency impact of roughly EUR 1 million. And operationally, we were also above the Q1 '18 profitability in adjusted EBIT. So overall, nicely in my perspective as we had predicted.Regarding order backlog, EUR 1.7 billion, which fully supports our ambition for the full year 2019. Really strong book-to-bill of 1.4. And we did experience really strong order intake in all of our IT services businesses. PDS has short cycle, so I don't here refer in the very strong book-to-bill to PDS while that were fully normal all across our industry software, our business consulting and implementation. And our TSM services, really high level of activity, good win rates, and as commented, gives nice degree of confidence when we look at the volume development for the full year. So overall, key P&L indicators. This gives us a justification to call it a good start overall for the year.Regarding the growth components across our businesses. BCI growing by 7%. A healthy level in relation also to how we believe the market is developing. The domain of Customer Experience Management approximately 33%, for the full year last year about 22% -- about 20%. And we do believe the market opportunity in the same area is absolutely at these levels that we are reporting.Within Technology Service and Modernization, cloud services up by 8%. Security services all the way up to 69%. In the comparable period last year, actually both Q1 and Q2, we had a degree of delivery capacity challenges, and that these have been resolved as demonstrated by the growth figures.Regarding software businesses, Lifecare growing by 4%, payments by 14%, Hydrocarbon Management in the oil and gas sector by 24% and overall Data-Driven Businesses over 150%. So the growth investments we believe continue to be very important and we believe we have made healthy bets. Always room for improvement while the bets have been, as commented, healthy up to now.Other core indicators from a KPI standpoint. I'll begin first by commentary on offshoring. And we continue to develop our offshoring capability at the speed that our customers wish to utilize offshoring. IT services now up to 48.2%. And overall we are nearing the 51% level. This has been, is and will be a very important competitive factor for us. Scale, quality and customer satisfaction continues to be good.A brief commentary next on cash flow, major component. Overall cash flow, fully as expected. Major drivers in the cash flow, change in working capital, nothing unusual. And on the other hand, the IFRS 16 implications. We do believe that the cash flow profile will continue to be steady and attractive according to the type of trajectory we have also had previously.Net debt to EBITDA at 1.1. The contribution of the IFRS 16 impact actually 0.5 of the 1.5. So nothing unusual in any of the core indicators. These are solid and give us good grounds to continue the normal agenda.Next, I'll move into the overviews of the service lines and the industry groups. Here we get a full picture of the dynamics of the businesses, maybe couple to highlight on the service line side. BCI, 7% growth; Product Development Services, the 12%, that's super strong; and of the industry groups, Public, Healthcare Welfare, 7%. So quite a healthy mix overall. And naturally our appetite continues to increase in the growth profile. I do not claim by any means this is a perfect picture. There is room for improvement in several of our businesses, absolutely.Next I'll go through the details of the service lines. I'll begin by technology services and modernization. I would call the overall performance for TSM in Q1 as being mediocre, primarily driven by the price erosion or the price discounts that have kicked in fully as anticipated in the first quarter. And we actually had one large project with a degree of delay that impact actually both the revenue side and somewhat on the profitability of TSM as onetime occurrence in the TSM business mix.Nevertheless, the adjusted EBIT being 10.4%, at a fairly, fairly good level. I commented briefly the business or growth mix infrastructure cloud, 8%; application services, 3%; and security, growing, although as a smaller business nevertheless attractive growth in percentages. Traditional infrastructure services down by 6%, fully -- actually in accordance with our own estimates.And regarding the second quarter, as usual we give a kind of high-level commentary on expectation. We expect Q2 EBIT margin to be below Q2 '18 level as the savings from the simplified structure and the cost savings program shall be affecting as from the second half of this year. So in that sense for the very short period the cost base of TSM is somewhat high. And we fully believe this shall be fixed as we enter the second half of this year.Our Business Consulting and Implementation was on the upper end of our own forecast projection. Local currency growth of 7%, organically in local 4%, adjusted EBITDA at 10.4%. Getting to be clearly at the healthy levels. And many of you likely remember my reflections on this in the prior quarters, we had 1 or 2 large somewhat challenge projects that did create a degree of negative volatility and we predicted at the end of the fourth quarter when we reported in early February that we should have seen those being fixed and that indeed has been the case.Regarding second quarter, which will be affected by the number of working days being 1 less, we expected adjusted EBIT margin