Trifork Group AG (TRIFOR) Earnings Call Transcript & Summary

Hi, everyone. This is Jorn here.

Okay. Great. So we seem ready to start. Hi, my name is Kristian Dollerup. I'm the newly appointed Head of Trifork' Investor Relations. I'll be moderating our meeting today, and I would like to welcome you to the presentation of Trifork second quarter and half year results. Today, our CEO, Jorn Larsen; and Kristian Wulf-Andersen will start by providing you a -- just take a 20-minute presentation and, thereafter, offer you a Q&A session. Before we start, I have a few housekeeping points that I would like to run through with you. First and foremost, I would like to inform you that this presentation is being recorded and will be made available on our investor web after the session. Second, I would also like to inform you that if you want to download the presentation we're having now, it has just been released on our investor web under the tab Events. Third and not least, we, of course, invite you to ask questions and engage with management after the presentation. And here, just a very quick run-through of how that works. First and foremost, you raise your hand if you have a question. You find a control to do so on your screen. And then the way we take the questions is that we will announce you. And thereafter, you will be allowed to unmute your microphone and ask a question. So before we really get started, I also quickly have to present a disclaimer. So a few seconds to look at this. Okay. With that done, I think we are set to go. I hereby would like to hand over to Jorn.

Thank you, Kristian. Thank you for the introduction. So my name is Jorn Larsen. I'm the Co-Founder and CEO of Trifork. So welcome, everyone. I'm really grateful you take your time to listen to us here today, where we will talk about our Q2 results and some highlights in our business, but also touch a little bit on where we are in the year, so the first 6 months and how that tracks accordingly to our guidance for the whole year of '22. So first of all, we have had a high organic growth in challenging times, as we have stated on our formal slide here. Here, we put it in perspective of the whole track from 2007 to present date. And at Trifork, we always look long term. We have long-term strategies. When we invest in our business development, we do it for the long run. We want to be here in many years into the future. So -- and here you can see how we have -- how we are guiding. So the EUR 180 million to EUR 185 million. And we are ballpark halfway there with EUR 91.7 million realized in the first 6 months. And let's move to the next screen. Also, what characterizes this quarter is that the whole growth has been -- almost all of the growth has been organic, and we should see it in this slide. So here are some of the main events. First of all, Inspire. You know we have been through a long period of COVID lockdown, and we have not been able to do in-person conferences. That was good in a way because then we could do digital events, and we could start digital channels such as our online community on our YouTube channel. And I'll get back to that in a moment. But now in Q2, we actually started doing a number of in-person events. They are slightly smaller than before, but they are very popular. And we have had some sold out events and the biggest one was GOTO in Amsterdam. That was actually postponed 3 times, and you can imagine what a frustration that has been for everyone. But also what a relief when it was finally done and with success. In Build, we have seen a satisfying organic revenue growth and so for the revenue, we are very happy. We are satisfied. Then if we talk about the profit in Q2, we have -- we are not quite happy. We could have wished for a slightly higher EBITDA. And we have some, we believe, onetime reasons for this to have happened. So let's look a little bit into them. It's important you understand them or we have a chance to communicate the reasons behind that. So first of all, one driver for actually having high organic growth in some business areas is that we invested in business development. So in the beginning of the year, we invested in hiring new business developers. And it takes some time before that actually kicks in and generates revenue. It did that in Q2. But also, it is a cost. So revenue and cost, I mean, cost comes first, which hurt the EBITDA. And revenue comes a little later, and then comes profit. So that is one explanation, but we believe that is a good one. Then, unfortunately, also having had a situation where people have been mostly at home. You all know that once you get out in society after a lockdown period, your immune system might not be as robust as it was before. So we have quantified this in numbers, as you see here. So on a normal year, that means pre-COVID, we had around 2% sick leave. And in Q2, it was 2.9%. And this quantified in hours. Kristian can talk about it, is around 12,000 hours for our company. So it is a considerable loss of actual revenue we could have had, but of course, also EBITDA. Then it is troubled times, and one area that is really troubled is all the start-ups around the world. They have a very hard time raising money from new investors, so they have to rely on current investors to keep financing growth for these companies. And Trifork, we in some cases, work for start-ups. And we had to write off EUR 0.5 million in working on a big unicorn start-up that unfortunately defaulted as a result of the war in Ukraine. So that is very unfortunate. It was actually a company that made good for the world and made education for kids in Asia, especially, but a big company. We have a hope that they will be reconstructed and they will become a customer again. So a little optimism there. Then we have also seen that the logistic challenges following the war in Ukraine had, had the consequence that some of our customers have had troubles in manufacturing and have to reduce capacity or cost. And in a handful of cases, that has had an impact on our revenue and, of course, also EBITDA. And finally, we have also accelerated investment in the organization with having more social event after also the lockdown. We could, of course, have anticipated that, but that has been more loaded in Q2. And normally, these social events and gatherings and the teams are distributed all over the year, but there was a high concentration in Q2. Of course, we understand that, but it's also something we expect to normalize. So that was some time talking about the consequence of our EBITDA. Anyway, let's go to Run. In Run, we have continued to invest in our facilities, and we are really ready to scale up in both Switzerland and in Denmark. And we have also characterized in Run, we have seen a high revenue growth in Cyber Protection. But at the same time, as we have also invested in sales and business development. In our Trifork Labs, we have done 4 -- or so 4 of our lab companies have had events where they received capital. We will return to that in a moment. Let's move to the next page. Okay. This is also a little heavy pace. I said most of it already. So if we look at Q2, our organic growth have been 17.8%. And for the half year, 17.8% as well. Is that correct, Kristian? It's the same number?

