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Good morning, and welcome to Tietoevry's Fourth Quarter and Full Year 2022 Earnings Webcast. My name is Tommi Jarvenpaa, the Head of Tietoevry's Investor Relations. Our performance in the fourth quarter was very good with strong growth and profitability. For the full year, our growth accelerated and overall financial performance was solid. Next, our President and CEO, Kimmo Alkio, together with our CFO, Tomi Hyrylainen will go through the highlights and results of the quarter and the year 2022. Kimmo, please go ahead.
Thank you very much, Tommi, a very warm welcome also on my behalf to our Q4 results announcement. What an exciting end of year and full year 2022 we have had. The main developments in the year consists of our new strategy and operating model implementation. As of January, a year ago, the announcement of 2 significant strategic reviews and furthermore, concluding the year with the strongest quarterly performance to date, thus glad to share many of the drivers and factors behind. Fourth quarter overall strong growth and profitability with the revenue growth of 9%, driven by 2 of our software businesses, Banking and Care, as well as the digital engineering business Create. Overall favorable development in profitability, EBITDA margin adjusted at 15.4%, driven by the growth driver -- growth factors and naturally the performance improvement programs we have had in place. Also to confirm the strategic reviews of Tietoevry Banking and the combined Tietoevry Transform and Connect are all progressing according to our original plans. And furthermore, the dividend proposal by the Board of Directors, EUR 1.45. What an exciting and transformational year we have had, rigidly taking Tietoevry forward. I'd like to highlight a couple of the main developments throughout the full fiscal year as we launched '22 with the new strategy of driving value and competitiveness through our specialized businesses and glad to comment in the totality of the year that all 6 specialized businesses got up and running successfully quite early in the fiscal year 2022. Growth agenda has started to solidly materialize. We now have 5 consecutive quarters of accelerating growth. Furthermore, as any of our peer companies, high attention of drive for efficiency, offsetting the era of high inflation naturally has been high in the management agenda. Furthermore, we are very pleased to see continued very positive development in employee engagement, actually record results and have continued and actually elevated new talent attraction throughout the year. And I would like to naturally confirm that we have continued very high focus on the safety and well-being of our Ukrainian colleagues as we have approximately 2,200 colleagues in Ukraine. Furthermore, in terms of the full financial performance for the fiscal year; revenue growth of 6%, adjusted EBITDA of EUR 379 million, 13%. Order backlog EUR 3.3 billion, plus 6% for fiscal year '23 and net debt EBITDA at the end of the year, 1.5x. Overall we believe that this growth acceleration, mindfulness and efficiency, all driving a strong financial position and a very good foundation in continuing the transformation agenda of the company. The year also consists of very important and inspiring customer wins in our specialized businesses. In digital engineering, we have gained footprint of very significant brand names and opening up new revenue streams, as an example, in the automotive and highly advanced infotainment solution areas, digital engineering overall, taking advantage of the potential of the larger development in cloud native and data in the broader international and global market arena. In terms of our software and platforms, consisting of the Banking, the Care and Industry, the common denominator being the great deal of advancement in the SaaSification scalability and data orientation for further competitiveness and success visible across all our businesses. The one I would like to highlight in the area of the Care solutions, data-led integrations, data-led solutions, actually integrating patient experience across a multitude of traditional IT systems and directly increasing the efficiency for the hospital staff, the doctors and nurses. SaaSification data enablement, highly advantageous in terms of competitiveness. Furthermore, in managed service and transformation, important new multiyear contracts, both with totally new customers and expanding the wallet share within our installed base, but favorable development in terms of customer acquisition in all businesses. The other point from a nonfinancial standpoint, I would like to highlight is our focus and commitment to sustainability, which has been rewarded with the highest market recognitions as an outcome of our multiyear focus on sustainability. We have seen 70% reduction in Scope 1 and 2 greenhouse gas emissions compared to 2020. Very important, 95% green electricity used in our datacenters and offices globally. And we've seen 2 percentage point uptake on the share of female employees, up to 31% and in aggregate, all gaining positive market recognitions, including the commitment to science-based targets. The best A-class results on the Carbon Disclosure Project, the CDP project, and also the Ecovadis recognition as very important in terms of the gender balance and diversity agenda for the company. It has been a very important part of our agenda and will continue to be. Let us next go into the actual financials and business drivers. In aggregate, Tietoevry, I've highlighted some of the numbers already, so no repetition. Growth of the -- organic growth for fourth quarter being the 9%, reported 3.5%, naturally impacted by the currency and the divestment, and we always emphasize the organic drivers. And the main drivers, as earlier mentioned, being the software businesses and Create and adjusted EBITDA for the quarter, EUR 118 million, 15.4%, healthy cash flow and order backlog, as commented early on, all providing a nice foundation into '23. Then let us go through for business, Tietoevry Create. So this is a business that I