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

Ladies and gentlemen, welcome to the Knowit Year-end Report 2024 Conference Call. I am Valentina, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Per Wallentin, CEO. Please go ahead.

Thank you, and welcome to Knowit's report for the fourth quarter and full year '24. My name is Per Wallentin, and with me is also our CFO, Marie Bjorklund. Next slide, please. First, I would like to take you through some operational highlights during the fourth quarter. In our largest business area, Solutions, we have a continued positive trend in utilization and improved margins for the third quarter in a row. We have a stable delivery in Connectivity. Largest challenges still in our digital agency Experience and also to some extent, in our management consultancy Insight. We work with further cost reductions and organizational work in this quarter as well in these units. We outperformed our peers in Finland, and we now see some early signs actually of improvement in Sweden. The Norwegian market remains rather stable. And in Denmark, the market is still uncertain as it is in Sweden. Work to balance cost optimization and increased sales activities remains a priority throughout the whole group. And as you probably have seen, the Board of Directors proposed a dividend of SEK 2.3 per shares for 2024. We can take the next slide, please. And we'll now take a look at our business areas more in detail, starting with Solutions, our largest business area with more than 50% of our revenue. We reported a net sales of SEK 915 million for the fourth quarter. The margin increased slightly to 9.3%, and we are happy to see that utilization continues to improve. But the geographical differences remains and Norway is the more stable market. We performed well in Finland relative to our peers and now see some early signs of improvement in Sweden. We can take the next slide, please. Our digital agency Experience have a net sales of SEK 290 million and an EBITA margin of 2.8%. And here, we still have a really weak market and work with downsizing and cost reductions. And of course, this impacts our profitability and margin fell compared to last year. But we maintain a very strong focus on sales activities and our position as the leading digital agency in the Nordics remains. And when the market turns, and it will, we are ready to take off in Experience as well. We can take the next slide, please. Business area Connectivity reported sales of around SEK 212 million for the fourth quarter. The EBITA margin somewhat below last year at 10.7%. Our ability to adapt quickly to changes in client demands have been a strength during this recession. We have a nearshore offer in Poland. It's attractive and support our overall performance. Our investment in sales capacity has had the desired effect and has helped us with some new clients and broadened our client portfolio during the quarter. We can take the next slide, please. Going to our business area Insight reported net sales of around SEK 233 million for the fourth quarter. EBITA margin fell to 5.3%. We continue to work on balancing good demands in some areas such as defense and cybersecurity, and we need to continue our cost control and optimization in the organizations in others. The challenges in Finland in Insight remains with lower performance than expected. And we have a high focus on transforming the business areas towards a more AI-based delivery in all areas and we really see some good signs of performance connected to AI and business consultancy or management consultancy. Next slide, please. And now I would like to turn to Marie and go through our financials in more detail. Next slide, please. Marie?

