NNIT A/S

CSE:NNIT

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the NNIT interim report for the first 3 months of 2022. [Operator Instructions]

Today, I am pleased to present Par Fors, CEO; and Pernille Fabricius, CFO. Please begin your meeting.

[Par Fors, executive]

Thank you. Hi, everybody, and thank you for calling in to our Q1 results presentation. My name is Par Fors, and I'm the CEO of NNIT. And with me today is our CFO, Pernille Fabricius. We are to present the results of the first quarter and of course, be ready to answer your questions.

Please turn to Slide 2 for an overview on today's agenda. I will kick off today's presentation with an overview of the highlights for the first quarter, followed by a brief update on the strategic initiatives we have put in motion to strengthen NNIT's operational and financial performance. Pernille will follow up with a review of our business unit performance and the group financials for the quarter. I will then end the presentation with comments on our outlook for '22 before turning to the Q&A session.

So let me please turn to Slide 3 for the highlights. Q1 was a transformative quarter for NNIT as we took the necessary step to build a stronger business for the long term, aiming to grow revenue and to secure satisfactory earnings level. We have set out to improve performance with a sharpened focus on efficiency and cost as well as the introduction of our new business unit, among other things, I will get back to this shortly.

Our financial performance this quarter was in line with our expectation with lower revenue and earnings. The period was marked by a temporary drop in capacity utilization, and an expected decline in the average selling price. The lower capacity utilization was a result of a few large projects within Life Science and Cloud and Digital Solutions being canceled and postponed by customers as well as the expiration of an SLA contract.

We still expect a positive revenue contribution from the postponed project this year and consider the decline in the capacity utilization, a temporary situation that can be isolated to the beginning of '22. As such, we see no evidence of any structural changes that will prompt us to adjust future growth expectations for these segments. On the contrary, early Q2 trading supports a view that Q1 performance is merely temporary.

As previously mentioned, we renegotiated a large infrastructure management agreement with Novo Nordisk Group during the summer of '21. And the lower average prices under the new contract had a negative impact on our average selling price as expected. Despite the pressure on our financial performance this quarter, we are confident that we are on the right track. This is supported by several significant contracts won in Q4 and Q1 as well as a number of cases where our customers have displayed their trust in us by renewing existing contracts. On this backdrop, we have increased our order backlog by 8.8% from the level at the end of '21. More importantly, we have done so by winning more of the type of projects we really want in order to strengthen our business.

Based on the traction of our strategic initiatives as well as the contract won in Q1 and our solid order book, we are maintaining our outlook for 2022 today.

Let's move to Slide 4 and a brief strategic update. We have outlined some key strategic elements on this slide to provide a bit of color on our efforts to strengthen NNIT's competitiveness. In a nutshell, we are focusing our efforts on returning to the growth trajectory as soon as possible and taking out cost to improve profitability. Cost reduction program has been introduced in the second half of '21, and we are focused on establishing clear profit and loss responsibility in each of our profit units.

This quarter, we have taken steps to consolidate our global delivery center in Manila to ensure compliance with EU legislation and strengthen our capabilities. The initiatives entail a significant geographical relocation of our outsourcing organization, which resulted in the special items during Q1 and will drive sustainable cost reduction from 2023.

We also introduced our new organization and reported structure with the 3 business units, Life Sciences Solutions, Cloud and Digital Solutions and Hybrid Cloud Solutions. As previously mentioned, we have done so to support the future growth of NNIT, promote customer centricity and even further and increase efficiency and financial transparency. In addition to the organizational changes, we are very pleased to welcome new customers during the quarter. We signed a 3-digit contract with ATP and Banedanmark in Q1 after entering into new contracts with E-nettet and Nordic Regional Security Coordinator in Q4.

This contract will contribute to revenue and improved capacity utilization several years from now. At the same time, we renewed a number of existing contracts with customers, which is a proof point in our quality in delivery.

On top of the new contract, we welcome prime4services and 60 new colleagues as part of the NNIT Group to strengthen our position within production IT. We are very pleased with this addition to the team and look forward to collaborating with the skilled group of experts who will strengthen our offering.

Finally, we continue the development towards greater independence of 1 single customer, Novo Nordisk in the quarter.

Pernille will now provide an overview of segment performance and the group financial for the quarter. Please turn to the next slide.

[Pernille Fabricius, executive]

Thank you, Par. Before I turn to each of the segments, I'd like to add a few words on the new reporting structure, which was introduced at the turn of the year and specified with pro forma comparison figures a week ago. The new organizational structure matches the diverse characteristics of our customer base, and has been introduced as we are tailoring our approach to each market segment. .

We have revised our external reporting structure to ensure alignment and consistency with our internal management reporting and the implementation of the new structure is still ongoing with regards to share production cost.

Let's look at Life Sciences Solutions first. We grew reported revenue in Q1 on the back of our acquisition of SL Controls in July last year, and prime4services which Par mentioned before. These are strong and well-performing additions to the business units, and we look forward to continuing the positive development going forward.

