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

Hello, everyone, and welcome to the NNIT announcement. My name is Charlie, and I'll be coordinating the call today. [Operator Instructions]. I will now hand over to your host, Pär Fors, CEO, to begin. Pär, please go ahead.

Thank you very much, Charlie. And thank you all, participants, for taking the time to call in for this brief presentation of today's announcement of our decision to accelerate NNIT's strategy execution through the divestment of our infrastructure operations to Agilitas. My name is Pär Fors, and I'm the CEO of NNIT. And with me today, I have our CFO, Pernille Fabricius. And we have both been looking very much forward to present this deal to you and take all your questions. Let's turn to Slide 2 and go over today's agenda. We will begin by providing a brief view of the transaction highlights before turning to a description of the divested business. We will then turn our attention to the continuing activities that we call the NNIT of the future, consisting of the 2 core business areas: Life Sciences Solutions and Cloud & Digital Solutions. On that backdrop, we will share a few comments on the transaction proceeds and timetable as well as full year guidance before we open for the Q&A session. Please turn to Slide #3. We are very pleased with the transaction that we have announced today. There is still a lot of work to be done in the coming period, but we are confident with that this deal will generate value for all our involved stakeholders and enable us to accelerate strategy execution and both growth and profitability for the new NNIT. The divestment to Agilitas includes our infrastructure operations, consisting of the Hybrid Cloud Solutions business unit and also select part of our Cloud & Digital Solutions business unit. The activities generated total pro forma revenue of DKK 1.4 billion in '21. The infrastructure business has 1,500 employees, and the fully owned data center in Bagsværd and Glostrup are included in the transaction as well. We have agreed on the purchase price of DKK 1.5 billion on a debt-free basis. Pernille will detail this further later on. Net proceeds from the divestment will be reinvested in accelerating growth in the continuing business as well as on our core activities in Life Sciences Solutions and Cloud & Digital Solutions. Following the signing today, we are entering a transition period that expected to last 6 months. During this period, we will work on the detailed planning of the transfer of this infrastructure operations. The transaction will entail a significant structure change for NNIT, and we have, therefore, decided to suspend our guidance for '22 as we work to get the deal closed. As mentioned before, the divestment is an important step in our strategic effort to increase growth and profitability in the continuing business, which will become more focused and have critical mass in our core business areas. The new NNIT will be a highly specialized IT services provider, focusing exclusively on the 2 core areas within Life Sciences and Cloud & Digital Solutions. This will enable us to center investment, competencies and sales force around delivering high-quality solutions and services in an attractive market with strong growth prospects. NNIT has completed a value-creating acquisitions in recent years to add capabilities, services, customers and growth. And we will continue to focus on M&A opportunities, strengthening our both business units. With these highlights, let's move on to Slide 4 and the divested business. We are selling Hybrid Cloud Solutions and part of our Cloud & Digital Solutions business, which constitutes a leading Danish IT infrastructure outsourcing player. The business has a strong track record and customer relationship with private and public customers in addition to international life sciences companies, including Novo Nordisk. On that note, the largest customers in both the present NNIT group and in the divested activities has confirmed it continues its IT operations contract and the current relationship under the new ownership. The business built on 3 data centers, of which we own 2 ourselves. These 2 data centers will be part of the transaction in addition to 1,500 talented employees in Denmark, China, the Czech Republic, the Philippines, who would be transferring to the new business. We have been working closely with Agilitas to ensure that the transfer is well prepared and will be conducted in the best possible way once we are able to close the transaction. This work will continue, and we will establish a separate legal entity with a view to transfer all our activities to this entity following a close dialogue with our customers and appropriate parties to address all the commercial, HR and legal aspects. In doing so, we will pay special attention to avoiding any disruption in our daily operation as customer satisfaction and employee retention are key focus areas to us. The market for infrastructure operations solution is increasingly being consolidated, and we believe that IT operation will thrive as a dedicated outsourcing business unit under Agilitas' ownership. We have been pleased to learn from our discussion with Agilitas that they are very committed to growing the business and building an even stronger offering of services and solutions based on their insight and experience from the Danish IT infrastructure market. Please turn to Slide #5 and a glance at the NNIT of the future. We have set out to establish a specialized IT services provider, focusing on the attractive growth areas in Life Sciences Solutions and Cloud & Digital Solutions business areas. The divestments announced today enable us to pursue this ambition aiming to accelerate growth and improve profitability for NNIT in the future. After closing, the new NNIT will have around 1,650 employees in Denmark, Germany, the Czech Republic, Switzerland, the U.K., Ireland, U.S.A., China, the Philippines and Poland. The continuing activities generated pro forma revenue of DKK 1.5 billion. The 2 continuing business units focused on the life sciences customers in Europe, Asia and the U.S. as well as private and public customers in the Danish market. The first business unit is Life Sciences Solutions, with around 850 employees providing high-quality, regulated IT solutions for the global industry. The Life Sciences Solutions generated around 49% of revenue in the continuing business in '21, with great growth prospects going forward. The other area, Cloud & Digital Solutions, has around 800 employees, delivering business-critical applications and cloud transformation services, generating roughly 51% of the '21 revenue in the continuing business and focusing on Danish corporate and international life sciences clients. Let's take a quick look at each of the business areas and our strategic priorities on the next couple of slides. Please turn to Slide #6. Our Life Sciences Solutions business is highly specialized and supports the entire value chain in the global industry, with great growth prospects. We base our offering on deep subject-matter expertise, and we will pursue the attractive growth opportunity by delivering agile services and solutions. We will also engage in further specialization in high-growth areas and leverage the trend of accelerated cloud migration. Acquisitions and new partnerships will continue to play a role in our effort to build the business going forward. The Life Sciences business unit is led by Ricco Larsen, who has been with NNIT for more than 20 years. Please turn to Slide 7, where I'll elaborate on the CDS business. CDS, the Cloud & Digital Solutions business unit, offers digital transformation solutions centered around applications, which include Microsoft solutions, SAP solutions as well as cybersecurity solutions and custom application development. We also provide Danish customers and international life sciences clients with digital business consulting. The CDS business unit holds good growth potential. To fast track growth, we will sharpen the focus on application-centered solutions, where we have an edge and where we were able to build critical mass and strengthen our offering. We will also build our cloud capabilities further to support our customers' data-driven journey into the public cloud. Kasper Søndergaard Anderson is leading this business unit and has done that for more than 10 years. Pernille will now share a few comments on the divestment of the IO business on Slide #8.

