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

Hello, everyone, and welcome to the Knowit Year End Report 2022 Call. My name is Daisy, and I'll be your moderator today. [Operator Instructions] I would now like to hand the call over to your host, Per Wallentin, the CEO of Knowit to begin. So, Per, please go ahead.

Hi, everybody. My name is Per, and with me here today, I also have Marie Bjorklund, our CFO. We can take the next slide, please. The slide with Q4 in brief, Slide #3. And first, I would like to take you through some operational highlights during the fourth quarter. We continue to see good demand for our services. There is an uncertain macroeconomic development and we see -- although we see some longer lead times among some of our clients. To mitigate this, we have increased our focus on sales activities even more. And with that said, this doesn't mean that we have stopped recruitment activities. The need for competence remains high. Our business area, Connectivity, continues to perform well with increased revenue and margin. We have an increased share of sub-consultants primarily within our business area, Solutions, in Norway. This has a negative impact of the margin. This is due to some new and quite large frame agreements that we have signed in Norway, where we're working together with partners in order to have enough capacity. We can take the next slide, please, the full year. The full year 2022 has been strong and we expect high demand in all regions -- we have experienced high demand in all regions. And we see that Nordic companies and public sector have had a strong pace in their digitalization agenda. We have recruited almost 250 employees, net recruited almost 250 employees. And of course, all year long, the focus on finding talent have been high. And our employer brand is still very important and it is strong. We have, as you know, been working actively with acquisitions and integrated 7 new companies into the group. We have a strong track record when it comes to acquisitions and it's important and continuous important part of our growth strategy. You know that, our uncertainty connected to the macro development has increased gradually, but I think that we are working with that and handling that well. And thanks to stable profitability, good and stable cash flow, the Board is able to propose an increased dividend for 2022 of SEK 7.5 per share. We can take the next slide, please and go into our sustainability agenda. And of course, our sustainability goals are important to measure the transition that we strive for towards a sustainable and a digital society. Our somehow new sustainability goals in combination with our financial goals will ensure that we continue to steer towards long-term profitability and also sustainable growth. One example of this, for the fourth quarter is the digitalization of one of Statkraft's hydropower plants in southern Sweden. We have helped Statkraft to reduce time and resources in monitoring and take care of this hydro plant and making the controlled process more or less completely automated and remote. We can take the next slide and dig down into our business areas and we'll start with our biggest business area, Solutions. The area reports net sales of SEK 1.121 billion for the quarter, corresponding to 12% growth, including acquired entities. The EBITA margin was 9.9%, mainly impacted by increased share of sub-consultants, as I mentioned before, due to some large frame agreements in Norway, and -- but we also experienced somewhat longer lead times into new assignments and projects. We see particularly strong performance in Norway and Sweden. We have reduced focus on recruitment in Denmark and Finland, while the recruitment and the need for recruitment remains high in Sweden and Norway. I can take the next slide, please. Our digital agency and probably the biggest digital agency in the Nordic region, Knowit Experience reported sales of SEK 432 million in the quarter. That's an increase of around 12%, including acquired entities. The margin was -- EBITA margin was 11.2%. And this fall and Q4 experience have broadened its offerings by including services from Poland as well, making us more relevant for larger deliveries and these have been very appreciated by our clients and as you probably know this is due to the 300 people we have in Poland, mainly connected to Connectivity since before. But we experienced somewhat longer lead times to get consultants into new projects, of course, following a period of quite heavy recruitment. And also in Experience, we shift focus from recruitment to sales in the quarter. And these have had a really positive impact of our growth. We can take the next slide, please. Our newest business area, Connectivity, reported sales of SEK 287.5 million for the quarter, growing with almost 20% in existing business. Margin improved to 12.1%, this is a very strong result. We see high demand for our competence in both Poland and Sweden. And this is of course contributing to the overall results. But also here, we experienced somewhat longer lead times among some clients. But overall, there is a continued good demand. Our management consultancy, Knowit -- consultancy, Knowit Insight, which have grown quite a lot the last year.

