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Edited Transcript of NETCG.CO earnings conference call or presentation 6-Nov-19 10:00am GMT

Nine Months 2019 Netcompany Group A/S Earnings Call

Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Netcompany Group A/S earnings conference call or presentation Wednesday, November 6, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* André Rogaczewski

Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board

* Thomas Johansen

Netcompany Group A/S - CFO & Member of Executive Board

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Conference Call Participants

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* Alexander William Tout

Deutsche Bank AG, Research Division - Research Analyst

* André Thormann

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Erik Elander

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* George W Webb

Morgan Stanley, Research Division - Equity Analyst

* Poul Ernst Jessen

Danske Bank Markets Equity Research - Senior Analyst

* Yiwei Zhou

SEB, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the presentation of Q3 report conference call. (Operator Instructions) I must advise that this conference is being recorded today, Wednesday, 6th of November 2019.

I would now like to hand the conference over to the first speaker today, André Rogaczewski. Thank you. Please go ahead.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [2]

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Good morning, and welcome to this presentation of Netcompany's Q3 2019 results. My name is André Rogaczewski, and I'm the CEO and Co-founder of Netcompany. And I'm joined here today by our CFO, Thomas Johansen.

But before we get going, there are some important disclosures that I need you to read through. So could we have please Slide #2, please? I will pause for 30 seconds here and let you all have a read-through of these important disclosures.

And with that, can we go to Slide #3, please?

So the topic of today's presentation is, I will give an update on the business highlights for Q3 and I will discuss our employee base and how it's been developing. I will also spend some time discussing the projects that we've delivered over the last 15 months, as the results are really quite remarkable and tells an important story about Netcompany and our continued and relentless focus on always to deliver on time, budget and in a great quality. Finally, I'll go through our revised guidance for 2019, where you will have noticed already that we have revised our expectations to full year revenue growth down slightly, however, at an unchanged margin. Thomas will be discussing the financial performance for each country in greater detail, which also explains our revision to our top line expectations. Finally, I will discuss our current expectations for 2020. Once I'm done, Thomas will go through the numbers in greater detail, including cash flow and work in progress.

Can we have the next slide, please?

In Q3, we continued our high-growth rate and realized growth in top line of more than 21% in constant currencies. Gross profit increased relatively more than our revenue, leading to increased gross margins, even after including the negative impact on gross margins from a recent acquisition in the Netherlands. Adjusted for this negative impact, gross margins would have increased by 0.4 percentage and gross margin would have been 43.6%.

FTEs grew by almost 500 in Q3, 480 to be exact, which is 25.7%. Of that growth, 4.4% was related to the acquisition of the business in the Netherlands and the organic growth in FTEs was thus 21.3%.

To go a little deeper into the dynamics of the employee base, please, let's go to the next slide. Can we have the next slide, please?

So on Slide 5, the FTE growth in Q3 on the organic business was, as mentioned, 21.3% compared to the organic revenue growth at 18%. The increase in client-facing FTEs, excluding the impact from the Netherlands, was 22.7%. The reason that we have continued to grow at a fairly high rate despite lower-than-anticipated revenue growth is the simple one that we have strong expectations to our pipeline, both in short term and longer term. The level of freelancers was further reduced by another 22 in the quarter, following the strategy we've outlined to have as much work be done by our own employees to maintain superior quality and increase margins.

In addition, we have also reduced the amount of independent contractors in the U.K. by 26 during the quarter as a deliberate decision to bring down the percentage of independent contractors and instead hire our own employees in the U.K. market. This naturally has a negative impact on top line, but a significant and positive impact on margins, as you can also see from the numbers and that I know Thomas will discuss later on.

Excluding the FTEs from the Dutch acquisition, the amount of client-facing employees was 2,111. This is an increase from Q2 2019 of 49, which is lower than our growth in client-facing FTEs seen during the last 4 quarters. The main reason for this is the reduction of freelancers and independent contractors, which in total was reduced by 48. And again, such a reduction naturally takes out some top line growth, however, the impact on margin is highly positive.

Average age remains low and is currently around 34, reflecting the continued commitment to hire 8 out of 10 employees straight out of university. In Q3, we had 263 new employees starting, which is 18 FTEs more than in Q2 2019, reflecting the ramp-up in FTEs, as discussed on earlier occasions, and our continued belief in future growth.

Churn for the last 12 months was 20.5%, which was 0.8% lower compared to last year's same period. In Denmark, the churn ratio was reduced slightly compared to last year and was 16.7% compared to 19.6%. And in Norway, the high churn we saw in Q2 is coming down to more normal levels and was 19.9% in Q3 compared to 18.1% same period last year, but more importantly, down from the 20.8% in Q2. In the U.K., churn rate was reduced compared to the same period last year and was 32.4%, which is still high compared to the group. However, the U.K. churn also decreased from Q2, where it was 35.8%, following the same pattern as in Norway. We will continue to monitor the development in the churn rate closely and expect it to come down to around 17%, 18%, in line with historical averages.

In total, the amount of administrative employees measured as non-client-facing resources was 6.5%, which is a reduction from Q3 2018 where it was 6.9%. We firmly believe that the non-client-facing resources ratio will come down towards a level of around 5% during the next couple of years, in line with the level pre-IPO.

The reason why we spent quite some time on the development in FTEs is twofold.