briefly commented earlier, taking advantage of the growth opportunities in the international markets, successfully driving organic growth of 11% and success being in the international markets and Norway. And this business overall continues to develop favorably. We see continuous growth opportunities, opportunities for expanding market reach, and we believe we are playing in exactly the right type of market segments, further building more and more advanced capabilities and the total staff in the areas of cloud native data and highly advanced software engineering as an example, in the areas of automotive and infotainment. Furthermore, as a forward-looking consideration, we anticipate the first quarter '23 adjusted operating margin to be at or above the comparable quarter a year ago. So overall, good development for Create in the fourth quarter and it continued. Next we'll go into Tietoevry Banking, delivering strong organic growth of 15% and profitability of 17.8%. And on a positive footing, furthermore, good performance across the full portfolio of our banking business, covering payments, cards, core banking, financial crime prevention, credit and wealth. I do want to highlight that the underlying growth being 11% and underlying profitability slightly over 14% in light of 4 percentage point impact of onetime licenses taking place in the fourth quarter. And the profitability development has been high on the agenda. This has been driven naturally by the growth agenda and very tangible efficiency measures that have existed throughout the fiscal year 2022. And furthermore, we anticipate the Q1 '23 adjusted operating margin to be above Q1 '22 level. Then into our other software business, Tietoevry Care. Organic growth of 14% and continued good profitability at slightly over 32%. And also in the Care business, we have seen favorable development across the full portfolio, health care, welfare and customer solutions plus laboratory. And specifically, in the fourth quarter, we saw positive progress in health care, data-led solutions and also incorporating further renewal and software upgrades, specifically in the health care domain. With these considerations in mind, we anticipate the Q1 adjusted operating margin to be at or above Q1 2022 level. Next into Tietoevry Industry, the business that consists a number of software suites, and we saw continued fair performance, growth of 3%. We still have the 3 percentage point impact on growth, which existed throughout '22. So organic growth in terms of the 3%, naturally not quite at the level that our long-term ambition, while very fair business also in terms of profitability, 18%. And during the quarter, further acceleration, specifically in the Pulp & Paper division and in Education and consistent drive on the profitability side. And with this -- in this business, we anticipate the adjusted operating margin to be at the level of Q1 '22. Next into Tietoevry Transform. Here, we have seen favorable development according to our expectation in the fourth quarter, reaching organic growth of 16%. And as a result of high attention on the efficiency program, adjusted EBITDA reaching 11.5% level. And within the business mix, we have seen specific advancement positively in the Industry & Forest division, while decline in the Retail & Financial Services. I would also like to highlight that Tietoevry Transform was able to achieve strong order intake in the fourth quarter with new multiyear contracts, adding to the longer-term prospective opportunities of the business. We anticipate the Q1 '23 adjusted operating margin to be at or above Q1 '22 level. Next into Tietoevry Connect, organic growth of negative 3% and profitability of 8.4% level, very similar development in the business mix and business dynamics as we've seen in prior quarters. In the modern scalable Cloud Platform and Security Services growing 11%, while the traditional infrastructure services, still a lion's share of the business, declining by 9%, continuing to confirm the rapid transformation to multi-cloud services from legacy environments. The profitability naturally impacted by the negative growth and overall high inflation, including technology costs while supported the profitability being from the performance improvement program with high attention and solid achievement throughout 2022. Regarding Q1 '23, we anticipate the adjusted operating margin to be at the level of Q1 '22. So this would conclude the overviews of the businesses. Overall a good constructive positive development in terms of execution. Next I would like to confirm the state of the strategic reviews. And naturally, as both have been announced with the objective of accelerating value creation, both are progressing as planned. A few words on each one. In the case of Tietoevry Banking, we are on schedule. We have 3 main stages in the implementation and in the project leadership, first part being the carve-out and public company readiness. Second one, evaluation of transaction alternatives, including the legal and financial considerations and the listing venues, and furthermore, actually moving towards the implementation. Main focus has been on the carve-out and public company readiness and very importantly, the nomination of Klaus Andersen, and he started already on the 1st of February. And we'll naturally be commenting also the Banking strategic review in due course as progress is being made. Then briefly on the Transform % Connect strategic review, also on schedule, high degree of attention has been in the initially late Q4 on integration planning, early Q1, actually progressing with the integration and progressing with the nomination being very important. And we announced a couple of days ago, the appointment of Satu Kiiskinen as the Managing Director for the combined business, which we will be calling Tietoevry Tech Services, effective as of April 1st and to confirm both businesses operate as is throughout the first quarter. Also in the case of the strategic review for Transform & Connect, we shall be sharing updates as progress is being made. With this in mind, I'd like to turn over to Tomi.