to be close to the Q2 2018 level. Also regarding BCI, actually the book-to-bill and order intake Q1 was really good and happen to be the case also in the previous recovered TSM side.Then regarding our industry solutions, our practically 11 software businesses, this also overall performance on the upper end of our own forecasting profile, but very much in accordance within the spread that we had ambition to be delivering in the first quarter. Organic growth in local currency is 2%. From a growth profile standpoint, not fully -- not clearly, excuse me, at the level that our ambition and plans are. Nevertheless this is fully in accordance with our own performance expectations given that both the growth profile and the profit profile for the recovered businesses has been sustainably developing well. And we continue to invest into the utility side, which is actually eating up the short-term growth potential and then further profit improvement.Profitability, healthy at 11.1%. Overall, we did see continued good performance. If I recap this a bit to what we've discussed the last 4 quarters, we have had 3 software businesses undergoing significant technology and business model transformation. We had invested into 3¸areas our Lifecare, our Payments, VAM solutions and Tieto Smart Utility. We had commented as of the third quarter last year the Lifecare side and the VAM payment side began its turn around. In the Lifecare and the VAM side we have continued to see good total operational progress including R&D efficiency, which has now contributed to the good performance in the first quarter.Furthermore, as I had commented also 3 months ago in the fourth quarter announcement, we continue to invest in the full recovery of the Tieto Smart Utility for the year. And we believe that we absolutely have all the good reasons to maintain our longer-term growth and profit ambition for the software businesses. We expect Q2 adjusted EBIT to be, naturally to be improving from the from Q2 2018 level. And naturally we will come back and reflect very openly on the magnitude of potentially faster turnaround in the areas where we have been placing the higher investments into.Regarding product development services, a stellar, stellar quarter. Very good total operational and financial performance. 12% growth in local currencies, 12% or 12.3% adjusted EBIT. To be fair, 3 months ago we had commented that we expect the profitability of Q1 to be somewhat below Q1 of '18. Now it's pretty close. But overall, super strong performance within PDS.Regarding Q2. We expect EBIT margin to be below or at Q2 '18 level as recruitments drive growth. And actually there is 1 less working day in the second quarter. But overall, confidence level regarding the future of PDS continues to be very good.Next, if I go through somewhat more brief highlights of the industry groups. I'll begin by our financial services side. The growth profile of financial services clearly impacted by the price discounts in continued services, both on the infrastructure side and application services. So this is naturally not in accordance with our longer-term ambition from the growth side, while actually we had a really strong book-to-bill in Financial Services for the first quarter. And we had very interesting important and highly competed bids won during the first quarter including [ Fogsum ] and Getswish here in Sweden.Regarding Public, healthcare and Welfare, clearly the best performing of our industry groups during the first quarter, good 7% growth in local currencies. While growth was good, we also had very strong book-to-bill in the first quarter as well. And we believe to continue to gain market share in our core markets and good deals also signed during Q1.Regarding our industrial and consumer services, total growth somewhat of a disappointment. Here we had also a degree somewhat less than in financial services regarding price discounts in continued services. But naturally our ambition and prior quarters has been higher growth in ICS. We have also signed attractive contracts during first quarter. And in ICS we also had good book-to-bill, not quite at the very high end like we had for the other 2 industry groups.Overall, presence, profile competitiveness also in ICS. And the growth potential across Sweden, Finland and Norway, actually in all 3 sectors we believe to be attractive.Next, I would like to briefly confirm the quite usual performance drivers that we have been able to relatively well also both predict and deliver in prior years. Currently our ambition and plan is to continue to grow above the market. We maintain as expected our offering development cost at approximately 5% of group sales. We continue, as is the case each year, drive productivity improvement through automation, offshoring, the competence pyramid optimization, the very usual elements in our industry logic, not just for Tieto, but any one of our peer group.Furthermore, we expect the salary inflation to be approximately EUR 30 million for this year. And naturally regarding 2019, a significant contribution anticipated to come through the simplification program we have initiated in early February. And gross savings anticipated to be in the range of EUR 30 million to EUR 35 million and contribution to begin as of the second half of this year. And restructuring cost anticipated to be between EUR 20 million and EUR 25 million. Currently our visibility and