Knowit AB (publ) (KNOW) Earnings Call Transcript & Summary

Welcome to the Knowit audiocast teleconference Q4 2021. [Operator Instructions] Today, I'm pleased to present Per Wallentin, CEO; and Marie Bjorklund, CFO. Please go ahead.

Hello. Per Wallentin here and welcome to this presentation of the year end report 2021. And as you mentioned, with me today I also have my dear friend, our CFO. Next slide, please. Overall, the fourth quarter was characterized by high activity driven by good demand in our services and by the continued integration of the acquired business, Capacent and Cybercom of course. So I'm pleased that we delivered net sales of almost SEK 1.6 billion corresponding to an increase of around 5.5% and that's around 4% in constant currencies including the acquired entities. We delivered an adjusted EBITA of SEK 181.1 million and that's our strongest quarter ever and that's with a healthy margin of 11.5%. We can take the next slide, please. Looking back at the full year 2021, we took great steps in building a stronger Knowit. As you recall, we are now organized in 4 business areas. We added a new area Connectivity and we also integrated Creuna first and then Cybercom and then Capacent into the Knowit organization. And of course, the integration work has affected all business areas. We have been able to gain from cost synergies, but we also have seen costs from the reorganization work and restructuring work because there's been a lot of changes in the organization of course. But the margin potential is, in adding further competencies, allowing us to take on larger and more complex assignments. So good progress in the integration. For the full year, we delivered annual net sales of over SEK 4.8 billion, up around 4.7% including the development in the acquired entities and adjusted EBITA of SEK 488 million corresponding to a margin of around 10.1%. And of course, it's very encouraging that we for the eighth year in a row are delivering an improved result. We can take the next slide, please. Our vision of a sustainable and humane society is hugely important in building Knowit for the future and I think that's a key differentiator in our employee brand. We have during the year taken large steps in our sustainability work. We are measuring how we help our clients to contribute to the humane sustainability development goal following the model initiated by Cybercom. It was really good to get that from the Cybercom board. We are measuring our own CO2 footprint. We are working actively to promote gender balance, as you know, since many years at all levels in our company and I think that our strategy has paid off. We enjoy top ranks in various surveys and we have an employee Net Promoter Score of 30, which is a lot better than average in our business. There's lot of people working at Knowit today that gladly would recommend their peers to work at Knowit in the future and that's extremely important going into 2022 because the best of 2022 I think will be to keep and recruit people. We can take the next slide, please. We will now take a look into our business areas more in detail. And we start with Solutions, our largest business area, reporting net sales of SEK 912 million for the quarter, up by a lot 11.7% to previous year compared as Cybercom has been included last year. We continue to grow across the board with an especially strong development in Norway and Sweden and that's our largest market. The business area has been strengthened by consultants from Cybercom, which has been successfully integrated. Solutions have been the business area with most effect of the integration of Cybercom. We are pleased to note some large assignments, new assignments in both Norway and Sweden, both in private and public sector, but we see some really large new assignments frame agreements in public sector that are long term as well. We can take the next slide, please. Experience reported sales of SEK 365 million in the quarter, an increase of 3.8% including acquired entities. Continued positive effect from the integration of Creuna and Cybercom. Markets were really strong in Sweden and Norway. We see new assignments generated in energy and logistics and transportation among others. During the second half of the year, the personnel turnover has increased a bit somewhat has been led by net recruitment initiatives and increased investments in competence development and of course that has affected the margin. But I think that's really important going into 2022 to be able to meet up with a lot of recruitment activities now this fall. We can take the next slide, please. And that's our new business area, Connectivity, reporting SEK 229 million in the quarter and that's an increase of 2.3%. Connectivity strengthens our offer to R&D-intense industries such as tech, telco and automotive. The business area consultants are based in Sweden and Poland and I think that the Polish presence means a lot of opportunities for further delivery capacity for all business areas in the years to come and that's really interesting. We see a strong business flow with new assignments with new and existing large clients. We see some margin effects temporarily in Poland connected to cost increase mainly due to local regulations and that will even out in Q1. We can take the next slide, please. Business area Insight reported sales of SEK 165 million for the third quarter, including the acquired Capacent business. We see a continued really positive trend. We see a strong margin generated from restructuring of businesses in Stockholm and Gothenburg. As you know, we have worked a lot with the internal organization during 2020 and beginning of 2021 and then that paid off now. We see new assignments in security applications and transformation in the automotive industry, et cetera, et cetera. We can take the next slide, please. And that was a brief look into our 4 business areas. And now I would like to turn over to Marie to go deeper into the financials. We can take the next slide.

