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Edited Transcript of NNIT.CO earnings conference call or presentation 14-Aug-19 8:30am GMT

Q2 2019 NNIT A/S Earnings Call

Soeborg Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of NNIT A/S earnings conference call or presentation Wednesday, August 14, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Carsten Krogsgaard Thomsen

NNIT A/S - Executive VP of Finance, Legal, IR & CFO

* Klaus Hosbond Skovrup

NNIT A/S - Head of IR

* Per Kogut

NNIT A/S - President & CEO

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Conference Call Participants

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* André Thormann

ABG Sundal Collier Holding ASA, Research Division - 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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Hello, everyone, and welcome to the NNIT interim report for the first 6 months of 2019. (Operator Instructions) I will now hand the call over to the Head of IR, Klaus Skovrup. Please go ahead.

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Klaus Hosbond Skovrup, NNIT A/S - Head of IR [2]

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Thank you, and good morning, and welcome to this NNIT call regarding our financial performance for the second quarter and first half year of 2019. My name is Klaus Skovrup, and I'm Head of Investor Relations. And with me today is CEO, Per Kogut; and CFO, Carsten Krogsgaard Thomsen.

I'll briefly walk you through the practicalities for today's meeting before handing over to Per and Carsten. Today's earnings release as well as the slides being used for this presentation will be available on our website, nnit.com. The conference call is scheduled to last approximately 1 hour, and the presentation is expected to last around 20 minutes. And after the presentation, we'll open up for questions. Today's agenda can be found on Slide #3. Note that this call is being webcast live and a replay will be made available on NNIT's website after the call.

Turning to Slide #4. I need to advise you that this call will contain forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to deviate considerably from the outlook set forth. Furthermore, some of these expectations are based on assumptions regarding future events, which may prove incorrect.

With these words of introduction, I'll hand over to Per Kogut and turn to Slide #5.

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Per Kogut, NNIT A/S - President & CEO [3]

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Thank you, Klaus, and welcome from me as well. As you have read already, the first half year results for 2019 are very disappointing, of which to a large degree is due to a decline from our main client, Novo Nordisk, of 8% due to a decline alone in Q2 of 16%. In Q2, project revenue from Novo Nordisk declined by almost 40%, which came to a surprise to us. At the same time, we have doubled our business within international life science at attractive margins, which is a key element in our strategy from January.

Besides the weak results of the first 6 months of '19, we face further risk in the next 2 years with uncertainty related to the sales to Novo Nordisk; a large application maintenance agreement will not be prolonged after 2019; and we have an operational maintenance agreement with Novo Nordisk that expires at the end of 2020 that might be won at a lower price; then we have the PANDORA situation that we have described; and that DSB for the second time have chosen to not prolong with NNIT.

Please turn to Page #6 or Slide #6. Therefore, as a result of the above-mentioned elements, we have initiated a business and a cost restructuring plan targeting an impact in 2020 of DKK 150 million and a target full year run rate impact of minimum DKK 200 million in 2021.

Our strategy back in January, which many of you have questioned, still stands, but certain elements require more and a swifter action. Continue full-speed on our organic international life science growth of more than 20% as well as growth in the project business in Denmark of 11% for the first 6 months, that will continue. We will also continue our focus on acquisitions within the life sciences and within selected technology areas. The success we have had with the recent acquisition has increased our appetite for further acquisitions. And as number three, it is obvious we all need a much better insight into the sales and opportunities between NNIT and the Novo Nordisk Group.

Please turn to Slide #7. The business and cost restructuring plan will protect our margin against the mentioned risks. Key levers in the plan are to reduce 250 full-time positions, increase our offshore and automation rates and increase billable utilization and efficiency in project execution. Please note that the current strong growth in international life sciences and the acquired companies, SCALES, Valiance and HGP, will not be impacted negatively.

Please turn to Slide #8. Following these uncertainties to sales to the Novo Nordisk Group and the loss of business on 2 key customers and the implementation of the business and cost plan, we have decided not to publish long-term targets.

Please turn to Slide #9. From a strategic level to an operational level, in Q2 we have won and extended several agreements on the positive side. As communicated back in May, we won a very large Microsoft D365 implementation project with GN Great Nordic. Further, we have won cloud operation agreements with existing customers and extended several agreements. I'm sure we will return to that during the Q&A.

