Netcompany Group A/S (NETC) Earnings Call Transcript & Summary

Welcome to Netcompany Group A/S Q3 2020 Results Conference Call. [Operator Instructions] This call is being recorded. I will now hand it over to CEO, André Rogaczewski. Please begin.

Good day, and welcome to this presentation of Netcompany's Q3 2020 results. My name is André Rogaczewski, and I'm the CEO and Co-Founder of Netcompany. And I'm joined today by our CFO, Thomas Johansen. Before we get going, there are some important disclosures that I need you to read through. So could we please have Slide #2, please? I will pause 30 seconds here, and I'll let you all have a read-through of these important disclosures. And with that, can we please go to Slide #3, please? The topic of today's presentation follows our usual layout, which is that I will first give you an update on the business highlights for Q3. I will briefly comment on a number of larger contracts won and update you on the current status for the remaining part of the year. Finally, I will go through our revenue visibility and our financial guidance for 2020 and our current expectations for 2021. And once I'm done, Thomas will go through the numbers in greater details, including an update on our upcoming Capital Markets Day later in the month, before we open the call for any questions. Can we have the next slide, please? In Q3, we continued our high-growth rate and realized growth in top line of 18% in constant currencies, all of which was organic. In reported currencies, we realized revenue growth of 17.3%. Gross profit increased by 14.7%, yielding a gross margin of 42.2%, which was slightly lower than the same period last year, mainly driven by the financial performance in the U.K. that has had a negative impact on all our numbers in Q3. Adjusted EBITA margin was 19% higher at 28.1%, which was an increase of 0.4 percentage points compared to the same period last year. Strong performance in the Danish business unit, supported by strong performance in the Dutch business unit, led to this relative increase. And Thomas will go more into details with this later. However, I'm naturally proud to see the performance of this organization in these particular times. FTEs grew by 472 in Q3, following the strong growth in FTEs in Q2 of 404, and lay the foundation of our continued growth. Can we have the next slide, please? So the 472 new employees in Q3 is -- they are distributed as shown on this slide. Our operation in the Netherlands accounted for 38% of the increase in FTEs, which is all organic, and on a comparable basis to last year, as we owned the Dutch operation in the full Q3 in 2019. We have added FTEs in all units, including the U.K., where we also see the biggest change in the workforce. While we've added 156 permanent employees in Q3 2020 in the U.K., we have reduced the use of independent contractors by 105 compared to Q3 2019. On average, our age of the workforce remain low, mid-30s, and we are continuously ranked high in the various employer branding service among students. Churn for the last 12 months was 14.5%, which was 6 percentage points lower than compared to last year and the trend we've seen in the previous quarters, with reduced churn. That has continued into Q3 2020. In fact, we have seen reduced churn in all our geographies, which, to a certain degree, have to do with the current uncertainty in the labor markets following the COVID-19 pandemic. We have decided not to send home any of our close to 3,000 employees on any form for furlough. We are not participating in any of the relief packages. And we continue to hire new employees during these difficult times. Alone in Q3, we have welcomed close to 400 new employees. And the amount of administrative employees measured as non client-facing resources was 6.5%, which is at the level seen in 2019. We firmly believe that the non client-facing resources ratio will come down towards a level of around 5% during the next couple of years, in line with the level pre-IPO. Can we have Slide #6, please? In Denmark, we have won a number of large and multiyear contracts with different governmental agencies, the Minister for Agriculture and the Ministry of Finance for various solutions. We have also renewed a number of ongoing engagements with the Danish Tax Ministry under the current framework agreement. Where we in Q2 won the first of a number of contracts with the Danish Customs Agency, we lost a second contract in that tender portfolio with the Customs Agency, and we lost it on price by a significant factor. In Norway, we won the first large-scale project with the Norwegian Medicines Agency, a multiyear development project which we are naturally excited about. We've also won a couple of additional projects in Norway, one being the implementation of the equivalent to the Danish Smittestop app, the track and trace app, a tracing app to be used in the COVID-19 response in Norway. And in addition to these public tenders, we have continued to see strong demand for our projects in the private sector in Denmark with a number of sizable wins in Q3, too. And despite the strong performance in contract wins in Denmark, Norway and the Netherlands, we have also seen projects being delayed again in the U.K., following the introduction of new restrictions in September. This development has been further worsened with a strict lockdown in the U.K. recently implemented. Aside from the contract wins, I also want to highlight a founding of a new company in a joint venture with Copenhagen Airport, the company, called Smarter Airports. In this new company, Netcompany and Copenhagen Airport will develop the future digital platform, DAP, for airports worldwide, with Copenhagen Airport being the first customer on the platform. I'm thrilled about this new way of developing a market-leading digital platform together with one of our long-standing loyal customers. Can we have the next slide, please? At the beginning of Q4 2020, we have visibility of more than DKK 2.7 billion of revenue, as shown here. This is an increase of 14% compared to the same period last year. The strong performance in our Danish business units has increased the level of contractual committed revenues in the private segment to the same magnitude that we see in the public business, a result of more wins with multiyear contracts in the Danish private segment over the last year. This leads me into our expectations for 2020 and our initial expectations for 2021. So can we have the next slide, please? When we reported our half year results, we highlighted a number of risks that potentially could have a negative impact on our revenue growth of up to 2 percentage points. One of those risks was a significant weakening of the U.K. market following potential new strict lockdown measures. This has unfortunately happened during Q3. The worsened outlook in the U.K. has led us to reduce expectations to the full year revenue growth by 2 percentage points to the low end of the year -- of the range of 17% to 19% revenue growth. And as this loss of revenue is an effect of the significantly reduced activity level that comes with very short notice, it will also have a negative spillover effect on margins, where we have reduced expectations to full year performance by 1 percentage points. In these times, this uncertainty in some of the markets in which we operate are large and purely driven from COVID-19 restrictions imposed and their performance instantly with limited visibility prior to being introduced. The underlying uncertain market conditions naturally also have an impact on our current expectations for 2021. At this point in time, we expect to grow revenue organically by 15% to 20% and we expect margins to be around 25%. And with that, I will give the word to Thomas to take you through the financials in greater detail. So Thomas, please go ahead.

