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

Welcome to today's presentation. We have the pleasure to present Columbus. To join us today full lined up, CEO, Soren Knudsen; and CFO, Brian Iversen. The subject for today is put here on the front page of Q2 results and of course, also always there are the expectations for the rest of the year. As always, you're very welcome to ask questions in the box down below, do it in English, do it in Danish. I will try and translate the last -- the latter to the best of my ability. We will take the main part of the questions in the end to give a good flow. But for now, I think I will hand the call over to you, Soren.

Thank you very much, Michael, and thank you very much. Yes, I can't see the questions as they come in. So Michael can just interrupt me if there's something you want me to address straight away. Yes. But as we get said, my name is Soren Knudsen, and I'm the CEO of Columbus. I'm joined here by Brian, who is our group CFO. And the running order for our presentation is that, first, I'll just briefly go through financial highlights and some operational highlights, share them with you. And then Brian will go into a little bit more detail on Q2 and half year results, mainly Q2, where we look at some of the segment breakdowns from geography and the business lines as well how they have developed. And then we will conclude with comments on the outlook, followed by a Q&A session. So let's go to the next slide. All right. If we start from the very top, Columbus delivered a 9% growth this quarter. So that amounts to DKK 427 million and that growth is primarily driven by a very robust performance in our two big ERP business lines that constitute about 75% of our overall business but also two smaller business lines, so that's data and AI as well as the one we call CXE customer experience. And then slightly offset actually by not so impressive growth in our two business lines, digital commerce and security and Brian will come back to the details about that. Good. So the EBITDA result for Q2 amounted to DKK 30 million and that corresponds to an EBITDA margin of 7%. This is an increase of 2.4 percentage points compared to last year's second quarter as well for the comparable quarter. We are pretty satisfied that we're seeing improvement here, but we're also absolutely committed to a longer journey. As you know, the EBITDA-15 journey. So this marks sort of the first stepping in a series of improvement steps. And we will come back to sort of how we are setting ourselves up for further improvements as we go forward. Efficiency somewhat lower at 63%, down from 66% in the comparable quarter last year, also largely due to the setbacks in the two business lines I mentioned, so digital commerce and also in security. We've already taken the actions. So we'll come back to what they are and what we expect to see in Q3. Recurring revenue, so basically, just to explain, we have a large part of our revenue that is project-driven, but we also have service contracts and other business contracts, you could say that are recurring or sort of more annuity-based contracts. And that now constitutes -- well, it's increased by 13%, and that marks a small increase in sort of the mix to our project revenue, which we're happy about. Profit before tax declined by DKK 5.7 million, which is due to the extraordinary adjustments related to the acquisition of the ICY Security business. And Brian, again will come back on that later. Cash flow-wise, if you look at the operating activities, remained positive at DKK 16 million, marking an increase of DKK 12 million, and that improvement is mainly due to positive changes in our working capital. So again, sort of the overall statement for me would be satisfying results for Q2. There are obviously two things that we are working to address and have addressed but we're very pleased that sort of the vast majority of our business is running well and also from a -- both from a geography and from a business line perspective and it makes it -- from a managerial leadership perspective, it makes it easier to be very targeted about the things we need to correct and that we have corrected in May and June going forward. All right. Next slide, sharing a few of our operational highlights. So I thought it was worth a comment about the strong growth in our ERP business. We continue to see a very high win rate. So we are absolutely positive that we are taking market share there. We're also seeing improved project margin in these key areas, which is essential for our EBITDA-15. And some of the things we've also been asking ourselves is that this hesitance -- investment hesitance that we are experiencing in the market overall and IT services seems to be less pronounced for this one. And I think it's largely due to ERP systems being so absolutely business-critical as they are. They tend to be -- no customers tend to do this unless is strictly necessary and it's always been like that. And they have usually like at least a 10-year view on it when you work with big customers as we do, big enterprise customers. So this 75% part of our business is probably the one that's the least affected by a little bit less favorable general IT services market. So that's very good. I'll say a little bit about the steps we've taken here on cost management to go further towards the EBITDA-15. During May and June, we reduced our staff by approximately 60 FTEs as we start to sort of understand exactly how our organization needs to look to get our efficiency up a few percentage points and particularly, of course, to address the digital commerce situation and the security. What we've done. Commerce is a little bit of a capacity drawdown. It's a big unit. So we have drawn down the capacity a little bit. But percentage-wise, it's not super much. It's more a complete reorganization of the organization, more focused on sales, a little bit less management layer, more customer-facing organization. When it comes to security, a more significant adjustment of capacity, but also we've now integrated it with our biggest business unit, the Dynamics business line to get more synergies out. And particularly, we are pursuing this area which is called the cloud security. And essentially, what it means is that all of our dynamics customers are running on a Software-as-a-Service platform to use that generic phrase. And that comes with a big toolbox as they run on Azure, a big toolbox of security tools. But there's a big obligation on our customers to actually configure that toolbox and keep it up to date, which they struggle with. And that's the part of the business we think is the closest to us. So we continue to lean into this. We're not happy about our results yet, but we recognize the long-term potential of security. Next one is the appointment of a new People Officer. Katharina has joined us. She comes from Boston Consulting Group, where she's been for many, many years. German national, living here in Copenhagen and joins the executive team, perfectly timed for our sort of ongoing maturity journey of the organization and our previous Chief People Officer is going on retirement. So we're very happy about that solution. And finally, just a few things to celebrate both from the Microsoft side. We've again been awarded the Inner Circle membership and we've also won some nice awards in Denmark on our business applications abilities. In particular, we've won a nice award for the work we do on Microsoft platform with Bang & Olufsen. There are also great things to celebrate with our -- the other big partner, Info. It's also a very big company, not as big as Microsoft, but I would say we -- there, we work simply on the executive level, one-on-one between and the CEO, and we are one of the very large partners globally, and we continue to sort of develop our partnership together. That's it for the first highlight, and then it's over to you Brian.

