TietoEVRY Oyj

Good morning, and welcome to Tieto Evri's second quarter earnings webcast. My name is Tommi Järvenpää. I'm the head of Tieto Evri's investor relations. We have lots of exciting topics to discuss this morning. Yesterday, we announced our permanent CEO appointment, and earlier this morning, we introduced our new near-term focus areas in connection with our Q2 report. Naturally, we will be also discussing the second quarter highlights and results in this call. Our teleconference line is open, and as always, we will be hosting a Q&A after the presentation. With me here today are our CEO, Enre Rangnäs, and CFO, Tomi Hyryläinen. And at this point, I would like to hand over to Enre. Please go ahead.

Thank you, Tomi. And welcome to the Tito Every Q2 2025 quarterly presentation. So I'm really, really honored to take on the role as the CEO of the company, having been the interim since the beginning of May. So, in addition to the financials, I will come back to some of my observations and then also actions initiated during these close to three months and also some of our near-term priorities. When we look at the messages, the overall messages are the following. This company has a very solid market position, a strong software and services portfolio, and also highly talented people. However, lack of revenue growth over a long period of time has resulted in a too high cost and SG&A base. So based on this, we have taken some immediate actions. One, new leadership team is in place. Two, cost initiatives has been initiated and will be initiated. And three, we will refocus the organization towards the market and our clients with sales focus. And like I repeat every single day to my colleagues, everything starts in the market. We should never, ever forget that perspective. Since I joined beginning of May, I have spent a lot of time engaging with our customers, my colleagues and also our partners. And it has become clear that our company stands on a very solid foundation. First of all, we have a leading position in our core markets in the Nordics. For example, a very competitive software product base. We have a strong customer base in many industries with active innovation agenda in place. Also, more and more we see AI embedded in new cases. Thirdly, we have a portfolio of leading-edge software and digital consulting capabilities. And we clearly see that we can unlock even more potential in these areas going forward by being more relevant compared to the market demand. And then, last but not least, we have a global team with highly talented people. However, it's also clear that we have failed to deliver adequate performance We have had lack of growth for an extended period of time. The average organic growth during the last 12 years is close to 0%, while the market has been growing a CAGR of 4 to 7%. And then according to our clients, we have been missing customer and client interactions and sales focus. And then the cost base has been growing too heavy. So consequently, we are introducing three main focus areas or what we call near term top priorities. One, customers first, two, restoring growth, and then also set a competitive cost base going forward. We just have to become much more market and customer oriented, and this will be crucial to get back on growth trajectory for this company. We have identified a set of actions to get back on track. First step, we are strengthening customer-focused sales and delivery capabilities. So as an example, we have launched and we are continuing launching a new governance structure with our clients. And this is mainly to build trust again and to ensure a better interlock with our clients. This governance structure was tested out extensively during my time period as a managing director for banking, and it really works. We have also started a sales-focused sales harmonization project across the different business units of T2 Every, and we have kicked off a sales recruitment program to strengthen the sales structure in T2 Every. To secure competitiveness, we are also launching a cost optimization program aiming to achieve a total cost saving of 115 million euros by year end 2026. As you probably have seen, we have already initiated savings of 40 million during first half, mainly in the second quarter. And we are taking new measures targeting savings of 75 million euros by end of 2026. We have also earlier this morning confirmed our new leadership team, which is then focused to execute and to deliver. And their main tasks are to strengthen customer orientation and to drive efficiency. This is the new leadership team focusing on execution. Since May, we have onboarded several new members to the company leadership team. We have also extensively renewed the leadership team for continuing businesses, as well as extended the scope of the team with new roles, including legal and communication. Then upcoming in the near future, the new head of HR will join us as Trond Winne has resigned and will be leaving at end of August. And then naturally, Satu will be excluded from the team upon the tech services closing, which is expected to happen in Q3. We are on a track towards that, as earlier communicated. So this team is focused on steering the company through the challenging times ahead. And we will ensure our meeting cadence and the structure supports the close teaming needed for execution. On the positive side, we have also the latest agreements and recognitions, which really demonstrates our good market position and potential for growth. We are proud of continued partnership with the leading European energy company, Vattenfall. At EGIG in Austria, we can help them improve customer service through automated AI-based handling of customer emails. And then we have also Lokalbank, a constellation of 16 different saving banks in Norway, where we deliver our full stack technology platform, which enables a new modernized, cost-efficient, and robust banking platform for these 16 banks, of which 10 are win-backs, or new clients for T2 Every. Then also