Zalaris ASA

OSE:ZAL

Earnings Call Transcript 2018-Q1

[Hans-Petter Mellerud]

Good morning, everyone. My name is Hans-Petter Mellerud, I am the CEO of Zalaris and I'm here together with our CFO, Nina Stemshaug. Thank you for joining us for this webcast presentation of Zalaris results for the first quarter of 2018. Please note that the conference is being recorded. You will find a link to the recording on the investor part of our website. Let's go straight to the presentation. 2017 was an extraordinary year for Zalaris, as we have continued with full pace as a European player in the first quarter of 2018. We have secured the position as a leading provider of multi-process payroll and human resources outsourcing with a scalable platform in regions characterized by growth. Why have we taken these steps? We have done so in response to customers' expectations. New technologies and cloud solutions drive demand for new services and cross-country offerings. Successful launch of existing customers in new markets, such as Ireland and Germany, prove revenue potential in our scalable business model across the regions. In addition, we delivered organic growth in our underlying business. Growing into new markets require attention from the entire company. Integration activities across acquired businesses are progressing according to plan, and we'll continue to meet 2018. Financial results continue the trend from previous quarters, with revenues up more than NOK 80 million in the first quarter compared to previous year. We are already winning new customers with the competency and experience from our combined operations. The new contract with leading full-fledged oil company, Aker BP, proves that we are the HR partner companies come to when they look for a state-of-the-art human capital management system. Now let's take a closer look at the numbers. Quarterly revenues have grown steadily quarter-by-quarter and reached NOK 186.2 million in Q1. Our profit margin in the first quarter are marked by integration activities. These efforts are expected to continue to meet 2018 and are supporting short and long-term growth prospects. In line with our dividend policy, the Board of Directors have proposed dividend of NOK 0.65 per share for fiscal 2017. The Annual General Meeting will be held on May 15, 2018. The recent acquisitions have balanced and increased our geographic presence across Europe. Zalaris have decided to respond -- to report its revenues for the following regions in order to simplify its geographical reporting: Nordics and Baltics, Central Europe and U.K. & Ireland. Let's take a closer look at our 3 regions. Central Europe. A slight decrease due to seasonal variations and on the back of consulting capacity being engaged in sales activities. U.K. & Ireland, the region launched its first customer, both within the HR Outsourcing segment and in Ireland in the quarter. Nordics & Baltics. The revenues from the Nordics & Baltics region have grown both from the HR Outsourcing and Cloud segment through the launch of new customers compared with the same quarter previous year. The region had a successful launch of payroll services for Statkraft both in Norway and in Sweden in the quarter. The number of employees served by our HR Outsourcing team was continued up in Q1 to a record high 280,000 employees across Europe. This is mainly due to the launch of a new large Norwegian customer and expansion of existing customers. Expansion into Ireland with Circle K in Q1 2018, a long-term customer, new services provided in Norway U.K. and Germany for Statkraft. Zalaris Group headcount, including all new colleagues in ROC and sumarum was 837 at the end of Q1. And please do not forget that in addition to these employees, we manage systems for customers that serve more than 1 million employees on a monthly basis. And with that, I hand over to Nina to cover the key financials before I return to say a few more words about market and outlook. Nina, the floor is yours.

[Nina Stemshaug, Chief Financial Officer]

