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Edited Transcript of NETCG.CO earnings conference call or presentation 21-Aug-19 9:00am GMT

Half Year 2019 Netcompany Group A/S Earnings Call

Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Netcompany Group A/S earnings conference call or presentation Wednesday, August 21, 2019 at 9:00:00am 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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* André Thormann

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Claus Almer Nielsen

Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT

* 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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Good morning, ladies and gentlemen. Thank you for standing by and welcome to the presentation of the Q2 report. (Operator Instructions) I must advise you, the conference is being recorded today, Wednesday, the 21st of August 2019.

And I'd now like to hand the conference over to your speaker today, André Rogaczewski. 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 Q2 '19 results. My name is André Rogaczewski, I'm the CEO and Co-Founder of Netcompany. And I'm joined 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 Slide #2, please. I will pause for 30 seconds here, and I'll let you all have a read through of these important disclosures.

And with that, can we please go to Slide #3, please. The topic of today's presentation is that I will give an update on the business highlights for Q2, and I will discuss our employee base and the development in that. I will also spend some time in giving you an update on the recent acquisition we made in the Netherlands, where we acquired Q Delft on the 13th of May. Finally, I will go through our guidance for 2019 and our reasoning for narrowing the revenue guidance gap as outlined in the Q2 company announcement. Thomas will then subsequently go through the numbers in greater details, including cash flow and work in progress.

Can we have the next slide, please? So in Q1, we continued our high-growth rate [or by] both still lower than we have reported in the last year. Growth in revenue was 18% in Q1, which is fully in line with our own expectations. As I also mentioned in connection with our Q1 report, we must always seek to run that company at long-term responsible growth rates as we will potentially jeopardize quality in our deliveries and hence, long-term relationship with our customers and ultimately see margins decline if we continue to grow too fast.

Our gross profit in Q2 was negatively impacted by less working days compared to Q2 2018 as a consequence of the Easter being in Q2 this year. Naturally, this has an impact on both our revenues and the follow-on effect on margins. The impact of Easter is around negative 3 points on revenue and around 2% point on margins. FTEs grew by 23.6%, and I'll comment more in details on this in a few moments. We are now more than halfway through 2019. And so far, we are very satisfied with the results that overall are in line with our expectations and form the basis for our full year expectation still to be within the originally guided ranges.

Can we have the next slide, Slide #5, please? Over the last year, we have increased employees to a total FTE level of 2,259, including our latest acquisition in the Netherlands, an increase of 23.6%. And if we look at the decomposition in a little more detail, we note that the amount of freelancers that have been reduced by another 27, following the trend from Q1. Also worth noticing is that the amount of non-client-facing FTEs are growing faster than the total as a result of the timing of hiring support staff following the IPO, which was accelerated into the second half of 2018. If we adjust for the increase in the administrative staff and exclude the addition of FTEs coming from the Dutch acquisition, client-facing FTEs grew 20% in Q2 2019. Average age remains around 33, reflecting the continued commitment to hire 8 out of 10 new employees straight out of university. In Q2 alone, we had 245 new employees starting, which is more than 100 FTEs more than in Q1 2019, reflecting the ramp-up in the FTEs, as we discussed, on early occasions.

Churn for the last 12 months was higher than the normal 17% to 18% blended and was 21.7% as there was a significantly higher churn in Vietnam following the move to 1 office location from 2 office locations. In Denmark, the churn ratio was actually reduced slightly compared to last year and was 15.8% compared to 18.5%. In Norway, we have seen increased churn, reflecting the highly competitive labor market, with really high churn in all IT rated industries and with all companies there. Churn decreased in Poland, which is good, and important given the relative size of the group that Poland is getting, with 11% of the total workforce actually coming from there. In the U.K., churn rate increased as a logical consequence on the ongoing change in the project portfolio, which will require a different skill set to deliver on. We 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 towards the back end of '19.

In total, the amount of administrative employees message -- measured as non-client-facing resources grew above our target of around 5% to 6.6%, following the increase in support staff, driven by the IPO. However, very importantly, the sequential development from Q1 2019 was a reduction from 7.1%, indicating that we have reached the peak in terms of relative share of non-client-facing employees, and we will be getting down to around 5% during 2020.

