NNIT A/S

CSE:NNIT

Earnings Call Transcript

[Operator]

Hello, and welcome to the NNIT interim report for the first 3 quarters of 2021 (sic) [ first 3 months of 2021 ]. [Operator Instructions]Today, I am pleased to present Pernille Fabricius, CFO. Please begin your meeting.

[Pernille Fabricius]

Thank you very much. Good morning, and welcome to this call on NNIT's financial performance for the first 3 months of 2021 and outlook for 2021. Turn to Slide 2, please. My name is Pernille Fabricius, CFO of NNIT. With me today is our CEO, Per Kogut. I will briefly walk you through the practicalities for today's meeting before giving the word to Per.Today's Q1 release as well as the slides being used for this presentation will be available on our website, nnit.com. The conference call is scheduled to last approximately 45 minutes, depending on the level of questions. The presentation is expected to last around 30 minutes. Today's agenda can be found on Slide #3. Please note that this call is being livecast and that a replay will be made available on NNIT's website after the call.Turning to Slide 4. Please be advised that this call will contain forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause the actual result to deviate considerably from the outlook set forth. Furthermore, some of these expectations are based on assumptions regarding future events, which may prove incorrect.With these words of introduction, I will give the word to Per Kogut and turn to Slide #5.

[Per Kogut, President]

Thank you, Pernille, and a warm welcome from me as well. Starting off, I'd also like to extend my gratitude for your time and interest in our company. As you see from the agenda, I will spend the next few minutes talking about key commercial highlights for first quarter of '21.Now let's look into that. Please turn to Slide #6. Seen from an overall NNIT perspective, we have started the year as planned, and we are on course in terms of our strategy and outlook. Allow me to provide some more words on this. We have started 2021 with a revenue growth of 1.2% compared to Q1 2020 and an operating profit before special items of 6.6% compared to 6.5% in Q1 2020. And there are a couple of key reasons behind this. First of all, we are experiencing positive momentum in relation to the Winning Solutions strategy overall. Momentum relates to solution areas such as hybrid cloud, Microsoft Solutions, cybersecurity as well as several of the solution areas, primarily focused on life science, such as production IT and our Veeva area.In first quarter of 2021, 49% of our total revenue originated from our Winning Solution areas, which is an increase of 5 percentage points from last year. In our Private and Public business, we are impacted by the loss of the Pandora contract, which is still negative impacting this area. This means that most of our first quarter growth is driven by a continued strong performance in our Life Science International business. Again, this is important as it is in line with our strategy. The revenue from our Life Science International business, excluding the Novo Nordisk Group, grew 73% compared to last year. The organic growth is mainly driven by growth in Europe and U.S.The inorganic growth come from our latest acquisition, Excellis Health Solution we talked about last time. We acquired Excellis in November 2020 to further strengthen our position within key life science areas such as regulatory affairs, quality management and production IT. And it is reassuring to see Excellis contribute to our strategy in line with previous acquisitions, such as Valiance and HGP. A key point in parallel with the growth figures is that Excellis and the previous acquisitions, including SCALES in Denmark, are supporting our Winning Solution strategy in production, IT, Veeva and Microsoft.Looking at it from an employee standpoint, since Q1 2020, the number of employees in our -- in the international offices increased by 61%, all 117 FTEs in absolute figures due to the above-mentioned strong growth in the International Life Science segment.I would like -- I will now turn to Slide #7 to offer some highlights on commercial development in the beginning of the year. They relate to growth in the existing customer engagement in Winning Solution areas such as Microsoft solution, cybersecurity and Veeva, and it covers both new projects and a multiyear service-level agreement. As it relates to our business based on the fast-growing Veeva technology stack in life science, we are proud to be categorized as a leader by Everest Group in their latest PEAK Matrix Assessment. That is the table you see at the bottom right on this slide. We are competing against some prominent logos in the IT service industry, and yet we are regarded as one of the leaders. This is a testament to our dedication towards the Veeva solution stack and our ability to build services around it that are in high demand by our customers.With that, I will end my business update, and we will turn to you, Pernille, for the financial performance.

