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

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the NNIT Q1 2023 Results. [Operator Instructions] I would now like to turn the conference over to Par Fors, CEO. Please go ahead.

Thank you very much, and welcome all of you to this call about NNIT's results for the first quarter 2023, and a brief introduction to a focused business after completing the divestment of our infrastructure operation just last week. My name is Par Fors. And with me today, I have our CFO, Carsten Ringius, by my side. We are both really excited to cover the highlights of this quarter, and finally being able to add color on the new NNIT after months of working and waiting time. We also look forward to taking your questions after the presentation. Please turn to Slide 2, and a high-level introduction of our new business. We have mentioned before that in '22, was a truly transformational year for NNIT as we signed a deal to divest our infrastructure operation. On April 28, we finally announced that the deal has been completed, and we have now officially set out a new course and embark of a new beginning for NNIT. This means that we have sharpened our focus and emerged as a leading provider of IT solutions to life science internationally and to the public and enterprise sectors in Denmark. These areas are our home turf, and we are building on almost 30 years of NNIT legacy, as we pursue new and ambitious targets as a dedicated people-centric and international consultancy. Please turn to Slide #3 for a few comments on our future of our company. When we look upon the future NNIT, we will be an industry-leading employer and a solution provider of specialized consulting services in international life science and in public sector Denmark. We are a people company. So it all starts with our people, where we need to continue to attract the best possible people and build up on the strong legacy -- the power legacy of NNIT. We're going to be a leading international life sciences provider built up on the solution we already have today, where we are full services providers to all the steps in the value chains of pharmas companies around the world. In parallel, we are going to build even deeper specialization around public sector Denmark. This is a sector that NNIT has been in for many years. But during the -- thanks to the great wins during the last out years in public sector, we have significantly strengthened our position, and we will continue to build up on that. Of course, in parallel, we are also in Denmark delivering services to the enterprise sectors, which is industry agnostic, and we will continue to do that as well. But from an industry perspective, we will continue to invest to build deep sector expertise within public sector and in life sciences. The new NNIT will also be a truly more international company. For instance, our Life Sciences business will have a large part of this business outside Denmark, and we really see a true avenue of growth. Then of course, also the public sector will also be important. But overall, we're going to be a much more international company with a more international management team. As a consulting company, we will be much more commercially steady, as the sales of our services will be driven much more by our people than by a sales organization, and we will, thereby, simplify the way we operate our business, and we're going to continue down the avenue where we are considered easy to do business with. Please let's move to Slide #4. Several conditions are in place to make us succeed in '26 -- sorry, no -- yes, succeed in '26. First of all, we have the best possible foundation in our talented people, values and culture. We are 1,700 skilled employees across our markets, and we are focused on offering an industry mastery with a business-first approach to digital solution that really works. This enabled us to further offer superior quality in all our solutions, wrapped in an easy and efficient customer experience. Secondly, our markets are globally attractive, we're offering new business based on long-term macro trends that are relatively resistant to economic fluctuations, meaning the Life Sciences Solutions and the public sector. Thirdly, our problem-solving skills and our ability to navigate complexity are highly demanded by clients facing increasingly challenging environment and tough regulatory demand. Finally, we are ready to have a strong and satisfied customer base that allow us to aspire for more on a very solid foundation. All in all, this condition form a solid starting point and enable us to build a great people company recognized as a best employer and digital partner to companies and organization, where the quality of life is at our heart. Let us briefly turn to Slide #5, please. If you look at the NNIT world map, after the divestment of our infrastructure business, we have a new world map in front of us. We want to build a truly international organization and follow our customers as they expand globally, as we have done in the past, where we have good base with activities and teams across Denmark, the rest of Europe, Asia and the U.S. We are in a market where we like to be, and we -- from there we will grow. Please turn to Slide #6. Based on our roots in Life Science, we have established a clear competitive edge in industry characterized by strict regulatory demands and a higher level of complexity. That is our DNA. This is why we have carefully selected 3 industries where our competencies can be put to good use and deliver great value to our customers. The global life science market is a strong hold for NNIT. That's our cradle. And this offers great works puts growth potential as the appetite for digitalization of our customers' value chain is constantly increasing. We are already well positioned in this market, and we will continue to pursue growth with existing and new customers in a global context. We have successfully applied our special competencies and ability to navigate complex environment for several Danish customers in the public segment. The public market in Denmark offers a strong potential for NNIT, and exciting assignments are crucially important to the development of our society. We will sharpen our focus on this market, and develop our position in the coming years. Finally, we will also serve the Danish enterprise sector with particularly demanding IT needs by continuing and accelerating the positive development of SCALES and building on the strong brand value and their position. As our customers and their markets very significantly, we will, of course, provide bespoke solutions based on the best suited content technologies, drawing on that experience and competencies available across our partner ecosystem. This snapshot of NNIT provides a high level of our aspirations, the assets available to us and the arena in which we have chosen to compete. This is a true turning point for NNIT, and we are confident that we are on the right track to successfully pursue growth opportunity across our different markets. On that note, please turn to Slide #7 and a summary of developments in Q1. We delivered solid performance in the first quarter of 2023, and we are pleased to report revenue growth of 16% with a good 11% organic growth. Revenue increased to DKK 413 million. It was the highest level for the last 5 quarters. While this is certainly encouraging, please do note that the first comparison quarter in '22 was marked by slower -- rather slow sales. Still, we note that the positive performance was driven by higher activity and a positive development in both Life Sciences Solutions and Cloud & Digital Solutions, most notably the Danish public sector. This is important and serves to underline the good trajectory and potential across our business units. We were also pleased to report positive development in earning and profitability for the quarter, as operating profit and the margin before special items increased quite significantly on the back of higher activity and utilization level. This was realized despite the negative impact of a higher cost base until the separation of the infrastructure operation has been completed. Special item came to DKK 20 million this quarter, attributable primarily to earn-out payments related to acquisitions in earlier years. To sum it up, we did well in the first quarter of 2023 and delivered solid results. We will continue on this track and face a lot of hard work to unlock the full potential of NNIT in the years to come. Let us now move to Slide #8 and Carsten's brief review of the business unit performance.