Next slide, please. Well, thank you, Per. Getting back to Knowit Group, the whole group. We delivered sales of approximately SEK 1.6 billion in the quarter compared to little more than SEK 900 million reported for the same quarter in 2020. And same as last quarter of course, the sales increase was mainly impacted by the acquisition of Cybercom. This quarter we also consolidated Capacent, the acquisition made on October 1. But more importantly, we can also see a growth in our existing businesses, which we're very proud of. Our adjusted EBITA increased to SEK 181 million for the quarter, which also means an increase of almost 70%. The adjustment we're making since the second quarter is related to acquisition and integration costs and amounts to around SEK 13 million in the fourth quarter. The currency effect has a positive impact on the EBITA of around SEK 2 million. And this is the last quarter I'm commenting on the allowances from the government, which was minor in the fourth quarter of 2020 and amounted to around SEK 1 million. We ended the request for support in November last year. All in all, our adjusted EBITA margin was 11.5%, almost in line with last year. Next slide, please. And since we're now also ending our full year of 2021, I want to take the opportunity to comment on the total as well. We're glad to present a growth of net sales of more than 40% amounting to SEK 4.8 billion. The adjusted EBITA margin adjusted with SEK 49 million of acquisition and integration costs amounts to SEK 488 million, which is an increase of 46%. Summing up the year, it was about the integration of Creuna, but of course and also Cybercom both in preparations of the transaction, but also extensive work done on the integration during the fall. And so far I have to say we're very pleased with the outcome and this is reflected in our figures explaining the increase in sales and also EBITA. But on a full year basis, we can also rely on steady growth in our existing businesses, which is of great importance to us since our goal is to grow sustainable by acquisitions, but also organically. The formerly communicated annual cost synergies totaling SEK 45 million have now been achieved on a yearly basis. The last 3 months of the year, we consolidated Capacent as mentioned and we're also proud to announce the acquisition of Stromlin and 1508. And just to remind you, those 2 companies are not consolidated in our figures until January 1, 2022. Support from the government amounted to SEK 40 million in the full year of 2020. In total, we're finishing the year with an adjusted EBITA margin of 10.1%, which is slightly up from 9.9% last year. Next slide, please. This slide shows our adjusted EBITDA development in which you can see how much the result has grown over the years and we're ending the year with a rolling 12 months and also full year, of course, of SEK 488 million. Next slide, please. Commenting on the cash flow. We can see that we have a healthy cash flow and continue to have a very solid financial position. Cash flow from operation was improved to SEK 267 million due to a strong result and lower working capital investments and this was mainly due to increased short-term debt. Cash flow from investing activities was impacted by the financing of the acquisition of Capacent. And as all quarters, we have an effect from amortization of recent debt impacting the financing activities with SEK 35 million. All in all, this resulted in a positive cash flow of SEK 62.8 million for the quarter leaving a net debt amounting to SEK 41.5 million as of December 31 of 2021. This corresponds to net debt to EBITDA ratio of around 0.07, which is well within our financial target and we are happy to still possess a solid financial position and end the year with a very strong balance sheet. And with that, I leave it to you, Per, to say some final words.

Thank you, Marie. To summarize, we are as you probably can understand delighted to present another solid quarter with high activity in all areas. During the intense work with the integration across the whole group, we have managed to stay focused on the business and deliver growing net sales and stable margins. The integration work is promising, completing and strengthening our business. After the year-end, we have also completed an acquisition in Denmark to be consolidated in Q1. I'm of course very pleased that the Board can propose a dividend for 2021 of SEK 7 per share to the shareholders. Looking ahead, we see good signs of a stable demand in the market and we are very well positioned for continued profitable growth and look forward to exciting opportunities ahead. And with that, I open up for questions.

[Operator Instructions] We have a first question. It's from Daniel Thorsson, ABG.