Can we have Slide #6, please? During Q2, we continued to win contracts in the public sector in Denmark, of which we have mentioned, the most significant ones here. The contracts are smaller in nature, and the level of contracts one reflects the lower level of activities in the public sector that we have seen in Q2 as a direct consequence of the general election in Denmark. A number of cases were put on hold, which impacted our wins of public contracts during Q2. The cases are not lost. They are still active in the different ministries, and as such, the impact of the general election in Denmark is expected to be of a timing character only. Further, we have won a multiyear contract in the U.K. with the home office. And in general, we have seen a significant increase in wins in the U.K. public sector compared to '18.

Can we have Slide #7, please? The 2 acquisitions we've made in '16 and '17 in Norway and in the U.K., respectively, are both progressing to plan, and as such, I will not be speaking to those but rather give an update on the recent acquisition we did in the Netherlands. On May 13, we completed the acquisition, and you will find full disclosure here off in the company announcement. We're excited about entering into this new country, a country that is very similar to the Danish market, and in particular, for public spending. The market is 3x as large as in Denmark. The initial plans of the integration, where we move them to our common platform, has already been completed. And we are focusing on strengthening the go-to-market capabilities, which is much earlier in the process than our 2 previous acquisitions.

One of the learnings from our 2 acquisitions in Norway and in U.K. is that the go-to-market capabilities and pipeline focus needs to have full attention in strengthening. And the sooner, the better we initiate the process to [go] faster. We get to growth margins that are targeting -- that we are targeting on longer-term perspectives. The Dutch operation is based in Delft and located on the campus of the Technical University of Delft, which gives a great recruitment tool for us to tap into. We have allocated a number of our Danish recruitment team to help the Dutch team, and we're already seeing a very positive impact from this. While Netcompany Netherlands is still a very small part of the group, we have great expectations to rapid growth, both in revenue and margin.

Can we go to the next slide, please? When looking into 2019, we currently have visibility for a total of around DKK 2.1 billion of our full year revenue. The highest amount of contractually committed revenue is within the public sector, as has been the case historically. However, we have seen improvement in the visibility in the private segment, following major wins in both Denmark and in the U.K. during Q1.

For 2019, our pipeline looks good and consists of interesting cases in both private and public segments. But as I've already mentioned, a number of cases that we expected to be closed already in Q2 have been pushed further into the second half of 2019 and in some instances, into early 2020. Our current level of revenue visibility, combined with our performance in the first 6 months of 2019, gives us comfort that we will still reach top line growth inside the original guidance range. However, given the delayed decision on some larger projects in the Danish operation, we narrow our expectations for the full year revenue growth.

So let's look at how that now reached. Can we have the next slide, please? As a consequence of the general election in Denmark in the spring, early summer, we've seen a number of pipeline cases being deferred into the second half of '19, and in some instances, into early 2020. Consequently, we've narrowed the ranges for expectations for the full year organic revenue growth to be between 20% and 22%, which is still within the original guided range of 20% to 25% organic revenue growth. We maintain our expectations to margins from the organic business to be around 26%. On May 13, we acquired Q Delft. And at that time, we expect reported revenue to be impacted positively by around 0.75% to 1.25% for the full year and margins to be negatively impacted by around 0.3 percent points. And we have consequently included these guidance targets here, too.

And with that, I will give the word to Thomas to take you through the financials in even greater detail. Thomas, please go ahead.

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

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Thank you for that time. Thank you for that, André. Mike already mentioned, I am CFO of Netcompany, and I will now go more into details with the financial performance for Q2.

So if we move past the breaking Slide #10 and straight into Slide #11, please, then we get to an overview of the amount of working days in Q2 compared to last year in each of the countries where we operate. Both in Denmark and Norway, we have 2 working days less, whereas the impact in the U.K., there's 1 working day less. In both Denmark and Norway, the loss of working days hit both revenue and margins. Revenue as the amount of hours we can produce is reduced due to fewer days and margins because we are still paying full salaries. In the U.K., the impact on margin is less since more than 2/3 of the workforce is still independent contractors that are only billing costs for the hours that they actually deliver. Overall, impact on revenue was around 3 percentage point lower for the quarter and around 2.5% lower on margins. For the full 6-month impact was negative around 1 percentage point in revenue and around 0.75% on margins as there's 1 working day less for the [full half year].

