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Ladies and gentlemen, good morning from our studio in Helsinki. We warmly welcome you to join our Q2 call. We will start with Q2 highlights and introduction to business performance by Kimmo Alkio, our President and CEO. We also have Tomi Hyryläinen, our CFO, in the studio, and he will dive deeper into the financials. And Kimmo will end our presentation with performance drivers and summary. My name is Tanja Lounevirta, I'm Head of Financial Communications. Now Kimmo, please go ahead.
Thank you very much, Tanja, and good morning to everybody. A warm welcome to our Q2 interim report presentation and a dialogue also on my behalf. As you may have noted already, we have had a very good and a demanding quarter. We have made a lot of progress, including significant decisions to support our future ambitions. During the quarter, we've had several significant achievements and significant decisions. Main highlights of our Q2 are strong operational performance with the synergy targets increased and dividend payout decided. Very practically, our second quarter consists of 4 very significant parts that strengthen, we strongly, believe our future. Our adjusted operating profit of EUR 80.4 million, 11.7%, with really solid performance across all of our businesses. We have our integration well on schedule. With this in mind, the synergy targets increased to EUR 100 million from the prior year EUR 75 million level. During the quarter and during 2020, we will have large onetime items for the sake of future contribution and to be fair, ensuring that the investments we put in place as a company have adequate returns in the future. Furthermore, as decided yesterday that -- by the Board of Directors, the dividend payout of EUR 0.635 per share, totaling EUR 75 million level. These are such big items that deserve specific attention also in this session. From a standpoint of the business performance and underlying businesses, it is satisfactory for the management to see that our businesses, indeed, are quite resilient, even in the era of the pandemic and we are on our path of building a very solid operational foundation. As our integration is well on schedule, we are not just achieving but on our path -- plan of expanding the merger potential. And as we have large onetime items in the second quarter and during 2020, these are in place and decisions taken to enable future profit contribution. And let me please be very clear, which we'll open up both in my session and Tomi's, we do expect to have significantly lower onetime items in 2021; all of this forming a good foundation, strong belief in driving strong shareholder returns and also attractive future dividends. I'd also like to confirm our perspective around the COVID-19 implications. We maintain our view on the market outlook, which is by -- quite naturally, we also follow the industry analysts predicting to minus 3% to minus 7% impact on the sector as a whole. And we maintain our estimate of minus 2% to minus 5% impact on the revenues for the full year. I have already referred a few times the resilience that is indeed working fine. During second quarter, we had approximately negative 2% impact on our revenues. We also believe, like the rest of the industry, a need to accept that demand uncertainty will continue during second half, very specifically due to COVID-19. Our short-term savings actions were implemented very fast already towards the end of Q1 to offset any potential impact of COVID-19, and this has functioned fine and clearly contributing to our performance in the second quarter. And we will continue high degree of attention on both temporary and more permanent cost savings throughout 2020. And furthermore, very important that our employees feel good about, even in the era of COVID-19, getting used to the remote ways of working. Employee satisfaction at the high level, confidence in the merger continues at the very high level and naturally, we are keeping huge degree of attention on the wellbeing of employees in order to also safeguard the quality of services and keeping the society well functional. And we, like any company, currently, are looking into the partial return back to the office in the second half as well as the longer-term implications on the kind of overall facilities and structures. For the second quarter, the main financial highlights here being summarized. Revenues, EUR 686 million, organic growth of minus 1%. Impact of COVID, as mentioned, the negative 2%. Adjusted EBIT, EUR 80.4 million, 11.7%. Healthy cash flow, EUR 90 million level and net debt-to-EBITDA, 2.9. And we also entered the second half indeed with a healthy backlog. So overall, from the management standpoint, we believe we actually executed very much in accordance to what we believe should be feasible for the second quarter. As referred to a few times, we will open up very transparently to considerations around the onetime items and given the magnitude of these, we'll cover this very thoroughly. Our onetime items can be categorized into 2 areas. One is around the integration and the second, which covers both the partnership and end-of-life consideration, is to resolve of issues which would have inhibited our future growth and profit expansion potential; the integration very much, as anticipated onetime items for the integration itself and the restructuring very much in accordance with our earlier communications. Furthermore, as announced in June, we have redefined the IBM partnership to build the foundation for higher quality, higher trust from the customer standpoint, higher growth opportunities and here, fully in accordance with our June announcement, the onetime items for the transition and settlement of the old agreement. The new piece of information in the second quarter is actually the end-of-life thing of the Tieto SmartUtilities. The decision to end the common SmartUtilities platform with high investments needs is eliminating any future profit leakage. During the second quarter, the SmartUtilities projects, with anchor customers, have ended under mutual agreements. The deliveries, the remaining customers continue on a project basis. All probable risks have been booked in Q2 consisting of onetime items for asset impairment, cause for terminated customer contracts, and resource ramp down. This has been an important difficult decision we firmly believe has been the only right thing to do in terms of the investment priorities of the company and following our customer preferences. Furthermore, we want to be clear and open on the quantification and future view of onetime items. We have the categories around integration, redefined partnership, end of life of