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

Welcome to today's event where we have the pleasure to present Columbus [indiscernible]. Today's presentation, we are joined by CEO and President, Soren Krogh Knudsen and CFO, Brian Iversen. We are going to talk about your Q1 results, the expectation for the rest of the year. You delivered these results last week, but let's get some perspective on your performance here in the first part of the year. Looked pretty strong, but I will hear you whether you think the same. As always, ask questions in the box down below. Do it in English, do it in Danish, English and Danish, I'll try and translate to the best of my ability. But for now, I will hand the call over to you, Soren.

Thank you very much, Michael. Thank you, and good afternoon, everybody. Nice to meet you. Yes. As Michael just said, we'll be going over the Q1 2024 financial results, doing a bit of commenting on them. And the structure is going to be quite simple. I will cover the financial and operational highlights first and then Brian will cover the financial performance for the first quarter in a bit more detail. And then we will have a Q&A session towards the end. And that should set us up for a good half an hour. So, if we look at the Q1 first, I think we can start by making a general overall comment and that is that we are overall pretty pleased with the outcome of the first quarter. But there are, of course, nuances to this, which we would like to go through with you during his presentation. But let's just go through the top line numbers as they stand. First of all, the revenue, we have an increase of 14% corresponding to NOK 444 million for the first quarter. The EBITDA ended at NOK 55 million, which is an increase of 41%. There was an uplift in this number and which we'll come back to, which was a nonoperational event, the settlement of a legal dispute. The EBITDA margin was also positively affected by this, landing at 12.4%. So, an uplift by this one-off event and then a slight headwind from the Easter holiday. So, I think for those of you that follow consulting companies, you might have heard this before, but Easter can sort of shift between the first and the second quarter. And this year, it was in the first quarter, and that leads to fewer production days compared to last year. So, Easter alone accounts for 2 days and then there's also sort of the 2nd of January, how opportune is that in terms of providing a full work week in the first week of the year, and that was a 1-day deficit for this year. So, it's just basically a timing, which is back and forward in terms of the Easter. Our recurring revenue grew by 18%, which we're very pleased with. So, we have been aiming at getting that growth percentage up to at least the level of the combined revenue growth and preferably a little bit higher. So, we would like to have a slightly higher share of revenue coming from recurring revenue. And for those that are new to us, just explaining the types of revenue we have, we have a large, large part of our revenues are basically consulting revenues, and they are largely based on the time and material. But we also have these recurring revenue contracts, which we call them, evolve contract. They're typically customers where we've done a huge piece of installation work, implementation work. And then we have a role in monitoring and optimizing and future-proofing that solution going forward. And that is on a fixed or recurring revenue typically multiple year contracts. Also here, in this bucket, we also have a little bit of revenue from subscription and things like that. So, profit after tax, landing at NOK 35 million, an increase of 87% and then the cash flow is slightly down from last year, although positive. And again, I think, Brian, you might comment on that. But the 31st of March was on a Sunday, which means that I think a lot of customers took the opportunity to just do it on the following Monday, which means that we receive it in the second quarter, and that's how we do it. But I would say that in terms of our accounts receivable, which, Brian is the main, but I keep an eye on it as well. We have a very, very clean setup. So, we don't see any issues at all, but just a small timing effect there. Then in terms of efficiency development, this is probably the most important KPI, as you know, for a consulting company. We have been steadily increasing our efficiency percentage quarter compared to quarter, but also quarter by the next consecutive quarter. We're landing at 62% here, which you can see is actually not for the first time, an improvement in a long time. And I think for us, it means 2 things. First of all, we're starting to get up into a slightly thinner air. So, compared to when I started, there were some very easy things I could do to improve this metric. It's a little bit more difficult now, although we do still think we have some points to improve, definitely. And then I think some of the things holding us slightly back now we'll come back to that, is the actual business performance in some of our smaller business units that draws down the average somewhat. Good. And then as you can see, the revenue split here very, very similar to last time. You can see that our dynamics in M3 business still makes up about 75% of the business. And then we have the rest of our business lines with Commerce as the runner up to sort of the big 2 and then our investment business lines. And we'll get further into them as Brian comments on their individual performance. Good. Then I will make some very broad comments to the geographies we are operating in. And as you will see also from the financial report, it's a little bit of a tale of 2 cities where we have Denmark and the U.K. as sort of the front runners in terms of growth. We have probably, at least in Denmark, a little bit more favorable market conditions, not as such in the U.K., but I think the main part of the quite substantial growth these 2 markets deliver is simply that we've set up our own operations, our own organization, the way we do customer development and sales is working very, very well for us. So, we are taking market share big time in these markets. And then the other 2 larger markets in Sweden and Norway, we are, from an external and perhaps sort of more macro perspective, we are seeing a little bit more headwind. Markets are a little bit more hesitant as such, but I would caution reading too much into that. We're talking pretty small differences. But if you combine those small differences with our business unit exposure, where we have the Commerce business unit is very big in Sweden and also pretty big in Norway. The Commerce unit is very exposed to the retail sector. And the retail sector is probably the one where you're seeing the quickest response to macroeconomic uncertainties. So, they scale back a little bit faster on investments, and that is basically what's holding our growth back a little bit in Sweden and Norway. And then, I would also mention that Sweden and Norway have just been very big contributors to our growth in the past years. And sometimes you sort of plateau a little bit before you can take the next step. Otherwise, smaller geographies, we're seeing Germany performing very well, always exploring what opportunities that holds for us in the future. And the U.S. sort of at a pretty, I would say, stable level. Yes. And then let's go to just a few other operational things. We've taken the opportunity, as you can see here from the pictures, to upgrade our office facilities a little bit, which is important given that we are a people business, and we're starting to get more people into the offices. In Norway, given that we've grown so much since years back since we took the office we had, we were really under capacity. So, we inaugurated a new office there in early January. And very recently, we took the chance of moving our main U.K. office into the center of Nottingham in a new and very nice facility, which was simply a better working environment. And our people are very pleased with it and it further helps sort of dynamics about getting people back to work, getting customers to want to meet up at our facilities when we have planning workshops when we have strategizing sessions with them. So, having this sort of brings our strategy to life well. We further invested in enabling life science readiness, as you can see. This is about our new industry vertical life science. And for those that have followed us for a while know we are big into manufacturing. We're big in to food and beverage before we are big into retail. We continue those. We wanted to add a fourth one, which is life science. We're actually lending quite a lot of new customers into this segment. But to have sort of the long-term growth, there are a few new things we need to learn in terms of how to address them. What are the regulatory requirements that are separate to them, some of them they share with the rest of the FDA. But there are, of course, very specific things we need to build capabilities so on. So, we've set up a global team which works with the enabling of this customer segment going forward. We have second bullet, almost finished the integration of Endless Gain, small acquisition we did in the commerce space. This was very fast. It wasn't the biggest. It's been very successful. It's been very easy to integrate. People are mainly sitting in the U.K. and India. They have been integrated into our Commerce team and they specialize in what's known as click rate optimization. We didn't have that capacity or competence in-house before we now do. And particularly Sweden and Norway are pulling extra demand and will allow us to sort of grow that further. Yes. And I think with that and to have questions at the end, Brian, I'll hand over to you.