First of all, it's the foundation for our continued growth. And second, the reduction of external freelancers in combination with the growth that is more human at around 20% has a large impact on the projects that we continue to deliver, which is what I would like to discuss further on the next slide.

Can we have Slide #6, please?

Over the last 5 quarters, we have delivered a number of complex and society-critical projects in Denmark, and we have also delivered on a number of complex projects in the other countries. In Denmark, we've delivered a project such as the new housing benefit, child benefit systems. And we have delivered a rather complex project for case handling regarding abuse of children and young persons in Denmark, the so-called DUBU system. In addition, we delivered the new system for collection of all public debt in Denmark, including outstanding taxes. And while there has been some media discussions on the ability for the Danish government to reclaim all old debt, there was nothing -- that had nothing to do with the system that we delivered. And finally, we delivered the new system to all the schools in Denmark a couple of weeks ago, Aula. Aula is a platform with more than 2 million users and has been delivered in time, budget and in a great quality also. On top of that, we've managed to move a fixed fee project in the U.K. that was based on delivery from mainly independent contractors, which, from a project status, was moving fast into a high red to become a high green project with almost only permanent employees on the project over a period of just 6 months. In our recent acquisition in the Netherlands, we worked closely with our new Dutch team members to ensure delivery of 2 fairly large and very complex projects, too.

So all in all, the quality of the deliveries on our projects is as strong as it has ever been. We continue to deliver -- develop our own employees. And we stand on a much firmer foundation for continued successful deliveries of projects than just a year ago.

This quality in our delivery capabilities is so important for us, not only because it is important for our customers, it also supports our margins. And it is the best possible branding in the market for us to win new, exciting, complex and critical projects.

So let's move to the next slide and take a look at some of the largest new contracts we won during Q3. Next slide, please.

So in Denmark, we were finally awarded the contract to deliver the new digital post for all public communication to the citizens of Denmark. This particular tender process has been long, and 2 times the decision to award the contract to Netcompany has been questioned and brought to the agency for complaints for public tenders in Denmark. We had expected this project to have been awarded in August, but a late and surprising complaint postponed the final awards to early October instead.

In the Netherlands, we won a project to deliver the registry used for all elementary schools in the Netherlands. And in Norway, we won a contract with Kulturrådet, which was a retender of the current engagement we have in Norway with that client. In all of our cases -- in all of these cases, our reputation to deliver on time, in budget and in a great quality has been a decisive factor for the win.

Can we jump to Slide #8, please?

So the wins in Q3 adds further to our revenue visibility for the remainder of 2019, which is shown here. We currently have visibility for a total of around DKK 2.4 billion of our full year revenue, which is close to the full year guided revenue. The highest amount contractually committed revenue is within public, as has been the case historically. However, we've seen improvement in the visibility in the private segments following major wins in both Denmark and in Norway earlier in the year.

The delays that we've seen in Q3 and the lower amount of new contracts won, in particular in Denmark, combined with a lack of new large deals won in Norway, as already communicated in connection with Q2, and then on top the reduced usage of independent contractors in the U.K. has given us reason to revise the expectation for revenue growth for the full year.

So let's look at how that now reads. Can we have the next slide, please? Slide #9.

As a consequence of the general election in Denmark in the spring, early summer, we've seen a number of pipeline case being deferred into the second half of 2019, and in some instances, into early 2020. This was communicated already in connection with Q2. However, in Q3, we saw an unexpected long prolongation of a number of projects in the public sector in Denmark, including the project regarding a new digital post system, which impacted not only August negatively, but impacted September at the same magnitude, too. This led to a utilization which was significantly lower in Denmark in Q3 than expected. In addition, we saw the same pattern in our Norwegian operation as we saw in Q3 2018, namely that we lack a large new -- that we lack large new projects that can absorb all the new employees typically starting in Q3. We had expected this not to be the case, but the loss of a couple of large tenders in Q2 in Norway led to the same result for Q3, as was the case last year in Norway.

Finally, we saw low revenue growth in Q3 in the U.K. as a result of a conscious decision not to renew a number of contracts with independent contractors in anticipation to accelerate the transformation of the U.K. business into a more Netcompany group structure. Countering these lower-than-expected revenue growth factors was the development in the Netherlands, which was more positive than anticipated.

All in all, revenue growth in Q3 was around 5% point lower than we expected, which naturally impacts our expectations to the full year result. Consequently, we revised our expectations for revenue growth for the full year to be around 20% from the current level of 20.75% to 23.25%. We maintained our expectations to margins from organic revenue growth at around 26%. Based on a different revenue mix with more revenue from the Netherlands, we revised our expectation for total reported adjusted EBITA margins to be around 25.4% from previously 25.7%. All measures here are in constant currencies.

While we are not satisfied with having to revise our top line expectation for the year, we are pleased with the margins to be upheld and with the increased delivery capability clearly demonstrated during the last year. Also, we are pleased with the continued increase in FTEs that form a strong foundation for continued growth for Netcompany.

Compared to the lower end of the recent guidance, the revision of the top line expectations and a change in revenue mix have a negative impact on reported adjusted EBITA in around DKK 11 million EBITA. For 2020, we expect organic revenue growth of around 20%, with adjusted EBITA margins of around 26%. As there are a number of uncertainties impacting the macro environment and therefore also potentially impacting Netcompany, we will be providing our financial guidance in connection with the annual report for 2019 in February 2020 where we will have a better insight into how these uncertainties potentially will or will not impact Netcompany.

