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

Ladies and gentlemen, welcome to the NNIT Financial Report 2022. My name is Glenn, and I will be the moderator for today's call. [Operator Instructions] I will now hand you over to your host, Par Fors, CEO and President of NNIT to begin. Par, please go ahead.

Thank you, operator, and welcome to our earnings call about NNIT's full year results of 2022. My name is Par Fors, and I'm pleased to be able to introduce Carsten Ringius, who joined us as CFO in December and is by my side today. We look forward to sharing some highlights of '22 and providing a bit of background for the guidance for '23 before answering your questions. Let us turn to Slide 2 with a brief overview of the agenda for today's call. The first point of the agenda is a few highlights of '22, which was immensely busy year for us in NNIT. We will follow up with comments on the strategic direction we are taking after the contemplated divestment of our infrastructure operation. After that, I will provide an update on the performance of our 2 business units, which comprise the continuing activities of NNIT. Carsten will then briefly describe how we have allocated revenue and cost between the segments before zooming out and taking us through the Group figures. I will close the presentation with our outlook for '23 before taking your questions. Please turn to Slide 3 for the highlights. '22 was truly a transformational year for NNIT. We set out to accelerate the strategic journey, improve our results and enable profitable growth in the years to come. These efforts culminated with the announcement of the divestment of the infrastructure operation in June. We are divesting roughly half of our business and have dedicated significant resources and a lot of time to ensure good progress and complete the necessary carveout activities and also obtain customers and authority approvals, among other things. As announced this morning, we now expect closing to be completed in the first half of the second quarter as the Danish -- Business Authority decided to extend the deadline for its FDI approval until the 17th of April. The carveout is progressing. We have obtained authority approval, and we have an ongoing and constructive dialogue with our lenders about the postponement. We look forward to taking the next step and the -- of the sharpening of NNIT's profile. Early in the year, we took steps to streamline our outsourcing organization in the Philippines. We were pleased to successfully complete the initiative during the first -- fourth quarter and expect to see the full effect from Q1 this year. This move entailed higher staff cost during '22, but it will strengthen our global delivery capabilities, streamline operation and contribute to ensuring lower salary expenses and improved profitability going forward. We are -- we see good growth opportunities in the production space and boosted our capabilities by the acquisition of prime4services, which is a leading European manufacturing execution system provider. The team has performed well since acquisition, and we expect further growth and progress in this year in the coming years. Finally, we were pleased to report a number of great wins during '22 as this provides a solid foundation for our growth in the years to come. This includes substantial contracts like with ATP, Denmark's National Bank, the Danish Health Data Authority, the Agency for Higher Education and services and Lantmännen Unibake, among others. We also ensured engagement and renewal with strong traction within Regulatory Affairs, clinical and Production IT. We will be focusing less on our order backlog after the divestment of the infrastructure operation, though as our continuing activities are mainly centered around consultancy services. On that note, please be aware we are presenting financial figures for our continuing operation in this presentation and the annual report and that these figures are impacted by the carveout process and allocation to discontinued operations. The underlying business performance was marked by a slow start of the year and improving performance in the second half. On that backdrop, we posted a revenue of DKK 1.5 billion and a 10% growth driven by acquisition and currency effect. The gross profit and operating profit before special items improved versus '21 with special item increasing as well. Let us take a look at the strategy on Slide 4. The course is set for us to create a specialized IT services provider and center of focus and investment competencies and sales forces around the 2 core business areas: Life Sciences Solutions and Cloud & Digital Solutions with strong growth prospects. We are now eagerly awaiting the delayed FDI approval from the authorities and look forward to closing of the deal in the first half of the second quarter. Life Sciences Solutions will continue to pursue strong international growth within the full Life Sciences value chain. The business units will maintain its focus on developing and delivering the best digital solution to address the fast-growing global market. This focus area includes assignments within regulatory affairs, clinical development, quality management, drug safety, medtech, production and laboratory. Our team is supported by a dedicated partnership with leading solution provided such as Veeva Systems. CDS will focus on the Danish market, specifically within the public and enterprise sectors. The business unit draws on our comprehensive experience from highly regulated industries to deliver tailored solutions for public sector clients. We will, of course, go specifically on central and regional government opportunities with key service, including Custom Application Development, cloud services, dedicated business consulting and security services. In addition, we will cater to larger enterprises with complex IT demands. This will mainly be in segments such as manufacturing, utilities, transport and finance. We will continue to focus also Microsoft-related services and leverage scale, unique position within Microsoft Dynamics 365, finance and operations. The 2 focuses on these 2 core business units will make NNIT an increasingly international people-centric consultancy business and enable us to run asset-light business models going forward. We are certain that our best experience from highly regulated industry will give us a competitive edge we need to succeed with our clients and deliver improved results in the years to come. Let us turn to Page -- Slide 5, please. About Life Sciences Solutions. As mentioned on previous calls, the Life Sciences business unit had a slow start of the year. We took step to lift the activity level and improve utilization, and we saw a pickup in the second half of '22. Supported by acquisition and currency impact, we generated 20% growth in Life Science, reported revenue of DKK 873 million. The improved capacity utilization was a result of higher activity and capacity adjustment completed in Q2, which had a positive impact on the gross profit for the full year. Still, the business unit's operating profit took a hit in '22, and we are focused on delivering improvement in the coming period based on the positive impact of capacity adjustment and increasing activity. Life Science won several orders during the year and strengthened the business unit position, the attractive areas of production and regulatory affair in the Life Sciences space. Please flip to Slide 6 and the CDS business. The continuing business in CDS generated stable revenue in '22 and delivered solid performance in the last quarters of the year. The business unit increased sales to Life Sciences customers and remains on good trajectory. We took steps to improve capacity utilization in CDS in Q2 as well. and we improved gross profit and operating profit as a result of these efforts. The gross margin improved throughout the year and reached 16% with the operating profit margin coming to 7.5%. We will continue to improve profitability going forward and maintain our focus on costs, while ensuring CDS is able to accommodate demand and drive growth. The CDS team won several orders in the custom application development field and did well in China and Denmark in particular. Carsten will now provide an overview of the segment information after the split into continuing and discontinuing operation. Please turn to Slide 7.