And can we have the next slide, please, Slide #12. So the financial performance in Q2 is outlined here. For the group revenues, grew 18% in reported currencies and 18.1% in constant currencies, here up 16.6% was organic revenue growth, and the rest came from the inclusion of the Dutch acquisition. Growth was evenly spread across all countries, with the Norwegian unit growing the least contrary to Q1. The Norwegian unit was impacted from Easter falling in Q2 this year as the other units. The U.K. was, apart from Easter, impacted by the cleanup of the project that we mentioned during Q1, which impacted gross margins, both on revenue and on operating margins in U.K. negatively by around 3 percentage points. This particular project will not be impacting the U.K. business negatively from Q3 2019 and onwards.

As André has already commented on, the growth in Denmark during Q2 was impacted by a number of projects being postponed as a consequence of the general election in Denmark in May. Gross margin and adjusted EBITA was also impacted negatively by Easter effect, which, in isolation, more or less explains the lower margin in Q2 2019 compared to 2018. In addition, we had a reversal of DKK 5 million in Q2 2018 from the provisions which impacted margins positively in Q2 2018 by 0.7 percentage points. So on balance, and taking [no] margin-driving [index] into consideration, Q2 2019 is at least on par with Q2 2018.

Financial expenses are negatively impacted by the currency adjustment we made related to the financing of -- part of the U.K. acquisition of Hunter Macdonald, which was made in British pounds. And while we had a positive impact on the same regulation to the P&L in Q1, this has been eliminated during Q2 from the decline in the British pound rate.

Interest rate cost were more than half compared to Q2 2018, following the refinancing in connection with the IPO and stood at DKK 4.7 million in the quarter. The effective tax rate was 20%, driven by a lower effective tax rate in the U.K. Special items were significantly reduced as there were no IPO costs in the quarter. Special items in Q2 2019 realized relates to the acquisitions done.

So can we have the next slide, please? Growth in Denmark was driven by growth in the public sector, which grew 22% in Q2, while revenue in private segment grew at 8%. In the public segment in Denmark, growth was mainly driven from existing clients and only to a smaller extent, new contracts, whereas the growth in the private segment continued to be driven by the contract in the insurance industry that we won in Q1 2019. Growth in Norway was driven by the private segment, which grew by 42%, whereas the growth in the public segment in Norway was flattish compared to last year. Growth in the U.K. segment was fueled by a growth of 98% in the public segment, although from a lower level and some small reduction in growth in the private segment. The growth in the U.K. public segment was negatively impacted by the cleanup of one particular contract, as also mentioned in Q1 and early on in this presentation. The impact -- this impacted Q2 revenue in the U.K. negatively, however, this impact will not continue into Q3 and onwards. The Netherlands only impacted reported revenue marginally and accounted for around 1.4% of total reported revenues.

So can we go to the next slide, please? Gross margins in the quarter were negatively impacted by Easter by around 2.5 percentage points, which explains the lower margin in Denmark and Norway. The negative impact on margins in the U.K. was offset by a significant improvement in the underlying business, despite the negative impact in Q2 from the one large public project that were in progress during Q1. Thus, the U.K. is continuing the trend we've seen from Q1 and laying the foundation for continued margin improvement. In addition, the level of one-off pass-through revenues and profits in Denmark was lower in Q2 2019 compared to that of Q2 2018. Gross margins in Holland was impacted negatively by activities related to the integration.

Can we have the next slide, please? The negative effects from the Easter break seen in gross margins flows through to EBITA margins as shown here. Negative impact from Easter hits the Norwegian business, whereas the 6-month EBITA in the Norwegian business is generating margins in line with 2018, despite actually 1 working day less in the first half of 2019 compared to 2018. In the U.K., adjusted EBITA is developing positively, in line with gross margins. The main reason for the lower increase in adjusted EBITA margin compared to gross margin is increased rent for the London office in the U.K. operation. In the Netherlands, margin was negatively as a result of various integrating activities, including the procurement of the domain name "netcompany.nl" and other nonrecurring costs.

Can we move to the next slide, please? Looking at the public segment, we see growth at 27.5%, however, at reduced margins. The reduced -- the reduction in margins are attributable to the higher share of U.K. public revenue and the addition of the Dutch operation, which mainly has revenue in the public sector. Further, the one specific project that has been troublesome and was fixed in Q1 in the U.K. has had a negative impact on margins in the public sector in Q2 also.

