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

Ladies and gentlemen, welcome to the Knowit Interim Report Q3 2024 Conference Call. I'm Vicki, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Per Wallentin, CEO. Please go ahead, sir.

Thank you. And with me today, I also have Marie Björklund that will talk a little bit later. And first, I would like to take you through some operational highlights during the third quarter. In our largest business area, Solutions, we are happy to deliver a continuous positive trend in utilization. And in addition to that, the EBITA margin improved for the second quarter in a row. This is mainly a result of our cost reductions and organizational changes. The market is still uncertain with long sales cycles. After summer, the market had a slow start with projects starting up later than normal, particularly in Experience and Insight. In Norway, we have continued to develop our strong partnership with several customers, creating a very stable foundation during the quarter. In Sweden, we still meet the largest challenges, although we see some improvements in certain segments. Finland and Denmark, our development being strong in some areas, but we still need to work more to reach a stable ground in others. We can take the next slide, please, and take a look at our business areas in more detail, starting with Solutions, our largest business area, reporting net sales of SEK 750 million for the quarter. The EBITA margin increased to 8.1%. And as I said, we are happy to see that utilization are slowly improving. The geographical differences remains. In Finland, we outperformed the market. We still have challenges in Sweden and Denmark. And in Norway, we have a continued strong client relationships and a really good platform to work with. And our efforts to optimize the organization and reduce costs pays off, but it's yet too soon to say that we see a broad market recovery. Next slide, please. Going over to our digital agency, Experience, reported net sales of SEK 235 million in the quarter. The business area had a very tough quarter with negative results due to slow start after summer, of course, affecting the utilization a lot. Sweden and Denmark are the most difficult markets, where we continue to take action to improve profitability. We have a strong inflow of requests from clients, but the competition remains fierce and clients take time to decide upon new investments. We can take the next slide, please. Business area, Connectivity, reported sales of around SEK 190 million for the third quarter. EBITA margin slightly below last year at 11.3%. Our ability to adapt quickly to market changes have been a strength during this recession. And we also have long projects in Connectivity, making it easier to handle a start after the summer. We are in a competitive market, but we still continue to recruit at a comfortable pace. We have a solid position in the industry segment, a key to be able to continue to deliver strong results despite the current market weakness. We continue to maintain a strong focus on sales. We have increased sales capacity and ensure utilization rates at a good level. Moving over to next slide, please. Moving over to our management consultancy, Knowit Insight, reporting sales of around SEK 160 million for the third quarter. The business area reported a loss in line with the same quarter last year. Just like Experience, the start after summer was very slow with projects being delayed into the end of the quarter. And this, of course, has impacted both utilization and margins. Our position in cyber security and legal remains strong, and we have had a net recruitment in the quarter. We work hard to develop and strengthen our offerings with defense launching highly appreciated training programs for employees to prepare for possible assignments in the industry, the quarters to come. Next slide. And with that, I hand over to you, Marie, going through some financials.

Thank you, Per. We can take the next slide. So back to the group as a whole. We delivered sales of approximately SEK 1.3 billion, a decrease of 14%. There is a positive calendar effect for the quarter of around 8 hours, but due to the timing of these extra hours during vacation, there is no effect on the revenue or EBITA. We are around 10% less employees, of course, affecting revenue. But besides that, the revenue from subconsultants is less than Q3 '23. The adjusted EBITA amounted to SEK 57.9 million for the quarter, a decrease compared to the same quarter last year. This leads to an adjusted EBITA margin of 4.4% in the quarter. Last year, it was 4.9%, so it's slightly down. We do have some layoff this quarter as well as restructuring costs, but far less than both Q2 this year and Q3 '23. And we now consider it at a level where we see it as a normal course of business. We also managed to keep savings on a good level, but we are now meeting comparable figures on Q3 '23, which also included savings. Cost awareness is still high up on the agenda for the quarters to come. We see that the market is still challenging, even though we see signs of improvement, especially in Solutions and Connectivity. Competition is tough, prices are under pressure, but still above the level of last year. Salary revision has been kept at our expected and desired level. Next slide, please. This slide shows the development over time and also on a rolling 12-month basis. Our adjusted EBITA for the latest 12 months is at SEK 436 million and revenues at SEK 6.6 billion at an EBITA margin of 6.6%. We note that the adjusted EBITA margin improved compared to Q1 this year and are in line with Q2. In other words, we do have a trend of stabilizing results. Next slide, please. This is an overview of our net debt development. We have SEK 600 million in used credit facility, and we have a total credit facility granted of SEK 1,050 million. Future considerations amount to SEK 26 million. And other liabilities, mainly leasing debt, amount to SEK 524 million, affected by amortization. This totals a net debt of SEK 792 million, and divided with our EBITA of SEK 582 million on a rolling 12-month basis, we are at a leverage of 1.4. We have a stable balance sheet and a good financial position. Also, this means that we are well within our financial target, which is set not to exceed, too. Next slide, please. We have a solid platform and a strong position as a digitalization partner in the Nordic region. The share from the public sector has decreased compared to last year following a significantly softer demand in some areas compared to a year ago. The demand within defense continued to be strong. We have a strong, solid position in the industry sector, allowing us to grow despite challenging market conditions, and our retail share has gone up also, and we see an increased demand from certain customers. Clients remain focused on business-critical projects also in an economic downturn. And with that, I'll leave it back to you, Per. Next slide, please.

