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

Welcome to the Netcompany Q4 update. Throughout the call, all participants will be listening only mode and afterwards, there will be a question-and-answer session. Today, I am pleased to present CEO, Andre Rogaczewski; and CFO, Thomas Johansen. Please begin your meeting.

Good day, and welcome to this presentation of Netcompany's results for Q4 and the full year of 2021. My name is Andre Rogaczewski, and I'm the CEO and Co-Founder of Netcompany, and I'm joined today by our CFO, Thomas Johansen. But before we get going, there are some important disclosures that I need you to read through. So could we please have Slide #2. I will pause 30 seconds here and let you all have a read-through of these important disclosures. And with that, can we go to Slide #3, please. The topic of today's presentation is our performance in and a detailed presentation of the financial performance in both Q4 and for the year. I will walk you through the business highlights for 2021. And I will also go through a revenue visibility in our financial guidance for 2022. Once I'm done, Thomas will go through the numbers in greater details, both for Q4 and for the full year before we open the call for questions. And can we have the next slide, please? We grew revenue in 2021 with close to 28%. Of that growth, 10.1 percentage points comes from the acquisition of Intrasoft International in October. The remaining growth was organic. As communicated during the first half of 2021, our employees have, in general, deferred some of their vacation from the beginning of the year to the end of the year, which was accelerated towards the end of 2021 and ended with our employees taking a little bit more vacation for the full year than expected. Gross profit increased by more than 15%, yielding a gross profit margin of 36.7%, which was 4 percentage points lower than in 2021. As was the case in the first 9 months of the year, we continued to work with Danish resources on international projects, which led to lower margins on those projects and also a higher usage of freelancers in Denmark. However, the relative level of such activities have been decreasing during the last quarter of the year as expected. In addition, COVID-19 related restrictions in post late December reduced utilization with the equivalent of 2 working days, which naturally also had a negative impact on both revenue growth and margins. However, the main effect of our margins to be lower was the inclusion of Intrasoft into our books in 2021, irrespectively of the fact that financial performance in Intrasoft actually was better than our initial expectations for 2021. The lower gross profit margin naturally impacts adjusted EBITDA margin to the same tune and adjusted EBITDA was DKK 880.9 million, which yields a margin of 24.3%, a decrease of 4.2 percentage points compared to 2020. We added more than 1,000 full-time employees during 2021. And here, Intrasoft also adds a significant share to the number and constitutes almost half of that increase. And can we have the next slide, please?. Continuing on the employee topic. The breakdown here shows the growth in Netcompany core and analyzed a number of employees in Netcompany Intrasoft, freelancers and independent contractors and Netcompany core are not growing as fast as early in the year and the number of independent contractors is also coming down fast as expected. We also note that out of the close to 2,900 employees in Netcompany Intrasoft, more than 600 are freelancers or contractors as a result of the different delivery model in Intrasoft compared to Netcompany. Churn for the last 12 months was higher compared to last year and ended at more than 22%, driven by the high churn in Norway, the U.K. and the Netherlands. In Denmark churn was more than 19%, which when comparing to 2020, where it was 14.5% might from the outside, seem high. This is, however, not the case as churn in Denmark historically has been around 17% to 18% with a significant drop in churn in 2020, the year of corona. What happened in 2021. When society opened up, was the change between jobs deferred from 2020 was added to the normal job changes in 2021 and thereby drove up churn compared to 2020. We have certainly seen increased competition for IT talent during 2021 and the demand for our experienced consultants have increased significantly. In times like these, I'm proud that we have been able to continue to add a significant number of employees across the group. And again, we have Slide #6, please. We have won a number of new contracts during the last quarter of the year, of which I am mentioning a few here. In Denmark, we have won a project to renew one -- to renew one of the main platforms for Flex Denmark that will support their ambitions for a more efficient operation and supporting their ambition to contribute to a green environment. We have also won a large contract with the second largest municipality in Denmark, Aarhus, to deliver the entire social domain within the municipality of OS. The solution will be based on our moderate social platform and forms a great example of the power and the value of our [indiscernible] framework. In addition, we won the project to digitize a solution for registration and management of ownership of real estate, transfer hereof and other related processes related here to for the National Board of Justice. We've also won a major project to deliver the new system for general elections in Denmark. That project is run by combat and it is a significant piece of critical infrastructure in Denmark that we are really proud to be delivering going forward. We've also won a large contract with Miller Mobility Group, a private customer in Norway, which is a multiyear strategic development contract that will enhance our position in the private segment in the Norwegian market. Can we have the next slide, please? I also want to take this opportunity to mention a couple of the contracts we've already won in 2022. The first contract under the so-called RF initiative funded by the EU has materialized in our Greek operation of Netcompany Intrasoft. The project is a digitalization project of all land and parcels in all of Greece and will be run as a joint project with the Greek subsidiary of the Deutsche Telekom OE. This gives us even better comfort that the large amount of more than DKK 30 billion in the RFP in Greece will be spent as planned. Also, I want to highlight a recent win in Norway where we won the biggest contract ever in Norway. It was a renewal of the strategic agreement with the municipality of Oslo, but bigger than previously and with Netcompany being the only vendor on this new contract. The win was only made possible due to the outstanding cooperation with highly skilled employees from both Denmark and Norway and underlines why in fact is a good idea to have cross utilization of Danish resources for the longer run. Can we have the next slide, please. With the acquisition of Intrasoft, we have updated our operating model approach to that of Netcompany core and of Netcompany expand. The core part of the group constitutes of our operation in Denmark and the acquired companies in Norway, the U.K. and the Netherlands, and they are labeled as core because we integrate the acquired companies fully into our operating model. Unlike with the acquisition of Intrasoft, that we are not integrating fully and hence, labeled as Netcompany expand. Can we have the next slide, please. Our investment in Norway and the U.K. continued to improve in terms of the financial performance with revenue growth of 27% full year in Norway and close to 16% in the U.K. Performance in our Dutch operation was not satisfying as we saw revenue decline with an equally sharp decline in gross margins. We have taken appropriate corrective actions in our Dutch operation, and I'm confident that the team in place now will facilitate a strong recovery for us in the near term of the Dutch market. Then we have the next slide, please. Last year, we acquired Intrasoft International, and we're excited to have welcomed Intrasoft to the Netcompany family. I am confident that we combined -- constitute a strong and highly competitive company that can compete for large and complex projects in most of Europe. The acquisition gives us better reach within Europe and within the EU institutions and the level of interaction with the EU is maybe best illustrated by the order backlog in Netcompany Intrasoft, which is mainly contracts with the EU. For 2022, more than DKK 1.3 billion is going to be released from the backlog. And if no new contracts are one at all, the value of DKK 6.5 billion will be realized as shown in the diagram here. We are confident though that new contracts will be added to the backlog. And can we have the next slide, please. The strong performance in all our business units has increased the level of contractually committed revenues to close to DKK 3.8 billion at the beginning of January 2022, which was an increase of more than 62% compared to the same period last year. 17 percentage points comes from the Netcompany core part of the business and the remaining increase is related to the Netcompany Intrasoft part of the business. And as in recent quarters, we see improved revenue visibility in both the private and the public segment throughout all our units. And this leads me into our expectations for 2022. So can we have the next slide, please. With the acquisition of Intrasoft, our guidance table has become somewhat more busy. However, we find it important to continue to be transparent on our expectations for the Netcompany core part of the business, too. For Netcompany core, we expect revenue growth of 14% to 19%. This is net of the dilutive impact of 3 percentage points that the discontinuing of 2 services for 2022 have on our growth expectations. So in a directly comparable analysis against 2021, we would have expected revenue growth of 17% to 22%, all other things equal. And when we have taken the decision to discontinue parts of the services we offer, it all comes down to the strategic alignment and doing the right types of projects. And by being even more focused on the strategic core projects, we will lay an even better foundation for the accelerated growth in the future. Total organic revenue growth is expected to be between 13% and 18% and includes the dilutive 3 percentage impact as just mentioned, and the impact from Intrasoft for the month of November and December 2022. We expect adjusted EBITA margin of more than 23% in Netcompany core. This is net of the dilutive impact on margins from changes to employee benefits that has an impact of more than 3 percentage points on margins in 2022. The benefits relates to level of paid vacation, maternity leave and pension plans. In all other things equal situation compared to 2021, our margins expectations would those have been 3 percentage points higher at more than 26% for Netcompany core. For Netcompany Intrasoft, we expect adjusted EBITDA margin of more than 9% for 2022. And for the group altogether, we expect adjusted EBITDA margin of more than 20% for 2022. And with that, I will give the word to Thomas to take you through the financials in greater details. So please go ahead, Thomas.