the Gartner hype cycle for healthcare well demonstrates our readiness to introduce our open modular data-driven care software beyond the Nordics. This is a quite key element into our strategy. The recognition for T2Every banking and T2Every as a total as an attractive employer also signified a high quality of our businesses. And then as you see to the right, we're continuing to deliver on our very high standards and ambitions on the sustainability area or areas. And it's now time to look into our second quarter results, which was, I would say, second quarter was really a challenging one. Our market remained soft, which was visible in a negative growth with revenue down by 4% year-over-year. And we are not at all satisfied with the revenue and profitability development. The adjusted profitability margin was 9.4%, which also includes the negative IFRS 5 impact related to temporary cost burden related to tech services. So due to long-term weak performance, we are now taking actions to get back on track. We have today announced a new cost optimization program targeting 75 million euros of savings by end of 2026. And then furthermore, based on regular reviews, we have also booked 80 million euro non-cash impairment related to the banking platform modernization program in Norway. as we are now aligning with future demand. And then we do impair all non-value adding or older components of the core bank system. And last but not least, we have appointed also a new leadership team that will help us in steering the company through the next phases. Let's then take a look at the business highlights and then we start off with the aggregated numbers. As mentioned, organic growth minus 4% year over year. Then following the strong Q1 cash flow, operating cash flow for the quarter remained healthy at 51 million euros. As you can see, we continue decreasing the net working capital. The quarter ended with a strong order backlog, especially in banking. Organically, the total backlog was up 14% year over year, and then also up 9% compared to Q1. And of course, this is a very good foundation when we're striving for future growth. When we then look at the different business units, we are starting off with Crate. And I would say that is probably where we had the biggest challenge in Q2. The market remained soft. And I would say that the consulting market as such has continued with a weakness across all geos. Some of the non-critical projects are being postponed or paused by our clients. mainly due to the geopolitical picture and then also partly due to low demand. And furthermore, we have seen continued price pressure impacting our margin development. However, the long-term market growth outlook remains strong as enterprises remain focused on optimization projects aimed to improving agility and also efficiency. We can see this across the GEOs. And then also continuous demand for projects related to AI will keep up the services investments over the forecast window. When we look at the numbers for T2 Every and then Create, the weakness is visible in our organic growth of minus 7% in Q2, also partly then impacted by less working days year over year, and then also lower internal invoicing, lower internal revenues. So to offset the market weakness, we have executed capacity and also SG&A reductions during first half. We have reduced personnel by 5% year to date. And we will also now, with new initiatives coming, continue to drive for even more efficiency within CREAT. On a positive note, the order backlog has remained stable, and we have new wins in Q2 with AI embedded. As an example, we already mentioned G&G, the Austrian fixed broadband access infrastructure provider, where we helped improve customer service through efficiency with the AI tools. Looking at the next business area, which is banking, In banking, we came in with minus 2% organic growth impacted partly by Norwegian bank mergers or one bank merger in Norway in first half 2024. Considering this impact, the underlying growth was flat with growth in BAS and financial crime prevention. BAS is our core bank solutions and FCP is the financial crime prevention. Profitability is slightly improving, supported by efficiency improvements that was executed in second half 2024 and also in first half 2025. It's also important that we have regained client confidence in the Norwegian banking market with multiple new wins. A couple of examples is Lokalbank and Sparbank Norge, and this has resulted also in a record high order backlog within the banking unit. When we look at care, growth was impacted by decline of legacy product business by four percentage points, and then also partly lower public sector demand in Finland. In Q2, there were three one customer contracts waiting for market court decisions, escalations impacting growth and profitability. The total revenue impact is assessed to be approximately two percentage points. Currently, we actually have six cases in the court system, which will be impacting also partly the Q3 numbers for care. We are increasing our focus on growth in care which is also slightly impacting the profitability near term, mainly due to higher investment related to our international growth. And one example of that is, or one example of the international expansion is that we have entered into collaboration project with Basel University Hospital in Switzerland. In industry, Q2 market slowness continued, mainly in pulp and paper and fiber and public 360, and that impacted overall growth development. At the same time, we had healthy performance in education and data platforms. And when we look into second half, we see improving market activity, and we have had multiple new wins end of Q2 and into Q3, which will support also our second half development. And as you have probably seen with regards to profitability, industry executed significant efficiency measures in Q2, which will start showing results in Q3 and onwards. So, Tommy, that brings us to the numbers and the details of the numbers and the CFO report. So, please, Tommy.

