Columbus A/S (COLUM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the H1 interim report conference call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 19th of August 2020. I would now like to hand the conference over to your first speaker today, Thomas Honoré. Thank you. Please go ahead.

Thank you very much, Erabelle. My name is Thomas, and I'm the CEO and President of Columbus. I'm here with our Corporate CFO, Hans Henrik Thrane. And we will start the presentation on Slide 4. The reporting today is a bit different than previous as we both cover Q2 and first half of the year in this webcast. We will start the presentation by looking at the highlights of Q2 and the highlights of first half, followed by a brief review and the impact of -- related to the COVID-19 pandemic situation and a review of our income statement. We will also cover trade receivables and cash reserves to cover our financial position. Then we will present our financial value drivers and our different business segments. Afterwards, we will cover our expectations for 2020. And finally, we will open up a Q&A session, where we will -- where we hope for a lot of questions. Let's go to Slide #5 to begin the presentation. Our focus has been to adjust and to secure the business in relationship to our employees' safety, our customers' digital business need and not at least to adapt our business to the new situation. In Q2, revenue declined by 7% despite the increase in Columbus Care of 18% and Cloud of 19%. The drop in revenue was compensated by an increase in EBITDA of 23%, primarily due to reduced staff cost and other external cost. Most of our employees have been working remotely since the beginning of March, with some returning to offices and some others will return as the local conditions allow for it. COVID-19 has affected our market in different ways. We have seen that, in general, investments slowed down during Q2 and some projects have been postponed. Profit before tax increased by 64%, which is, of course, very positive, and it's due to the cost reductions in Q2, which we will come back to later in the presentation. Revenue from recurring business grew by 2%, constituting 27% of total revenue. We consider the result of Q2 as satisfactory, seen in the light of the COVID-19 pandemic in the world. Next slide, please. In the first half of 2020, revenue and EBITDA was realized in line with last year. We delivered a revenue of DKK 969 million, which was driven by progress in key business areas such as Dynamics Sweden, Columbus Care and Cloud. EBITDA grew by 2%, amounting to DKK 104 million. Profit before tax grew by 4% to DKK 52 million. Recurring revenue grew by 7%, now constituting 25% of total revenue. Columbus Care continued to show great progress during first half with a growth of 22%, and Cloud Services also continued to show strong growth. In general, we saw good progress across Columbus' business segments, where the majority delivered progress during the first half of 2020 despite COVID-19. As seen in the light of the pandemic, we are satisfied with the results as we are with Q2 performance. We're also satisfied with the first half. And not least are we impressed by the fighting spirit and readiness for change that we have seen internally and with our customers. We foresee a challenging second half of 2020 due to the continued uncertainty in the world economy. However, we, as Columbus, have adapted our business. We have a strong financial position. And we have a robust global delivery model to cope with a potential second wave of the pandemic. Next slide, please. I will now cover briefly the business impact of the global pandemic and the management initiatives that we have initiated to handle the situation. So please go to Slide 8. As I mentioned, most of our employees have been working remotely since the beginning of March when COVID-19 hit us. We have offices in some of the countries that have been severely impacted, such as U.S., U.K., India and Sweden. However, we rapidly adapted our business to 100% remote work to secure our employees' safety and ensure customer delivery, and we were successful in doing so. We follow guidelines from local governments. As they advise for it, we allow employees to return to the offices. In general, we saw a slowdown in our markets during Q2, which impacted our business. On the positive side, we experienced an increased demand for services, such as cloud, remote workplace, security and e-commerce during lockdown period. We have successfully delivered 100% remote implementation, helping our customers to run a safe, effective and sustainable business. We have also recently managed to sell projects remotely to customers without any physical interaction with customers, which is also very positive. To reduce cost and secure our employees' employment, we have applied for various governmental aid programs. These programs have been different furlough programs where employees worked less than full-time with different degrees of governmental compensation. In general, we think that we have used the governmental compensation at a limited size in the world. Columbus has a strong financial position to withstand a period of turbulence. The group balance sheet amounts to DKK 1.7 billion and the equity is DKK 694 million. Equity increased by DKK 25 million since 31st of December 2019 and total equity is DKK 695 million, which is a solvency ratio of 41%. During March and April, we have adjusted the organization with 212 full-time employees to adjust capacity to the new reality. Some of this reduction is natural attrition in the business. We are fully focused on adapting our business and commercial activities to the changing situation while maintaining our ability to service our customers in the best way possible. As COVID hit, we promptly initiated a business continuity plan to mitigate risk and keep our business in good health, which I will briefly cover on the next slide. The business continuity plan has been executed since March and will continue throughout the rest of the year. We set up different task forces, among others, a global resource allocation process where we closely monitor the resource allocation and increased global sourcing. We also execute capacity adjustments across business units to address the temporary decline in demand. We have initiated a range of sales and marketing activities to drive growth, such as carbon-free implementations, security checks and we have seen an increased demand for services such as cloud, remote working services, security and e-commerce during Q2, as I mentioned before. We are convinced that more companies will see the benefit of increased digitalization in more areas, such as increased productivity, employee work-life balance, lower cost and less carbon footprint going forward. Columbus is already well positioned within digitalization, and we have a strong go-to-market model with our 9 Doors to Digital Leadership, our global delivery model and our deep technology and industry knowledge. We are very well positioned in the digitalization market, and we are ready to seize the digital market opportunities ahead of us while ensuring business continuity during the COVID-19 crisis. I will now hand over the conference to Hans Henrik, our CFO, who will cover our financial position in these times. Next slide, please. Hans Henrik?