[Pernille Fabricius]

Thank you very much, Per. Please turn to Slide 9, where I'll elaborate on key financials in relation to our Q1 release. NNIT realized a Q1 revenue of DKK 731 million, corresponding to a 1.2% increase compared to Q1 2020. The organic growth was minus 1.7%. Our full year 2021 guidance is a growth of 1% to 4%. As mentioned by Per, the revenue growth was driven by life sciences, excluding Novo Nordisk Group. This business grew 43% compared to Q1 2020. Operating profit landed at DKK 48 million, constituting a margin of 6.6% in Q1, which is in line with our full year 2021 guidance of 6% to 7%. The investment level was kept at DKK 33 million in Q1, corresponding to a 4.5% of total revenue investment for Q1 has therefore been kept below guidance, which is around 5% to 7% of total 2021 revenue.Please turn to Slide 10. As mentioned, the total Q1 2021 revenue growth of 1.2% compared to Q1 2020 was particularly positively impacted by Life Sciences excluding Novo Nordisk Group, which saw an increase of 43% compared to Q1 2020. Q1 2020 revenues from the Novo Nordisk Group declined 14% and revenues from Private and Public declined 16% compared to Q1 2020. Gross profit margin declined to 13.7% compared to 14.3% in Q1 2020 due to the above customer mix impact as well as an investment focus within infrastructure outsourcing businesses. The operating profit before special items of DKK 48 million corresponds to operating profit margin before special items of 6.6% compared to a 6.5% margin in Q1 2020. Net profit was DKK 31 million compared to DKK 35 million in Q1 2020.The subsequent slides talks to the financials of the 2 legs of the business, Life Sciences and Private and Public. Starting with Life Sciences. Please turn to Slide 11. Life Sciences within NNIT consists of 3 areas: Life Sciences International, Life Sciences Denmark and the specific business with the Novo Nordisk Group. In Q1 2021, total Life Sciences revenue grew 12.5% compared to Q1 2020. Life Sciences International revenue increased to DKK 159 million corresponding to a 73% growth, of which 49% organic compared to Q1 2020. This was mainly driven by strong organic growth in Europe and the U.S., helped by inorganic growth related to Excellis. Main growth drivers where the strategic business areas, regulatory affairs, quality management and production IT supported by the Veeva and TraceLink technologies. Revenue from Life Sciences Denmark increased to DKK 69 million, corresponding to a 3% growth in revenue compared to Q1 2020, mainly driven by a new contract with Orifarm. Turning to the business with Novo Nordisk. Q1 revenues ended at DKK 159 million, a reduction of business with Novo Nordisk of 14% compared to Q1 2020. The split of businesses between project- and service-level agreements changed in favor of the project-based business, with revenues stemming from projects increasing by 31% compared to Q1 2020 and revenues stemming from SLAs decreasing by 10% compared to Q1 2020. Operating profit before special items ended at DKK 37 million, resulting in a total operating profit margin of 9.6% compared to 9% in Q1 2020.Now to Private and Public, please turn to Slide 12. The Private and Public business within NNIT consists of 3 areas: enterprise, property and finance. The total Private and Public revenue decreased to DKK 344 million, down 9% from Q1 2020. With the enterprise segment, revenue decreased to DKK 174 million, down 15.5% from Q1 2020. The decline was expected and related primarily to the phasing out of the Pandora outsourcing agreement. Within the public segment, revenue decreased to DKK 98 million, down 6.7% from Q1 2020. The revenue decrease was mainly driven by a reduction in project activity within Udviklings and Forenklingsstyrelsen, The Ministry of Taxation; and [indiscernible], partly offset by the [indiscernible] contract with the Danish Defense. The finance segment saw a revenue increase to DKK 72 million, up 7.5% from Q1 2020. The revenue development was helped by transformation project worth DKK 7.1 million from AP Pension. Within