NNIT A/S

CSE:NNIT

Earnings Call Transcript

[Operator]

Hi, everyone, and welcome to NNIT's results for the first 6 months of 2024. [Operator Instructions] This call is being recorded.

I'll now turn the call over to your speakers. Please begin.

[Par Fors, executive]

Thank you, Rasmus, and good morning, everybody, and thank you for joining this webcast. My name is Par Fors, and I'm the CEO of NNIT. With me today at our new headquarters at east Soeborg, I have our CFO, Carsten Ringius, and together, we will present the results for the second quarter, which we released yesterday afternoon.

Please turn to Slide 2. I will walk through the key business highlights, including regional performances. After that part, Carsten will go through the group results, including our financial outlook for the full year. Before heading to the next slide, please pay attention to the disclaimers in the bottom of this slide.

Let's turn to Slide 3, we are now 1 year into the first strategy period for the new NNIT. We have taken important steps to become a pure-play IT consultancy business within life science and the public private space. We have become a more commercially savvy and resilient company over the past year with our internal nonfinancial metrics are showing us. Liability is also improving. Our attrition rate is at a low level also compared with the industry. And our customers continue to value our services deliveries very highly. The latter part is not only evident through measurement but has also been recognized by independent consultancy firms like Everest Group, ranking NNIT as a company with the highest value delivered.

Another testimony to this are important strategic wins we had during the quarter and also in the third quarter. For instance, we've been able to grow and gain market share in Region Europe mainly through expansion of existing engagements and customers.

In Region DK, we have prolonged our contract with Fødevarestyrelsen, and we won the public tender with Kriminalforsorgen and expanded our presence within SKI agreements. And we're also close to sign a large contract with a significant public customer.

Last week, we also announced that we have signed the largest contract in the U.S. ever worth approximately DKK 130 million. The contract is with a large existing pharma customer, which is really emphasizing the strong partnership we have. During the quarter, we reached some important strategic milestones. Firstly, we went live with a new ERP and HR system in June. Not only with these systems to ensure stronger data quality, they will also enable more efficient work streams across the business from controllers to project managers to consultants.

Secondly, we have relocated offices in several locations. The new offices are modern. They facilitate a healthy work environment and are better located. We strongly believe that we also support NNIT to continue to breed an employer of choice. Lastly, we are finalizing the IT separation from Aeven, which has been ongoing since the divestment was that was announced last year. We expect this to be complete during the third quarter this year.

All of these achieved are of great importance to us as they position us as a company for future growth opportunities and act as enabled for in profit margins over time. Having lapped over more than a year since the strategy launch, we can now with certainty conclude that it was the right strategic choice we made a year ago. And we are on the right track on our transformation journey to support the long-term ambitions of the company.

Please turn to Slide 4. I will not go in depth in this slide as Carsten and will go through the figures in more detail later. However, I want to highlight two things. First thing is that the overall financial performance continues to improve. We managed to gain market share and expand our profitability despite the headwind from a macroeconomic challenges in Europe and in Asia. The second thing is that we have confirmed our full year outlook as the second quarter performance was in line with our internal plans. We do believe that we have strong levers in the place to continue to grow momentum and gradually accelerate the profitability. We also continue to have a solid backlog and pipeline for the remainder of the year.

Please turn to Slide 5 for regional performance update. Our financial performance in Region Europe was driven by our strategic focus on winning in life science. During the second quarter, Region Europe managed to grow its business to DKK 135 million, which translates into an organic growth of 12.3%. We are pleased to see that we are gaining market share despite the headwind from the challenging macroeconomic environment and the temporary decline in our data migration business. And when it comes to data migration business, we are taking action and adjusting the data migration team to fit the forecasted demand.

In Europe, the growth is mainly due to our continued ability to expand engagement with existing customers. We can see that our existing customers value our services and our partnerships, and we have to cope with them, which will lead to more project scope, something I'm truly happy about.

The region's group operating profit margin is up almost 5 percentage points to 6.7%, driven by a few things. Our availability has continued to increase throughout the years while we've been able to manage and also reduce costs. However, we still have a lower utilization rate as we have people on [ the bench ] in order to accommodate our progressing order entry. Those employees will be assigned to future projects in the back half of this year.