Thank you, Soren. And Soren is sitting just next to me, you can see that on the other side of the screen. But just if we are looking outside the screen or the camera, that's why we just looking at each other. Okay. I am going to give you a brief overview of the business line revenue split. And as Soren mentioned, and as you can see, we saw a strong growth in our key areas or key business lines, which is the cloud -- key business line Dynamics and M3. Dynamics continued the strong growth and -- with 17% in the quarter Q-over-Q and primarily U.K. and Denmark was driving this strong growth. Also, as Soren mentioned, they have a very strong relationship with Microsoft, of course. So we see a lot of referrals and joint effort to go out to the bigger and medium-sized companies to really to promote strong usage of the whole cloud ERP landscape. M3 is also well back on the growth track, 10% on the quarter, 13% year-to-date. And actually, that was in Sweden, one of the few business lines when I go to it, that saw a good uptake in Sweden, where entry is particularly strong with the big industrial customers. So we're happy to see that there is a good momentum in this area. Digital commerce, where we saw the -- where we have undertaken a streamlining. So a drop in the revenue of 10%, also mainly in Sweden, where we -- there is some headwind in this market and the cost they are heavily linked to the whole retail business, which is seeing some bump on the road with our colleagues up in Sweden as well. Data and AI is back on the growth track again, Q1 was a bit dull in this -- for this business line, but they have a good revamp and we expect that to continue in certain -- in a fine pace, rest of the year and they are starting to get a very strong foothold in the whole AI business, not to go into that major part, but that is something that we're happy to see. CXE continue and that is a wild growth and they are moving up the ladder. If you look at our different business lines, and they are particularly doing well in the U.K. where we also see foot strong. But basically, in all our countries, they are growing well. And security, as Soren also spoke about is where we are lacking some momentum and have done quite a major revamp during Q2. Good. So overall, we are happy. And I think it's also a strong result looking into the market and what we can read and see in general, our growth of 8% organic in the quarter and 10% year-to-date. So we are happy with the overall development.

I think Brian now is the time I would just have time to look at one of the questions. So there is a question relating to the restructuring costs of what we've talked about. So 60 FTEs, as I said, a big part of that coming from the two business lines in question, but also fine tuning of the rest of the organization and all the costs are contained in the Q2 results. So -- and for us, the monthly, we -- they are in the month of June.

It was DKK 9.1 million for the quarter. That was -- we took in the -- within our EBITDA. Yes.