But for further financial insights, I will now like to hand over to you, Carsten, for the detailed walk-through.

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [4]

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Yes. Sure. Let me go a little more into details if you turn to Slide 10. And let me concentrate on Q2, these being the new numbers. As Per mentioned, Q2 is a big disappointment. We see a revenue decline of 1.2%. This is almost entirely driven by a decline in the revenue from Novo Nordisk of 16% and as also mentioned, a surprisingly high decline in revenue on projects of 40%.

Now of course, when you suddenly get a drop of 40% on project revenue from a customer who delivers more than 35% of our revenue, that, of course, has a big impact. You can also see that our cost of goods sold have increased by 4.2%. That is driven by the COGS in the acquired companies, and we have not been able to take down the costs of delivering on Novo Nordisk fast enough due to the very surprising decline in projects. This means that gross profit is down 26% and then gross profit margin with 4.5 percent points.

We see sales and marketing costs and administrative expenses going down 9% and 6%. And this is due to the intensified cost focus we have in the current situation. So despite this, due to the drop in gross profit, we see the operating profit margin declining to 5.9% compared to 9.9% last year, which, of course, is disappointing. And this is in the future addressed with a cost program that Per alluded to and also through accelerated growth in our international life sciences, where we see margins which are above the NNIT's average margin.

If you then turn to Page 11, and have a look at the life sciences business, then you will here clearly see that revenue from the Novo Nordisk is declining, what I've mentioned, 16%, of which 40% is a decline in projects. You can also see that our international life sciences is increasing by 99%. Some of this, of course, is due to our Valiance acquisition and HGP acquisition. But the organic growth in itself is at 21%, so still a very satisfactory development here. We see life sciences in Denmark, as in previous years, being more or less flat.

So due to the big drop in Novo Nordisk revenue, then we actually have a completely flat revenue in the life sciences segment as such. And the cost of goods sold still increased due to the acquisitions and the growth in the international life sciences. And as I mentioned, we haven't been able to take out costs on the Novo Nordisk delivery teams fast enough to compensate for the lower revenue from Novo Nordisk. This all in all means that we see gross profit going down by almost 30% and the margin declining from 27% to 19% and then operating profit margin of 13.8%, which is 7 percent points down compared to last year and is clearly not satisfactory.

If you then look at Page 12 in the private and public segment. We see the enterprise revenue declining by 8.1%. This is due to lower scope and price reductions on some of the prolongation of large enterprise agreements last year. And these decreases have been so big that they kind of overshadowed the new business that we, for example, got from STARK, which we didn't have in the numbers in the first 2 months of the year.

Otherwise, we see our public segment declining by 7.6%, mainly due to lower scope on the DSB agreement. And we see then as a positive growth in the finance segment of 24%, driven by higher scope in revenue on existing clients and also the new contracts with AP Pension and with SDC. The operating margin is at 0.8% compared to 1.5% last year. That is clearly not satisfactory and project recovery plans have been made for the major contracts. Together with DKK 200 million cost plan, this should see these margins grow in the future, but it's a hard fact.

If we then turn to Page 13, I think the overall picture on our currencies is that they fluctuate somewhat. But in short term, they have only minor impacts on our financials. So in Q2, our operating profit saw a margin headwind of 0.1 percent points. And it's primarily due to the appreciation of the Philippine currency. And for full year, we look into currency headwind on operating profits from PHP but also from the CNY.

These will then be mitigated by the hedge program there, which you can see on the next slide, 14. So when you look at our net financials for the first 6 months, then we see improvement from minus DKK 3.5 million to DKK 5 million. This is driven by higher currency hedge gains, where we see a gain of DKK 11.4 million. This is not just due to, you can say, to favorable timing of our hedging but is also due to the interest differential between the Danish krone and the CNY, which will at the current rates on average give us gains on our hedging. If you look at the currency hedges on the balance sheet at the bottom of the slide, you can see that we still have DKK 8.2 million positive currency hedges placed on equity for future quarters.

If you then turn to Slide 15 and briefly look at the employee development, then we see an increase of 3%. This is entirely driven by the international part of our business, especially an increase of 75 FTEs in the Philippines but also due to the inclusion of Valiance and the HGP employees. In Denmark, we saw a decline in FTEs of 1.3%.