Thank you, Pär. Yes, we signed the agreement with Agilitas today, and we're now entering a transition period, which we expect to last around 6 months. During the transition period, we will plan the structure of the activities included in the deal. All activities and employees will be transferred to a newly incorporated Danish legal entity in accordance with relevant legislation. As you will recall, we, last year, consolidated our infrastructure activities in a dedicated business unit, Hybrid Cloud Solutions. So in terms of organization and people, much of the carve-out work has already been done. When it comes to contracts and legal entities, it is a bit more complex, but we and Agilitas have agreed on a very comprehensive separation plan, outlining a number of checks that will be activated during the transition period and completed by closing. The plan also includes certain milestones, which must be met before closing without material adverse changes to the divested IO business and NNIT's continuing business. We have made it a priority to personally inform all customers, and in the days and weeks to come, customer dialogue will intensify to clarify how to best proceed with the transfer. We will also enter into a close dialogue with employees and other stakeholders to address potential concerns and ensure a high level of customer and employee satisfaction throughout the process. It is a key concern for us and for Agilitas that we are able to complete the transfer in a way that does not interrupt day-to-day operations for our customers or has a negative impact on employee retention. A customary in this type of deal, we will, of course, also wait the relevant regulatory approvals. Let's move to Slide 9, and the financial aspects. As Pär mentioned, we have agreed on a purchase price of DKK 1.5 billion on a debt-free basis. Net proceeds will be adjusted for debt, working capital and potential EBITDA variations at closing. Net proceeds will further be adjusted for the payment of carve-out and separation costs as well as taxes related to the divestment. We currently estimate carve-out and separation costs at a level of DKK 200 million. We will book these costs as special items this year. Net proceeds will be paid in cash and through a vendor loan note of up to DKK 200 million to be repaid no later than 6 years after closing. Slide 10, please, and the outlook. The divestment of the infrastructure operations has a great impact on the structure and financial results of our company, and there are still some moving parts before closing. The divested activities will be classified as discontinued activities going forward. And the exact outcome of the deal is not 100% certain at this point. Due to the massive changes and the few unresolved issues, we have decided to temporarily suspend guidance for '22. We expect to introduce new guidance for the continuing activities during the second half of '22 as we move further into the transition period and get better insight into the exact impact on business performance and financials, including revenue and operating profit. Obviously, the investment -- the divestment will also impact the financial structure of NNIT as we divest the most investment-heavy part of the group and reduce capital employed. We look forward to clarify these changes after closing. When the transition has closed, we will leverage the sharpened focus on the 2 core business units to significantly strengthen revenue and profitability of the continuing activities from '23 and onwards. Before we turn to the Q&A session, I'll sum up today's news. This is, indeed, a great day for NNIT as we've taken a major step to accelerate our strategy execution. Moving ahead, we will establish a truly focused business with 2 core areas with great growth and development potential, both business units operating in attractive markets with strong growth prospects. At the same time, we've found a perfect fit for our colleagues in the infrastructure business with Agilitas. The new NNIT will be able to capture growth in the life sciences and cloud and digital spaces, and we will be able to make targeted investments to strengthen our 2 core business units. Meanwhile, we will continue the efforts to cut costs and improve profitability levels going forward. Thank you very much for your attention. We'll now look forward to taking your questions. Next slide, please.