Thank you, Par. Our Life Science business continued the positive trajectory with revenue picking up significantly from the beginning of 2022, which was relatively slow. Revenue grew by 14%, of which half was organic and the rest can be ascribed to our addition of prime4services in March 2022 and positive currency effects. Gross profit and earnings improved significantly, though as the business benefited from a much higher capacity utilization. On the back of higher activity in the quarter and capacity adjustments completed during 2022. The operating profit margin exceeded 10%, and we see a continuation of the positive trajectory in the Life Science unit. It was encouraging to see the Life Science business win several extensions of current contracts as well as new long-term customer engagements during the quarter. This contributes to the strong foundation for Life Science in the quarters ahead. Performance was particularly strong in R&D and manufacturing, and we look forward to continuing on this track. Please turn to Slide 9 and the Cloud & Digital Solutions business. Performance was strong in CDS, with very good progress being made in the public sector part of the business. The business unit delivered reported growth of 19% and organic growth of 16% as we delivered on a number of major public sector contracts won during 2022. And development in Q1 was a continuation of the positive trend seen over the course of the last couple of quarters and revenue reached DKK 173 million. The solid growth and high activity level had a positive impact on earnings as well. And the operating profit margin came to 5.6%. There is certainly still room for improvement, but we are on the right track and have great confidence in the expectations for the CDS business as a key pillar in the new and more focused NNIT. We also secured significant new contracts and renewals in CDS, where we closed a couple of public contracts, which will have a positive impact on 2023 to 2025. Let's turn to Slide 10 and some selected key figures for the last 5 quarters based on today's trading statement. Consolidated revenue grew by 16% to DKK 413 million based on organic growth of 11% supplemented by acquisitions and positive currency effects. Gross profit improved significantly to DKK 64 million from a low base in Q1 2022, which was impacted by slow sales. The gross profit margin improved to 15.5%. The operating profit improved significantly to DKK 20 million before special items corresponding to an operating profit margin of 4.9%, following stable sales and marketing cost as well as administrative expenses. In addition to the quarterly figures, we have added a bit more color on the outcome of the divestment of the infrastructure operations in our trading update today. The purchase price for the divested operation is DKK 1.35 billion on a debt-free basis after EBIDTA adjustments at closing. In line with expectations, the cash impact of the transaction adjusted for net debt and working capital, carve-out and separation costs as well as tax and adviser fee, it seems to amount to DKK 1.288 billion. This includes a vendor note of DKK 200 million, which will be repaid no later than 6 years after closing. We have settled our revolving credit facility after receiving the proceeds and secured refinancing for an interim period until we have negotiated new long-term facilities. Please turn to Slide 9 for our 2023 outlook and closing remarks from Par.