And can we have the next slide, please? When looking at the development in the private segment, we see growth close to 7%, primarily driven by the growth in Norway, up 42%; and in Denmark, up 8%, whereas growth in U.K. in the private segment in Q2 was negative as it was also the case in Q1. The relatively 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? Free cash flow improved from DKK 23.9 million to DKK 117.2 million in Q2 2019. Operating profit was improved, and working capital changes improved, mainly as base sales outstanding was reduced. Of the amount of receivables overdue at the end of Q2, close to 80% has subsequently been paid, in line with the trend from Q1 2019. Underlining that, we have no issues with overdue receivables. Paid taxes was significantly lower than Q1 2018 as the taxes due were paid accordingly to the official schedule, which was not fully functioning in Q2 2018. We have further made an investment, acquiring Q Delft in Q2, which had a cash outflow impact of DKK 37 million. Also, we have purchased treasury shares for DKK 175 million, in line with the commitment outlined in the prospectus and communicated subsequently to cover the RSU obligation associated with the acquisition of Q Delft. To cover for some of these cash outflows, we drew down DKK 75 million on our lending facilities in Q2. Overall, cash in hand is DKK 136 million at the end of Q2 compared to DKK 172 million last year at the same time.

And can we have the next slide, please? The development in work-in-progress has been stable in Q2, as expected. The breakdown of the work-in-progress balances will occur during Q3 and Q4, where we will be meeting a number of large payment milestones on a handful of projects in the Danish portfolio. There are no indication of issues related to [past] income recognition of any of the projects with work-in-progress balances as of end of June 2019.

And with that remark, I've concluded the detailed financial walk through. And we now open up the call for questions. So can you move to the Q&A slide, please, and open up the call for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Claus Almer of Nordea.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [2]

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Yes. I have a few question regarding these delayed public tenders. What is the best guess for these very mature public tenders to be awarded? That will be the first question.

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

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Yes. Thank you for that question, Claus. Well, as you know, the general elections in Denmark has been -- the campaign has been longer than expected and actually going -- and it went into the summer vacation as well. So what we're talking about here is actually some processes being delayed, and I -- we do believe that we will also be giving, on some of these contracts, during Q3 and Q4.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [4]

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Okay. And then, if we look at very early tenders and also less mature tenders, do they see the same delay?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [5]

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No. This is one-time off. I mean this is a very natural consequence of the public sector administration being not active for almost 2.5 months. So this is just a pause in the processing of tenders, and that has a one-time effect. So the answer is no.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [6]

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Good. And then just my final question regarding adding new employees, both Q2 but also the situation here in Q3. Have you delayed or paused on -- maybe not paused. That was the wrong word. But have you added fewer people due to this delay, or are you just adding as many as you can?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [7]

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We're trying to balance all the time, Claus, in terms of early intake of FTEs. But it is dangerous for a company like ours to come to a complete halt in hirings. The graduates are available when they're available. And if they're good, we want to take them on. And that's also why we said hello to 245 new employees in Q2. So for a lack of a better word, we are probably a little bit ahead of the curve in terms of hirings. Not significantly, but a little bit.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [8]

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Okay. So when you move into 2020, and I know you're not guiding for 2020, you will have a better balance between revenue and employee costs? Would that be a fair assumption?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [9]

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Yes. Like you said, we're not guiding for 2020. So we are, all the time, making sure that we have the adequate amount of staff to support a growth of 20% to 25%. And that then, of course, fluctuates a little bit. And if things are delayed, we might have been a little bit ahead of the curve, but it's premature for us to say anything about 2020.

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Operator [10]

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

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [11]

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Coming back to the question about the tender delays or postponement. Could you put some -- I also know that there's a high pipeline of tenders coming up for next year. Could you put some names on some of -- I know that social pensions is by February next year, but what are the tenders coming up, just to get some flavor on that?

Then on Norway, your attrition rates is picking up, and there's some slowdown at least in the net adds of new employees up there. Could you talk about the Norwegian labor market? Also, how you expect that to perform going forward?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [12]

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Regarding the tenders, I mean, I can refer to -- you can actually see many of these tenders. They're already publicly known in various ministries and in the public central government sector, so I will not dive into details in regards to exactly what tenders we're aiming for from a strategic point of view.

