Knowit AB (publ) (KNOW) Earnings Call Transcript

[Operator Instructions] I would like to now pass the conference over to our host, Per Wallentin, CEO. Please go ahead when you're ready.

Hello, all. My name is Per Wallentin. I'm the CEO of Knowit. We also have Marie Bjorklund here, our CFO, who will take us through some numbers later on. We can take the next slide with the highlights. First, yes, we can take the next slide again. First, I would like to take you through some operational highlights during the first quarter. The trend that we pointed out in Q1 with longer sales cycles and clients remaining in "wait-and-see" mode has continued even accelerated in Q2. This impacts our growth, but of course, primarily our profitability and margins, every percentage point on utilization have a large impact on revenues and results. This means that we don't have a huge decline in utilization, but it impacts profits to a quite large extent. Our clients still demands the digitalization projects and our competence, but we see longer lead times and at some customers, smaller budgets driven by the higher market in security. For us at note, this means that we increase our sales focus even more, looking for new projects, but also that we have a very close dialogue with our existing clients and maintain good relations. We spend a lot more money on sales and less on recruitment. Furthermore, we look over our internal efficiency, reducing costs where needed and making sure that we optimize our organization. We still see challenges in utilization on more junior consultant as well as administrative roles, while the technical experts software developers are still in demand. As in Q1, we see good demand in cyber security, defense and some other sectors. These are sectors where we have high competence and a strong position. We can take the next slide, please. And we will now take a look at our business areas more in detail, starting with Solutions, our largest business area, reporting net sales of SEK 962 million for the quarter, corresponding to 5% decline, including acquired entities. The EBITA margin was 5.2%. Margin decrease is following lower utilization, primarily in Norway and Sweden. And of course, we focus a lot on implementing measures to restore profitability levels, reducing costs and becoming more efficient. We somehow noticed some stabilization towards the end of the quarter. Next slide, please. Going over to our business area, Experience. Reporting net sales of SEK 395 million in the quarter, a decrease around 2%, including acquired entities. The EBITA margin was 5.1%. We have a stable revenue development in Denmark and Norway, but are challenged in Sweden impacting the overall utilization rate. We have also here initiated work to reduce capacity and overhead costs in the quarter already. We have a strong focus on sales in -- and have had that also, of course, in previous quarters. And this opens up for new opportunities even when the market is going down. We can take the next slide, please. Going into our business area, Connectivity. Reporting sales of SEK 267 million in the quarter, unchanged in existing business compared to last year. The margin was 7.2%. We meet challenges in sectors like automotive and see increased risk in telecom, while the defense industry remains strong. We have been successful in extending existing assignments, and we also see good inflow of new clients in this business area despite that we have a more sellers in market. And to highlight, our Polish business continues to develop well. Thanks to our strong ability to adapt to market changes quickly. We can take the next slide, please. Our business area, Insight. Reporting sales of around SEK 236 million for the quarter, growing by 1%, including acquired entities. EBITA margin was 7.6%. The challenge to utilize pure management consultants remains, but demand for cybersecurity and legal competence remains high. We also see good demand as we have talked about before in the defense and in the energy sector. We increased focus on sales a lot and implement measures to reduce costs in this business area as well. We can take the next slide, please. Q2 in figures. And now I would like to turn over to you, Marie, who will take you through some financials in detail. Next slide, please.