And with that, I will give the word to Thomas to take you through the financials in greater details. Thomas?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [3]

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Thank you for that, André. And like already mentioned, I am the CFO in Netcompany, and I will now go more into details with the financial performance for Q3.

So if we move past the break in Slide #10 and straight into Slide 11 in one swift go, please? Let's look at Slide 11.

The financial performance in Q3 is as outlined here. For the group, revenue grew 20.8% in reported currencies and 21.2% in constant currencies. Hereof, 18% was organic revenue growth and the rest came from the inclusion of the Dutch acquisition. Growth was mainly generated in Danish unit, with lower growth rates in Norway and the U.K. Still though, all units grew in Q3, however, slower in all units than what we had anticipated, which I will go more in details with later. Despite lower-than-anticipated top line growth, margins were developing positively with increasing gross margins and adjusted EBITA margin on par with Q3 2018.

Adjusting for the impact of the Dutch acquisition, margins are increasing with around 1 percentage point.

As André has already explained, we have delivered a number of complex projects during the last 15 months, which also meant that the underlying risk in the project portfolio has decreased, which has led us to reduce DKK 10 million from the contingency reserve. This has had a positive impact on margins of around 1 percentage point on group level in Q3.

Administrative costs grew by 28% in Q3, including the impact from the Netherlands. Excluding the impact hereof, the administrative costs grew by 20% or DKK 14 million in Q3. The main increases are additional office space in Copenhagen, London and Ho Chi Minh, which has increased housing rent by around DKK 3 million in the quarter. In addition, another DKK 1.4 million was used for refurbishment of a new office location in Aalborg, Denmark. And further, the ongoing cost buildup for the 3-year revolving RSU program impacts Q3 with around DKK 1 million compared to Q3 last year. We have also restructured the tasks for a number of senior managers and partners to work on group business development projects like improvement of the pipeline in Norway and further strengthening of the go-to-market strategy in both the U.K. and the Netherlands, which means that costs of around DKK 2.5 million are included as administrative costs. And finally, the normal follow-on costs from new FTEs on administrative cost is also impacting Q3.

Overall, the amount of non-client-facing FTEs are coming down, and we will gradually move from the current level of 6.5% to around 5%, as already mentioned by André.

Net financial cost was DKK 3.8 million, with both positive and negative adjustment on currency position and a cost on external banking facilities of around DKK 4.9 million. Effective tax rate was 23.4%, a little higher than normal, driven by adjustments due to timing differences to a number of internal pricing agreements between countries.

And with that, let's move to a more detailed discussion of the country performance. So can we have the next slide, please?

Growth in Denmark was driven by growth in public that grew 23% in Q3 while revenue in the private segment grew at 14%, which, on balance, resulted in a growth of 19.4% in Denmark. While that growth is a continuation of the growth seen in the first 2 quarters, it is still slower growth than what we had planned for and also hired according to deliver, too. In the public segment in Denmark, growth was driven from existing clients, but we had expected to win more new contracts in the public sector in Q3. Many of these decisions have been postponed into Q4 and Q1 2020. The growth in the private sector in Denmark is based on wins already made in the spring, however, expected to be substantiated further with wins in Q4.

Growth in Norway was 16.7% and was driven by the private segment which grew by 45%, whereas growth in the public segment in Norway was flattish compared to last year. The growth rate of 16.7% was below our expectations for the Norwegian market in Q3 and was a result of lack of new large-scale contracts that would have enabled us to ensure that all new graduates and employees would have been fully utilized. Instead, we lost a couple of large tenders, which we discussed already during Q2. And this has meant that the staffing situation in Norway was similar to that of Q3 2018 with lower utilization as a consequence. A number of corrective actions have been initiated in Norway to change this pattern going forward.

The growth in the U.K. segment was fueled by a growth of 60% in the public segment, following the same pattern as seen in Q2. Growth in the private segment was negative as a number of projects in the private sector was not renewed on our initiative. On balance, the U.K. grew around 15%, which is less than year-to-date growth and also lower than historically. The reason for this is a conscious decision taken to discontinue soft-margin projects with a high proportion of independent contractors. In addition, new legislation will come into force during 2020, whereby independent contractors will be looked upon from a tax perspective as if they were permanent employees. This will, for all practical matters, change the market for independent contractors significantly in the U.K. And since it will be applicable for all in the industry, we expect to benefit from the new legislation in the means of having an easier route of hiring permanent employees. The change away from independent contractors means that the share of independent contractors in the U.K. is now down to around 42% compared to 55% in Q3 2018 and close to 70% 2 years ago. Activities in the Netherlands remains high and also higher than expected based on strong performance in public sector where we continue to see new wins.

Can we go to the next slide, please?

Where we saw revenue growth below our expectations across all units, except for the Netherlands, margins were in line with or above our expectations across all countries except for Norway. In Denmark, margins were only slightly down from the Q3 2018 level despite a utilization that was lower. In the U.K., we saw gross margin increase by close to 12 percentage points, following the reduction of independent contractors, combined with the new projects we won in Q2 on much better terms than previously. Gross margins in the Netherlands were also at a relatively high level when taking into consideration that they have only recently been added to the Netcompany family. Margins in Norway were below our expectations, driven by the low utilization, as already explained.

