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

Good day, and thank you for standing by. Welcome to the Columbus Annual Report 2021 Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded, Wednesday, the 16th of March 2022. [Operator Instructions]. I would now like to turn the conference over to your speaker today, Soren Krogh Knudsen. Please go ahead.

Thank you, operator. Yes, my name is Soren Krogh Knudsen, and I'm the CEO and President of Columbus. I'm joined here today by Hans Henrik Thrane, who is our group CFO. So first off, thank you for joining this afternoon. We look forward to taking you through the 2021 financial results and some very recent updates on our company. If we just go to Slide 4, I will walk you through the running order of business or the agenda. At today's call, we will start by giving you an update, a very recent update on our activities in Russia. And following that, we'll be looking at the milestones and financial highlights of '21. Hans Henrik will share the full financial review of 2021 after that. And then we will end the presentation with an outlook for 2022 with some long-term guidance, followed by a Q&A session. Yes. Okay. So let's go to Slide 5 to begin the presentation. And the first agenda item is an update on our operating activities in Russia. And as a consequence of Russian's invasion of Ukraine, Columbus has been investigating options to exit the Russian market. And as of today, we have entered into an agreement with the management team, whereby we hand over 100% of the ownership of the Russian business to the management of the Russian business. The agreement is effective of today, and means that the Russian business unit will cease using the Columbus brand immediately. We do consider the handover of the Russian business unit to the management group in Columbus Russia, the best solution under the given circumstances. With the agreement, we secure a very rapid entanglement -- complete entanglement of our Russian activities, and we still think it's the most responsible solution we can give to our former 213 Russian colleagues. The agreed purchase price is DKK 2 million, which will be paid to us in year 5 and year 4 after closing, so in 2 installments. In 2021, the revenue we saw from the Russian business unit was DKK 68 million, which was 4.5% of group revenue. However, since then, the exchange rate for the ruble already, prior to the invasion, had gone down by quite a lot. And now after the innovation, of course, that has diminished what we could look into as revenue stream for 2022 in the first place. So somewhat softening the effect. And due to the decline of the ruble since the beginning of the year, the carrying value of the Russian business has also declined, of course, from about DKK 20 million to DKK 11 million. So with the agreed purchase price of DKK 2 million, the negative impact on group equity will be DKK 9 million. And that is our update on Russian activities. We continue to provide support for associates and their families in Ukraine, and we'll be further looking into that in the hours, weeks and months to come. Moving on to Slide 6. The milestones and financial highlights of 2021. So 2021 was in many ways, including Russia that we just talked about, a year of transformation for Columbus. It was the first year of the Focus23 strategy, with the ambition to become a trusted digital adviser for larger enterprise clients in the retail, food and manufacturing industries. During the year, we have implemented major changes to our organization to streamline our business and increase our operating efficiency. Part of focusing our business has been the completion of key divestments. In January, we divested a software -- our software company to increase in the Netherlands. We've divested some 2 smaller units in the Baltics. In November, we sold off our small and medium business segment in the U.S. And as of today, we have sold the Russian business unit in its entirety, leaving us to focus on our core geographies. In April last year, we also launched a new customer-centric organization, a complete new operating model with global Business Lines and local Market Units, rather than just the strong local market units. And this new operating model allows us to apply our global strengths much better. We can basically leverage our global solutions and drive a higher degree of customer focus across the entire organization. So in short, we are creating much more of a 1 global -- Columbus -- one unified Columbus to allow us to operate at scale. To support this new organization, we also implemented a complete new global ERP platform, which is now operating. The new platform has increased our level of financial transparency and our ability to control the business. And it also allows for much better cross-utilizations between our service units and market units. And the effect that we're looking for here is, of course, to improve the efficiency or the -- if you will, the billing rates of the company further, and we're already seeing some of that improvement in the 2021 results. During 2021, we also launched our new company values, which I will just come back to as a separate topic a little bit later. Just from my side, looking into the 2021 financial highlights. We did realize a revenue of DKK 1.482 million -- sorry DKK 1.482 billion, and that does correspond to an organic growth of 5%. And while the year started actually with negative growth in Q1. If you remember, we did see quite significant growth of 11% in Q3 and 15% in Q4. So we are gaining some momentum, and we're really happy to be back at delivering organic growth after, I believe, many years. This is a core part of the Focus23 strategy. The normalized EBITDA increased by -- sorry, by 22% from DKK 90 million to DKK 109 million, resulting in an EBITDA margin of 7.5 -- sorry, 7.4%. And I think given the transformational efforts that we undertook in '21, we are satisfied that EBITDA margin level is as expected by us. And also, I would say, all in all, as a management team, we consider the consolidated results for 2021, in line with our expectations. Most importantly, we can see ourselves now being back in organic growth and a clear path to further improvements. Coming back to the values, I think it's important to start with that we are -- we have always been, but we are even more so today, a people business. So our entire business is built on talented people who are serving customers all over the world. And the values of our company is extremely important to these people. With many acquisitions during recent years and a new strategy, we saw a need to strengthen our One Columbus culture across the globe. And therefore, we launched and completed a global value program to define our common values. So with the program, we identified and adapted 4 core company values. The first one is to stay curious. The second one is to trust and collaborate -- or sorry, to collaborate. The third one is to build trust. The fourth one is to be very focused on delivering customer success, which is both our success with the customer and the customer's success with the products we deliver. I think all of these 4 make perfect sense on their own. But for us, they probably make more sense because they also represent some strong improvement areas for us, and they're completely necessary for us to deliver on our strategy going forward. We're all very excited about the result of the program. And especially, I think we, as a management team, have been impressed by the commitment and great level of involvement from almost all of our 1,800 employees. So this has been a bottom-up exercise with involvement from all our employees. And basically, all we had to do was synthesize the results and present it back. So it's really owned by the organization rather than just being defined by us and communicated. Now of course, the next step will be to fully live by at all times. And I think we've tested that today with our decision in Russia to live these values. And also, we are working on expanding them into some very firm leadership principles that our leaders across the firm can operate by, and that should further drive speed and the ability to have decentralized and sound decision-making all over the company. So nobody has to wait for us. And I will now hand over the presentation to Hans Henrik, who will cover the financial update in details.