Thank you for that, André. And like already mentioned, I'm CFO of Netcompany, and I will now go more into details with the financial performance for Q3 2020. So if we move past the breaking Slide #9 and straight into Slide #10, please. So if we have Slide #10. So André has already spoken to our performance in general terms, and here, we have shown actuals against the same period last year. Revenue growth for Q3 was 17.3%. It was negatively impacted from currencies by 0.8 percentage point, leaving growth in constant currencies at 18.1% against Q3 2019. All revenue growth was organic in Q3. And the underlying growth was actually a little bit higher if adjusted for the impact from the release of the DKK 10 million from the contingency reserve taken in Q3 2019. On a like-for-like basis, revenue growth was 2 percentage point higher, at 20.1% in constant currencies. This impact is calculated by adjusting revenue growth in Q3 2019 for the positive impact of the DKK 10 million released from the contingency reserve. Gross profit margin was 42.2% in Q3 2020 compared to 43.2% in Q3 2019. The decrease in gross margin was driven by the ripple-down impact from the release of the DKK 10 million from the contingent reserve in Q3 2019. While revenue growth was negatively impacted in Q2 -- Q3 2020 by 2 percentage point, this same adjustment impacted gross margins positively by 1 percentage point in Q3 2019. And hence, adjusting for this, margins would be on par comparing the 2 periods. Further, the Danish business unit showed strong performance and realized margins in line with last year. And the change from loss to profit for our Dutch business unit clearly also adds to the overall positive performance in the quarter. Offsetting some of the positive impact was the impact from the U.K., and to a lesser extent, the impact from Norway. Administrative costs were almost flat despite a continued net hiring in the period. And the main reason for this is, like it was the case in Q2, that a series of administrative costs have not occurred during the lockdown in Q3. We have not done any business travel, there have been no external training sessions and social activities has been very limited. Some of these costs will reoccur once societies are generally more open. However, the timing hereof is difficult to predict. Interest rate cost was reduced from DKK 4.9 million in Q3 2019 to DKK 3.5 million in Q3 2020, both as a result of debt being reduced and also interest rate on our loan facility coming down as leverage was decreased. Overall, net financial costs increased, mainly due to currency adjustment on the loan held in the U.K. unit that was established in connection with the purchase hereof back in 2017. The opposite leg of that adjustment, so the income for the same loan, is accounted for under comprehensive income. After-tax, our net result increased to DKK 128 million. So could we have the next slide, please? Growth in Q3 was mainly generated in the Danish business unit, that grew 24%, and in the Dutch unit, that grew organically by more than 100%, 108% to be precise. These strong performances in both Denmark and the Netherlands follow strong performances in the same units in Q2. In Denmark, in Q3, both the Public and the Private segment grew at 24%. And in particular, the growth in the Private segment in Denmark has been important to retain the high growth rate during the quarter. And it illustrates the increased activity level that we see in the Danish Private segment, which from an overall revenue mix perspective is good. The growth in Norway was 5% in constant currencies, and as such, display the continued impact that the loss of a couple of contracts all the way back in the summer of 2019 still have on top line. But however, growth was slightly improved from the previous quarter, so sequentially growing from Q3 -- from Q2 at 3% to 5% into Q4 -- Q3. In addition, the impact of COVID-19 in Norway has been harder than in Denmark, in particular, in the Private segment. In Norway, revenue in the Private segment decreased by 15% in Q3, whereas revenue in the Public segment increased 10%. In the U.K., growth was heavily impacted from COVID-19 and decreased more than 17% in the quarter. The reason for the decrease is the impact the lockdown restrictions have on the U.K. economy on a macro level, which has also impacted Netcompany. Revenue in the Private segment fell by 25% compared to last year. And revenue in the Public segment decreased 11%, underlining the significant negative impact from COVID-19 in the U.K. in fact, in Q2, Public segment revenue grew 17%, but that positive trend has been eliminated in Q3. On a total revenue basis, the U.K. was flattish from Q2 into Q3. Can we have the next slide, please? Gross profit margins was 1.1 percentage point