If you then turn to Page 16 and on the balance sheet. There was a time when I said that was rather boring and nothing much happened with our acquisitions. We do see some movements on the balance sheet, especially when you look at the intangible assets. They increased from DKK 209 million to DKK 516 million. And of course, that is goodwill from our acquisitions of Valiance and HGP. We see work in progress increase with DKK 40 million due to a large transition project for STARK. And on other receivables and prepayments, we also see an increase due to a few large projects with the Novo Nordisk Group and the inclusion of HGP.

When you look at the contingent consideration on the right-hand side of the slide, you can see this is increasing from DKK 54 million to DKK 134 million. And this, of course, has to do with the earn-out provisions for Valiance and HGP. And further down on the slide, you can see bank overdrafts have increased from DKK 184 million to DKK 417 million. And this is primarily due to the acquisitions of Valiance and HGP.

If you then turn to Slide 17 on our cash flows, we see cash flow from operating activities declining DKK 47 million due to lower net profits than last year and changes in net working capital. On the investing side, we see cash flow from investing activities at minus DKK 160 million compared to minus DKK 82 million last year. This is primarily due to the acquisition of HGP. When you add it all up, we get a free cash flow of minus DKK 67 million compared to DKK 58 million positive last year. That is, of course, due to the HGP investment, lower cash flow from operating activities and a little of the net working capital.

Let's turn then to Page 18 and the backlog development. You may have read in the quarterly report that we will no longer publish our backlog numbers for the year 2 and 3. I think we prewarned you about that already last time. The reason, of course, is that with our acquisitions, with much higher growth in the project business than in the service level agreement business, then having our backlog going out as far as 2 to 3 years doesn't really give much meaning anymore and it could sometimes be directly misleading giving these numbers. So we will solely show you the backlog numbers for this year.

And what you see here is that we see a backlog growth. So that's both revenue already in our books and it's the signed contracts for future revenue for the rest of the year that is increasing by 1.7%. And the reason for that not increasing more and in line with our previous guidance is that we now see a drop in the backlog from Novo Nordisk of 11.7%, very much driven by the decline in projects from Novo Nordisk that we've been talking about.

On the very positive side, on the other hand, you see that our life sciences business is increasing by 33%. And this is -- this increase is completely driven by a very large increase in our international life sciences business. So on that point, our plan is working very well. On private and public customers, we see an increase of 3.5 percent points, again driven more by the project business, which is around 10% and then a decline in the service level business.

If we then turn to Page 19 and look at the outlook for this year. When we look at the revenue guidance, this used to be a guidance of 3% to 6% revenue growth. This, we need to change due to the backlog growth of 1.7% being below the guidance. Of course, this is almost entirely due to the decline of the Novo Nordisk backlog, where we earlier in the year saw much smaller declines in the backlog. So we are now guiding a low single-digit growth this year.

On the operating profit margin, we are sticking to the 8% to 9% guidance from last time in our company announcement regarding PANDORA. We reiterated this and we also said that we are guiding, excluding restructuring costs, of DKK 15 million to DKK 25 million. The reason for this being that executing on the DKK 200 million cost plan will require that we reduce the number of FTE positions with around 250 FTEs. And even though we will try to do what we can with relocations, natural attrition and so on, we will have to make some dismissals expectedly in Q3. And the layoff costs in connection with that is expected to be in the area of DKK 15 million to DKK 25 million. And finally, our guidance on CapEx is unchanged at 5% to 7% of revenue.

And Per, over to you for closing remarks.

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Per Kogut, NNIT A/S - President & CEO [5]

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Yes. Thank you, Carsten. I would like to conclude our disappointing numbers. We have a growth of 2.9% half year and an operating profit margin of 6% at the first 6 months in '19. And as we have mentioned, this is very disappointing, largely due to the lack of sales to the Novo Nordisk Group.

Our decline in revenue and margins from the Novo Nordisk Group will challenge us going forward, including the loss of PANDORA and DSB. Currently, we don't have any exact dates on when this will impact us. Consequently, we are initiating a business and cost restructuring plan, which will not impact the strong growth in our life science and all the acquired companies.

