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

Hello, and welcome to the NNIT A/S interim report for the first 6 months of 2021. Today, I am pleased to present Par Fors, CEO; and Pernille Fabricius, CFO. [Operator Instructions] I will now hand over to Pernille Fabricius. Please begin your meeting.

Thank you very much. Good morning, and welcome to this call on NNIT's financial performance for Q2 and first half of 2021. Turn to Slide 2, please. My name is Pernille Fabricius, CFO of NNIT. With me today is our new CEO, Par Fors, who is with us for the first time. I will briefly walk you through the practicalities for the meeting before giving the word to Par. Q2 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 45 minutes depending on the level of questions. The presentation is expected to last around 30 minutes. The agenda can be found on Slide #3. Please turn to that. Please note that this call is being live cast and that a replay will be made available on NNIT's website after the call. Turning to 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 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'll give the word to Par Fors and turn to Slide #5.

Thank you, Pernille, and good morning, everyone. I will now be taking you through the main business highlights for Q2. So let's start diving into this, and please turn to Slide #6. In Q2, my first quarter, I came on in June 14, we continued to roll out our strategy, focusing on Life Science and Winning Solution across all our customer segments. We continue to deliver and pursue further solid growth within Life Science, particularly internationally. Our Winning Solution continued to do well, and we maintain our strong focus on this part of the business. As a new CEO, we are now well into Q3. The plan is, of course, to continue to drive international development and growth and staying, of course, with our new strategy, focusing on Life Science and our Winning Solution. Please turn to Slide 7, where I will introduce myself a bit further. As some of you might know, I come to this role to NNIT from a former position as CEO for CGI Scandinavia, and that business was an IT and business consulting outsourcing company. And in parallel, I also had the role of the configuration of Swedish IT and telecom industries. For me coming to NNIT was a very conscious choice because I have a passion to work in this industry, and I would like to continue to do that. But I also wanted to have some new elements in a new setting, NNIT, for sure, is such a place. I have more than 30 years of experience within the IT industry and more than 20 years in executive roles, both naturally, but also on the Nordic level and not the least internationally. Right now and for my first time in NNIT, I'm in the process of deep diving into the specifics of the NNIT business across all units, not least Life Science, which is a bit new to me. NNIT has a very strong executive leadership team with expert knowledge, not the least within Life Science, which is a perfect complement to my own experience from the IT industry. As it happens, my education background is MBA in business administration and economics, meaning that apart from the passion for our industry, our people and my clients, I'm also like numbers. And I'm really passionate of creating a company where we, as employees of NNIT, are proud of our company, at the same time as we are creating value for our clients and our shareholders. This is just a brief introduction. If you have more questions about me, please feel free to ask follow-up questions during the Q&A session. I will now turn to Slide #8 to offer some highlights on our commercial development during the second quarter. I'm happy to announce that NNIT secured substantial infrastructure business with Novo Nordisk for another 5 years, which was an important win for NNIT, and also a strong testament of the relationship that exists between Novo Nordisk and NNIT. However, because of the fierce competition in this particular field, and that does not just go for us, it's go for the whole industry we're in, we were not able to extend the contract on previous terms, which has resulted in some lower profit margins. And of course, this is something that we must continually address within our infrastructure business going forward and of course, we will do that. Another significant wins for NNIT during Q2 were a compliance as a service engagement with an existing Life Sciences customer and a new IDMP compliance and data governance advisor engagement with another new Life Science customers, so we are continuing to grow in this area. Now turning to Slide #11 -- 9 sorry. On acquisition, just outside Q2, we could announce the acquisition of SL Controls, which will expand NNIT's portfolio services to the international Life Sciences market. We are executing on a clear strategy to position NNIT for further organic growth by consolidating the group as a leading player, as one of the foremost suppliers of IT services, to global life science industry. To support this, let's have a look on our recent acquisition history on the next slide, #10. Since 2017, we have added a new company into the NNIT Group once a year to bolster our Winning Solutions area, not least toward the Life Sciences industry. In fact, since 2018, all acquisitions have been within Life Sciences. So SL Controls mark the fourth Life Sciences acquisition made by the NNIT Group in as many years. SL Controls joins the NNIT Group as an independent company, but in time the plan is to fully integrate the business into NNIT in the same way as a former HGP. SL Controls, will significantly bolster NNIT Group's capability within the Winning Solution area called production IT. Let's take a closer look at the strategic match, and please turn to Slide #11. Since pharma production is one of the most important Life Sciences growth areas with an annual growth rate of 14.2%, this particular area is, of course, of great interest to NNIT. Going forward, through the combination of NNIT's existing production IT Solution unit, the group company called Excellis Health Solution and now SL Controls, will be able to offer our customers the full range of IT services to support the entire pharmaceutical supply chain from the implementation of a manufacturing execution system called MES systems over the efficient integration and validation of production equipment system and to packaging and delivery, including Track & Trace. We are very happy to welcome SL Controls to the NNIT Group. With that, I will end my business update, and we will turn to Pernille on the financial performance, and please turn to Slide 12.