When it comes to the Norwegian operation, yes, the market is pretty tough up there. I mean to get the -- to get people working for you is even harder than in other markets. And then we see a general lack of IT competencies in the Norwegian market. However, we succeeded in hiring a substantial amount of very good employees up there, and we expect them to get into new projects during Q3 and Q4.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [13]

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And then a follow-up on the guidance for the second half. You moved the guidance down to the low end of the range. But if you look at secured by contract, then it grows from plus 22% to plus 26% from Q1 to Q2. Are there -- can you talk about the link between you seeing improved secured by contract and then going down in the guidance line? Because now, you are above your full year guidance when you look at secured by contract. Or are you just more confident about the full year than earlier?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [14]

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Yes. It's true -- Poul, thanks for the question. It's true that if you calculate the revenue visibility for 2018 at the same Q of time, compared to what we realized, you get to a coverage of 82%, and if you do the same at this point in time for the target of the [range], you get to a coverage of around 84%, so it's true that the coverage is higher. However, also taking into consideration that at the same time in 2018, there were a number of contracts that we actually had won. And we were basically waiting for some payable [we're working on] so they did not count into revenue visibility. The revenue visibility that we have for the remaining part of 2019 gives us confidence in the guidance range of 20% to 22%.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [15]

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Okay. And then 2 very small questions. One was about the U.K. where you had the headwind from the contract you spoke about and you said a margin impact of 3%. Should we see gross margins improving by 3 percent points moving into the second half in the U.K. then? And second, you spoke of -- yes.

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

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Yes. We will see continued margin expansion in the U.K., whether it's specifically 1 to 3 percentage points, I'll defer from commenting on. But I'll just state that the impact that this particular project has had on our margins has been to that tune, and so we expect of around 3 percentage points on growth. So we expect clearly a pickup in margins in Q3 and Q4 in the U.K., which is contrary to what we saw in 2018, where margins were dropping here and therefore, the margin expansion in the U.K. is going to be significantly acquisitive to group margins.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [17]

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Okay. And then the final one. You commented on overdue payments. You had these payments, which moved up from 30 days delay or overdue to 60 days in the quarter. Did you say they have been paid by now? Or...

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [18]

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80% of the overdues that was overdue on June 30 was paid in July. And it's [broad to be] between the different pockets. But 80% of the overdues have been paid.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [19]

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So that includes the one-off DKK 13 million?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [20]

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Yes. Depending on whether it's one pocket or the other. The total overdue amount, which is more than 30 days overdue, of that total, 80% has been paid. And then whether it's 80% in every pocket or is 90% in one and 75% in another, it's not disclosed. But it's 80% of the total. So we're comfortable with the overdues.

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Operator [21]

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The next question comes from the line of Yiwei Zhou of SEB.

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

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I have 3. Firstly, just looking to the U.K. margins. I understand that you just expand the one-off project impact on the public sector. But then looking to the private sector, you also have a significant improvement. And could you add a little bit color on that? And then should we expect the -- this would be the run rate? Or -- yes, please do.

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

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So on the [markets] and in private, the significant -- or the most significant impact on margins in private is the change mix from the geographical perspective. And in Q2 2018, we have much more revenue in the U.K. in the public sector than in the private sector, which was reversed in 2018 Q2. So the geographical split is mainly the driver of the margin pickup in the private segment.

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

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My question is the U.K. private sector margin, the improvement in the quarter.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [25]

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Okay. So the improvement in the quarter -- sorry, I misunderstood the question. We -- so the improvement in the margins in the U.K. private sector is driven by more of the "mid-company-like projects in the portfolio" that have a better margin and also saw new wins, where we are seeing significantly higher margins than what we have seen historically. As to specific guidance on each of the market, I will defer from that since we're guiding on group margins. But I'll just say that the U.K. business is showing significantly improved underlying business in 2019, in line with what we had expected.