Thank you, Marie. Well, to summarize, we see a positive trend in our largest business area, Solutions, with both utilization and margin improving. Competition is high in all areas. Our top priority continuously is to remain high focus on sales and client relations. Sweden and Denmark are the most challenging markets and require further cost control and efficiency. And we are proud to have a strong position as a Nordic partner in the digital transition. We are in good shape for further growth when the market improves. And with that, I open up for questions.

[Operator Instructions] The first question is from Jesper Stugemo, Handelsbanken.

Yes. Jesper Stugemo here. A few questions from me, if I may. I was thinking around stabilized trend and slightly improving utilization trend here in Solutions. I read into this that this is an improvement from Q2, so sequentially? Or do you also see this as a year-over-year improvement in the utilization rate there?

Hello, Jesper. Well, the answer to your question there is that we started to see the improvement in the second quarter in Solutions. It has continued in the third quarter, and when we compare to the same quarter last year, we also have an improvement for Solutions. So there is a positive trend there.

All right. And on the slight weaker segments, Experience and Insight, what kind of tools do you think you have to further reduce internal costs? Or is it more about additional layoffs to secure margins and match the supply with demand? And if so, is it more in Sweden and Denmark? Or what's the mix there between the regions?

I think that the weak market that we have in Sweden is, of course, challenging, especially for experience. We see that at our competitors as well. So I think that we have done quite a lot of things. We now have a really high focus on sales and sales activities and trying to close deals. We continuously increase efficiency in Experience. For example, just after summer, we consolidated a couple of companies, subsidiaries within Knowit Experience in Sweden. So we are on that task as we speak.

Yes. And I can just agree with that and say that we've done a lot of things in Experience also in the second quarter. And I don't think that we have quite seen the effect of that yet. So there is a full focus on sales and also, of course, cost savings.

Great. And on the new framework agreement you announced here a few weeks back in Norway, the framework around NOK 3.5 billion over 4 years. Do you have an estimate here how much this could contribute for you? I think it's additional 2 to 6 partners included here. And yes, do you expect an uptick from this already here in Q4?

Well, it's not really said how much we will benefit from that, but it was said NOK 3.5 billion, as you said, and it's over 4 years. And a good guess could be that something around [ NOK 20 million to NOK 25 million ] of that would be beneficial for us. But we are not really certain of that figure yet, but that would be a good estimate.

All right. And looking at the calendar effect here for Q4, it looks to be a slight headwind around 8 hours less? Do you have any estimate how much this could impact our results for Q4?

Yes, you're right. And actually, we don't really know how that will affect it. It's always very uncertain how December is affecting, and especially now when there's an economic downturn, we've seen that there is a slower start after summer. It might be this continues that there is a slower end of the quarter. So I don't actually have an amount to give there. But yes, it's true. In total, it's not as much as 8, but a little less than that, headwind.

The next question is from Daniel Thorsson, ABG.

I have a question on the net recruitment here on group level. When in time do you think we may be back on positive net recruitment? Again, what's kind of your internal plans here on timing?

I think that our focus right now is to optimize the margin and have a strong focus on that. When time comes, we know that the market has changed a little bit, and then we will start to net recruit. So I don't have any estimates connected to that.

It doesn't sound like very near term at least.

No. We haven't said anything about the net recruitment. We still see a possibility to recruit, especially in Connectivity and in Solutions, obviously, since the utilization is going up.

But I would like to say that if you look back on recessions over time, the last 20 years or so, it's almost always been quite -- when the recovery comes, it's usually quite fast, but it needs to come.

Yes. I see. And then if I heard correctly here, you said that you were in positive net recruitment in Insight in Q3. And if that was right, is that a sign that the segment ended on a higher note and that the outlook for Q4 and '25 looks somewhat more optimistic? Is that right to think about it?

I would say that I don't think that we have any chance of having a more positive net recruitment in Insight in '25 than the other business areas. On the contrary, I would like to highlight Solutions and Connectivity due to their margins and the trends that we see right now. But it is true that the Connectivity is the business area recruiting most in the third quarter, and that is mainly within cyber security and...

Insight.

Yes, Insight, sorry, yes, and where we can see that we can utilize consultants.

