Knowit AB (publ)

STO:KNOW

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the Knowit's Audiocast Teleconference Q1 2022. [Operator Instructions]

Today, I am pleased to present Per Wallentin, CEO; and Marie Björklund, CFO. Please begin your meeting.

[Per Wallentin, executive]

Hello. My name is Per Wallentin and, as he said, I'm the CEO of the company. And with me, I also have Marie Björklund, our CFO, who will take us through the numbers later on. We can take the next slide, please.

First of all, I would like to take you through some operational highlights during the first quarter.

We had a very good start of the year where we experienced good demand for our services, which, in turn, have resulted in strong growth and improved margins. I'm pleased that we delivered net sales of almost SEK 1.7 billion, corresponding to an increase of around 13% when we compare Knowit today to Knowit plus acquired companies a year ago. Adjusted currency effects of the growth was around 10%.

We delivered an adjusted EBITA of SEK 194.2 million, and that's our strongest quarter ever at a healthy margin of 11.5%. And all in all, we see all 4 business areas performing very well. We can take the next slide, please.

An important milestone in the first quarter was the publication of our new sustainability goals around 1 month ago. These goals, in combination with the financial goals, will ensure the company's steer towards long-term profitable and sustainable growth. And the goals are 80% of our net sales shall contribute to at least 1 of the UN SDG, where Knowit can make the largest difference, in 2021 this figure was 74%; in 2022, we will be climate positive, and we commit to halve our CO2 emissions before 2030; Knowit shall be an inclusive workplace with an even gender distribution among executives at all levels. So that's the three goals. And we can take the next slide, please.

And we'll now take a look at our business areas more in detail.

Solutions, our largest business area, reported net sales of SEK 976 million for the quarter, corresponding to 17.1% growth included acquired entities. We are pleased to report a healthy EBITA margin of almost 13%. And we continue to grow with an especially strong development in Norway, and we also see good trends in Finland for the quarter. We can take the next slide, please.

Experience, our digital agency, reported sales of SEK 413 million in the quarter, an increase of almost 14% included -- including acquired entities. We see especially good demand in particularly Sweden and Denmark. And we are happy to see that the integration of our newly acquired digital agencies Strømlin and 1508.dk has been very successful, driving high-end strategic consulting and new businesses. And as some of you know, we recruited many new colleagues during the second half of 2021, and the process of getting them up to speed in projects have been very successful. So we can take the next slide, please.

Coming to our newest business area, Connectivity, reporting SEK 246 million in the quarter, growing with almost 13% in existing business, which I'm very happy with as that is a new part of Knowit. And Connectivity strengthen our offers at R&D-intense industries such as telco, tech and automotive. Also, the share of Polish employees that delivers into the Swedish projects have increased, which have a good positive impact on our margins. And of course, also here, we continue to recruit and focus on recruitment activities to support further growth. We can take the next slide, please.

Our management consultancy, Knowit Insight, reported sales of around SEK 170 million for the third quarter, corresponding to around 7% growth, including acquired entities. The consolidation of business offerings in Stockholm have been proven successful with many new business opportunities. And we have a solid margin development and EBITA margin increasing to almost 12%. And of course, in Insight and in other areas, we see that the employee turnover in the market is challenging and the recruitment activities will remain in focus. We can take the next slide, please.

And now I would like to turn over to you, Marie, and you will go through the financials in detail.

[Marie Bjorklund, executive]

Next slide, please. And thank you, Per.

Looking at Knowit, the whole group in total, we delivered sales of approximately SEK 1.7 billion compared to SEK 1 billion reported for the same quarter in 2021. The sales increase was, of course, impacted by our acquisitions, both Capacent and mainly Cybercom. This quarter, we also consolidated Strømlin and 1508. The acquisitions closed in beginning of January this year. More importantly, we can see a very good growth in existing businesses, which is satisfying. We have a positive currency effect, but after taking this away, we can still see a very good growth.

Our adjusted EBITA is SEK 194 million in this quarter, and the adjustment we're making is related to acquisition and integration costs and amounts to around SEK 2 million in the first quarter. The currency effect has a positive impact on the EBITA of SEK 4.8 million. All in all, our adjusted EBITA margin was 11.5%, in line with the last quarter in 2021 and way higher than the first quarter of 2021 when it was 10.2%.