[Operator Instructions] Our first question comes from Poul Jessen of Danske.

Yes. Congratulations to both of you. With today's news, a few questions. First of all, on the transaction price, you mentioned the DKK 1 billion is the minimum. Does that mean from your side that if the final price goes below DKK 1 billion, then you call it off? Or is it something put in by Agilitas?

This is something, Poul, put in for us. So it is basically a clause that says that should the adjustment, which is very unlikely -- but should the adjustment fall to that level, it's at our discretion to say then we are no longer interested in carrying through the deal.

Okay. So that's the minimum price that you are heading for?

I don't want to say we're heading for it, but it's a clause that basically says to limit any kind of uncertainty that's in there like that.

Okay. And then Novo Nordisk, they have committed to maintain or keep the contracts with the divested business. Have there been any discussions with any of the other major customers of the HCS?

Due to that we are a listed company, we have not been able to talk to customers before the announcement. But right after the announcement early this morning as soon as the client got off their bed, we have been calling them. So that has started already today, and we continue during the transition period.

Okay. Then in the CDS business, part of that is -- well, DKK 100 million or so of that is going to the new entity. Can you give some insight into giving the revenue distribution of CDS you gave on the Q1 numbers? Where do we subtract this DKK 100 million of the CDS? Is that the Novo Nordisk business? Or is it across the board or where is it?

I can give some flavor from an operational basis, and Pernille can fill in with kind of the numbers. I mean because -- we are setting up a stand-alone, fully operational infrastructure solution business, and to do that, we have decided to include 2 parts, which is now outside the Hybrid Cloud Solutions. One is our SAP Basis operation, which actually is totally connected to the infrastructure business, which has application operation on SAP based on the infrastructure. That's one part. The second part is cloud, which we are transferring the cloud transformation capabilities on the infrastructure that will be part of the new company. But I think it's very important to state that within NNIT, we will keep and develop cloud capability to drive the business in remaining NNIT because that would be crucially important for our operation going forward. Pernille?

Yes. So talking to the level of revenue and debt, we haven't disclosed it, so this is something we're going to come back to when we update the information in [ August 2 ].

Okay. I was just wondering if the DKK 100 million that you take out of CDS, if that was the Novo Nordisk business, but that's not the case. That's DKK 91 million last year to Novo Nordisk on that unit.

