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

Hello and welcome to the NNIT Interim Report for the First 9 Months of 2020. [Operator Instructions] Today, I'm pleased to present Jens Binger, Head of Investor Relations and Treasury. Please begin your meeting.

Good morning, and welcome to this call on NNIT's Financial Performance for the First 9 Months of 2020 and Outlook for 2020. Slide 2. My name is Jens Binger, and I'm Head of Investor Relations and Treasury. With me today is CEO, Per Kogut; and our CFO, Pernille Fabricius. I will briefly walk you through the practicalities for today's meeting, before giving the word to Per and Pernille. Today's earnings release, as well as the slides being used for this presentation, will be available on our website, nnit.com. The conference call is scheduled to last approximately 1 hour, and the presentation is expected to last around 30 minutes. And after the presentation, we will open up for questions. Slide 3. Today's agenda can be found on Slide #3. And please also note that the call is being live-casted and that a replay will be made available in NNIT's website after the call. Slide #4. Please be advised that this call will contain forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause the actual result to deviate considerably from the outlook set forth. With these words of introduction, I will give the word to Per Kogut and turn to Slide #5.

Thank you, Jens, and a very warm welcome from me as well. The COVID-19 continues to challenge NNIT on a global scale. With our offices in Europe, U.S. and Asia, we do see big differences in the restrictions and guidelines on how these impact our employees and customers across the world. Since January, where we began to see the COVID-19 situation develop in China, we have been impacted by the situation, and we have gained valuable knowledge and learnings on how to ensure our employees' health and safety, while continuously delivering high-quality IT services to our customers globally. In NNIT, we continue to have a robust global delivery model and we are also prepared for this current second wave. But the COVID-19 situation continues to impact our financial results here in Q3, as you have noted. The private and public segment showed less project activity with customers delaying projects. We have not lost projects. Further, the SLA business was impacted due to delays of tenders that have been postponed -- that has postponed revenue, which organically was expected to realize here in Q3. In general, small and midsized projects are highly exposed towards the current uncertain situation, and given increased number of infections and potentially new lockdowns, we do not expect a normalization here in 2020. On the other side, more positively, the life science international segment, including China, showed much more resilience, which can be seen in the realized growth rate of 29% compared to same quarter 2019. We expect the positive development in the life science segment to continue throughout the rest of 2020. As earlier communicated, the updated strategy, winning solution, keeps focused on M&A activities within the life science segment and with the ambition of closing one deal within the next half year, enabling further growth in Europe, U.S. and China. Please turn to Slide #6 for the financials for Q3. In Q3 2020, revenue decreased by 14%, driven by a 27% decline from the Novo Nordisk Group and a 23% decline in the Enterprise segment. That decline was partly offset by growth from life science international and life science Denmark. Our operating profit before restructuring cost was DKK 25 million, equals to an operating profit margin of only 3.8%. Please turn to Slide #7 with the financial for the first 9 months. Here, we see revenue decreased by 7.8%, driven by the expected decline in the business where we have lost contracts from the Novo Nordisk Group and Pandora, as you know. That decline was again, partly offset by growth around 20% in the international life science segment and the life science segment in Denmark. Our operating profit before restructuring cost was DKK 110 million, equal to an operating profit of 5.3%, which is 1.7 percentage point below same period last year. We continue to see strong order intake in the life science segment, as promised in our new strategy. The growth is driven by Veeva-related solutions, pharma production IT and digitization of clinical trials. But we also see more classic IT services are in demand in this segment. The updated strategy introduced the concept of winning solutions, where NNIT delivers proven concept that are fit-for-purpose. We see a strong demand for the winning solutions, especially from the life science segment globally, but also for the Danish home market. In Q3, we expanded the collaboration with a top 20 global pharma company, where NNIT shall support its research and early development process with data analytics and artificial intelligent -- artificial intelligence. In Q3, NNIT also expanded business with the Chinese life science company FibroGen, and NNIT is now responsible for end-to-end SAP operations for FibroGen. Further, NNIT has been awarded a contract with an existing Chinese life science customer, BeiGene, where we will deliver Amazon cloud services to support BeiGene's S4 HANA environment. On a brand-new note here in October, NNIT have signed a contract with the life science customer Orifarm, covering IT environment, applications and infrastructure carve-out to support all Orifarm's acquisition of a significant product portfolio from a Japanese pharmaceutical giant, Takeda. It is our ambition that further projects may arise when the carve-out situation is finalized. In the private and public segment, NNIT expanded the engagement with Copenhagen Airport also to cover service desk and monitoring services during the next 5 years. Further, as part of the framework agreement, NNIT was awarded an IT consultancy service from the Danish Tax Authority. The framework agreement includes the preparation and implementation of IT analysis and IT project-related to property valuation, VAT and a general modernization of legacy systems. That agreement runs for 4 years with a total estimated value of DKK 1.6 billion. So with that, I'm sure you are equally interested in our numbers and I'm happy to hand over to you, Pernille.

