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

Welcome to this presentation of Knowit's report for the second quarter. My name is Per Wallentin, and I'm the CEO of Knowit. And with me here today, I also have Marie Björklund, our CFO. We can take Slide 3, please. First, I would like to take you through some operational highlights for the quarter. The trend of more stable utilization remains, and we are pleased to see that the adjusted EBITA is improving for the first time since Q1 '23. This is mainly a result of the cost reductions and organizational changes that we have implemented in the past year. We now see signs of improvement in utilization in certain areas, although work on efficiency and optimization of the organization remains. We note an increased dialogue among some clients while others remain cautious and the competition in the market is still intense. This means that I don't -- or we don't expect a quick turnaround in 2024. Sweden remains our most challenging market, but we do see some improvements in certain parts, even in Sweden. In Norway, we have a more stable development based on strong partnership with several clients as well as signs of growth in public sector. Denmark shows a positive trend while Finland and Poland are stable. Next slide, please. We will now take a look at our business areas more in detail. Starting with Solutions, our largest business area, reporting net sales of SEK 933 million. The EBITA margin increased to 7.3%, improving compared to last year following improved utilization rates and intense work with efficiency and to optimize the organization. We noticed some signs of increased market activity, but we see intense competition in almost all new assignments. Margins in Finland and Norway are on good levels, while Sweden and Denmark needs further improvement. We can take the next slide, please. Our digital agency experience reported a net sales of SEK 320 million. The EBITA margin increased to 6%, a small improvement compared to last year, but still on a too low level. Experience faces the largest challenging right now in the market, and it was the same in Q1, if you remember. We have a positive margin development in Norway, Denmark and Finland, but Sweden still underperformed due to low demand. Work to reduce cost and capacity and to adjust the organization will continue in areas where we see that it's needed. In parallel, we focus on developing client relations and our offer to ensure that we have the right competence mix when the market turns for the better. We can take the next slide, please. Our business area connectivity reported net sales of around SEK 207 million. EBITA margin in line with last year, 8%. The market is highly competitive, and we have worked intensely to adapt and optimize the organization to meet the current demand, and that has shifted quite a lot in -- at different customers as well. We have a very solid position in the industry segment, and this is a key to be able to continue to deliver strong results despite the current market weakness. We see good activity in several areas, and we are able to secure interesting new assignment in the market, for example, in the defense industry. We continue to work with the organization and to reduce cost in combination with active client dialogues. And thanks to our ability to adapt cost changes in client demand, we still have a good utilization level in the business area. We can take the next slide, please. Going into our management consultancy insight reporting net sales of around SEK 233 million, a slight growth compared to Q2 '23. EBITA margin was 6.5%, somewhat lower than last year. This is a consequence of the utilization rates still being on a too low level. In Sweden and Norway, we now have a stable development, but the quarter is burdened by weaker development in Finland where work remains to build the right foundation for further profitable growth. And I'm very proud that we are able to work through the tougher times overall to continue to invest in growth, for example, in cybersecurity and defense in the business area. So the trend for the first quarter with an improved demand for general management consulting services remains also in Q2. We can take the next slide, please. And now I would like to turn over to you Marie, who will take you through some financials in more detail. Next slide, please.