Yes. That's correct.

Okay, I just saw that now, that was exactly the same. As you can see here in the middle, as I stated on the first page, revenue of EUR 45.9 million for the quarter and with including Q1, we believe it is achievable to be within our guided target for revenue. The same can be said about EBITDA. And here, you can see the number, the EBITDA of EUR 6.4 million that we are not totally happy about, but we believe that with the explanations, it will normalize, and we can get back on track in Q3 and in Q4. If you look at the right, you will see that we are continuing to develop our business units in quality, in quantity and in performance. We have 25 active lab startups. We just passed the mark of 1,000 colleagues and employees. And here, you can see that despite we have started in-person events in Inspire, we still grow our online YouTube channel quite a bit. And this is our biggest channel, we actually have other channels as well. And maybe we can talk about them another day. If you look at the strategic priorities, then it really is, of course, to be opportunistic where we have good opportunities. But the main part of our short-term strategy for Trifork is more defensive It is to grow and deepen the relationship with our good and loyal customer base. And for the lab strategy, it is really to invest in lab companies that can provide business for the Trifork Group on more short term rather than long term and more about this later. So we can move on to the next. So here, you see, you probably all noticed that the Trifork Group is divided into 2 segments, Trifork segment and Trifork Labs segment. Let's move on to the next. And Kristian here, I leave the word to you.

Yes. Here we show the ratios in between Inspire-Build-Run. And as you see, compared to previous reports, then the Inspire business is now growing with at 2.9%. And the ratio in between Build and Run is more or less the same as it's been in the past. We see here that we have a 13.7% organic growth in the Build-based subsegment when adjusting for the deconsolidation of Dawn Health, I will get back to that a little later. And then also here in Build report, an adjusted EBITDA margin of 16.9%. And if we adjust for the one-off debtor write-off that Jorn just mentioned before, then it would have been 18.4%. In the Run-based business, we see all organic growth, 11.8%. And an adjusted EBITDA margin of 16.2%. And this is for the -- for Q2 here. And in Q2, we invested EUR 400,000 in the operation centers. Adjusting for that, we would see a margin of 20.3%. Back to you, Jorn.