SmartUtilities and then smaller other components. We have, in today's report, announced the Q2 onetime items, approximately EUR 90 million level. For the year 2020, onetime items are estimated to be between EUR 200 million and EUR 210 million and with cash flow impacting between EUR 105 million and EUR 115 million. For the year 2021, onetime items are estimated to be between EUR 85 million and EUR 100 million and cash flow impact between EUR 45 million and EUR 55 million. With this in mind, year 2021 is estimated to be 50% of the 2020 levels. And Tomi, as the CFO, will also share further details on each one of the planned items. A few words on integration. So our -- the train of integration continues to move ahead from station to station very solidly. And as communicated earlier, this is an 18- to 24-month progress, and we will keep high, higher tension for -- throughout the duration. A few highlights on the progress or specific progress made in the second quarter. First, a couple of commentaries on the integrated structure and leadership. We did move into a fully integrated common operating model, common organization across all businesses and across all functions, and this specifically took place in the second quarter. And we have, furthermore, the integrated structures for Financial Services -- excuse me, that's the exception, the integration to the full extent, will happen in the second half of the year according to our internal plans. The common processes and systems, naturally, in terms of a merger of our magnitude, the full care and caution on the financial restatements, financial consolidation process synchronization, very important, we believe these have been completed with very high-quality during second quarter. And by nature, the system implementation as well as standardized common processes will take a bit further. With this in mind, we are not marking ourselves at any -- approximately at the 50% mark relative to our end state ambition. Integrated go-to-market and service portfolio we have been able to maintain even in the midst of COVID-19, very active level in customer engagement. And furthermore, work is progressing fine in terms of consolidating the full-service portfolio of the 2 prior companies. Employee engagement and cultural integration, the continuous feedback and pulse surveys continue to demonstrate that the engagement levels have continued to actually increase. They have been at the fine level throughout the merger period. Furthermore, we have launched in the second quarter, a common code of conduct and diverse set of principles that will become very important as a common ground for the company, promoting our values of openness, trust and diversity. And furthermore, the synergy planning and realization, we are marking this as being roughly halfway done, given that the -- our planning is proceeding very well. The synergy target increased to EUR 100 million. We have achieved the EUR 45 million run rate level. And naturally, our ambition is to execute all of this through the P&L to its full extent. Next, I would like to reiterate the background to the renewed IBM partnership as announced in June, and also to confirm the factors behind our decision. A combination of financial and operational feasibility in the prior agreement simply did not exist. Why was this the case? The service experience and quality experience for customers was not up to the expected level of our customers or -- nor of the industry norms. This did cause loss of customer trust and negative impact on revenues. Furthermore, the quality resolutions required continuous investments, impacting profitability negatively and creating continuous disputes between the parties. Overall, the prior arrangement did not make the partnership sustainable in the future. With this in mind, what we communicated in early June that in the future which is now under implementation, we have a refined scope, a clear set of responsibilities following TietoEVRY's core processes and tools. We have a clear implementation plan and we have provided clarity on financials, including our perspective on the mid and long-term accretiveness for the whole Cloud & Infra business. And also to confirm that redefined partnership focuses on 3 specific objectives. One, the superior service experience. Being able to provide unified delivery models, 100% clarity on roles and responsibilities, bringing proven cloud offerings to our customers and to accelerate our customers' cloud adoption through using all possible best technologies in the marketplace. Efficiency of operations is extremely important. One service architecture, predefined one common delivery model and working processes as well as increasing the level of automation. Attractive financials shall be driven by the add-on volumes and drive for market share gains, reduction of overlaps and SG&A in serving the customers. Furthermore, as a background of the combination of efficiency and attractive financials, I'd like to point out to the development of the last few years in the ex-Tieto Hybrid Infra business, which provided a very clear path of efficiency, continued improvement in quality, and attractive financials. So I want to take a moment here to reconfirm why these decisions were made in June. And then into the next and the fourth pillar of our main message today around the dividends. So the dividend decision drivers consist of a combination of the COVID-19 uncertainties in the marketplace, our strong operational performance, both in the first and second quarter, the continued solid integration execution, the ability to increase our synergy targets, while having unusually high onetime items during 2020. And as communicated in the opening part, we are naturally pleased to share the decision of our Board of Directors for the dividend of EUR 0.635 per share, totaling the EUR 75 million level. And this shall be paid in equal installments in August and October. In the next section, as usual, I'll talk through the performance, specific performance of the businesses. The group summary is around, as shared in the opening part already, revenues of EUR 686 million; adjusted EBIT, EUR 80.4 million level; and given the magnitude of exceptional onetime items, reported EBIT, minus EUR 9.8 million. A bit specific at the group level commentary, the growth supported primarily from Financial Services with a 6% growth and in Industry Software, 3%. And the COVID impact of negative 2% has been fully mitigated through cost savings activities. Then, main highlights for business. Our Digital Consulting business, revenues of EUR 163 million. Organic growth of minus 6%. COVID impact being approximately negative 3%. And very specifically visible in Customer