Next slide, please. This slide shows our adjusted EBITA development in which you can see how much the result has grown over the years. And we are ending this quarter with a rolling 12-month adjusted EBITA of SEK 579 million. We're especially happy with this development since we had an intense period with integration work this time.

Next slide, please. Our net debt at the end of the quarter amounted to SEK 184 million, an increase compared to previous quarter following mainly due to acquisitions this past year. This corresponds to a net debt-EBITDA ratio of around 0.3, which is well within our financial target, which is set to 2. We continue to enjoy a solid financial position, which leaves room for us to take good care of the opportunities that lie ahead of us.

And with that, I leave it to you, Per, to say some final words. Next slide, please.

[Per Wallentin, executive]

Thank you, Marie.

Well, to summarize, we are delighted, of course, to present another solid quarter with high activities in all areas. We see a very high demand for our services across the Nordic region and Poland. However, we are challenged by a hot employee market, meaning that even though our recruitment activities are successful, we also lose some employees, and that is mainly due to post-COVID activities in the market. And I think that, that will remain during -- in the market during 2022. But we are -- I think that we are handling it well.

The integration work is done and have been successful if you look at especially the big acquisition that we did last year, Cybercom. We are proud to be a company that contributes to transition to carbon-neutral world around -- with our new sustainability goals.

And looking ahead, we see a good sign of continued good demand on the market. And we are very well positioned for continued profitable growth, and we look forward for existing -- exciting opportunities ahead. And that's all. So now we are open for questions.

[Operator]

[Operator Instructions] We already have one question in the list, and the first one comes from [ Johan Dahl ] Handelsbank.

[Unknown Analyst]

I'm not sure if I lost myself. Can you hear me?

[Per Wallentin, executive]

Yes.

[Marie Bjorklund, executive]

Yes.

[Unknown Analyst]

Yes. Okay. Then it's [ Johan ] here from Handelsbanken. And congratulations to the strong numbers here. A tough day in the market, though.

I was wondering, first, you mentioned about continued tough trends in terms of recruiting and turnover trends and so forth. And I guess, especially so should be natural in Cybercom or Connectivity. Can you comment if you've seen some kind of abnormal hikes there and if you were heading into more normal waters or -- with regards to Connectivity?

[Per Wallentin, executive]

No. There is not a higher employee turnover in our business area, Connectivity, than the other business areas.

[Unknown Analyst]

Yes, that's good to hear. And also, obviously, super strong demand still in most segments and geographies, it seems. And the question is really, do you see any signs of weak demand? Because you have some -- there's talk about in-sourcing, and we do see component shortage hitting and building inventories, the industrials and so forth. So my question is if you can see around the corner a bit in terms of automotive and so on and if you've seen some -- if you're planning for this high demand to continue for the full year.

[Per Wallentin, executive]

We don't see any sign of weak demand at all, and we plan for a good demand this year. And I think that, that will continue for quite a while. Even if, of course, those industry -- companies that you're talking about are struggling with shortage of opponents, et cetera, that will probably not affect the investment in the digitalization that much. So I think that we will see a trend with an increased focus towards digital platforms and digitalization in those areas as well.

[Unknown Analyst]

Perfect. And the question on high employee turnover obviously triggers, and we also have a high inflationary environment. So the question is if you will -- do you think you'll be able to pass on salary increase to pricing or hiking prices in 2022. And is frame agreements a big problem on that? Or can you go around those with that?

[Per Wallentin, executive]

Yes. It's -- I think that we will see a salary increase in our market 2022, and we have already seen that coming as those discussions mainly are on springtime. I'm pretty convinced that we will be able to take that out in higher prices. Of course, we have a situation where we have long-term contracts, for example frame agreements, but there is always a percentage of those that are renewed every year. So I think that, that will even out even in 2022.

[Unknown Analyst]

And my last question will be to Marie. It would be a little bit if you can remind us about the number of workable hours that impacted Q1, i.e., the year-over-year effect. I guess we had a little bit positive Easter effect in this quarter compared to -- this quarter; and also Q3, Q4, how it will be in number of days.

[Marie Bjorklund, executive]

Actually, we had a positive effect of the hours, but that was more in January than later in the quarter. And it's always difficult to estimate how much that is affecting us when it's more hours around the New Year's and the holidays during Christmas. But apart from January, it was more or less the same.

