TietoEVRY Oyj

Good morning and welcome to Tieto Evry's first quarter earnings webcast. My name is Tommi Järvenpää. I'm the head of Tieto Evry's investor relations. This morning we will go through our earnings development and key highlights of the quarter. At the end of the presentation, we will also go through the special topic of the day, the CEO transition, which we published earlier this morning. After that, we will host the usual Q&A session. With me here today are our CEO, Kimmo Alkio, and CFO, Tomi Hyröläinen, who will go through the highlights and results of the quarter. Our chairperson of the board, Tuomas Fransén, and Enre Rangnäs, our newly appointed interim CEO, will join the call towards the end of the presentation. At this point, I would like to hand over to Kimmo. Please go ahead.

Thank you very much, Tommi, and a warm welcome to our first quarter interim session. Q1 main thematic would be, as visible here, performance as anticipated, major step taken in strategic renewal. As Tommy highlighted, we have a multitude of topics. We'll confirm the strategy execution, majority of the focus on Q1 performance, and I'm sure a lot of interest on the third topic, including the information from this morning. And let us begin by the strategic development and strategic focus. It is fair to highlight that in the recent few years, it has been the most significant strategic transformation in the company's history, meaning over the last six decades. Now being able to pursue the future as a leading software and digital engineering company. whereby each of the businesses, three of the software businesses, care, banking and industry, as well as the digital engineering business Create, were aimed to become some of the world's best performing businesses in the respective categories. Naturally, strategically, a significant step was taken and achieved during the first quarter, as the tech services divestment was announced. All of this enabling the company in the future to focus on asset-light businesses with greater growth and scale potential. Furthermore, I'd like to confirm the focus and ambition of each of our specialized businesses. First of all, in the case of Create, to continue to build internationally scale and customer base focusing on the type of technologies and consulting domains where incremental demand will be in tomorrow's markets, centering a great deal around the AI type of expertise. Furthermore, both the banking and care software-centric businesses aiming to drive market expansion primarily in the European continent, building on the proven competitiveness and scalability primarily in the Nordic countries. And furthermore, Tieto Every Industry, building focus scale on vertical expertise, ensuring that greater scalability and addressable market domains would be available. I would like to now only very briefly touch on the third topic of the day, that in light of the strategic evolution of the company, the time is absolutely opportune for me after 14 years to pursue my new chapter and to step down from the role as CEO. And most of you have naturally seen the announcement from earlier today. And we will be addressing this thoroughly as the last topic of the day. As always, let us go through clearly the primary developments of our first quarter. Organic growth of negative 4%, naturally not according to our longer-term ambitions, while fair to highlight that the soft market environment is also impacting demand for our services similarly to most of our industry. Profitability in terms of adjusted EBITDA 10.6% and important to recognize the IFRS 5 related temporary cost burden of 1.8 percentage points. And to confirm the numbers we are reporting and I am highlighting here have to do with the continuing operations. Furthermore, and on a positive note, strong cash flow and strength in order backlog confirming competitiveness in the market space, as well as continued successful focus on efficiency in the company. An important customer contract specifically achieved in banking and care. And as well, recognize the tech services divestment that I've commented earlier, and we will be also updating and providing the updated guidance during this session. As always, fair to take a short moment in terms of the external market influences. Market continues to be soft with limited visibility. That driven a great deal and incrementally by the US tariffs, we do not believe to be that directly impacted by the considerations what's happening in the US, while the indirect implications shall be dependent on the implications on our customers' businesses and demand for their products and services. It seems to be clear that the increased macroeconomic uncertainty is impacting our customers' decision-making and this is mostly visible in the consulting domain. And we shall continue in this soft market and low growth era, no growth era, very critical to keep the company's profitability healthy and continue the tension on efficiency. AI market adoption, we have very active winning footprint in the market, and this is equally relevant for all of our businesses. I'd like to confirm that that we are maintaining also in