Experience and Business Consulting. From a growth standpoint, we do believe we are at least on par relative to how the market is being impacted by COVID-19. Digital Consulting is very likely one of the areas of highest impact in terms of market challenges regarding postponement of decisions and investments by customers. And the adjusted EBIT development, absolutely in the right direction to the EUR 17.9 million level at 11% compared to the 8.4% level 1 year ago. And to be fair, we have a very consistent message in all the businesses that profitability development, driven by continuous efficiency improvement and mitigation of COVID-19. Furthermore, it was really good to see, especially towards the end of the second quarter, the activity level in the marketplace has actually elevated and our pipelines are gaining good ground across all of our key markets. Few main highlights of the Cloud & Infra business. Organic growth, negative 3%; COVID-19 impact, very minor on revenues; our profitability level development favorable to 11.5% level from the prior year 10.2%. The declining sales are mainly due to onetime hardware sales in Q2 '19 and challenges in the add-on sales in the installed base of certain customers and certain segment of customers in Cloud & Infra. And again, profitability development driven forward by a high degree of attention as the case across the company on efficiency and mitigating COVID-19. We do expect the cloud transformation acceleration to continue also in the second half of the year. Then, a few more specific messages and factors on Industry Software. Organic growth of 3%. Adjusted EBIT solidly improving to 15.1% level from the 11.8% level 1 year ago. The growth of over 10% visible in 3 sectors: health care, welfare and the public sector software, and profitability development similarly as in all businesses, that got of attention on the cost base. And to be very clear, on the end of -- implications of the end-of-life decision for the common SmartUtilities platform, all probable risks have been booked in the second quarter. And for everyone's information, TSU has had a negative impact of approximately 2% on Industry Software EBIT margin during 2019. We wanted to give a perspective on an annual basis as there is an -- there are elements of seasonality typically in software businesses. Financial Services Solutions organic growth, solid at 6%; adjusted EBIT, 11.8% level, not fully according to our longer-term ambition, given that there have been highly mindful growth investments in the Cards business to support new volumes. Organic growth was driven extensively by card services. And furthermore, we have recently announced a significant win with one of the largest financial institutions in the Nordics for a long-term agreement, specifically in the Cards business. And finally, our Product Development Services, organic growth of negative 2%. And this is the sector most impacted by COVID-19 at the level of negative 6% and visible very specifically in the automotive sector. Profitability development favorable from the prior year 7.6% level to 11.5%. And also very positive to see in the second quarter, especially towards the end of Q2, new customer acquisition actually proceeded well, both in the telecom and automotive sectors. So this would conclude overview and insight for the businesses. And now over to Tomi for the CFO report.
Thank you, Kimmo, and good morning, everyone. We implemented our new reportable segments in Q2, as earlier communicated. Last Friday, we released historical comparable information for 2019 and for Q1 2020. It's worth pointing out that the restated historical financials are based on comparable information with full consolidation of the group from January '19 and are not the official reported numbers of the company. I'm pleased with our Q2 performance with all businesses delivering good profitability and confirming our ability to mitigate the negative profit impact of COVID-19 at the current revenue impact level of minus 2%. Overall, delivering an improved profit at 11.7% during the period of fast-paced integration and COVID-19 uncertainties is a good achievement. During the second quarter, we booked large onetime items that allow us to derisk the integrated company and to support future competitiveness and our financial ambitions. I'll cover those in more detail later. Our integration has progressed well, and we have achieved EUR 45 million synergy run rate by end of Q2, and we expand the merger business case potential by increasing our merger efficiency target to EUR 100 million. During the first half of the year, we have experienced significant currency headwinds mainly from NOK and SEK. And assuming the same FX rate levels, the currency impact for the full year would be approximately EUR 80 million on revenue and approximately EUR 30 million on profit compared to 2019. With our new reporting structure implemented and good progress in the integration, we aim to keep the CMD prior to the year-end. As mentioned, we estimate the COVID-19 impact on Q2 revenue to be minus 2%, and that we were able to fully mitigate the negative margin impact. So in euro terms, our temporary cost base reduction was approximately EUR 13 million. This cost base reduction we achieved primarily from external costs relating to subcontactors, consultants, travel and office equipment, to name a few of the main categories. Cost base reductions from temporary layoffs was relatively minor, with less than 1% of the employee base on an FTE basis being impacted. This quarter demonstrated to us that our cost base is flexible and provides us a good opportunity to mitigate negative financial impact with different revenue decline scenarios. On financing and liquidity, we refinanced our bridge loan during Q2 with a EUR 300 million bond with 5-year tenure, completing our financing arrangements relating to the merger. 