Please turn to the next slide regarding U.S. preference. The core business of Region U.S. and Excellis continues to grow in the second quarter. Despite the growth, it was not enough to offset the large decline in the data migration business while organic growth ended at minus 15%. We are seeing more Veeva-related projects incoming, and we are tracking according to our recovery plans. We still expect the shortfall in growth to be temporary, and we will continue to have a negative impact on the U.S. for the remainder of this year. That being said, we are definitely not happy about the situation.

On a more positive note, we signed our largest ever contract in the U.S. with a large existing pharma customer as mentioned on the previous slide. The contract will start to generate revenue already from the third quarter. The overall backlog and pipeline for the U.S. looks solid and promising for the rest of the year, and we do expect that will return to growth.

We've continued to scrutinize costs and we have made hard efforts to keep costs at a lower level and reduce the number of subcontractors which has mitigated effect on the decline data migration business for the regions group operating profit margins still declined to 4.2% in Q2.

In early July, we have calibrated our cost base by reducing capacity to protect profitability with a strong focus with our migration organization. We expect to see improvements starting from the third quarter.

Please turn to the next slide. During the quarter, we have seen a step-change momentum in Region Asia where we delivered 6.4% organic growth despite a sluggish macro environment in China. We're seeing early signs that the demand is slightly improving.

In the first quarter, we took hard decisions and outlined a plan for what that we would require to do turnaround in Asia. The majority of these actions were carried out in Q2, where we restructured organization and integrated a sales function into the delivery units. We also put much more focus on sales excellence and pricing strategies. We have also reduced our mainly billable employees by more than 40 people and cut other SG&A-related costs to dramatically improve profitability. Asia's group operating profit margin went from minus 17% in Q2 last year, to a positive 3.9% in Q2 this year, which I'm very pleased with.

Even though Region Asia is performing much better, we are not out of the woods yet. We will continue the work we have started to further improve the business in [indiscernible].

Please turn to Slide 8 for an update of Region Denmark. The momentum in Region Denmark continued with a strong organic growth, ending at 27% for the quarter. The growth was driven by all business areas, including our group company SCALES.

During the quarter, we have made solid progress on our strategic choice to win in public sector. The public business continued its good momentum from last year and now comes to around 30% of the total region Denmark business. As mentioned earlier, we won some good contracts and expect to sign a large contract with a large public customer shortly.

The region's group operating profit grew from DKK 13 million in Q2 last year to DKK 18 million this quarter due to top line improvement and focus on the cost base. Even though the profit increased, we still have a significant number of billable employees being dedicated to internal projects such as IT separation from Aeven. This has, of course, resulted in less leverage on the cost compared with normal circumstances. We still see further opportunities to increase profitability through improvements in billable utilization and sourcing mix.

Please turn to the next slide. This concludes my part of the presentation. And now I will hand over to Carsten for the group financial performance and comments how we are improving our business and the financial outlook. Please, Carsten.

[Carsten Ringius, executive]

Thank you, Par. Please turn to the next slide. For the second quarter, the group revenue ended at DKK 474 million, entailing a total revenue growth of 11.8% compared with the same quarter last year. The revenue grew organically by 11%, and the main difference to total revenue growth is mainly due to sales towards Aeven assets being booked as inorganic. And this involves the month of April. The impact was 0.6 percentage point rate of exchange had a minor effect of 0.2 percentage points.

We are pleased with 11% organic growth as it tells us that we are gaining market share, even though the European and U.S. markets were challenged by the data migration business. Overall, the growth was driven by our signing contracts with new customers and especially expanding our existing engagement despite challenging macroeconomics.

The group operating profit, excluding special items, increased from DKK 25 million to DKK 32 million. This was partly driven by the increase in sales turnaround in Region Asia and a continued strong focus on costs across the board.

We continue to follow our plan of reducing costs across the business and streamlining ways of working to become more efficient in an IT, and with the implementation of the new ERP and HR systems, we are currently seeing that unfolding. The group operating profit margin, excluding special items, increased from 5.9% to 6.7% during the quarter. As Par mentioned, the profitability increase has been dampened by the decline in the data migration business, billable employees with low utilization being kept on bench for future projects and time spent on internal projects by available employees.