No, no, no. Okay, then I understand it. No, it isn't.

Okay. So it's across the board of the different lines?

Yes.

Okay. Then just -- you don't give guidance, but I was wondering, in the Q1 numbers, you had 1% growth in the 2 units combined, which is well below what you had last year. At the Q1 reporting, you gave reasons like cancellation of projects in Life Science and also that the restructuring had removed focus on sales and so on. I was just wondering if we look at Q2, we should assume that there has always -- also been a lot of internal focus in these units on the separation. So should we expect that kind of negative impact in the near term as well, Q2, Q3?

Of course, I can't sort of talk directly to that, but I can sort of talk to it more general because it's a super good point, Poul. When you make a transformation like this to basically establish a sort of high-growth, high-profitability unit, then that doesn't necessarily come just overnight. We have to make a sort of a new strategy for this business and also streamline the various places, both in terms of processes and in terms of people and all of that over the course of this year. So that's going to be quite a focus for us and then the carve-out of the business that, that happens in a really efficient and fast way. So there are going to be quite a lot of moving parts. It's going to be that business that's going to be in the going-forward business that we consider really sitting in a really, really good segment. And then there's going to be the carve-out. So -- but in August, we can talk more to both in terms of where it lands size-wise and also to the profitability and the cost levels in doing this. That was a long story, so we didn't talk about the second quarter. We talked about the situation more.

Okay. And the restructuring, DKK 200 million or the carve-out cost, I was just the -- up to DKK 150 million you reported earlier as restructuring for this year, which also includes moving people from China to the Philippines and so on. Is there an overlap here? Or is the DKK 200 million on top of the -- [ for change ] to be DKK 150 million?

There is a slight overlap in terms of the offshore piece. There is a slight overlap, but we have quite prudently assumed DKK 200 million here. Relating to, for instance, the IT separation piece, that's actually the biggest part of this where we hope to be able to do it cheaper, but that's the biggest part of it. And then also looking into how can we optimize our lease, how can we optimize our sort of people front as well in this. And that'll cost something, and that's what this is. So it is -- the short of the very long answer is the majority of this comes on top of the other.

Okay. And is it cash or noncash? Is it write-downs? Or is it a cash cost?

It's a cash cost.

Okay. And then my final question, that is on everything below the gross profit of the business units is the undistributed part, and then you have all the overhead cost. How should we initially do some assumption on allocation of these costs between NNIT and the divested? Will the majority, if we do it 50-50 by revenue, the 2 units, the majority -- or how much will stay at NNIT?

So at 50-50 by the units, do you mean the Life Sciences and CDS versus the hybrid cloud?

That is the [ part ]. Yes, yes.

No, there's going to be -- it's more going to be 35-65 split with the aim to rightsize, and that's also part of the carve-out cost, the remaining split.

So the 65 is the continuing business?

Yes.

Got it. And that's both on the gross level and on the overhead?

No. Now you only asked for the gross level only, so that's what I commented on, and that relates to [indiscernible]. Yes.

Okay. And what about the sales distribution and admin? How is the split there between the 2 units?

Well, I think we have talked about what the new unit looks like. And that is -- and I can sort of refer to that, right? So we have talked about that the new unit has, what did we say, DKK 1.4 billion in '21, and that is what we are divesting. And we've also talked to 2 other units. So I think that, that you should rely on as a split.

So it's a 50-50 on the sales distribution and admin?

Now you are down on the sales distribution and admin expense.

Yes, down right there. The overhead cost down.

Yes. So the way -- so to be helpful on that call. So the way we are doing this is we are setting up 2 brilliant companies on both sides of the fence here. And as a first, we carve out the business, and we set up the optimal structure for SG&A that you're talking about for the carve-out business. And then we look at the continuing business, and we do the same there. And as a start, the carve-out business will have less costs than -- it's lower than the 50-50, and that's where I meant 35-65 is the split, percent.

Okay. So that's both for the gross cost and for the operating expenses then?