We have changed our revenue growth guidance to low single digits for '19 previously from the 3% to 6% you have known. Our operating profit margin of 8% to 9%, excluding restructuring cost at the level Carsten just mentioned in constant currencies as communicated in July 3, 2019, is still maintained. And our investment level is still expected to be around 3% to 7%.

Two last comments. We have decided not to publish our long-term targets going forward for the reason that Carsten just mentioned. And as a final comment, late August, 24th of August, we will pay out interim dividend equaling DKK 2 per share.

So with these words, I would like to conclude our presentation and open up for questions. So operator, we are ready to take the first question, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Poul Jessen from Danske Bank.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [2]

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I have a number of questions. But let's start by the Novo Nordisk relationship. First, the second contract, which you talk about that it can be prolonged or you can totally lose it, can you try to put some arguments on why you should be able to prolong it now that you lost the one mentioned yesterday and not lose this one as well? And do you still, given that they are reducing, more or less, their exposure every quarter, not having any indications of what their long-term ambitions or intentions are due to this relationship?

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Per Kogut, NNIT A/S - President & CEO [3]

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Yes. Because it's such a central element and I don't want to have my comments lost in transaction on the way, Poul. You are absolutely right. And the loss last night after the meeting with Novo Nordisk on the application maintenance is as mentioned a huge disappointment. And we have also mentioned in our statement that the next deal, because we anticipate that will be of interest, that is coming up for renewal will end, end of 2020, which is 16 months from now. I think this has come across maybe a little too negative. We have not initiated any discussions with Novo Nordisk, and we have no information on the risk of losing that is higher or lower than anyone else. But I am actually pretty certain that we will continue with this deal. But the negotiation has not begun. I also read it a little negative and maybe we are a little too pessimistic here, given the circumstances.

When it comes to your second part of the question about the insight into Novo Nordisk going forward, it is a clear desire both from you and investors and NNIT to have a much, much better insight into the run rate and where we are with business. And I think there is a common goal and understanding, first of all, of the impact of business towards NNIT from Novo Nordisk and an interest of trying to solve that challenge when it comes to Insight. So I have requested that discussion with Novo Nordisk and that was discussed yesterday. I cannot promise you that I will succeed on it. But I think there is a much better mutual understanding for the need, given the impact on NNIT across the board. So hopefully, we will be able to articulate something. And I don't know if it will be tomorrow or 6 months from now, but some kind of an insight that is a much better projection of the business relationship with Novo Nordisk that is clearly needed.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [4]

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And of course, the next question is that if they continue reducing the relationship and they also cut some of the strategic, or more strategic projects or contracts, then we could start asking why should they have an ownership interest in the company at all.

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Per Kogut, NNIT A/S - President & CEO [5]

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That's a very relevant question that you should ask them.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [6]

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About the cost cutting, a few questions there. First of all, if you can take out now DKK 200 million of costs, then I'm just wondering, why is it coming now, why that has not been on the agenda, let's say, for the last 1 to 2 years? And secondly, when you take out the costs, are there any risk that you lose the competitive edge or competencies here? You say that you have to take out some of the delivery teams to Novo Nordisk now. Are they leaving with know-how which is needed for the life sciences business?

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Per Kogut, NNIT A/S - President & CEO [7]

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Also a very, very relevant question. We have, of course, addressed our cost base ever since August and also before, of course, addressed the cost base significantly since August 2016, when the Novo Nordisk decline began. It is obvious that we have not prior had an aggregated amount of loss of contracts so it requires a more comprehensive plan. But we have moved people around in the organization since hiring -- the manning cost is the main part of our cost base. We have done that historically. So there is no changes to that. And obviously, several of the people who understand the Novo Nordisk business understand the production environment, the regulatory environment, R&D area and so on.

We will, of course, redeploy them in our international life sciences, if possible. But of course, some of the people may be geographically be at the wrong location. So if I'm going to move a project from Bagsværd to the southern part of California, that could establish a challenge. But if possible, of course, we will redeploy the people equally. A smart project manager from PANDORA will also be a smart project manager for another client, so -- and that's why Carsten alluded to that canceling of the 250 positions might end up with some fewer dismissals, which we don't know right now because it's an equation with a lot of unknowns. And right now, we don't know the runoff of the contracts we have.