Thank you, Per. Looking at the group as a whole, we delivered sales of approximately SEK 1.8 billion compared to SEK 1.6 billion [Technical Difficulty] we recorded for the same quarter in 2022. This contributes to a growth of 7% and minus 1.8% when comparing Knowit now and including the acquired units a year ago. Adjusted for FX effect, this decline was minus 2.5%. EBITA adjusted for acquisition and integration costs, which was for this year, minor though amounted to SEK 77 million for the quarter, quite a large decrease compared to the same quarter last year. This leads to an adjusted EBITA margin of 4.4% in the quarter. Last year, it was 8.5%. So here, we also have a decrease. And as we already mentioned, this margin decrease is due to a slowdown in demand causing lower utilization affecting several markets and all business areas. We have increased our hourly rates. So the negative growth of comparable figures is coming from our utilization. We see longer sales cycles and difficulties utilizing junior consultants in specific, but not exclusively. Challenges are biggest in Norway and in Sweden, which are also our biggest markets and Sweden with all 4 business areas present. The share of subcontractors is still high, but not growing as a share of total revenue. And if anything, this quarter has been a quarter of execution for Norway, as we've had a very intense focus on sales, but at the same time of cost reductions to strengthen our resilience in a tougher market. Cost reductions will be of other external costs, such as travel, conferences and events, but also staff costs, and we expect to see effects during the fall. Next slide, please. In the first half of the year, we delivered sales of approximately SEK 3.7 billion compared to SEK 3.3 billion reported for the first 6 months of 2022. This contributes to a growth of 12% and 2% when comparing Knowit now and including the acquired units a year ago. Adjusted for FX effects, the growth was 1.5%. The EBITA adjusted for acquisition and integration costs amounted to SEK 275 million, a decrease compared to the same month last year. Our EBITDA margin was 7.4% in the first 6 months. And last year, it was 10%. And we are, of course, very concerned with the margin development. And as I mentioned, we have initiated several actions to reduce costs and increase internal efficiency in combination with full focus on sales. As you can see, the figures for half year are better than the ones for the quarter, both concerning the growth and EBITA margin. And this stresses the fact that the effects of the slowdown and the challenges due to low utilization that we mentioned already in the first quarter have accelerated into the second quarter. Again, I want to stress that we have full focus on our side on actions to protect our margin. Next slide, please. This slide shows the development over time and also on a rolling 12-month basis. Our adjusted EBITA for the latest 12 months is at SEK 549 million and revenues at SEK 7.2 billion at an EBITA margin of 7.6%. And as mentioned, all our energy towards breaking the trend of the margin. Next slide, please. This is an overview of our net debt development. We have a SEK 700 million in used credit facility. And we have a total credit facility granted of a little more than SEK 1 billion, SEK 300 million due in 2026 and SEK 750 million due in 2027. Future considerations amounting to SEK 90 million, with the decrease since last quarter, mainly because of the payment of Creuna and Ascend earn-out, but also since some revaluation of future payments. Leasing debts amount to SEK 592 million, an increase towards last year because the new leasing contracts in several places. For example, Oslo and the Stockholm and the amount has a small decrease since last quarter because of amortization. This totals a net debt of around SEK 1 billion and divided with our EBITDA of [ 712 ] on a rolling 12-month basis, we are at leverage of 1.4. And this means that we still have a stable balance sheet and a good financial position. Also, this means that we are well within our financial target, which is set not to exceed 2. Next slide, please. We do have a solid platform and a strong position as a digitalization partner in the Nordic region and the share from the public sector have increased compared to last year, mainly driven by an increase in the defense sector, but also by acquisitions. In other parts of the public sector, we noticed greater caution than previously, driven by the need not to drive inflation. Hence, budget remain stable or decrease even though prices go up, impacting volumes. And even though we're not satisfied with the recent quarter's development, we see demand for our competence and a big need to continue digitalization in several sectors. Back to you, Per. Next slide, please.

Thank you, Marie. And well, to summarize before we open up for questions. We present a quarter where negative trends regarding demand have continued. This, of course, affects utilization rates. We focus to move consultants to sectors with higher demand. For example, defense, energy, cyber security, et cetera. Of course, we also focus on sales and close dialogues with existing clients. In addition to that, we work to improve internal efficiency and to reduce costs. We expect that these actions to improve profitability, will have effect in this fall and of course, early next year. The market outlook for the coming year is uncertain and the market visibility is low. But we have a strong position to continue delivering growth and profitability even in a market like this. And now we will open up for questions.

[Operator Instructions] Our first question comes from Raymond Ke from Nordea. Please go ahead when you're ready.

