Nepa AB (publ) (NEPA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the presentation of Nepa's Second Quarter 2022. My name is Ulrich, I'm the CEO of Nepa. With me to present today, I have our CFO, Ann-Christine Fick. Turn page. If we summarize our second quarter, we continued with our growth and profitability. Our net sales increased by 10.2% to SEK 86.5 million from 7.9% currency adjusted. Most of our markets had a stable development and our customers' willingness to invest in marketing activities remained. We are well in line with our strategy to focus on growing recurring revenues. They grew 17.5% during the quarter and correspond ended for 65.4% of our total net sales. Our primary solution, Marketing optimization increased by 25.8%, which we are especially glad about. But this is the proof of our product offering and also the area where we will focus our future products, our future product line. During the quarter, we completed the transition of our business or we have previously referred to as the legacy cleanup. From now on, our goal is the focus on growing into selected markets and with our marketing optimization offer, which already now is more than 80% of our recurrent income. Turning to the cost to remain, we keep the margin stable during the quarter amounting to 11.1%, the same as quarter 1 group year. This is partly due to temporary system upgrades and increasing investments in sales and marketing initiatives. We have during the first half of the year gradually introduced price adjustments to offset increasing costs. This won't have an immediate effect but rather expect gradual results. We will continue with price adjustments in the coming future. Turn to the next page, please. I also wanted to give you an update of each respective market. But before that, I will just shortly talk a little bit about what we have done in our sales and with our sales organization. Before, as I had pointed out in several meetings with the investors before, we basically rely on the -- our clients who come to us with and asking us for offers for what to do. And we are not so very active in our sales because this is so -- and what we did -- what we have done now during the spring is to get ready for a more active approach resale to sales. So we have carved out 8 to 9 people from our key count organization into a sales top court, which will be focusing on the current income within our MO offering. And this will then be led by our new CRO, who will join Nepa on the first of October. So that's what -- so we go from being more consistent organization when it comes to sales into a more active sales phase and that is also supported by our marketing. We still saw continued growth in most of our markets. If you think about our sales organization as it goes with an exception for Finland, where we where the Finnish market is a little bit special and a lot of companies are highly dependent on the Eastern market, and they have been strongly affected by blockade of Russia. So the new sales has been a little bit more challenging than we are. But yes, we feel confident that we make our target anyhow. Region, our largest market is growing stable. But as said, more can be done. In lot of course, as I said, it has been -- Nepa has been growing very, very good last year as a bounce back effect after COVID. And yes, that combined with that it's a bit tougher right now. U.K. growing very, very strong. Although from what I consider to be around the low numbers, we hope to change that as it's one of our focus markets. In all other markets, is India that picks out with high growth. We strongly feel that a lot of Western companies are now focusing a little bit more on India when both China and Russia it's not so -- it's not the popular anymore. So there, we hope that gets a high market in the growth. Turn to the next page, please. Our focus forward is growth and higher profitability. We have, during the summer, completed the legacy cleanup phase and now have a stable and profitable platform in place. However, good platform is never finished, and we will keep to facilitate and strengthen it so we can reach better scalability. And one of the targets, of course, is always to sell more product only and not so much ours connected with that. So in order to raise profitability and scalability. In the coming years, the vision our sales undertake new growth base. We will continue to work on our ability and solution development at focus forward will be on growing our business to active sales and marketing activities. We made several investments in our marketing organization. For example, we have developed our CRM sustained system, and we'll launch a new website during the call. In addition to that, we announced this week the appointment of a new role, the Chief Revenue Officer that will coordinate this growth initiative. As great abilities of our new CRO to optimize sales in selected markets and product categories. All in all, we are focusing on a more international sales perspective with the strength in group management to facilitate growth in the European market. Now I hand over to our CFO, and Ann-Christine, who will give you an update on the financials, and please turn the page 12.

Thank you, Ulrich. Like mentioned before, we saw a continued stable demand in most of our markets. Net sales increased by 10.2% to SEK 86.5 million, and the gross profit increased by 9.3% to SEK 67 million. Both these are record levels have [indiscernible] less profit. Sweden and U.K. contributed much to our gross profit. Looking at the total personnel costs, they increased by 18.3%. However, SEK 6.4 million of these are attributable to investments in internally generated intangible assets. We have invested in the development of our own platform and digital tools. Adjusting for these, our rational personnel costs increased by 8.1%. This is also including provisions for incentive program, where final outcome depends on the results of the full year 2022. EBIT amounted to SEK 9.6 million, a decrease of SEK 2.2 million from the second quarter last year and earnings amounted to SEK 9 million, a decrease by SEK 1.7 million from Q2 last year. And we continue to maintain our strong net cash position amounting to SEK 79.6 million at the end of the quarter. Please turn to the next slide. If we look at the capitalized expenditure line item, as was also mentioned on previous slides, we can see that there has been a focus on development of our platform and digital tools in Q2, which we also had in Q1 compared to last year. Our other experiment costs, SEK 2.2 million are attributable to temporary system upgrade costs. We have invested more in marketing compared to last year, and we also need to remember that last year, we considered with some cost savings still due to profit. This year, employees are coming back to the office, which increases cost of running the office and people [indiscernible] SEK 7 million. Looking at the financial income and the positive deviation from the second quarter last year, it is mainly due to the unrealized currency gains from a loan to our U.S. operations. Handing the word back over to Ulrich and please turn to the next slide. Thank you.