Thank you, Hans-Petter, and good morning. I will walk us through Zalaris' financial performance in the first quarter of 2018. We start looking at the operating revenues for the group and, as usual, all numbers refer to are in Norwegian kroner, unless otherwise has been stated. Q1 '18 revenue was NOK 186.5 million, which is an increase of 75% compared with Q1 previous year, or NOK 80 million. The growth was mainly coming from the recent acquisitions, but also the Zalaris pre-acquisition business grew 2.9% compared to Q1 '17. It is the HR Outsourcing and the Cloud segment, which contributed to this organic growth. The decline in revenues from previous quarter is mainly due to reduced project revenues from Consulting and Cloud business units, which I will come back to, in addition to the one-off revenues announced in the Q4 '17 presentation.So let's take a closer look on the revenue development per segment. When we look beyond the relative numbers, we see that HR Outsourcing grew from NOK 91 million in Q1 previous year to NOK 108 million in Q1 2018. Most of the change stems from the sumarum acquisition. The organic growth in the pre-acquisition business was around 3.4%, as Zalaris has launched many new customers within this segment since the same quarter previous year. The quarter includes full revenue effect of [ auto compo ] and Schneider; the latter one, a customer, which changed from a cloud to a full BPO customer; and partly Statkraft, which will have full revenue effect in the second quarter of the year. In addition, Zalaris successfully started to deliver payroll and HR services to Circle K in Ireland in February from its new service center in Dublin. The revenues in this segment is, to some extent, also affected by reduced number of employees for some customers and a churn rate of 0.5%. The launch of DNB and Santander, which was planned in February and March, respectively, have been postponed by the customers and is now estimated to be within Q2. Whereas HR Outsourcing stands for about 58% of the revenues in the new Zalaris, the Consulting segment is the strongest segment revenue-wise for both sumarum and ROC, with respectively 52% and 72% of the revenues being generated in this business unit. This business though is based on strong customer relationships and as mentioned in earlier presentations, sumarum has long-term application maintenance outsourcing contracts within this segment, also generating recurring revenues. Total Consulting -- I'm sorry, so total Consulting revenues in Q1 '18 was NOK 47 million, which is a remarkable upswing of NOK 45 million from Q1 '17. This is attributable to the acquisitions. As earlier mentioned, Zalaris consulting capacity is not only being utilized to generate revenues within this segment, but actually a higher portion of the total consulting capacity is being used for customer's implementation projects as well as changed-order deliveries within the Cloud and HR Outsourcing segment, and thus the revenues in this segment may vary as a consequence of this. A high portion of consulting capacity has also been involved in business development for new opportunities in all segments in the quarter. The increase in Cloud revenues is partly driven by continuous demand from Zalaris' existing and new customers, and compared to Q1 '17, the recurring revenue in this segment has increased through the launch of customers as [indiscernible] with Employee Central and [indiscernible]. The mentioned switch of Schneider from a cloud to a full BPO customer negatively impacted revenues in this segment compared with the same quarter previous year, but it is a proof of trust from our customers when they decide to increase the scope of work we deliver. The growth is, to a large extent, also driven by our new businesses through the acquisitions. We may experience variances from quarter-to-quarter in revenues related to implementation projects and change orders within this segment.Group operating profit for Q1 was NOK 11.3 million, implying a profit margin of 6.1%. As Hans-Petter mentioned earlier and as foreseen and earlier communicated, our post integration activities have affected all business segments and hence, the profit margin for the period. However, we are progressing well with the integration program, and the profit margin are not expected to be affected by these activities in the second half of the year. These efforts are supporting short and long-term growth prospects, and Hans-Petter will tell more about this later in the presentation.Profit margin in our business segments were marked by integration and associate activities, which as mentioned, will be temporary. In HR Outsourcing, Q1 '18, operating margin was 5.7%, and operating profits were NOK 6.1 million. Looking at Zalaris pre-acquisition, we see a positive trend in the underlying business. The offshore and nearshore percentages have increased with 5 and 1 percentage points, respectively, compared to Q1 2017. This has reduced the percentage of resource costs within the service deliveries. As part of the integration program, it is initiated to introduce the same delivery model in the new regions. In Consulting, the operating margin was 13.6% in Q1 '18, although this is a margin improvement compared with Q4 '17, the utilization of the total Consulting capacity was, to some extent, lower than target level. As mentioned earlier, the consulting capacity is used to deliver services to customers in both the Cloud and HR Outsourcing segment. These services include customer implementation projects, change orders, system support services and business development support. Thus, the profit margin in this segment will be affected by to what extent they sell their capacity to external customers versus how much of their capacity is used to deliver services internally.Operating margin in the Cloud segment was 3.8% in the quarter and for this segment too, lower utilization had a negative impact on the margin. Across region, workforce planning is established to ensure that people are utilized across the group.Group cash and cash equivalents was NOK 37.7 million at the beginning of the quarter and NOK 31.7 million at the end of the period. The main changes are as follows: Cash flow from operations was negative NOK 2.3 million, mainly driven by changes in customer projects and changes in net working capital; cash from financing activities was positive NOK 1.5 million; cash for investing activities amounted to NOK 5.3 million, mainly from system integration projects of the acquired companies on Zalaris ERP system and mobile first platform 2018 in addition to other smaller projects to improve the functionality of our services. Total asset at the end of Q1 was NOK 561.8 million, up from NOK 190.2 million 1 year before. And the equity ratio was 22.3% at the end of the quarter, down from 56.6% same quarter previous year and up from 21.1%, end of 2017. Interest bearing debt was NOK 217.4 million at the end of Q1 '18, up from NOK 1.4 million, end of Q1 '17. And the increase relates to the 2 acquisitions. And as already mentioned in our previous presentation, the company will carefully manage its financial position with the aim of strengthening its capital structure going forward. Thank you very much, and I hand back to Hans-Petter.