Sorry, I was on mute. I was talking about our case story when you couldn't hear me. So here we are talking about one of our cases. So in these meetings, we also want to take one case story every time that we can explain so you get an understanding of what we are doing. So turning back the clock 22 years, and that's just to referring back to that we are long term. I actually lost a bit on this very system we are talking about here. It is so that in Denmark, there is an extensive system that monitors the safety and the quality of how patients are treated and cared for, and doctors and the health care personnel have to report any abnormality but also track the success of different treatments. And this is very key to improve quality of treatments. So -- and I just said we lost this 22 years ago, but we actually won it this year back. And hopefully, we will keep it for many years. So this was a public tender. We had a fierce competition with some of the usual competitors that we have in this space in Denmark. We won it with Trifork IP. So we won it with a product that can be used in more markets and in more disease areas. It is so that this system is already being rolled out into production for 1 disease area, but there are many disease areas, but these next disease areas will also have to be tested in a public competition. But having won the first one, we at least stand a good chance of winning some of the others that are -- that needs to go out in public tender. But you can -- we can follow that as it develops. Here, we have our 6 business areas, and I don't want to talk much about this slide. Let's move to the verticals. So when we look at the verticals, I want to highlight Digital Health because on the face of it, it is now providing 8.8% of the total revenue. And if you remember that it was exactly here where we deconsolidated Dawn out of the business. And if we take that into account, it has actually grown almost 40% organically. And so this is a very active business area. And I know the people in our company who are responsible for the business development here, they have ambitions to go double digits, again, in share. If we go to the next, to the horizontals. I want to -- let's go to the horizontals, please. Yes. There I have 2 remarks. One being that as you can see, we have a slight underperformed Smart Enterprise. And Smart Enterprise for us is digital solutions for the public and also business solutions and productivity tools for the private sector based on SAP installations with typical Apple and iOS on top. And these 2 areas has been affected in 2 different ways. For the public sector, we have been in Q1 and Q2, struggling to find enough people because it's a very specific people. They need to have working in a specific demographic, and it's something we are working on because we are not the only one having this challenge in the Copenhagen area specifically. The second one being the Smart Enterprise for the private sector. It has affected a lot by the war and logistic challenges around the world, but we have still some good wins. And we believe there is still a lot of potential for the future here. And we believe we make good progress also outside the Nordics. If you look at cyber protection, that is clearly the winner with a growth in Q2 of 28%. And for the half year, 53.3%. We are overly happy about this growth, and there is a large appetite for companies to finally take cyber protection as a serious thing, but it's still very much in the beginning as we see it. We have currently 3 business units that are focused on cyber protection. Let's move on to the next. Here is an overview of other case stories. I don't have time to talk about them here in this meeting, but you're very welcome to look them up on our website and call us for more information. If you look at the next page, the lab overview. Here, we, as you know, have mapped all our lab companies in how they support the business areas and how they support Inspire-Build-Run. I just want to highlight one here in light of time. So Arkyn Studios is a quite young company and it was founded less than 3 years ago. It was actually Trifork IP that was used as a base and also Trifork team members who were among the co-founders of Arkyn Studios together with Trifork. And this has been a very successful intense journey so far. But already now, Arkyn Studios have products in production at customers at enterprises. So companies as [ Spant ] in Denmark and [ Ale Foods ] are using these tools. The implementation partner and system integrator for these tools are, of course, Trifork, so it has generated revenue to Trifork as well. And it has made Trifork more competitive because now we can offer products and implementation of products rather than custom and development from scratch. Let's move on to the ESG update. So there is a lot to say here. I want to just highlight 2 things. One thing is that in July, we completed purchase of a forest. It is so that Trifork is concerned about our environment. We want to make sure we do our part of capturing CO2 in this world. And of course, by buying forest, we are not solving the world's problems. And you can say, well, it doesn't really change who owns a forest one or the other. But actually, it does. This forest can be developed. We can work on biodiversity, we can optimize the production and the CO2 capture on this land. And as you can see, this is an actual picture from the forest. There are also trees ready to be used in our future smart buildings. So as you can see on the next screen, if you can go there, then here is actually a rendering of our first Trifork Smart Building. That is -- how many tons of wood are we using in this house, Kristian?