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 addition to our EUR 250 million corporate paper program. Currently, we have approximately EUR 40 million of corporate papers out, and the market is providing the required liquidity for us. On accounts receivable, we did not evidence any negative impact from COVID-19. On the contrary, our overdue receivables profile improved during Q2 compared to Q1. We have high relative exposure towards public and financial services sector as well as large corporations, which certainly improves our resilience in this area. We delivered a solid EUR 90 million of operative cash flow for the quarter. As mentioned, we did not experience any delays in receivables collection due to COVID-19. Our working capital decreased by EUR 58 million from Q1, driven primarily by lower receivables and increase in provisions. Capital expenditure was flat from Q1, amounting to EUR 23.3 million. The primary components being fixed assets relating to data center investments and in-house developed software relating to core banking platform development. We expect the overall CapEx run rate to be relatively stable throughout the year. As mentioned earlier, we booked large onetime items during 2020 to build a foundation for future performance. I'll start from the left column in the table. In Q2, onetime items amounted to EUR 90 million and consisted of integration cost of EUR 26 million, reflecting the good progress being made to deliver on the synergies. As you recall, the total integration costs are estimated to be between EUR 120 million and EUR 140 million. Secondly, IBM old contract-related write-offs amounted to EUR 12 million, which is in line with our earlier communication related to the IBM partnership renewal. EUR 41 million related to the decision to end-of-life the common TSU platform, out of which EUR 32 million relate to contract settlements and resource ramp down and EUR 9 million to write-off the previously capitalized asset. Last component of EUR 11 million relates to the amortization of PPA. Second column summarizes the OTIs for the first half of the year, which amount to EUR 118 million, with approximately EUR 25 million cash flow impact for the period. The second half of the year, which is the third column in the table, consists of integration costs, new IBM contract-related transition of services, and PPA amortization and amount to EUR 81 million to EUR 94 million. The fourth column summarizes the 2020 one-off items, which we estimate to be in the range of EUR 200 million to EUR 210 million and have a cash impact of EUR 105 million to EUR 115 million for 2020. In 2021, the onetime costs are estimated to be less than 50% of the '20 level with EUR 45 million to EUR 55 million of cash impact. As mentioned, we made good progress with merger integration, and as a result, achieved the EUR 45 million synergy run rate via the Q2, which allowed us to increase the estimated full year run rate to EUR 70 million to EUR 80 million from EUR 45 million to EUR 55 million. In addition, as mentioned, we increased the total synergy target to EUR 100 million. In light of the good progress being made, we increased our estimate of the onetime integration cost for the year to EUR 75 million to EUR 85 million, as shown in the earlier slide as well. As said before, we aim to take these benefits fully through the P&L. During Q2, we've taken significant steps to derisk the integrated company. I'll summarize the key points. We are delivering and expanding on the merger business case with EUR 45 million of run rate synergies being achieved already and increasing the target to EUR 100 million. On COVID-19, we have seen good resilience with minus 2% impact on top line and our ability to fully mitigate the negative profit impact at these revenue decline levels. We refinanced our bridge loan and with that completed our financing arrangements relating to the merger. Our liquidity situation is good, with undrawn EUR 250 million revolving credit facility and corporate paper market currently functioning well. The redefined IBM partnership enables service quality improvement and settlement of past disputes. From the profitability standpoint, it's profit neutral in adjusted EBIT in the short term from 12 to 18 months, and enable accretive financials for Cloud & Infra in the future. The decision to end-of-life common TSU platform concludes a multiyear investments and resulted in large onetime cost in Q2 as we booked all probable risks into our Q2 result. However, quite practically, it eliminates potential future profit leakage and will contribute to industry software profitability at TSU had, had a negative impact of approximately 2% on the Industry Software profit margin during 2019. Now back to you, Kimmo.
Thank you very much, Tomi. And now then towards the last chapter of our today's presentation, the performance drivers and overall summary. As usual, we'd like to be clear on the main components impacting our second half outlook. COVID-19, as recalled, we have -- we are keeping our full year estimate in the range of negative 2% to negative 5%. Profit impact, we have successfully been mitigating from cost savings, and we will continue cost-saving measures to be executed in the second half. Accelerating synergies, as shared during the dialogue -- so the full year synergy run rate increased to EUR 70 million to EUR 80 million level and the EUR 45 million run rate achieved, with approximately EUR 23 million contributing to the year 2020 adjusted EBIT. And maintaining, naturally, the perspective on negative currency impact estimated to be around EUR 80 million in revenues and approximately EUR 13 million in adjusted EBIT. Furthermore, as a bit reflective considerations on other operational drivers, we do believe we are entering the third quarter with healthy business momentum and significant risk mitigation, as shared during this session, has taken place during the second quarter. We will see a slight cost base increase fully, as anticipated, in Cloud & Infra due to the significant transition program underway. And as informed earlier, at the end of 2019, we do have an expiring customer contract gradually affecting volumes in the Cloud & Infra side and the negative impact of approximately 3% on the current Infra revenues. And overall, business momentum, as reflected upon as we enter second half, we feel is good. As a summary for our second quarter report, so we've had a very exciting, a demanding, and a good second quarter, we believe, clearly strengthening our view of our future. And I hope you feel we have opened up these 4 big components very transparently. These are very clear drivers for our future. As we have demonstrated resilience and solid operational execution, we believe we are also creating a solid and efficient high-quality in the future, also growth-oriented operational foundation. In terms of the integration, we are not just achieving, we are rather looking into further expanding our merger potential. And as we have had significant onetime items in the second quarter, and will have for the year 2020, we believe this will also -- these decisions will drive future profit expansion. And as we've been clear, we do expect significantly lower onetime items for the year 2021. And furthermore, also with the latest dividend decision, and in light of the full equation on the company's table, we do believe we'll have attractive future view for our shareholders. Thank you very much for this session. And now I think it's time to shift over to the Q&A.