lower than same period in 2019. However, as already mentioned, on a like-for-like basis, gross margins in this quarter is on par with the same period last year. The Danish operation realized the highest margin, at 48.8%, in line with last year. Strong margin in Denmark was driven by strong underlying performance on projects and deliverables in time and on budget. The reason for the decrease in margins in Norway is the same as in Q2, namely a combination of the continued impact from loss of large deals in 2019 and the COVID-19 restrictions leading to higher resource capacity available than projects currently on the books. Margins in the U.K. were reduced as a result of the hard lockdown in the U.K. Where this impact in Q2 was mainly impacting IT consultant servicing in the Private segment, we have seen a negative spillover to the Public segment in Q3 too, increasing the negative trend from the previous quarter. In addition, we are in the middle of transitioning away from contractors to our own employees in the U.K., which means that the bench that is created when projects are [canceled] on a very short notice now belongs to ourselves, and that clearly have a negative impact on margin. Netcompany has chosen not to lay off staff or send staff on furlough in any countries and in the U.K., in specifics, during these difficult times. Despite the short-term positive impact that this would have on margins, we believe that the negative impact on staff perception is far bigger than any potential short-term saving on margins. And finally, margins in the Dutch operation were increased, as was the case in Q2. It's a combination of the continued improvement of the underlying project and increased efficiency in the Netherlands. And can we go to the next slide, please? Adjusted EBITDA margin for the operating entities, that is before allocation of central headquarter cost, was in line with performance in Q3 '19, at 29.4%. We saw improved margins in Denmark and in the Netherlands. In the Netherlands, margin improved from negative 14% to positive 20.9%, as a result of completion of a number of loss-making projects, completion of integration projects and lower administrative costs in general following lower activities, as a result of COVID-19. Margins in Norway was down more than 9 percentage points to 6.8%, as a result of underutilization and continued cost for business development driven out of Denmark, however though, at a lower level than in Q2. The important win of new larger multiyear contracts early in Q4 will have a positive impact on margins going forward in Norway. Adjusted EBITDA in the U.K. was negative, following the lower gross margin, but also as a result of increased administrative cost for housing in London that we entered into in January 2020, just before the COVID-19 pandemic started to impact all over the world. In addition, HR cost in the U.K. increased to facilitate the hiring of own employees in the transition away from contractors. On balance though, we are satisfied with group margins realized in Q3 2020. And can we move to the next slide, please? Free cash flow was DKK 155 million in Q3 2020, and the strong cash flow was used to reduce bank debt further by another DKK 200 million, so reducing the bank debt in total to DKK 760 million. Total cash and cash equivalents was DKK 236 million at the end of Q3 2020 compared to DKK 176 million at the end of Q3 2019. Days sales outstanding were improved to 60 in Q3, which is one of the lowest level in many years for Netcompany. Work in progress increased as some projects have payment plans, that means that they will allow for invoicing and subsequent payments during Q4 and Q1 2021. The strong cash flow seen through 2020 so far is expected to continue into 2021. And the strong cash position, the low leverage of 0.8x and the anticipated continued cash flow generation for the remaining part of 2020 puts us in a position to be able to redistribute around DKK 100 million for the year 2020 to our shareholders in connection with the AGM in March 2021 as a combination of dividend and share buybacks. Can I have the next slide, please? I want to make one final advertisement for our Capital Markets Day. It will be held digital-only on the 19th of November. We had originally planned to host a mixed event with physical presence in Copenhagen, but the organizer that we had chosen has canceled the event due to COVID 19. The agenda is laid out here. And you'll get the opportunity to hear from a number of our partners in Netcompany as well as hear customer experiences from both Copenhagen Airport and ATP. And with that remark, I have concluded the detailed financial analysis. And we now open up the call for questions. So if we move to the Q&A slide, please, and open the call for questions. Thank you.