And like already mentioned, I'm CFO of Netcompany, and I will go more into details with the financial performance for Q4 2021 and for the full year of 2021. So if we move past the breaking Slide #13 and straight into Slide #14, please. Andre has already spoken to our performance in general terms, and I will go more in details with the performance both for Q4 and for the full year. Revenue growth for Q4 was 59.1%, positively impacted from currencies by 1.5 percentage points, leaving growth in constant currencies at 47.6% against Q4 2020. 37 percentage points of the growth was nonorganic related to our acquisition of Intrasoft in 2021 and the remaining 12.1% was thus organic related to Netcompany core. Gross profit increased by close to 18% to $385.8 million, whereas gross profit margin was 33.5% compared to 42.4% in Q4 2020. The main negative impact on gross profit margin was the inclusion of Netcompany Intrasoft, which diluted gross profit margin by 5.4 percentage points in Q4 2021. For Netcompany core, gross profit margin was 38.9%, which was 3.5 percentage points lower than Q4 2020. The restrictions imposed in December related to COVID-19 and the more contagious Omicron variant led to increased vacation and more absence for illness, which impacted margins negatively by 2 percentage points. The use of freelancers and continued cross utilization of Danish resources impacted margins negatively by another 1.4 percentage point in Q4 2021. Adjusted EBITDA was flattish for Q4 compared to 2020, which led to EBITDA margins of 20.7%, compared to 31.1% for the same period in 2020. As was the case when discussing the development in gross profit margin, the main reason for the lower adjusted EBITDA margin related to the inclusion of Netcompany Intrasoft, which had a dilutive impact on margins of 3.7%. In addition, administrative costs in Netcompany core was higher in Q4 2021 than was the case in Q4 2020. We more than 20% higher per FTE. This is a result of spend in Q4 2020, being extraordinarily low rather than cost level in Q4 2021 being high. Administrative cost per FTE in Q4 2019 and Q4 2021 are on level at around 40,000 per FTE, whereas the average cost per FTE in Q4 2020 was as low as 33,000 as a direct result of the hard lockdowns and less activity in societies in 2020. Can we have the next slide, please. Taking a closer look at revenue growth in Q4, we have shown where growth was generated on this slide. Revenue growth in Denmark was 12.2%, driven by continued strong growth in the private segment that grew 13.3% compared to the public sector, where revenue grew 11.5%. Both segments was negatively impacted from a growth perspective by the COVID-19 restrictions imposed in late December and the higher level of sickness following the Omicron variant. And in total, revenue growth was negatively impacted by this of around 3.5 percentage points in Denmark, in Q4. Norway grew 8% in the quarter, also negatively impacted by restrictions from COVID. and the drag on some projects won back in 2020 at lower rates that is now coming to an end. Public segment grew 38%, whereas the private segment declined 26.4%. The decline in revenue in the private segment as a result of a number of projects being completed in Q3 and the starting of new projects did not happen in the private sector until the end of Q4. However, with the win of the Miller Group, the private segment is set for continued growth in Norway. In the U.K., revenue grew 15.3%, supported by our relationship with the NHS, but also driven by other new customers in other parts of the administration, which is exciting for the future. In the Netherlands, revenue declined 26% and continued the trend seen previously in the year. However, with an improvement from Q3 and where the decline in revenue was 14%. The Dutch operation has been on a strict lockdown, which together with the lack of a functioning government, continue to have a negative impact on our growth in the fourth quarter. In our recent acquisition of Intrasoft, we realized revenue for the month of November and December 2021, of $285.7 million, which was higher than our initial expectations. Revenue was mainly driven by the parts of Intrasoft related to the EU and the enterprise segment. And with the recent win in Greece under the RRF, revenue growth in the public segment is expected to pick up, too. Can we have the next slide, please. For the full year, revenue grew 27% in constant currencies, of which 10% was nonorganic and 17% was related to Netcompany core and organic. Revenue in Denmark grew by close to 18% in the year, which would actually have been higher had it not been for the COVID-19 restrictions imposed late in the year. The private sector was the main growth contributor in Denmark in 2021 and grew by 32.4%, whereas the public segment grew 9.4%. Towards the end of 2021, we started to see an increased number of tenders and cases emerged in the public segment. And our expectations is that growth in the public segment will accelerate in 2022. We Demand in the private segment, on the other hand, continues to remain strong. In Norway, we grew 27% for the full year, driven by strong demand in the public segment. The reason win with Oscar municipality underpins this demand. However, as in Denmark, we also see strong interest for our services in the private segment and the recent win with the Muller Group is a good example hereof. In the U.K., revenue grew close to 16%, which constitutes stronger and higher activity in the operating unit than the growth number indicates. The growth of 16% is generated with a growth of just 5% in client-facing employees, which has been a deliberate management decision in the U.K. to focus on setting the right organization before accelerating growth. This means that we are now in a strong position in the U.K. with less than 4% of the workforce being independent contractors. We have bigger and longer projects, and we start to see more cases in the public segment in the U.K. In the Netherlands, revenue declined by 16.6%, which we have already discussed as being not satisfactory. Corrective actions has been taken in the Dutch operation, and there is now a functioning government in place in the Netherlands. This should lead to activities in the framework agreements that we won participation on in the spring of 2021. It is expected that these are to begin to generate work for Netcompany Netherlands in 2022. Despite the