We're using just about 500 cubic meters of wood, equal to 500 tonnes of CO2 that would be storage in the building.

Yes. So the users of this house, and that is ourselves and our partners, will take care of not emitting the CO2 captured in this building. This building is a story of its own, of a lot of new innovations, but also from a material point of view, from a technological point of view. And I will invite you, when we open it, to come in and have a look. We are quite proud of the progress. We have had some really challenging times to build in but we are approaching the finish line here. So very happy about that. Okay, Kristian, the word over to you.

Thank you very much. So I will deep dive a little bit more into the financial performance based on a lot of the explanations that Jorn told you before. So yes, I will give a little more details here. This is more or less the same as Jorn presented in the beginning. The only comment here is that we see our division or ratio in between private and public sector of 65% in the private sector and 35% in the public sector. And as always, we have no revenue included from the Trifork Labs companies when we report the numbers of revenue in the Trifork Group. So this is the Trifork Group and Trifork segment in relation to revenue. Then moving on to the Trifork segment performance, then we guide on the adjusted EBITDA. And for the year, we guide, as you know, the same guidance, EUR 30.5 million to EUR 33 million. After the first half, you see we have EUR 14.4 million. So roughly halfway to the lower end of the guidance. But we do believe, based on what Jorn told you before, that our guidance is still fit, and we are comfortable in meeting the guidance. For the second quarter, isolated, you see a decrease compared to the second quarter in '21. And this is all related to the explanations that Jorn talked about before. Looking into the Trifork Group, then we guide on EBIT. And our guidance on EBIT is EUR 16.5 million to EUR 19 million. And you see here end of half year, we are at EUR 7.7 million. And we're also still comfortable in meeting the guidance that we have and continue to guide in the same way. The margins in the second quarter was lower, once again, but this is exactly the same explanations as related to EBITDA. Looking then deeper into the real numbers for the period. First half year on the Trifork segment performance, then here you see the actual numbers and the division and also the different profit margins in the different subsegments. We do believe that Inspire will be more or less breakeven this year, potentially a small profit in the end. And then we will see the growth in Build and in Run. More detail into the revenue and adjusted EBITDA in Inspire, what I've just told you here. As you see, it's a quite dramatic change based on those reopenings and the in-person conferences that we have had and then also balancing out. So actually in Q2, we had a profit isolated in the Inspire subsegment. On the Build subsegment, you see here, that Build was the only subsegment where the deconsolidation from Dawn Health is into play. So here you see the differences in between the organic growth of 14.8% and -- in the half year, and 13.7% in Q2 versus the ratios where it's not adjusted for the deconsolidation. In relation to adjusted EBITDA, you're also still seeing the same margin. The Build subsegment was the segment primarily impacted by most of the factors that Jorn mentioned. So only -- so all related to sick leave, et cetera, is mostly impacted here in the Build subsegment. Looking into the Run subsegment and development here. You see it's all organic growth as usual. So we don't have any acquisition or growth or any impact from the deconsolidation here. So the 16.9% on half year is the total development here in growth. What we also do see here is a decline in EBIT margin, adjusted EBITDA. This is, to some extent, related to the investments of -- on the half year, EUR 1 million; and in the second half, EUR 0.4 million in the operation centers. And the rest is small fluctuations over the year. Looking one step deeper into the Run subsegment revenue split and comparing Q2 '22, to Q2 in '21, then you see that combined with the license support and hardware, then we are a little higher and primarily related to the license and support compared to the same quarter last year. And you see that hosting and security area is here a little more or less the same as it was in Q2 '21. Reason here is also that some of the services delivered in the Cyber Protection area is not necessarily Run revenue, but it's also in consultancy. So even if we have a very high increase in the sub -- in the business area, Cyber Protection, then you do not see all the impact directly here in the Run-based revenue. Looking into a Lab segment performance. Then for the first 6 months, we see a profit on EBIT of EUR 1.6 million. That is due to the -- you can say the activities that Jorn mentioned with the lab companies, Jorn before. One example here is a realized gain that we had on the programmable infrastructure solution, where a new investor came in and took a larger ownership share. And now we have 6.5% in the continuing company after restructuring. But at the same time, we cashed in the same amount in cash as our balance sheet value, book value and now we holding 6.5% in the continuing company, which is then will be all profit in the end. You see here on the right-hand side that we differentiate the investments that we have in the Labs investments so that we divide in cash invested and values coming from the deconsolidation of companies. So you see the value from deconsolidation of Dawn of just about EUR 20 million is part of the EUR 39.1 million. And our investment in cash is EUR 18.8 million. So if you wanted to do calculations in relation to return of investment in cash investments, then you have these information to use. Our cash flow and financial position, then we still have a positive cash flow from the operations, a little less than last year but we still expect a stable cash flow also during the rest of the year. We saw an increase in the working capital due to growth and seasonality. So this is somewhat behind the decrease from Q1 in 2021. Cash flow from investing activities is divided actually from exits, as I just mentioned before, dividends from Labs companies, and then also new investments, so investments in Visikon, for example, was a new investment in Q2. So all in all, we were net positive from investing and divesting. Relating to our financing activities, you see a minus of EUR 21 million. And this is -- majority of that is related to dividend payments in April. And then also repayments of borrowings of almost EUR 8 million to acquisition loans primarily in the past, and then also we have a decrease in the lease liabilities. Overall, it's EUR 3.4 million in positive cash in net debt. So we're still on the positive side of that. Our guidance, as we talked about before, is still maintained. We are now, in relation to organic growth, in the upper end of the range we had before, so 12.5% to 15% organic growth for the year. And total revenue of EUR 180 million to EUR 185 million. And in relation to adjusted EBITDA in the Trifork segment, then it's EUR 30.5 million to EUR 33 million. And Trifork Group EBIT is EUR 16.5 million to EUR 19 million. So this is all for us. And now we will then open for questions.