For the group, we saw increased margins of 0.8% in Q3 despite lower revenue growth. And adjusting for the impact of the release of the contingency reserve in Q3, margins were on par with last year. Had revenue growth been in line with our expectations, margins would have been around 3 percentage point higher.

If we move to the next slide, we'll see the same patterns for the adjusted EBITA margin. So can we have the next slide, please? Slide #14.

Adjusted EBITA margin for the group was only marginally lower than Q3 2018 despite the lower-than-expected revenue. Excluding the impact from the Netherlands, margin increased by around 1 percentage point. And particularly, the performance in the U.K. was strong with a close 10 percentage point increase in adjusted EBITA. The negative margin in Netherlands was driven by accelerated activities related to the integration, which is progressing much faster than anticipated.

Can we move to the next slide, please?

As in previous quarters, growth has been strong in the public sector, driven by both Denmark and the U.K. In addition, the inclusion of the Netherlands further adds to the growth in the public sector as the majority of the Dutch business is within the public sector. The higher proportion of revenue from the U.K. and now also the Netherlands drives the margin for the segment in total downwards, however, still within a couple of percentage point compared to last year's margins.

Can we have the next slide, please?

When looking at the development in the private segment, we see a growth of close to 11%, primarily driven by growth in Norway of 45% and in Denmark of 11%, whereas the growth in the U.K. private segment in Q3 was negative, as it also was in Q2. The relative smaller impact from the U.K. on the private segment is the main driver of the increase in margins, supported by improved performance in all geographies for reasons already discussed.

And can we have the next slide, please?

So free cash flow improved from DKK 49.3 million to DKK 126.5 million in Q3 2019. Operating profit was improved. And working capital changes improved significantly also during Q3, driven by reduced days of sales outstanding, changes in short-term debt. Of the amount of receivables overdue at the end of Q3, close to 56% has subsequently been paid, in line with the trend from Q2 2019 and in line with the level of Q3 2018. Further, we have repaid DKK 75 million of the bank debt, which now stands at DKK 1.1 billion. And year-to-date, the repayment of the DKK 75 million is mutual as we grew the same amount in connection with the acquisition of our Dutch operation in Q2. Year-to-date purchase of treasury shares and impacted cash flow were negative by DKK 175 million, and both transactions impacting cash flow from financing activities, so below the line in terms of free cash flow from operations.

Can we have the next slide, please?

The work in progress has decreased in Q3, as expected. The work in progress balance did not increase to the full potential though, as a relatively higher proportion in Q3 than normal relates to time and material work not invoiced due to lack of matching purchase orders. It is expected that the relative share of time and material balances in work in progress will be around 15% for the full year, leading to further reduction along with the already planned invoicing of work in progress according to payment plan for fixed fee projects. The work in progress that has been invoiced related to large fixed fee projects during Q3 will be paid during Q4, improving cash flow by more than DKK 30 million over and above the cash flow from the normal operating free cash flow in Q4. There are no indication of issues related to past income recognition on any of the projects still sitting in work in progress at the end of September 2019.

And with that remark, I have concluded the detailed financial walk-through, and we now open up the call for questions. So we move to the Q&A slide and then open up for question. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of George Webb from Morgan Stanley.

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George W Webb, Morgan Stanley, Research Division - Equity Analyst [2]

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I've got a couple of questions, please. The first, on the U.K. situation with the independent contractors. You're gradually getting towards kind of 50% of employees being permanent. What's the sort of ratio you're targeting there as you move through next year? And should we expect the U.K. growth in that part of the business to continue to be slow while you make that progression?

And then the second question, in terms of the Norwegian business. Can you elaborate a little bit more in terms of the challenges you're facing with winning new contracts and some of the steps you're taking to get that back on track?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [3]

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George, thanks for those questions. If we start by the latter one in Norway, so in Norway, we are working very focused on winning some of the larger tenders also in the public space. And they're very binary of nature, which tenders like that are. We are working focused and we have a good pipeline. And well, we just need to win 1 or 2 of those tenders eventually, so -- and we did not do that at the end of the second quarter. So the pipeline looks promising and we are ready and set to win one of these projects and then continue the growth in Norway. However, if you look at Norway, and without those large tenders being put into the backlog, we still grew by 15%. We have a good business up there. But of course, we would love to get a larger project up there. So that's your question on that one.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [4]

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And then, George, thanks for the questions. On the U.K., it's correct that it's below 50% now in the independent contractors. And the way we look at the U.K. is we also include the employees in Vietnam into the U.K. operation. If you include them also, then we are currently at 42% independent contractors of the full U.K. business per se. We previously had an aspiration to come down to around 1/3-2/3 split, so 1/3 independent contractors and 2/3 perms. That looks very well within reach now for 2020 with this new legislation, IR35, it is called. And we might potentially even go further. That will have a positive impact on margins for sure.

As for growth in the U.K., difficult to be really specific at this point in time since there will be some impact on the transition. But we see the U.K., despite Brexit and everything else, still a highly interesting market there to be in, lots of potential for us to grow. And especially, lots of potential for us to grow as being one of the few IT providers, service providers that actually deliver on time and in budget, which we can see there is a universal need for.

So a long answer, not to answer your question in terms of how much growth it is, but I think you understand where we're coming from.