low activity level in the Netherlands, we have continued to hire employees in 2021, and we have grown the amount of client-facing FTEs with 20% to 142 in 2021, which will ensure that we can accelerate growth in the Netherlands once projects are being released. Full year revenue for Intrasoft has already been covered during the walk-through of the Q4 numbers previously. And can we have the next slide, please? Gross profit margin was 8.9 percentage points lower than for Q4 2020 and ended at 33.5%. The dilutive impact on margins from the inclusion of Intrasoft was 5.4 percentage points. Margins were reduced in Denmark with 1.1% as a combination of more use of freelancers and the cross utilization of Danish resources on international projects. This have led to an increase in the usage of freelancers in Denmark. However, at a lower ratio than seen in both Q2 and Q3. COVID-19-related restrictions and Omicron reduced margins with another 2 percentage points. In Norway, gross margin was reduced from 24.6% to 19.5%, mainly as a consequence of cross-utilization and the provision for additional resources required to complete one fixed fee project. In the U.K., gross margin was improved significantly as utilization was improved compared to the same period last year. More and more, the operational setup and the projects undertaken in the U.K. begin to be of a type and character desired for the longer-term growth and continued margin expansion in the U.K. Margin in the Netherlands was negatively impacted by the continued low utilization and usage of Danish resources as seen throughout the year. The largest fixed fee project in the Netherlands is being completed in Q1 2022, which will bring improvement to margins in itself. In addition, cases are emerging in the Dutch pipeline and the fact that a functioning government is now in place is positive for our 2022 aspirations in the Netherlands. Gross profit margin in Intrasoft was 17.6%, above our expectations and a result of strong delivery on projects across the portfolio within the European part of Netcompany Intrasoft group. And can we have the next slide, please? The pattern for the full year gross profit margins follow that of Q4, lower margins impacted by the inclusion of Intrasoft, as expected and communicated in Q3 and continued impact from cross utilization of Danish resources and impact of COVID-19 imposed restrictions towards the end of 2021. Positive trends in Norway and the U.K. in terms of projects and delivery hereof is expected to continue into 2022. The performance in the Netherlands is expected to be improved, too. Can we have the next slide, please. Adjusted EBITDA margin for Q4 2021 of the operating entities decreased by 6 percentage points in the quarter. Part of that is due to the reduced gross profit margin that I've just explained. And again, the main impact on margins come from the inclusion of Intrasoft. Also, we did see increased costs related to employee activities -- This was expected, and we are pleased that it is now possible to have more face-to-face activities with our employees. We expect these types of costs to continue to increase slightly through 2022. In addition, higher costs for our new office in Oslo, which was taken in us end of Q2 2021, impacted cost base. This was originally planned to sublet part of the new office in Oslo until we have grown FTEs ourselves to occupy all of the new building, but this has not been possible and thus, we carry the full rent ourselves. Margins in the U.K. continued to improve as a result of lower proportion of independent contractors, better and longer-term projects and increased utilization. EBITA margin in the Netherlands took a decline for reasons already discussed when analyzing gross profit margin. In addition, the continued focus on growth more people to do recruiting, increase management remuneration and increased marketing efforts in the Netherlands clearly have its tolls on margins. However, these actions are initiated because we continue to see a very interesting market opportunity in the Netherlands. Adjusted EBITDA margin for the quarter in Netcompany Intrasoft, was 7.4%, above our expectations. Can we move to the next slide, please. For the full year, adjusted EBITDA margin was 22.9% compared to 27.7% last year. 1.3 percentage point of the reduction was attributed to the inclusion of Intrasoft. For the core part of Netcompany, adjusted EBITDA margin was 23.1% compared to 26.2% last year. As mentioned before, 2022 -- sorry, 2020 was extraordinary in the means that the lockdown of most of the world in 2020 led to a significant reduced administrative costs impacting margins positive in 2020. For 2021, the continued cross utilization and use of freelancers in Denmark to cover here for had a dilutive impact of margins of more than 1 percentage point. Also, increased vacation and sickness related to the widespread Omicron variant reduced margin by around 1 percentage point. Can we have the next slide, please? Free cash flow was positive with DKK 408 million in 2021 compared to DKK 557 million in 2020. The decline in free cash flow compared to 2020 is related to the acquisition of Intrasoft and changes to net working capital. For net working capital, work in progress and accounts receivables increased considerably. The most of that increase comes with the mismatch of bringing only 2 months of P&L into the group from Intrasoft, but balance sheet items based on the full year's activities. In addition, income taxes paid and interest paid increased in the year also impacting free cash flow negatively just as the one-off of payment of EUR 100 million to the Danish vacation fund had a negative impact on our cash flow. Adjusted for the one-off payment to the vacation fund and adjusting for fair value adjustment to the cash conversion ratio, it was 94.3% compared to 103% last year. During the year, we have repaid $612 million on our debt prior to the acquisition of Intrasoft, and bought back shares for DKK 100 million alongside with the payment of dividend of another DKK 50 million. Our cash at hand at the end of the year increased by DKK 100 million and underlines our strong financial position with underlying strong and recurring cash flow generation. And with that, I've concluded the detailed financial analysis, and we now open up the call for questions. So if you move to the Q&A slide, please, and open the call for questions. Thank you.