Thank you, Soren. So yes, on Slide 8, you have the overall income statement. And as mentioned, revenue grew organically by 5% and service revenue rose by 7% as this is a strategic focus areas. This is where it is important to us to grow our business. Other external costs decreased by 10% to DKK 123 million, and this reduction is primarily related to lower costs for external consultants and less interim travel as 2021 was also a year heavily impacted by COVID and work from home and much less travel. So Columbus realized a profit before tax of DKK 55 million, an increase of DKK 21 million compared to 2021. And the increase is driven by EBITDA growth as well as less financial expenses due to less currency adjustments in 2021 compared to 2020. Profit after tax from discontinued duration amounts to DKK 697 million in 2021. And that, of course, sort of overshades (sic) [overshadows] the remaining result. But the results from this what is called discontinuation duration is, by and large, the realized gain from when we divested our software business in January 2021. So now we move to the next slide, to the Slide 9, where we see growth in service business. And again, service revenue increased by 7% to DKK 1.3 billion. And in the above chart, you can see service revenue split in our global Business Lines. And the biggest growth rates are delivered by Digital Commerce, Data & Analytics and Customer Experience & Engagements. They are still incumbents or small Business Lines, but they are growing heavily. And -- but in general, the increase is driven by all our Business Lines, and I will shortly go through each of them. So Cloud ERP, the biggest one grew by 1.1% to DKK 689 million. And this business is covering what we call both our Dynamics D365 and our M3 Cloud ERP businesses. The small growth is mainly due to lower M3 revenue in Sweden. That was offset by strong growth in Dynamics D365 business in Norway and Sweden. Columbus Care delivered a growth of 7.3% to DKK 261 million. The revenue growth is mainly from increased revenue in Norway and U.K. Digital Commerce growing 22.7% to DKK 157 million is actually coming from all our markets. And Data & Analytics increased by 16.1% to DKK 38 million. And here, the revenue was driven by Denmark, Norway and Sweden. And the last Customer Experience & Engagements grew by 26.3% to DKK 30 million, and this revenue increase is delivered by Norway, Sweden and the U.K. So next slide. And now back to sort of the -- go back to about our -- what we call the recurring revenue. Recurring revenue rose by 12% to DKK 319 million. The recurring revenue now constitutes 22% of total revenue for 2021, an increase from 2 percentage points from last year. Year-to-date, the development in the recurring revenue shows good overall progress. Cloud products grew by 41%, and Columbus Care contracts versus our service contracts, they grew by 19%. However, the subscription declined by 10% as these are related to the own perpetual licenses and is part of the overall Cloud conversion. So this is an expected development that the subscription part will continue decline over time. We consider the overall development in our recurring revenue for us satisfactory. So now we move to the next slide. So this customer work is our biggest KPI in our service business, and our chargeability increased from 54% last year to 57% in this year -- or in 2021. This is an important -- this sort of KPI is a very important driver for both growth in our service business, but also our overall profitability. So during 2021, we have onboarded many new colleagues, while continuing to increase the customer work. And the explanation is a strong focus on fast onboarding and a steep learning curve, which ensures that many of our new consultants were quickly able to deliver on customer projects. We consider the development satisfactory. So now I move on to market units on Slide # 13. So now when we look at the business from a geographical point of view or market point of view, you can see that especially our market unit in Norway delivered a strong revenue growth of 47%. The way we show the market numbers here is the revenue in the market and not sort of revenue across market from one legal entity to another, but -- so this is purely revenue in the market. Our U.K. business also delivered growth in 2021. However, Sweden and Denmark did not deliver as expected. In Denmark, we have been challenged in both our Cloud ERP D365 business and our Care business, where 2 large contracts were discontinued. In Sweden, we have been challenged in our Cloud ERP M3 business. And during 2021, we have invested heavily in reversing this trend. And we actually here in the beginning of 2022 see a turn of the trend as we start seeing growth in both Sweden and in Denmark for the first 2 months of 2022. The growth in Columbus Norway is mainly driven by our Business Lines Dynamics 365, Columbus Care and Digital Commerce, but all Business Lines are growing. So overall EBITDA normalized has increased by DKK 20 million, and the increase is primarily driven by increase in U.S. where EBITDA increased by 66% due to cost adjustment of the business after our divestment of the SMB business mentioned by Soren earlier in this call. So that was sort of the walk through of our P&L and our segments. So now I'll hand back the conference to Soren.