Next slide, please.

Yes, sorry. Next slide, please. Knowit Insight. Reported sales of around SEK 254 million for the third quarter, growing by 8%, including acquired entities. There is a positive demand situation in Sweden and Norway. Demand for cyber security competence remains high. We see a good recovery in Finland contributing to this result improvement compared to Q3. But still in Finland, more improvement needs to be expected in 2023. And with that, I will handle over to you, Marie, to elaborate the financials more in detail.

Next slide please. Thank you, Per. Next slide please. Thank you, Per. Taking a look at Knowit, the whole group, we can see that we delivered sales of almost SEK 2 billion compared to SEK 1.6 billion reported for the same quarter in 2021. This means a growth of 25% and close to 12% when comparing Knowit now and including the acquired units a year ago. Adjusted for FX, this growth was 8%. EBITA, adjusted for acquisition and integration costs, amounted to SEK 179 million for the quarter, more or less in line with the fourth quarter last year. Our adjusted EBITA margin was 9.1% in the quarter and last year, it was 11.5%, so we do have a decrease. One explanation to this is an increased share of sub-consultants in some larger projects. This is mainly in the business area, Solutions, who has taken on these large projects, which is an opportunity for us. But because of the volume and need of some specific competence, we need to use sub-consultants. Unfortunately, this is a disadvantage on the margin, but it also means a higher flexibility, meeting variation in demand. Apart from this, we have costs for moving to new premises in several cities and an increase of costs for travel and physical meetings. Also, the market is still good. However, we can notice a somewhat delay in getting new younger employees into assignments in some areas. Next slide, please. So summing up the year 2022. We delivered sales of approximately SEK 6.8 billion compared to SEK 4.8 billion in 2021. The increase is coming from a good organic growth in all 4 business areas and also from our acquisitions. It sums up to a growth of 28% and close to 9% when comparing Knowit now and including the acquired units a year ago. Adjusted for FX, this growth was 8.5%. EBITA adjusted for acquisition and integration costs amounted to SEK 609 million, an increase of 25%. During the year, we made a number of acquisitions, starting with 1508 and Stromlin, after that, Swedspot, Miracle, Marketing Clinic, and Ascend, and Ionic. All performing very well except for Miracle and Marketing Clinic, who have challenges during the fall and we have taken actions to see improved results in 2023. Our adjusted EBITA margin was 8.9% in 2022. And for similar reasons as for the quarter, the margin has been challenged by cost for travels and conferences, a high-growth with use of sub-consultants and a strong net recruitment. But all-in all we still performed very strongly in the year. Next slide, please. Looking at the revenue and EBITA development. We are proud to present yet another quarter with good growth and stable profitability during a period of large external uncertainty regarding future macro development. Our adjusted EBITA for the latest 12 months is at SEK 608 million and revenues SEK 6.8 billion as I mentioned and an EBITA margin of 8.9%. Next slide, please. We continue to look at our net debt development, and can see that we still have a solid financial position and a strong balance sheet. Our net debt at the end of the quarter amounted to approximately SEK 1 billion, an increase compared to previous quarter following intense acquisition activities in the past year and also following an increase of other liabilities linked to leases and new premises. We have moved into new offices in Oslo, Stockholm and Helsinki this past year. This corresponds to a net debt to EBITDA ratio of around 1.5, which is leveraged well within our financial targets. In the second quarter, we extended our revolving credit facility with Nordea. And we now have access to little more than SEK 1 billion, of which we used around SEK 700 million at year end. So we have a good headroom. Next slide, please. Knowit is well positioned to manage a possible downturn well. Our largest segment being the public sector that tend to be stable, even in worst financial times and nearly 40% of revenues come from this segment. We also see the projects that are business-critical to the digital -- digital transition remain and the fact that development resources are scarce speaks in favor of consultancies like Knowit. Another trend is the project that supports the transition to a sustainable society, an important and prioritized area for Knowit. And with that, I leave it to you, Per, to say some final words. Next slide, please.