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

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Okay. Fair enough. And then my second question is on the admin cost, it has increased to DKK 94 million in the quarter. And should we expect this to be the run rate for the remaining of the year? And could you also give us a little bit of indication on the level for 2020?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [27]

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Yes. In terms of the run rate and the likes, and you know I will not defer from commenting on what's going to happen in Q3, Q4 because that is fairly easy to calculate the other way around if you have the amount of the admin cost, right? So what we'll say and what we can say at this point in time is that we expect the amount of non-client-facing FTE. So the admin FTEs, we expect that to come down also during the second half of 2019, which will have a relative impact on admin cost. Whether the run rate is going to be DKK 96 million, DKK 98 million or DKK 94 million, I'm going to defer to comment on. But the main reason for admin cost to increase is that we now, in Q2 '19, have the full impact of being publicly traded, which we didn't have in Q2 2018. Then I also know that there is a sequential tick up in admin costs from Q1 to Q2 in '19. Some of that clearly has to do with the amount of people that we have hired. Whenever people start, they get a computer, they get a phone and stuff like that. And all of that is expensed as an admin expense. There's also more time spent on courses, which is also admin. So from a nominal amount, that is simply increasing the baseline. But the run rate into the rest of '19, I'm going to pass on commenting on. And I'm just going to state that we have maintained our guidance for the full year at around 26% in adjusted EBITA.

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Yiwei Zhou, SEB, Research Division - Analyst [28]

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Okay. And for 2020?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [29]

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I'm not going to comment on 2020. We expect the non-client-facing FTEs to come down and convert around the 5% level during 2000 -- or 2020, but I'm not commenting on the admin level in 2020.

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Yiwei Zhou, SEB, Research Division - Analyst [30]

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Okay. Fair enough. And my last question on the FTE. Compared to Q2 '18, it shows that you have hired much more FTEs in Denmark this quarter. Can we expect this would be the hiring pattern for Q2 in the future?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [31]

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No. I think it's -- that's difficult to draw any specific conclusion on. There are some timing in it. Sometimes it's in Q2, sometimes it's Q3. We try to -- ideally, we would like to face it throughout the year. That's not always up to us to decide entirely. It has to do when graduates are available, so don't try to make too many conclusions on that specific level. I think, though, talking about FTEs, and then since you asked about it, we -- if we look into the client-facing FTEs for the group level, and let's just keep the Dutch organization out of it. But if we look at the client-facing FTEs, then client-facing FTEs in 2018 Q2 was 1,715. And that increased to 1,720. So it increased by -- into Q3 2018. So from Q2 to Q3 '18, we only grew by 5 in client-facing FTEs. And clearly, that growth is not a lot. And that also kind of underlines and supports our expectations to see more rapid growth in Q3 2019, which of course, is needed to pick up and get to the 20% to 25% -- 20% to 22% revenue growth.

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Operator [32]

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Your next question comes from the line of André Thormann of ABG.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [33]

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Just another question on the guidance. So I understand it's due to -- this delayed tender for us is due to the election. But do you then expect a positive contribution from these delayed tenders in 2020?

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

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Yes. There's no -- generally speaking, yes. If you look at the public sector in general, they are more busier during the next 2, 3 quarters because there has been a break of almost 2.5 months. So yes, generally speaking, that is the case.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [35]

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Okay. And then my next question is regarding one-offs. Is there any significant one-offs we need to be aware of? I saw some lines on that in the report, but can you elaborate a bit on it?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [36]

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We had some one-offs in terms of the costs associated to the integration on the Hollands' staff on costs. We had some pass-through license revenues in Q2 2018 that were higher than what we saw in Q2 2019. They were fairly limited in '19. So that's clearly impacted. But apart from that, there are no significant one-offs in Q2 '19.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [37]

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And how much -- is it possible to say how much does that impact the margin? Or is it a special items?

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

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It impacts margins at around 0.5 percentage point, which we have, and 1 percentage point. In fact, it was higher in '18.

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

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Yes. Yes, yes. And then there was some noise on the line. So maybe just one more time, regarding this higher churn, as I heard it in U.K. and Norway, can you elaborate a bit on that again?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [40]

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Well, the churn in Norway is a bit higher due to the fact that the lack of resource and the right competencies are higher in Norway. There's a bigger competition regarding wages and salaries in general. But we're still very well positioned. We hired a great deal number of new employees that are about to start after the summer break. And we expect them to get into projects over the autumn Q3 and Q4 this year. And in the U.K. -- well, in the U.K., we are winning more projects, the like of Netcompany traditional projects, which where we need other competencies than the one existing there. So you -- we are actually exchanging some employees with other types of employees, and that's why we have a higher churn in the U.K. But that would also lead, in the longer term, to better margins in the U.K.