Please turn to Slide 11. The net cash flow ended at minus DKK 91 million as free cash flow was minus DKK 262 million, which is worse than compared with last year. However, we do see large changes in our working capital, where the majority of them are nonrecurring. We have made a bridge on the right-hand side of the slide, which I'll briefly go through.

As you can see on the slide, there are several elements to the changes to the working capital bridge, the larger ones I would like to highlight, which is recurring and the nonrecurring elements are, for example, if you look at the trade receivables, they are inflated due to some late invoicing to customers in relation to the transition from the old ERP to the new ERP. We went live on the new ERP in the beginning of June. And as -- which is quite normal. When you go live on a new ERP system, you have some processes that you need to restart on your new ERP and that has caused some delays in our invoicing, causing this temporary increase in our trade receivables. Another element is, of course, that when your revenue increase, you also have a larger trade receivable proportion.

If we look at the work related to the IT separation from Aeven, which was beginning last year, we have expensed that last year, but we see the cash flow effect of that now. So that amount sums to around DKK 40 million. Then we have a service framework agreement which were related to agreement we entered with Aeven, which we settled actually this year giving a DKK 15 million cash effect on our working capital is for, you can say, reduce our cash, negative cash flow going forward as the rebate agreement actually consists of a larger double amount rebate that we are now settled with this amount.

Then we had some bonus payments. And then we had a higher amount of prepaid expenses related to IT licenses and IT costs of DKK 44 million, which is also a nonrecurring payment, which was expensed in '23.

And then finally, I would like to highlight the earnout related payments of DKK 51 million, which is also the last earnout payments that we have committed to paying out related to previous acquisitions. So those are the bigger movements in terms of our working capital movements. As you can see, there are a lot of variables of nonrecurring nature, which can be related to our transformational journey in terms of being the new NNIT.

Please turn to the next slide about the financial outlook. With the Q2 company announcement distributed yesterday, we confirmed our full outlook for 2024, meaning around 10% organic revenue growth and a group operating profit margin, excluding special items, between 8% and 9%. The organic growth is expected to be back-end loaded, meaning single-digit growth in Q3 and double-digit growth in Q4. We acknowledge that the group operating profit margin, excluding special items of 6% for the first 6 months of the year in sales and acceleration in profitability to reach full year outlook.

On this slide, we have listed 5 key levers that will drive profitability up for the last half of the year. The strategic importance we have won in the second and third quarter are, of course, of great importance to the backlog and pipeline for the rest of the year. As we executed on our actions to turn around the situation in Asia during the first and second quarter, we do expect to see the full effect of the restructuring done, and therefore, there should be an upside to Asia's profitability compared with the first 6 months.

As mentioned earlier, we are rightsizing our data migration business in both U.S. and Europe. This calibration of capacity has been done in early July with the largest cost saving to be expected in the U.S.

Despite slowing our recovery, we believe it's the right thing to do in order to protect profitability. We have briefly touched upon the completion of larger internal projects. We did initiate key internal projects last year for us to become the new NNIT, most of the projects are done such as the implementation of the new ERP system and very few elements are outstanding. Some of these larger projects are now in their final stage, which would not only create synergies and efficiency gains over time, they will also free up billable resources to external projects.

If we, for instance, look towards Region DK, we have had around 40 or more billable employees spending time on the IT separation from Aeven. As we are expecting to complete the project during the third quarter, we have a plan on every employee level to be assigned to external projects. And if you recall the presentation from our Capital Markets Day we hosted last year, we presented a slide stating that some of the cost reduction initiatives we were doing would come from new office locations. Now we have relocated several offices, and the new facility costs come with a lower run rate going forward. All of these levers will positively support the uplift in profitability in the second half of the year.

In terms of phasing, we expect the profit margin to gradually improve quarter by quarter, supported by the realization of the initiatives and key levers carried out in the first half of the year and also the historical seasonality of our business.

I also mentioned it. What I want to reiterate, we believe we are on the right track and we can see that our business is improving. We have a strong foundation for the rest of the year with necessary actions taken during the first 6 months. Furthermore, we have a solid backlog and pipeline in place to support future growth. Therefore, we remain confident on our outlook for the full year.