Thank you, Marie, and well, summary. I think we presented a stable quarter with high activities in all areas. We see a high-demand for our services have grown around the Nordic region. Of course, there are some variances depending on geography and segments. We have increased our use of sub-consultants in a couple of large projects that creates flexibility. And of course, an ability for us to take on those projects. But this has an impact in our margin. The uncertain macro environment imply that lead times get somewhat longer. That means the time it takes to get the consultants out into an assignment, but still there are assignments and the assignments are in place and we get those new projects. And connected to that, we have a strong focus on sales activities. There is still a large need to continue recruitment activities. I would describe a little bit more as the change in mindset than actually reallocation of resources. And we have invested heavily in growth the past years as you know. This has created a really good and stable platform to take the next steps in our development and maybe in the consolidation of the business. One important thing is that we have a really strong hold in the public sector. That's a stable part of Knowit in a possible economic downturn. And as I've said before, the Board proposes an increased dividend to SEK 7.5 per share, and I see it as a sign of strength, reflecting our expectations for the future. We're entering 2023 with a strong foundation for further growth. Yes, we, of course, see some uncertainty regarding the macroeconomic development. Well, and with that, we are now open for questions.

[Operator Instructions] Our first question today comes from Daniel Djurberg from Handelsbanken.

I would like to start off with -- the demand situation is still strong overall. And also if you can comment a bit on the employee turnover on aggregate. I guess it's a bit more of variation today, but would you consider it year-over-year to be stable or is it going down? That's my first question.

The demand situation is, of course, it's much more uncertain today than it was 1 year ago. But as we said, we see some parts of our business like in Norway, the public sector, the defense industry, bank and finance, et cetera, et cetera, there is quite a lot of parts of our deliveries that are the same demand actually. But there are some parts with more lead times and we don't know exactly what that will lead to in the future. So we will see, but we are coping with it now. And it seems that there is a long list of things to be done as many customers connected to digitalization for the future. The next question connected to employee turnover, it is down. It's -- as most of you know, it was very low during the pandemic. It went up for us and in the business right after that. And now we see that it's going down, and it was higher H1 than H2 definitely.

Yes, and would you compare it as -- do you expect this to continue to go down, is it on a good level now, because you need some turnover as well to keep, but to take in younger employees et cetera?

Yes, of course. I think that it will continue down a little bit more 2023, but -- maybe not that much more down, but it will continue down a little bit in the business, I think so.

Perfect. May I also ask you on the Norway and especially the use of sub-consultants to these larger projects where you need both competence and more resources. Is this in the beginning, do you expect this to ramp up to that we will see even more pressure on the margin front there. So we'll see the opposite that you have will level-off and coming down as a percentage on the total sales in Norway?

We will see it. To start with, these projects or frame agreements are one-offs. It's not a new strategy and it's not that we're going to increase that part of our business very much for the future. That's important to say, but of course, there have been some of the big consultancy buyers that's been out asking for new frame agreements in 2022, for example, the tax authorities. And their way of asking imply that no one could answer themselves. So you need to build a consortium of a couple of or quite a few companies. And we are such a big player in Norway today much bigger than 5 years ago when this was the case, the last time, we were asked to take lead on those frame agreements. So we take lead and do it together with a lot of other consultancy companies and of course, then we need to do it together with them.

Perfect. May I ask you last question before I get to back to the queue? And that would be on Finland and Denmark. Obviously you are more sub-scale there than elsewhere, but we now have more about it. And my question is, you've done a couple of acquisitions that fit troublesome that you're working on to fix. Has this changed your appetite for you now to grow to get more both in Finland and Denmark or on the opposite that you now understand that you need to even buy more to get this full fetched similar to Norway and Sweden.