Private and Public, revenues stemming from projects declined by 15%, with a 3% decline within service-level agreement. Positive revenue related to the strategic -- positively revenue related to the strategic focus areas Winning Solutions increased by 1.7% from Q1 2020. Consequently, the overall operating profit landed at DKK 8 million with a margin before special items at 3.2% compared with 4.2% in Q1 2020.Please turn to Slide 13. Turning to the balance sheet. Please turn to Slide 14. Total assets on 31st March increased to DKK 2.702 billion, up DKK 195 million from DKK 2.507 billion on March 31, 2020. The increase was primarily due to the increase in intangible assets after the acquisition of Excellis, which partly countered -- was countered by a decrease in tangible and leased assets. Tangible assets decreased as investments were lower than depreciation. The same is the case for leases, where we only had a few lease additions regarding company cash. Net cash and cash equivalents amounted to DKK 209 million on March 31, down DKK 100 million from March 31, 2020. The decrease was mainly driven by payments related to acquisitions and payments of ordinary dividend for 2020, DKK 25 million, partly countered by cash flows from operating activities.Equity on March 2021 amounted to DKK 1.1 billion, down DKK 5 million from March 31, 2020. The decrease was mainly due to payment of interim dividend for 2020 of DKK 49 million and ordinary dividends for 2020 of DKK 25 million, but partly countered by reevaluation effects and net profit for the period.Now let's move to cash flows. Please turn to Slide 15. Yes. Free cash flows for Q1 2021 were negative at DKK 86 million, which was DKK 69 million below Q1 2020 due to a negative change in working capital partly countered by lower investment activities due to a higher earn-out payment in Q1 2020 compared with Q1 2021. The negative change in working capital is mainly regarding trade receivables, which were at a very high level at the end of 2019. Therefore, the decrease is lower than the decrease in Q1 2020.Now let's move to the outlook for 2021. Turning to Slide 16. Before wrapping up with closing remarks from Per, let's have a look at our financial outlook for 2021. Please turn to Slide 17. At the beginning of Q2 2021, NNIT order entry backlog for 2021 amounted to DKK 2.379 billion, up 4% from last year. This is a positive development considering the change towards a more project-based business. The backlog from Life Sciences customers, excluding NNIT -- or Novo Nordisk Group increased by 41%, driven by Life Sciences International and through the acquisition of Excellis, whilst the Novo Nordisk Group declined by 12%. Private and Public decreased by 3.4%, mainly due to the expiry of the Pandora outsourcing contract. The high-growth forecast within NNIT's project business, driven by Life Sciences International and Winning Solution has a relatively low backlog visibility. The growth in project business, combined with a declining multiyear outsourcing business, makes the backlog numbers less useful as a predictor for total revenue growth. Therefore, the backlog for the current year should not be used in isolation as a proxy for the upcoming year. Now let's move to our outlook for 2021, turning to Slide 18. The overall 2021 guidance for NNIT group is maintained. As mentioned, initially, Q1 2021 revenue increased 1.2% compared with Q1 2020, in line with full year guidance, leading to no adjustment to full year guidance of 1% to 4% growth. The operating profit margin ended at 6.6% and we maintain the full year guidance of 6% to 7% operating profit margin. With regard to CapEx investment levels, Q1 ended at a 4.5% share of revenue. We maintain the full year guidance of 4% to 5% -- 5% to 7% of full year revenues. It must be noted that the outlook may still be influenced by continued uncertainty relating to the COVID-19 situation. Per will give some last comments on our Q1 release and the expectations for the remaining of 2021. Turning to Slide 19, please, and I'll hand over to Per.