[Operator Instruction] Our first question comes from George Webb with Morgan Stanley.

Andre and Thomas. A few questions from my end. Just firstly on Intrasoft the midpoint of your 2022 guidance, it looks like the order backlog there gives you a little bit over 80% visibility. Can you just talk about how you see Intrasoft evolving moving forward, given the price you paid for that business? I guess the EU RF is one of those big attractions, and it's still early days on that. You mentioned one contract award so far. Is that guidance you've set in your mind, therefore, more of a baseline with the potential to move up to higher rates of growth if some of those contracts materialize? Or are you already incorporating some success there? That's the kind of first question. And secondly, on the kind of Netcompany core guidance range of 14% to 19%. You mentioned 3 points impact from discontinuing 2 service lines. Can you just briefly mention why you've taken that decision now to discontinue those activities? And how much of that 3 points will fall between Denmark versus the U.K. And then just lastly, reading through the annual report, there's obviously a lot of mention in there around new target opportunities moving forward in the DAC region being an opportunity if an opportunity arrives there, that would be something that would be interesting. Can you talk about how you kind of balance expansion plans against, for example, consolidating the U.K. market where your scale is still very small in the greater context of things?

George, yes. But looking into the Intrasoft acquisition and looking ahead in 2022, I think it's very important to underline that Intrasoft is a business that has been running for 20-plus years, and we expect Intrasoft to continue delivering and running many of the projects that they do in the EU and also in Greece. What we are concentrating on is and focusing on, particularly in 2022 is, of course, all the new opportunities arising, both from the RRF but also in other areas in Europe. So that's where our main focus is. And the rest of Intrasoft, will continue doing what they do. And as we also said around 2020, we expect Intrasoft with a growth rate of around 9%-ish. When it comes to the service lines that we have dismantled this is -- has very much to do with, in particular 2 areas, and they're both in the nature of us either aiding or configuring standard packages that we are not a part of. I mean, work that is not strategic for us or us providing, in particular, in the U.K. help in program management as a separate isolated business. That is not a strategic nature to Netcompany, and we've decided to focus on what really creates growth and what is important for us, that is long-term business-critical projects where we have the entire ownership of delivering from A to Z, and that's extremely important for us. So that explains the decline of 3%, which is dismantlement of these service lines. And when it comes to the dark region and balancing that against the U.K. growth rate, it's always a balance as we are definitely looking at the U.K. as a very interesting market where we can see more or less a breakthrough and great customers coming in. But at the same time, we're also looking at further expansion possibilities over the years to come. And I think the separation into Netcompany core and the Netcompany expand is a very good example of how we look at it because there is a -- There's an opportunity in the years to come, where the whole of Europe is digitizing. And what that demands from a company like Netcompany where we have the ambition to become a European leader. We need to get into those markets. We need to be present there. And then on top of that, we will start delivering with the Netcompany methodology and the model that we know so well and that has been so successful for us throughout the years. So yes, in Netcompany core, where U.K. is a part of, we will do exactly what we've been doing in Denmark, and we have accomplished a lot changing the entire organization, going from contractors to perms now having many more strategic engagements. And when we grow in the Netcompany expand, we will go into new markets and that can happen on top of platforms where the existing company is in place, and then we will add our services and projects on top of that. And in the longer run, a longer perspective, we will incorporate our methodology into those areas. I hope that answered your 3 questions. And yes, I hope that's sufficient.