Thank you, Par. I am pleased to take part in this presentation today after spending the first basic 4 months here at NNIT and meeting our employees, customers, analysts and not least, investors. I look forward to building relations with all stakeholders in the coming years. As Par mentioned, the infrastructure business has been classified as discontinued operations in our annual accounts, we are, therefore, presenting and focusing on continuing operations in our annual report and today's presentation as this is aligned with our internal reporting. The continuing operations are comprised of services delivered to the 2 LSS and CDS business units, which Par just provided comments on before. In addition to these activities, we have specified activities that are allocated to the discontinued operations, including parts of the CDS business unit also included in the transaction. Finally, this item includes unallocated costs related to the carveout process and reflects a reclassification between production cost and SG&A. The table on this slide and in the annual report outlines the steps from continuing business units to consolidated Group figures and highlights the significant stranded costs impacting our business in a transition period. With this, let's move on to Slide 8 and Group financials. 2022 consolidated revenue grew by 9.6% to DKK 1.5 billion, mainly driven forward by the full year effect of the acquisition of SL Controls in 2021 and the acquisition of prime4services in early 2022. Currency effects had a positive impact on revenue as well, and organic growth was negative by 1% after the slow start to the year mentioned by Par earlier. Gross profit improved to DKK 151 million from a low base in 2021 with both years being impacted by the stranded cost related to the carveout of the infrastructure business as mentioned before. The gross profit margin improved by 1 percentage point to 10.0%. The stranded cost also impacted the operating loss of DKK 7 million before special items. We booked special items of DKK 278 million in 2022, mainly related to the relocation of global service delivery center from China to the Philippines. Costs related to the carveout and impairment of headquarter building. Following a recent ruling by the Danish Business Authority, we were furthermore required to reclassify and include employee benefit costs as part of contingent consideration agreement previously recognized as goodwill. All in all, we reported a net loss of DKK 258 million for the continuing operations in 2022. We obviously look forward to improving these figures quite significantly as the impacts from the carveout and stranded costs paid out. On that note, Par will now share a few comments on the near-term guidance. Please turn to Slide 9 for the 2023 outlook.