[Operator Instructions] The first question is from the line of Poul Jessen.

My first question is on the guidance, both for this year and next year. You changed the organic guidance from 18% to 20% now to be 16% to 18%. But in the low end, why not just then give a guidance of approximately 16% for the year? What's the reason for keeping the 18%? And what could move it up there? Second, on '21 guidance, can you elaborate a little on what's behind the high and the low end of that wide range?

Thank you. Great questions. Well, it's very simple. I mean the reason why we say 16% to 18% in the lower end is because that's -- we're expecting the lower end. However, there are some uncertainty related to all this, and that goes from month-to-month. If we get more work in the U.K., which could happen, it will influence the numbers. And also, the -- how fast we get work in our books in the last couple of months, say, for instance, particularly in Norway as well. So there is some uncertainty to it. But -- so yes, you're right. We could have said 16%. But we're saying lower in 16% to 18% to accommodate for variations there. When it comes to the guidance for next year, well, I think all of us agree that these are uncertain times. We don't know exactly what's going to happen in -- particularly in the U.K. right now, but it could happen in any country basically. So we are guiding in a bit higher range in order to have the flexibility to accommodate any changes in -- specifically in relation to the pandemic. But our underlying business is strong. We have a good visibility at this point of time. And that's why we actually go out and guide for next year right now, usually do at the end of the third quarter.

Okay. I have 2 more questions. One question is about the continued hiring of people. First, in the U.K., you've hired about 30 people in the third quarter. I assume that is on expectations that there would have been tenders completed by the end of the year, which now apparently are not. So it's just a question of getting that confirmed. The second is, in the Netherlands, you had close to 50% on personnel. And in general, you talk about an organization being able to do 20%, 25% more consultants to be operating optimal. Now you're close to 50 -- for how long can you continue that growth rate? Or how should we relate that into '21?

To your first question, I think the short answer is, yes. To your second question, well, it's correct. In a small operation like the Dutch one, it is easier to add people, and also because, we add a mix of experienced and younger people. And many of the projects and tasks there are run by and held by Danish management team. So there is more experienced staff involved in many of the initial projects and engagements in the Dutch operation in order to get that going. And of course, we are very, very happy that strategic customers chose us for a larger engagement in the Dutch market so fast as they did. We are generally experiencing a real pickup with some of the public customers there. And of course, we are concentrating on giving them a real good service. So we're actually adding Danish management team resources into the Dutch operation, and that just gives us the opportunity to hire more people there at the moment.

Okay. And then the final one, Smarter Airports. Can you put a little more flavor on what you see as the potential in that JV with Copenhagen Airport? And secondly, should we going forward see that you do similar things? Like for instance, your payment solutions or in the Intranet for the education system. So this is just the beginning? How should we look at that?

Thank you for that question. Yes. Well, the airport, Digital Airport Solution is a platform solution that can be used as a starting point and a soft -- more or less, a software platform for any other airports when we finish it with the Copenhagen Airport project. So of course, it opens up -- that company opens up some doors for new airport customers across the globe. Now is that different from what we do? Well, at least there's a lot of reusable -- reusability in this concept. And it will definitely help our ambitions to grow internationally if we get larger airport-driven projects in any geography, that goes without saying. When it comes to our other platforms, we are definitely reusing our platform, specifically in the Gulf Tech sector. We can already see that. We have what we call the Gulf Tech Framework. You can actually find it in -- there's a good walk through on our web page, where we are operating with reusable components and platforms. And we'll see more of that as a part of our -- basically, it's not new. But the volume of what we do is just bigger now, and we can reuse more and more components. So we have more and more platforms with reusable components that we will reutilize every time we are addressing customers. So we will talk more about this in a -- at our company day later during this month.

And the next question is from the line of Claus Almer from Nordea.

Yes. A few questions from my side. The first question goes to the performance in Holland and the margin improvement we saw in Q3. Is this a new level we should expect for Holland? Or how should we think about that level in Q3? That would be the first question.

Thank you for that, Claus. When it comes to the margin in Holland of plus 20% in Q3, that is clearly a strong performance. As we also mentioned during the presentation, there are some costs that are not occurring right now, on a little bit on a sad background, which is that we cannot travel. That means that all of the important education that we normally do is postponed a little bit. And that will have an impact on costs, dragging down the margins a little bit. So margins are good, and they'll continue to be good. They might fluctuate a little bit up and down around the current level. But the improvement is structural to the Dutch business following the completion of the 2 main projects that were negative in 2019 and then the continued win of new projects.

Okay. And then about the U.K. and the backlog of projects. So what have you seen? Have you seen cancellations of projects? Or have you seen them being postponed into 2021? That will be the second question.