First one on group organic growth. It was 4% in Q4, slightly weaker than I expected. At the same time, you highlighted Radar is expecting Swedish and Norwegian IT services markets to grow between 6% and 8% in 2022. Is that the level we should expect for Knowit as well given your exposure or are you significantly larger now making it more difficult to reach the market growth or how should we think about that?

I think that we will be able to grow in line with the market. Of course, it's impossible to predict exactly what the market will grow in 2022. I think -- I'm actually quite pleased with the trend that we have. If we look back to 2020, we saw that we have an effect of course of the slower pace connected to the pandemic. We stopped growing first half of the year 2020, we had a soft second half of the year 2020. The same thing third half -- or the first half of the year 2021 and then we have a significantly better situation in the second half of 2021 even if we are in that half of the year integrating Cybercom and restructuring quite a lot. You have to bear in mind that this half of the year -- second half of the year is a lot about integrating parts and actually we has less overhead people than before in the Knowit Group, nonbillable.

Okay. And then secondly, on the margin side, you say in your comment that we should see clear effects on profit and margins in 2022 when those integrations are fully finalized. When should we expect to see that and is that enough to take you to the 12% financial margin target or will it just take you a little bit above the current 10%? Just to understand the magnitude here.

I don't think that that is enough for 2022 to get to the 12%. We have to continue to work during a couple of years to get up to the 12%. I think that we will see some effect of the integration and we already see that, as you recall, from 9.9% to 10.1% this year.

And then finally, what is the first impression of employee turnover from the acquired companies? Have you seen larger than expected levels or lower than expected in the fall from people leaving Cybercom and Capacent for example?

It's actually lower than what I had anticipated and expected. We can't see any differences in the employee turnover in the different parts of the Knowit Group compared to Capacent or Cybercom and that's very promising.

The next question is by Valter Lindhagen, Pareto Securities.

Another question on the profitability target. I mean you have improved recently in Insight and you have also perhaps seen some lower cost during the pandemic. And I'm curious to hear -- I mean in what part of the business or in which segment you see the greatest potential going forward in order to reach the profitability target a few years out?

I don't think that -- to look at Insight we saw, as you mentioned, that we had the problem with the profitability back in 2020 in Insight and we have been able to adjust that with a lot of internal work here. So that was a problem that we now have somewhat solved at least to some extent. I think that the next steps that we take now both connected to the integration and the lower overhead that we have in the years to come, connected to that will take us one little step. But I also think that we have to work with a lot of different activities both on the cost side and the revenue side to get up to the 12%. I don't -- if you would have asked me 1 year ago, I would have talked about Insight and the problem that we had there with our margin. Now it's more about small steps in all areas.

All right. And then a question related to salaries. If you look into 2022, could you comment anything about what you believe in terms of potential salary inflation and how confident you are that you could compensate for that through potential price increases?

I think that we will have a salary inflation in 2022. We have had a very calm situation both '20 and '21 due to the pandemic so it's obvious that that will come in 2022. But we also see already now that when we take on new frame agreements now in November, December and when we renegotiate existing frame agreements with our larger customers and talk about the price level for 2022, we are able to take out that in higher prices. So I'm actually quite confident that we will be able to take out the price -- or the salary inflation with price increase.

Okay. And last question from my side. I can see that you reported financial income in the quarter of roughly SEK 17 million, which is higher than it usually is. Could you comment on what that relates to? I couldn't find anything -- any comments in the report.

Maybe you could take that question, Marie.

Yes. It's mainly a revaluation of additional purchase prices and this quarter it was Capacent. We had an additional purchase price there, which they didn't receive. We didn't pay that to Capacent. So that is the explanation.

[Operator Instructions] There are no further questions at this time. Please go ahead, speakers.

We do have a question from the mail, which is from [ Mario Thyadhal ]. On the sick leaves exploding at the moment, how do you think you will be impacted in Q1 from the sick leave? Per, would you?

Yes. We didn't see that big effect of sick leave in Q4. I think that we will be affected a little bit in Q1. That is probably the case. But I don't think that this will be a huge effect. But to some extent, I think that we will be affected, yes. All right. You have some more questions by mail, [ Chikki ]?

No, no.

Then it's time to thank you all for attending to this meeting and wish for a good Friday and thank you.

Thank you.