Yes, that's helped. Touch on one of those points. Can you give us any kind of feel on how much of that 3-point service discontinuation comes out of the U.K. versus Denmark?

It's a total 3% of growth, George, not disclosed what is in each unit, but it's fair to assume that they are of a more or less same magnitude.

Our next question comes from Claus Almat with Nordea.

Also a few questions from my side, and I will do them 1 by one. The first question goes to the employee cost inflation. So how are you actually managing and also offsetting cost inflation? And related to this topic, do you see a different pattern when it comes to pricing when you are in tender and project negotiations? That will be the first.

Yes. In general, one can say that it is true that the demand for IT resources across Europe, basically across the globe, is increasing. And of course, looking at that, that will mean eventually, if it continues that employee cost will go up, salaries will go up. That's a fact. Looking into the market itself and how that relates to our pricing. One can say it's easier. It's somewhat easier in the private sector where pricing will go up as a result of this in the public sector that will happen to some of the long-term framework agreements, you need to negotiate those. You can negotiate those every year because you can you can add with the inflation rate to the contract. But of course, in some of the longer-term contracts, especially the fixed price contracts that last over 1 year, 2 years, 3 years, that is very difficult. But overall, we would try to price we put a pricing effect on the increased salary cost for sure. There will be somewhat of a delay in some of the public contracts, but we are very aware of that, and it's something that we are focusing on. And it's a part of being -- doing what we do and running the business that we do.

And just one thing more, Claus. We used to a salary model whereby the average salary cost increases between 7% and 8% every first January, simply because of the performance-based evaluation we have on all our employees. So top performers are already a mid-company will receive a salary increase of 12% to 14% on an annual basis. it's not new for us to work with salary increases. And like Andre said, we have ample opportunities to reflect that also in our ongoing contracts.

And do you see competitors doing the same they need to do that, but you also see them doing it?

Yes. It's -- I mean it's always difficult as most of our competitors are not very open and frank about how are they adjusting their prices like we are also not. But clearly, the market in general is seeing increased salary cost. So that's something that hits everybody. And our assumption is that everybody is, to a certain extent, pushing that price increase to the extent possible to the end customer. It's not always fully possible, but to the extent possible, it will be pushed off.

Okay. And then my second question goes to Intrasoft and I guess it's a twofold question. The first is, now you have owned this entity for a few months. Is everything else it should be? Have you had any learnings? And then secondly, lower margin by Intrasoft, And I know this is not a big surprise. But is this mainly a reflection of a more fierce pricing environment in general? Or it's more about the setup and execution ability of Intrasoft? That will be the second question.

Yes. Thanks for those questions, Claus. Well, we are, as we said, 2 months with Intrasoft, it's been going as we expected, actually a little bit better, as you can also see from the numbers. the due diligence has been -- has been thorough. And right now, we are looking into exactly the company that -- so we have no negative surprises and things are running accordingly to plan. And we are, of course, focusing on new projects where we could deliver together. I think the lower margin is that a reflection of a fierce competition. Well, in some areas, it is, for instance, when Intrasoft is selling hourly based consultancy services to some of the service agreements in EU. But however, on larger projects and engagements where the ability to deliver entire engagements and fixed price projects. I think that has much more to do with having the right platforms and having the right organization. So lower margins -- well, of course, there is competition in some of their services, but we will look into where we can change that, especially going forward with the new projects where we go together and using the Netcompany model because that's where we want to go with -- and when we increase margins, that's where we're going to focus in 2022. And they do -- the delivery model for Intrasoft on Netcompany Intrasoft, as we call them now, is inherently different from that of Netcompany. So like and say, a higher proportion of basically resource selling, which comes at a lower margin. We know that, no surprise, and that's going to change gradually. And then the split between contractors and own employees, which is also what we've seen in the U.K., and we also know what impact that has. So a combination of the operating model, the type of projects, engagements in some areas. Some parts of the group which is not yielding as profitable returns as other parts of the group of control. And that's all things that we will look into 2022 and onwards.

Okay. And is there any difference between Greece and EU projects?

From a margin perspective, no.

Our next question comes from Frederic Boulan with Bank of America.

Two questions on my side. The first one is on your margin profile outside of Denmark. So if you look at U.K., Holland, Norway. If you can maybe share with us some thoughts on where you think you can realistically take those businesses on a, let's say, 3-year time frame versus what you've achieved in Denmark. And if you see structural differences there? And maybe within that, you can bring in the Intrasoft point around some of the potential arbitrage that you could do in terms of solving some of the skills shortages than you may have in those geographies with a lot of talent that you've acquired in that deal? And second, around free cash flow. If you can discuss the moving parts in your debt guidance for 2022, what we should assume in terms of delta between your kind of normal free cash flow generation? You mentioned the DKK 100 million buyback, anything else that you've taken into consideration in terms of contribution to vacation fund or any other points we should have in mind?

I can take the first one. You can take the second, Thomas. The margin profile in U.K., Norway, Netherlands, Denmark. Well, that's the Netcompany core. And our overall ambition and strategic direction in those markets is to create businesses that resemble the one in Denmark. Norway is a very good example. You can have very good margin there. Then of course, if you have 1 or 2 projects in the quarter, can dilute the margin somewhat. But the ambition is and has been in those markets to create a business that operates fully in line with what the Danish business is doing, using our methodology, our career model entirely and also having the blend of fixed price and we're basically taking the responsibility for entire outcome-based projects. So to answer that question, we are having the ambition to have margin profiles in the likes of Denmark. Now we have to remember, Denmark is 20-plus years of experience. A lot of organic on top growth also on people's competencies and abilities to perform. But we are definitely moving in that direction in all those new 3 markets. When it comes to the Intrasoft part of the business, I think it's -- It's fair to say that when we look into new projects where we're going to run it by the Netcompany methodology, that's going to be the same ambitions. Whereas looking into the existing interest of business, I think Thomas said it very well in answering the previous question that there we have to use other means like, for instance, replacing contractors with perms. We have 600 contractors in the Intrasoft part of the business, and -- but we've done that in the U.K. You can show how to speak. We are kind of experts in replacing contractors with perms from the U.K. experience. So that's one of the tools we're going to use there. And yes, you're right, Frederic, altogether, I think bringing in Intrasoft also opens up for new competencies and also resource pools that we haven't had before. So that's -- overall, that is a very strong thing for the company in a time where resources will be restrained across geographies. And Thomas, if you could answer the second one.

