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

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

Thank you, and good morning, and welcome to this call on NNIT's financial performance for 2020 and our outlook for 2021. Slide 2. My name is Jens Binger, and I'm Head of Investor Relations and Treasury. And with me today is CEO, Per Kogut; and 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 release as well as the slides being used in this presentation will be made available on our website, nnit.com. The conference call is scheduled to last approximately 45 minutes. The presentation is expected to last around 30 minutes. And after presentation, we open up for questions. Today's agenda can be found on Slide #3. Please note that the call is being live cast and that a replay will be made available on our 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 actual results to deviate considerably from the outlook set forth. Furthermore, some of these expectations are based on assumptions regarding future events, which may prove incorrect. With these words of introduction, I will hand over to Per and turn to Slide #5.

Thank you, Jens, and a warm welcome from me as well. Last year brought extraordinary challenges to NNIT. Before entering the year, we saw 2020 as a year of transformation, dedicated to executing on our revised strategy. Throughout the year, the organization has been heavily invested in bringing our strategy and winning solutions to the market, while scaling the organization to match the reduced business activity. We actually have come far, and we see strong tractions in our winning solutions and, in particular, Life Science international. But for almost a year, we have also been impacted globally by the COVID situation, like anyone else. We have experienced a financial impact, mainly in our Danish business. The private & public showed less project activity with customers delaying some projects, while the SLA business was impacted due to delays of tenders that have postponed orders, order intake, and revenue. In general, small and midsized projects have been highly exposed towards the uncertain situation. And given the current outlook, the current lockdown, we don't expect a normalization shortly. Despite business impact from the COVID-19 pandemic and an overall slowdown in the market, I am actually very pleased that we succeeded in delivering on our financial guidance for 2020. I strongly believe that our strategy and not least the talented people we have will help us through the challenges we face, and we expect that numbers will show growth and improved profitability already this year. We will achieve the growth, both organically and inorganically. Life Science showed strong performance last year, and we expect the growth to continue into 2021, based on a very solid backlog growth. Further, we remain on the outlook for attractive M&As within Life Science as well as in Denmark within our winning solutions areas. Please turn to Slide #6 for the financials for Q4 2020. In Q4 last year, revenue decreased by 6.5%, driven by a 12% decline from the Novo Nordisk Group and declining business from private & public. The decline was partly offset by growth of 37% from Life Science international and growth of 5% from Life Science in Denmark. Our operating profit before items was DKK 55 million, equal to an operating profit of 7.3%. Please turn to Slide #7. Revenue from the Novo Nordisk Group declined by more than DKK 200 million, while Pandora declined around DKK 150 million. Despite being part of the expectation for 2020, a sudden decrease at this magnitude is hard to mitigate. As a consequence, for revenue -- as a consequence, revenue for 2020 decreased by 7.5%. The decline from Novo Nordisk and Pandora was partly offset by growth from Life Science international, Life Science Denmark, and the Public segment. Operating profit before special items was DKK 165 million, equal to an operating profit of 5.8%. Compared to 2019, operating profit before special items declined by DKK 74 million as a direct consequence of the price reduction and loss of business with Novo Nordisk. Please turn to Slide #8. In Q4 2020, we continue to see strong order intake in the Life Science segment. The new deals were driven by Veeva-related solutions and more classic IT services. The updated strategy introduced the concept of winning solutions, and we see a strong demand within these offerings, especially from Life Science customer globally. In Q4, we signed the largest Veeva deal to date with a top 10 pharma company, where NNIT will roll out Veeva regulatory information systems on a 4-year program. It is yet another milestone for the NNIT Veeva Powerhouse, which is the most successful of our winning solutions. The program will be a joint delivery between Valiance and in an IT's Life Science project organization and will provide another strong foundation for NNIT's collaboration with the client. In December, we signed an expansion to a current contract supporting AstraZeneca with a Veeva Vault Safety implementation. NNIT will, along Veeva, deliver safety surveillance for the benefit of the customers' COVID-19 vaccine development and production. We are very pleased that we in NNIT can support our customers in such a critical process. In Q3, we announced a contract with the new customer Orifarm. And here in Q4, Orifarm chose NNIT as a strategic technology partner where NNIT will deliver infrastructure and application outsourcing services through a 5-year period. The outsourcing services will commence after finishing the current carve-out transition project. In our Private & Public segment, we actually welcome back Pandora, who has chosen NNIT as a vendor for delivering AX support for the next 3 years. The services was transferred out of NNIT. However, Pandora has decided to take the services back to NNIT again. We see some great perspectives in the rewin, both when looking at Pandora and with regards to other potential customers within this winning solution. Lastly, we recently announced a data center contract with the Agency for Governmental IT, Statens IT. The customer will move into NNIT's newly built 3-tier data center during the coming year. Having the Danish Defense, the agency for digitization and now the Agency for Governmental IT as tenants is a firm testament to NNIT's capabilities within this very important area. Please turn to Slide #9. In 2020, we continue to make a mark on business and society. As we enter into 2021, we are committed to developing our business based on a combination of the profitable growth while acting in a continued responsible manner. In 2020, we began working more extensively on our environmental, social, and governance principles. The independent ESG and corporate governance research and rating company called Sustainalytics recently rated this work in NNIT and will do so on an annual basis going forward. We received the rating 7.1 -- 17.1 which means that NNIT is rated as a low-risk company by Sustainalytics. Also, this make me proud to say that we are the first -- with this first official ESG rating by an external partner, places us in the global top 100 among companies within IT services and software in the software industry. And also on that positive note, I will now hand over to you, Pernille, for more financial details.