Thank you, Carsten. We are maintaining our revenue and earnings outlook for '23 today and look forward to being able to lever to sharpen focus in the 2 core business units with the ambition to significantly strengthen revenue and profitability of the common activities. We still see strong performance in Custom Application Management and production with good effects on both business units, but 2023 will still be impacted by transition costs. The second half of '23 is expected to be less impacted by these costs, and performance will improve in '24. Revenue growth is still expected around 10%, assuming stable currencies and we aim for operating profit margin before special items around 5%. As mentioned, profitability will be negatively impacted by stranded costs related to the carve-out. We still expect cost of up to DKK 180 million in '23, relating to carve-out and separation activities, earn-out payment acquisition and restructuring costs to right size organization after closing. We now expect to book DKK 70 million of those costs as special items, with the remaining amount being reclassified as part of discontinued activities. The main part of these special items are expected to relate to earn-out payments in connection with completed acquisitions, while restructuring costs will be significantly lower. Please also note that we have appealed to the Danish Business Authorities concerning the -- our earn-out payment. Our prospects for profit growth in the coming years are unchanged and we look forward to improving performance on the transition of all support and back-office assignment has been completed. Thank you very much for listening today. We look forward to taking your questions. Next slide, please.

[Operator Instructions] The first question is from the line of Poul Jessen with Danske Bank.

I have a number of questions, which come randomly. I was just wondering going forward, reporting structure, will that be the 2 business lines? Or will you give subsegments as you did in the past?

Well, going forward, once that we have fully completed the new commercial organization in our reporting structure, we will provide more details as to how we perform on a regional level.

Poul, we are now launching a new revised organization, where we will have 4 P&Ls based on our regional structure in Denmark, Europe, U.S. and Asia.

Yes. You were in the media, I think, 2 days ago discussing the 4 regions. And as I understand it, you have 3 regions, which are covering the Life Science, and then 1 covering CDS Denmark. I was just wondering, how the 3 region are going to work together, both that you have 3 progressional regions? And then you have a number of companies below that. How are they going to cooperate on larger wins? Or are they going for local wins in each of the area?

Now if you took on the commercial level, how is it work in the organization from a business perspective, the vast majority of our deliveries are delivered in either China or in Singapore in the U.S. or Europe. There are not a large amount of deliveries that goes across the organization. But there are some, and we have high ambitions to also be able to win the larger deals that goes across the regions. Therefore, we have 2 horizontal support functions, firstly, coordinating our sales and account management; and secondly, also to coordinate that -- and make sure we do an efficient solution development. So we don't reinvent the wheel in the 4 different -- 3 regions, the 3 life sciences regions. So I think we found the right balance, how we would drive this with client proximity, where we align the daily delivery in the regions closest to the client, and while we still maintain the ambition to also go for the large deals.

Okay. And if we take the proceeds of DKK 1.288 billion, and you say that the DKK 200 million loan facility to the acquirer is included. I just want to be certain. So you have DKK 1.088 billion available for yourself and the rest will that be receivable or interest-bearing asset on your balance sheet for the next 6 years?

Yes, that's correct.

That's correct, you said.

Yes, that's correct. We will have this lender loan note up to 6 years on our balance sheet.

Okay. And when you take the -- you put DKK 110 million from the restructuring, which you had announced earlier, and you take those into discontinued operations. Will there be any negative future cash impact from when they are being realized? Or are they -- that's included in the DKK 1.288 billion?

That is included in the DKK 1.288 billion. It's the net expected cash proceeds.