Well, this year we did 7 acquisitions. We have had that, as you mentioned, some problems with 2 of those 7. The other ones are performing really well. And I think that we have come quite far especially in the marketing clinic with taking care of the problems that we have had in that company. So I'm actually quite confident that we are able to take on somehow -- some problems as well. So it hasn't changed our appetite for acquisitions that's decided by other things.

[Operator Instructions] Our next question comes from Daniel Thorsson from ABG.

First one on salary inflation and price increases. So based on your employee base, what you have today, your project portfolio that you have insight into. On an overall group level, how would you expect salary inflation and price increases to develop in 2023? And which one is likely to increase more than the other? I guess, the price increases outgrow salary inflation in '22 in the market as a whole and could this potentially revert in '23?

The fair answer is that I don't know, of course, but I can't speculate maybe not connected to Knowit in special, but more to the industry and I think that we see salary inflation, plus 5% in the business. I think that we, you have to bear in mind with the price inflation is that some of the price increases we did those in H2 2022, so they will affect 2023 figures as a total as well. And then we have some index regulations to and as you know, we have 40% public sector. So I think that we will be able to have some price increase in 2023 as well, but it will be much harder. I would hope for and think that it might be possible to get them even out, but it's not going to be much on the positive side connected to the rates, price, and salaries. It was much more positive 2022 and '21, of course, but I have some -- hopes for some price increases for 2023 as well.

Yes, I see, okay, that's a perfect answer. That was exactly as I thought as well as we saw price increases already coming in H2 '22. And then secondly, related to that, you target a 12% EBITDA margin in 2022 as a whole was a step back and you have elaborated on the regions. So I'm just interested in what are the main initiatives to drive the margin upwards towards the 12% target. And also when in time is it reasonable to come closer to that?

Maybe you should take that one Marie. We are working, of course, thoroughly with it.

Yes. Daniel, yes, we said that the target of 12%, it was over time. So it's not going to happen in 1 year. And we are of course working with these all the points that we mentioned that are taking our margins down today, of course, we're working with to -- take action to make sure that the margin goes up. I mean we will probably see conference calls to be higher than during the pandemic. But probably they will not be as high as this year as 2022 because we had a -- it was a high need for meeting, and we will also as Per mentioned this sub-consultants, probably we will not take on as large projects using sub-consultants in the future. So we will grow and we will take on new assignments, but with them, we will also increase the margin. But as you know, 2023 is a year of uncertainty. Macroeconomic uncertainties, so could be that this is not the year that we will reach the 12%, but we are definitely on our way there. So our target of the 12% space over time.

And also with our growth now, we have been able to take out some scalability gains from that. We already see that that's not shown in the figures, but because we had quite a lot of one-off costs for 2022 as well, but of course, we worked quite hard to be more efficient as we grow. We work very much with our mix consultants with our mix in increasing prices over time going from low price, time and material contracts to more projects et cetera, et cetera. So there is a long list of things that we are working quite totally with.

Yes, and one thing that we mentioned is that, we also had high cost for moving to new premises. Both costs for moving, but in some cases, we had double costs for rent and this we will of course not have in the future once we have already moved.

Okay, perfect. That's understandable. And not to repeat ourselves too much here, but just to understand the margin development in 2023, we have a slowing market on the margin here? Or the delta in terms of demand we have a pretty credit negative calendar effect in 2023, we have salaries increasing more than prices in 2023. Can you say something about what we should expect margin wise in '23. We have, obviously, all the positive drivers that you mentioned with scale and moving offices, et cetera. I mean, is it -- should we expect to see an increasing margin for you in '23 over '22, even though the market as a whole will have difficulties to increase it? Is that fair to assume?

I think that you have mentioned almost all of them, most important drivers for margin development in different directions. I hand that calculation over to you.

[indiscernible] during 2023.

Okay. And then my final question is actually on Insight that surprised positively in Q4 both on the growth and also on the margin side. I mean, does it say something on the cycle that we are not seeing dramatically slowing cycle here or should we not [indiscernible].