Thank you, Thomas. And as Thomas mentioned, we have initiated a business continuity plan and part of this plan has been to strengthen the monitoring of our accounts receivable. COVID-19 has not affected group trade receivables collections significantly, and we have no significant additional losses on accounts receivable. However, due to some uncertainty of our customers' ability to pay, we have increased our provisions for bad debt by DKK 4 million compared to 31st of December 2019. So next slide, please. Columbus cash position improved by DKK 44 million compared to 31st of December 2019. This is due to a strong cash flow from operating activities. And in addition, Columbus has engaged in some governmental programs for postponed tax and VAT payments. The total amount of postponed payment of taxes amounts to DKK 78 million. The cash flow for first half is impacted by payments related to acquisitions of DKK 82 million. In order to ensure sufficient liquidity, Columbus has increased the lines of credit with DKK 120 million 12 months committed line of credit. Next slide, please. So I'll now cover our income statement for the first 6 months of 2020. We saw the COVID-19 impact in the second quarter with a revenue decline of 7% and thus revenue amounted to DKK 459 million. EBITDA grew by 23% to DKK 50 million in Q2, which is primarily due to reduction in staff cost and other external cost. The reduction in staff cost is a combination of employees and the various furlough programs applied. The reduction in other external cost is driven by less travel and less physical marketing events. The net result before tax increased by 64%, and this increase is a consequence of the increased EBITDA of 23%. So let's go to Slide 13, where Thomas will take us through our financial value drivers.