Thank you, Enre, and good morning. So, I would like to begin by confirming the good progress made with tech services closing activities. We expect the closing to happen in Q3, aligned with our original timeline. One of the key messages in Q2 is our cost optimization activities to build an even more competitive cost structure and mitigate against the tech services cost burden. Combined with the cost saving decisions that we have already taken in Q1 and Q2, we aim to achieve 115 million run rate savings by the end of 26. As a result, we expect our full year one time items to increase to approximately 3% of revenues from our earlier estimate of 1 to 1.5%. Then, specific Q2 events for banking. We received a Court of Appeal ruling related to Sparebank e-dispute. The ruling was positive to us, although not at the level of our claim. However, if the ruling will stay without appeal to the Supreme Court, we will be booking the fixed fee increases to revenue of 24.5 million in Q3, 2.2 million in Q4, and 8.6 million during 2026. Then the already mentioned non-cash impairment of 80 million into banking platform in Norway. This was a result of recent large customer contract wins and renewals, including our extensive customer pre-studies, which confirmed the future demand of our developed technologies. The technologies that did not have future revenue streams were accordingly written off. Lastly, we executed a 300 million bridge loan for our expired bond, and we will be initiating refinancing activities post tech services divestment. More details on the cost optimization activities. As mentioned, we aim to achieve 150 million run rate savings by end of 26. That translates into 70 to 80 million run rate savings by end of 25. This base year comparable is end of 24 cost baseline. There are two main buckets. First one, the already decided Q1 and Q2 actions, which aim for 40 million run rate savings by end of 2025. This includes potential reduction of approximately 800 employees. That is 50-50 from SG&A and delivery capacity, and includes tech services transferred employees. OTIs, so one-time items associated to this, are approximately 20 million, which majority have been already booked by end of H1. Second, the new program, 75 million. So we estimate the run rate by end of 26 by 75 million. There are two elements to it. potential reduction of up to 450 employees, both from group functions and in the businesses, and this mostly relates to SG&A employees. And the related OTIs are estimated to be 15 to 20 million. And then an external cost bucket where largest share comes from facilities rationalization, and that will require OTIs of approximately 5 to 10 million. Consistent with Q1, the reported figures in Q2 do not reflect the underlying profitability of the continuing business. On revenue, the growth of minus 4% is correct. Adjusting tech services out is very straightforward. No adjustments needed on top of that. However, profit includes approximately 6 million or 1.3% negative cost burden from tech services. which relates to costs that cannot be allocated to tech services segment under IFRS 5 rules. Then for illustrative purposes, we have included post-closing TSA income assumption, which simulates the post-closing profitability level during the TSA period. We continue to deliver healthy operative cash flow in Q2 following the strong Q1. Our net working capital decreased slightly despite some seasonal headwinds in Q2. Our interest bearing net debt and leverage increased due to 89 million of dividend payment in April and our net debt debit DA was at 2.4 at the end of Q2. Then as a reminder, tech services divestment will decrease our group net debt by the transaction proceeds, plus approximately 100 billion reduction in lease liabilities. On employee matters, the LTM attrition has remained at low levels, being 8% at the end of Q2. This reflects the soft market environment. As a result of the continued soft market, we have reduced capacity on a net basis by approximately 350 FTEs during Q2. This has particularly been in CREATE and in industry. With the new decisions, we will be making further reductions during H2. We expect salary inflation for the year to be 4 to 4.5%, which would be slightly lower than in prior year. Next, I'll summarize the performance drivers for Q3. On growth drivers, CREAT will continue to be affected by weak demand across all its markets. Banking is impacted by ending of a significant, although margin dilute, the mainframe contract by negative 2%, and there is a potential positive impact from Sparebank En, as mentioned. Care growth is supported by well-being county wins in Finland and market expansion in Sweden, especially with Karolinska. Headwind from legacy product decline and 6-1 customer contracts waiting for market court decision. Industry growth is supported by strengthened order backlog, while pulp paper fiber will continue to be impacted by customer investment postponements. Working day will have negative impact of 0.2 percentage points. On profit drivers, CREAT will continue to see price pressure Our new and existing cost optimization activities start to contribute to profit and negative working day impact is minus 0.2 percentage points. On other drivers, there's a positive FX impact to revenue of 6.1 million. Then to Q3, profitability outlook per business. We expect tietoevery create and care to be below prior year level and banking and industry to be above prior year profit level. To note, banking soft guidance here does not include the potential positive impact from SpareBank EN court ruling. Then to H1 and H2 performance dynamics, we expect the group performance to improve from H1 to H2. The drivers are very similar to Q3 performance drivers. So in CREAT, we do not expect market to recover. Slight growth recovery is expected due to easier comparable. The already executed cost optimization activities will support H2 profitability. Banking's record high order backlog supports H2 growth with headwind from ending of the significant although margin diluted mainframe contract with negative 3.5 percentage points. Profitability is supported by cost optimization activities and there is the potential impact from SpareBank N. CARE is benefiting from its strong wins in Finland and market expansion in Sweden, with headwind from legacy product decline and large magnitude of one customer contracts waiting for market court decision. Also with CARE, cost optimization activities support profitability in H2. Market activity in industry is improving, and with multiple wins and improved backlog, the H2 growth is supported. The significant cost optimization measures already implemented in H1 support H2 profitability. Now back to you, Endre.