[Operator Instructions] Our first question is from Daniel Djurberg from Handelsbanken.
Congrats to a solid Q2 and for giving us the details on the onetime items. My question is, first, on COVID-19. To me, you had better resilience in Digital Consulting than I thought, despite a low recurring percent of sales. You also comment that the pipeline is gaining ground in key markets within Digital Consulting. Can you comment a bit more on this? How this, first, is possible in terms of COVID-19? But also if you can give any ballpark numbers. Is it flattened or increasing or growing? Or anything would be helpful.
Sure. By the way, I didn't hear maybe the first 6 seconds, but I will -- I think I can estimate what the first 6 seconds were about. So let me please comment and let's -- please add if you want to ask further questions. So overall in the Digital Consulting domain, so organic growth of being negative 6%, it could be -- but I don't ever want to be overly optimistic on our performance. So it could be a bit lower. It could be a bit better than the average growth in the market because it -- the consulting market tends to be more impacted of the businesses we are in. But to be fair, this was very much in accordance what our own expectations has been in the midst of also the significant integration. I -- for the view on the futures, I think the audience well recognizes we do not give guidance on the next quarter specifically on the businesses. But of course, as always, I'll try to answer your perspective. So I think we need to be mindful that the COVID-19 uncertainty, which we all likely feel the same way, will probably -- this is one of the areas that will have more uncertainty moving ahead. Now there's some promising signals of the improving pipeline and the like, so things are possible to proceed, fine. I need to be humble and let's see what happens. Will we have a second wave or not? Then how does it impact macro and the decision by our customers?But overall, the whole integration of Digital Consulting in terms of the clarity of the businesses we are in, the investment shape up, the cost structure shape up, the integration, as a whole, also Digital Consulting is proceeding fairly fine.
Another question, if I may, would be on your comment that COVID-19 impact on sales was, I think, minus 2% on aggregate. Would it be possible to give any ballpark estimate on the net positive gain from the stop spend categories, the impact -- positive impact on OpEx from COVID-19, temporarily?
Yes. So as I reflected in my set, so roughly EUR 30 million was the temporary cost benefit that we were able to create in Q2.
Perfect. I missed that. And my last question would be on the SmartUtilities. You shut down the common platform. Can you comment on the impact or possibly negative impact on the growth potential for industry software ahead? I guess you had some positive thinking ahead of this, at least, for SmartUtilities. And also, if it impacts your project management or lesson learned from project management would be greater here.
So we tend to do kind of a, I would call it, typical portfolio planning in looking -- systemically looking into the growth opportunities and patterns of our businesses. We do that naturally in our industry, software as well. We have a number of alternatives. And if I may, this is a longer-term comment, not just a Q2 domains, which we have talked about very openly the last year. First of all, the whole domain of Financial Services, right, this is a separate unit nowadays. We have shared perspectives today also on the continued good momentum on the health care side. That is one rapidly moving industry sector where we are very active in. So I do not believe -- of course, a change is a change, but when we read the future signals of the market, I think we have good clusters of growth opportunities moving ahead.
Okay. Good luck, second half.
So comment on second -- sorry, what was your question on second half?
No, no. Good luck in the second half.
Okay. Thank you. Okay. I was ready for another question.
And our next question is from [ Michael Bates ] from [ TDS ].
Just in terms of the exceptionals or the increased savings envelope. Can you explain where the additional EUR 30 million is coming from relative to the original plan? That's my first question.
Yes, of course, good question. So of course, we look into both external and internal cost in all of our businesses and functions. We are building a cost structure for the integrated company, which needs to be competitive as the market is highly competitive. The raised target comes from all of these categories throughout the company.
But is it facilities? Is it people? Is it systems? Can you say anything on that?
Exactly. But nothing specific. All of the categories, as I mentioned.
Okay. And then on the Q1 call, you've talked about COVID having 200 to 500 basis point impact over the course of the year. Obviously, it's at the low end in Q2 itself. And I think you've said that was probably going to be the most acutest quarter. Did you stick with that sort of 2% to 5% impact for the year? Maybe I missed it, but I didn't see it repeated in the press release today.
Okay. So very good. So we did confirm that, that is how we maintain our perspective and estimate of the -- in our case of minus 2% to minus 5%. But let me add a bit of flavor to that one. So as we had 2% in the second quarter, currently, we are estimating that -- our own estimate, subject to will we have wave 2 or not, is that we'd likely see the highest impact in the third quarter and then likely, the big question mark, to all of us, not just TietoEVRY, is that what will happen in the fourth quarter. And if there is no wave 2, we think we can be on the lower end of the minus 2% to minus 5%. And let me also be very clear, so we have a firm view as a company that if and when we are at the lower end of the minus 2% to minus 5%, the cost saving activities will work very hard to offset that potential impact.
I thought you said, Kimmo, that, that sort of demand was picking up exiting the quarter. So why would Q3 have a bigger drag effect on sales?