Thank you very much, Par. Please turn to Slide 13, where I will elaborate on key financials in relation to our Q2 results. So NNIT realized a Q2 revenue of DKK 710 million corresponding to a 1.3% increase compared to Q2 2020. The organic growth was a minus 1.8%. Our Winning Solutions revenue increased to 52% or DKK 368 million. Operating profit before special items landed at DKK 36 million, constituting a margin of 5.1% in Q2. The investment level was kept at DKK 19 million in Q2 corresponding to 2.7% of total revenue. Turning to the first half of '21. Consequently, NNIT realized a revenue of DKK 1.441 million, corresponding to a 1.3% increase compared to first half of 2020. The organic growth was a negative 1.7%. Revenue from Winning Solution was DKK 727 million, which corresponds to a 50% share of H1 total revenue. Operating profit before special items was DKK 84 million, constituting a margin of 5.8%. And lastly, investments were then kept at DKK 52 million, corresponding to 3.6% of total '21 revenue. Now please turn to Slide 14, where I will elaborate on NNIT's group performance. The total Q2 '21 revenue growth of 1.3% compared to Q2 2020 was particularly impacted by Life Sciences International, excluding Novo Nordisk Group, which grew 56% compared to Q2 2020. Q2 '21 revenues from the Novo Nordisk Group, on the other hand, declined 14% compared to Q2 '20. Revenues from P&P declined 8% compared to Q2 '20. So that was quite a decline. Cost of goods sold increased to DKK 624 million, up 2.6% compared with Q2 '20. The increase relative to revenue stems mainly from investment into the infrastructure business to cater for quality and to ensure stable operations. Gross profit margin consequently ended at 12.1% compared to 13.3% in Q2 '20. The operating profit before special items of DKK 36 million corresponds to an operating profit margin before special items of 5.1% compared to 5.4% in Q2 '20. Special items of DKK 63 million relate to impairment of the headquarter lease following a reduction of office space in Østmarken, Denmark, change of CEO as well as restructuring costs. Overall net profit was a negative DKK 30 million compared to DKK 14 million in Q2 2020. To improve visibility and to enable execution of efficiencies and thereby accelerate cost takeout, Importantly, a strategy to separate the NNIT Infrastructure business into a dedicated business unit was established in Q2. This will be further worked upon in second half of '21. Turning to the half year. Revenue consequently grew 1.3% compared to first half '20, mainly driven by the positive momentum within Life Sciences International, as mentioned. Gross profit margin declined to 12.9% from 13.8% due to the before-mentioned investment into the infrastructure business to keep high quality levels. Operating profit before special items for H1 ended at DKK 84 million, corresponding to an operating profit margin before special items of 5.8% compared to 6% first half '20. The subsequent slide talks to the financials of the 2 customer segments of the business, Life Sciences and Private & Public. Starting with Life Sciences. Please turn to Slide 15. Life Sciences within NNIT consists of 3 areas: Life Sciences International, Life Sciences Denmark and the specific business with the Novo Nordisk Group. In Q2 '21, total Life Sciences grew 10.3% compared to Q2 '20. Life Sciences International revenue increased to DKK 165 million, corresponding to the mentioned 56% growth, of which 36% was organic compared to Q2 '20. This is mainly driven by a strong organic growth in Europe and the U.S., helped by inorganic growth related to the acquired company, Excellis. Main growth drivers were the strategic business areas, regulatory affairs, quality management and production IT, supported by Veeva and TraceLink technologies. Revenue from Life Sciences Denmark increased to DKK 69 million corresponding to a 1.5% growth in revenue compared to Q2 '20, mainly driven by new contract with Orifarm. Turning to the business with Novo Nordisk. Q2 revenues ended at DKK 151 million, a reduction of business with Novo Nordisk of 14% compared to Q2 '20. Operating profit before special items for this segment ended at DKK 29 million, resulting in a total operating profit margin for the segment of 7.5% compared to 7.4% in Q2 '20. Turning to the first half. Consequently, revenue stemming from Life Sciences increased by 11.4% compared to first half '20. Life Sciences International increased to DKK 324 million, corresponding to a 64% growth, of which 42% organic compared to Q2 '20. This was mainly driven by a very strong growth in Europe and the U.S., helped by the inorganic growth mentioned related to Excellis. Revenue from Life Sciences Denmark for that period increased by 2.2% compared to the same period last year. Turning to the business with Novo Nordisk. On a half year basis, revenue ended at DKK 310 million, which means a reduction of business with Novo Nordisk of 4% -- 14% compared to same period last year. As a consequence of the large decline in revenue from the Novo Nordisk Group and higher