Thank you very much. And I will now cover the outlook for 2022 on Slide 15 as the last topic just before we go to questions. 2022 will be focused on bringing our operating model further to life. As I said, we've invested in this sort of rewiring our operating model completely. So as we bring that to life, that's our way of driving further organic growth. And we will also continue our focus to streamline the operations further and bring up the efficiency and profitability of the company. Hans Henrik just showed you before, the increase from 54% to 57%, so 3 percentage points in what we call customer work, which is sort of the chargeability of everything we have, not just the consultants. And we need to drive that further north. We will expand and grow our key solutions into more of our geographical markets. There's a significant potential in that, and we'll focus on growing a broader range of our business-critical solutions portfolio. We also continue to invest in building our digital advisory capabilities. That's a bit of a longer-term investment for us. We need that to roll out in more areas of our business. And we also develop propositions around sustainability, which our customers show us there's a big demand for. Columbus' ambition during the current strategy period is to gradually increase our profitable growth to a minimum of 10% annually by 2023. And it's a level that we're starting to hit as of Q3 last year and Q4. So we can see ourselves landing on that level. The revenue, now excluding Russia, next year is expected to be in the range of DKK 1.525 billion to DKK 1.625 billion, corresponding to an organic growth of 8% to 15%, respectively, and that's excluding now Russia, which we've just removed today from the numbers. Now the EBITDA is expected to be in the range of DKK 120 million to DKK 145 million, which corresponds to a growth of 16% to 21%. And that concludes the guidance and outlook for 2022. And with that, I think we should open up the lines, and I think the chat room has been open all the time, and take any questions.