Organic growth was around 4% and lower than expected due to the cancellation of a project in the U.S. This had a negative impact on capacity utilization and the segment's gross margin, which declined quite significantly to around 12% in the quarter following increasing production costs impacted by acquisition and negative currency impact.

While the development in Q1 was certainly not satisfactory, we are pleased to note a positive trajectory on capacity utilization as activity seemed to pick up in the coming quarter combined with capacity adjustments. Finally, we are pleased that the order backlog has increased following the acquisition of prime4services and after important renewal of existing contracts with Danish Life Sciences customers for the coming 4 to 5 years.

At the same time, the business unit continued to accelerate sales of Life Sciences production IT solution to current and new International Life Sciences customers.

Let's turn to Slide 6, our Cloud and Digital Solutions business. The CDS business was quite stable in Q1, growing revenues slightly to DKK 213 million and generating a gross margin of 16.4%. We saw a good activity level within Cloud Services and Microsoft Dynamics as well as SAP implementation to enterprise and finance customers. Sales to the public customer segment was down compared to a very strong performance in Q1 last year, and our capacity utilization was subdued as a significant ERP implementation project which was postponed by the customer.

The project is still expected to be initiated later. Our colleagues in CDS won a large cloud migration factory engagement for a Danish enterprise customer in Q1. And ATP awarded us a 6-year extension on the maternity payout application support contracts.

All in all, the order intake was good and the business unit's backlog grew from the end of '21 and remain solid despite the effect of this postponement of the ERP implementation mentioned before.

Please turn to Slide 7, and the Hybrid Cloud Solutions business. The performance of our HCS business was significantly impacted by the renegotiation of our infrastructure contract with Novo Nordisk completed during the summer as well as the expiration of an SLA contract. These effects were expected and affected revenue negatively by DKK 30 million and DKK 20 million, respectively.

As we have seen these effects coming, the HCS team did a good job reducing production costs by 12% in Q1. Still the decline in revenue obviously had an impact on gross profit, and we are taking steps to improve the utilization rate through higher sales and reduction of costs. The efforts are progressing to plan and include automation initiatives and a significant transformation and geographical realization of our outsourcing organization to strengthen our global delivery capabilities and to ensure lower salary expenses going forward.

During the quarter, we also laid the foundation for an improvement of the capacity utilization as we closed a new 5-year contract with Banedanmark. This positive event follows the signing of 2 important contracts with E-nettet and the Nordic Regional Security Coordinator in Q4. The strong traction with new and large HCS contracts contributes to ensuring a backlog of around DKK 1 billion despite the impact of the renegotiated infrastructure contract mentioned before.

Let us turn to Slide 8 and an overview of the group financials for Q1. All in all, we saw revenue decline by 4% to DKK 701 million this quarter which was characterized by strategic transformation and a temporary decline in the capacity utilization covered previously. As a consequence of the decline in revenue, we reported a drop in gross profit to DKK 44 million, entailing a negative operating margin of 1.3%.

Special costs came to DKK 35 million, comprised of restructuring costs related to the transformation of our outsourcing organization and redundancies as well as impairment of our headquarter building here in Denmark. On this background, we generated a net loss of DKK 33 million for the quarter. Needless to say, we are not satisfied with these results, and we look forward to returning to profitable -- to profitability and growth.

On that note, Par will now share a few comments on our outlook. Please turn to Slide 9.

[Par Fors, executive]

Thank you, Pernille. Despite the bumpy start to 2022, we are maintaining our guidance today and still aim to grow the revenue by 2% to 5%, and reach an operating profit margin of around 5% before special items, which may reach the same level as in 2021. The outlook for '22 is based on the strategic initiatives we have already set in motion, combined with a solid order backlog for the year, which was further strengthened in Q1 with several great contract wins. .

Growth will be driven by Life Sciences Solutions and Cloud and Digital Solutions this year, while our Hybrid Cloud Solution business is expected to be somewhat impacted by the lower project volume. As always, the outlook is subject to uncertainty.

Please turn to Slide 10 for a few closing remarks before we turn to the Q&A session. To sum up today's presentation, we have highlighted 3 key takeaways describing our efforts for challenging Q1 and the outlook for the rest of the year. Firstly, we introduced the new organizational structure this quarter to promote a sharper focus in our 3 business units, which will bring up the group back to growth and profitability.

As part of the transformation of our business, we have simultaneously taken steps to strengthen our delivery capability and cut costs. Secondly, we continued on the positive trajectory, winning large new contracts and strengthening the order book for '22 and for the years to come. We are pleased to grow the order backlog for this year by 8% from the end of '21.

Finally, we are maintaining the outlook for '22 based on the strategic initiatives already set in motion and the current traction in our business.

Thank you very much for your attention. We now look forward to taking your questions. Next slide, please.

[Operator]

[Operator Instructions] The first question comes from Poul Jessen from Danske Bank.