growth from other customers, Novo Nordisk Group now constitutes 40% of total revenues against 52% in the first half of 2020 of this segment. Now to Private & Public, please turn to Slide 16. The Private & Public business within NNIT consists of 3 areas: enterprise, public and finance. The total Private & Public revenue decreased to DKK 325 million, down 7.7% from the same period last year. The Enterprise segment, including our SCALES business, saw a revenue increase to DKK 182 million, up 7.1% from the same period last year. The increase was also helped by a contract with a new customer, which was the Saint-Gobain customer. Within P&P, revenue decreased to DKK 75 million -- or the Public segment, sorry, revenue decreased to DKK 75 million, down 30% from the same period last year. The decrease was driven by a reduction in project activity as well as reduced revenue on service level agreements here under specifically infrastructure. Within the Finance segment, revenue decreased to DKK 68 million, down 9.3% for the same period last year. Consequently, the overall profit landed at DKK 7 million with a margin before special items at 2.2% compared to 3.4% same period the year before. Turning to the first half. Consequently, revenue from P&P decreased by 8.4% compared to first half '20. During the first half of '21, the Enterprise segment saw a total revenue decreased to DKK 356 million, down 5.3%, and the decline was expected due to the phasing out of the Pandora outsourcing agreement, which has now happened. Within the Public segment, revenue decreased to DKK 173 million, and that was down 20% or 18% from the first half of the year before. The revenue decrease was driven by a reduction in project activity, partly offset by the commencement of a new customer contract. Within the Finance segment, revenue decreased to DKK 140 million, down 1.4% from the first half of '20. Please turn to Slide 17. Turning to the balance sheet. Please turn to Slide 18. Total assets on June 30, '21 increased to DKK 2.677 million, up DKK 206 million from DKK 2.471 million on June 30, '20. The increase was related to intangibles following the acquisition of Excellis in Q4 '20, which partly was countered by decreases in tangible and used assets. Net cash and cash equivalents amounted to a negative DKK 166 million, down DKK 138 million from June 30, '20. The decrease is mainly driven by payments related to acquisitions, which was DKK 225 million, payment of interim dividend for '20 of DKK 49 million and payment of ordinary dividend for '20 of DKK 25 million, partly countered by cash flows from operating activities. Equity on June 30, '21 amounted to DKK 1.136 million, down DKK 40 million from June 30, '20. The decrease was mainly due to payments of interim dividends for '20 of DKK 49 million and ordinary dividend for '20, which was DKK 25 million, but partly countered by reevaluation effects and net profits for the period. Now let's move to cash flows, please turn to Slide 19. So the free cash flow for Q2 was positive DKK 150 million, which was DKK 44 million below Q2 '20, mainly due to the loss for the period, primarily resulting from special items, as mentioned earlier. Also payment of earn-out during Q2 had a negative impact on the free cash flow as compared to Q2 '20. Now let's move to the backlog development and full year outlook, turning to Slide 20. Please move to 21. At the beginning of Q3 '21, NNIT's order entry backlog for '21 amounted to DKK 2.643 million, which is up 4.3% from last year. The backlog from Life Sciences, excluding Novo Nordisk, increased by 41%, driven by Life Sciences International, positively impacted by the acquisition of Excellis, while Novo Nordisk Group declined by 9%. Private & Public decreased by 3.8%, and that was mainly due to the expiry of the Pandora outsourcing contracts and lower order intake. Now let's finally move to our outlook of '21, turning to Slide 22. The overall '21 guidance for the NNIT Group as per company announcement on June 29 is maintained leading to no adjustment to full year guidance of 1.4% -- 1% to 4% revenue growth; operating profit margin before special items of around 5%; operating profit margin and CapEx investment level of 5% to 7% of full year revenues. Turning to Slide 23, please. For closing comments, please turn to Slide 24. In summary, we are very pleased with the growth trajectory of Life Sciences as well as the development of the share of revenue stemming from Winning Solutions. Within these areas, focuses and will be on growth, both organically and via acquisitions. At the same time, we recognize the significant financial impact of the reduced revenues stemming from infrastructure here under specifically within the Public segment. Efficiencies and cost takeout is key. This will be tackled through a separation of the infrastructure area into a dedicated business unit. In summary, our expectations for '21 remain in accordance with our financial guidance provided 29th of June '21. Operator, we are now ready to turn to the next slide and take the first question, please.