All right. Thanks, Soren. Then let's have a deeper look at the business line first, revenue development for the first quarter. And as Soren also mentioned, it's quite a mixed picture. But overall, we're actually very happy with the 14% growth or 11% organic growth for the quarter also seen in the light of the industry and some of our colleagues out of the market. And secondly, just to mention last year, I talked a lot about the FX impact compared to previous years. This year, it's fairly stable. So, we cut that piece out. It's a minor impact with you now because the Norwegian and the Swedish ground keeps on a steady low level, if we can say that. But overall, we're very happy to see that our 2 what we call the ERP cloud business line dynamics in entry is off to a very strong start of the year. This is around 75% of our business and is key for delivering during the year. So, that's very positive. Then as you can see, I know you have seen that we have some of our strategic smaller business lines, digital commerce, data and analytics or data and AI, as we call it today, had some headwind in the first quarter. They are mainly operating or they have a big part of their business in the Swedish and Norwegian market, which Soren also commented on, is seeing some challenges and especially digital commerce is heavy in the retail sector that, let's say, looking at its spending, they are spending at the moment, fair enough, and that do sometimes impact the speed of new projects and when they start. So, I think that a few comments. I think, again, I wrote it in the bullet, M3 is back on a growth track. Some of you might remember last year, they had some challenges here and there, but they are actually becoming stronger out of this year. So, that's really nice to see for our big team up in Sweden. All right. There was the revenue. And if we then have a brief look at the business line contribution that's a key measure for us towards our business line executive that is running each business line. Again, and of course, it's heavily related. If the revenue is healthy, it's strong, it falls down to the bottom line. And again, the dynamics and especially M3 is off to a solid start, and both of them is running on close to the healthy around 30%, which is definitely some of the internal targets slightly that we are setting for our business lines. Digital Commerce and data and AI, as mentioned before, saw some headwinds. And as we have a lot of valuable consultants, all know that it's not like getting offboarding and onboarding, that's not something you do during a month or 2. So, it's a constant optimization and believe in what is the right and best set up. But, of course, we are taking that seriously. We are looking at it and see where we can optimize and if needed, smaller restructuring. Then at the end, I might put a comment on security. As you know, we acquired that a year ago. And I think as some of you might have read as well, we strongly believe this is an important leg to our offerings, but we have seen some challenges in getting that up on our fair profitable level. But again, we have some solid plans and that is high on my agenda as well for the coming quarters definitely. But overall, we are happy and as Soren also mentioned that we saw the Easter. So, in the consulting industry to compare like-for-like with Q1 last year, you might need to adjust for the Easter holiday and the loss of revenue days that we saw in Q1. And if I do a rough calculation, it is around $10 million or 2 percentage points on the bottom line and that you can, of course, discuss back and forward and calculate the base in XL, but that is a some of rural number that we use internally. All right. Next slide, that's briefly about efficiency and recurring revenue, some of our KPIs that we follow very closely, Soren talked about efficiency. So, let me just briefly comment on the recurring revenue. It keeps on around 13% of our total revenue, which is okay. But as we also have mentioned earlier, that is an area that we definitely want to explore more and are putting a lot of effort in growing. It's a nice and strong service to our valuable customers and after implementing a new ERP system or whatsoever that we can continue and give them the right support in that. So, we push on that. But again, at least they are growing in the same line as our general construction business. Last slide from my end is the revenue spread per market unit. Again, Soren mentioned it, we saw again a very strong Denmark coming out into Q1. This is including security from last year. So, it's around 26% organic growth, which is still very healthy, and we really gained market share in Denmark when we look at it a bit deeper. Sweden and Norway, a bit flattish, which it's not a 100% as expected. But again, seen compared to our colleagues out there and compared to the market in general, I think it's a fair achievement that they keep it good and flattish. U.S. is very small so, a few projects coming in and out within a quarter, of course, effect that quite heavily. But overall, as I mentioned in the beginning, we are very satisfied with the solid growth. So, if I end that up in our outlook for 2024, we still maintain the outlook as we set out when we released the annual report for 2023. So, organic growth of around 8% to 10% and EBITDA margin of 9% to 10%. And, yes, good. I think that leaves some time for questions.