Thank you very much. So we are now at Slide 9. As you can see, group revenue decreased by 14% in Q3 and 7.8% in 9 months 2020. Positively, revenue from life sciences international continued the growth path, with revenue increasing by 29%, while revenue from life sciences Denmark increased by 3.2%. In Q3 2020, other life sciences now generated more revenue than the Novo Nordisk Group. Excluding business from the Novo Nordisk Group, revenue, year-to-date, Q3, slightly increased by 1.2%. Cost of goods sold decreased by 9.2% in Q3 and by 6.3% in 9 months 2020. The decrease in costs is mainly due to the implementation of the cost restructuring program to match the reduced business activity. Sales and marketing costs declined by 6.6% in Q3 2020 and by 3.9% in 9 months 2020 compared to the same period last year due to staff reductions as part of the cost restructuring plan. Administrative expenses also decreased slightly compared to last year. Operating profit before special items ended at DKK 25 million in Q3 2020 and DKK 120 million or DKK 110 million in 9 months 2020. This corresponds to an operating profit margin before special items of 3.8% in Q3 and 5.3% in 9 months 2020. Turning to Slide 10. Here, we are talking about the status of the implementation of cost restructuring plan. In Q3 2020, the business and cost restructuring plan progressed in line with expectations. As already mentioned, both COGS and SG&A costs decreased compared to last year. Utilization was impacted by COVID-19, resulting in a slight underperformance compared to target, but the underlying measures to support the targeted utilization has been implemented and it is expected to have full effects when the situation normalizes. Turning to Slide 11, and life sciences. As already mentioned, life science international showed strong growth of 29% in Q3. And the Chinese business rebounded and now seems to be less impacted by COVID-19 compared to the first part of 2020. Total life sciences revenue decreased by 8.3% in Q3 and by 9.6% in 9 months of 2020 compared to the same period last year, driven by the expected decline from the Novo Nordisk Group. Gross profit margin decreased in both Q3 and 9 months 2020 due to the loss of Novo Nordisk business, but we do see an underlying increase in profitability in the other life sciences business. Turning to Slide 12, is the Private & Public segment of the business. There, you saw revenue from private and public customers decreased by 19% in Q3 and by 6% in the 9 months of 2020. In Q3, gross profit margin was 8.9%, which is a decrease of 3.5 percentage points compared to last year. The lower gross profit margin in Q3 2020 was driven by loss of Pandora agreement that Per already talked about, which could not fully be offset by the positive impact from the cost restructuring program. In 9 months 2020, gross profit margin was 10%, which is an increase of 1.7 percentage points compared to 9 months 2019. Also Per commented earlier about the segment being impacted by COVID-19, affecting project activity and tenders, and this has a direct impact on performance in Q3 within this segment. Turning to Slide 13, net financials. As you can see there, the net financials were negatively impacted by -- with 9.1 -- or DKK 9 million in Q3, mainly due to currency fluctuations, where especially U.S. dollar receivables were impacted. Turning to Slide 14. Numbers of employees, as you can see, decreased by 246 or by 7.5% as a consequence of the cost restructuring program and the loss of business with the Novo Nordisk Group and Pandora. The reductions have mainly impacted Denmark and China, whilst our international offices have seen growth in number of employees to support the expanding international life science business. Turning to Slide 14 that talks about the balance sheet, where we only have a few comments. Employee benefit obligation increased due to the new employee vacation scheme, Feriefonden. Contingent considerations decreased due to the earn-out payments to Scales and Valiance, and other current liabilities increased due to the postponement of employee tax and VAT as part of the COVID-19 initiatives in Denmark. Turning to Slide 16 that talks about the cash flow. The free cash flow for Q3 was positive DKK 7 million and positive by DKK 184 million in the 9 months of 2020. Correcting for the COVID-19 initiative around the cash flows, this increase -- this has increased by around DKK 100 million compared to 9 months of 2019. Moving to the Slide 17 that talks about the backlog development, current year. There, you can see that at the beginning of Q4 2020, NNIT's order entry backlog for 2020 amounts to DKK 2.7 billion, which is a decrease of 7.9% compared to last year. The development was expected due to decreasing business in 2020 but positively, we see 20% growth in order backlog from other life sciences. Turning to the outlook on Page 18. COVID-19 continues to impact our business negatively by delaying project work and tenders, and we now expect that our performance for 2020 will be at the bottom of previously guided intervals. Hence, our guidance for 2020 is specified as follows, assuming no further deterioration in relation to the COVID-19 situation. Handing over to Per.