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [8]

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And Poul, about why first now with these cost reductions. If you think back then over the last 3 years, we have actually executed on the operational excellence program in the old operations division where we took out almost DKK 100 million. 1.5 years ago, we had a big project on the staff functions where we reduced staff costs by more than 10%. So I think, we have been doing this, but of course given the losses we're having now and the impact on our margins, we will dig even deeper.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [9]

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Okay. And then follow-up, twofold. One is, if you assume nonrecurring cost of about high end DKK 25 million this year and you say DKK 15 million next year, I don't know, if it's a guess then you'd say DKK 40 million total. And you can get a cost reduction of DKK 200 million by that, to me, comparing to a lot of other restructuring cases in the past in other companies, it's a very high return on our limited cost. Then you mentioned that part of the improvement is higher utilization. And seeing other consulting companies to raise the billable hours per employees one of the really tough tasks, how confident are you that you actually can deliver on that higher utilization?

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [10]

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So maybe if I take about the high return on the investment, as you call it, Poul, then I think we do have a business where we have natural attrition. So we do not have to dismiss as many people as we might see in other places. And with the termination clauses and so on we have, then these are the numbers that you get. We don't have to close down plants where you make one of write-downs on plants and equipment and things like that which you often see in other places. Sometimes you see write-downs on R&D, which is making money on products, and so on. So this is just purely on the people side we are looking.

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

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Okay. And then about the utilization, how confident are you that you can raise it, the billable hours?

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Per Kogut, NNIT A/S - President & CEO [12]

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We have done with external help, Poul, an analysis on where we are with utilization and productivity and we are relatively confident that our billable utilization will increase over the comment period, which is, again, an equation with several unknowns. You could work with the hourly wage, you can work with less people and increase and you can distribute work much better. But I think we have -- actually, the result of our analysis was that we were very, very close to the median in the industry. But we want to be compared with ambitious companies and go to the top level of that. So we will increase our billable utilization and it will provide an impact. So I'm pretty -- I'm confident that, that will succeed.

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Operator [13]

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Our next question is from André Thormann from ABG.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [14]

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My first question is regarding the guidance for this year. So you maintain your guidance on an 8% to 9% EBIT margin for 2019, but as I see, you have generated around the 6% EBIT margin for the first half year so what should we see you do for the next half year to increase the EBIT margin for the current year to reach your guidance? That's my first question.

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [15]

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So, yes. Well, pure mathematics. Then we need to have an average margin in the last 2 quarters above 10% to get above 8%. You may then ask how can you do that? And I think I mentioned it already at Q1 that in the first half of this year we have been impacted by several cost overruns on projects, not big black swans, but DKK 5 million here, DKK 3 million there, and so on. And nearly all these projects which have had cost overruns they are close to being finished. So they will not be impacting us in the next 2 quarters. At the same time, we are taking down our cost level through use of the cost consciousness we have. But then also in September, we are taking out a number of positions, which will also take down our cost level. And then finally, Q4 is normally a strong Q4 where our customers buy more and where our billable utilization goes up and our margins normally go up. This we see every year.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [16]

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Okay. Just to be sure because what has really impacted your margins for the first half year as I understand it is partly Novo Nordisk -- the lower activity with Novo Nordisk. And as I see it, it doesn't seem to become better in the coming quarters. So just to understand in your current guidance, how -- what is your expectations on Novo Nordisk? If you will be just a bit surprised, will we have to revise it down, or -- just to understand.

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [17]

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Well, our current guidance -- our new guidance is based on the backlog and the pipeline numbers we have from Novo Nordisk. So that is as you see them in the Q report. Of course, if Novo Nordisk were to decline even more, then the 12% you see in the backlog that would, of course, make a change. But right now, this is what we see and we are at a very low project level. Yes, the big question is to what extent that comes in Q4 impact or not from Novo Nordisk, on the industry.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [18]

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Okay. Yes, because in Q1, I think, the backlog fell around -- what was it, 8% or something like that? And then actually the Novo Nordisk revenue fell like 16%. So I mean how confident are you in this backlog? Can it double or like we saw for this quarter or...

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [19]

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I think we should be cautious about what we're saying about Novo Nordisk, history has taught us. So what we can say, this is our best estimate based on available backlog numbers, projects in the pipeline, and so on, and the knowledge we have of Novo Nordisk. But yes, it is more uncertain than we have seen in the past.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [20]

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Okay. And then just moving to something else. In terms of these 250 positions, as I understand you're already starting to take down some of these already this year, is that correctly understood?