Thank you, Kimmo, and good morning, everyone. I'm pleased with our Q4 performance overall. As mentioned, we delivered strong organic growth of 9% driven by Tietoevry Create, Banking, and Care. Our adjusted operating margin was also strong at 15.4% or EUR 118 million, supported by the strong growth and performance improvement programs. Our reported operating profit was EUR 103 million or 13.4%, which is higher than prior year level when taking into account the EUR 33 million of capital gains in '21 Q4. I'll comment cash flow and net debt on the next slide. Our order backlog was EUR 3.3 billion, which is organically 2% down compared to prior year. However, our FY '23 backlog is 6 percentage points stronger, supporting our '23 growth ambition. Our CapEx was EUR 24.3 million, which is a very normal level of around 3% of revenues. And our onetime items for Q4 were EUR 3.5 million and for the full year, 2.25%, which is in line with our expectations. FX revenue headwind was quite significant, minus EUR 32 million. We delivered solid Q4 operating cash flow of EUR 166 million, which is at the same level as prior year. Our working capital change in Q4 was quite normal with normal seasonality. However, as the year ended on a Saturday, we did have somewhat higher AR levels than normal at year-end. When we compare net working capital to prior year, we are at higher level, which is impacted by the strong growth, primarily visible in the AR levels and decrease in AP, accounts payable, which is by nature volatile. And at the end of '21, we had significantly high AP levels. We expect the current net working capital level to be fully sustainable with some improvement potential. Our net debt to EBITDA, as mentioned, 1.5x, and interest-bearing net debt, EUR 679 million. Overall the company is in a very strong financial position. Our attrition continued to decrease. Our rolling 12-month attrition was 14.4% compared to 15.3% at the end of Q3. Our personnel over the year increased 250 FTEs, which was driven by high talent attraction, as mentioned, with 4,800 new hires. Looking into business-specific changes, Tietoevry Create increased its personnel based by 450 employees, i.e., around 5%, allowing us to deliver the good growth numbers that we are seeing. The Q4 recruitment base in Tietoevry Create was slower to address the decrease in attrition and the high level of recruitment during Q3 of the graduates. During Q1, we expect to be back on higher recruitment levels. Similarly, Tietoevry Create increased, Care increased employee base by 150 employees, around 10%. And on the other hand, Tietoevry Connect reduced its employee base by 250 personnel, around 5%, while increasing offshoring ratio by 8 percentage points to 52%. Also Tietoevry Transform reduced its employee base by around 4%. Salary inflation in '22 was around 4%, and we expect slight increase into '23 of 4% to 5%. And the majority of the impact will be already visible in the Q2 results consistent with prior year. Next I'll summarize the Q1 performance drivers. We expect good momentum to continue in Tietoevry Create, Banking, and Care. We will continue to see a decline in traditional infrastructure services driven by acceleration of cloud transformation. And during Q1, we start to see price increases gradually taking effect supporting our performance. On the profit drivers, we expect continued high inflation, which creates demanding agenda for all market participants to maintain and expand margins. We see particularly high-cost inflation in technology costs impacting especially Tietoevry Connect and Banking businesses. And as usual, annual customer price discounts become effective in January, impacting Tietoevry Connect and Transform. On a positive note, we have tailwind from the performance improvement programs that we have executed during 2022. We will continue to see negative FX headwind estimated at minus EUR 23 million on revenue and positive impact from the working days of 0.8% on growth. Back to you, Kimmo.
Thank you, Tomi. And let us -- next, let's move into considerations of the future. And I would like to begin by our perspective of the market drivers and the type of considerations on implications towards our business. We see a high degree of consistency in the market dynamics. I would still like to go through these actually carefully. First of all, the market continues with high inflation and geopolitical uncertainty. That's pretty much very clear likely in terms of any tech company in the world and any enterprise, so no real change. Customer focus on resilience, efficiency, and business continuity, so here we see slightly new dynamics, customers prioritizing investments based on their priorities per business area, continued attention, high attention, efficiency and business continuity, which has been there before, as an example, the higher importance on security. So resilience being slightly higher driver in terms of the customers' agenda than in prior eras. Diligent spending from customers, focus on fast returns. As an example, objectives for data-enabled product release cycles on much faster cycle time than we may have seen before, which again actually can turn into an opportunity for us. The fourth one I would like to highlight is the continued high demand and even accelerated demand for cloud data and security services. So customers' willingness and need to improve their own competitiveness calls for further investments, specifically into these capabilities and technology areas. And our perspective being that the talent market is expected to stabilize from a heated 2022, and we have seen signals of that already towards the end of last year. So with these considerations in mind, the implications towards our industry and our business, software, and digital engineering services, we believe, will experience an active market, and it is a clear growth driver for Tietoevry. Outsourcing to accelerate with high expectation on efficiency and cloud transformation with the background of necessity of reducing the run cost of any enterprise. Faster decline and price erosion in traditional services, again, to reduce run costs, being able to actually drive, shift, and transform towards the modern multi-cloud services. So we anticipate this momentum to continue. Demanding agenda overall for service providers to maintain and accelerate margins. This is a bit an industry-wide commentary, given the era of high inflation, including the related technology cost. And we anticipate, as commented, normalizing attrition levels and slight improvement in talent availability. So our overarching consideration, again, being that the market, we do not believe would be any -- that would be a hindrance to actually execute what we believe important strategically and operationally. With these considerations in mind, we would like to confirm our guidance for '23. We expect organic growth to be 5% to 7%, and we expect our full year adjusted operating margin to be between 13.0% and 13.5%. I would like to further highlight the main drivers behind our thinking. As earlier commented, active market, clear pockets of growth and further opportunities, we believe, do exist. We have a strong order backlog for '23 and these do support our continued growth ambition. We anticipate good momentum to continue in the areas of software and digital engineering businesses fully according to our strategy. We do anticipate the cloud transformation to accelerate and continue to impact traditional services. And we naturally anticipate the high inflation era also to continue, very important to have the mitigation actions through both price increases and continuing high attention on productivity improvements. Based on our good '22 results and the operational foundation, I would like to also confirm our way forward, building further on our specialization-based strategy. We drive profitable growth in software and digital engineering businesses. We rigidly take forward our strategic reviews of Tietoevry Banking and the combination of Tietoevry Transform & Connect to be driving value acceleration for shareholders. We shall have emphasis on efficiency, price increases and productivity in this era of high inflation, and we also build a great place to be for tech professionals, building on the really strong foundation on engagement we have been able to achieve. So this would summarize our fourth quarter report and some reflections on the full year 2022. So this would be an opportune time for the Q&A.