So then what is the investment case? But first, we have a growth story. We have until recently cleaned up our legacy organization to achieve higher internal decision. This phase is completed and our focus forward is growth and higher profitability. We will achieve this by steering our organization and focus towards sales and marketing of our proven business model. Second, we have a strong product offering to customers who want to understand the impact of the media and marketing investments. How to optimize customer experience and understand their own market and get ahead of their competitors. So what we will do is focus more on what we call marketing optimization [indiscernible] in our reporting. Third, we have a sticky customer. We have over time built up a certain [indiscernible] customer base. Approximately 67% of our revenue is recurring, and we have a history of long-term customer costs. But this is proof that we create value for our customers, four, our solid financial position. Fourth and lastly, I have to reiterate our strong financial position and profitable business. We have a net cash position of almost SEK 80 million operating cash flow for the last 6 months of SEK 18 million and the EBIT margin for the second quarter of 11.1%. Together, this shows that we have a resilient business taken on our next journey from a solid base. So thank you very much for listening to our presentation of the second quarter. I will now hand over to Andrea, who will handle the Q&A.

[Operator Instructions] And our first question comes from Jesper Von Koch. Your line is now open.

So let's start with the capitalized expenditures of SEK 6.4 million in the quarter. So could you just talk about the underlying bit of this. I mean, how much is for like moving customers from the old to the new platform? How much is for new development and also how long should we expect this to last? Is it also into 2023?

Would you please just repeat your question. Is it about the --

The investments that you're making, which amounted to SEK 6.4 million. If you could just talk about the inside of that and how long it will last.

Well, the investments, as we said before, will last at least during this year, and we will -- we have not decided anything about the next year yet. And they are mainly focusing on SA, transferring clients to the new platform, which is less than 20% of it, I would say. And the rest is to develop the platform, so we can handle it more efficiently. So to streamline basically our production lines. That's what we are doing. And then it always -- there's always [indiscernible] day of course, to improve the -- what is called the debt part again for our clients. So that they feel that there are things happening because otherwise, people or customers tend to look after new things if they never get anything new from us that doesn't work. Sometimes I have to go a little bit deeper.

And so how far have you come with transferring the clients? I mean in what markets do you still have clients on the old platform and yes and how much is left?

I think we have basically -- I think we have 1 or 2 really one of the bigger clients, which has a very specialized solution for their need they are like in a separate production line. And basically, all the rest of it is lost. There's not much flat.

Okay. So on all markets, they are to [indiscernible]

You don't move -- now we don't move the clients in different markets. We have rather move clients than they might be on 1 or several markets. But 1 client has 1 solution, basically. On all markets.

Okay. Okay. I understand. And also regarding slightly -- I mean, the cost base from these investments is this like 100% consultants or what

No. The people -- the work of the people we are like taking as an investment, that our technicians has no [indiscernible] Maybe a [indiscernible] sometimes give some input to the work, but we do not activate that out and those hours that would be, no, no, no. That's only technician.

Okay. Good. And then I'm wondering about like -- I mean, if they are -- I mean the ones that are capital, I mean the investments that are capitalized right now, perhaps like that capitalization will go away next year or not, we'll see. But then how do you expect -- I mean, your staff to develop going forward, like this is the number of employees and also what parts of the organization will change?

I think the path that we change is like with the technical side, I [indiscernible] that dependently bit on what we decided during the budgeting process as a strategy. But like we are we have strong technical platform, and we always have to work on it more or less. And well, that is something I don't thought in detail about. But the rest of the organization, we will focus more on sales, and we will carve out the active sales organization we have already started with that, and we will do it even more going forward. And we will most likely need whatever we call it customer success team, which we don't have today and this we will not employ more people for doing these organizational changes. Then the question is, okay, how much will our personnel cost grow in relation to our growth. And I would say that next year, we should -- we expect some -- of course, some raises in personnel costs from -- because we have to hire the wages, but that should not affect our bottom line, let's say it like that. So I don't expect many -- I don't expect a lot of a lot of new hires next year, we do not gain considerably higher growth than this year. That's what I said.