NNIT A/S (NNIT.CO) Earnings Call Transcript & Summary

Joining this webcast. My name is Par Fors, and I'm the CEO of NNIT. Here at the headquarter in Copenhagen, I'm joined by our CFO, Carsten Ringius. And together, we will present our third quarter results, which we released yesterday evening. Please turn to Slide 2. I will walk through the key business highlights, including the regional update. After this, Carsten will go through the group results, including our financial outlook for '25. Before heading to the next slide, please pay attention to the disclaimer in the bottom of the slide. Let's turn to Slide 3. Since we released our second quarter results in September, the macroeconomic environment and geopolitical uncertainty has remained at the same level. We have most notably experienced the market unrest in Region Europe, where we still see some hesitation from customers even though it is improving. Now I will just briefly go through the numbers, and Carsten will put some more words to them later in the presentation. The group revenue ended at DKK 432 million, which corresponds to negative total growth of 2.9% and an organic growth of 1.4%. Please remember that we have not done any M&A activity recently, while the organic growth is equal the total growth plans for currency rate development. The group operating profit, excluding special items, ended at DKK 35.6 million, which is more than double compared with the same quarter last year. The group operating profit margin, excluding special items, was 8.2%, 4.3 percentage points increase compared with last year and a 3.2 percentage points higher than last quarter. Please turn to Slide 4. As we mentioned on the previous slide, the overall growth in Q3 was negative due to Region Europe as other regions are in positive territory. We have seen a solid development in our order entry across regions throughout the third quarter with some important contract wins, which is, of course, very important for the future revenue generation in the fourth quarter, especially towards next year. Even though the market unrest, we have observed that during the year has -- we've seen a continued slowdown in the life science consultancy industry, mostly impacting the European business. I would just highlight an example from Europe that showcases that even though the business is challenged, it is definitely not evaporating. In Europe and in line with our strategy, we have continued to broaden our focus to the lower-tier segment, where we have closed a number of projects. The size of these projects are structurally smaller than our normal run rate. However, it is important for us to reach these segments as we see strong growth potential. For sure, the portfolio needs to be balanced, and I'm very pleased to see that we have continued our engagement with a long-term global pharmaceutical customer where we recently signed a 5-year contract. We have continued to progress well on our strategy where we have sharpened our project execution and capacity planning, leading to improved profitability and a higher utilization. Furthermore, we continue to optimize our internal processes where tools like our new ERP system and our internal AI platform supports that, not only in terms of working smarter, but also in terms of driving better performance management. At NNIT, we have previously adjusted the capacity to fit the demand alongside reducing our cost base to protect profitability. The profitability development in Q3 is a true testimony to all the efforts done across region and enabling functions. We are pleased to see that we are able to strengthen the absolute profit and margin in an uncertain environment with revenue temporarily contracting. We will continue to optimize our cost base and the way we work. However, we strongly believe that we are internally well positioned to further improve profitability when growth returns. Lastly, we have maintained our full year outlook, which I also will come back to later in this presentation. Please turn to Slide 5 for the regional performance review. As we have mentioned before, even though 3 out of 4 regions of NNIT operate in the same domain, their performances are fragmented. This is primarily due to different market positions, market characteristics and how the macroeconomic environment impact the given region. Region Europe was impacted by the market unrest and the lower order entry from the first half of the year, which were the primary reason for the material organic growth decline in Q3. Despite that, we have won several new contracts within the lower-tier segment and expanded an engagement with an existing global customer for the next 5 years. The regional operating profit and margin increased compared with last year. We are pleased to see that we have been able to increase the profitability despite the material decline in revenue. This was driven by stronger project execution and the capacity adjustment done in previous quarters and savings on regional overhead costs. Region U.S. delivered an organic growth of 1.2%, which was moderate as a few projects was postponed from Q3 to Q4. The smart supply chain area, the former Excellis Health Solutions has continued to grow whilst the data migration business is recovering and grew more than 30% compared with last year, although from a low level. During the quarter, U.S. increased its number of new engagements. We have engaged with Care Advantage to deploy our AI platform to sort out complex data, and we were appointed by Simtra to support them on their digital transformation they are facing. The region continued to deliver strong profitability, which can be attributed to the increase of repeatable solutions, uplift from data migration business and structurally lowering the cost base. The strong organic growth of almost 24% in Asia was driven by bringing in several new customers, expansion of customer engagement with long-term customers and increase of hardware and software sales. We are satisfied with the top line development in Asia, even though there continues to be uncertainties around the trade war and how it will affect China going forward. The increase in regional operating profit margin compared with last year is mainly due to increasing utilization, a solid focus on execution partly offset by the hardware, software revenue that comes with a lower margin compared with our time and material projects. In Q3, in Region DK, we grew by 2%. The growth was driven by the public segment, the SAP business and SCALES who continued to solidify its position as a leader in Dynamics 365 Microsoft solution. During the quarter, Region DK won important contract such as being selected as the Danish agency for Digital Government to deliver and operate the eID Gateway, which is a 5-year contract. Furthermore, Sund & Bælt has engaged SCALES through SKI tender and SKI is a state and local government procurement service. Profit and margin contracted compared with last year. However, regional overhead cost was negatively impacted by around DKK 5 million this year as in the previous quarter. Adjusting for that, the margin would have been 18.4% last year, which entails an increase in margin of 1.3 percentage points versus Q3 last year. As the other regions, Region Denmark have sharpened their project execution and leveraging the cost reduction initiatives carried out earlier this year. Please turn to the next slide. I will briefly go through this slide as Carsten is going to add some more flavor to it in terms of implied outlook for the fourth quarter and the key drivers and the assumption behind it. Our financial outlook for the year is maintained. The range for organic growth is 0% to 5% and 7% to 9% for the profit margin, and we continue to expect to be in the lower end of the guided ranges. Please turn to the next slide. Now I will hand over to Carsten for the group financial performance and the details around the financial outlook. Carsten, please.