Thank you, Per. Before going any further, I want to comment on the fact that we have an adjusted EBITA this quarter. We made a provision of SEK 28 million related to the decision of the Swedish agency for economic and region growth, [Foreign Language] in Swedish and repaying of support for short-time work that we received in connection to the COVID-19 pandemic. And we do not share the view and we have appealed the decision to the administrative court in Stockholm. And since this does not reflect the underlying business of Knowit, we are instead following the adjusted EBITA and the adjusted EBITA margin. And since I got a question this morning, I want to emphasize that the adjustment of the SEK 28 million is only concerning the support. Nothing else. So back to the group as a whole, we delivered sales of approximately SEK 1.7 billion, a decrease of 4.4%. And there is a positive calendar effect of the quarter of 11 hours, but also notice that we are end of the quarter, 250 employees less than previous year. So revenue per FTE is increasing. The adjusted EBITA amounted to SEK 94.2 million for the quarter, and this is an increase compared to the same quarter last year. And this leads to an adjusted EBITA margin of 5.6% in the quarter. Last year, it was 4.4%. So here, we also have an increase. And yes, there is a calendar effect, but also the effect of currency and restructuring. And including these items, we actually still have an improvement since last year. Restructuring costs in the quarter amounts to SEK 21 million, the effect of dismissals of 70 employees due to lower utilization. And savings are continuing this quarter amounting to SEK 9 million, and this is according to plan and includes conferences, events, travel, marketing and more. And as Per said, we see that the market is still challenging, and there are some small signs of improvement, but competition is tough. Hourly rates increased towards last year still, however, they are under pressure. Next slide, please. This slide shows the development over time also on a rolling 12-month basis. Our adjusted EBITA for the past 12 months is at SEK 453 million and revenues at SEK 6.8 billion at an adjusted EBITA margin of 6.6%. As you can see, we have an increase of the adjusted EBITA on a rolling 12-month basis for the first time since Q1 '23. And that is, of course, encouraging because it means that the hard sales focus, together with cost awareness have given results. Next slide, please. This is an overview of our net debt development. We have SEK 500 million in used credit facility. Knowit has a total facility granted SEK 1.5 billion. Future considerations amounts to SEK 26 million and other liabilities, which is mainly leasing debt amounts to SEK 530 million. And during the quarter, this amount is more or less unchanged, and that is because amortization is even out with a new contract. And this totals a net debt of SEK 917 million and divided with our EBITDA of SEK 600 million on a rolling 12-month basis, we are at a leverage of 1.5. We have a stable balance sheet and a good financial position. And also, this means that we are well within our financial target, which is set not to exceed 2. Next slide, please. We have a solid platform and a strong position as a digitalization partner in the Nordic region and having a broad footprint is a strength. The share from the public sector has decreased compared to last year, following a softer demand in some areas compared to a year ago. The demand within defense remains strong. In the quarter, we also have a strong growth from certain clients in the retail segment, impacting the overall figures. It is, however, difficult to draw any conclusions on a long-term basis from just 1 quarter, I remind you. We have a strong and solid position in the industry sector, allowing us to actually grow despite challenging market conditions. And clients remain focused on business-critical projects also in an economic downturn. So I leave it back to you, Per, to say some final words before we take our questions. Next slide, please.

Thank you, Marie. Well, to summarize, the stabilization continues in Q2. This means that most data points shows a positive trend, but we still have a way to go before we reach equal levels of utilization and profitability. In some areas, we now see signs of market improvement, but we need to continue to work with optimization of the organization in other areas, especially as we mentioned in Sweden. And the geographical market differences remains Sweden, Norway, and we think that, that will continue during 2024. And with that, we are now open for questions.

[Operator Instructions] We have our first question from the line of Stugemo, Jesper from Handelsbanken.

My first question is regarding the calendar effects here. You mentioned 11 hours for Q2. But how much did this contribute to sales and EBITA? And I guess, we have the largest swing from Norway here, which is 30% of sales. So could you also just remind me in which business area you have the largest exposure to Norway? Is it experience?

Maybe you should elaborate.

Yes. It's 11 hours in the quarter, and we don't disclose how much that is in amount. But as I said, there is a calendar effect and then you have the currency, and we also have restructuring of 21. And as I said, if we include this, we have an improvement since last year. And then maybe you can sort of calculate how much that is from that information.

Okay. And on the Swedish market here, it seems a bit challenging, whereas you're seeing improvement signs from the public sector in Norway. But if you look at the Swedish regions and municipalities here, do you see actually some improvements in a few certain areas? Or could you perhaps elaborate a little bit on the Swedish market across there?

Well, we don't see a sign of improvements still in public sector in Sweden. I hope and think that, that will come in 2025, as we have talked about several quarters before, but the autumn is as it is. So we are more talking about different other segments like the defense industry. We see some strong activities in -- stronger activities in the industry segment, et cetera. So it's more like that.

All right. And on the improved utilization in a few areas, is that also only related to cybersecurity and defense in connectivity and insight or do you see any improvements there?

It's more broader. And -- but I have to emphasize that, that is not connected to the market development. It's more connected to our own optimization.