Arribatec Group ASA (ARR) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Arribatec's second quarter presentation. Second quarter has been a good quarter for the company, both financially and in the market. And I look forward now to take you through the most important aspects of the second quarter report. So first to the highlights. We have -- we're reporting a quarterly revenue of NOK 148 million, which is a 23% growth compared to same period last year, all of it being organic. Additionally, we report a positive EBITDA of NOK 8.4 million, that is an improvement of NOK 19.9 million also compared to previous -- or the quarter -- the same quarter last year. Liquidity-wise, we have for the NOK 2 million bank balance. And on top of that, we have the credit facility of some NOK 20 million. Both consulting services and recurring revenue is up 23% and additionally, we have signed 334 new contracts for new business, as well as scope extensions for a total value of NOK 121 million during the quarter. We also would like to highlight a couple of new signed contracts that we saw come in second quarter. First of all, we won the tender process with Sykehuspartner. That's a public -- one of the public contract that we have been waiting for quite some time, and we are very happy, of course, that we managed to be the selected partner. It's a contract valued at NOK 6.3 million just for the licenses, and we expect that to be consulting work on top of that. We also signed a new contract with Vår Energi, worth NOK 11.9 million, and that's for work that has already now started up in June, and it's going to last for about 10 months. And then also, we have in U.K., landed an ERP support contract worth NOK 16 million and that, of course, is very valuable for Arribatec and for our U.K. operation. Here, you see on the top of the slide, the performance for the first half of this year. NOK 298 million in revenue compared to NOK 246 million same period last year. So 21% growth from last year. Payroll, as you see in the middle, total NOK 215 million as compared to NOK 206 million in previous year. So that is a 4.7% increase. And I'll come back to why this is part of our presentation. Lastly, we see the half year EBITDA of NOK 13.7 million. That is a NOK 31.4 million improvement compared to first half last year, with an EBITDA margin of 4.6% so far this year. For those of you who has not followed us over the last quarters, I just want to repeat, we have organized our business into 5 business areas, where the light blue business areas are the 3 largest ones. They are what we call industry agnostic, in the sense that every company, no matter which industry you are, whether you are a public entity or a privately held company, needs services, both from our Business Services segment, or from EA-BPM business area or from the Cloud business area. And we have a substantial cross sale between those 3 business areas. The main products that those BAs are delivering to the market, you can see on the left-hand side. Then we also have Marine, which is our Marine and Hospitality. They are smaller BAs. We call them industry verticals, and they are specializing in delivering products and services to Marine and Hospitality, respectively. If you look at the individual business areas and see how they have performed during the quarter. First of all, all 5 of the BAs have grown compared to the same period last year. And if we start with Marine down in the right-hand corner, you can see 3.3% revenue growth. They are now back to where the activity level that we saw before we started restructuring back in 2022. We have recorded NOK 13 million in revenue for the BA, and more interestingly, I would say, 37% EBITDA margin for the second quarter this year, and that is NOK 4.8 million in actual EBITDA. So a very good performance now of -- from Marine. Hospitality also have a very high growth rate, but that, of course, comes from a low base. So far in Q2, we have a NOK 2 million revenue and EBITDA for all practical purposes, breakeven. Cloud, also a strong growth, 12% compared to last year, and shows NOK 32 million in revenue for the quarter. EBITDA margin just north of 10%, with the actual EBITDA of NOK 3.3 million. EA-BPM has also a very strong growth for the second quarter, 37% with an EBITDA margin for the quarter of 13.8% and NOK 3.9 million in actual EBITDA. Lastly, our biggest business area has Business Services, NOK 75 million revenue, which is a 6% growth compared to a year ago, and an 8.5% EBITDA margin. On this slide, we have shown now over the last few quarters, it shows our revenue development BA-by-BA and quarterly by quarterly. And we can see that we have a healthy growth from 1 year ago. Also on the top, you see our recurring revenue. It accounts for 35% of our total revenue, and it has increased by NOK 10 million, from NOK 43 million last year to NOK 53 million this year. So we continue to build a recurring revenue in the company. Also, we see that revenue from outside of Norway now stands at 39%. And we, of course, are still focusing on growing our revenue also outside Norway, and we are on track to continue growing outside Norway. I also wanted to show you the change that constitutes the EBITDA increase for the first half this year. We increased our revenue by NOK 52 million. If you look at first half '22 to first half '23. That is a 21% growth. And the COGS or cost of goods sold, which is basically hired in consultants, as well as licenses that we resell. That increased almost the same pace as the revenue, which is normal. And more importantly, I would like to just highlight that payroll increase only is 4%, while we had a 21% revenue growth. So it really shows the restructuring that we undertook in Marine has had a significant impact on payroll for this year. I'll get back to that in a little bit. Other OpEx, despite high inflation in most of the countries where we operate, we managed to keep other OpEx at a growth rate of 6%, and the increase in actual number is NOK 2 million. So all these components then builds up to a EBITDA improvement over last year of NOK 31 million, and we are quite satisfied that we have been able to do that. Also, another way to look at the EBITDA improvement compared to first half last year. You can see here that 4 out of 5 BAs have contributed to the improvement. The blue bars here represents the actual improvement in EBITDA for each of the business areas. And Marine, obviously, has a strong contribution to the EBITDA and NOK 12 million in improved EBITDA over a year, and that is -- that is a good performance. Hospitality and Cloud, also on a smaller scale, but still contributed NOK 2 million and NOK 3 million improvement, respectively. And then again, we look at EA-BPM with a strong 36% revenue growth, and have improved the margins and also showing a NOK 9 million EBITDA improvement compared to a