Thank you very much. So we are now at Slide 10. As Per said, 2020 was delivered in line with the financial guidance provided. We have seen traction and strong growth from Life Sciences international as well as within winning solutions. Despite this, the business climate with COVID-19 as well, specifically, the revenue decline of more than DKK 350 million from Pandora and Novo Nordisk, resulted in a negative revenue growth for 2020 as well as for Q4 when comparing to the same period of 2019. In Q4 2020, revenue decreased by 6.5% to DKK 749 million. Revenue from Life Sciences international increased by 37%, supported by growth from Valiance with the acquisition of Excellis, adding to that mix. In Q4, revenue from the Novo Nordisk Group declined, as expected, by 12%, and the revenue from private & public declined by 16%. Turning to the revenue for the full year 2020, a decrease of 7.5% to DKK 2.830 billion was seen. As mentioned earlier, revenue from Life Sciences international increased by 26%, whilst revenue from Life Sciences Denmark increased by 14%. As expected, revenue from the Novo Nordisk Group showed a decline of 23% when comparing to 2019 whereas revenue from private & public showed a decline of 8.7% due to a combination of the loss of the Pandora business and this challenge related to new contract wins, partly due to the COVID-19 situation. Operating profit margin contracted in Q4 and full year 2020, driven by the before-mentioned development of business with the Novo Nordisk Group and Pandora, and as a result of the COVID-19 situation, impacting the private & public business. Positively, the cost restructuring program and the growth in Life Sciences and winning solutions helped the margin. Profit before tax consequently reduced for both Q4 and full year 2020 compared to 2019. A double -- a number of nondeductible special costs held in 2020 temporarily impacted the tax rate upwards to a level of 25.5% for the full year of 2020 when comparing to a rate of 20.8% for 2019. The net profit for the year 2020, consequently was at DKK 76 million. Turning to Slide 11. Throughout 2020, the business and cost restructuring initiatives set forth in 2019 have been carried out. Progress has been made in line with expectations and costs have been reduced in line with the program. Specifically, utilization has been worked with throughout the year, and the focus has yielded improvements within this measure. In 2021, we will diligently explore ways to further improve the profitability of the business. Turning to Slide 12. Revenue in Q4 within Life Sciences international showed strong growth of 37%, while Life Sciences Denmark showed a year-on-year increase of 4.7%. In first half of 2020, we saw a decline -- a declining Life Sciences business in China due to COVID-19, but from third quarter, China seems to recover, and we now see double-digit growth in all international regions. Due to the growth in Life Sciences international, total Life Sciences revenue for Q4 increased by 3% despite the expected loss and price reductions from the Novo Nordisk Group of 12%. Turning to the full year 2020. The declining business from Novo Nordisk Group of DKK 200 million could not be offset with a growth of 26% from Life Sciences international and growth of 14% within Life Sciences Denmark. In Q4 and full year 2020, gross profit margin decreased as the growth in Life Sciences international and Life Sciences Denmark and the implementation of the cost restructuring program could not offset the margin impact from the reduced level of the Novo Nordisk business. Turning to Slide 13. In Q4, revenue from private & public increased by 16.2%, impacted by declining business in all 3 segments. Full year 2020 revenue decreased by 8.7%. The enterprise segment in Q4 experienced a revenue decline of 16% related to the contract loss of Pandora. Positively, revenue from new customers like Saint-Gobain and Radius added to the business. Further, full year 2020 revenue decreased or in -- decreased by 11% due to the COVID-19 situation and Pandora business impact. The public segment in Q4 experienced a revenue decline of 5.5% due to less project activity on several customers, which was not fully offset by revenue from new customers like the Danish Defense and the Agency for Governmental IT Services, Statens IT. Full year revenue increased by 3.8%, mainly due to high project activity in the beginning of 2020 prior to the COVID-19 situation. The finance segment in Q4 experienced a revenue decline of 30%, mainly due to expiry