Thank you, Par, and good morning, everyone. Please turn to the next slide. As the headline states, the Q3 results landed in line with internal expectations. The financial performance improved compared with last quarter and profitability more than doubled compared with same quarter last year. Even though 3 out of 4 regions delivered growth, revenue in Europe continued to be dampened by the market unrest. That is the reason why organic growth ended at minus 1.4%, equal to total revenue of DKK 432 million. As Par alluded to, we secured solid order entry with new important contract wins across regions and business segments. The positive development is important as it adds to the foundation for the fourth quarter and especially for 2026. During last year and the first part of this year, we have adjusted capacity to fit the current market demand and taken out regional and corporate overhead costs to structurally lower the cost base. We have also improved our efficiency in our internal processes and become more operationally efficient when it comes to project execution. All of these activities are the reasons for the material uplift in absolute profit and margin in Q3. For the third quarter, the absolute group operating profit, excluding special items, ended at DKK 35.6 million compared with DKK 17.5 million last year. The margin in Q3 was 8.2% compared with 3.9% last year. Please turn to the next slide for a brief update on special items. Special items have been lower quarter-over-quarter throughout the year. In Q3, special items amounted to DKK 7.9 million compared with DKK 25.3 million and DKK 20.3 million in Q1 '25 and Q2 '25, respectively. Special items in the third quarter consisted of DKK 6 million related to restructuring costs and DKK 2 million related to earn-out payments and to the discontinued business. The full year outlook for special items is unchanged and still expected to be up to last year's level of DKK 69 million. Please turn to the next slide. We maintain our full year financial outlook as the business performance is progressing as expected with improved profitability and important contracts secured. We still expect to end in the low end of range of 0% to 5% organic growth and also in the low end of the range for group operating profit margin, excluding special items of 7% to 9%. We fully acknowledge that we need to accelerate revenue growth in Q4 and also take another step up in terms of profitability. The implied Q4 outlook is supported by the backlog and the cost base has been structurally lowered to support further uplift in profitability in Q4. For reference, organic growth for Q4 last year was 7.1% with a margin of 9.1%. Please turn to Slide 11. Before we head into the Q&A, Par will provide some closing remarks. Par, please.

Thanks, Carsten. During the third quarter, we saw an improvement of our financial performance, with especially a strong uplift in profitability. The improvement can be attributed to our solid strategic progress, where we continue to sharpen our project execution, optimizing internal processes and leveraging the cost saving effectuated earlier this year. Despite the market still being uncertain, we have won important contracts across our regions with new customers and expanded engagement with existing customers. This is a solid foundation for the fourth quarter and looking into next year. As a result, we have maintained our full year financial outlook. This concludes the presentation for today. Thank you very much for joining the call. Now we will open the line and take your questions. Operator, please turn to the next slide and open up for questions.

[Operator Instructions] It seems that we don't have anyone lined up for questions in this call. Therefore, I will hand it back to the speakers for any closing remarks.

Okay. Thank you, everybody, for attending this call. Please do not hesitate to reach out to me or Carsten if you have any further questions. Thank you very much, and have a good day.