So all the costs refer to this program that is taken in this quarter. So if I may ask very simple, we won't see any more costs coming in the coming quarters for anything doing with this. Is that correctly understood?

It's correct that it's taken as normal operations. So it's not under any special items or anything like that.

And normally, we don't comment on it or go into detail because that's the normal change a little bit up, a little bit down. But this was a major or a bigger change. So that's why we also thought it was worthwhile mentioning. All right. Let's move on to the business line contribution, which is basically the key financial indicator we use when we run our different business lines and when we are sitting in business reviews with them. And here again, slightly the same picture, our 2, let's say, or 75% of the business that is accounting dynamics and M3 is running on a strong level, especially dynamics, which is keeping the high level of 28% business line contribution. And we are happy to see that M3 is moving back to a more sustainable and right level. There's still a way to go and we're working hard on that. But I think it's fair to say that one of our strategic initiatives to look at our contract profitability. So on a contract level is starting to pay off. Then on the other side, M3 in this quarter had a slightly lower efficiency that they normally have due to intake of new good consultants and work that might go a little bit right and left between the quarters depending on our customers. But the contract profitability is increasing, and that shows off in the business line contribution.

I guess, on this slide, that is the proof in the pudding that what you have said, Soren, that this was needle pointed. You could point out your problems. I guess this is the proof in the pudding, right? All other areas are moving up in the contribution margin, I know efficiency a little bit -- it can take a little bit longer to show. But I guess here, the proof in the pudding is that it's not broad-based. It is, as you say, is targeted and thereby also easier to deal with is a bad word to use here, but I guess this one is the proof in the pudding. Is that correct?

I can see there's a specific question that we can also come back to and I have to go into. But, you're absolutely right. The challenge has changed somewhat. So if you're working towards increasing your EBITDA level overall and you have issues with that level across all of the business, it's one issue. And now we're starting to see parts of the business dynamics in particular, okay? So we have that one. That's a little bit more than half of the business. We're starting to see our M3 coming back to full pace. We can also see CXE already. So we can more pinpoint where we need to address some of the smaller units, yes, where we don't have the same revenue dependency, to be honest.

All right. So if I just continue on the business line contribution just to take digital commerce and Security, as Soren mentioned, they were hit also by the restructuring cost and the provision for the people that we unfortunately have to lay off then, of course, also have a negative impact on their business line contribution together with the relatively downward trend in the sales. So these 2 factors, unfortunately, they ended on a minus level. Again, on the positive side, data and AI plus 14%, which is a good level, not fully where we wanted it, but still compared to last year, where it was around 12% -- yes 12%. So that's good. And CXE is back from Q1. Q1, they were in very low. So they are back on a 14% margin. All right. So that's so much for the margins, then let's move on efficiency and recurring revenue, not much to say here. Slightly slow efficiency, which is basically not satisfying, but we know where we have the issues and we've done the restructuring program that definitely will support that, that KPI in the coming quarters. So I think that's the most important point to say here, recurring revenue increased with -- from 13% to 14% of our total revenue, which is good. It's a focus area for us to keep that on a slightly higher increase than our service revenue increase. So we succeeded, although it's in the small percentages. Last slide from my end is the revenue split per market unit. And here, we see that Sweden still see some kind of headwind. It's primarily digital commerce, which is the second to third largest business line in Sweden as well, and they are heavily hit there. I think they dropped 25% in the quarter, alone in Sweden. And that's also where we are taking out most costs on this business line. Dynamics -- or Denmark is again increasing with double digits here 28%. And I think it's primarily due to dynamics, which have a very, very strong foothold and we continuously see a request for our strong experience consultants in that field. Norway is slowly coming back. We don't celebrate the success yet but at least we're starting to get in a small plus. And there is some light at the end of the tunnel. I think it's fair to say. And U.K., again, is a high-rise 43%, positively impacted by the smaller acquisitions we made by Endless Gain. But still, without that, it's 31% growth and that's still very strong in our U.K. market, where you could say that the economy in general in U.K. is not sort of helping us, but there is a lot of the question for basically all our business lines over there. So it's good to see.