Thank you, Kimmo, and thank you, Tomi. Operator, we are now ready for the questions.
[Operator Instructions] The next question comes from Daniel Djurberg from Handelsbanken.
Big congrats to solid numbers and also the progress with the strategic reviews. I have a couple of questions, if I may, starting off with the -- perhaps the number of billable hours, it is a little bit of a tailwind here in Q1. But then we see quite of a headwind, I guess, mostly for Create. Can you Tomi perhaps give us the implication for the full year or for Q2 to Q4 with regards to the headwinds, so we can do this correct in our numbers?
Daniel, were you asking '22 Q2?
Yes, 2023 billable hours Q2, Q3, Q4 compared to 2022, more or less.
Yes. So when you ask billable hours, of course, the foundation is to Create businesses in it what you're talking about. And there, of course, the driver is the capacity increase, which are reflected. We did have over the year, 5% for '22. Now we intend to increase the level of billable hours going forward naturally. Now what you see in the Q4 of 2022 was a small decline in the number of FTEs, i.e., billable hours, improving our productivity and therefore, also delivering somewhat higher profit for the Q4. But we intend to, as I mentioned, build up the capacity during Q1 and towards the end of the year. The SKU is kind of similar for '23 as we saw in '22, likely in terms of the buildup of the capacity.
Sorry, Tomi, I meant actually workable time, i.e., a number of working days or working hours not available hours.
Okay. Now I can't remember exactly the working days for '23 per quarter, but I can get back to you on that.
Another question, if I may, would be a little bit on the salary inflation that you do expect here of 4% to 5%. Obviously, in normal cases, that would be a quite high number. But if you look back in '22, you mentioned that you roughly had 4% salary inflation. And now we have quite -- seen quite hefty cost inflation overall in especially the second half of 2022. So my question is really how comfortable are you with this 45% given that we do have a lot of these processes ongoing right now in Sweden, for example, here? Just to understand how you get to the 45%.
Yes. That's a very good question, Daniel. And of course, there are assumptions behind that number. So the drivers at a high level are that, yes, in the Nordics, we will be seeing higher salary raises than what we saw in 2022. And we've seen this with the union processes already ending in Finland and now in Sweden. So that is a fact. Now the balancing is coming from the, let's say, the onshore/offshore countries, India and the likes where this attrition comes down, the decline we already reported and saw in Q4. That will ease up a bit the pain of the salary inflation in these countries. So it's kind of a balancing act, but we see the net coming out a bit higher.
And if I may, perhaps to Kimmo, on the care side, very nice margins. They're obviously impressive. I was thinking if you could give a little bit of, perhaps a bit detailed question on the -- I believe there's ongoing procurement in Region Stockholm and Gotland, for example, currently you see?
So we cannot comment right on very specific customer engagement. So I cannot comment, of course, we anticipate, of course, to be active across the Nordic countries. So but cannot comment customer-specific details.
The next question comes from Aditya Buddhavarapu from Bank of America.
Just a couple from me. So firstly, on the outlook for 2023, 5% to 7% organic growth. Can you talk about whether the assumption there in terms of the macro? And then if you tend to see the macro situation being better than expected, how much of that is built into your guidance? Second question on the -- again, on the outlook for 1Q, you've given us some color on the margins for each segment. Can you also talk about the organic growth outlook for the different segments in 1Q? And then finally, on the free cash flow, that's been impacted by the working capital during 2022. You said there's some scope for improvement in '23. But how should we think about the overall free cash flow generation in '23 and then that sort of working capital dynamic?
Yes. Thank you. So first of all, on the macro, I slightly touched on it earlier. We are also mindful of course, any type of assessments and new flavors. We -- currently, our read is that the implications of the macro in the -- of course, everybody reads the same signals of higher interest rates, to high inflation. Of course, the point is about the implications to customer behavior. So we do see firmly continued attractive development in terms of customer investments into areas which increase their competitiveness. That means investments into cloud and data, cloud native apps as an example, data management, data platforms towards machine learning and even more towards AI. So -- and you could -- and one could put security in that category as well. So these implications. And then, of course, time will tell how actively customers start to consider kind of driving further cutting or efficiencies in the run cost, which would -- which can accelerate the transition from traditional infrastructure to the cloud areas. But overarching, I think our market perspective is that it shall be relatively stable. That's the feedback we are getting from our clients in terms of their investment agenda. Maybe final commentary on this one, of course, we are being likely as mindful as any company on any other potential on sudden changes. But that would be our current perspective on how we believe the year is starting. Q1 growth. So we are -- so our practice is that we aim to provide a perspective, kind of softer guidance in terms of profit, but we do not have a practice of giving full guidance also in terms of the business-specific revenues. I'm a bit hopeful that people have a good read on what is the type of trajectory we have in the businesses. If we combine how we did in '22, which businesses have grown over the quarters, how we set the ambition at the Capital Markets Day and with the whole consideration that as a managed leadership philosophy in the company, we expect every business, every function to improve performance on every fiscal year. So those would be maybe some of my -- a bit higher level reflections on that point.