expectations regarding this efficiency improvement is fully in accordance with our own estimates and plans as we communicated this in early February. With the above in mind, our guidance for the year remains unchanged. I would like to nevertheless read the statement carefully in order to adjust for the IFRS 16 implications. We expect our full year adjusted operating profit to increase from the previous years' level, comparable being EUR 168 million added by the impact of IFRS 16 to maintain the comparability after the adoption of the new standard. So with this in mind we maintain the absolute improvement level that we had communicated also previously.In summary, nice start for the year, good momentum, good motivation, good market, good inspiration. Overall margin healthy at 10%. Nice to see to a degree, as anticipated, improvement in our software business. Super strong total quarter for Product Development Services. And volume development fairly fine, growth 2%, supported by strong order intake and strategy implementation progressing fully as planned.Towards the end of my summary for this interim report I would like to take a few minutes to also confirm the main drivers and the game plan to step up the company's performance and the overall market competitiveness through the strategy which we launched in early February. A main driver of our future, of our customer's agenda, of the industry is to significantly increase the adoption of data-rich capabilities, how any entity, any industry, any public institution serves the market, the society. The data richness shall be embedded into every service our customer is taking to the market. And we believe that this whole digital experience side and the wheel of innovation through adding capabilities into design, into data science, data platforms, cloud-native application development, total application modernization supported by hybrid infrastructure combining of the legacy, the private cloud, the public cloud will add to the competitiveness of Tieto. And for us to be able to serve our customers in an even more compelling manner than in the past. And as commented few months ago, we expect to be adding some 2,500 to 3,000 people during the strategy period into our digital experience business as such.Also a very important foundation in the next chapter of Tieto's future, all of our businesses are healthy and the market opportunity is even greater than we had performed up to now. I wish not to just talk about the digital experience side, main driver shall be commerce and customer experience, data science and platforms, cloud-native applications which I summarized already a minute ago, very important to also see that the hybrid infra as a business continues to survey mega important purpose for keeping our customers' businesses up and running every second and creating the total organizational agility for their business all the way from hybrid infra, our 24/7 services and data center capabilities including in our case of our end-user services.Our industry software business that I talked a bit about as usual already we bet on industries where we have significant understanding of customers' business processes and believe we have opportunity for larger scale, and in selective areas also through global expansion.And finally, our PDS business. Over time we've seen the appetite for extending from the more traditional telecom steps taken towards automotive, more references announced in the last 4, 5 quarter timeframe and for the further opportunities clearly in the overall consumer electronics side, anywhere where there is a prerequisite for highly advanced software development in connection with the connectivity needs. That's an area where as Tieto our PDS colleagues are indeed superstrong.Regarding the value creation and drive behind our businesses, I would also like to offer a perspective, what type of levers are we actually working on to deliver on the opportunity we believe is in each one of the business. On the digital experience side I believe we have quite significant upside through building the scale. We are still quite early stages. Although we are developing some 30%, 35% growth as an example in the same side, this is an area that will develop over the next 2- to 5-year timeframe superfast. And this is an area where we will target large proportion of our future investments. Foundation is fairly okay to begin with as commented in the financial performance, kind of the foundation being primarily from the BCI side.Hybrid infrastructure, the multi-cloud platforms and adoption of automation, artificial intelligence, machine learning into the total predictability of services will continue to be super important. And quite significant steps in terms of scale and predictiveness, machine learning we believe will be addressed and achieved in the next few years.Industry Software, a domain where we naturally reflect quite a bit on, now we are setting up in the new structure all software businesses to be run like a software company would. And as we unify the practices and gain synergies on the R&D capabilities on offshoring, on technology partnership and architectures. I think really interesting improvement potential equally on, in Industry Software. PDS, well-performing. There the primary driver of value in relation to today's good performance already will be the extension of the market reach and into adjacent and/or new industries