And then there is actually a question is what is happening in Norway and Sweden, and you have alluded a little bit to it. Is it purely macro-driven? Because, as you say, you can actually perform in the U.K. Is it you are in the wrong business segment there where you are in the more right business segment maybe in Denmark. And then maybe lastly, you expressed a little bit optimism, and I am not trying to call you a big optimist. But you're expressing that something is turning. Are you seeing anything and/or is that the macro changing there? And what should we look out for on the macro side? Is the consumer or is it the general macro region? Maybe to talk a little bit about why your macro hit here and actually not in the U.K. and a little bit around that.

Okay. It's a very good question. So let's focus in a little bit on Sweden and Norway. There are many components. But if we start from the top down, yes, and just asking ourselves about the macro, as sort of the overall business environment. We do actually see that there is a little bit more of a slowdown perhaps in Norway and Sweden on a sort of our -- on a meter level, the market we operate on. But we don't assign a lot of the challenge to that actually. So I think we more need to go into for the Swedish part, exactly what Brian was saying. We have a big exposure to digital commerce in Sweden that we don't have in the other countries. It's simply a much larger part of our revenue. That business line typically has a very big exposure to the retail business. And if you look across industry verticals, all the verticals we operate in, the retail one is probably the one that sort of is fastest on the brake and the accelerator when they have macro uncertainties to deal with. So that's sort of the things where I would say, okay, something is from the external side. Then, I would also -- and we do see our competitors also going through some of the same challenges. Then, I would say there's also something for us to do, and we could be organized better, and that's why we've changed it. So we've simply optimized the organization, getting more emphasis on winning market share, a little bit less overhead. So we're expecting that to bring us something as well. The outlook that you asked about is the -- so we are very closely, both Brian and I into the business revenues of these teams. And when we express a little bit more light at the end of the tunnel, as you say, it's based on not the macro, we were not expecting big improvements at all, but simply, that's our own pipeline reviews when we sit and track on all the sales dialogues we're involved with. And also we can start to see some growth coming back into Norway. Last thing I want to point out, which has been a challenge for us a little bit, is that these 2 countries have been quite dependent on importing resources from Denmark and the U.K. to deliver as we've been building up this organization over the past years. And the exchange rate has made it a less good business for Danish consultants now to work in Sweden and in Norway. So we are sort of recalibrating our delivery set up a little bit and have increased the share of deliveries coming out of Poland and India to address that. Because as Brian was saying, we're very observant of our project margins going forward. We can't just keep revenue up. We need to basically keep revenue up with higher-margin projects. Good. Yes, I'll just briefly cover the outlook. And as always, it's subject to our disclaimers about sudden changes in the external business environment that could cause changes. We have, in our restating of our previous outlook, gone through a very meticulous sort of demand forecasting for the second half year, both based on external things, as I said before, but also our own pipeline, our backlog of orders, our current performance levels, our business revenues. And based on that, we don't expect the general market, not in commerce or in any other market to improve a lot, sort of the macro, the geopolitical. We are expecting a continuation of the first half year, more or less. And we've also taken a small consideration towards, if it gets slightly more difficult and we can contain that. And with that, we restate that we are set to deliver organic growth on the revenue side of 8% to 10% and an EBITDA margin of 9% to 10%. And then I think we have time for some remaining questions, Michael.

Perfect. Perfect. Let's start by one from the audience. How is your M&A pipeline evolving? Do you still expect additional acquisitions in this market? I guess you have an add-on on your New Heights strategy to '26 to put the M&A on. So a little bit about the pipeline and how this is evolving. Is there a potential out there. I know you can't comment on anything specific but your feel about this area.

Okay. Yes, that's a very good question. two or three things. The market is good. I mean we're -- there's a lot of things to be had, if I could say that there's a lot of things that are offered at a more reasonable valuation level than we saw a few years ago. And I think our capacity -- our financial capacity is very far from exhausted. As you can see, our debt levels are low, cash flows can support it. So that speaks for this being interesting. I'd say, thirdly, this thing that we've gone through with Columbus now, we have a super streamlined organization, systems, processes to integrate on. So we've built this backbone that we talked about for the last 2, 3 years. That speaks forward. The fourth one, which may sort of contracted a little bit is that, yes, we are interested. But I'm also a little bit picky in terms of not doing a string of very small acquisitions, because I'm concerned that we get absorbed with -- we absorb too much on our management capacity in small stuff. Like, we can do so much on our own, we can drive a good organic growth rate. So I would perhaps say as much as that we're a little bit more interested in bigger stuff, where we -- if we invest the management team's time and capacity, there should be a bigger price at the end of it to make that work. Yes.