Thank you, Pernille. Well done. The uncertainty that COVID-19 creates primarily affects the Private & Public segment, which could also be seen in our financial performance for the first 9 months. The performance was below our expectation, as project work and tenders has been delayed and postponed to an extent that was not predictable. We believe that things will return to normal and with our strategy, diversity and expertise, we are well equipped for the future. The Q3 performance evidences the importance for NNIT of having different main business segments to execute on during challenging times. The life science international segment showed strong growth rates with the quarter, and we expect this positive development to continue during the rest of 2020. With these words, we conclude our presentation. And operator, we are ready to take the first question.

[Operator Instructions] Our first question comes from Yiwei Zhou from SEB.

I have a couple of questions, and I'll start with the first one. You lost this Alka or it's expiring. Could you give us an indication on how much sales have you lost in the quarter? And what is the annual sales?

Which contract? Alka, the insurance company?

Yes. Yes.

Right, yes. Technically, it's a loss, but Alka was purchased by Tryg. I don't think Alka was disappointed with health services, in general, but these things happen. Alka was a minor deal, around a couple of million kroner per month, something like that.

Yes. So I can give you a bit more of an exact number. So in '19, for the first 9 months, Alka was DKK 16 million, and it has only been DKK 1 million of revenue in 2020. So that's sort of an indication of level, like Per said.

So DKK 16 million for the first 9 months?

Yes, in '19, and we only had DKK 1 million of that in '20.

Okay. Great. And my second question, could you give us an indication on the organic growth in international life science?

Yes. So the growth in international life science, we are slightly positive impacted by the HGP acquisition. That gives around DKK 12 million, DKK 15 million in total in 2020, inorganically. So if you deduct that, then you have the actual organic growth for international life science. I don't remember the exact number, Yiwei, but you can do the calculation.

So DKK 12 million to DKK 15 million, that's for the year?

Correct, which was in Q1.

Okay.

So all growth in Q2 and Q3 are organic in international life science.

Okay. Clear. And my last question, and I'll jump back to the queue, could you please give us some clarification on the M&A deal you're talking about?

We have, as mentioned on a number of occasions, we have a comprehensive project spanning the international life science, IT services companies in our markets, Europe and U.S., mainly. And we are working on them continuously also, together with a partner in a structured process. We cannot disclose anything if we are looking into 1, 2 or 3 going forward. But obviously, we have an anticipation. And you can see historically, we have closed one deal every 18 months.

You mentioned the one which you expect to close within the next 6 months. Is it possible to give us an indication of the size of that one?

No, not yet. We are -- and -- because we need to select which one we are going after, and I need Board approvals and all that. I'm just rephrasing and restating that M&A activity, we will continue to do and that was the purpose of that comment.

Our next question comes from Poul Jessen from Danske Bank.

I have a few questions as well. Just following up on the M&A question. I think at -- in August, you also said that you assume to make a deal maybe this year or within 6 months. And now 3 months later, you just talk about 6 months still. Does that mean process has been postponed or if it's difficult to close anything? Or is it the same comment that you're doing this time?

No, no, Poul. Actually, on the contrary, and here, 2 months later from August, we are, of course, having discussions with a number of candidates. But my philosophy making transactions in Europe or U.S. or in China, for that matter, is that we sit down and meet people. And due to the COVID situation, it has been difficult. So when we're going to acquire a company that fits into our strategy, we have them targeted but for -- actually only, and that is the only reason COVID, I want to see, feel and sense what we are going to buy, and that has been a challenge. So as soon as that is solved and it is possible, you will most likely see a transaction. If that takes -- unless you know more than we, if that takes 3, 4 months. So just to emphasize the COVID situation.

Okay. Then, I'll ask in another way. If you then assume that the day that you can start traveling again, how long will you then believe it will take before you can do anything, 1, 2, 3, 4 months after that the airport or the airlines open up again?

Yes it's about airports. It's about seeing what you're going to acquire. And if you're seeing something you don't like, then we will not buy it. If you see something and feel and sense something, except for a number -- the number games, which obviously is possible to look into, did electronically, if we see something we like, we can close a potential deal within the 6 months we have mentioned.

Okay. Then, some accounting question. You mentioned a onetime license sale, which is supporting revenue but diluting your margins. Can you give indication of the size and what segment that is in?

It's a low million amount, but it -- as the margins are quite tight, so it just somehow impact. But we don't disclose the segment for that, Poul. I think when we start to -- when we do this license sale, and it is a low-margin business, and it impacts margins slightly.

Yes. But just to know if it was in Public & Private or if it was in life science?

That's in the Private & Public.

Okay.

It's not a life science.

Then the restructuring costs, the DKK 6 million, how is that split between the 2 segments?