So that's a mix. I mean we see both. When it comes to larger strategic customers, we see some postponements and delays. That's basically what we see. When it comes to smaller peripheral customers, it's just an order to stop doing what we do for a period of time. And then you'll never know if you come back, because depending on -- so there's no doubt that the serious situation in the U.K. has made most companies to rethink their expenditures, and they go -- it's very simple. They look at what they need right now that is critical for them. That they will continue to invest in. What they don't need immediately and probably if this is -- these are smaller projects or less business critical, they will just pause them indefinitely. And then you don't know exactly when that will be picked up. And that's -- I mean that's a very good point, because where we are in -- we are in a transition phase in the U.K. We have some really, really strategic, interesting customers, and we also still have some customers that are not on strategic nature. And the latter are always hit by a crisis like this. Whereas in Norway and in Holland, we are much better positioned with business critical engagements and strategic engagements with a much stronger relationship building between us and the customer.

So more to that topic. So if you're going to split your revenue or activity level in the U.K., how much is a critical business? How much is -- we have to assume will be -- you will not be able to do for the next couple of quarters, at least? So what's the bottom level of the business?

It's difficult to give a straight answer on, Claus. And then the reason for that is that, to a certain extent, some of the revenue that has gone away in Q4, if you had asked us the same question 6 weeks ago, we would have said, well, that is for sure, something we're going to do. And at the end of July, Boris Johnson was saying that come 6, 7 weeks, we'll be back at work in the U.K. Ports are open, and we're going to watch football. So it's extremely difficult to have any firm opinion on that. What really is the challenge here, as André is saying, that a part of the portfolio that we have or a part of the project portfolio we have in the U.K., is short-term in nature. And when you have short-term projects, even though that they are also in the public sector, when they are renewed, and if the counterparty that are to renew them are in deep crisis, which is the case in the U.K. now, then they will postpone it. So in terms of what the ceiling is, if you saw it on the floor in the U.K., that's difficult to say with any firm conviction at this point in time.

The next question is from the line of George Webb from Morgan Stanley.

Hope you guys are well. I have a couple of questions to follow-up on, please. Firstly, you mentioned a number of sizable contract wins in the quarter in the private sector. Can you give some color on what sort of projects those are for and how broad that vertical mix is? And then secondly, back on to the U.K. Can you talk about where utilization is today and how you expect to be managing the workforce and hiring through the fourth quarter and into the start of 2021?

So if we start with the last question first, George, on the utilization. And we don't disclose utilization by country. But it's no surprise, I think, to anyone that the utilization in the U.K. is lower than what it was in the beginning of the year and also lower than what we would like it to be. So -- also moving back to one of the previous questions as to the 30-some people we hired in Q3 in the U.K., they were hired under the assumption that they would be working on projects, which was not really the case because the majority of those projects were postponed or even canceled. And that means that, to a certain extent, we do have some bench and also a fairly large amount of bench still in the U.K. We expect to be able to utilize that better and when we get into Q1 and Q2. But in Q4, the bench here will be of the same magnitude more or less than we saw in Q3. As to the first question, in terms of private wins, André will comment on that.

Yes. The private wins are more or less equally distributed across various sectors, but they are all sectors where you have a great deal of administration work. So it's logistics and transport, financing specifically, also insurance industry and also utility sector. So it's typically systems where we either do heavy administration, billing, logistics, planning and integration work. So -- and there, the good news is that these projects that we've won and engagements that we have enlarged are all business-critical solutions with strategic attention from the customers. So that's really, really positive. And that's just a paradox in these times: you have customers who are approaching you and really want to volume up and create stuff faster than you've expected. And then you have customers who are more or less entirely closing down, depending on their own financial situation. So the volatility is bigger. However, the positive trends in these sectors, as I mentioned, is definitely outlining the negative trends. And right now, that makes us think and also looking at the visibility and pipeline, that makes us think that 15% to 20% is the right level of growth for next year.

That's helpful. Maybe if I can follow-up with one more. I mean I guess you've always positioned the U.K. business being a multiyear transition than it would be a number of years before got what you'd hope it could achieve at the group level. Are these targets fundamentally shifting at all? Or is it just a matter of timing?

No. I think we would agree to your analysis, George, that 2020 is a year of transition. When we looked at 2020, all the way back at the beginning of the year, we also labeled 2020 as a year of transition for the U.K. A little bit of different reasoning, though. But 2020 has, in many aspects, turned out to be a real year of transition and will basically be a year which is not really moving us significantly forward in the U.K. We're not changing our view on the U.K. as a market. We still think that is a highly attractive market to be in. We still think that digitalization will drive demand in the U.K. We still think that Brexit, whenever the U.K. gets around to do that, will drive continued digitalization, specifically into the public sector as a lot of system has to change. So our baseline assumption on the U.K. is not changing. Of course, timing is a little bit uncertain here, but we still think that the U.K. is a very interesting market.

Yes. What we can do in these difficult times there is do what we also have been doing in the other countries. With patience, build up the capacity and capabilities of our workforce, and make sure that they can they can actually pick up the business when we are -- when things lighten up a bit. I'm absolutely sure that it's difficult to build up new customers in the situation that we are in right now. We're doing our very best, and I think we're doing pretty well. But still, in a transition phase as we are in the U.K., being hit by COVID, it has a much larger effect than when you have a more stable customer database and foundation, as is the case in the other countries right now.