[Poul Jessen, analyst]

Question number one, you say it's in line with expectations in the first quarter. Is that because you already knew that it would be so soft -- this soft when you report the full year because I guess it's not in line with the expectations from, let's say, late last year. Yes, that's the first question.

[Pernille Fabricius, executive]

So I think I'm going to take this Poul. The performance in Life Sciences -- International Life Sciences was definitely not in line with expectations. It was much reduced compared to where we had expected it to be. And that was due to the cancellation of certain projects, in particular. So on that note, it wasn't -- and they are now getting back up on the -- with the projects that have been postponed and getting new projects in to fill those gaps. So that's where they are.

And when -- with the comment on as expected, that was within broadly CDS and completely HCS. So those 2 entities or pillars landed where on an overall term where it was expected. In CDS, there was a cancellation of a project, and that did impact there, which is now going to be -- or has been postponed, but is going to be taken up here in the coming quarters. So that's on an overall level. It was not as a total expected at all that the revenue would land where it did and mitigating actions are being taken to ensure that we end for the full year where we should.

[Poul Jessen, analyst]

Can you give some more insight into the Life Science that it's so weak or when you talk about the postponement of ERP and cancellation within Life Science. Is that externally driven because the client on the ERP is not ready to implement right now? Or is it because that you have failed in some way, that's the same for the cancellation of contract because the client has taken off the project or was it NNIT not being able to deliver?

[Par Fors, executive]

I can maybe touch upon. If you talk Life Sciences first and then the ERP project and the Microsoft afterwards. I mean, in Life Science, if you look on our last quarters, for the last years, actually, we've seen a positive growth trajectory within Life Sciences, not at least internationally. So -- and we've been taking on larger and larger engagement, and taking on large engagement is good. But what happened this quarter is basically one of these large engagements that we have been working on, and they will go into the next phase.

And the client actually decided to move on to take that on that next phase internally. And then another project was actually postponed. So that revenue will come down the line. And we were not able to mitigate that because we did not want to kick out the people because we saw a positive demand coming. And we can also see that towards the end of the quarter, it was a positive development within Life Science.

So for Life Science, we're still positive about the development also going forward. On the ERP project, I mean, that business is actually a pure project business. It's a [ UCL ] project. And when you have larger projects that are postponed for different reasons that clients are acting upon their internal circumstances. And when they -- and this was an unexpected postponement of a large project.

That will pick up down the line. So it's not a lost project. But then you don't have new projects on the shelf, perfect the timing when there is an unexpected delay. So that's what was happening in that area. And that we also see going to pick up, but that was definitely damage done during the first quarter. And for these 3 events, it was not according to plan.

[Pernille Fabricius, executive]

And just to add, Poul, so the first description that Par did was within the Life Sciences piece, the ERP is actually within CDS and specifically scale. And that was completely unexpected and is -- and we can now see that, that pipeline is filled up again there. So it is just.

[Poul Jessen, analyst]

Okay. And a question on the new contract wins, both the renewals and the new ones. Can you indicate something about the margin on those contracts? Historically, it's been more or less normally that contract has been taking in at very low margins. So I was just wondering, the contracts you have now reported in Q1, the margins on those let's say, on the business unit profit margin, are they on par with what you report for the segments? Or are they actually providing better margins than what you have in the business units? Or do you take them simply to share cost?

[Pernille Fabricius, executive]

So the new contract wins, they are taken at better margins than what you had seen historically. So what is good in terms of the 3, you could say, units is that there's now quite a focus throughout that unit or a higher focus on margins. So the contract wins improve the margins compared to those you're looking at now.

[Poul Jessen, analyst]

Okay. And for Life Sciences, when should we expect Life Science to be back in the 20% level?

[Pernille Fabricius, executive]

On growth?

[Poul Jessen, analyst]

On the margin.

[Pernille Fabricius, executive]

On margin, over the course of Q2 and Q3. I would love to say it's just a complete Q2, but I'd say it's more like towards the end of Q2 and then into Q3.

[Poul Jessen, analyst]

Final question for now on the guidance for the full year. You maintained the guidance. But since you gave the guidance, you also made the acquisition of prime4services. So my question is, are you implicitly -- as you are not adjusting guidance to upward on that one, are you implicitly making a lowering of your full year guidance today?

[Pernille Fabricius, executive]

Yes. I mean it's such a small acquisition, Poul. So we are not implicitly lowering our guidance. But the revenue and margin of this is, is quite sort of -- it's not moving us outside of our ranges. So that's the reason for that.

[Operator]

[Operator Instructions] There are no further questions at this time. Please go ahead, speakers.

[Par Fors, executive]

Okay. I mean if we have no further questions, I think we can conclude this call, right?

[Pernille Fabricius, executive]

Yes. So thank you, everyone, for your participation today, and this concludes the call.

[Par Fors, executive]

Okay. Thank you very much, and you all have a great day.