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Per Kogut, NNIT A/S - President & CEO [21]

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Yes, we will begin in September.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [22]

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In September. Okay. And then when do you expect to have finished this, is that also in 2021 or...

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Per Kogut, NNIT A/S - President & CEO [23]

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Yes, yes. You could argue that we begin this now because part of the equation is that we have more than 100 open positions, and of course we want to fill those positions because we have tasks and needs for these with some of the 250 that are relevant to deliver those openings. And then you have attrition every month of, I don’t know, 10%, 12%, not every month, but a yearly rate, so that's 30 positions. So we have actually begun to bring this 250 down. It is our goal to have delivered that saving already this fiscal year because we need the full impact.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [24]

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Yes. But just so I understand, because I understand it's 250. That's really without the 3 contracts that you mentioned in the report, both the Novo Nordisk, PANDORA and also DSB. So how much should we expect in total, including these?

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Per Kogut, NNIT A/S - President & CEO [25]

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Yes. If we knew we would have stated it. First of all, we don't know when and how much will expire. Of course, you could argue that at what's been anticipated everything. But that's several hundred additional headcounts that will be obsolete going forward when we know the contracts will end and a potential new vendor have taken over.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [26]

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Okay. Just to understand you will already see positive effects from this cost reduction program in the current year?

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Per Kogut, NNIT A/S - President & CEO [27]

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Yes.

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [28]

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Yes. Okay. You could say when we look at our operating profits before restructuring costs, of course, the notice period for the employees that are dismissed that will have to be paid for the rest of the year. But before restructuring costs, you will see a positive impact.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [29]

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Okay. And then maybe just the last question. Can you maybe elaborate a bit more on how in practice you will increase automation and off-shoring much more than you already would have to do to reach these cost savings?

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Per Kogut, NNIT A/S - President & CEO [30]

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It's a lot of small minor tasks, but we have been very positively surprised with a number of activities within automation that have actually gained us tremendous momentum and believe in this. But we similarly need to copy those activities, it could be avoidance of double work or work with human interaction in service desk, as an example, chatbots and other automation elements in our operation units. So it's a lot of smaller tasks. And we will provide more people to these type of projects and programs and by that getting a bigger impact.

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Operator [31]

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The next question is from Yiwei Zhou from SEB.

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Yiwei Zhou, SEB, Research Division - Analyst [32]

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I have 2 and I'll start one by one. Firstly, you mentioned there is a price reduction and the lower scope in the enterprise segment. Could you add a little bit of color on this? And then in combination of the loss of PANDORA contract due to disagreement on pricing, could you please confirm the areas with increased price pressure in the segments or in the market?

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Per Kogut, NNIT A/S - President & CEO [33]

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I don't think I can confirm that. What I can confirm is that the number of larger outsourcing agreements currently is at a relatively low level. I honestly personally believe that will change depending on the financial cycle you are in. In a financial positive cycle, you will see a lot of application and project work. And in the opposite cycle, you will see more cost reductions and clients changing their OpEx, CapEx picture. But right now, we are in a situation where a lot of work and investments are dedicated to projects, new applications, digitization, cloud journeys, and so on. I don't think that emphasizes that there is a cost pressure more than normal. But there is a lower volume of larger outsourcing deals. When it comes to the PANDORA case in itself, we have a situation where we know the client, we have given them very attractive services, they are -- we have a very good customer satisfaction. So I don't think there is any element of significance into that being a decisive factor. But when we calculate, and I think we have more or less the same hourly rates and the same cost picture than the bidder that won the deal, then when we come to a conclusion where we will lose money to continue with PANDORA, that's where we will exit. I'm not in favor of continuing -- not continuing, but on-boarding deals that are negative in margin contribution and then hope and expect you will get more business or trying to change the picture during a process. And that's why we disembarked on that deal. We could simply not lower the cost. But again, others might be more interested to attract these icon clients.

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Yiwei Zhou, SEB, Research Division - Analyst [34]

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All right. Next question, is it possible for you to quantify how much of the costs are shared costs for the lost contracts?