year ago. Business Services, while they still had revenue growth, we saw a slightly higher cost increase during the first half this year, and they have a slightly lower EBITDA first half this year compared to last year. And then the last blue bar shows NOK 8 million improvement in corp and overheads, and that is showing the effect of us finishing all the internal projects and internal building activities that we were undertaking during 2022. Now that they have stopped, it immediately shows up as an improved or reduced costs on a group level. So we are, of course, satisfied with that. All in all, these 5, 6 contributors show how we managed to improve the EBITDA by some NOK 31 million compared to a year ago. I also wanted to show the revenue development in a longer perspective on the left-hand side, you see the quarterly revenues that you have been reporting over the last, let's say, 2.5 years. Currently standing at NOK 148 million for Q2. But more interestingly, if you look at the right-hand side, that is 12 months trailing revenue, which means that if you look -- stand in end of Q2 this year and look 12 months back, that amounts to NOK 557 million in a 12-month trailing revenue. And for those of you who is good at math, then you can see that this points to a full year 2023 revenue north of NOK 600 million, and we think that is achievable. Sales on the left-hand side, you see the volume of new contracts and scope extensions that we have signed in Q2 was NOK 86 million last year. This year, we signed the contracts worth NOK 121 million. And that's a 40% increase, and we are satisfied with that increase. On the right-hand side, you can see how each individual BA has -- how the sales have increased compared to last year, and 4 out of 5 BAs have an increase in sales, while Marine, due to restructuring last year has this year, then a slight dip in new contracts, but we expect that we will win more in the coming quarters. Then I wanted to show you some of the very interesting contracts that we have been winning and signing during the second quarter. First, on the left-hand side, you can see the Growth Company. That is an ERP support and development contract won by our U.K. operation, worth NOK 16 million over 3 years. Starting as we speak, and we are very happy that we have secured this during the quarter. Vår Energi has signed up with us for another NOK 11.9 million. The work has started on this contract. It's business process management consulting, and we expect to work through this contract in about 10 months. As I said at the beginning of the presentation here, Sykehuspartner is one of the public attenders that have been out for quite some time. During Q2, we were selected, and we were -- we signed a contract with Sykehuspartner, very important and strategic, important contract for us. We have a value of NOK 6.3 million for this contract. That is only licenses, and we expect that there will be consulting work on top of this. So that for us is a very important and exciting contract. We have also signed Hallingplast, and that is for business area cloud, that's outsourcing of the IT platform, value of NOK 6.1 million over 3 years and also starting as we speak. And lastly, I just wanted to highlight one of the new contracts that Hospitality has signed during the quarter. It's a Swedish hotel group, Got City, 8 hotels, value at roughly NOK 3.2 million over 3 years. Very important for us because we now have a bridgehead in Sweden, and we look forward to see additional contract being signed going forward for Hospitality in Sweden. So all these good signs of us having a good traction in the markets where we operate. Cash flow-wise, we end the quarter with NOK 41 million in the bank. On top of that, we have a NOK 20 million credit facility with Danske Bank, unused. This is slightly down from previous quarter in terms of cash in the bank. However, we got a large customer payment just a few days after the closing of the quarter. Thus, the actual cash or liquidity balance, so to speak, now mid-August is NOK 78 million, and we are comfortable with that position, and we are comfortable looking forward. Lastly, balance sheet development. Here, we are comparing the end of 2022 with end of Q2 2023. Not any big movements. What we can say here is that our equity ratio is 52%, and it has been at that level now for quite some time, and we don't expect any big movements either on the balance sheet going forward. So then to outlook. We expect a slightly higher revenue growth in '23 compared to 2022. We see robust strong demand for our cloud services, and that will, of course, drive growth for our Cloud and managed IT services activities. Hospitality continue to sign new contracts, and we expect that to go on into the next quarters. And that means that we are building SaaS revenue in Hospitality as well as getting onetime payments for all the checking kiosks that we are installing in the hotels. Marine, we expect them to continue growing. There are a lot of large projects available in the market, and we are quoting and fighting for being selected from some of these, and we expect that Marine, again, will continue to grow in the quarters ahead. We are also looking for partnerships with AI and machine learning companies. We have, during Q2, signed a agreement -- a cooperation agreement, a partnership agreement with Semine that is related to our ERP service offering to the market, and we think that is exciting for the company. And we are -- and we'll be continuing to look for other partnerships, both within the business services space and also EA-BPM and cloud space. We also see that the demand for hyper automation is increasing. This is something we expect to materialize into new or additional revenue streams for EA and BPM, and it's a exciting part of the market that is now rapidly growing the way we experience it. Lastly, of course, we will continue to focus on EBITDA margin improvements. And that we -- it will always be relevant to -- for us to work -- to improve our margins and our business performance in general. So that is what I intended to talk about. I will now give you a minute or 2 to send in questions if there should be any. Thank you so much.

Yes, we got one question here asking why hospitality only shows NOK 71,000 as payroll during second quarter. And that is, let's say, due to 2 things. First of all, that we have capitalized some of the development hours for projects that now has completed during Q2, and that means that you're reducing the actual payroll cost. And secondly, we have what we call a Norwegian Feriepenger in June, and part of that is contributing to reducing the actual cost or reported costs in that business area. That is actually also an effect that we see in both, all Norwegian entities in the Q2 report. Any other questions? If not, I thank you all for participating, and have a nice day.