No. So again -- so you were talking about the administrative expenses, and I said for those, they are that split but not, of course, for the whole delivery.

Okay. And CapEx -- sorry, depreciation, that's the business unit? That's the divestment?

That's the majority [ I'm telling ]. Yes. Yes.

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

Congrats to the deal. I have a couple of questions here. I'll do one at a time. Firstly, on the divested business, could you sort of indicate how much CapEx going forward for the continuing business?

Yes. I mean we have previously talked to that the majority of the CapEx of the business sits in the infrastructure piece. So if you look at the continuing business, that's going to be CapEx related to, of course, certain sort of new development of services and then also new IT systems and those -- and we are -- so it's going to be very, very -- it's going to be quite limited compared to the total business.

Is it possible to give us an indication on the CapEx level as percent of sales going forward?

Well, we haven't actually made those specific calculations, but I think you can assume that to the tune of 80%, the CapEx is Hybrid Cloud Solutions CapEx.

Okay. Cool. Clear. And my second question here is I understand, I mean, after divestment in IT, we're transforming to an IT consultancy house with quite a concentrated exposure to life science sector. Do you see it as a risk? Do you see any risk? Could you maybe comment a bit?

On the risk of the focus or...

Yes. Having so concentrated exposure.

So basically, this is what you also see other companies doing with quite great success. So with this, there is an ability to actually focus on the consultancy piece and talk to the customers eye to eye on that level. The IO business or the Hybrid Cloud Solutions business is very different to this. So we don't today see a risk in this in terms of going forward. It's also really important to state that there will be a close collaboration with the Hybrid Cloud Solutions business still even though it's under a different ownership. And that's, of course, very important for everyone, all the stakeholders. So the fact it's under different ownership, we believe actually is only positive.

Okay, clear. And for the continuing business, how much is going to be the recurring revenue, if any?

So what we have listed in our release is basically that we are taking out the revenue, which this year is more like DKK 1.3 billion and DKK 1.4 billion, and the rest sits basically with the Life Sciences and the Cloud & Digital Solutions business, where we also listed the revenue levels in '21, and that holds. So the DKK 850 million for Life Sciences Solutions and the DKK 750 million for Cloud & Digital Solutions for 70 -- or for '21 as a base of which to grow is exactly what we want to do with the sort of higher growth levels in the Life Sciences Solutions and higher margins and then followed by Cloud & Digital Solutions. So that is where we see that business going with that focus.

Sorry, I think I haven't been so clear. So my question is regarding the recurring revenue for the continuing business. I understand that you're transforming to an IT consultancy house, and let me put it another way. So how long time in the contract?

Yes, I understand completely, sorry. So with -- when we look at our backlog, the -- I cannot provide you a specific split right at this minute. But it's quite clear that the backlog for the Hybrid Cloud Solutions business is, of course, much more firm because it's service level agreements and long-term service level agreements. This is also what you have seen that the consultancy business basically has shorter contracts. So there's going to be a lower backlog ratio than for this business than the other quite very significant. But what exactly the level is, I can't give you that at this minute.

Okay. Fair enough. And could you maybe indicate a bit on the growth rate over the past couple of years for the divested business, if you can give us any indication?

Yes, the divested business has had quite a reduction -- a very significant reduction in revenue -- are there somebody in the background? So that has had a very significant reduction in revenue, which is also what has impacted the total business. And it has also -- yes, so it has had that. But of course, with the latest wins, that, we definitely see changing. But if you ask historically, there's been some reductions, both with Novo Nordisk and with DSB and all of what we've previously said. But now we have some significant contracts going in there.

Okay, clear. And my last question is regarding your revenue exposure going forward. Do you still have a little bit of Novo Nordisk and also Danish public and the private segment? Could you give us an indication on revenue exposure to the business [indiscernible]?

Yes, I don't know whether that's a revenue exposure way, but the -- what's handed over -- or not handed over, but what's sold to Agilitas is the infrastructure agreements like [indiscernible], and everything that has to do with consultancy for Novo Nordisk sits in the continuing NNIT, so there's that. And it's basically the same with private and public that the large contracts -- the infrastructure contracts go over, and then the rest sits here. So it's that split.