Thank you, Per. So back to the group as a whole. We delivered sales of approximately SEK 1.6 billion, a decrease of 10%. And there is a negative calendar effect of the quarter of 6 hours and also a small negative currency effect. Also notice that we are at the end of the quarter, more than 400 employees less than the previous year, which amounts to around 10% less. So we have an organic decrease in sales that was expected. The adjusted EBITA amounted to SEK 107 million for the quarter, a decrease compared to the same quarter last year. This leads to an adjusted EBITA margin of 6.5% in the quarter. Last year, it was 8.1%. So here, we also have a decrease. And yes, there is a calendar and currency effect, and we see that the market is still challenging and competition is tough, but we do see some early signs of improvement, as Per mentioned. Next slide, please. So let's have a look at full year figures since we are at the end of the last quarter. We delivered sales of approximately SEK 6.4 billion, a decrease of 9.6% following the decline in market demand and our actions to reduce capacity. The adjusted EBITA amounted to SEK 395 million for the full year, a decrease compared to last year. And the adjustment that we are making is a provision of SEK 28 million related to the decision of the Swedish Agency for Economic and Region growth on repaying of support for short-time work that we received in the connection to the COVID-19 pandemic. And all in all, we have an adjusted EBITA margin of 6.2%. Last year, it was 7%. Solutions is, as we mentioned, on a good journey with improving utilization for several quarters. And main challenges are within Experience business area and also Insight, and they are more vulnerable to the macro environment. We have worked hard during the year on our hourly rates and managed to raise prices towards clients, but not to the full extent to compensate for salary increases. And despite this, I want to emphasize that our main challenge and also opportunity for growth and improved margins is our utilization. We have a good potential to increase this in the year to come. And we have the right competencies and have done a hard focused work on our cost structure and are ready to continue our journey towards the 12% that are in our financial targets. The proposed dividend for the year is, as mentioned, SEK 2.30 per share, which is in the higher range of our policy of distributing 40% to 60% of net profit to our shareholders. 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 395 million and revenues of SEK 6.4 billion. We can take the next slide, please. This is an overview of our net debt development. We have SEK 500 million in used credit facility and Knowit has a total credit facility granted of SEK 1.050 billion. Future considerations amounts to SEK 26 million and other liabilities, mainly leasing debt amount to SEK 496 million. This totals a net debt of SEK 624 million and divided with our EBITDA of SEK 541 million on a rolling 12-month basis, we are at a leverage of 1.2. And this means that we have a stable balance sheet and a good financial position. Also, it 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 the share from public sector, as you can see, has decreased compared to last year following a significantly softer demand in some areas compared to a year ago. And the demand within defense continued to be strong also in the public sector. We have a strong and solid position in the industry sector, partly thanks to a good development in the defense sector, allowing us to grow despite challenging market conditions. And we see that the retail sector improved, and this is coming from several customers increasing demand, which is potentially a sign of general improvements in the economy. The negative development in the telecom sector primarily relates to one significant client reducing its demand. And to sum up, clients remain focused on business-critical projects also in an economic downturn. And with that, I hand over to you, Per, to say some final words. Next slide, please.

Thank you, Marie. Well, to summarize, we see a continued positive trend in our largest business area, Solutions, with both utilization and margin improved. The market recovery is still at a low pace, but we now see the first signs of improvement in Sweden. That's really good. We maintain our focus on sales and cost control. We are very proud of our strong position as a Nordic partner in the digital transition. We are in good shape for growth when the market improves. And with that, we are now open for questions.

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

So the first one is around the improvements in utilization that you've seen. As I understand, it is mostly in the Solutions business area. But what parts in Sweden do you see a better outcome? For example, is it in the Stockholm region or northern parts, southern parts? If you could elaborate a little bit on that.

Well, looking at Q4, we see some signs of more demand connected to retail and some smaller customers. Long term, if we look at the market possibilities in Sweden, I think that we already see some market trends connected to that. There will be bigger or larger budgets for the public sector for 2025. And we see some signs of demand connected to retail picking up a little bit as well. So it's really small signs, but there are signs.

All right. And the demand picking up in retail here, the experience FTEs are down some 14% year-over-year. Do you expect that you will do more cuts here? Or has it bottomed out yet? Or -- what's your view on that?

I think that our focus now is we did have cost cuts and we are less people in Q4 as well, as you can see in the report. So we have had a big work with that in Q4. But our view on this is that we are in some sort of a bottom in Experience as well right now, yes.

Yes. All right. Great. And the quite well development in Finland here. Is this more related to the employees that you have on sort of temporary leave improving the utilization? Or is it actually underlying business for Knowit that is improving here?

Finland, to start with, as a market, is a very tough market right now. As you know, they have had big struggles connected to the economics for quite a while. So the market is quite low, but we are performing really well in Solutions due to that we are on the right customers and have really good relations. We are doing things well, and I would like to say that we are overperforming the market in Solutions. In the other business areas, in Experience and Insight, it is a tough market, and we are suffering from that. As you know, we are not in Finland connected to Connectivity.

And Jesper, I wanted to add to your first question there in what regions in Solutions in Sweden that we can see improvements. And that is both in the south of Sweden and also in Stockholm. But the market is still challenging, but we do see improvements in the utilization, both in Stockholm and in the south.

All right. Okay. Great. And the industry growth we saw here, the percent of share of revenue coming up to 19%, showing roughly 15% growth year-over-year despite Connectivity being down. So is this -- could you just elaborate a little bit on where this growth is coming from? Is it more defense related? Or...