We don't disclose in which area we reorganize and terminate people. So we cannot disclose that, Poul. But if you use 50-50, then you're probably close.

Okay. That was also the same in Q2. Then, on the net working capital around the postponement of the government schemes, I had assumed that you should do some repayment in the third quarter. When should we see the DKK 146 million starting to be paid? This year? Or will it be postponed to next year?

So we are expecting that repayment only be in next year, in the first quarter. And that's also actually what you see in other businesses. So this is what we follow. So it's expected to definitely positively impact for this year.

Okay.

I think earlier, we communicated that it would have -- we have to repay something in Q4, but then the Danish government postponed these payment further into Q1 next year.

Perfect. And then the final ones for me, that's then looking into next year. Are you willing to give any indication of what kind of level we should look in Novo Nordisk? Is that the current run rate now? Or should we take further revenue off the Novo Nordisk? And secondly, what expectations do you have for the defense and the tax contracts when they start ramping up?

Very good questions. If I knew the numbers for Novo Nordisk, I will most likely be the happiest man on the planet. I don't know. But we have, I think, a relatively solid guidance on Novo Nordisk and we are following that during this year. And I would assume less a decline in '21 than the decline you have seen over the past couple of years, without giving any numbers. But I would not anticipate a continuation of 25%, 30%, 31% decline. And maybe that is slightly, including a wishful thinking from my side. But that's how I'm looking into the budget discussions we have right now. It's probably a little too early, but to be honest, around that. Secondly, when it comes to the [ Damask ] and tax authority contracts that we have been fortunate enough to win, we are in considerable discussions with both entities around these contracts. And we are actually welcoming already, coming Monday, 26 employees who should assist us in delivering on some -- to some extent, on these contracts and international life science. So we have significant expectations for both [ Damask ] and the Danish tax authorities to be important clients in 2021. But we need to have more meetings and actually to meet them -- because they are also impacted by the COVID-19 situation and high degree, actually, to meet them and discuss how the resource usage will be in '21. But expectations from our side is high, also because it has been postponed to some extent, and we need to get things done. And both entities are -- have high hopes on the collaboration. And it's also my understanding that the services we are going to deliver are in high need for both clients. So I think...

We should not expect anything this year in the fourth quarter?

Yes, but not significant.

Okay. And then the public contracts that you had a reduction in the tax in Sund & Bælt in the third quarter. Is that temporary? Or due to activity levels or so? Or is it a change in level?

It is more or less -- it's not temporary. It is lower activity level. And then we see new agreements like the tax framework agreements, where we expect to have an increase in revenue.

The Sund & Bælt contract is delivered and done. So that's finished.

And for UFTS, it's -- we are doing a lot of project work during 2020, and we see phasing out in that.

[Operator Instructions] Our next question comes from Yiwei Zhou from SEB again.

A quick question on the public segment. Looking at next year, I remember earlier you mentioned the DSB contract -- remaining DSB contract would be higher in 2021 -- April 2021. And I remember you also said not expected to be prolonged. Is this still the case?

It's actually interesting you're raising that question because I was looking into that as late as yesterday. And we have no -- the contract will expire 31st of March or around April 1, '21. And so far, we're, of course, assisting DSB for -- on their new journey. So we have no knowledge around extension of that contract or if the extension in case will only be 1 month or 6 months or anything. We don't know. But that's a meeting we're going to have with DSB within the next couple of months because I need to do the resource planning as well.

And maybe just follow-up on the restructuring plan. And given you haven't been able to offset the business loss and also if DSB contract expires and will not be extended and should we expect more reduction of FTE and more cost saving for next year?

It's too early to say. It will not be done based on the DSB contract in itself. We -- I think -- I know we are in control of that resource pool. And the remaining contract is relatively limited compared to the big contract. So we have to look into that. Luckily for us, we are still winning contracts. So in case DSB will not be prolonged, the few FTEs working on that today will be moved to other activities. So there will not be a massive restructuring program due to the prolongation of DSB will not take place. It's a minor thing.

We have a follow-up question from Poul Jessen from Danske Bank.

It's just a minor one about the pipeline. Now in Q3, we got the [ Damask ] contracts. We got the tax authorities allocated both of them. What do you see for the next 6, 12 months coming up of new contracts being out for tender, where it has interest to you?

Quite a lot in the public sector. There are some Danish institutions that will hopefully continue despite of COVID-19, the RFP process that will come out. And these are very, very big ones, both within the tax authorities and within [ issues, states ] and a number of others. Next year will be a big year within the public sector.

And is that operations? So is it solutions?

It's both operation and development.

This was the last question. I'll return back to the speakers.

Okay.

This concludes our call, and thank you for having taking the questions and listening in. So bye-bye for now.

Thank you. Bye-bye.

Thank you.

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.