[Operator Instructions] We have a question from the line of Poul Jessen from Danske Bank.

First of all, welcome to you, Par, in the company. I guess we will meet somewhere in the future as well. First, the question is for you, Par. You've been there 2 months now. I was just wondering not on just how you look at the management team, but have you had time to sit down, I think, taking your own thoughts on where to take the company? Or is it execution on existing plans only so more or less where would you see NNIT in a 3- to 5-year horizon? Or is it too early to take that part by now? Yes, let's take that as the first one.

Yes. Thanks, Poul. A really good question. As I said, I started on June 14, and I had -- with the vacation in between. So I'm actually fairly new to the company. So what I'm actually focusing now primarily is actually to talking a lot to people, to learn to know the management team all the great people in the company, but not the least, talking to the client. And so regarding the strategy, there's been a lot of strategy work conducted in the company. And my intention right now is to see on that strategy, where it is and where it leads us. But some first observation is that I'm not foreseeing any revolution, more on evolution. And I think you also gave a bit of an answer in your question that the big focus is actually on the execution of the strategy. And just to remind that, of course, it is on the Life Science where we intend to increase our focus, starting at a very good point. It's a really interesting position we have in the market. And as well, of course, our Winning Solution. And Winning Solution, it is a key way of packaging on the part of our service portfolio, where we delivered the highest level of value to our clients and where we intend to focus, and I'm happy to see that we are growing in that part of the business; and also, of course, touch upon the M&A strategy. I mean we have a build-and-buy strategy. And I'm very pleased to see that we deliver on that 1 because that's going to be a very important part also going forward. So not to be too lengthy on the answer. I mean I would say I think the strategy is there. We could accelerate some parts and then, of course, also make sure that we address the challenges that's on the table as well, which is what was mentioned by Pernille before in -- within our infrastructure operations, where we're now taking action to consolidate that unit into 1 more ring-fenced units in order to address the necessity to improve the efficiency and the cost level of that operation.