Yes, let's jump to the questions. Let's start by this Easter effect. I think you mentioned now 2 percentage points was the effect. So, that was one of the questions. So, if we can just bridge this, if I do understand you underlying without -- if you take away the positive effect, onetime effect and then add the Easter effect, are you then landing around 10% or something like that in the quarter. Is that a good ballpark?

That's well calculated, Michael. But that's around the 10% point. If we adjust for Easter.

I know there will always be swings there. And the second part of the question is, will you regain that? Will that be a positive effect? Is that automatically regained when you get more working days, our contract fulfillment and so on? So, it will be a boost to your second quarter as also a question automatically. Is that correctly understood?

So, the 2 days for Easter, yes, will be regained. So, that's what switches back. The 1 day lost compared to last year in calendar week 1. If you look back in your calendar of last year, you will see that it was a really, I think, I don't know if it translates well to English, but it was an employer's Christmas or whatever you call it last year. So basically, the 2nd of January, which is the first working day in 2022 was a Monday. So, you kind of get 5 full bang for the back. And now in 2023, you're losing 1 day in the first wave. You don't get that one back.

Then there's a question regarding M&A targets. Any candidate in sight, I know you can't answer that fully, but you can talk about your pipeline or maybe the areas where you need to maybe, yes, strengthen your capabilities.