Yes. And on the free cash flow and what our expectation is for 2022 in all other things equal situation. So that's before any potential acquisition. We would expect the leverage, which is currently at 2.7x. We would expect that to come down to below 2% based on the free cash flow generated in the organization and including share buyback of at least DKK 100 million. We expect to see some impact on cash flow on the positive note from Q1. There's been a substantial reduction in Netcompany core in work in progress that has been moved out from operating model. But that is also a thing that we will look into in 2022. So for Netcompany core, we expect continued strong cash flow. Unlike in 2021, where we had the one-off payment to the Danish Vacation fund, which also happened to be DKK100 million. That will not happen in 2022, which, of course, will add another DKK 100 million compared to '21. And then basically, the growth in the business of Netcompany coal will accelerate free cash flow generated. So free cash flow for our in all practical matters, we think looks strong and will, in all other things equal situation, reduce leverage quite fast.

Our next question comes from Poul Jessen with Danske Bank.

Coming back to the attrition rates and then the increased cost for the employee benefits next year. First, attrition rates, do you see the range of attrition rates being any limitation on your ability to grow in the near midterm? I haven't seen it at that level at any of the companies I look at. And then the additional cost on the improved employee benefits. Is that part of general negotiations with employees? Or is it you deciding to improve the benefits for employees to become more attractive as a workplace?

Yes. Thank you for those questions. Thank you, Poul. Great questions. attrition rates, in general, one has to say that we've had very low churn 2020 because of COVID and then we had an overreaction, so to speak, in 2021 and that trend we've seen, specifically also in Denmark. You're right that we have higher churn in U.K. and in the Netherlands. But one has to remember that in particular, in both those countries, we've been also deliberately changing the organization and putting in people that we need -- that we now have run after the methodology that we want to enforce in those countries. So some parts of that is also deliberate, and we expect churn to come down to normal levels in those countries. When it comes to the benefits that is entirely imposed by ourselves. We've increased pensions for some of our employees in the U.K. We've also changed vacation benefits in Denmark. And that has done -- has been initiated only by ourselves, not legislation because we want to be in line with what we think is both reasonable and adequate for the market itself, and we want to be a company where people really feel that they get the benefits that they deserve. So we will always be in the market where we're not going to go be better than the market, but we want to be positioned in a balance where employees feel that they are -- that they are taking very well care of.

And Claus's question earlier about the ability to push cost inflation to your contracts on the public side where you have this delay, do you see any dilution of the margins from cost inflation versus public sector in '22?

No, no. We don't.

All of that is managed. And here, of course, the law of big numbers is helpful. There are certain -- there are some projects where it's more difficult. There are other projects where it's easier. And I think, as Andre alluded to earlier on, easier on new contracts and also easier on existing contracts in the private segment. And then we have to be clever intelligent in how we handle some ongoing, especially maintenance projects in the public sector. But all of that is balanced and the assumption that we have in terms of employee cost going into 2022 and is fully reflected in our expectations to margins.

And now you mentioned or start talking about Netcompany expand and you talk about becoming a European leader by 2030. Is it possible to say some words on what is necessary to be for you to become a European leader what kind of revenue or size or number of people do you need so that you can label yourself the European leader in 9 years?

That's a very good question, Poul. I mean, two things are necessary to become a European leader and then we can take numbers after that. But 2 things are definitely necessary. One is to have enough offerings and platforms that you are relevant across many countries with the Intrasoft acquisition. Now we have also platforms within the customers and tax area and with the launch of the composable Acito framework last week for the private businesses and the govtech framework that we launched a few years back on the -- for the government parts. I think we are getting there. We can still have more platforms coming into our pallet and portfolio of solutions, but we are getting there. And then, of course, you need to be present in many markets. You need to be there One thing is that you have a message, you have platforms, you have something that the customers would like to hear about and possibly buy, but you also need to be present and that requires that you have offices and people there. And that's why we're also using the expand way to go into markets with existing solutions and building on top of those. So when are you an European leader Well, it's a very good question. It's not just a question of number of employees, but it's definitely a question of markets and size. And I'd say some of the bigger European countries are definitely areas where we would go specifically also the dark region is interesting because over the last 2 years, digitalization has become a very important focus in those countries, too, whereas before it was something 1 talked about, but not really acted upon. I don't think I can go more into detail than that.

All right. And then just a follow-up on that one and I'm done. Given the performance of Netherlands, U.K. and Norway in the last 3 years, which I would assume, has not performed as you had expected and now you had interest of. Do you see that you have the resources? So are you just accelerating the risk profile of the company?

I don't think we are accelerating the risk profile of the company. On the contrary, I think we have more legs to be standing on more platforms and solutions. The company now delivers many more things than it did 4, 5 years ago, but most importantly, many of the things that we are delivering are of long-term nature, and criticality that just brings the customers into a strategic partnership across geographies. And I think that's very healthy for a company like ours. Instead of focusing only on a few solutions and maybe a limited market space. So I sincerely believe that the company has a wider but also a more critical role in various countries. And I think that's stabilizing construction when you're growing.