Yes, we're ready for questions from the audience. I see Poul has a question.

Can you hear me?

Yes, we can hear you.

Okay. First of all, I think it's correlated both of them on the full year guidance. So I was just thinking about high, low on the range that you're coming up with. I was seeing the biggest risk on revenue or on profitability, of course, it's fit together. But putting that in relation to your clients to say that there are some delays and so on. What feedback are you getting from the clients? Are they holding back because they are focusing on their own cash flow? Or is it because that they are nervous about what the next coming months will bring? How is the process again?

I can talk to that. So actually, Poul, it's none of the ones -- there are none of the reasons you mentioned is actually purely in the cases that really affected us in Q2. It was our customers' ability to produce their own order pipeline because they could not get the components for the manufacturing facilities, and therefore, a slowdown in intake of components, you cannot deliver. And then it hurts their business. So it was not a fear of something. It was the actual disruption from the war.

Okay. And if you look into the second half, is that the main factor you're looking at if they are able to then to get the components or...

No, you can say that we -- this kind of business with these, you can say, midterm customers, that will be a positive effect when/if, I would say, when they return as good customers. And so you should see that the Q2 has been some shift between one and the other customer. So if one says, okay, I have unfortunately to do this to you, even though we have contracts and agreements, but if you help me today, I help you tomorrow is our attitude always. So the hit we have taken in profit is because you cannot just find a new customer from one day to the next or in very short term. What we have found, so today, everyone are busy, but they are not busy with the same thing as we expected 4 months ago. But you can say those kind of companies who primarily as we see it, would be affected by what we have seen so far, we don't have them as customers anymore. Now we have other customers, we believe, will be less affected. And the same thing because, yes, I hope you understand. So we have shifted some revenue from one set of customers to another set of customers that we hope will be more resilient in the coming 6 months.

Okay. And about the sickness leave that you also have been impacted by in the second quarter, are you seeing a normalization now you are in the third quarter of the year? Or is it still an issue?