Okay. That's good. And then just thinking about the potential margin here in 2025. I mean, given that the market is tough, price pressure likely to continue for a while, that should limit the margin, but you also see utilization rates already now bottoming out or stabilizing in the Solutions. How should we think about the reasonable margin assumption in '25, not a specific number, but the trend should be upwards, but not as good as in '22, '23, obviously? How should we think about that potential?

Well, it's, of course, very difficult to say. We're not sure when the market will turn. But for Solutions, definitely we see a positive trend. But then in Experience, we have the trend in the other direction. So it's difficult to say. But of course, we're hoping to have a better margin than this year. That much I can say.

And let's come back to that when we see a stabilization in Experience as well, because that will, of course, be quite important to reach.

Yes, I see. And then on the further potential cost reductions, are you planning to close any offices or to exit any local market or anything like that?

No. So I think that we are doing quite a lot connected to consolidation of subsidiaries, changing business models in some areas, of course, reduce capacity in other areas. So we do and have done really big changes in some areas. But the markets that we are at are really good to be part of, even the smaller markets in Sweden.

I see. And then a final question on hourly prices here. On the group level, could you kind of estimate what the hourly price change year-over-year was here in Q3? I guess it was slightly negative, but do you have any better feeling for that?

The price development is actually slightly positive. We see the price pressure, but we are able to have increased prices when you compare it to the same quarter last year.

The next question is from Raymond Ke, Nordea.

Two questions for me. First one, a peer reporting earlier this week that they saw no improvement in the public sector, but you're saying you're seeing early signs of recovery in Solutions. Curious, could you provide some more color into what you think that is and what you're seeing differently from your peer maybe here?

Well, on the industry share, we see that the public sector has gone down. And I would say that the fact that Solutions has a positive trend in utilization is not due to the market. It's due to our measures, the sales focus, the cost savings and the efficiency. I would say it's more that than the public sector increasing their demand in total.

All right. Very clear. And then on Connectivity, demand there is holding up relatively well. Do you see the underlying market sort of turning tougher ahead? Or anything due to its sort of cyclical nature, I'm thinking? Or how should we think about that?

We have already seen a little bit tougher market in Connectivity as well. I think that we've been good in handling that, getting into new areas, for example, a little bit less in telco and increasing in the industry segment. So we foresee a tough market connected to connectivity as well for a while, but I think that we take some measures to handle that.

[Operator Instructions] At the moment, there are no questions from the phone.

All right. We have a couple of questions from the webcast. First, coming from [indiscernible]. How is monthly utilization relative to last year for the months in the quarter? Is it a slow start from back to work, leading to the subdued top line this quarter?

Well, it's a slow start back to work after summer, as we talked about.

Yes. Second question from [indiscernible]. What is the status and expectations on increased public budgets for spending on consultants in Sweden? How is Stockholm evolving in the quarter?

Well, as we talked about now for, I think, it's more than 2 years that we had lower budgets in public sector in '23 and even lower in '24 than '22. We expect increased budgets due to that the inflation is down for '25, and that's what we see, especially talking about Sweden now. But we don't know how that will affect our business in detail yet, it's not presented. I mean, we have a budget as a total in Sweden, but we don't know where those money are going. You could expect that some of them are going to the defense industry and civil defense, et cetera, and that's good because we are part of that. So I think that it will increase in '25. I also think that when they get new money, it's not going to be a really 1st of January start in '25. It will be a slow start in the first quarters. But we have a good platform to continuously do really good things at our customers in public sector in Sweden as well. I think that we are performing really well or overperforming at public sector, for example, in Norway. So even if there is slow budgets there as well, we have been able to take so many new frame agreements. So that's not a problem in Norway.

And concerning the question you had about Stockholm, I mean we disclosed that we are having challenges mainly in Sweden and that involves Stockholm as well. So the competition is serious in Stockholm. So there is a challenge.

And Stockholm is a lot about public sector as well.

Yes. Great. And 1 more question from [indiscernible]. How large is the revenue from defense? And can you give any color on how you are -- sorry about the hesitation on translating from Norwegian, how you're focusing on that sector?

Well, it's less than 5%. So it's not that big, but it's increasing. And as I talked a little bit about, we are actually investing money now and have done that for a while to move people from other sectors into the defense industry, and it takes some time, because there's a lot of regulations in that industry. So technical competence from somewhere else and then add-on industry competence in the defense industry. And we also see that we are growing both connected to public sector and defense and some private sector customers, mainly then in Sweden. We also have 1 or 2 of those agreements in Norway as well, but mainly in Sweden. So from a quite small level, we will continue to grow in that area. And I think that we have a really good platform to do that.

Great. And there are no further questions from the webcast.

All right. Thank you for listening in and have a continuous good Friday. Thank you.