this era our investments in each business to support the future growth and expansion opportunities. Very important to build and prepare for future growth and to a degree dependent on the market bounce back. As usual, fair to highlight the competitiveness of our businesses, very important role The contract signed in the case of banking has to do with the core banking solution specifically for the Norwegian markets, Paribank and Norge, finance Paribank. Furthermore, Tieto Every Care extending its capabilities in Sweden, industry success in the paper pulp and fiber within the manufacturing execution systems. and a bit longer-term opportunity, create announcing the frame agreement with NATO. Just some of the samples characterizing the movement in the market and success. A couple of samples on AI and gen AI, Tieto Every Care, we were able to extend The footprint of AI-enabled services also in Sweden, we had done that previously in the Finnish market, create gaining interesting new projects in AI domain, supporting our customers, improving their competitors, gaining new productivity gains. A couple of samples in the industrial equipment sector. Furthermore, highlighted here in the case of Tieto Every Industry, around e-services and has to do with the purchase to pay automation, AI in its core supporting over 80,000 users, so starting to get interesting degrees of, let's say, towards scale and towards tangible financial impact. In terms of summary, at the group level, highlighted earlier already, the growth and the profitability level, cash flow from operations, 98 million. This time, we want to comment the order backlog through two factors, the 18% growth quarter year over year, Q1 of 25 compared to Q1 of 24, up by 18%. This has to do with the significant delta or development In the care business, as the primary contributor, the most fair aspect of looking at the healthiness and constructive development would be the plus 4% here comparing end of Q1 to end of Q4 level. I want to highlight that naturally the type of order importance and priority on winning business, on order intake, gaining backlog, very critical to ensure we shall be returning to growth. Then we'll do the summary as usual per business, create continued soft market impact in performance. And I'd like to confirm that this is the business most impacted of our businesses of any type of economic volatility and naturally the soft market being impacted. The low demand environment continues actually in all markets. Furthermore, the developments on the internal revenue impact in the growth side with some of the factors. We are also highlighting, like most of the consulting businesses in the industry, on degrees of overcapacity, very, very price competitive. Short term, we naturally will be driving further efficiency measures in the business while continuing to keep the eye on future growth markets. AI, activity level on AI, very solidly increasing the number of deals that are being won and while the time to revenue, as expected, will take a bit of time. Time to significant revenue contribution was meant. In the case of banking, stable profitability, and as highlighted, very interesting, very important wins in the core banking side in Norway... I'd like to highlight that the underlying performance is fairly okay, growth being impacted by the Norwegian bank merger by four percentage points. Several of the businesses' credit side cards and financial crime prevention continue to grow. Continued retention efficiency has been done successfully, stable profitability, strong order backlog, and interesting opportunities for the banking business moving forward. In the case of care, healthy underlying performance with our very competitive, open and modular life care software platform. Short term, the growth is being impacted by decline in legacy software and the public sector demand specifically in Finland. Couple of the one customer contracts are waiting for market core decision. And we'd like to confirm that while profitability is slightly below 25%, longer term, we absolutely believe in the continued healthy profitability of the business. and we are maintaining and putting in place investments on go-to-market activities and any degree of localization required, we believe the life care software platform will be scaling well in the future. And also, furthermore, to highlight success with the social care side in Sweden. In the case of industry, also negative growth very specifically impacted by the decline in pulp paper and fiber, customers postponing investments recently in the past few quarters, tougher time. Public 360 had been impacted by delays in customer decision-making, while I'd like to confirm that some of the sub-segments are starting to see increased activity level except in the PPF side, the pulp paper and fiber. Healthy growth in the data platforms and education profitability has been impacted by overcapacity. This is clearly below the levels we are expecting mid and long term, and further efficiency measures are absolutely ongoing. So this would complete the overall performance summary and highlights of the businesses, and over to Tomi.