And that's also why we've expanded the communication on our operating models from both to core and expand. So Netcompany Intrasoft is an example of expand, which is where we will not be integrating the unit fully into Netcompany in methodology from the get-go. If we were to integrate 30 or 2,900 employees, into our methodology into our academy, redo all the project documentation and stuff like that. Then I would be fully with you, Paul, in terms of that is an increase to the risk profile. But because we're doing it the other way and because we are working our way gradually into Netcompany core or new projects together. And that actually has a smaller risk profile, even though that is a bigger acquisition than some of the previous acquisitions we've done where we've changed everything into Netcompany core. We see strong improvement in Norway, a little bit later than what we originally thought, I fully agree with you on that. But 2022 looks really strong. We also see improved performance in the U.K., also looks very interesting for 2022. And then we have the Dutch acquisition, where our first year was fantastic. We more or less grew revenue by 100% in 2020. In hindsight, that was maybe a little bit too fast because we inherited some problems on some projects in 2021. All of that is now in the past, and the organization is strong with change the delivery team in the Dutch operation. So we have high expectations to the Dutch market and our performance there also for 2022. So a long answer short, we don't think that we are increasing our risk profile. And that's also why we stick to our guns and say we still want to deliver the original financial performance in Netcompany core that we have set when we've entered those new countries, and we will continue to focus on that because that's a good foundation for continued growth.

[Operator Instructions] Our next question comes from Eva Yu with SCB.

I have 2 follow-up questions, and I have one housekeeping question. I'll do one at a time. And firstly, looking at the Intrasoft, I realize there's quite a big difference on the margins across its region. So looking at the Nordic business, the margins are very high. And I guess for the rest of the business is also very low margins. Regarding this new contract under RRF in Greece increase. What margin do you expect to deliver?

Just on that, and you're referring to the disclosure in the 2020 annual report of Intrasoft International, where it's disclosed that the margin on Intrasoft Scandinavia is 3 or 4x as high as Intrasoft group. So it's closer to 25%, 27%. Intrasoft Scandinavia is where Intrasoft is doing the joint project with Netcompany. So that's the projects we do on costims together. And that is a good example of what joint projects will look like once we start winning them and delivering them. So that's what we can expect when we win new projects in Netcompany Intrasoft, that we will deliver in the core model. The new project that Intrasoft won under the RRF contract is a project they had pitched for already before we acquired Intrasoft that will be delivered on Intrasoft -- Netcompany Intrasoft of one of the old model, if you so will, which means that the margins there will not be to the same magnitude as the ones we have in terms of Scandinavia for 2020, so the project on customs. Now new projects that we will bid for in Greece under the RRF and we can think of a lot of different digitalization projects. There, clearly, we will utilize the [indiscernible] platform that we have developed and expanded so heavily in Denmark over the last 10 years. And clearly, that means that there will be some margin upside when starting to deliver on those.

Great, very clear. And my second question is on the Dutch business. I mean you have grown FTE 20%, and it seems the pipeline also looks really good. So when exactly should we expect to see the growth pick up and the margin improvement?

We expect that to happen during 2022, and we see a strong pipeline. We see strong and good activity. So that will happen during 2022, whether it's in one or the second or the third month where it is difficult for us to say very clear. But we clearly have an opinion and an expectation that 2022 will start to look better in Holland.

Okay. Great. And my last question is admin cost is higher and you say it's normalized. Is it fair to assume this would be the run rate for 2022?

Which one? Sorry, I didn't hear the first part of the question?

Admin cost.

Okay. Yes. That's a fair assumption that it will be more towards what is the level of Q4 and onwards.

Our next question comes from Gianmarco Conti with Deutsche Bank.

So I've only got a few here. I'll say them one by one. The first one, I know that you've touched on this before, but clients facing FTE growth was lower in Norway and in the U.K. because you have higher churn rates. I was wondering whether that is because you have seen higher attrition from your younger workforce? Or was this sort of more spread out across all ages?

A little bit difficult to hear the full question, Gianmarco, mark. But as I heard it was the question was the hiring growth Norway, U.K. and whether churn has prohibited us to hire more than what we have. At least that's what we're going to ask answer on. So if you want another question, then forgive us. But especially in the U.K., the reason why we did not grow that much. is not so much a result of the churn. We can actually see that we can hire, and we are a good name in the universities in the U.K. So there, it has more been -- it has more been a case of rightsizing the organization before we start to grow. So the 15% growth is generated on only 5% employees, which means that we've taken up driven up utilization. We've hired actually a lot of people that we've replaced with independent contractors. So the underlying hiring in the U.K. is higher than what you can see in the number, and it will continue into 2022. On Norway, yes, there is some churn, but we start also to see increased interest in our offices there, both in Oslo and Tonheim. So it's not it's not as much a problem for us to hire. Of course, there's still a battle for the right people, but I think we get our fair share. And I don't know whether you want to add anything?

No, I just want to say that in Norway, it's always been tough and historically throughout the year to get the right people. And the only way to do that is to be very close to the universities as well. And we are, and I think we're taking our fair share and in the U.K., I think I heard something about whether it's young or older people leaving us when people leave us I think it's fair to say that we are very good at attracting young people, both entirely new people from universities, but also people with a few years of experience, they really like to go into Netcompany, especially in the U.K. as well. So if anything, I think people leaving us when they leave us, that's typically when we close down service lines or do something that are -- our core business, the way we like to run it, we need a constant inflow of young and also 1 to 2, 3 years of experienced people. And right now, we are getting that in the U.K. But it's always a struggle. It's always a battle. You need to be good at what you're doing. I think our HR people are some of the best in the world to do that. And of course, the market is -- it's a tough market, but we are getting what we need at the moment.