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

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Okay. And in terms of Norway, is it a change you see in the market in terms of this lack of competencies? Or is it as you expected?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [42]

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I think the Norwegian labor market is just red hot, and that's just how it is. And interestingly, in Norway, the ones we are competing with for talent and the ones that are also sometimes recruiting from our current is that, that's actually public institutions. So we are, in Norway, a competitive private institution. And then in comes a public institutions and basically offer employees 35 points [that won't vary] in a public institution. And that's a little bit difficult to compete with. We don't want to go there. But that's just the Norwegian market. It's very tight these days. So it's not that -- yes, there are some good people, but there's also extreme competition [for it].

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [43]

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Yes. And I can add to that. I think you're looking at -- specifically, that is the case for experienced hires. When it comes to new hires from universities, we are very well positioned. And we're getting exactly the chunk of people from there that we expected. And that is good. So in the -- just in a longer-term perspective, we are very well positioned to get the people from universities, and we are getting them. When it comes to experienced hires, the market in Norway is just, yes -- it's red hot.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [44]

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Okay. And then in terms of Denmark, I think I read that you won a new insurance client in the private segment. Can you elaborate a bit on -- is it a very big client or something like that?

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

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Yes. That is a substantial client with a very complex and interesting portfolio of engagements.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [46]

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It was the one we won in Q1 that continued to drive revenue into other segments.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [47]

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Oh, it was the same one?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [48]

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Yes. It continues to grow revenue growth in Q2.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [49]

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Okay. Okay. But it's the same as you won in Q1?

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [50]

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Yes.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [51]

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Yes.

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Operator [52]

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Your next question comes from Erik Elander of SHB.

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

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So 2 questions for me. The first one is what is the reason behind the improved revenue visibility within the private sector? Is this related to the insurance contract in Denmark that you have won?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [54]

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Yes.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [55]

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That is the case.

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [56]

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That is the case, okay? So simple answer, Erik, that is the case. And therefore, you can also deduct from the answer and the numbers that it is a substantial case.

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Erik Elander, Handelsbanken Capital Markets AB, Research Division - Research Analyst [57]

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Okay. Great. And also, my second question here is that time and material contracts have increased as a proportion of the total work-in-progress. Why is this? Do you expect this trend to continue? And what proportion are you aiming for in terms of split between time and material and fixed price project?

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Thomas Johansen, Netcompany Group A/S - CFO & Member of Executive Board [58]

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Yes. Yes. And that's more a coincidental timing effect and has to do with certain projects where we are delivering on time and material. But we have to raise invoices against the purchase order. And depending on when that is done, from a timing perspective, it will be either receivable or work-in-progress. So that's more a timing difference from one quarter to another, Erik. We don't have any specific target as such on that. It will vary a little bit from quarter-to-quarter.

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Operator [59]

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And your final question comes from the line of George Webb of Morgan Stanley.

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George W Webb, Morgan Stanley, Research Division - Equity Analyst [60]

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Just got a very broad question maybe just to round up. Could you maybe just give some color in terms of your level of confidence or your level of visibility in terms of your full year EBIT margin guidance? It was clear you've kept that level whilst reducing or narrowing your revenue growth guidance to the bottom end of the range, so is there anything we should be inferring from that in terms of your mix of freelancers versus FTEs or anything like that? That would be really helpful.

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

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No. I mean the major reason for us guiding in the lower range of the revenue has been the election and the Danish operation. We're waiting a bit there on public tenders. Overall, we are running the operation exactly as we did previously. Everything -- I mean the visibility is good. We have a great pipeline. We have a good backlog. We are delivering the projects according to plan, so we are very confident on our guidance when it comes to the margin.

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Operator [62]

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There are no further questions coming through. (Operator Instructions) No further questions coming through on the line, sir.

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André Rogaczewski, Netcompany Group A/S - Co-Founder, CEO & Member of Executive Board [63]

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Well, then thank you, everyone, and have a great day.

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Operator [64]

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