Free cash flow, naturally, as I mentioned, we do expect better cash conversion coming into '23. It is driven by the working capital improvement compared to our performance during '22.
The next question comes from Sami Sarkamies from Danske Bank.
I have 3. Let's take them one by one. The first one relates to your '23 outlook. Would you be able to comment how you expect the year to unfold in terms of growth and margin improvement? Are you expecting the year to be front-loaded regarding both aspects?
So maybe I'll comment briefly. So I believe that as everybody kind of have a good perspective on our business mix, what is typically our in this industry. And for us that in terms of the managed services, the annual price discounts kick in every year in Q1, that kind of brings in a type of kind of a dynamic in the development between first and second half. But Tomi, I don't know if you want to add anything else any more…
Yes. So the margin profile, it's kind of similar now Sami what we saw in '22. So we see the high salary inflation coming into impact in Q2. Then going into Q3, we start to see the benefits from the vacation accruals for our recurring business. So I see a relatively similar curve. Of course, we don't guide specifically how it will turn out. And then the growth, I mean, when you look at how we deliver growth, it's been quite consistent over the year, how we deliver the full year growth. So -- but I wouldn't sort of call out any specifics in that curve for '23.
And then moving on to Connect. Could you try to help us understand the volatility in quarterly margins? I mean, if you look back in the third quarter, you improved margins year-on-year with help from the efficiency measures in fourth quarter, you were again below the previous year, but now you're expecting to be on par with the previous year in Q1. So what is causing this quarterly volatility?
So Sami, as an example, the third quarter is impacted by the vacation accruals. That's a kind of a standard procedure in that business. So that impacts the profitability of third quarter. And then to confirm the earlier commentary, the annual price discounts in frame agreements kick in, in January. So that's the type of nature of the business we experience every year. I would like to add, naturally, that in this business, which is every year need to improve efficiency. And now when we have era of high inflation, including the technology costs, so this business requires extensive attention on cost optimization continuously. I would like -- just would like to add a flavor still that the development around the scalable cloud platforms has been somewhat favorable, although 11% growth, yes, it can be more. But we have also been able to demonstrate that the profitability of the new scalable platforms very consistently is more profitable than the legacy ones. So these are the drivers that are, if I may, all the time in managed services infrastructure type of business. And naturally, we anticipate these drivers to continue, that's why we are very open about these drivers.
Yes, I wasn't that -- actually after the seasonality factors, but I was after why there is volatility if you compare against the sort of benchmark quarter from the previous year. So there seems to be quite some fluctuation if you use the previous year as a benchmark?
Actually the trend, Sami, is relatively similar from prior year. Yes, maybe the Q4 was now a bit lower when you take your sort of comparison from '21, but that would be sort of the only real difference there.
And then finally, on one-off items that you're expecting this year, are you planning on new efficiency improvement programs? Or are these mostly related to the planned separations?
We now guide -- give soft guidance on onetime items for 23, around 1%. That includes, let's call it, some normal improvement programs that we run, which is sort of consistent to what we have done over the years. And then we exclude this strategic review onetime cost from that 1%.
And any sort of color on at which areas of the business, we may see improvement programs this year?
Well, we do our normal annual productivity naturally in Connect and Transform areas, but they are sort of not programmatized in a way that we did last year.
The next question comes from Matti Riikonen from Carnegie Investment Bank, Finland Branch.
It's Matti Riikonen, Carnegie. I would like to continue from the previous question related to, one, of course being 1% of net sales. Do you expect that there would be restructuring programs outside Connect and Transform? And I'm supposing that you would probably take those 1% costs in the beginning of the year, like the normal is the case. Is that correct assumption?
Yes. So we don't now guide in this way. I mean these are called onetime items. They are not all preplanned. So unfortunately, what I comment to Sami was something we've sort of seen in many, many occasions now, and we don't comment on any other businesses at this point in time.
Could you give any ballpark estimate for the strategic review costs because you kind of rule out that in the 1% one-off guidance? What kind of sums are we talking about?
That would be something that we intentionally took out because we don't want to speculate at this point in time, Matti. But of course, we'll give you indications and when those materials tell you how they turn out. But they are, of course, in the millions.
Then regarding the salary pyramid of yours, do you think that your salary pyramid is now wider in the low end and more narrow in the high end kind of easing the salary burden? Or is it pretty much the same as it has been? I mean the question behind that is that you have been recruiting quite a lot. So is it mostly younger people who would kind of make the pyramid easier? Or is it across the board?
This is something that we have been working now many years and increasing in our focusing on building the right type of pyramid. I can say we haven't been that good in this earlier. We are getting much better. I did comment on specifically now on the Create with graduate recruitments in Q3. We are consistently building a better pyramid that eases out on the salary inflation and the cost competitiveness of us in the market.