So overall, so the fact that we are seeing the pipeline increasing in certain businesses -- so that just -- to me, that's a very relevant market reflection. But Michael, as you know, the sales cycle in the sector are pretty long.
Okay. So there's an air pocket in Q3? And then hopefully, that business comes in, in Q4?
Yes. Yes. So the decision -- okay, just to try to be very clear of our view. So when we look at the impact of COVID-19 into customers' decision-making, the delays, the prolongation is very practical in the cases we see. And with this in mind, we are experiencing that there's an element of slowdown that will move into the third quarter. But then let's see what happens in the fourth quarter. But I also wanted to reflect that we are working on simultaneously building the pipeline.
Okay. And then just my final one is on the SmartUtilities business. I mean the cost of EUR 32 million to wind down with customers seems very large. Is there sort of penalty clauses in that? How long will that take to be executed because it's presumably a cash cost as well?
Indeed. So that is naturally an area that we cannot fully open up externally the details. But of course, we will be as open as we can. So very practically, that -- when this has been a multiyear program between customers and ourselves, so there are elements that are driven by the contractual commitments and then naturally winding down the unit itself. So it is a combination of these factors.
And as I mentioned in my section. Sorry, to add on Kimmo's comments, so the cash flow you should assume most of it to exist in the H2 period, as visible in our cash flow impact estimate as well.
Okay. And then just finally, sort of related to that, I mean, how do you feel about R&D capitalization? So you've had to write-off EUR 9 million related to this project. I think when you bought EVRY, they had over EUR 130 million of capitalized R&D on their balance sheet. What does that -- does that mainly relate to the big core banking system? And where are you on developing that and bringing it to market? Is there a risk there could be more write-downs of projects in the future?
Thank you, Michael. So indeed, the largest investment in that -- in these terms, indeed, is the core and payments renewal. And naturally, that is being safeguarded carefully. That program in itself is making good progress with clear customer commitments. And as you would expect, we have done reviews of the contractual structures given the challenges we had overall in the TSU. And in this area, and also to be very open, there is a principle of one standard solution in the contractual terms of the core and payment renewal program. And so far, the program is well on schedule.
And our next question is from Panu Laitinmäki from Danske Bank.
I have a couple of questions. Firstly, to continue with the capitalized R&D topic, so the capitalized R&D was up quite a bit in the second quarter, in the first half. Was it mainly due to the EVRY acquisition? Meaning that EVRY used to capitalize more than you did? Or was the kind of underlying figure up year-on-year?
So conceptually, Panu, there is no change in the capitals to R&D. We're running the same level. So the difference would be that there is an ex-Tieto and ex-EVRY side. And as a combined CapEx software R&D, we're at the same level.
All right. And then secondly on this SmartUtilities, just to clarify, you say that it used to burden the Industry Software margin by 2 percentage points, which kind of translates to roughly EUR 10 million loss. Does this kind of disappear now, starting from the second half or next year? Or how should we think about the kind of profit impact from this change?
Exactly as you said. That would disappear, that minus 2%.
In the second half already?
Yes. Confirming your statement.
Okay. Great. And then just finally on this costs and kind of a good Q2. Just to clarify one thing, did you say that the temporary cost savings were EUR 13 million, 1-3, in Q2?
Yes, reflecting the minus 2% of top line change. Of [indiscernible].
Okay. And then, kind of how temporary are these? Are you kind of able to continue this for the remainder of year? Or was it kind of Q2-specific? I mean was it so that -- well, yes, how sustainable do you think this cost level is?
So we are able to -- as I commented, our cost base is flexible, and we will be able to continue this while we see the negative COVID impact. So we are increasing and adjusting this continuously to mitigate the COVID impact.
[Operator Instructions] Our next question is from Christoffer Bjørnsen from DNB Markets.
So just wanted to touch a bit on the increased targets for synergies. So don't -- I know you don't want to guide on the future. But going into, for instance, next year, you're now talking about significantly higher anticipated run rate when exiting 2020. But still it seems like consensus is not expecting any significant increase in your adjusted EBIT from kind of the pro forma level in 2019 even in 2021 for the combined companies. Could you just give me kind of an explanation or any way you see why that net -- that shouldn't be a net number, the synergies that you are to realize in 2021? Why we shouldn't see that kind of EUR 70 million to EUR 80 million improvement in the pro forma EBIT from 2019? Is there anything I'm missing in terms of negative things going on?
I think from the company's perspective, which is obviously the only angle I can answer this question, I would hope that our run rate already achieved of EUR 45 million by end of Q2, would build confidence to the realization of the EUR 70 million towards the year-end and the overall target of EUR 100 million.
And our next question is from Matti Riikonen from Carnegie.
A couple of questions. First, about the SmartUtilities, the decision to basically discontinue the development. Now you have been talking about the reduced costs related to that, but what kind of revenue potential are you missing when you discontinue that project? What's the kind of upside that you have been expecting? Naturally, I'm assuming that since you have taken quite a lot of cost in developing the software, you had some top line expectations as well. So what kind of level are we talking about as the revenue potential?