[Per Kogut, President]

Thank you, Pernille, for taking us through the figures for Q1. For my closing comments, let's look at Page #20. As I started out by saying we are on course in terms of our overall strategy and outlook. This is very important. As we look to the underlying factors, we are pleased to deliver growth in Q1, mainly driven by very strong growth in Life Science, very good momentum in our Winning Solution, in the Private and Public business areas. As Pernille just explained, we maintain our outlook for the remainder of 2021.So with these words, we will conclude our fast running through of the presentation. And operator, we welcome questions. Thank you.

[Operator]

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

[Poul Ernst Jessen, Senior Analyst]

I have a few questions. Let's start by Novo Nordisk. You have a decline of plus 14% or 15% year-over-year. How shall we look at Novo Nordisk now going forward? Is this the run rate that we see in the first quarter coming for -- for the coming quarters as well in the next stabilization? Or what's your interpretation of the outlook here? That's the first one.

[Per Kogut, President]

Yes. That's a very, very good question and an important question, Poul. And we have no more insight into this. It is a little deeper decline that we have anticipated to give you that information. And of course, the numbers hopefully begin to work in our favor that the decline will be lower going forward. But honestly, I don't know right now. It is a little to the high end here in Q1, but then, of course, offset by some of the growth in the other areas. I have no more insight than that, Poul.

[Poul Ernst Jessen, Senior Analyst]

Okay. That's fine. Just checked if there had been more long-term discussions here on what you were going do. The second part is about Winning Solutions and the International Life Science. Now you give a split saying that 49% of revenue is coming from International Life Science and other more growing services like digital transformation. If I do a subtraction of those 49% by International Life Science and then look at how has remainder performed, then it says minus 12%. So I have 2 questions. One is can you give more insight into what is within this definition of Winning Solutions besides the International Life Science? And secondly, what is then going on within the remaining part here?

[Per Kogut, President]

Yes. Also, Poul, spot on comments that is within our daily operation. So the Winning Solutions is you could actually divide that into 2 segments. We have the Winning Solutions for our life science area. That's the Veeva, the production, IT, quality management and so on. Secondly, we have the remainder of Winning Solution, which covers both life science and the Private and Public. And that's Winning Solutions such as Microsoft, cybersecurity and cloud transformation, just to mention a few. And then, of course, the remainder, what is not growing as fast or actually have a decline, and that is our infrastructure outsourcing business. That is declining. And it's still a sizable business for us. But for obvious reasons, as you already know, that the margins in this area is getting lower and challenged. And that's why we reinvest the majority of our resources within Life Science and Winning Solutions and less in infrastructure outsourcing, so that the composition change you will see going forward.

[Poul Ernst Jessen, Senior Analyst]

Yes. But is infrastructure outsourcing part of the Winning Solutions? I would assume not.

[Per Kogut, President]

No.

[Poul Ernst Jessen, Senior Analyst]

Okay. Then we -- and my point is more than -- if I take 49% of total revenues, when I get a number, and I take 44% last year of total revenues. Then of both those numbers, I subtract International Life Science. And that result has a decline of 12% year-over-year. And that must then be a decline in Microsoft 365 side or cloud and so on. So what's causing the decline? Is that the loss of Pandora? Or what's causing the decline here?

[Per Kogut, President]

I'm not sure following you completely, but our International Life Science has a growth in it. Our Winning Solution has a growth in it. What is declining if you take DSB and Pandora out is classic IO business, which is declining.

[Pernille Fabricius]

I think Poul that...

[Per Kogut, President]

Maybe, Poul, we can take it offline and go through the numbers.

[Pernille Fabricius]

I think your -- the calculation is a bit flawed. We can take it off because it's not bad conclusion. Definitely not the Winning Solutions are growing year-on-year.

[Per Kogut, President]

But Poul, to your point that our -- we still have very good business within our infrastructure outsourcing business. We have clients with solid margins and definitely very robust services delivered, but we also have contracts that have been challenged. That's the fact.