Thank you, Carsten. We are presenting our outlook for '23 today after introducing the continuing operation under the assumption that we closed the transaction in the first half of the second quarter as expected. We look forward to being able to leverage the sharpened focus of the 2 core business units, with ambition to significantly strengthen revenue and profitability of the continuing activities. As the carveout has dragged out and postponed closing, we expect '23 to be somewhat more impacted by the process and transition costs than expected back in June. Still, we expect to be up to speed during the second half of '23 and improved performance in the full year of '24. For '23, we expect to continue the solid trajectory we are seeing in Life Science and CDS to generate revenue growth of around 10%, assuming stable key currencies. This positive traction in sales and our continued improvement of utilization should entail higher profitability, resulting in an operating profit margin before special items around 5%. As mentioned, profitability will be negatively impacted by stranded costs related to the carveout. Special items are expected to amount to up to DKK 180 million relating mainly to carveout and separation activity as well as restructuring costs to rightsize the organization after closing. All in all, we see potential for improvement in '23 despite the postponed closing, and we see prospects for profitable growth in the coming year when the separation is completed. And the transition of support and back-office assignments have been completed. Thank you very much for listening in. We now look forward to taking your questions. Next slide, please.

[Operator Instructions] We have our first question comes from Poul Jessen from Danske Bank.

I have a few, just take them randomly from one end, starting by guidance. Special items, you say, DKK 180 million. The split of those is that about DKK 120 million on carveout costs. And when you say earn-out and then how much is continued restructuring, just roughly?

So restructuring is -- you're correct on the carveout that's estimated to around DKK 120 million and the restructuring part, we assess in the vicinity of DKK 30 million.

And then third is for carveout -- sorry for earn-out?

Yes, that's our current estimate.

On the guidance then, where you say 10% growth, can you give indication on what you see for Life Science and CDS, respectively. Is that the same level 10% each?

Well, if we are looking at the combined business, we are talking about 10%, but what we will do before the next quarterly release is that we will send out a seasonalized -- or numbers on the 2022 numbers. As of now, we only have this discontinued and continued split produced on full year numbers. So before the next quarterly release, we will send out continued business with seasonality, allowing you to see the development on a quarter-by-quarter basis. As of now, we are guiding as a total on the continued business. And here we say around 10%.

And maybe Poul, I can just elaborate this. Generally on what has happened in '22, I mean we have been very successful in winning a number of deals in the public sector which has created a good foundation for growth in our CDS business here in Denmark, while we also continue to will -- and that also long-term business, so to speak, running over multiple years, as we announced in the press releases. And then in parallel, we also have been -- continue to win many smaller deals in many different areas, not the least Regulatory Affair and Production IT within Life Science. So it's -- it's a solid sales performance in '22, which we will reap some of the benefits from in '23.

The reason I ask is that if I try to do the math on the wins you reported last year and you referred to earlier. And I would assume that there would be up to some 15% addition to the CDS. And that's actually on a base that was larger than what we achieved from. Therefore, it should be higher. So if you guide 10% for the Group. And I would see CDS based on the wins being higher than Life Science should grow less than the 10%.

Yes. As of now, we are guiding as a total for the coming year. And we, as Par mentioned, are in a transition year going forward also into 2023. And once that we have the seasonality provided on the continuing business, we will provide you that information. So you have a better data foundation for actually assessing the growth between the 2 continuing business units.

Can you give any indication on when you will be at a normal business rate, meaning that there are no more cost reduction? Where is the cost base in place so that we can see this is the normal NNIT [indiscernible] going forward?

Now with this -- Yes. Now with this delay because of the delays in FDI approval, we see this transition going into Q3 this year actually before we are at an expected cost rate, reflecting how we want to operate going forward.

Yes. Because as you know, I mentioned in the previous call from the last quarter announcement that we said that we will kind of be up speed versus midyear 2023, that I think was, I, who said it. But now due to the postponement of the deal that would be delayed with approximately 1/4.

Okay. I have several more. I'll take one, and then I'll jump back to the queue. Factoring that was under the old structure in the range of DKK 180 million to DKK 190 million. Now I see when you do the separation here that you have DKK 81 million left, and that's increasing from DKK 7 million previous year. That means I was right on the -- on my assumption earlier that the majority of the DKK 180 million would be in the now divested business. meaning that in the continuing business, you have done a lot of factoring during 2022. Would that be normal because I think -- thought factoring was more in the infrastructure business?

Well, we have the possibility of also doing it on larger, you can say, customers on the project business. But going forward on the continued business, this factoring will constitute a smaller proportion than you can say the total NNIT as of now as the discontinuing business has been utilizing the factoring to the highest extent.