And I want you to keep in mind also that we have now also businesses in several countries, so it's not only to look at the figures in Sweden. However, we don't give any details about our hours. But you can look at how it's -- the main holidays. And you can get a pretty good estimate of what it's going to turn out this year. But it is true that it was a positive effect this quarter.

[Unknown Analyst]

Okay. Fair enough. And good luck here in Q2. And again, my congratulations.

[Per Wallentin, executive]

Thanks.

[Operator]

We have other question from Daniel Thorsson from ABG.

[Daniel Thorsson, analyst]

I start off with a question on different countries in the Nordics. You're right that you see strong demand in different countries in the different segments like Norway in Solutions, while Sweden and Denmark in particular in Experience. What is explaining that really? Is it different type of projects being made in the different markets? And why is that?

[Per Wallentin, executive]

I think that's more an internal discussion, how long we have developed our internal business in those countries and the possibilities that we are facing.

[Daniel Thorsson, analyst]

Okay. So much more than the general markets in there?

[Per Wallentin, executive]

Yes. Yes. I think it's -- the general market is strong in all countries, in all areas. And I think that it is -- it wouldn't be wise for us to rank the different business area markets in the different countries in detail.

[Daniel Thorsson, analyst]

Okay. Fair enough. Looking at Sweden then, the EBITA margin in Q1 here was close to 16%. So that must be close to all-time high historically, I guess. What is driving that mainly? Is it prices? Or is it utilization? And do you expect that level to remain during 2022 as salary inflation will probably come a bit later this year?

[Per Wallentin, executive]

Yes. I think that, yes, it's really strong margins in Sweden this quarter. And I think one thing is that we have been able year-end to increase prices, and we see an increase also in salaries now coming. I think that we will be able to continue to increase prices during the year, though. So we will see what happens. I can say that I think that, that will probably even out during the year, yes.

[Daniel Thorsson, analyst]

Okay. But nothing unusual in this quarter that drove the strong margin? It was basically a good underlying execution?

[Per Wallentin, executive]

Yes. Yes. I think that of course, we have a high utilization. We are -- I think that although that we have a higher employee turnover than last year with the COVID situation, I think that we are still in a healthy situation if you compare it to peers in our business. And of course, as we are growing, we're also able to take on larger assignments with -- that are a little bit more complex. We see that happen already in Q1, and we also see an effect of the integration and the synergies that we have been working to take out.

So there is a lot of small details connected to the margin. But, of course, you have to bear in mind that Q1 is almost always a very strong margin quarter.

[Marie Bjorklund, executive]

Yes, I totally agree with you. It's a number of things that all went in the right direction this quarter that sums up to this good EBITA margin.

[Daniel Thorsson, analyst]

Okay. That's very clear. And then of the roughly 10% pro forma organic growth here in Q1, how much was explained by increased utilization versus prices and underlying growth in employees, to get a feeling of the main driver here?

[Per Wallentin, executive]

We don't disclose that in detail. But of course, price is one component. We also see that we grow with higher utilization. We -- in some areas with a shortage of people, we grow with subcontractors as well. So it's a lot of different things.

[Marie Bjorklund, executive]

Yes. I guess you could say there's just a lot of small things adding up, both prices, utilization. We have the calendar effect, as I mentioned earlier.

[Per Wallentin, executive]

Well, yes, as you've seen in the report, it's more that we are increasing that much with the amount of employees.

[Daniel Thorsson, analyst]

Sure, sure. Okay. So another question on Insight then. I mean you have been above 15% margin historically, but you are not really there now despite the strong market. What is needed to happen in Insight to return back to the 16%, 17% we have seen historically?

[Per Wallentin, executive]

We -- I think if you go down to details in Insight, we have had the consolidation of actually I think it's 5 subsidiaries in Stockholm, 1 starting end of Q4, continuing now in Q1, that have affected the margin. We also see that we had the -- stopping 1 or 2 projects in Finland during the quarter. So it is actually more in the details.

[Daniel Thorsson, analyst]

Okay. Interesting. And then my last question is on the net recruitment of 22 people here in Q1. Was that in line with your expectations? Or are you working to achieve something higher than that in the rest of the year?