Maybe I'll just add that exactly like Tomi commented and in addition, the pyramid and much more actively think the optimization of the balance of onshore/offshore. Also go in combination, but very important progress being made.
Okay. And then finally, when you described the IT market development this year, you talked about dynamic. I was having a bit difficulty putting that into a number. So could you -- you, Kimmo touched on the topic and saying that you -- I heard word stable. So is it basically that you're expecting a flat market growth in IT services, '23, what kind of number should we take it from the text?
That's a very good point. Thank you for asking that. So we are now wanting to stay away from giving an average because we -- I think it's very important that we recognize the distinct dynamics of the software and digital engineering, which is a growth market, very important. And then we have the managed services, which in the world is flat or declining. So then one can do an average of saying it is X and Y percent. But I think it's really important to recognize that where our strategy is heading towards and the identity of the company, software. And digital engineering, they are positively dynamic growth markets and then to differentiate on the managed services side, which is a different kind of development in the marketplace. We can do an average, but we are trying to stay away from that. If one looks at industry analysts, they would be saying as an average in the marketplace. The market is expected to grow slightly at a lower level than 22 if one wants to look at an industry analyst view. But I do, as I know I mentioned twice already, I'll say one more time, hopefully, it's okay, that this average market view, we are -- we don't want to be put in the category of an average IT services because we have different types of businesses.
The next question comes from Felix Henriksson from Nordea.
Congrats for the results. I have a couple of questions. I can go one by one. Firstly, can you give some sort of rough estimates in percentage point terms on how big of a contribution from price increases do you factor in, in your 5% to 7% organic growth guidance for this year?
Yes, Felix, we don't now give this type of metrics out. First of all, it's very difficult to give an exact impact. It will be more than what we had in '22. And then there's a bit of sensitivity also in the marketplace to be calling out sort of numbers of price increases. So we don't want to give out that number, of course. It will be more than 22%.
And maybe furthermore, just to maybe background on the point that, again, to give an average, we don't think it would be -- we would provide anybody adequate insight. And naturally, we -- there's very different mechanisms of driving price increases where we have high attention as an example on the type of consulting services. That's one type of dynamics of when they become effective. In software businesses, you have a different lead time. And then in managed services, you have a much longer lead time given the long-term frame agreements. So those are the drivers that we are working on very actively more actively than any other year that we started during '22.
Then another one for me regarding Banking profitability, high on your agenda there. But if we sort of exclude the onetime license sales margins were up by quite modestly in Q4. So could you just describe a bit on what you plan to do for margin improvement standpoint in Banking, in particular in 2023 to get your margins closer towards the target of 16% to 18% levels?
So naturally now in similarly in banking, like any other software businesses to continue to work per solution area. We have 6 solution areas. We do not kind of share externally the growth and profit levels of each of the businesses. We have a clear view, which are actually well accretive where we have lack of scale, what type of investments are needed to get into a more of a scalable common code base type of an R&D agenda with the relevant new technologies, avoiding the type of customization. I just wanted to take a few seconds on the notion of how to run and deliver scalable software also in all the 6 solution areas of Banking. So a lot of attention there and continuous attention on the totality of SG&A that was well started already in '22. And I would like to also add naturally that as we have the banking CEO, Klaus Andersen, appointed, there is naturally an opportunity to consider the full strategic approach and towards then the whole strategic review, the consideration of the multiyear business plan towards the equity story. So naturally, we anticipate to do a holistic perspective as part of the full Banking way forward.
The next question comes from Jaakko Tyrvainen from SEB.
It's Jaakko from SEB. Most of my questions have already been answered, I think, but let's continue with a couple of technical ones. First one on the solid growth of 14% in Care. Could you open a bit how clean or comparable that growth was? Just trying to understand, should we extrapolate the solid performance seen in -- during the quarter?
Maybe I comment briefly, so thank you for that question as well. So a couple of comments. One, I touched upon, and I'll add one more flavor. I briefly commented earlier, the strong progress in health care data-led solutions. So that's a background as an example, with the Helsinki University Hospital, improving actually what is called patient 360 view integrating data sources from approximately 80 systems being able to provide exactly that one patient view for a doctor on the full history of the patient experience and the kind of a full -- kind of health records of a patient. That's one factor that is gaining good attention. Second factor, which we had not commented earlier, has to do with the fourth quarter that in the health care side, we have the solution suite is called Lifecare based on the open [ EHR ] standard, and we did a new product release in the fourth quarter that gained strong positive acceptance from a number of customers. So that actually delivered and developed very favorably delivering a bit of an extra boost into the fourth quarter.
Then in Connect, your Q1 indicates and implies a rather hefty quarter-on-quarter drop in the margin. Could you repeat what is behind this? Is it the seasonality effect of the annual discounts that will take place in Q1?
Yes. Jaakko, it's fully seasonality, which plays the Q1.
Then regarding the order book. I recall you stated in Q3 that the book-to-bill in transform was very solid. It's still the case with the current order book mix?