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Per Kogut, NNIT A/S - President & CEO [35]

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Yes, I think and I know that is possible. I don't think we will disclose it. So, of course, we know the cost picture involved in PANDORA and DSB. But to be honest, I think that's a commercial issue that we will keep internal. I hope you understand and you respect that.

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Operator [36]

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Next question is a follow-up from André Thormann from ABG.

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

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I just had a follow-up. So in terms of these extensions that you announced with danish life sciences clients, did you see price reductions on those as well as you did on the extensions you did last year?

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Per Kogut, NNIT A/S - President & CEO [38]

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Not to my knowledge. I think we have -- of course, if you have a 10- or 20-man project and you have 19 Danes and 1 Chinese involved and suddenly the composition of involved parties even including automation, if that changes, of course, the cost picture for NNIT changes and the picture for the client changes as well. But I'm not aware that we should have engaged on any larger client where we have completely different cost picture. If that were the case, then we would have mentioned it. So we, of course, you have to work with the nominator and denominator constantly and we believe we can do so going forward.

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

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Okay. And then just another question in terms of the 40% decrease in project activity from Novo Nordisk. Just to understand, what is causing this? Is this solely lower project IT activity in general that Novo Nordisk procure or is it you being -- I mean, Novo Nordisk choosing somebody else instead of you?

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Per Kogut, NNIT A/S - President & CEO [40]

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I would ask that question to Novo Nordisk, but it is my perception that it's also a result of many, many different things. One of them being that Novo Nordisk for years have been in a cost saving mode, meaning lower activity, simply fewer projects. I also think there is an element maybe they are doing a little more themselves. And of course, like in all industries, there is a price pressure and these top-tier icon clients are attractive for all. So maybe they have chosen others. It is not my anticipation and I actually got confirmation yesterday at the meeting with Novo Nordisk that our -- what they call, our level of business with Novo Nordisk, relatively our market share, that was the word I was searching for, has not decreased which led me to a conclusion that they simply are spending less.

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [41]

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That is also my perception.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [42]

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Okay. And then regarding this price pressure, I mean can you compete in this price pressure environment because as I understand you are losing on price sometimes? So are you able to compete on this going forward?

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Per Kogut, NNIT A/S - President & CEO [43]

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The clear answer is absolutely yes. Our growth in the, what we call life science or biomed, is going well. We have solid growth in it. We are acquiring companies where they all are contributing to our margin going forward. So we strongly believe in that. But you will see that sometimes vendors make decision on buying a client and I will not embark on a journey where we will lose money on a specific client. That's bad business. It's a downward trending spiral and it doesn't bring any positive for anyone.

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

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But then if you take the public and private segments, then you have a very low margin. Should we then expect to see some of those clients going out?

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Per Kogut, NNIT A/S - President & CEO [45]

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No. Actually on the contrary, the enterprise segment, the finance segment and the Danish public segment are very, very important strategic segments for us as well when it comes to Denmark. We will continue to work in these segments and attract clients. And we know we have attractive prices. So I think a lot of the optimization. We clearly need to put into that is exactly along the lines of increasing utilization and productivity. So it's an internal issue that we will and can address. We are not up against a lot of Danish players of different sizes. When we work with the Danish top clients in finance and public and especially in the enterprise and life science, we are up against Tata, Cognizant, HCL, IBM, Accenture. This is Champions League game. And sometimes you win and sometimes you lose. And historically, NNIT was also a great company before we won PANDORA. And we will become a great and proud company again going forward. The real challenge is that the amount of bigger deals have become less. So we need to redistribute and rethink which we have done. In general, how we address the markets sales wise and how we can gain more and smaller- and medium-sized deals, that will take time, but it will also lower the risk of the situation we are in right now. Having these mega deals that just impact us instantly. So instead of having one big deal with PANDORA, it's of interest of NNIT to split that up into 10 minor deals. So if we lost one of the 10, it's a bad thing, but it's not a complete disaster like we had with the PANDORA and DSB. So my belief on the development in the industry especially on the business we bid on, I think we are very much of a positive outlook and we should not put ourselves into a situation where we have the exposure as we have right now of losing -- where things become binary. That's a huge risk for NNIT and have been ever since. Now we are in that situation, we have learned from it and we will recover. That's my promise.