[Hans-Petter Mellerud]

Thank you, Nina. A key aspect of our success to date has been our ability to focus and our scalable integrated operating model. An important element of this has been common IT solutions for all aspects of our business, ranging from internal systems for HR and payroll, finance and accounting, sales and lead generation as well as our frequently mentioned 1 common multi-client customer-facing cloud solution. We thus have, in the past, been eating our own dog food. That is, using all solutions offered to our customers internally to better be able to put ourselves in the position of the customer. Going forward, we want to continue doing this. We want to implement and promote efficient harmonized internal operations that enable us to maximize the time that is spent with customers and market-facing activities. Thus, our ongoing integration program is an important activity to enable continued organic growth and margin expansion. The program consists of a number of work streams, including organizational design, defining our future HR roadmap, communicating with our people and customers, defining group-wide service lines, implementing common internal IT infrastructure, common finance and accounting processes and, last but not least, merge our current 3 brands into 1 common brand to simplify communication in the market. I will share with you some further information on our organization and the time line for becoming one Zalaris brand. First, it's incredibly motivating to see the spirit and positive mood in our joint organization as displayed in our Q1 kickoff. Team Zalaris now consists of 8 -- more than 820 specialists and consultants covering the Nordics, Baltics, Poland, Germany, Switzerland, U.K., Ireland and India. To effectively manage our operations and to be able to assimilate additional growth, we have organized our business in 4 regions headed by Regional Executive Vice Presidents. Together with myself and our CFO, Nina, this compose our commercial leadership team. The heads of each regional business unit have 3 key responsibilities: one, being a business operator securing profitable delivery of products and services to customers within the region and securing happy and satisfied customers; being a value creator, driving market share in the region and being a people developer, developing our people and organization in the region. In addition, the regional managers are responsible for the provision of local market insight to support the development of our service lines and will provide relevant input to the group support functions to underpin the effective development of group-wide policies, frameworks and processes. Our service and product lines aim at developing and managing market-oriented offerings across the regions. The concept is to have a suite of services and products that are developed and used by all regional business units as a franchise concept. Individuals from across the group will lead the development of the service propositions and the associated operating models for group-wide deployment. They will do this by forming a team of contributors from each of the regional business units and relevant group support functions. And the leader of each service line or product line has the overall responsibility for thought leadership for the service line, developmental strategies and approaches to service line development and creating all compelling services for delivery by the regional business units. And as you can see on the left side of the slide, you see the service lines that we have currently defined and where we have nominated leaders and where we're also seeing positive development.With these -- with 3 strong brands in their respective markets, we were left with a decision of continuing with a multi-brand strategy or build our future around one common brand. To simplify communication in digital and social media channels and to support our multicountry and integrated solution value proposition, we decided on the latter. Going forward, we will just focus our effort on developing one strong brand around Zalaris and the slogan: "Value People". We have adjusted our visual identity to reflect our new family members. Thus, our target is that by end of Q2, all Zalaris group entities will be operating under the Zalaris brand. Now let me round off with some thoughts about where we are heading. First of all, through our recent acquisitions, we have built a significantly stronger platform for continued organic growth. While transactions have been formally concluded and the company is already offering its broader range of services in new geographies, full effect of the integration is expected from mid-2018. Expansions for existing customers in new markets such as Germany and Ireland prove our scalable platform. Our integration efforts have affected all business segments in this quarter, supporting short and long-term growth prospects. Effect of integration is, as previously communicated, expected from mid-2018. Margin improvement will continue to be a priority going forward, as structured program is being implemented, and we have a clear ambition, we seek to maintain or increase historic organic growth rates and target industry-leader profit margins. We believe the underlying market trends are supporting our ambitions driven by advances in digital technology, the European market for multicountry payroll HR Outsourcing is strong. Cloud solutions and mobile innovations are some of the key areas that will pave the way for growth. For Zalaris, this is reflected in a pipeline of business opportunities that remain solid, and we are optimistic about growth opportunities, both in the form of contracts with new customers and increased scope with existing ones. Thank you for listening. We will open for questions.