Please turn to the next slide. Before we head into the Q&A, we will conclude the presentation, which I'm closing remarks. Please turn to Slide 14. The second quarter was an eventful one. We have delivered on several important strategic milestones such as the implementation of our new ERP and HR systems. We have relocated our offices and are now on the rise to complete our IT separation from Aeven. We believe that these efforts are truly important for the future profitable growth of the company.

On the overall financial level, the Q2 performance continued to improve. We are pleased with the strong growth in Europe and Denmark and a turnaround in Asia. However, we are not pleased with the development in the U.S. even though the recovery is going according to plan. Lastly, we confirmed our full year outlook due to all the improvements we are seeing within the business and due to the solid backlog and pipeline.

This concludes the presentation for today. Thank you for joining the call. And now we will open the line and take your questions. Operator, please turn to the next slide and open for questions.

[Operator]

[Operator Instructions] The first question will be from the line of Yiwei Zhou Jo from SEB.

[Yiwei Zhou, analyst]

It's Wei from SEB. And I have 3, and I'll do one at a time. Firstly, I can see you are indicating that are guiding the low single-digit growth in Q3. And could you please elaborate a bit here? You had a tough comp in Denmark in last year. And apart from this, is there any other moving parts what we miss hear?

[Carsten Ringius, executive]

No, we expect to continue the growth, and it will be single digit in Q3. We expect billed data migration to recover, but the full recovery will not be before we get into Q4. And the effect of the large contract win in the U.S. will only, you can say, materialize late into Q3 and have full effect in Q4. So this is why we see this spacing with double-digit growth coming in Q4.

[Yiwei Zhou, analyst]

Okay. So the phasing is mainly due to the U.S. temporary weakness here?

[Carsten Ringius, executive]

Yes. That is one of the main drivers, yes.

[Yiwei Zhou, analyst]

Great. And my second question is on the Danish gross margin in Q2. I remember last quarter, you had a sort of headwind from the time of Easter and I guess this should have been reversed in Q2. Could you maybe comment on how much of the two here in the quarter, the impact on the margin?

[Carsten Ringius, executive]

Yes. If you look across the 2 quarters, it is correct that Q1 had a higher gross margin. I think if you look at the underlying performance, we see it more or less being at the same level, what we saw in Q1 was a range of minor one-off sort of improving the gross margin. We had a little bit of spillover of revenue on a client from last year coming into Q1. And we have some ongoing cases where we could potentially have some reservations that were reversed because of a good dialogue with the customers not leading to any sort of, you can say, reservations being necessary to cater for these projects. So we had a little bit of additional you can say, a tailwind in Q1 because of these minor one-offs. So the underlying performance is more or less the same between the 2 quarters. And you can say that is making up and sort of overshadowing the Easter effect between the 2 quarters.

[Yiwei Zhou, analyst]

Okay. And lastly, Asia had a significant improvement on the gross margin, is this a sustainable level? Or is there any one-off here in Q2?

[Carsten Ringius, executive]

So we believe this is a sustainable turnaround. We have taken some half measures in into effect reducing our organization to more than 45 employees. So it is quite a dramatic difference to rating of our capacity that we have done, as we believe this to be sustainable turnaround. Of course, we are monitoring the development closely on the macroeconomic development to see if we need to take further measures, but we believe that we have taken great measures for now.

[Par Fors, executive]

Yes. And then talking to that, I mean, we haven't had the real full effect in Q2 of the measures we have taken. So the full effect of the cost reduction measures that we have taken is actually going to be in the third and fourth quarter. So I mean, I think there is, at least we expect improving margins in the remaining of the years as a consequence on taken in the first half. And that is actually based on the quite low expectation of improvement of the macroeconomic situation but based on the backdrop backlog we have and the pipeline we have. So it's -- we have taken that into consideration.

[Operator]

[Operator Instructions] The next question will be from the line of Poul Jessen from Danske Bank.

[Poul Jessen, analyst]

I have a few questions far as APAC, where you had a surprising growth organic in the quarter. I was just wondering do you see this as a one-off for the quarter. Or have you seen a turn to the better in general so expected in the coming quarters?

[Carsten Ringius, executive]

Yes, we have seen some organic growth, partly countered by the development of radar fixed change, but we have seen some positive momentum, and we also expect that to continue for the remaining quarters. So it is something we believe to be sustainable.