So Transform order book actually was -- book-to-bill in Q2 was very strong, not that strong in Q3, but now Q4 was extremely strong again. And of course, naturally as Kimmo went through some of the wins there like [ Aker BP ] and the like. So we have good new wins and then renewals in that area.
Maybe just to reflect a bit further, so higher, better momentum in the second half in the overall than in the early part of the year, both in terms of winning business, driving revenues and also the drive for efficiency. So in all the factors towards the year-end continue to become stronger.
Then finally, just Tomi, could you remind us of the interest rate sensitivity in your debt portfolio? What is the effective rate you are looking at for '23?
Sorry, can you repeat, intra -- interest rate…
Interest rate sensitivity.
So we have 2 bonds out there, EUR 300 million and EUR 100 million, and we have EUR 250 million term loan, which, of course, is interest rate sensitive. And then we have additional 100-ish, which is interest rate sensitive. We of course do hedging on the interest rates as well. So -- but overall, the interest rates will be higher. It is already visible in our finance cost, not too much, but a few millions.
The next question comes from George Webb from Morgan Stanley.
Just a few questions left on my end. Firstly, perhaps if you don't want to give specific numbers around price when you think about digital engineering and the more software-heavy business units. Can you talk through which of those do you feel you have more or less ability to be using price at the moment, either because of competitive behavior or because of the strength of your position there? Secondly, just on the employee base. You mentioned the onshore/offshore ratio is important, up 2 points in 2022. What are you planning on that ratio as you look into '23? And actually when you look out to 2025, how much of a factor is that in driving your expected margin uplift? And lastly, just a small one. You called out the high technology cost inflation, particularly in Connect and Banking. Can you be a bit more specific in what areas or items there are that you're seeing that in those 2 divisions?
Okay. So if I maybe begin by your first point on. So the ability to drive price increases and your question is on digital engineering, meaning the Create and then the software businesses. So it tends to be a faster cycle in the digital engineering type of business. In the software businesses, it again differs by the type of software business. In case of some businesses, which may have a high degree of public sector penetration, they tend to be quite firm public sector type of contract structures. So there, the lead time tends to be a bit more complicated. So those are some of the factors. And then in areas where you have -- in some of the other areas, we are able to move faster. But it's quite dynamic and at times difficult, meaning that we'd like to increase prices, of course, on a rapid cycle, but they are customer-specific negotiations. A lot of attention has gone into. We continue to make progress, and we will continue high, high attention on the topic. But it does deserve a lot of effort from senior management as well.
Offshore/onshore ratio driving competitiveness in the future. Naturally, as we have said, this is a bit of a movement which is demanded by our customers. So as we have talked about the competitive edge of having the offshore/onshore capabilities, this is kind of how it's driven. Now when customers are looking at cost competitive services declining the run cost of their infrastructures, that calls for increasing onshore/offshore ratio for the company. It's kind of a natural outcome of how the market plays out. So we don't sort of specifically now say, we need the offshoring to be at this level at some point in time. But of course, we're mindful that that's the way this market is going increasingly. And yes, we will continue to do that as a company. Last one on the technology costs. So specifically, this is visible in the software and hardware cost. Software, the large U.S. software companies, you have likely seen those in the market as well, very aggressive price increases there. It has to do with electricity and other cloud-related costs and that's where this comment to Connect and Banking come from.
The next question comes from Nicolas David from ODDO BHF.
Yes. I have several from my side. The first one is to come back on the pricing story, but I understand that you can't read share the impact for '23. But could you give us the number of the pricing impact for '22? I would be very helpful. Second question is regarding Create. What drove the significant margin improvement in Q4? Did you believe from some exceptional elements because especially when you look at your Q1 guidance, it looks like you are more cautious regarding the margin development for Q1 '23, especially taking into account that you have a positive working day impact? And this leads me to the next question, which is for Q1, could you quantify please the positive impact from working days on your margins be at group level or Create level? And my last question is back on the efficiency improvement measures. I understand that there is no predefined plan right now. But could you share on average, what is the usual benefit on your EBITDA -- adjusted EBIT of when you spend like 1% of sales in cost for improvement measure program? Are you able to benefit the same magnitude at EBITDA level or is it below or above that?
Now I have to say I didn't get all of your questions, but let's start from the pricing component of '22. Consistent with '23, we don't want to call out the specific numbers. And it depends a lot per business and the contract types that we do, how much of price increases we are able to do over a year. In terms of the Q4 margin improvement, was there a specific business that you…
On Create.
Yes. Indeed, so recruitments were slower given the high intake of graduates in Q3, so that improved the productivity. So in that sense, nothing unusual. Utilization of our people went up and the productivity went up. That's how the margins came in stronger. Yes, the working days, as I mentioned before, I don't have the specifics now on -- ahead of -- in front of me, so I will need to get back on those impacts. In terms of the onetime items and if we spend 1%, of course, it depends what type of onetime item this is. So if we assume that there is a restructuring onetime items, maybe the rule of thumb is that if we execute that in the middle of the year, there's slightly net 0 impact on the EBIT from that program. That would be sort of a rule of thumb for you.
And my question regarding the working days was specifically in Q1 for the margin impact. So maybe you have this figure -- I understand that you don't have it for the rest of the year, but for Q1, maybe specifically, you have it?