Hello, Per and Marie, can you hear me?

Yes. Thank you.

Yes. We can.

Okay. So 2 questions from me. Could you first perhaps comment on the market development and project availability throughout Q2? And if you perhaps see any changes in the trend towards the end of the quarter?

Yes. We saw decline in market already in the end of Q1. And we -- as you'd probably remember, we talked a little bit about that report in Q1. And this have -- this trend have accelerated in Q2 and especially in the beginning of Q2, but it's not an acceleration in the end of the quarter. So it's the stabilization.

Okay. And then you also talked about focusing on generating sales. At the same time, you talk about better cost control, such as cutting back conference and spending and travel. It sounds to me like you might be cutting back on marketing activity that should be driving sales. Could you perhaps just concretize your plans to drive sales going forward for us?

Yes. Good question. But we don't have that much marketing activities. We never had. This position that we have in the market is a lot about a close relationship with the customers and meetings. So we don't have that much spending in marketing as it is to cut down on from the beginning. So it's more activities, that we do decrease is connected to, of course, recruitment, and we have had also some marketing activities back in the days connected to that. Less recruiters, of course. And of course, slow down spendings connected to our internal work in different ways. When we talk about sales, of course, we have dedicated salespeople, and we try to increase the amount of those people and increase their focus, but in such challenging times that we have had now in the quarter and what we expect for our focus for the fall as well as is to increase sales among people that are in leader positions. But also connected to more senior consultants. So all over, it's a much bigger focus on sales. And this is unfortunately also possible to do. Due to that we have now a higher or lower utilization among some of our consultants. So we have people available to sell. We didn't have that a lot last year or the years before. So it's that focus that have shifted.

[Operator Instructions] We have no further audio questions registered. I will now hand over to the management team to go ahead with the questions submitted via the web.

Thank you. We have a first couple of questions from Tom Guinchard at Pareto. First question, could you share the dynamics of the public sector business price versus volume or demand? And is pricing more difficult here compared to the private sector? Marie?

Well, we have been able to increase prices. And we can't really see that we have more challenges in the private sector. We've been able to raise prices beginning of this year in the public sector. We have many of our agreements are indexed. So we -- overall, we haven't really had challenges yet in terms of pricing. Was there another part of that question?

No. And then another question from [ Pon. ] I think this would be better suited for you, Per. On utilization, how has the trend developed throughout the quarter, worse towards the end and your thoughts on Q3, our order books and project size length covering the summer months? Or are you finding new projects to maintain and improve utilization?

It was a little bit the same question as from Nordea. And we don't see a worsened situation in the end of the quarter. We saw that in the end of Q1, but now we are somewhat flattening it out. And that is good. Because then we have something to -- a platform towards to create profitability in this market. Of course, if you look at Q3, we have a lot of focus on sales, but my understanding connected to this business for quite a few years. The sales cycles are quite long. So when there are hesitations connected to some customers, you won't get new deals in 1 day rather like in a couple of months. So I think that we will have to bear in mind that sales cycles are quite long in this business.

Great. We have a question from William Balfour at Highclere Investors. Do you think you're losing market share?

No. I don't. If you compare to Q2 last year, I think that we have gained market share.

Great a question from Evan at Neustar Industrial. Actually, 3 questions. First 2, I think, is best for you, Marie. Can you give some indications on how many percentage points the utilization rate declined this quarter. That's the first question. Second, what kind of covenants do you have on your debt? Any covenants tied to the net debt-to-EBITDA?

Well, we don't disclose the utilization rate. But what I can say is that each percentage unit means a lot for us. So it has declined as we raised a couple of units this quarter. And the covenants, I'm not going to give you the details of our covenants. We have a couple of KPIs connected to our covenants. We are well within target on those, and we have a headroom. So there is nothing to worry on there.

And then third question from Evan for you, Per. Give some thoughts on your increased hiring efforts last year compared to the down cycle we are now seeing.