Thank you, Kim, and good morning, everyone. So the Q1 main operational event was naturally the agreement to sell tech services, which we expect to be closing during Q3. This divestment impacts our Q1 reporting, so that until closing of tech services divestment, tech services is reported as discontinued operations and consolidated only in one line in P&L and balance sheet, with cash flow statement being unchanged. So cash flow statement will continue to include continuing and discontinued operations. This type of accounting results in us reporting profit margins which are not representative of the standalone businesses for either continuing or discontinued operations. Looking at our Q1 numbers, organic growth of negative 4% was impacted by weak market environment, as commented, but in addition to less working days having a negative 0.5 percentage point impact on growth. Adjusted EBITDA of 10.6% was impacted negatively by the technical accounting from IFRS 5, with cost burden of unallocated cost of approximately 8.5 million, having a negative 1.8 percentage point impact on profitability. In addition, negative working days impacted profit of 0.4 percentage points. Due to slow market environment, we have had active cost-based management ongoing in all of our businesses, which will continue into Q2. We did deliver strong operative cashflow as mentioned, which was supported by seasonal working capital improvement. Tech services as discontinued operations, the performance organic growth minus 5% net loss for the Q1 negative 92.3 million, which includes an impairment loss of 107 million due to re-measurement to fair value less cost to sell. For the fair value less cost to sell, we have utilized 254 million for the re-measurement, which includes an initial management estimate of the present value of the future earn out in the amount of 30 million. Earn out estimate will be updated as needed at each reporting date. Then to the technical accounting growth and profit bridges. So on the left-hand side of both of these bridges, we have combined Q1. This represents the prior reporting structure, and the reported Q1 represents the continuing operations, i.e. the numbers that we're reporting today. In terms of the growth numbers, tech services carve out this relatively straightforward, so we are looking at the true growth numbers for the continuing business at minus 4%. On the profitability, that's impacted by the unallocated cost as mentioned, which in Q1 were 8.5 million, impacting the profit margin by negative 1.8 percentage points. Then we have, for illustrative purposes, estimated the level of transitional services agreement income which we will be receiving post-closing, which gives a positive profit impact. This impact will last for three to 18 months and gradually get smaller. We will naturally optimize our cost base accordingly to the size of the continuing operations going forward. On the cash flow, briefly, so strong 97 million of operative cash flow, also strong free cash flow, 63 million. Our interest-bearing net debt declined to 807 million, with net debt debit DA remaining at 2.2x. Reminder that tech services' divestment will reduce our group net debt by the transaction proceeds and approximately 100 million reduction in lease liabilities. On employee matters, our LTM attrition is at low levels at 7.9%, reflecting the soft overall market environment. We have cost optimization ongoing in all of our businesses in response to the market. And in Q1, Tieto have recreated reduced capacity by approximately 200 FTEs, and these capacity adjustments will continue in Q2, including SG&A reductions. In addition, we have done minor FTE reductions in banking and industry. We confirm our group-level salary inflation expectation to be between 4 and 5 percent for the year. Next, I'll summarize the performance drivers for next quarter. Overall, Q2, we expect to be negative growth quarter for us while improving from Q1. This is primarily driven by the market softness, which we expect to continue. On growth drivers for the businesses, they are similar to Q1, with negative working day impact to growth being minus 0.7 percentage points. On growth drivers, soft market conditions increase pressure on margins. Annual salary increases, as you recall, likely kick in from April. Banking is experiencing higher technology costs, and the working day impact, similar to growth, for the profit, the impact is roughly 0.5 percentage points. On other drivers, we expect positive FX impact on revenue to be approximately 6 million. On Q2 profitability outlook, create care and industry, we expect to be below prior year Q2 level and banking at or above prior year level. Then our guidance update. So we have updated our guidance technically to reflect the tech services divestment. So this includes only the continuing operations. We expect the organic growth to be minus two to plus 1% and adjusted EBITDA 12 to 13%. Main assumptions in the guidance are that market continues to be soft with limited visibility in the second half of the year. Our guidance ranges reflect the macroeconomic uncertainty, and there's a negative net impact of minus 1.4 percentage point from the IFRS 5 accounting, which includes an estimate of the cost burden for the year in addition to transition services income, which is assumed to be post-closing. The logic of the guidance is similar to our prior guidance. So if the market is not recovering, we will be at the lower end of our guidance ranges and with the market recovering towards the mid to high ends. Looking forward into 25, as mentioned, we expect the market to continue soft with limited visibility. Currently, there are no clear signals of real market recovery. We do continue obviously to focus on resilience in all of our businesses while investing in the future growth to be ready when the market truly picks up. Then to confirm, we do plan to host CMD in Q4 with more details to follow. This would conclude the financial section and now I will hand over to Thomas.