And when you get the proceeds from the divestment, would you then reduce in some factoring?

Yes, we expect to be able to repay our credit facility with the proceeds from the closing of the transaction.

And that's DKK 857 million which were drawn by the end of the year?

Yes, we expect to be able to fully pay out our drawn credit facilities by the closing of the transaction.

Yes. And does that then add the DKK 81 million on top of that, so it's actually about DKK 950 million that we have to pay?

WE have, you can say, a revolving credit facility. So our actual draw is fluctuating over the month as part of our, you can say, a movement in our working capital requirement. But I can say that by closing of the transaction, we expect to be able to pay the fully drawn credit facility once that we close the deal.

[Operator Instructions] We have Poul from Danske Bank for a follow-up question.

Okay. And I'll continue. Capitalization, of course, part of the paramount and divestment of the units, will there be any capitalization of the cost in this process, which then will be maybe put in reducing a potential gain on the sale?

Well, as part of the transaction, the capitalized cost is part of the, you can say, the hype down and part of the, you can say, discontinued business. And in the continuing business, this will be to a much less extent a -- you can say, a way of dealing with costs as we are working on it and a time and material project going forward in the continuing consultancy business.

So for [indiscernible] or actual capitalization as part of the separation is already in the numbers now that will not be additional when you close the deal?

That is part of the -- you can say that the final transaction is one that we do the hype down, as let's call it, it's a rather complex transaction means containing several steps. But in the end, it will be an asset deal and the balance sheet that we are handing over will be including this, you can say, transition cost that is capitalized from the large projects that is part of the discontinued business.

The balance sheet that you have now reported today is the balance sheet that is the one we can use going forward.

That is expected, yes, there will be some -- as part of the deal, some net working capital adjustments by time of the closing, but the balance sheet as of now for 2022 should reflect the split. According to IFRS, we have not updated the balance sheet on '21 numbers, only the profit level.

Then on note 2.1, where you have the separation. I'm just trying to understand what's actually the margin here to businesses, the allocation of discontinued operations, is that only being taken in out of CDS? There's no LSS part of that.

There is a really minor adjustment to Life Science, but for practicalities, you can say that it's CDS and then unallocated cost which is part of the -- allocated to discontinued operations segment.

What I'm trying to understand, when I look into 2023, the 16% margin of CDS. Is that the ongoing business or how much should I subtract which then will be stranded cost? So going forward...

Once that we are able to give you the, you can say, the updated number on 2022, reflecting the continued business, you will be able to see that and you can say, make that part of your projections. And we will distribute these numbers before we actually release Q1. So you have that information available.

So the truth is somewhere in between the 10% reported -- a guessing level on where it actually is.

That depends on -- you can say the speed of which -- sorry, I didn't get the last part, Poul.

On the gross margin, you report 10% you have [ 18% ] and [ 16% ] procedures and then you move discontinued cost out, which I assume both the CDS, but must also be some [indiscernible] cost, which is branded in your business. Otherwise, CDS would come out with a negative gross margin.

Okay. Now I understand your question. Yes, you're correct, correct, somewhere in between.

Yes. So the CDS gross margin going forward until you get rid of all the costs is somewhere, I believe, between 5% and 10% or something?

You will be ...

18% on the LSS and you can 10% on the group, then CDS must be close to 0 or negative. So it's just to get an impression of way is the real CDS when you have completed all the separation?

Yes, I understand that. And I would really like to give you that information now, but we have to do this further split where you can actually see the development on a quarter-by-quarter basis on the 2 continuing business units. So we -- you can say -- can provide you with that information before we do the Q1 release. So you have, you can say, the right historical numbers for you to have a better assessment of what gross profit margins you can expect going forward in the 2 continuing business units.

And the 5% guidance you give for operating margin going forward, does that include further these costs which we report as discontinued -- so discontinued operation? Are there any cost in this column?

This is the total business ...

Of 5%?

The 5% is the total business operating margin.

Yes. But if I look at this for 2023 and you guide 5% margin, does that guidance include any costs in this column?

Yes, it includes everything, the entire business.

[Operator Instructions] We have no further questions from the line. I will now pass back to Par Fors for closing remarks.

Okay. Thank you for everyone who participated in today's call. If you have any follow-up question, please feel free to reach out to us. I wish you all a great day and a great afternoon. Thank you very much.