So we are not, as Matti you know, we are not opening up the revenues of each one of the solution areas of IAS. So I think a couple of factors, if I may, probably most important that when we look at the IAS portfolio, and I referred a bit to the portfolio planning, we expect to be in businesses where we actually have ample growth opportunity, and we can scale and deliver profits. So I think the accretiveness -- that this results in the accretiveness from a standpoint that, yes, we'll have a portfolio of healthy growth businesses, and we will not have profit leakage due to TSU. And we'll come back on the growth potential of IAS very likely than in our CMD. But the software businesses, overall, in the market, are growing faster than the other IT services side. So this should not change our growth profile in the software businesses. I think as a combined company, I think that will be very interesting when we talk of the potential of the software businesses as the integration proceeds, as an example, on the FSS side. So no, I don't think it will reduce the growth opportunity of software businesses.
All right. Then second question is related to the IBM agreement and the continuation after the decision to basically in-source that part of the business. On Slide 23 in the presentation, you showed some of the costs or one-off costs that are related to that. So my question is that, when you talk about the IBM transition of services and the EUR 17 million for second half, what does that number represent? Where does it come from?
So very practically, the transition of services talks about the -- what is being kind of a moving back the combination of personnel and the total asset base that we take over of being retaking the responsibility for the full service delivery from IBM for the -- which is really the non -- primarily the nonmainframe part. And there is actually a mainframe component specifically in the second half of the year as well. So it's just very practically taking over those responsibilities that we can be in full charge of that service delivery to customers.
So if I understand correctly, it includes hardware and then also some personnel costs related to running the service, right?
Mostly, that, yes.
Yes.
Okay. And then when the contract with IBM is starting on the new basis, so that IBM still continues to deliver some services to you, but you're basically in-sourcing the bulk of that earlier agreement. Those costs that you will incur are then part of your normal operating costs going forward, I assume, because you are using your internal resources to basically deliver the service to customers. Is that right?
Yes.
Okay. So what is the difference between -- I mean, when IBM delivered the service, the costs were kind of marked as onetime items. And now when you are in-sourcing the same service, it's kind of internal costs, and you're reporting it as normal cost. So I fail to understand that -- why it was written as onetime items throughout the earlier contract, but then when it's in-sourced, it's no longer a onetime item, so it's a normal cost. So could you just clarify the thinking? Why has it been treated as a onetime item during average time and during now, your time for the second -- first half and then coming back to normal in the latter phase?
Okay. So very good point, Matti. So if I take the latter part, meaning the whole, why are we -- how are we running it now? If I may, that's for us most important, that this is how we deliver value. So what's very important that when we look at the full -- this is a bit technical, but it's a great question you have. So the significance of trust creation and high-quality is the most important factor in the Cloud & Infra business. If that is not done, you do not gain revenues, you lose add-on revenues, and you cannot deliver profit. We follow the path we did, Matti, you will remember from the ex-Tieto side, on the Hybrid Infra side, to make sure we consolidate the architectures, we follow standard service processes, standard tooling and we are able to increase the efficiency of all services in Cloud & Infra. This is why it's important that we take it into our normal operations that we can consolidate the critical mass of TietoEVRY in the cloud and infrastructure business. And that is our ambition is to have similar development as in the Hybrid Infrastructure side. So with this in mind, we feel this is by far the best way to run the business from June onwards, as we announced in June.
Yes. And for the ex-EVRY accounting policies -- principles being applied, I don't want to comment these. I think how we treat it now is very clear, transparent and understandable.
Yes. I totally agree. From now on, it will be very transparent, and it looks like a normal cost item, as it should be.
[Operator Instructions] Our next question is from George Webb from Morgan Stanley.
A couple of questions. So maybe on the first one around the merger. So clearly, you've increased the synergy target by quite a significant amount. The nonrecurring implementation cost expectation range is still unchanged. So is that because your initial synergy expectation was on the conservative side? Or is there anything else to consider around that -- around why that nonrecurring cost is at the same level as it was before?
So if I comment briefly, very good point. First of all, I think we commented in prior quarters as well that naturally, we'll be aiming at the lower end of the EUR 120 million to EUR 140 million. So I think we have been adequate prudency in our considerations. And naturally, the more we discover on the synergy potential, that's also a very natural outcome for us as we have these discoveries and drive the price competitiveness of the firm that we've been able to increase the synergy outlook.
That makes sense. And then just around the second quarter. If you were to split the business, if you can, between public and private, was there a significant difference in your growth rate during the quarter?
Sorry, did you say public and private industries? Can you repeat the question? Sorry, the line broke a bit.
Yes, sure. I mean if you just split your business into kind of a public sector versus private sector, how would the growth rates differ to the second quarter?
Well, okay. If I think just a bit background. I do the calculation in my mind to answer you. So as a background, we have a combination of Financial Services and Public, Health Care slightly over 50% of the company. So this was the reason also how -- why Tomi a bit reflected upon this, that part of the resilience also comes from the sectors we serve that those sectors tend to be also, in today's world, at least, a bit more resilient. Now with that in mind, I do believe the public sector of the business is somewhere between 25% and 30%.