Thank you, Hans Henrik. Let's go to Slide 14. During Q2, our services business was impacted by COVID-19 with a decline in revenue of 6%. The decline is mainly due to switch to remote working and remote meeting with customers and to some cancellations [ Process ] on customer projects due to the temporary uncertainty in our customers' business. Columbus' main customers are within manufacturing, retail and food, and the impact of these markets is very different. In view of the global impact of the pandemic, a decrease of 6% in Q2 is considered a small impact to our business. The Services business closed first half of the year in line with last year, declining 1% to DKK 749 million. Columbus Care showed strong progress in revenue with an increase of 18% in Q2 and 22% in the first half of 2020. Dynamics Sweden grew by 10% in Q2 and by 26% in first half. Our M3 business had a difficult Q3 (sic) [ Q2 ] with a decline in revenue and postponement of ongoing projects. Most of our M3 customers are large manufacturing companies who have been directly impacted by the global development. In addition, we have many M3 consultant booked on on-site development and maintenance work, and that kind of work was put on a temporary hold during COVID crisis as people were sent home and only the critical production was maintained. All in all, we consider our performance in the Services business as satisfactory. Next slide, please. I will now cover our Columbus Software sales. Columbus Software declined -- actually, it delivered Q2 in line with last year, declining only 1%. Our Cloud business grew at 48% in Q2 and the first half of the year, and the growth was slightly lower at 45%. Columbus license decreased by 48% in Q2 and 38% in the first half of the year, which is in line with our expectations. Subscription decreased by 7% in Q2 and 7% in first half. Overall, revenue from Columbus Software remained at the same level as last year, amounting to DKK 48 million. The development is expected and part of the ongoing cloud conversion, and this is a positive long-term development for Columbus. Next slide, please. In Q2, recurring revenue increased by 2% compared to Q2 last year. Columbus Cloud Services grew by 48% and total Cloud Services grew by 19% in Q2. The conversion to cloud increased during Q2 and customers' demand for remote working and cloud business apps increased with the COVID-19 lockdown. In the first half of 2020, the recurring revenue increased by -- from DKK 228 million to DKK 244 million, which is a growth of 7%. The recurring revenue constituted 27% -- 25% in the total revenue of first half, and we consider the result as satisfactory. This was the reporting on our financial value drivers. I will now hand the presentation back to Hans Henrik, who will present our business segments.

Thank you, Thomas, and I will start by taking you through Western Europe. Q2 revenue was in line with last year with an increase of -- with a 1% decrease. Service revenue increased by 1% and Columbus Software grew by 9%, mainly driven by cloud conversion. In the first half, revenue grew by 3%, primarily driven by a strong growth in Dynamics Sweden and application management services in Sweden. We also saw good progress in the acquired Advania Business Solutions in Norway. And in July, we successfully merged the 2 Dynamics teams. We see good activity in the Norwegian market, and we are now, in fact, the biggest Dynamics player in Norway. Despite the severe COVID-19 situation in the U.K., our U.K. business managed to keep customer work going, and increase revenue in Q2. Our M3 business had a difficult Q2. However, by the end of the quarter, we start to see good progress and good time line for the second half of the year. In Denmark, some projects were set on temporary hold and the process of assigning consultants to other projects slightly affected the growth in Q2. However, we have successfully implemented more customer projects remotely during COVID-19. One example is our customer, [indiscernible] who went live with a new ERP system during Q2. EBITDA declined by 10% in Q2, which is negatively impacted by declining revenue in our M3 business closing of activities in Spain and a large settlement with a customer. However, EBITDA is positively impacted by progress in Columbus, Norway and the acquisition of Advania Business Solutions. EBITDA is also positively impacted by capacity adjustment of 143 full-time employees. We consider the development in Western Europe satisfactory in light of the COVID situation. So thanks to our teams in Western Europe. So now to Eastern Europe. In Q2, Eastern Europe delivered a revenue in line with last year, growing 1%. Service revenue increased by 11% in Q2, which is mainly driven by sales of consultancy to existing customers. And EBITDA rebounded strongly in Q2 with an increase of 34%. In the first half of the year, our Eastern Europe business revenue increased by 7%, driven by all units. EBITDA increased for the first 6 months by 13%, primarily driven by improvements in Columbus Lithuania and capacity adjustment [indiscernible] 39 full-time employees during Q2. So thanks to our teams in both Baltics and Russia. So next slide, please, to North America. In Q2, revenue declined by 15%. However, EBITDA improved by DKK 3.6 million compared to second quarter last year. Columbus U.S. closed first half with a decline in revenue combined to 12%, while EBITDA improved by DKK 3.6 million. The COVID-19 pandemic is negatively impacted -- impacting the execution of the turnaround in our U.S. business. During second quarter, we have further implemented cost and capacity adjustment of 13 full-time employees. Customer work was 53% in Q2, which is an improvement and a result of the capacity adjustment. By the end of the quarter, we see an improved pipeline for the second half. Thanks to our team in the U.S. Next slide, please. So we are now on Slide 21. In Q2, our software company To-Increase [ declined ] revenue by 3% while EBITDA increased by 48%. To-Increase delivered progress in the first 6 months with revenue growth of 4% and EBITDA growth of 32%. The revenue growth is driven by a focus in sales of rental and lease services and cloud, which grew by 38% in the first half of 2020. EBITDA is driven by the revenue growth and cost adjustments. So now I will hand back our conference to Thomas, who will address our guidance.