So, I can certainly say that there are candidates insight. So, we do have the sufficient size that means that we have a dedicated function that continuously looks for new opportunities and maintains an actual pipeline of companies that we talk to and that we develop, just like you would with a sales pipeline. So, we have some that are in very early initial dialogues. There are some we follow up on and some we go further and further with. I can't comment obviously on sort of how advanced we are with some of them, but M&A certainly still forms an important part of our strategy going forward. I've said a little bit about my considerations before I can perhaps just reiterate some of them. And they go something along this is like I'm very focused on integration and successful integration. We can see how difficult it has been for us to integrate ICY. We can see how successful we work in terms of integrating Endless Gain. So, if you acquire companies in the consulting industry, it's all about the integration. You're not buying an asset, you're not buying a factory, you're not buying something, essentially, it's a people thing. So, integration is super essential. So, there are some considerations about that, is that we can't do too many too small because there's a certain entry level fee in terms of our own management effort, which is the same regardless if we require 50 people or 500 people. So, we have a consideration there in terms of also evaluating slightly bigger opportunities. There's then the usual distinction, I would say, where we need to be very mindful of why are we acquiring? Is it a capacity game where we simply just in a successful market unit in Sweden or Denmark just saying, okay, we're very successful here. Let's get more capacity. That's one type. The second type is that we know that we are very successful in one business unit in one geographical market. So, there's no reason we shouldn't be as successful in a different geography. So, we'll look to make a head start because we know what we're getting into. That's the second one and perhaps the second is the third one, which is security, and that's getting into a completely new competence, which security was for us in this type of security. That's the most difficult one, but sometimes we need to do it. And those are sort of the 3 lenses we evaluate on.

Do we need to work with capacity adjustments to catch your guidance this year? Maybe the question was because your margin was, but that sounds like the Easter effect, but maybe also because you could see that the efficiency was maybe not that strong in some business lines.

Let me start and then you can follow up, Brian. So, I think the first answer for me would be, in order to reach the guidance, I don't think we need to work with capacity as such. But will we work with capacity, absolutely and also with some capacity adjustments. And there's a difference now to last year in the sense that the 2 very big parts of our business dynamics and M3, that makes up 75% of our line, but much more of our contribution are running very healthily. And we have full capacity flow across the borders within those business lines. And then obviously, there is an overcapacity in some of our smaller business lines, which we're continuously having a look at. And what it comes down to here is that, these are future growth engines. So, we're not just going to take capacity out to optimize our results on a 3-month basis or 6 months. It doesn't work even that fast in the Nordics because of other things. So, we're quite committed to these areas. But that being said, of course, we're mindful of that and what I have done since I joined is, I've placed a number of strategic bets, some of them are already working, some of them we expect to be working. Of course, when you do this, not all will work. And then obviously, you need to adjust once you've seen enough for that. And we will always be doing that, and it's not linked to sort of the guidance for this year. And then the counter question could perhaps be well, why not just address everything that's below 64% or 68% straight away? Well, that's because I have an expectation that, that can contribute positively to our future growth. And then, of course, Brian has the EBITDA 15 plan, which I started and asked him to complete and says, "Yes, but there's this one as well". That's the balance we continuously work towards. So, we need to have the growth and the and the EBITDA positive development as well. Brian?

Yes. But I think you said it. I mean, it's always on the agenda. And as Soren said, it's easy to adjust your capacity, but then you also adjust your capability of gaining revenue in the future from very strong consultant that you have invested in. So, it is, of course, a constant balance and also to look a bit into the future and see what you have a project, what is the pipeline, what is coming up, et cetera, et cetera. But yes, the short is probably, of course, we always look at it, yes.

Yes. Then there's a question around the cash flow. I think you also answered that I also heard that from some of the other companies that the working capital because of this Sunday. So, there's a question here. Do we expect the cash flow to be around the same level as last year?

Yes. I think short answer is yes. We had a cash conversion of around 65% last year and that is what we are working towards. The only little thing that I see, but it's really minor is, of course, the bigger project and customers that we get the tougher they are on payment terms. That's how it is. But we are working hard on that but, yes, we expect the same thing. And March was ending on a Sunday. And as all good citizens, then you don't pay 5 days early, you pay 1 day late. I think we did the same. But that is hard work here.

Then there's a question here I will just ask, is the drop in CM dynamics due to increased competition in the market?

No. So, I think you're referring to the 1 percentage point drop from 30% to 29%. So, the overall contribution, of course, has grown with the revenue. But, no, I wouldn't say it's down to the competition. We are very mindful of now with the fast growth in dynamics that we go into the right contracts, and we're also sometimes walking away from business that doesn't contribute positively. So, what is it? I think what I can say is the following. First of all, around 30%, then it's good, like then a lot of things have to be good. Then there are 2 things holding us back from even going past the quarter-on-quarter comparison. One thing is that actually not all business units were fired. Despite the fast, fast growth, you will be able to see that Norway and Sweden are just picking up pace again. That would have contributed positively. And I believe also, as I said before, we have a very, very healthy accounts receivable. But in the first quarter, Brian, correct me if I'm wrong, in the first quarter, we had the first small write-off in a long time.