[Per Wallentin, executive]

It wasn't a net recruitment of 22 people. You have to bear in mind that we had an acquisition of around 40 people as well. But Q1 is always a quarter where we are not growing organically with people. That was the case last year and the year before that, et cetera. But what I'm happy about is that we are -- it's a little bit less people down this quarter than the quarter before even if we are bigger. So the percentage and the trend is really good.

[Operator]

We have another question from [ Walter Morgan ] from [ Walter Securities ].

[Unknown Analyst]

Another question on the personnel turnover. I'm wondering about those consultants that are leaving Knowit. Are you able to -- or what's kind of your strategy to replace them? Are you able to replace them with people of the same seniority and expertise? Or are you more replacing them with junior consultants, meaning that you perhaps lose some competence there?

[Per Wallentin, executive]

Yes, well, it's both. We actually try to focus on recruiting younger people as we all get 1 year older. So the experience and the competence will be there anyway. So the problem for us is not to recruit senior competencies because that we have a shortage of that, it's more the opposite actually. So that's the main focus. And I think that we are, as you see in the figures as well, really good in getting a lot of new people on board.

[Unknown Analyst]

Yes. And then I'm wondering if you could share anything on the M&A pipeline currently and if you will make additional acquisitions this year. Are those likely to be of smaller size like the Danish ones you did? Or -- yes, could you comment anything on that?

[Per Wallentin, executive]

Well, they will probably be smaller than Cybercom and not too small, but I can't comment that in detail. But of course, we have a pipeline. But what -- we are thoroughly going through every detail around culture, financials, possibility to good integration, et cetera, et cetera. So I'm pretty happy with the pipeline and -- but as -- it's actually the same answer that I've always given. We won't promise anything because the most important for us is to do the right ones, and we will see what comes.

[Operator]

We have another question from [ Benjur Jorvik ] Handelsbanken again.

[Unknown Analyst]

Yes. More or less, I have the same type of questions. But perhaps I can ask you like this: looking at the churn again, is it an equal mix among those leaving the company? Is -- i.e., is it both more younger employees and need experience and also with high seniorities? So -- or is it tilted towards mid or higher? That's my first question.

[Per Wallentin, executive]

No, it's a pretty equal mix, actually. As there is a shortage of -- I think the shortage in Sweden right now of highly skilled people in our business is around 70,000 people. So it's a big problem, for example, in Sweden. So the more senior people are going to really interesting management opportunities in our -- at our customers. And so we see that it's actually quite evened out during the H.

[Unknown Analyst]

Okay. That's good. And may I ask you on -- can you tell us a little bit more about your cybersecurity business, if it's difficult -- I know it's very hard to find talented employees there, but it's super hot segment and I guess it should be easy to raise prices and so forth. Can you just give us a picture of how it looks like now in size and trends and strategy? It would be great.

[Per Wallentin, executive]

Yes, it's continuing to grow organically. We are present now in Sweden and in Norway. And we have actually three programs and cybersecurity programs for people that haven't been in that part of the business before so that we help them to we -- get into that part of the business. So we are trying with a lot of ways to continue to grow organically. And that part is growing organically actually as well.

[Unknown Analyst]

Any ballpark numbers in terms of employees or revenues like 50, 100, 200 or...

[Per Wallentin, executive]

It's around 150 people. Yes, it's around 150 people.

[Unknown Analyst]

Is it mainly time and material? Or do you also have some kind of managed services security or -- yes.

[Per Wallentin, executive]

We have some -- if you add on -- then it's actually around 180, 190 people if you add on -- we have some managed services there as well. And -- but of course, most of it is time and material. That area is part of -- those 150 people is part of our Insight area, so they are really high end connected to security consultancy, a lot of strategy work and connections to the customers' business models and how to integrate the security work in the customers' strategy.

[Operator]

[Operator Instructions]

[Per Wallentin, executive]

And it seem, well, we have no further questions.

[Marie Bjorklund, executive]

We do have a question through email.

[Per Wallentin, executive]

We have some questions through email or from our website. Maybe you can take those.

[Marie Bjorklund, executive]

Yes, it's actually one questions, and you have touched on this topic before. "Do you foresee wage increases causing margin pressure going forward?"

[Per Wallentin, executive]

We foresee wage increases, but we foresee the price increases in line.

All right. Well, if there is no more questions, we would like to thank you all for listening and hope to see you in the mid of this summer again. Thank you.

[Marie Bjorklund, executive]

Thank you.