And then of course, there's always a risk. We saw you also put back the earn-out from some of the deals because it's not living up to expectations. But I guess, how are you dealing with that, the risk of when you buy something and then really get open the books or something goes wrong, but not living up to your expectation when own it. Is that giving you some hesitance or maybe giving you a wish to add-on in areas where you're really, really strong instead of new areas. If you understand what I mean, it's always easier to build something even if it fits into a very strong [indiscernible] instead of building out something new.

Yes, yes, I fully understand the question. So I think if we look at security, that did not fit into any of our existing business lines and that's how we run our business. Those are the profit and loss centers, which means that we have to set up a completely new management structure basically all the way up to me. So that is much more difficult than a smaller acquisition like Endless Gain that clicks directly into an existing management team. They are immediately with colleagues that do the same. So clearly, we would have to have very strong reasons to build a new business area. And I feel we have those reasons for security, but it's much more attractive for us to find something that fits into our current operational setup. And then obviously, it's notoriously difficult to do the -- we are a people business, and we acquire people businesses. So -- and that's also why I want some size and scale because then it's more warranted for us to use as much time as we need to use to get familiar with the assets we are buying before we basically commit it. So -- and we can't spend all that time if it's always 25 people, 50 people. We need something which warrants our time.

And then actually a question regarding -- and it's a big discussion, and I know you probably don't have the full answer, but this hesitance by customers. I don't think you clap enough -- yourself enough on the back, you mentioned because it's really, really broad based out in the Nordic IT sector. You're over-delivering or as you said, maybe your area is protecting you. But what do you feel is the reason? Is it the macro? Is the uncertainty? And somehow also discussing the fact that there's big changes, maybe not so big in the ERP area, but in other areas with the AI and how do new investments fit into that and they want to wait and see and so on. So what are your feel that -- why is it that there's a hesitance for taking decisions in IT investments and the main reason for that and the outlook for that changing. What do you feel that, that needs to -- I know it's a hard question -- so maybe with something gets released and they start being feeling more comfortable and putting more money into it.

Yes. Yes. So we are quite happy, as you say, about our own growth rates. So the market growth rate has dropped as we were expecting, we presented that already in our expectations to the New Heights. So it's gone -- as expected, we were actually expecting the market growth rate to drop even more, but we consider it to be around the way we measure it to about 5% right now. So we are about double the rate of the market and so we continue to take our market share. And we need to do that, and that's good. The hesitance, what can release the hesitance?. I don't -- when I talk to our customers, to Board and executives, I don't perceive that to be targeted only at IT or digitalization or technology. I think basically, the big industrial companies of Scandinavia or the U.K., it's more an overall reluctance of things that could affect their business model. Global supply chain changes, security policy issues, which means that they have some uncertainty in their business model and that just makes them sort of a little bit more defensive in terms of how they drive their investment profile. So -- and the tricks that we've used and continue to use to encounter it is to be very, very transparent about the value we deliver, at what pace to allow the customers to chop the projects up in slightly smaller bites than what we usually see. And then we know that if we, at the end of one of those phases are not up to par, there's a price to be paid. So we need to be on our absolute A game when it comes to deliver quality to then proceed into the next one. And it's been like that for 2 years. So it's not new. And I've said before, I think it's healthy for our industry because there was a job to be done in terms of improving this delivery quality. And I think we've gone on the forefront of that, and we benefit from it.

Perfect. Then next question, what will drive the expected increase in EBITDA margin, which is needed to reach guidance if you include the onetime gains you have had this half year. So then you need to raise the EBITDA to reach your guidance interval. So what is -- what will drive this? Is there simply some seasonality? Or is it what you already put in place? Or is it so many factors that this call will be too long to sort of...