Okay. And then you started my next question, that's about the separation of the infrastructure. Of course, that's the challenging part of NNIT. So how should we actually read the message of separation of that because it could be just to be more transparent on what's the profitability on the infrastructure and the rest? And secondly, if you separate it, it will also be a package, which could do corporate action on. Or is it -- I know it's a different one to answer here, but should it be seen as highlighting the profitability also to get a more better understanding in the group that something has to be done?

Well, firstly, I mean in my previous career, I spent almost 10 years running in an infrastructure operations. So I feel quite knowledgeable on that part of the business as well. So I think I would take the starting point of the question, what looking -- what's happening in the industry as a whole. All our clients than what you read in the market, they are having their transformation to the cloud, which is a big transformation for the client, but it's also a transformation for us who are providing services in this area. So sometimes we might be better on transforming the clients and we are transforming ourselves. So I think you should see -- a look up on this intent that we're describing here as just to better gather our operation. And of course, we've had an infrastructure unit before, but we have now consolidated some part of it to have it more in a ring-fenced unit, so we can better see what kind of action that is needed to improve the efficiency of that unit and to drive down the cost level as well as continue to modernize the service offering, which is also needed. So what we're doing is actually exactly that. We're trying to improve the efficiency, address the cost levels as well as modernizing the service portfolio.

So depending on how much you've been able to see, is the question of scale of the business? Is it too high cost of the business? Or is it the wrong product? Or is it all of it?

Well, I personally I'd say, I mean we are providing excellent services to our clients. And when we measured the client's approval rating for our services, it's on a fairly high level. So I think we have a good quality of our services. And I would not say that it's about scale. I mean we are a fairly big operator in the infrastructure operations. So I think it's more -- to be even more efficient working with the toolings, automation, using AI and other stuff to really drive down the cost of delivering the services without affecting the quality of the services because that cannot happen, of course. So I mean I think it's more that we have some backlog to do, and that was detected also before I came here. And I just can say approved -- that's the case that we need to work with a number of action to actually improve the efficiency, effectiveness and drive down the cost level. That's a major task in front of us.

Okay. I have a final one before I will step back, that's for you, Pernille I guess. Life Sciences, if you look at the numbers, you have overall an increase in revenue of DKK 26 million year-over-year. You had DKK 59 million in International Life Science and then Novo is down DKK 24 million. So you should be growing in the area where it should be having a good profitability. What's happening as your profitable or gross margins -- or gross income is flat having that high growth in the International Life Science and decline in Novo Nordisk? Is it simply fixed cuts that's too high reflected? So why don't we see an improvement?

Yes. So at the moment, the business -- so what you're basically seeing us report on, as you know, is on the customer segment. And within the customer segment, there's then a blend up offering in projects and in service level agreements, growth on application levels and on infrastructure. And that, as Par alluded to, that's one machine. So basically, what you see there is that if there is not as much work into that machine due to declining revenues, then costs are simply sort of allocated to those 2 customer areas. This is becoming very technical, Poul, and I know you understand it. So it's that part of it. It's basically that this area of the business is seeing reduced revenues, and therefore, there is an allocation of certain capacity to both of the areas.

[Operator Instructions] We have a question from the line of Max Cederborg from Carnegie Investment Bank.

Welcome to Par from my side as well. My first question goes to Novo Nordisk, which is down 13.7% year-over-year, which is in line with the first quarter of this year as well. So is this the run rate you should expect in the remaining part of the year? That is my first question.

So there, what you have seen there Max, it's Pernille, is that so far to date, there has been the usual combination of infrastructure or service level agreement and then there has been the projects. Starting from 1st of July, there's the new infrastructure agreement with Novo Nordisk, and that actually reduces the revenue further. So you are going to see a predicted further decline compared to what you're seeing here.