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George W Webb, Morgan Stanley, Research Division - Equity Analyst [5]

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That's helpful. Maybe if I can have one follow-up. In terms of that U.K. margin in Q3, are you able to help us understand how much of that uplift then was from the shift in the employee mix?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [6]

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Yes, sure. So part of it was in the employee mix, and that is probably somewhere between 1 and 3 percentage point, without being too specific, but somewhere in that range. And then the remaining uplift is a -- in Q3, a change in the project portfolio. The reset of the fixed fee project that André was also talking about, that was moving into high red in Q2 that we managed to get into high green. And then the new win we had in Q2 also on terms that are much more similar to what we see on Netcompany Group. So the U.K., from a transition perspective towards margins, both in terms of the change in the product portfolio, but also now with the help and then (inaudible) weight, if you so will, from the new legislation, will potentially accelerate how fast we will get margins up, which is, of course, also good.

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Operator [7]

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Okay. And your next question comes from the line of Poul Jessen from Danske Bank.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [8]

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I have a few questions. One is on the comment you have about having a set of resources at stake for looking into business development and the go-to-market strategy in U.K. and Norway. Is that a consequence of being more difficult to win the contracts up there? Or what is driving that you now put resources aside? Is it not that easy to export the Danish model to those 2 markets than you had assumed when you bought into those?

Second question is on the growth rates you have in digital transformation in general and if there are any changes to the competitive landscape. If we listen to what all, at least in Denmark, competitors are talking, then they all said that they are going to focus on the digital transformation now. So is it something that you see in the market that is getting tougher in general? Yes. Stay for that for now.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [9]

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Okay. Let's take the last question first. Thank you, Poul. No, I think we don't see the competition tougher. Actually, we see many more opportunities because a lot of our customers are digitally changing their entire operations and that has something to do with them changing the core systems as well. We do actually talk a lot about, and I'm out there talking about it all the time, which we call into the core. So for the last 8, 10 years, a lot of -- that goes for private and public space, a lot of services have been made in terms of self-service and enabling the access from customers to business. But what we see happening these years is actually that the back-end systems are changing as well and that the companies are changing entirely. And yes, there's a lot of companies wanting to help our clients with that. But in all modesty, I think we are very well positioned for that and we see a promising market space there. So the short answer is we don't see increased competition. We actually see a market space that is evolving.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [10]

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Then maybe I can take over here, Poul, and André can fill in on the resources for business development more on group sites. It is correct that we have allocated resources to help work on pipeline and pipeline execution in Norway and go-to-market strategies in the Netherlands and in the U.K. And the reason for that is, I mean, if you want -- the saying if you want a different outcome, you don't have to do the same thing all the times, right? So you've got try something different. Now we've been in Norway for almost 3 years and we still lack to win 1 or 2 of those large share orders. So what we have offered to the Norwegians is to help them basically quantify the pipeline better. We have, we think, in all modesty, a really good experience from the Danish market in terms of how to write tenders on large-scale public projects and win them. So we have dedicated 2 of our senior partners that has basically been the architects of all the tenders that we have won over the last 3, 4 years in Denmark to now work with the Norwegian organization 1 day a week in terms of quantifying what kind of pipeline we're looking at, how do we actually enter the tenders, are we anchored there with the right level of senior decision-makers in the different ministries and the like, and we can see that having an impact there already. So that's on the Norwegian part.

One of the things we have learned from the acquisition of Norway, which was the first acquisition we did, was that there are certain things that we need to accelerate in the integration process. And one of those things is to strengthen the go-to-market strategy of those country -- companies we acquire. So if you take a company like QDelft that we acquired in May, they have been, in the means of 20 years, grown from 0 to around 100 people. So that means that they are not used to 20% to 25% growth or around 20% growth. We can help them with that. We can help them with how to articulate that. And we might as well just do that upfront rather than waiting a year or 2 until we start to do that. So it's not because the Danish model cannot be exported, but it's more in terms of making sure that all the knowledge that we have in Netcompany Group, and particularly in the Danish organization, are spread to the new countries as soon as possible because that is beneficial.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [11]

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And maybe just to add to that. We've also institutionalized many of the references and the go-to-market packages and all the tools we need to get in to penetrate the markets, both in Norway and the U.K. and in Holland. So we do that from central headquarters and to provide our people out there in the markets with the right tool set, which is also an investment we've done. So I think we are very well positioned. So as Thomas said, this has nothing to do with not being able to export the model. It's more to enable and enhance the capabilities out there to do so.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [12]

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Okay. A follow-up on the U.K. You said that you are accelerating the transition to having more permanents. Is that proactive to make a shorter transition period? Or is it a consequence of a lower order intake scenario, you have the opportunity to do it faster?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [13]

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It's proactive.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [14]

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That was a short answer.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [15]

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It's very rare that you get such a short answer.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [16]

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It's proactive, Poul.

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Operator [17]

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And your next question comes from the line of Yiwei Zhou from SEB.

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Yiwei Zhou, SEB, Research Division - Analyst [18]

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And I have one on the -- you commented in the report that the revenue growth in Denmark was negatively impacted by the delay of start-off for one specific project, and I think that's worth explaining, and also a high amount of tender writing. And could you please elaborate a bit on the high amount of tender writing? Was it related to the initiatives you are taking in Norway, as you mentioned? Or is it due to the pipeline activities in Denmark?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [19]

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Yes. Thanks, Wei. So I think the question is whether -- it was a little bad connection. The way we hear the question is, on the tender activities in Denmark or the business development, whether that is related to tender activities in Denmark or Norway. Is that correctly understood?