[indiscernible] with all of them. But we can certainly adjust. So there is a little bit of seasonality. The Q2 has all the holiday in it, but let's forget -- let's just forget about that. And I will also say that we've implemented a lot of things, but we -- by far, we -- this is a plan that goes all the way to 2026. So if we look at some of the components and the progress we've made, important is to increase the actual contribution margin of each project. So we've been working very much at our price points. We've been working on our subcontractors. We do use subcontractors for specialty roles. So it's not an insignificant amount that we spend on subcontractors, and we need to have the correct markup on them. We've come very far on that. And I would say the last one on that is having the strict quality that I talked about before. Because it works 2 ways. If you don't have strict quality, you have unhappy customers that in itself is a catastrophe. But also if we have quality issues, we end up doing free work to remedy mistakes or cost overruns. So those are the 3 where we've progressed the most and I think these are very, very healthy at the moment. But we -- it's a marginal game where you always want to get better. You chase and chase and chase, and we will never stop on that. Then we come further down. And it's a little bit about how organization is calibrated, where do we deliver from. And initially, we have very poor uptake of our resources in -- particularly in India but also we could get better in Poland and Czech and Chile, where we are also represented with delivery capacity. We've now really have made good use of it. And now I think we need to grow it slightly more. We don't want to be sort of a -- like some models where you have all of the people sitting in basically a salary arbitrage model that will never be us, but we need a little bit of a better balance on that. And we have quite a way to go on that, I would say, as well. And then the final one is a little bit of recalibrating the seniority levels of the organization. So we're very senior heavy and our customers like us for that. We have very, very skilled people always, but we are maybe shooting with a too heavy caliber sometimes for the problem. So we just want to -- we want to increase relatively a little bit the more junior level of our consultancy base, not by a huge order of magnitude, but somewhat. And we're still working on that. And I would say we're going a little bit slower on that than what we normally would because in a market like we see now, customers are demanding these senior resources. They want the absolute best every time. So it's a little bit harder to introduce this delivery mix. So I think that's what we can do now and we can certainly take it up in more detail on more area.

And then you already said -- the last question here, and then I'll let you off the hook. You already said that a part of this is getting more profitable contracts. Actually, I guess, is saying no is a part of it or leaving some of the contracts that is not so profitable on the table. And you already said you have seen some effects of that. But I guess the balancing act because you both have a growth strategy and you have an EBITDA strategy. And if the market was big and growing, it's always easier to grow with it and say no to something. But I guess the balancing act here has maybe become a little bit harder because of the market conditions. So how are you actually balancing this? Do you still think you can go for the good projects and still keeping up the growth. That's kind of what I'm asking?

If I said that one was easy, nobody would believe me on the call, but -- so that's what we do on a daily basis. And we need to meticulously evaluate. And some of these deals are very big, like it's big customers, and we can see 10, 20 -- like we've been with FedEx now for 30 years, like we have very big industrial companies. So we know that once we get in there, it has huge potential. But if we get in with the wrong set of prices, it's very, very hard to move in those global procurement organizations. So -- I can't say anything else. So this is probably [indiscernible] and this is what we need to perfect further.

And maybe what I'm asking you because I think your margin targets are very important in your strategy. You are not swaying from these to keep the growth. The balance still needs to be right, and margins are still not #1, but it's still important for you not only the growth?

It's very important, Michael.

I feel we are definitely not saying the course on what we've said and actually a little bit more reassured now because we can see these large chunks of the business that we discussed earlier in the call, now operating in line with what we want. So we know the dynamics now, I think they are more than about 610, 620 people. You start to have this and you're then sure, there might be a project which is not fulfilling the requirements but then there are others that do and you have this maturity of a business unit and we're starting to see some of the numbers. So M3 and CXE can operate on that level. And then we can go gas or break a little bit if we want more quicker growth, we might have to be a little bit more aggressive on the pricing. I still feel we communicated rightly with sort of the market growth of 8% to 10% on the top line, whilst we still pursue upwards year-over-year through the end of 2016 is exactly.

Perfect. Yes. Well, I think that was the last question from the audience or from me. So I will let you off the hook and enjoy the weekend. And thank you for all the listeners for listening in.

Yes. Thank you very much. Thank you for all the listeners for listening. Thank you. Bye.