[Operator Instructions]. There seems to be no questions from the phone lines at this time.

Okay. So let me just read out, [ Michael's ] -- Hello, [ Michael ]. And I'll just read out your question loud. Thanks for the business update. Can you please talk about the business potential you see within digital sustainability, and to which extent we should anticipate this to be an important growth driver going forward? Right. So Michael, what I would say is that -- so obviously, sustainability as a general topic has a lot of traction everywhere right now. And given the nature of one of our biggest business area, the 3 letters, ERP, enterprise resource planning. So I guess we've always been involved in sort of the agenda of being more efficient and reducing waste. And we're just seeing -- I would say we're seeing an increased demand and interest in this, but it's also a different way of positioning our projects to the clients. So overall, I do see it as a growth driver, but I also see it as sort of a tweaked agenda for many of our customers that they continuously need to demonstrate that they're doing everything they can to operate in a more sustainable way. And our systems can help them to improve there, and our systems can also help them document it. And many of them are undergoing much more rigorous requirements for reporting and those reports can come out of our systems. And then [ Dark ] is asking us -- well, that's a good question. Will we go north of 60% in 2022? You want that one, Hans?

Yes. We are considering sort of changing that KPI to sort of an efficiency. But if I translate it into these metrics we're showing here, it is definitely going to be improved by another 3 percentage points for 2022 because that is a key focus area to improve both the growth and the profitability. So a clear, yes.

Yes. So I would agree the answer is definitely yes, [ Dark ]. And I think I'll just spend a minute on trying to explain what we're after here. So the customer work percentage, which you're used to seeing, and we'll continue to provide it. But it basically covers 2 things. It covers the efficiency or the chargeability of all the resources that we have that are meant to be used as chargeable resources. But it also tells you something about our overhead percentage, and it's all crammed into 1 number. And that's why if you see improvements, you can't know exactly whether it was due to better chargeability or lower overhead. And as we go forward, we will also be presenting you with a more raw version, which tells you what's the efficiency of everybody who's meant to be the invoiced towards the customers. That will be a much higher number, and then we will provide you with an overhead percentage, which you can then evaluate separately. So that was a very long one, given that you answered yes.

Yes. A very good...

So -- okay. Can you put some word on the loss of the big contracts in Denmark? What was the reason? And do you know which supplier took over?

Yes. I think one of them was due to a customer that went on SAP, so sort of left the technology we sort of are supporting. And I simply cannot recall the reason for the other one, but the one converting to SAP was also the biggest one.

Okay. And then I will read this one, so you can think about it because it's for you, Hans Henrik, a request for you. Again, in 2021, but also in 2022, divestments will change the historical numbers, making it difficult to know what to expect in quarterly revenues and earnings for the coming quarters. When you make transactions impacting historical numbers, could you please then report related -- or restated numbers for the last 8 quarters in the connection? And that's from [ Michael ], again.

Yes. And thank you, [ Michael ]. You have asked this question earlier. I remember. And we have taken notice of your ask, and it is important that we show this transparency. The honest reply here is that with all the transactions we've been through and the key personnel on parental leave, it has simply not been possible within the time available to produce these restated numbers. But I will put it on our to-do list, so we can provide it going forward, Michael, so we help ease the reading of our reports.

Right. So I think we're at the end of time. If there's one last question, we will take it.

[Operator Instructions]. There are no questions.

All right. Okay. So I thank you all for your time this afternoon. I think there was a lot of events falling into place just before this call. If you have any further questions sort of once you've had a sufficient time to digest that, Hans Henrik and I are more than happy to take individual conversations with you as well. All right. Thank you, and we wish everybody a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.