And our next question is from [ Michael Bates ] from [ TDS ].
Yes. Just a follow-up from me. Tomi, on that EUR 13 million of cost savings attributable to COVID, I assume you're talking about staff on furlough or short-term working. Is that what's caused it? Or is it also sort of lower travel and marketing? And can you maybe say how many employees today are on sort of short-term leave or furlough?
Yes, sure. So I can repeat what I actually said on the employees. So less than 1% of the -- on an FTE basis are impacted. And I think the COVID...
[indiscernible] But if I comment the whole EUR 13 million, which Tomi briefly touched on earlier, so this is a number of, for us, a very clear set of decisions taken. One is the subcontracting, any third-party personnel. It's the whole travel, it's all miscellaneous expenses, and it's a temporary layoff category. So there's a larger momentum we've seen that it's not just the management looking for ways of saving. I think the employees care enough that we've seen a lot of momentum of ideation, in a good way, much more broader than we may have thought originally.
And there's been some comments about people working from home more structurally going forward. I know you have a very large and lovely building in Helsinki, which is quite expensive to run. I mean can you talk a little bit about whether you think there are -- this is part of your savings envelope that you've expanded today around sort of lower infrastructure costs, more people working from home? Or just expand on that topic.
So to be fair, so in terms of -- 2 reflections on that one or 2 answers.So one is that I break that into integration and then into COVID. So part of integration, as one would expect, we are looking into, of course, which we've been also open ever since the merger announcement a year ago, naturally, we'll be looking into optimizing facilities. And that work is ongoing very much as expected. And those are longer-term savings, by the way, that category. And then we are also in the midst of rethinking that back to work. Exactly what does that mean? We are seeing very significant part of our employees actually feeling that productivity has improved and wellbeing has improved during this period of working from home or the remote ways of working. So we are conducting also dialogue with the employees on their preferences for the future. And no, we have not yet made decisions on exactly what will the capacity of offices look like in the future, but we'll be doing that as well.
Okay. And then just finally, there's normally a question on cash flow, normally because the cash flow is not very good, but very good numbers today. Tomi, can you say something about -- especially the receivables coming down? Were there any sort of unusual effect? Is this catch-up from Q1? Or is there something more structural that makes you feel better about cash flow in the second half?
Good question. And of course, I try to understand that every day and look through the COVID lenses as well. So we have periodic changes in the AR levels, and there was nothing particular in here. I guess if anything, it was surprising that there was no impact, in my eyes, from the COVID at -- for the levels that we achieved.
And do you feel cash in the second half, exceptionals apart, can sort of carry on this sort of cadence or conversion rates or whatever we saw in the first half is sustainable in the second half?
I think it's good to note now that second half cash flows will be impacted by this onetime -- larger onetime items, and we've tried to, therefore as well transparently articulate what we think the cash flow impact is. And as I showed in my slide, EUR 105 million to EUR 115 million from these onetime items, and it's primarily in the second half.
But apart from that, the underlying business should have good cash?
Exactly.
And our next question is from Christoffer Bjørnsen from DNB Markets.
Just a follow-up on the questions regarding the onetime items. So I just wanted to ask you to clarify that what you're saying is not that you are reporting these items in a different way than they were reported before, but you are saying that they are basically coming down. So you're seeing onetime items coming down next year. You're not saying that you are taking things that EVRY reported as onetime items and then you are just saying that these are normal recurring items, just to be completely clear?
To be completely clear, I confirm your statement. So there's no accounting treatment change involved. It's just a lower level in '21.
And our next question is from Sami Sarkamies from Nordea Markets.
We did touch this earlier, but I have still 2 questions related to your estimate on full year top line impact from COVID-19. Firstly, you did not revised the estimate despite solid Q2. Have we become slightly more positive as indicated by your comment earlier that assuming no second wave, we could be closer to the lower end of the range? And then secondly, can you confirm that this is only the COVID-19 impact? And if we assume some market growth, excluding COVID-19, lower end of the range could actually translate to the sales this year, obviously, assuming no second waves during second half of the year?
Okay. So I hope I have a very clear response to you. So indeed, as commented earlier, we maintain our full view. Kind of likely, similar to many other companies that so much is uncertain about second half, so we maintain minus 2% to minus 5%. We were also trying to be open. Yes, we anticipate Q3 to be a bit higher impact than Q2. And in case of no second wave anticipation for us, to be fair, like many other companies that the impact could be clearly less in the fourth quarter. With that in mind, we could be in the lower end of the minus 2% to minus 5% for the full year. And if and when we would be in the lower end, we believe that offsetting activities will continue and mitigate well. On your second point, I would like to remind, kindly, as we had commented, this is a year of integration so we cannot have similar growth ambition as in a normal year. So that should be accounted for.
And as there are no further questions, I will hand right back to the speakers for any final comments.
Okay. With all this in mind, thank you very much for joining. And I hope you feel we had a super exciting second quarter, and we are sure it will continue second half, and we hope to deliver good results also for the remaining part of the year. Thank you very much for joining.
Thank you.