[Operator Instructions] Our next question comes from Mads Quistgaard of Carnegie Investment Bank.

Yes. I just had a question on your backlog and because you have signed contracts worth around -- I think it's DKK 1.7 billion to DKK 1.8 billion in the public sector in Denmark this year. So your backlog looks extremely strong. But can you give any indications about the value of the backlog, which is including in the CDS segment and how much which is part of the Hybrid Cloud Solutions?

I would like to follow up on that, rather, than give it to you now, Mads. But it is true. The backlog, it is kind of -- it's the fundamentals of the business, isn't it, that the backlog is much stronger in a long-term service level agreement within the infrastructure. So the specifics on the split there, I'd like to come back with.

That's fair. And then also, you signed a major contract with the National Bank of Denmark some weeks ago. And I guess, obviously, [ that's not ] been informed about this transaction. You also serve some financial institutions in Denmark, which you like sort of 100% local and national position in a market with mainly global players. So what do you see sort of a risk on this deal that there will be a lot of negative customer feedback with the acquisitions -- you had a divestment to a U.K. player?

I'm still going to answer this one because Pär is now busy with the customers. So the feedback we've had so far, I can say, from the large customers has been positive. So -- and it is presented, and it's meant to be this that the infrastructure business is continuing with a strong financial backing and a really competent CEO and team and with the team from NNIT that has been there all along. So there won't really be a disruption, and there's going to be a strong collaboration. It's going to be a Danish legal entity that takes the business over. So really, there's not -- I think there's not going to be a lot of that. And also the entity is going to be quite strong financially and structured. So yes, so we have thought a lot about that when we made this agreement and chose the partner.

Our next question comes from Poul Jessen of Danske Bank.

Yes. It's just a follow-up on the purchase price, the DKK 200 million vendor note that you're going to give. Is -- when you say this minimum price of DKK 1 billion, is that to be subtracted from that? Or is that including that?

The DKK 1 billion is the enterprise value. So you need to subtract debt from that.

So that is -- when you give it, then you get DKK 800 million cash if we assume the lowest price?

Yes.

But then you will get it back within the next 6 years?

Yes. And we also have an interest on it and all of that. But again, Poul, we had to mention the DKK 1 billion here and this because that's the NASDAQ rules, but it's not what we are going for.

No, no, no. It's just if you want to take worst case scenario.

Yes, yes, yes. That's fair.

Okay. Yes. And then coming back to clients and the previous question, do you assume that there would be any problems with this requirement for some clients that it should have hosting within Denmark? I'm just thinking that central bank was doing KMD before, which actually is Japanese-owned, and other banks have outsourced to India and other places. So it should not be a problem.

And you know what, if we thought it was a problem, we wouldn't have done it. So we don't -- we think it's absolutely fine, but we have been very careful in going across all sort of legal aspects and GDPR and all of that when we have set this off. It has been looked through in careful detail. And so we don't expect any issues actually with this.

A final one, with the Chinese employees and the migration to Philippines, how many of these people are being left at your business? Or how much is being divested?

Yes. Yes. So basically, we -- as we've communicated on the offshore piece, we take all the offshore in China. We take that and transferred to the Philippines. And in that -- in doing so, we also rightsized at the same time. So the idea here is that we both reduce the number of -- in number of people and processes and all of that and doing that. So we make it very efficient. And that's on both sides of the fence. What's left in China is a smallish IO business that mainly relates to Novo Nordisk, and then there is a local Chinese business that sits within the life sciences area. And those -- the one piece is going over to Agilitas and the other stays with NNIT as the life sciences offering.

[Operator Instructions] At this time, we currently have no further questions. I'll hand back over to Pernille Fabricius, CFO, for any closing remarks.

Yes. So let me just close off here. So we just thank you all for your participation today and also at any point, just feel free to contact me for any further questions. So there's nothing further from this end. Thank you.

Thank you all for joining today's call. You may now disconnect your lines, and have a lovely day.