which we have begun to work on already. And periodically we'll come back and reflect on the type of progress we are making. This is a little bit of background, the foundation why we have also upgraded the financial ambition of the company in each one of the businesses, I believe very concrete the improvement potential and steps we will be taking to get there.In summary of the strategy a kind of a one-page synopsis of the whole consideration. All businesses are expected to grow above the market. Digital experience overall expected to be the greatest growth driver. And naturally we maintain the eye on the ball on software businesses to be scaling also outside the Nordics. So that's one factor. The business mix, the businesses driving the total revenue and business mix of the company.Second factor being the very significant operational simplification. We will structure the organization in a highly simplified manner. We are eliminating some 80% of the matrix we have had for the last 10 years. We have also identified a number of overlapping roles mostly of administrative and coordinative in nature that we believe these will cease to exist. We move the whole Tieto a few inches closer to customers and adopt the network way, so working much more agile operations while maintaining big time the eye on continuous improvement in productivity and profit through the operational simplification we earlier discussed a cost-saving potential that will begin materializing second half of this year.As communicated, we have the upgraded financial ambition. Growth of over 5%; adjusted operating margin, 13%; and attractive dividend policy to be maintained equally as the total balance sheet profile.And the implementation of the new strategy has fully started. Our Tieto-level leadership network became effective 1st of April. Our country based go-to-market implementation is currently underway, week-by-week it kicks in and takes over from the prior industry group structure. And as communicated, we began the personnel negotiations which we all take, always take very humbly, they are necessary. And furthermore, we will have the new reporting structure in place as of Q2. And the restated financials will be available there during the summer timeframe.So this would be summarizing the main choices and the main drivers of our strategy. We believe the future chapter will be actually even more exciting, the past few years. We have a very specific value promise to our customers of making our customers' businesses more competitive, and for all constituents, our employees, our partners that we create great everyday experiences and have a bit of fun in doing so.Thank you very much. So this would be summarizing the Q1 report. And as commented, a good start for the year, gives us a nice degree of confidence in a highly dynamic, highly competitive market. Thank you.
Thank you, Kimmo. Now I am happy to invite Tomi to join us for the Q&A. And I think we are ready to take questions from the call. Moderator, please go ahead.
[Operator Instructions] We will take our first question from Daniel Djurberg from Handelsbanken.
And congratulation [indiscernible] solid 2019. Two questions, if I may. And the first would be on the strategy implementation. You obviously [indiscernible] so far you haven't lost customer focus given book-to-bill and so on, but we -- the implementation on a country base, on a go-to-market is shown here starting Q2. How will you secure that you still have the focus on the customer book-to-bill here also in Q2? Can you describe the process? It would be great.
So this is actually an area that we talk about more than anything in every piece of communication, that we every day maintain the focus on the pre-sales, the sales side, the project delivery continue services side, and I think so far -- this is naturally in at the times of change, this is always, if I may, a risk, and we have -- I hope we have also seen this before. We talk about it extremely openly as commented in every possible engagement internally, so that's one factor. And so far, we have seen a very good level of activity maintained. And of course, the next weeks will tell that we end up doing so every hour, every day, every week. Regarding the other part, which is connected, as we move into the go-to-markets for Norway, Sweden, Finland, run by our country managing partners, so these networks are already to an extent active, there are kick-off meetings happening actually yesterday, today, tomorrow. So this is exactly happening now as we speak. And many of the roles also have a nice degree of continuity that everything is not changing. And in the next quarterly reports we might even come back and talk a bit about how the network ways of are actually functioning. But it is quite a significant transformation. When a company shifts after working in a highly functional, and to be fair, maybe too hierarchical manner moving into networked ways of working. Similar shift we expect many of our customers to be doing as well.
And if may, another question on Industry Solution or Industry Software, 2% organic growth. And obviously are very strong in Lifecare, Hydrocarbon and Data-Driven. But the SmartUtilities is the drag. And also -- are there other drags that you can talk about? And how do you see on the outlook there? Also if you could say more about SmartUtilities' timing, any lost customers, competitiveness, et cetera, would be great.