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Yiwei Zhou, SEB, Research Division - Analyst [20]

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Yes, exactly.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [21]

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So it's primarily tenders in Denmark. We have a lot of activity going on at the moment and we are writing a lot of tenders. And as you also mentioned, this was not only the postponement of one project. We've seen some late decision-making in the government sector in Denmark also due to elections. So it went into September and actually little bit into October as well. But we see that changing now. We see a lot of activity. And we also see a lot of tenders being written. But mostly, that is for tenders for the Danish market.

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Yiwei Zhou, SEB, Research Division - Analyst [22]

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Great. I have just one follow-up here. You previously mentioned there was a lot of systems in the Danish tax authority being outdated and need an upgrade. How should we expect them fitting to your tender pipeline?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [23]

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And again, I'll try to repeat the question. And correct me if I'm wrong, Wei. So the question goes along the line the activity and the communication by the tax authority, and especially the new tax ministry, in terms of the service check that they were doing and what kind of impact does that potentially have on our ability to sell more to tax. Is that kind of the question?

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Yiwei Zhou, SEB, Research Division - Analyst [24]

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Yes.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [25]

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Yes. Well, as you probably also noticed in the media, we delivered the debt collection system Q2 last -- Q2 this year. And that system is actually working and collecting debt according to Danish law and that has been affirmed by several companies working on that, too. So we are well in place to deliver even more debt collecting in that process and very well positioned to continue our engagement with tax.

When it looks into -- when you look into the further plans for digitalization of the Danish tax authorities, I think everyone agrees that there's a lot to do, both in customs but also renewing some of the old systems over time. And I think that's a common agenda across any government and across -- well, looking forward the next 2 or 3 years. That is one of the tasks that we have to do within the Danish tax authorities. And of course, Netcompany is also well positioned to do that. Was that enough answer to your question?

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Yiwei Zhou, SEB, Research Division - Analyst [26]

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Yes. Yes. I'll jump back to the queue.

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Operator [27]

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Okay. And our next question comes from the line of Alex Tout from Deutsche Bank.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [28]

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The first one, could you just clarify what surprised you this quarter from a revenue growth perspective? You said you were 5 percentage points below plan. But surely, you would have had a good idea of the contractor-heavy projects in the U.K. that you would exit coming into the quarter. And also, we knew about the contract losses in the second quarter in Norway. So what was actually the surprise in Q3?

And then secondly, more sort of general question. What are the trends that you're seeing around pricing and wage inflation at the moment in your main markets? And do you think that the U.K. situation, the change that you mentioned around independent contractors is going to have a meaningful effect on overall company-wide wage inflation as we go into 2020?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [29]

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So to your first question, it's a combination of factors really and it's not an exact science. When looking into Q3, we saw, as we also mentioned in Q2, some delays in decision-making in the public market in Denmark. And there's also some timing in finishing some of the engagements and starting up on some new ones. And our first priority here is to do the right stuff and not just grow by just to grow, but to grow in a responsible manner and start up the -- on the right engagements that will continue and put the foundation for future growth in the Danish market.

When it comes to the U.K., of course, we had deliberately looked at which engagements where we could take freelancers off. And at the same time, with the same hand -- with the other hand, we look into new types of engagement. As Thomas mentioned, we had a new contract this spring in the U.K. And we also changed a project, fixed price project to be yielding better results for us.

So altogether, and that also together with the Norwegians who -- we did have some lost tenders in Q2. We did not know exactly how much -- how quickly we could place our resources. All those 3 factors together surprise us a little bit on the revenue in Q3. However, we still have a very strong growth in Q3, and we're looking forward to continue that in the quarters to come. So we are guiding for 2019 around 20%, as we said, and yes. And then we have expectations for similar growth in 2020, not guiding for it financially, but same types of expectations.

Thomas, can you comment on the wage and pricing?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [30]

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Yes, sure. Sure. So on the wages and pricing, so thanks for the questions, we think that there will be a positive impact on margins in the U.K. from going towards more perms. We do not think per se that, that move will have any significant impact on our group wages and spill over to other countries. If we look at the market per se and the way we handle salary increases here in Netcompany, we have a model where every year, we evaluate all our employees. And depending on how they are rated from a performance perspective, they will get a salary increase. That salary increase last year, so that means for 2019, is put in effect in January and that was, on average, around 9%. And so that's a fairly high salary increase. The ones that get the highest salary increase, the top performers, they get somewhere between 12% and 14%.