Okay. And can you do the split between Infrastructure business and the drag from your project business and the revenue from Novo?

I don't -- as you would know, I unfortunately can't do that because that's not something we disclose. So at this minute, I can't do that. I can only refer you back to that release that we had previously in terms of the reductions in that area.

But maybe Pernille, you could comment on that. I mean it's two-folded situation at Novo Nordisk. I mean you're having infrastructure operation that all over the industry, not just in NNIT. When you renew a contract, it is always like-for-like on a significantly lower price level. So that is one fact that you see in the numbers. But on the other hand, there is a lot of opportunities where we're growing our business in other areas at the same time. So it's a lot of new business opportunities at Novo Nordisk on the one hand. But on the other hand, you have the infrastructure operation where by nature, there is a decline in revenue.

I think what I'll say to you Max, is that Par is absolutely right that there's a lot of cross-selling opportunities to Novo because we have done some very good acquisitions with some good capabilities that one can now explore. But if we look at the outlook, that you are basically using in your model. That hasn't been included. And in that Novo's revenue is reduced following that agreement to the levels that we have mentioned in the press release.

Okay. Fair enough. And then I guess on the guidance. I guess that the top line impact from the acquisition of SL Controls wasn't reflected in your new guidance following the agreement with Novo Nordisk. And this acquisition is, well, it's expected to contribute with around 1 percentage point to the full year growth. So have you seen a deterioration in the organic part of the business? Are you more conservative? Or do you see higher uncertainty in the second half of the year?

I think no. Even I talked about this earlier. So this is simply a matter of also prudency. There are uncertainties at the moment as we have seen in the Danish P&P market. And this is the reason why we don't want to change the guidance for the year.

Okay. And then my last question. You will not pay out any dividends, and you have this -- a few slides on the M&A story, and you talk about the future for many as well. And you still have some available credit facilities. So is it fair to expect that you have more appetite for M&A today, so we could expect to see more than just 1 bolt-on acquisition per year?

I mean you can -- I can say that there's certainly an appetite for acquisitions, as Par said earlier, within International Life Science. There's a great appetite for that. We want to grow it both by acquisitions and organically. But it's always a matter of opportunity. So we are pursuing it definitely, is all I can say.

Our next question comes from the line of Yiwei Zhou from SEB.

I also have 3 questions here. Firstly, I think we have touched a little bit on this topic regarding the Infrastructure business. I mean you mentioned the margin pressure and intense competition, but I guess it's not new to us. And my question here is, is there any change in the market dynamic sort of have to change your view here? I mean have you seen sort of margin pressure increasing or sort of accelerating?

Looking on the market, in general, I don't see any dramatic change during the second quarter. I think -- but coming here, I can just acknowledge the activity that was kind of already ongoing that we have kind of a backlog that we have been lagging behind, I would say, the general market with addressing the continuous price pressure and need for automation and need for cost takeout in order to stay competitive. So it's no dramatic change. I think it's just a process that has been continuing for quite a few years, but where we have actually been lagging behind somewhat. And I think the change that we are now implementing will increase the possibility for us to address this challenge.

I remember the automation is already a part of your restructuring for the last few years. Could you sort of give an update here? Or do you see sort of more room to reduce the cost from here? If it's -- yes, could get more color.

Maybe I can say something. As you can see on our half year also investment levels, we have quite some room to go on that. We are quite low on that. And the sort of aim is to go higher on investments into automation of that part of the business, definitely. So you are completely right that it has also been an aim historically, but still there's quite a way to go. So it's offering that as part of the strategy.

Okay. And my second question is regarding your order book, which is growing 5% here. And in relation to your guidance, is it fair to assume you have left some room in the revenue guidance? Or you're basically expecting way for second half?

I'm just going to repeat my answer to Max previously, right, that there are sensitivities in our outlook where we want to take that into account. And that is also the reason why we haven't basically adjusted it for the acquisition we did.