of the contract with Alka, acquired by Tryg, and less project activity from existing customers. Full year revenue decreased by 18%, also due to the expiry of the contract with Alka acquired by Tryg and the insurance application company, MIA. As a consequence of the above gross profit margin decreased by 1 percentage point to 10.7%, whilst the gross profit margin for full year 2020 increased by 1.1%, supported by the restructuring plan. Turning to Slide 14. In full year 2020, net financials was negative by DKK 20 million compared to DKK 16 million in 2019. The development in 2020 compared to 2019 was mainly due to a DKK 13 million adjustment of the Valiance earn-out agreement where the future payments are expected to increase due to their strong results. Turning to Slide 15. At the end of Q4 2020, the number of people at NNIT was 3,113. The growth in Life Sciences international and the acquisition of Excellis added to the number of people within NNIT's international offices. The number of employees increased by 60% when comparing to Q4 2019. In Denmark and the global sourcing centers, the number of FTEs decreased by 5% and 9%, respectively, as a consequence of the cost restructuring program and the loss of business with the Novo Nordisk Group and Pandora. Turning to Slide 16. We only have a few comments to the balance sheet. On intangible assets increase related to the acquisition of Excellis in November 2020. Trade receivables decreased mainly due to the additional factoring and other current liabilities increased due to the postponement of employee tax as part of the COVID-19 initiatives in Denmark. Turning to Slide 17. In 2020, cash flow from operations was at DKK 528 million, up from DKK 465 million in 2019. This was driven by the postponement of payment of employee tax as part of the COVID-19 initiative. In Q4 2020, NNIT enhanced the use of factoring by DKK 75 million. The benefit of this program include improved liquidity and financial ratios as a reduction of -- in NNIT's sensitivity to long payment terms, while the cost of factoring is less than the current revolving credit facility. The free cash flow for 2020 was DKK 143 million compared to a free cash flow of DKK 242 million in 2019. The decrease was mainly driven by the acquisition of Excellis. Turning to Slide 18. Due to low leverage of 1.2 and positive cash flow generation, the Board of Director proposes to pay out DKK 3 per share, corresponding to DKK 74 million, including the interim dividend payment in August 2020. This corresponds to a payout ratio of net profit of 99% and a dividend yield of 2.5%. Turning to Slide 19. At the beginning of Q1 2021, NNIT's order entry backlog for 2021 amounted to DKK 2 billion, which is a decrease of 2% compared to the same time last year. At the same time last year, the considerable price reduction on the prolongs operation maintenance agreement with Novo Nordisk Group was not known and recognized in the backlog. Corrected for that, the underlying backlog has increased around 1.5% in the beginning of Q1 2021 compared to Q1 2020. The backlog from Life Sciences customers, excluding the Novo Nordisk Group, increased by 38%, driven by Life Sciences international and the acquisition of Excellis. The Novo Nordisk Group declined by 22% or 11% corrected for the price reduction on the prolonged operation maintenance agreement, and some of the challenges from the Novo Nordisk seems to continue into 2021. Private & Public decreased by 4.5%, mainly due to the expiry of the Pandora outsourcing contract, the expiry of the DSB contract from Q2, and delayed order intake resulting from the COVID-19 situation. Turning to Slide 20. In 2021, growth is expected to return, driven by Life Science and international and the traction and focus on winning solutions. The Private & Public segment will, in 2021, continue to see the impact from the loss of certain contracts in 2020. Further, it is expected that 2021 will continue to be challenged by impacts from the COVID-19 situation. Hence, we see significant sensitivities despite having secured a solid backlog and as a consequence, we set the outlook for revenue growth at 1% to 4% in 2021. In terms of profitability, we are cautiously optimistic. However, in the light of the uncertainties on revenue growth and the corresponding impact on margin, we set the outlook for operating profit margin before special items at 6% to 7%. Investments, excluding possible acquisitions, are expected in the range of 5% to 7% of total revenue. Handing over to Per.