So what then happens during the year is that because we have a churn of around 20% and because we grow around 20%, then when we look at the average salary cost for the year, it actually turns out to be fairly stable, irrespectively of the fairly high individual salary increase. But that's because when principals and managers and partners and the likes are leaving Netcompany, they are not replaced by other principal and partners. Then we take seniors and promote them into principals. And we take principals, promote them into partners. And then we hire some more new people in the bottom. And that means that the average salary is actually fairly stable, even though we have high salaries. And that's how we actually manage this wage inflation issue. So it's not an issue for us. And it's worked for us like this, at least the last 5 years, in terms of salary increases and stable average cost per year. So that's how that works. And like I said, we expect the impact on margins in the U.K. to be positive and no contention spread over to group.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [31]

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Just as a real quick follow-up. We've had some larger competitors talking about some macro-type slowdowns, I guess maybe particularly in the U.K. market. Could you just give your view on client decision-making and demand? Has there been any kind of drop-off relative to, I guess, what has been a very strong period in digital demand, et cetera, in 2018 and to the start of 2019? I mean do you see any slight or maybe more than slight slowdown in your end markets, particularly in the U.K.?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [32]

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No. We don't -- there's a lot of talk about global recession may be coming around the corner. There's a lot of talk about politics and Brexit and macro events, as you said. But when it comes down to digitalization, I think most of our clients are really, really interested in finding out how to digitize and how to become more competitive. And that type of dialogue, I think, is almost independent of all that because, in many areas, digitalization can be used to create growth in good times, but also to cut down cost and become more competitive. So we see a -- we don't see a decline in the interest of the core services that we provide.

And in the U.K., in particular, one has to remember that we are, all due respect, not the biggest company in the U.K. So we are still a small company in the U.K. when looking at the market size. So being competitive, being able to deliver quality in time and on budget, actually gives us a very good position there. So we don't see any -- in particular, any trend in a decline in terms of interest in digitalization at all.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [33]

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And just to follow up on that. The worst thing that can happen if we are -- things are happening in the world economy and the worst thing that can happen to us is if we move into a prolonged period of this "let's wait and see," where people don't take decisions either yes or no. The worst thing is this maybe, "maybe, we don't really know." Either say yes or say no, but take a decision. So that's kind of the worst thing that can happen. But as André said, we don't really know. We can't see anything right now. It would be unwise of us to just state bluntly that there will be no impact on anything, right? Because we don't really -- we need to see it, but in the -- right now in the business in the U.K. in specific, no particular impact and also no particular impact from Brexit, whenever that happens.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [34]

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Exactly, exactly.

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Operator [35]

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And your next question comes from the line of André Thormann from ABG.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [36]

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Just the first one here. In terms of these tenders in Norway that you lost during the quarter, what is the main reason for -- been for you losing these turnarounds?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [37]

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It's a very good question. You have to remember, tenders like these, public tenders, are very binary of nature. So there's one winner and then it's never good to be on the second place, especially close runner up. We've been a close runner up. So that's, tenders are a difficult discipline. And I think we've done very good up there. We could have won one of these or 2 of these tenders, definitely, but we did not. We are increasing the quality of the tenders even further, as Thomas mentioned before, by involving some Danish resources in the tender writing itself because there's a lot of devil in the detail in tender writing and you need even -- the more experience you get into that process, the better you stand in the competition. So we are very much more anchored in the Danish practice of writing tenders. And it is a discipline that you have to learn. It takes some time. So we know that. And you have to be patient. And eventually, you will succeed. It's not that we don't have public customers in Norway, we actually do. And we have some successful ones as well. But we like to enhance our footprint in the public space up there, and we're going to do that by winning some of the big tenders up there.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [38]

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Exactly. And maybe to elaborate a little bit because, like we mentioned earlier on, André, then we've taken a couple of our senior partners in Denmark to help the tender process in Norway. And the specific reason why we lost were down to price. And when you lose down to price, if price is the only decisive parameter, then that tells you that you're not anchored at the right level in the buying organization. So if you do so big projects and the likes and you don't get the opportunity to talk your real quality through with the right level of people, then you don't have the anchor correctly stated in the organization. So that's why we're changing that now with our Danish partner colleagues to make sure that we're anchored in the right way.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [39]

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Okay. Okay. And then my next question is, these tenders you have won during Q3, Norway and Netherlands. I mean do you have some numbers in terms of contract size and length of these contracts?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [40]

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No, they are not disclosed, not disclosed, André. So yes, they're multiple years, but they're not disclosed.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [41]

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Okay. Okay. And then my last question is in terms of U.K. I understand that there is a few projects that you haven't renewed. Is this -- or a few contracts that you haven't renewed in U.K. I mean can you elaborate a bit on why, and how many projects is this and so on?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [42]

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So we can't elaborate on how many projects and what projects, but we can elaborate a little bit on why because it is -- we're doing 2 things in the U.K. at the same time. So we'll try and put the volume down on engagements where we are more or less just selling time, on time materials, selling some expertise by freelancers, which will not improve our capabilities in the U.K. and will not involve our organization and develop our skills there. So we will try and diminish that, of course, accordingly to customers' expectation and to behave properly in that sense. And at the same time, we will increase projects and engagements where we do offer same type of value that we do in Denmark, more outcome based, and where we can develop skills together with customers and come in with a value that is very much sought after also in the English market, and we do this at the same time. And I think in all modesty, it has happened during this quarter as well and also over 2019. So we have definitely acquired 2 -- we have 2 new major contracts in the U.K. running, which is according to our methodology, in the way we do business in Denmark. And at the same time, we've had, as Tom has elaborated during the presentation, also succeeded in getting rid of some of the contractors that would not lead to any future path for us in the U.K. market. And we're doing that. At the same time, that will yield higher margins, of course, when we get rid of those freelancers. But eventually, it would also yield some growth on the new types of projects.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [43]

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Okay. Okay. And just to understand. These projects, I expect that some of those you took over when you acquired Hunter Macdonald, right? Those you haven't renewed?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [44]

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Yes.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [45]

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Yes.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [46]

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Yes? Well, is there more in like your base of projects that will run out which you won't renew, in addition, that have the same characteristics as these?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [47]

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Well, the way we can answer that, André, is if you look at the performance of the U.K. operation right now from a margin perspective, then that is not where we want to be. So that means that we have to do 2 things. We have to continue to change the project portfolio mix and we have to continue to get the amount of external independent contractors down. So the answer is that, yes, there is still a little bit of projects from the old legacy that, at one point in time, will be discontinued. The project that we start to discontinue, of course, are those with the lowest margins. So we start with those and then we gradually work our way up.