Yes. That was actually my question. I have another one around when do you roughly expect to for both the U.K. and Norway be operating without the need of Danish freelances. Is it safe to sort of assume that it will be on the back end of 2022?

Well, we've had a -- we've been helping both Norway and the U.K., and that has been great. I mean one of the reasons why we could win the big deal in Norway, the biggest win ever in Norway with the Oslo municipality is because we have a very strong team working together. Now looking at the numbers over 2021, we have not grown the number of people helping out. It has actually declined somewhat in the last quarter. But of course, we are focusing on this. We do want to help every time it's strategic and it even grows the business further. And also, we have to remember that every time we do help, we also create local resources they can take over by themselves. So it will always be a balance. But we don't have any ambitions to amplify it even further. And every time we put in Danish resources and take them out again, we have some new local resources that can do their jobs. So that's the way we look at it.

And then one more comment on that Gianmarco is -- the projects that we put people on at short notice during Q1 in 2021, which was when we really started to see this cross-utilization and accelerating were projects that we already won. And clearly, when we bid for new projects, we will be able to also take into consideration the mix of the project team, thereby also better reflecting in our pricing vis-a-vis margins that there are some Danish resources on. We're absolutely certain that this is the right thing to do. And when we do it in a more longer-term perspective, then we can also better manage the potential dilutive impact on margins, which was difficult in Q1 and Q2 2021 because it happened at such short notice.

Right, right. So that makes sense. I guess, like because you have in Danish resources, you might with the new wins potentially adjust the pricing for those resources in the region. Could you perhaps give some commentary on whether you'll be trying to adjust the currently high number of contractors from Intrasoft for employees? And sort of what is more in line with what is that company call in 2020? Or is that more of a phased progress that you're going to try to shift those? Or is that just not at all in the strategy?

No. I think what is important here is to also reflect that when we acquired Intrasoft, we decided basically to that current business run as is because it would be impossible for us to change it in a short period of time. new projects that we win together will be based on teams that we have basically staffed the same way as a Netcompany core, which means our own employees, for 2022 and a good part into 2023, all the work that is being done in Intrasoft, basically comes out of the -- a lot of it comes out of the order backlog. So that has already been planned for and catered for. So difficult to change on short term. But clearly, we will always look into how we can best deliver the projects, and we will look into to that more broadly during 2022, and then we'll see where that takes us. So it's, of course, something we look at, but not something that we will, at this call, be able to say in Q1, this happened in Q2 that happened and the likes are.

Right, right. And just one last question, just a housekeeping. Do you expect similar levels of sales and marketing costs as a percentage of revenue in H1 as you had in Q4 or is that sort of still like an exceptional item? Because I saw that you guys had substantially increased it because you have participation of conferences, increased market campaigns and so forth?

We don't expect the same acceleration on an absolute amount in 2022. We have stepped up the game in 2021, also as a consequence of our desire to have a more European presence, be part of significantly important conferences as speakers and drive the understanding of the [indiscernible] framework and now most recently, the composable architecture framework. And that has come with a cost, which has been a step up in 2021. We do not expect to see the same absolute step-up in 2022.

Our next question comes from Balajee Tirupati with Citi.

From my side, if I may. First, how should we think of growth evolution in 2022 at the group level? Would it be fair to expect some COVID-19-related utilization headwinds in the first quarter of '22? And the second question is on midterm target for Netcompany core business. So with changing scale and talent market dynamics, should we see that growth in margin expectations have had a reset for the group?

We got the first question, Balajee on COVID-19. But the second part of the question was difficult to hear. So could you rephrase that and then we'll take the 2 of them.

Yes, sure. The second question is on the medium-term targets for the mid-company core business. And I was asking that with the changing scale of the business and the current talent market dynamics, should we see that the growth and margin expectations over the medium term have had a reset now?

All right. Well, around COVID-19, of course, no one can say what is actually going to happen. But we sincerely hope that with the Omicron variant, the impact of the pandemic is going to be less, and we can go back to more normal operations. One thing is for sure. It doesn't seem like the customers are buying less. So the impact of COVID-19 or hopefully disappearing from the European country are being less important will just mean that we don't have people -- this increase in sickness or vacation fluctuations will disappear. So that's what we are hoping for. And overall, for the group, and you asked about what do we expect in 2022? Well, what we've -- right now, as it is for the group, we're expecting for the whole year of 2022, 45 to 50 plus 50% growth and a margin above, I think it's 58% growth and a margin above 20%. So -- that's overall for the group, what we expect for 2022 when it comes to the medium targets.

Yes. I mean it's clear that if you look at the Netcompany core part, which was the question was towards then the gradual improvement of performance in Norway, in the U.K. and in Holland, which we expect to happen will have a positive impact on margins. We don't expect margins in Denmark to come down. So since the other part of the group is going to improve, clearly, the logic is that the margins will expand in the medium term without giving you a number.

Understood. So if I just follow up on that and ask the question differently. Would it be fair to say that the target would still be to deliver more than 20% growth in the core business with a margin of more than 25% in the medium term?

Yes. I mean we're not going to be able to comment on some specific questions, Bay, because we have not given any medium-term targets, so that would be wrong for us to sit here and be very specific on that. But what we can offer is that what we just said and clearly, as margins are expected to improve in U.K., Norway and Holland. It will have a positive impact without going into longer-term guidance implications.

There are no further questions. I hand back over to our speakers.

Well, thanks a lot, and have a great day. Thank you.

Thank you.