The management team believes that there is very good business opportunities going forward despite that our markets are still negatively impacted by the pandemic across all regions. We are present in some of the markets which have been severely impacted by the virus, and therefore, Columbus is impacted by these day-to-day varying market condition. Lockdown and mobility restrictions will continue to impact our customers and our employees. Columbus continues to execute the COVID-19 business continuity plan in order to react promptly to changes in our market and to mitigate risk and keep our business in good health. As a global digitalization company, we can serve our customers 100% remote, and we have proven our ability to keep a high customer engagement online. The adaptation to remote implementation and services have been positively welcomed by our customers. In addition, we have initiated a range of new sales and marketing initiatives to drive growth, as mentioned earlier in the presentation. In the short run, however, we expect that digitalization projects will remain at a lower level than last year. Columbus expects that extraordinary uncertainty in the global marketplace will remain throughout the year. However, based on the financial performance in the first half of 2020, our current order book and our pipeline forecast, our guidance for the full year 2020 is as follows. Revenue is expected to be in the range of DKK 1.750 billion and DKK 1.850 billion, which is a decline between 4% to 9%. EBITDA is expected to be in the range of DKK 175 million to DKK 185 million, which is a decline of between 26% and 22%. The reason for the expected decline in EBITDA full year is due to extraordinary circumstances and items in Q3 and Q4 in 2019 relating to a very large software sale in Q4 of last year, a large customer engagement provision and subsequent nonrecurring revenue from acquisitions. Normalizing for the extraordinary circumstances and items in the second half of 2019, we expect an actual progress in EBITDA from operations in the second half of 2020. Next slide, please. In connection with the release of our interim report in Q3, we will also announce Columbus' new strategy. Our current strategy Columbus 2020 will retire at the end of the year, and we are in the process of defining our new strategy. The new strategy will be a 5-year strategy with an overall objective to increase organic growth and improve EBITDA margin while enhancing customer centricity, digital leadership and sustainability. We also intend to improve operational effectiveness and agility in our organization and teams across the world. The strategy includes a strategic portfolio review where we evaluate how to focus and simplify our business and operations over the next 5 years. One of the elements in the portfolio review is an evaluation of our strategic options regarding our software business, where we are considering whether to intensify the strategy focus or to divest elements of the software business. We are looking forward to sharing the next journey for Columbus on the 4th of November. We believe that it is truly exciting and that it will set a very interesting direction for Columbus. We're now at the end of the conference today. I will now hand over the conference to Erabelle, our operator, for questions and answers.

[Operator Instructions]

Operator, Erabelle, I do not hear anything from you.

Yes, they're taking their names, sir. I'll let you know once the operator takes the names. Your first question comes from the line of [ Doug Nereng. ]

One question to the revenue guide for the second half of 2020. At the midpoint, you guide for a decline in the revenue of 13% coming from minus 7% this quarter. Can you please put some more color on where and why this decline accelerates?

Yes, I can cover that. Yes. So as you point out, we have actually been performing pretty okay on revenue in both first half and Q2. So the reason why we put a bit defensive revenue expectation is because of the overall uncertainty in some of our key markets. While we have not seen revenue decline, we take a cautious approach to revenue growth in the U.K., in U.S. and to some extent in our Swedish market.