Yes. So you can sort of convert that roughly to the revenue slightly less. If you take 75% to 80% of that, then that's the margin impact. So that 0.8% was the revenue. And then when you take a bit out, then that's the margin.
The next question comes from Christoffer Bjornsen from DNB.
This is Christoffer from DNB. So I was just wondering if you could help us understand how much of the organic growth of 11% in Create this quarter was from the opening in managing of the center there as I think it was opened was in November last year? And then also on the growth or new recruitments in Create, you help us understand a bit like the split between the different geographies. It seems like you have been more successful in some geographies and other in terms of adding people and retaining talent. So that would also be, appreciate that detail.
Yes. So [indiscernible] impact for Create was 3% for the full year growth. So full year was 13.7%, so 10.7% if you do fully year, exclude that. In terms of the FTEs geographies, we have increased our recruitment in our onshore/offshore locations in Create. So the balance is more there than in the Nordic countries that would be sort of the high level. And we see that continuing as well. And as we commented at the CMD as well the strategic plan for Create calls for the delivery centers from onshore/offshore delivers into North America and Central Europe, which is our growth plan going forward. So from that perspective as well, this is sort of the type of recruitments that we will be doing in Create.
The next question comes from Daniel Djurberg from Handelsbanken.
A question to Tomi, a little bit on how to think on the software R&D processes in 2023. You have had a high ambition on making your offerings multi-tenant cloud. I think it was like 60% of the portfolio by year-end '22 or something. But can you comment a little bit on where you are in these processes? If we should expect this to level off or to increase compared to '22? I think you were capitalizing also some EUR 37 million in '22 versus EUR 43 million or something in '21. So any color on the R&D processes on software would be great.
Thanks, Daniel. Indeed it felt by the way that you were cut off in the earlier one. So thanks for coming back. So we will both comment briefly. So on the software R&D, naturally in all the software businesses like for any software company, extremely critical part of the priorities for each business. Naturally the evolution of new technology adaptation by nature will always differ by solution area, and I'll comment briefly. So in the case of whole Care business, one of the main drivers for that productivity and profitability improvement is through the technology modernization that took place -- actually was initiated some 5 years ago. And to be fair, there's still a lot more to be done. But then when we look at the Care as a whole technology modernization, there's a huge degree to be done. I don't anticipate current investment levels to be going significantly up. The point being that we actually run very competitive combination, health care, welfare, there's more productivity to be added by modernizing that landscape. Now a bit lengthy explanation, but that's how it works in software. Then when we go to our industry, it differs again per solution area and good progress in some of these areas such as the paper and pulp that we have been gearing towards the common code base and with highly mindful investment levels that we always aim to reconcile with the volume outlook that the investment payback periods are smart. Banking on its own is a more thorough story. I anticipate we come back on that as part of the strategic review as there are 6 different solution areas just within Banking. Modernization has started in one of the core areas on the banking as a service, which is one of the larger ones and a lot more to be still done while the development path has been moving forward quite favorably. That would be in short. And currently, these investment levels, we are -- when we go into '23, we anticipate similar levels to exist.
Please state your name and company.
Greg Ward, Trafalgar Capital.
Go ahead. You can ask the question.
I was just looking through your annual report, the other day. I noticed in 2019, you disclosed that you had 2 factoring facilities. But 2020 and '21, you didn't disclose those facilities. Can you just update us, how many facilities you have and the current size of those facilities?
Sorry, we couldn't hear your question. Could you please repeat? The line was really breaking.
Right. I was just saying that I looked at your 2019 annual report, and you had 2 factoring facilities. But '20 and '21, there is no disclosure. Could you please update us with how many factoring facilities you have and the actual size of those facilities, please?
Sorry, the line was still really bad. We heard facilities, but…
Can you hear me now? Hello.
Yes.
Can you hear me now?
Yes, we can. It was a question on how many facilities. There was some -- we couldn't hear what was the word before facilities.
Yes, apologies. I think I'm in a dark spot. I was asking about your factoring facilities. You had 2 facilities in 2019. There was no disclosure in your annual report for '20 or '21. Could you update us how many factoring facilities you have and the size of those facilities?
Factoring, yes. Now we hear. Yes. It's been at the relatively same level. Now if I remember, we have 2 facilities up and it has been around 30 million-ish.
So you've got 1 in NOK and 1 in euro. Is that correct?
I need to now confirm the currencies. I don't have that in front of me. But it has been now roughly on the same level. So there's sort of nothing un-normal about the facilities.
Is it possible for you to publish those in the 2022 annual report?
Not anymore. But I can, of course, talk to you on those separately.
And I'm also interested, obviously, you've got the balance data, the final number used. But what would be also interesting is the utilization of that facility throughout the year? If that's possible.
Yes. It's relatively stable just for the record. Yes.
There are no more questions at this time. So I hand the conference back to the speakers.
Thank you for the questions. And I will now hand over back to Kimmo in case you have any final remarks.
Thank you very much for joining us today. I hope we all got a feeling that what an exciting and important year '22 we have had and concluding the year with the strongest quarterly performance to date and looking forward to our continued dialogue. Thank you for joining.
Thank you, and have a great day.