I don't have data on that, Poul. I -- we will need to wait until we see the monthly numbers because also the month we have went through has been vacation. And if people are sick in the vacation, we don't know. I mean -- so it's really -- yes, the months we have not yet been through, that are -- that will show it. And we don't have the numbers yet.

Okay, I have 2 more questions. One is on Switzerland and this health care project that you have been writing about both earlier and today. I was just thinking, as I understand it, it's more a new entrant to the Swiss market and new kind of surge. What kind of potential do you see in this?

I mean there is a big potential for us. So if you imagine that what we have been doing in Digital Health in the past 25 years, and as you might recall, Poul, we actually, in the beginning of Trifork, created the Digital Health company that we sold eventually to IBM, it was sold to Maersk first. That was a considerable business for us. It was actually 170 people. And then we have grown again. And now we see the same potential in other countries. So maybe not the U.S., maybe not Germany, but there are countries who have a decision model that cater for companies like Trifork. And in Switzerland, it's really run by the insurance companies. Insurance companies are commercial. It's private companies. And there are a number of those -- a few of them. But I would say some of the stronger ones and the ones in German part are the ones we are working with. And it's around 30% to 40% of the Swiss population, and the majority in the German part that is affected by the solutions that we have envisioned to build together with our customer. So our customer is also on a journey. If they will succeed the first time, will they really bet on this? We cannot tell you. But then it will happen eventually because it's unstoppable that Digital Health will come in every country. There are also other markets we are looking into doing the same thing as with Switzerland because there is a lot of interest in learning how things have been done in Nordics. So it's not just Denmark, it's Norway, Sweden as well who have a similar -- who went through a similar journey.

And my last question, Trifork Labs, I think, could you give, let's say an update on if you take the 5 most important investments seen from your side that you're having here? Just to run through this and then maybe give an update on how they're actually performing?

Yes. And first, I would say that in the future, we will share a little more light so investors and new analysts can have more transparency. Because we believe that is possible. So here, I'll put a little color on it. You know that our deconsolidation of Dawn was a major one for us, is also why we talk about it as deconsolidation. But since we did that, Dawn is actually a fast-growing company, and they grow a lot faster now than when they were consolidated. And some of the headlines might be a little visionary that comes from Dawn, but there are also some solid growth. And they are approaching 100 people, and that is -- and I think that's well done. And they are also looking into expanding, and they are successfully expanding outside Denmark, which was the main reason for us to deconsolidate and also to bring in investment from [indiscernible] and [ Agustín ]. So now there are some capital behind in that growth story. And I'm very happy, despite of everything you can say, I'm very happy with the development of Dawn. So I would say that is one of the major ones. Then also AxonIQ is an important one. AxonIQ has shown, from the beginning, a stable high revenue growth in yearly recurring revenue. And they are approaching round B and normal -- I mean, normal investor terms of inter terms, that would -- if round A is around EUR 1 million yearly recurring revenue in euro or dollars, then round B would more be like closer to EUR 10 million. So that is, of course, very promising. And so they are going on a good traction and on a good growth. Then we have Promon. We have 5% of Promon. Promon have big potential. It's in Cyber Protection, it's app shielding. So any mission-critical app, and there are more and more of these apps, needs to be protected from a tax through the phone itself, through the user. And Promon has a product and Trifork is a reseller. So here, we come with an offering to the Trifork customers, we resell the Promon product. And there are other resellers. So that is also something that would be past B round and so considerable revenue in this compared to other of their start-ups. Then we have some with a lot of potential, but still young. We have Kashet. Kashet is a new bank, and we have agreements to be able to get 10% of the company. So it's a bank for international people, people in, you can say, upper middle class, with like properties or assets in more than 1 country. And there are not really any bank offerings that cater for these people. So I believe it could be a success story. And yes, I would say those are the major ones seen now, the growth stories, if you want it that way.

Okay. Perfect. That gave a little more insight to what's going on in this space.