Okay. But is that kind of what you have been witnessing now going into second half of the year? Or is it more like a development that you're expecting to happen because the order book has declined very much or something?

Yes. So we have actually not seen our order books decline that much, but we are cautious about guiding -- giving our guidance on revenue because of the uncertainty in the marketplace. And I don't think I can get any closer on our different expectations at this point in time.

[Operator Instructions] The next question comes from the line of David Walton from Canaccord.

Thomas and Hans Henrik, can I ask a question about the -- yes, also about the guidance for 2020 and the EBITDA guidance. You explained that if you take out the positive one-off from H2 2019, then you expect to see an underlying improvement in EBITDA in H2 2020. I think that you're referring to the positive effect in 2019 of reducing the consideration payable for an acquisition. But also in H2 2019, I believe there was a negative effect from a project provision. So could you tell us what is going to be the underlying change in EBITDA roughly in H2 2020, if you adjust for both those effects?

So you could actually add a third effect, which is a very large software sale that we also announced at the end of Q4 last year. And so that's also a very positive one-off last year. I cannot come closer at our normalized EBITDA expected performance, but we stick to the guidance that we see normalized positive development in second half on EBITDA.

Okay. And could you explain -- do you expect -- or are you now taking any particularly significant project provisions now due to projects having cost overruns or other problems?

No. No significant write-offs in this period. So neither in Q1, in Q2 or -- we don't expect to have any significant write-offs in second half.

Next question comes from the line of [ Ola Jensen ] from Danske Bank.

Thomas and Hans Henrik, I can give you a few questions on the guidance also for second half. Given the currency movements for both Swedish, Norwegian, the U.S. and the U.K., how much of the decline in -- of those average 13% relates to FX? Second question, you've got a benefit on the cash flow from DKK 78 million in support from postponement of tax and VAT. Will that have to be repaid in the third quarter? Or what's the timing of the repayment? Then a question on your strategy update, which you announced, you mentioned specifically the software part. When I think back over the years then the software business continuously has been mentioned as a part of the business with significant opportunities inside that area. Why are you considering divesting it now?

Okay. Hans Henrik, would you cover the 2 first questions and then I can cover the last question.

Yes. So with regards to the question on exchange rates, we have not encountered any significant changes in currencies. Normally, there is a -- you can see because we have a number of currencies in our group and there can be sort of a currency that offsets each other. And as -- for the first half year, we have had no significant either positive or negative impact on exchange rates. So no to that question. And regards to the postponed tax and VAT payments, it is deriving from different countries and therefore, the required payback time will be different from Sweden, Norway, U.K. and various places. So it will -- it is not all expected to be paid back in Q3. In Denmark, it is -- we start -- have to pay back some of it and -- but it is a little bit different. But I -- we have sort of expected that we probably are back to normal by the end of the year with that part of it. But it's a little bit different from country to country. And as we wrote, we have sort of covered ourselves in terms of liquidity in case. So we have actually taken a committed line of credit to cover for various situations. So we are -- I would say we are in a very strong place in terms of liquidity. And then I will hand it back to Thomas to talk about our software considerations.

Yes. So our software business is a very good business of ours. It is constituting about 35% of our EBITDA. So you're perfectly right that this is an important part of our business. What we are saying here is that we -- in connection with an overall portfolio review of our business is -- we are considering our options because we do see that the required investments and -- in that business is increasing. And while we are performing very well, we want to inform the market that we are considering our options in -- either to intensify the investments or to find their partners that might takeover parts of the business or create other kinds of working relationship and partnerships over the next 5 years. We see that the software market is changing a lot. We are primarily a services business. So therefore, it's a natural step for us to figure out what is the direction that we take for the software business. Erabelle, operator, do we have any additional questions?

No further questions. Please continue.

Great. So thank you very much for your participation. We will now close the conference. And I hope that everybody will stay safe. And that we will talk to you again on the 4th of November, if not before. Thank you very much, and goodbye.

That does conclude our conference today. Thank you all for participating. You may all disconnect.