Yes.

Yes, exactly a Norwegian customer that went bankrupt. Not a big amount, but when you're into that small. Overall, I can say, I'm very pleased with, it's actually one of the things which I was pretty content with when I joined Columbus was that, the accounts receivables were run quite tight, but we've improved even further on it, and we chose as part of all of these macro geopolitical things to be even more mindful of it. So, we have very few losses and we have very few issues with that. But obviously, we have more than 1,100 customers across these geographies. Sometimes, we will experience a bankruptcy.

And then, of course, can have a small effect. I will leave you after Hope for asking your last question on the guidance, I need to do that as an analyst. So, if we corrected you got 10% in EBITDA margins and ballpark, you were above on the organic revenue growth. I think some of your colleagues in the market indicating that Q1 was the tough one, and they were seeing better outlook looking into the second half of the year. So, you kept your guidance, maybe another way to ask that how sustainable is this ERP cloud growth? Is it a too good quarter? Or is it actually you performing well being in the right industries? And you can see that continuing because I think there are maybe the answer lies a little bit. Is this sustainable? What you saw here and the good growth trends are the right things dragging you are working in the ERP cloud, I would say, and would that continue? I guess that's the second question. And, of course, regarding your guidance, you did upgrade it. I know it's early year, but it seems you're looking very good.

In terms of the 2 big ERP units, I think both Brian and I are feeling pretty complete. So, we look at the pipeline as well, what do we have incoming what's the order backlog, which big projects are coming towards an end. But these are fairly large business units now, and you tend to see that when you have a number of big customers, then it kind of evens out and then you have a small growth in it. So, I would say to that, it's sustainable. They are pretty big ships. And once they're up in speed, they don't just stop. On the other hand, you won't see a tripling suddenly of the growth that you can in some of the small business units because they're larger ships. So, I'd say Brian and I are mainly focused on the smaller business units that we commented on before.

And just to return to this ERP because it has been a good growth area, but maybe not a high growth area. Has people underinvested in their ERP systems? Have the challenges out in the world, been driving them needing to invest more,? Maybe if you can give some color on it, I know it can be hard to just mention one thing, but just to get a feel of it because it seems like, as you said, it's nice to fire on both your big cylinders. And, as an investor, I think it's important to understand whether that's a new normal or something like that.

Well, so obviously, if we go back a few years, what's driving it, so, the transition to cloud is almost complete, I would say, now, there are still a few that are on-prem running on-premise, which means they have their own basically installment. And you can split them again in 2. Some have done it for specific reasons that they believe that to be the right setup and some haven't gotten around to it. But to a large extent, we've now lifted companies into the cloud. There's huge benefits in terms of the transparency and how uniform the setup can be, I think the customers are experiencing. As part of this journey, and part of our advice to them was don't do as much coding, don't do as much customizing. So, we call it adoption to standards. Most of the companies don't like it initially when you say it because it's less bespoke to them. But it gives huge advantages in terms of life cycle management for them. And it also makes it much easier for them to acquire companies, to divest companies, to integrate their ERP system with different, could transport management, warehouse management, e-commerce, that we also do all of these solutions. So, I think they're just seeing the benefits in terms of business transparency, in terms of agility, in terms of security, in terms of predictability are some of the areas where they're reaping the benefits. And then I think what we benefit from in Columbus is that, we've sort of upped our track record, it's almost like building a house. The past holds many ERP projects that were way over budget, way over time. We emphasize a lot on predictability and quality and perhaps that's something that drives our increase in market share.

Perfect. That was nice. And I know you're probably not going to comment on the guidance, but with the strong start to. But maybe the last point, do you also see as some of your colleagues out there said that maybe there could be some better economic growth in the Nordic region in Norway and Sweden and maybe there could be a little bit pickup in market growth in the second half of the year with a better European economy or what you might say. Is that also something you are feeling or hearing?

It's very early days in Q1. But I can certainly say now that we are halfway into Q2 that we still see a very reasonable activity level going forward. And, yes, I think I'll leave it at that, Michael, for now.

We also a little bit over time. So, thank you to you, Brian, and Soren for taking us through your results, and thank you for the audience for listening in and asking questions.