The next question is from the line of Toby Ogg from Bank of America.

A few for me. So firstly, just on the outlook for 2021. Obviously, 15% to 20%. Sort of 2.5 point reduction at the midpoint, I think, from where our expectations were previously. Perhaps you could just help us a little bit with the breakdown of that contraction. How much of that is linked to the U.K. specifically? And then similarly, on the margins side, obviously, the new expectation is 25%, which is 150 basis points lower. Again, is that predominantly driven by the U.K.? Any further color on that would be great. And then just on -- I want to come back quickly on the Danish public sector. I think you mentioned there the loss of the deal due to pricing. Perhaps you could just expand a little bit on whom you lost that deal to, what the sort of price differential was, and whether you think that price is perhaps becoming more important to the government over perhaps value and quality of the offering.

Thanks for the questions, Toby. I'll take the first one and André will take the second part. When it comes to the outlook for 2021, we are right now expecting 15% to 20% and -- in organic growth. And that is based on the current macroeconomic environment that we see, which means still some negative impact, significant impact from COVID. A full breakdown on each country is not what we do in terms of our expectation or guidance for that matter. So I'm not going to be very specific on that. But it's clear that the current outlook in the U.K. is not as positive as in the other countries that we do operate in. And since we are in that situation with the U.K., that also have a bearing on our margins going into 2021. I remind you that we are talking from 26% to 25%, so it's 1 percentage point compared to where we sit last year. However, when we are in a situation where we have taken on a number of our own employees in the U.K., and therefore, own the bench, then we are facing a fundamental question as a company. And that is, do we believe in the U.K. on the longer term? Yes? No? And the answer there is yes. And when the answer to that is yes, then the subsequent question is also, will you then do something short-term to preserve margins, i.e., go out and fire 75 people? And we would never do that. And the reason for that is, first of all, we think that's a very short-term action to take in order to protect in all manners a small part of the margin. Second of all, and more importantly, we've spent the last 3 years in the U.K. building up our brand recognition, the Netcompany name in universities, both in London, but also throughout the U.K. And the minute we go out and say, well, the 140 people we hired in 2020, we're actually just going to fire 75 of those to save some short-term margins. It's going to take us 3 to 5 years to be able to get interviews with the university students again going back. So the base we have is talented people, and we want to hang on to those because we do believe that growth will come back. But on the short term, it will have a dilutive impact on margin.

And when it comes to the Danish government sector, and in particular, the loss we had at tax, we have to remember that Tax office right now, the customs part, there's at least 3 major deals. We won the first one. We lost the second one, rightly so on -- primarily because of pricing. That is not something we see very often. I mean we don't see pricing as a major problem in the public sector in Denmark. Most times, we are within 5% to 10%. And sometimes, we see few players go really down. I think not revealing who and why and whatever, my best guess is that some of this work will probably reoccur again. These are complex systems, and we will focus on our part of the engagement at Customs. We have a a really good relationship with the customer. There's much, much more work to come. And I think the most important thing here is that to accept that, sometimes, you don't win everything and just focus on the things that you win. And I'm sure there's a lot of -- a great prospect and future for us with that customer. So -- and I can't reveal more about the particular contract.

That's great, that's great. And just one quick one, actually, just on the private sector in Denmark. Obviously, we had a big -- we saw a big step-up in growth in that quarter. Perhaps you could just talk a little bit about the sustainability of that level of growth in the Danish private sector.

That's the positive thing here. I mean the sustainability of that growth is good because these are systems that are -- there's actually journeys with customers that are typically 1 to 3 years of developing and installing, and then maybe even longer times in maintaining. So they have the same nature as we see in the very complex public projects. And this is exactly what we want to do. So that's a really, really positive trend. And sometimes, on a very sad background, because some of these private customers, they -- maybe they've been circling around taking the decision of replacing their entire back-end systems. But now because of COVID, they decided to do so in order to be better prepared for integrating and opening up for both service and sales channels in their own business. And you cannot do that with -- when you have an old system in the background. So that has been positive for us. And it's great to see that we are highly competitive also compared to more traditional old players with 30 and 40 years of experience in the private sector. So as it also has been revealed in the media, we are actually winning deals, for instance, in the insurance sector, where you normally would find a more global player or a player with an old standard package systems, we come in with a completely new platform and outperform. So I think that's a really, really positive trend. And we've been talking about it for a couple of years, that we see the market going that way, more and more courage in order to replace the old kernel systems. And that courage has definitely been lifted up by the -- at least, it has been -- there's a quicker transition now than we expected just a year ago. So that's good.

And the next question is from the line of Erik Elander.