[Unknown Executive]

Thank you, Hans-Petter. [Operator Instructions] First question, how do your different regional markets differ from each other?

[Hans-Petter Mellerud]

Well, I think there are some -- our 3 regional markets, the Nordics, the Central Europe and U.K., Ireland. For now, we leave APAC as a support region, differ mainly with the state where they are outsourcing and as well as the type of competition and solutions preferred by customers. And in this respect, we see that the Nordic market is fairly well developed, particularly also now the Norwegian market. The German market is still in a relatively early stage as far as we see it. The U.K. market is well developed from an outsourcing perspective, but there are not many providers of -- with a similar type of offering that we can offer. So we see, in terms of market penetration, extremely interesting potential, in both the German market and the U.K. market. But having said that, I think we all realize that also the Nordics is our home market and we shall never leave -- or also focus on being a very strong player in our home market.

[Unknown Executive]

Can you also please elaborate on the market trends that are beneficial to Zalaris at the moment?

[Hans-Petter Mellerud]

I think there are 2 key drivers that we see is, the very strong focus on digitizing, in general, digitization, the focus from board levels to management teams of how to digitize business processes. So there is a very strong focus on -- and openness to change existing processes, including HR and people processes to digitized processes. And that is also supported by the GDPR regulation that is also coming into place where unless you have a properly digitized process, it is, I'm not saying impossible, but quite complicated to document that you are in compliance with GDPR. The other big trend is the increased focus on HR. Like we say, HR and people and personnel has also finally become the focus of many -- most organizations. One has, over the last 20, 30 years, frequently mentioned that and said that people is an organization's most important resource. However, history shows that one has been willing to invest a lot of money and effort in managing machines and developing maintenance systems and solutions for efficient utilization of machinery. However, one has spent little of the similar money to then what has been said as the most -- been the most important resource, managing the people. So with people cost consisting, been one of the key costs of most organizations, one increasingly see that to succeed in the market, you need the best people and you need to have the right people in the right position, and you need to keep them with you. And the solutions that we provide are industry-leading solutions that help customers doing that, and that's quite an important trend for us.

[Unknown Executive]

Thank you, Hans-Petter. This is all for now. We will revert with our second quarter results in the mid of August. Thank you all for listening, and have a good day.

[Hans-Petter Mellerud]

Thank you.