Yes. One of it is the defense industry actually, and that is going to continue to grow, and it is growing in Q4 as well.

Yes.

And could you just remind me how big defense is for you?

It's not big enough to have a own pie chart in the presentation still. But -- it's quite small, but it's growing in percentage quite a lot.

Yes. And this affects both the public sector and also industry, as you mentioned.

Yes. All right. Great. And then just one last one for me. Is it assumed fair that Q1 2025 could sort of have a similar slow start as we saw in Q4 that people are coming back from vacations and yes, projects are starting up a bit slower than anticipated maybe? Or...

Not to do any predictions at all. But I think as long as it is a tougher market, I think that you always have these slow starts after holidays. So that's the case in -- it's been that for 1.5 years now. And I think that, that is one part of a recession that you have that situation after holidays, both after summer and the winter holidays.

I agree. It's fair to assume that it will continue also this quarter.

The next question comes from Daniel Thorsson from ABG.

Yes. A question on the early positive signs. What are these signs really, more customers coming to you or existing customers doing more? Or what are these signs really?

One thing is in our order book that we see some early signs of that one growing a little bit. We see some more demand in some sectors in Sweden. So that is the early signs and connected to Knowit. And then if we talk about signs connected to the market, as I mentioned, it's about possible budgets for public sector and demand in, for example, retail.

Yes. And it's our pipeline that you're talking about also, Per, that we can see. And that, of course, remains to be converted to actual agreements, and that might take a couple of months. So that is why we're saying that it's early signs.

Okay. I see. That makes sense. And then secondly, cutting costs on employees to improve utilization and margins that makes sense, but it obviously affects sales as well. So what are your organic growth kind of predictions or expectations for 2025? Should one expect positive or negative growth for the full year?

Well, no predictions from us, sorry. But we have had 1.5 years of recession and cost cuts. And as you know, we are more than 10% less people right now. I predict that our focus from now on and furthermore will not be reduction in staff. It will be to focus on margin as a first step and then, of course, as a next step to grow.

Yes. Okay. And then on net recruitment, is Q3 '25 a fair assumption to see positive net recruitment next time?

Well, Q3 is almost always, if you look at 20 years, it's almost always a positive net recruitment in Q3. So that's a fair assumption, yes.

Good. And then the last question related to AI here. Have you seen any projects being canceled due to competition from AI solutions like easier programming or building a web page or so, which may be done cheaper internally with the help of AI?

No. Rather the opposite, actually. We have a really cool project that we showed in our office last -- or yesterday, connected to [indiscernible], where we help them with AI and virtual reality to train judges. There is so -- there are so many new possibilities connected to AI, things that were not possible to digitalize before that are -- were out of scope that now are in scope. And that's really -- it's amazing. It's just the start of that. But with that said, I think that we will also see a more efficient delivery connected to digitalization. So the cost for digital projects will go down a bit, and that will also increase the demand. So you see that, for example, connected to more low-end programming, but that's not a problem. We have had that development for many years in the digital sector. So it's nothing new. So it will be more efficient, but it will open up new possibilities.

Yes. I see. Then just a final one on hourly prices. On a group level for you and your mix, do you expect prices to be up in '25 versus '24 on an aggregated level? Yes.

Yes.

A very hard focus on raising prices, and that is the expectation. And we also have indexed agreements that we increased just now beginning of the year.

Yes. And as you know, 40% is public sector and those frame agreements are index regulated.

[Operator Instructions]

All right. I don't think that we have any questions on the webcast.

No.

Well, if there is no more questions, thank you for listening in. And of course, reach out to me or Marie, if you have further questions later on. Now we have a question. Well...

Yes. It's from Rafael at Andre. What salary inflation do you expect for '25? Could you please update us on the -- well, 2 questions. The second question is, could you please update us on the Board of Director evolution?

I don't think that there is any new information of the Board of Director evolution. So you will have to wait and see that. The salary inflation, it's a discussion now in Sweden between maybe 2.5% and 4.2%. I expect that we will be in line with the market. And I don't know, 3%, 4%, something like that, but not more.

Yes. And I guess that's relevant for the whole group. It's somewhere around there for the other countries as well.

0 So that was probably the last question. Thank you for that one, and have a really good day. Thank you very much.

Thank you so much.