All right. So I have 3 questions. First of all, your growth and margin targets for 2021. How do you expect the different geographies to contribute to that? Should we expect the same trend as of now? Meaning that Denmark and the Netherlands will be the main drivers of both the growth and the margins? Or do you expect anything different from now to appear in 2021?

Also -- well, obviously, when Denmark and the Netherlands are showing really positive trends. But not just trends, but also customer base and the pipeline is good. As we said, I think we've said this over the last 2 or 3 quarters, that with Norway you need to have some patience for us to build up the -- a larger project deal size up there. The thing is that the Norwegians are definitely doing so. We have a good pipeline in Norway. And we also have some, as you've also seen in the material today, we have some substantial wins there. So we actually expect Norway, Denmark and the Netherlands to contribute to the growth. U.K., we are more uncertain because of the crisis there and the situation. But I can say, in general, those 3 countries are -- we look with more -- a lot of positive -- with positive eyes on development in the portfolio of customers and the nature of the projects we do.

All right. And I think the Netherlands business is -- I mean has been very impressive the past quarters. And you also mentioned that the transition there into the Netcompany model is going faster than expected. When should we expect the Netherlands to post, I mean, average group margin levels as of 26% or above?

Yes. Whenever we do an acquisition, and thanks for the question, Erik. Whenever we do acquisitions, what we say is that we expect them to get to Netcompany-like margins and financial performance and that is an organic revenue growth of 20% to 25% and a margin of 20% to 25%. It's going to take 15 to 20 years for an acquisition to get to the same level as Denmark, which is around the 30% margin level, right? And that's because it takes time to build up the customer portfolio, it takes time to put the systems into production that you can then maintain subsequently. And therefore, the Dutch operation will not, despite the strong performance we see currently, will not go to a 30% mark in 1, 2 years. When we originally acquired the Dutch operation, we said within 3 years, we would be at the desired financial metrics, 20%, 25% top line and 20%, 25% margins. And for sure, we expect that still to hold up. And we expect also to see strong performance in Holland for 2021 already. So that's how close we can get to it at this point in time.

All right. And this one is also for Thomas, it's a very nitty-gritty modeling question. But I noticed that the internal sales or sales eliminations from the group level have increased. Before, it was like DKK 0 million every year, and now it's around DKK 20 million. Is that related to the Netherlands business? Or -- and this is also this level we should expect going forward?

Not necessarily -- not only related to Netherlands. There's also some internal sales between the different units. So it's actually more a reflection of an increased cooperation between the units. And what we do is we -- whenever we have some sales that are generated from other parts of the organization than in a country where they actually occur, then there are some internal eliminations. There's also some eliminations, internal trade from our operations down in Poland to the different countries. So it's the increased global reach, I would say, of the group that you see there, so not Holland alone.

All right. So we should expect the same level also the coming years then?

Yes.

I guess.

Yes. That's true. Correct.

Yes. Perfect. All right. And the final one. So your 2021 targets now, Assume you don't reach them, what has happened?

It's difficult to predict, especially the future. And I think everybody would subscribe to the fact that nobody really saw the pandemic coming. To put it into perspective, here in Denmark, 3 days ago, nobody expected that an entire industry would be killed, which is the mink industry. So overnight, things can really happen that you just don't have any view on in any meaningful aspect. So for us to really not grow in 2021, we would have to see things that we can't even imagine now. It's always dangerous to say that that will never happen because the COVID has shown that sometimes weird things happen. But based on what we can see now, Erik, and based on our backlog of projects, based on our continued multiyear projects in Denmark, both in public and in private, as André was talking to, our increased win ratio of larger scale projects in Norway, the ongoing development of Holland, we are comfortable with the 15% to 20% that we are outlining as our expectation at this point in time. Still, it's uncertain times, so that's why the range is wide. And then you can always have all kinds of different scenarios if the world stops to function. But we don't know what that will be, so we'll refrain from commenting further on that.

All right. So it's more or less to COVID then that you actually see something within your internal operations that would kind of show this target out of -- at the boat, so to speak.

That's correct. And that's also what we highlighted in the guidance or in the expectation for 2021 as some of the main assumptions are. So the main assumption is that the current macroeconomic environment, including the known factors from COVID-19, does not deteriorate further than what we already know. It's under the assumption that there will still be spend on digitalization. It's under the assumption that we don't see any material delay in the ongoing tenders. So all of those things, you can say, is, to a little bit of an extent, outside of our reach. If the world, “functions” kind of normal, then we have 20 years' experience in delivering projects, and we'll continue to do that.

[Operator Instructions] The next question is from the line of Yiwei Zhou from SEB.

Yiwei from SEB. Actually, most of my question have been answered. So I actually have 2. Firstly, earlier this year, you mentioned that the training and on-boarding of the new employee could be challenged if the pandemic prolongs. Now we have the second wave here. So how do you see the risk now?