Thank you, Pernille. Well done. NNIT concluded 2020 in line with the financial guidance despite the business impact from the COVID-19 pandemic and an organization under transformation. We realized double-digit profitable growth within the Life Science international business, and we executed on an acquisition to strengthen our Life Science offerings even more. Further, we implemented the business and cost restructuring program in order to align the organization to support our updated strategy. So all in all, we have focused on executing of the set strategy in challenging times of 2020, and we are looking forward to and hopefully more normalized 2021. So with these words, Pernille and I conclude our presentation. And operator, we are ready to take the first question, please.

[Operator Instructions] And we've received the first question. It is from Yiwei Zhou of SEB.

I have 2. Firstly, could you please comment a bit on the M&A pipeline here into 2021? And secondly, is the -- I recall, you had a DSB contract, there's a remaining part of you previously expect to also lose it in 2021. Is it still the case? Or if you have any changing our expectations? Any comment would be helpful.

Yes. So let me take your M&A question. So we are -- we have, of course, finished or concluded the Excellis acquisition, which went very well and was absolutely in line with the acquisitions that we are looking at within the international Life Science segment. And we are, of course, continuously looking at acquisitions and creating a funnel within, in particular, the international Life Science segment, which is a huge focus for us. In terms of specific acquisitions, I can't, of course, comment on that. But it's something we monitor very carefully and will enter into looking at in more detail in this year that we are in now.

Great, Pernille. Thank you. About the DSB contract, to my knowledge, it will end here end of Q1. It might be prolonged a month or 2. I don't have the exact details, and I don't know the status on DSB's transition with their new vendor. I'm listening too it's delayed a little bit. But -- so around end of Q1. Does that answer your questions?

The next question is from [ Alex Borreskov ] of Carnegie Investment Bank.

My first question is on the pipeline in the public sector in Denmark. I think it looks quite strong. So how do you see it compared to previous years? And what will you do to improve your win rate in this segment? That is my first question.

Okay. You're absolutely right that we do see a stronger pipeline in the public sector going forward, and we actually think that will continue the coming years. The public sector have anticipated and I actually very much in favor of our winning solutions strategy. So I think that correlates very well. We also do see the public sector having a number of RSPs or bigger contracts up for both renewal and tendering during 2021, which we hopefully have a good chance of winning. So we hope that 2021 will be a strong public year for NNIT.

Okay. Perfect. And then secondly, will you give any color on the estimated impact from Novo for this year?

Yes. We are absolutely also here doing our best. We think we will look into a continuation of the decline. But hopefully, fingers-crossed, a lower decline than we have seen over the past 4 years. But honestly, I don't have more insight than that. We have budgeted with a lower level of decline than the year we saw last year.

Okay. And then my last question, do you sort of expect Novo Nordisk to in source or outsource more IT in the future?

I have no comments on that. I suggest you call Novo Nordisk.

There are no further questions at this time. [Operator Instructions]. We haven't received any further questions. Please go ahead, speakers.

Okay. Perfect. Then this concludes our conference call. Thank you for participating in today's call, and feel free to reach out to us if you have any further questions. Thank you.