[Poul Jessen, analyst]

Okay. And then about cost reductions that you're doing now, can you feel an indication if it's gross margin, local cost or group cost that's going to move down in the coming quarters? Why should we see the improvements?

[Carsten Ringius, executive]

If you look at the restructuring that we have done in U.S., that will primarily be production costs as we are adjusting the capacity primarily in the data migration business. But if you look at some of the more, you can say, transformative projects like the relocation of offices, that will reduce our corporate costs.

If we look at the finalization of our IT separation, that would, you can say, free of resources that would go in and create a positive impact on our revenue and thereby improve our gross margin. So it will be different lines depending on what specific initiatives we are talking about.

[Poul Jessen, analyst]

Okay. And then coming to the ERP and HR and costs related to those? Have they been capitalized and therefore, the improvement you're seeing is just more billable hours going forward more than at a cost reduction?

[Carsten Ringius, executive]

If we look at the ERP implementation, we have capitalized the part that is, you can say, related to the development. Of course, there has been some cost that has not been, you can say, relevant for capitalization and those has been expensed, but the resources that has been engaged in the project are both back office resources and you can say, line of business resources. And now that we have completed these line of business resources, we'll be able to do external projects again and thereby pick up a margin going forward.

[Poul Jessen, analyst]

Okay. Then, two questions. The line on the data migrations, producing very early right now. Is that -- do you see that as a temporary issue because the activity in the market? Or is there also an element of, for instance, Veeva integrating or taking a larger share of this business being that you cannot come back to where you were want?

[Par Fors, executive]

No. I mean, there are several elements in this. And if we start on the market and the demand, it's definitely there. Data migration is a big issue in the pharma industry, both driven by regulatory perspective but also now in the commercial space when there's a lot of things ongoing as well, right? So it's -- the demand is there. And of course, Veeva is the big players who are affecting what's happening and what happened sometimes back, where our response to that change was not pressed enough, was that they started Veeva say, "Hey, instead of giving all this business to partners, we will try to build those -- we will build those capabilities ourselves." We underestimated the kind of speed with which they could do that. So they were -- rapidly to actually bid that capability, which means our revenue stream coming through Veeva more or less went down to 0 during a fairly short period. And going forward, what we see and what we have done, we see already that some of the more complex migrations they come back to us. because we see a pickup in revenue streams from that kind of channel. But in parallel, we have also started to use the data migration capabilities in other areas because there are migrations that are needed that is outside the Veeva areas. And this, together with the reduction of capacity means that we will come back to a profitable business but at a lower level than we were when the already started like 18 months ago. So it is a big change, but we will come back to profitability but at a slightly lower level than we were when this started.

[Poul Jessen, analyst]

Okay. And the final one. Guidance you give for the other remaining quarter is an acceleration both in revenue and net profitability. I was wondering when we then look at will end the year, for instance, the profit margins in the fourth quarter. Is that the margins that we should think of when we move into Q2 beyond this year?

[Carsten Ringius, executive]

When we look at the cost levels, we expect to be at a rate that you can extrapolate into the next year. But of course, you have seen some seasonality over the year, and I expect we will have the same sort of seasonality looking into '25. But of course, it is a gradual improvement on the profitability, so it is an indication of how -- at what level we will start at in '25.

[Operator]

[Operator Instructions] And we have a follow-up from Poul Jessen from Danske Bank.

[Poul Jessen, analyst]

That's just a simple one. Savings you're doing on your locations that was earlier you make an indication of how large they are?

[Carsten Ringius, executive]

When we talk about the facilities, it's expected between DKK 15 million and DKK 20 million is in that range that we are looking into for the full year.

[Poul Jessen, analyst]

Versus the spend you had last year?

[Carsten Ringius, executive]

Yes, correct, and we have, of course, transition cost and moving costs this year that has been expensed.

[Poul Jessen, analyst]

In Q1 and Q2?

[Carsten Ringius, executive]

I will have a little bit in spilling into Q3 as we had some activities carried out in relation to the move and also Okay.

[Operator]

As it seems we have no further questions in the queue. I will hand it back to the speakers for any closing remarks.

[Par Fors, executive]

Okay. Thank you very much for your questions. And also, thank you very much for listening in. Please do not hesitate to reach out to either me or Carsten if you have any further questions. I wish you all a good day.