Yes. I mean, I have to say I'm highly impressed about the way that HR, but also all our experienced employees, have handled this situation. And it's been going better than we expected. We do have a very thorough process when we hire people. We have 3, 4 interviews, and most of them now are done virtually. And what is maybe even more important when people start working for us, they start very fast. They start on a project, in an engagement with a real customer where they have to be productive and deliver value. And it has been a real eye opener during the spring, how that -- how to optimize that and make that work. And of course, it's a bit easier now. We can reuse our experiences. But the overall impression after that is that it's actually working out really, really fine. So I'm not worried about the mechanics or the ability to deliver or finding the right people. What you could be worried about in long-term perspectives is, of course, if you have a longer period of time when people do not meet anyone, the whole social aspect is something that I think most companies right now are wondering about. We've done several things here to mitigate that. We've had small assemblies. We've divided people up. We tried several things. But of course, if we experience a complete lockdown again and people cannot meet, I think it could have -- for any business, that's just not good. So that is a worrying fact. If we go into say 6 or 12 months where people cannot meet each other, that is not good. However, having that said, that will affect all businesses. And we are in a good position because our people are really, really used to work digitally. And on the positive side, we've never seen so much cross-country collaboration as we do now. Whereas before COVID, every time you try to push in, say, 20% of people from other offices to help out delivering something, you were met with skepticism and say, "hey, well, we cannot meet that often." There could be a cultural thing. Now it's just happening much more and in a much more agile and sensible way. So that has been the positive effect of that. So all together, I have to say, I'm impressed about the way we accommodated this, and we are ready for it.

Great. That was very helpful. And my second question here. So once your U.K. competitor kind of the actually said in the latest trading statement, the ongoing customer demand remains very high. So I was wondering, how your customer exposure has differentiated from this competitor? And -- yes, could you help us to understand? Maybe there's a difference in the type of the projects you are doing, what type of market?

Yiwei, it's always difficult to comment on somebody else's company announcements or trading update. Canes are doing well in the U.K. market. That's true. They -- I know, and that's publicly available, so you can find that in public databases in the U.K. They won a couple of fairly large projects with the NHS in terms of track and trace for COVID-19 response. And those 2 contracts to be delivered over 1.5 years are, for the size of Canes in the U.K., significant. But that question is probably something you should post to the management of Canes. If we look at our business, which is what we can relate to, what we can simply see is that the transition that we are in the middle of, not only when it comes to employees, but also when it comes to type of projects, is the right one to do, because the first projects that you lose in a period with uncertainty are the ones that are of shorter terms, which we also, to a certain extent, had in the public sector. So some of the projects that we were doing both in Q1 and Q2 and -- were then continuing into Q3 into July-ish, beginning of August, they are typically renewed or the ones that we have are renewed on a 3-month or 6-month rolling basis in the public sector also in the U.K. And those projects simply just disappeared more or less overnight. So because of the project portfolio that we currently have in the U.K. also in the public sector, that is the underlying impact short-term that we see in the U.K. Now we don't think, as we mentioned before, we don't think that the overall attractiveness of the U.K. market has deteriorated, but there is a timing difference to it.

Okay. Great. And how does the tender pipeline look like in the U.K. in the moment? I know it will be delayed, but I mean how does the pipeline look like?

The pipeline we're working on now in the U.K. is focused on 2021. And we're building that up, and we see some good activity. But that is for all practical purposes a pipeline that has to do with 2021.

And the next question is from the line of Gianmarco from Deutsche Bank.

I have just one question because most of mine have been taken as well. In regards to your 2020 strategy, more in the long term, you previously mentioned in your equity story that you were looking to kind of expand into other Northern European regions, something like Sweden and Finland. Has anything changed on that basis? Or are you rethinking anything around those lines in terms of expansion in different countries?

We are still looking into new markets, of course, and we are having continuous dialogues with potential acquisition targets. We're also looking at using some of our solutions to go into those markets. But right now, I mean, I don't think the market is the biggest challenge for us. We have markets in Norway and the Netherlands and in the U.K. So we are definitely also focusing very much on building up our practice in the markets we're already present. Having that said, we are also very interested in looking at new markets. So nothing has really changed in our strategy.

And then we'll give a much deeper and more thorough update on that on the Capital Markets Day. So André will go more in details with that. We'll have the content managing partners from both Denmark, Norway, U.K. and Holland present. You'll have the opportunity to discuss with a couple of our clients as to what do they think of us. So that is really a good segue into making a final push for signing up to the Capital Markets Day because that is exactly where we're going to discuss those matters in greater details.

As there are no further questions from the conference call at this time, I will hand it back to the speaker for any closing remarks.

So thank you so much for today, and I wish you a very good weekend, and stay healthy out there.