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Operator [48]

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And your next question comes from the line of Erik Elander from SHB.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [49]

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All right. So I have a few questions here. I mean, first of all, in order to reach your 2019 margin goal, you need a significant margin boost in Q4 now. What will actually drive this?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [50]

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Yes, sure. It's right that we will see a margin pickup in Q4. And relative, if you compare Q4 '19 with Q4 '18, then one building block is that the margin in the U.K. business in Q4 in 2018 was 2.5%. In Q3 alone, we did 17%. So that alone, if you assume the same margin in Q4, is a pickup of 15% on part of revenue, right? So that's one part. Then there are a number of other margin pickups sequentially from Q3 to Q4, which gives us comfort that we will reach the margin of around this 26% in the organic growth and then 25.34% in full year reported.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [51]

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Okay. Perfect. And then my next question is actually, how -- I mean this is not an official guidance, but you still have it in your presentation. How confident are you about your 2020 guidance? And what is the largest risk to this one, would you say? Is it a weakening market condition? Or do you feel that you have the situation in your own hands?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [52]

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Well, the way we look at it is that this is what we see right now. This is how we expect it to evolve right now. Of course, things can happen during the course of time. It could be further postponements of large tenders, it could be that, or it could be some general decline, and as Thomas said before, in the overall financial outlook for our markets. But -- so we -- of course, we do -- this is what we believe in right now. This is how it looks when looking into our pipeline and looking into customers' expression.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [53]

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And actually, the Norwegian business or the Norwegian public sector and so on, at least from what I've heard, correct me if I'm wrong, but they buy a lot of individual CVs when they procure consultancy services. Is this something that is changing? And how do you -- or how do you actually work around this in order to sell more fixed price Netcompany-style projects in Norway?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [54]

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Yes. Yes. You got a good point there. And yes, that is -- that's absolutely true. You see in some institutions in Norway that it's very popular to buy what we call arms and legs. But you also see a tendency in Norway that they really want some results on some of the very critical and society-critical projects and engagement. They want to make sure that they land these projects and that they are delivered on time and budget, and this is where we are very well positioned. Further on, we also see a demand of what we call agile teams, which is -- so it could be -- they could actually be sold on a time and material basis. However, they are operating in a more outcome-based style. So you buy an entire team to deliver some certain outcome, but you pay for them per resource. And engagements of that type, we're also interested, of course, because, at the end of the day, it's a question of delivering a project on an outcome-based scenario. So that is very interesting for us as well.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [55]

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And the last one for me, also related to the Norwegian business and also your business development measures you are taking. I mean are there any such as tender differences when it comes to Denmark compared to Norway? I mean in terms of processes, in terms of culture. Or are you actually sure that your Danish competence in winning tenders will be actually applicable also for the Norwegian market?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [56]

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Yes. So the short answer to your question is that there's almost no difference. So both countries are really -- even though the Norwegians officially are not a part of the EU, they have almost more following the EU guidances then sometimes within the EU. So no, there is no big difference. And we do believe that we can share competencies across the border. And don't forget that we actually already won previously. Last year, we have a big customer in one of the biggest municipalities in Norway, Oslo municipality. So we won that one actually. So it's not -- we do believe it's very much the same. And we can use the competencies from Denmark exactly to win those tenders.

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Operator [57]

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And your next question comes from the line of Poul Jessen from Danske Bank.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [58]

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I have a final one and it's also based on the initial guidance for next year. So I was just thinking out from a math point of view. If you have several employees which you hired this year based on assumption of winning contracts or -- and they potentially go for a lower billing utilization this year. And next year, we should assume that there will be a number of, at least in Denmark, big tenders coming to the market which were delayed from this year. Shouldn't we then expect that the growth should recover or accelerate more into next year or -- and that could be the flip side? Are you planning to reduce the number of intake of net hires in the Danish market?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [59]

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Sure. Thanks for the question, Poul. And I'll try to answer without answering it because we haven't really given any financial guidance per se. And like André said, the expectations for 2020 is what we expect as of now. We don't have any anticipation that we should start not hiring in 2020. So it's still very early to say anything about 2020. And in terms of the impact that people that we have hired now that are doing non-billable work, what impact that will have on the numbers when they do bill, then that's, of course, right that will have a positive impact. But in terms of making that forward calculation and then saying that this will do that for the implied guidance or not, I'll refrain from commenting on and just leave it at for now, we expect 2020 to be a year where we will grow, organically, around 20% at margins of around 26%. And then we'll come back with financial guidance in connection with the annual report to be released in February.

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Operator [60]

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There are no further question at this time. Please continue.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [61]

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Okay. It seems that we have no further questions. So thank you all for joining in on this session, and I wish you all a very good day.

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Operator [62]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.