Sure. So overall, actually our -- the transformation now of our software businesses is actually very solidly to how we have understood and planned for this to go. The Lifecare side and the Payment side maybe just a bit on the positive side in how rapidly this is being industrialized, but nothing dramatic. It's no great success. It is the transformation we have been expecting to achieve. Furthermore, we are fully expecting and the outlook on the Smart Utility side, if I may, it actually in Q1 it has not changed. I am very comfortable, I have been and comfortable stating that the transformation of smart utility will continue throughout this year, which you might -- you probably recall we also commented 3 months ago. So this is kind of as planned.
Okay. Do you see any another drags of the growth [indiscernible].
No, software businesses or other businesses?
Yes. In the software.
So I think we are seeing -- I never want to be overly optimistic. That's I guess needs to be a CEO nature and CFO, so for Tomi. But I think we are fairly fine. So there are a number of pockets that are starting to grow or the growth potential is becoming even better and -- but we'll come back very openly and talk about the scale of the software and the deliveries which have become better and SmartUtilities still to be fixed during this year.
[Operator Instructions] We'll take our next question from Sami Sarkamies from Nordea.
I have 2 questions regarding Industry Solutions. Firstly, you did achieve 3% higher operating margin in Q1 even though you had guided for similar margin than last year. What did surprise you positively in Q1? And then secondly on the Q2 outlook, you're expecting margins to be above last year level when they were exceptionally weak. Can you help us understand how we should think about the Q2 margins relative to Q1 level?
Sure. Okay, so first all, on the first quarter, which as I also a bit reflected in the earlier brief summary, so we actually were fully within our total forecasting spread of the software business in the first quarter. And we did see the activity level and the total improvement in also the efficiency and R&D predictability and the delivery predictability being actually just solid. So it's no magic, it was just good work done by the software businesses. So there is no other story regarding Q1. And to be fair, the Tieto SmartUtilities side was also very much according to our expectation. So everything was just in the slightly upper end of our own projection, no magic.Regarding the second quarter, and naturally, or any next quarter predictions, we try to be highly mindful of not trying to guide every business in too much detail. We're already doing quite a bit there. I would much rather come back as hopefully feels kind of okay for the audience as well that we rather tell things when we have done them better and we don't forecast them in more detail. But naturally our velocity is in the -- absolutely in the right direction.
We'll take our last question from the line of Michael Briest from UBS.
A couple from me. And apologize if you addressed these in the presentation. I was doing multiple other results. In terms of the restructuring, can you talk about when that's going to hit the cash flow and the P&L through the rest of this year? On the debtors, you noticed there was a big increase there in Q1. Can you talk about what caused that and where you see that trending to through the rest of the year?
Yes, so P&L perspective, the cost for the restructuring, we've said EUR 20 million to EUR 25 million. We expect the majority to be booked in Q2. The savings side, we've said EUR 30 million to EUR 35 million. And naturally, when we talk about Q2 timeframe, booking the cost, one would also assume that the H2 will be when we see the savings materializing, and that would be roughly half of the total amount. For the P&L -- that's P&L. The cash flow obviously sort of following the same trends.
And on the debtors, DSOs were elevated?
On the net...
Sorry, specifically, on the net debt, can you...
So I...
No, not net debt, the trade receivables.
The trade receivable?
Working capital flows and cash flow.
Yes. So the cash flow, as you see the change, roughly EUR 20 million if you do comparison with Q1 '18. There are 3 main components; there are IFRS 16, roughly EUR 30 million positive impact. Then when you do a comparison of the net working capital between the two quarters, that's EUR 21 million negative. There is nothing structural there. Obviously when you do a comparison between 2 quarters and the net working capital there is slightly increase in AR and slight decrease in AP. Then we paid roughly EUR 5 million to EUR 5.5 million more taxes than prior year at this point in time.
Okay. So cash conversion should be similar this year to last year?
Yes.
Although you have the benefit of IFRS 16 should we not expect a higher percentage of operating profit to flow through?
Yes. As you know the technicalities of IFRS 16, you will see the impact -- the positive impact in the operating cash flow side and the negative side in the financing cash flow, so obviously net 0.
We have no further questions. I will hand over the call back to you for any additional or closing remarks. Please go ahead.
Thank you. So on our behalf, we want to thank you for joining us today. Next report will be out 19th of July, and we wish you a happy day.
Thank you so much and see you or talk to you in July. Thank you.
Thank you.
Thank you.