[Operator]

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

[Yiwei Zhou, Analyst]

Also a couple of questions from my side. Firstly, just regarding the organic growth in the International Life Science. I realize this is a big acceleration from previous quarters. So how should we understand it? Could you elaborate a bit here on the acceleration?

[Per Kogut, President]

Yes. Of course, it's a combination of 3 things. It's a combination of that we do see organic growth in our classic consultancy. It's a growth within the Winning Solution areas such as Veeva. And of course, it's also a combination of the acquisitions we have made, both Excellis and the other ones in the previous years. We see growth in all these 3 drivers. And so we are very positive. Our major problem here is actually, as we have mentioned earlier, is to attract the right people and educate them to be billable towards client engagement. And right now, I think, don't hang me completely up on numbers, but at least it's 100 or 150, maybe even 200 open positions to our Winning Solution within Life Science. That's a high momentum here.

[Yiwei Zhou, Analyst]

Right. And then 2 housekeeping questions. One is on the restructuring cost. If possible to give us the update of guidance and the cost for this year?

[Pernille Fabricius]

We have actually not stopped guiding, including restructuring costs. So we are guiding before special items. So that's how we have...

[Yiwei Zhou, Analyst]

Just my question is, how much you would sort of spend on a restructuring, the recurring costs?

[Pernille Fabricius]

You would like us to guide on it. Is that the question?

[Yiwei Zhou, Analyst]

Yes.

[Pernille Fabricius]

Yes. No. I mean, we have quite deliberately chosen not to do that. So we are not doing that this way anymore.

[Yiwei Zhou, Analyst]

Okay. And then is it fair to assume the Q1 special item would be the run rate for the rest of the year?

[Pernille Fabricius]

I just -- basically, I think -- so we are not guiding on that anymore. We are continuously evaluating the business, and it's not...

[Per Kogut, President]

But if you look at the different years, we have not had a lot of restructuring elements. We have had it, I think, last year and maybe the year before, I can't remember. It is not a parameter we think about using or misusing at all. So...

[Yiwei Zhou, Analyst]

Fair enough. I understand. And then next question is regarding the admin cost, so the lower admin cost a year. I understand that you have some cost savings from the restructuring program. I was just wondering if you have also benefited some benefit from the COVID restrictions?

[Pernille Fabricius]

No. I can tell you, you're asking whether we've had support from that within Denmark. And the only support we've had there is last year from a liquidity perspective, where we had a certain term of payments which are going to hit us this year. So there's no anomality in relation to any COVID support.

[Yiwei Zhou, Analyst]

Great. And then maybe lastly, on the SCALES, could you give us an update?

[Per Kogut, President]

You mean the subsidiary, SCALES?

[Yiwei Zhou, Analyst]

SCALES business.

[Per Kogut, President]

Yes. They -- we acquired them in May 2017, and they are doing excellent. Again, here, it's the company name is SCALES, but it's definitely a scaling game to attract competencies and global sourcing, people to grow together and deliver. So it's a very, very positive part of NNIT's business.

[Yiwei Zhou, Analyst]

Yes. Understand. But my question is actually, I remember you had some disruption from COVID restriction and pandemic in previous quarters. Is it fair to assume this is expect to growth or how is the situation at the moment?

[Per Kogut, President]

Yes, yes. Correctly, well remembered. It is true that they were instantly in March, April and May last year, actually relatively impacted by the COVID situation because a lot of the clients were unsure about their own situation. All that has recovered to a complete normal situation. We're back on a significant growth trajectory.

[Operator]

[Operator Instructions] Okay. There are currently no further questions coming through at this time.

[Per Kogut, President]

And Poul, we will call you after the call to make sure we get your questions right and have the numbers add up.

[Pernille Fabricius]

So this concludes -- slide -- next slide. So this concludes our conference call. Thank you all for participating in today's webcast. Feel free to reach out if you have further questions. Thank you.