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

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Okay. Then just maybe just one last from my side. In terms of when you are taking down theses positions, is there any risk that the quality of the services you deliver will fall due to this?

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Per Kogut, NNIT A/S - President & CEO [47]

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It is not an ambition that we will lower quality level. We are a quality company. That's our mark in the industry. That's where we differentiate ourselves. But maybe the quality can be delivered in different ways. And some of our clients, when we discuss with them, you will actually hear that they are up for the automation journey because even automation journeys might include an increase in quality, which could be seen as a contradiction. But that's not the case. So we are not saying that we will go from, I don't know what you could compare, to a discount service shop. That's not the journey we are on. We will remain strong culture, high quality. But high quality may be delivered a little smarter than having 10 Danes to do it. It could be with solving it could be automated. And that's the efficiency and productivity work that the entire industry is going through and we, of course, adapt to that as well.

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Operator [48]

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Next question is a follow-up from Poul Jessen from Danske Bank.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [49]

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Just 3 minor ones. One is on SCALES, you didn't say much about SCALES in the report. If I try to calculate enterprise subtracting SCALES, then I come out at some minus 17% or something for enterprise. And you mentioned there has been this price reduction on larger contracts. But is that level excluding SCALES more or less the run rate for the coming quarters? Are there any exceptions there? Second question, the new contracts you are winning this year, are they on the same profit margin as in the past? That means very small on the level? And then final one, I had to ask PANDORA, you say that it moved down to prices when it was loss making. If you had the new cost structure after the DKK 200 million reduction you're coming up with now, would you then have been in a position where you could have been bidding and still being profitable?

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Per Kogut, NNIT A/S - President & CEO [50]

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Yes, this is very, very good questions. If we take the SCALES, we have in the situation we're in right now apparently we have successfully been able to focus on all the negative stuff, but SCALES are doing very well both prior and after the acquisition. The 17%, Carsten?

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Carsten Krogsgaard Thomsen, NNIT A/S - Executive VP of Finance, Legal, IR & CFO [51]

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Yes. So you will take the underlying 17%, if that is the number I haven't calculated right now, Poul. But certainly if you take out SCALES then the decline in revenue in enterprise is higher than the 8%. And that is due to price reductions, but are also due to lower scope on Arla and business where they have in-sourced some services. And that level will continue in the coming quarters.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [52]

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So the level, excluding an estimate at SCALES is the run rate going forward?

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Per Kogut, NNIT A/S - President & CEO [53]

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First of all, be careful about isolating SCALES. There's a huge collaboration between what you would call it an IT classic and SCALES on several accounts. So we have also moved some of our activity and resources towards the combined SCALES work in some of the accounts. So it's not like -- you cannot subtract them completely. Your second question about margin in the prolonging. I'm not aware that we have prolonged a lot of deals through a much lower margin. What we have to work on is the cost base, and of course, also the cost base when it comes to how we will allocate and distribute staff costs, for example. So many of the clients we were talking about end up not contributing a lot due to the allocation of central elements. And last, the PANDORA, saying if we had the new cost base, of course, we would be able to compete better on that isolated case. It is still -- I strongly suggest you talk to PANDORA about it. It is my observation that the offer they have gotten from the new vendor is so attractive then that might have been a challenge for us going forward as well. But we are constantly comparing our what is the winning price in the market, what's our average price, do we have search areas, that was one of the questions, I think, we didn't answer from maybe you or some other analyst about will we become sub-scale at a certain point. That's not the case. Of course, we will work on that constantly, and we -- with the McKinsey analysis and the program that Carsten alluded to previously, we are constantly benchmarking our prices. Where are we? Where are the market prices going? And can we do something either to increase them, because there are elements in the industry where prices are going up. And of course, also in this case, we are unfortunately, and for good reasons, been focusing more on the negative side.

I think we have to be a little careful about time as well. Maybe one last question if possible.

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Operator [54]

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And there are no further questions registered at this moment. (Operator Instructions) No questions registered at the moment. So I hand the call back to you, Klaus.

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Klaus Hosbond Skovrup, NNIT A/S - Head of IR [55]

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Thank you. This concludes our conference call. Thank you for participating in today's webcast and feel free to reach out if you have any further questions. Thank you. Bye-bye.

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Operator [56]

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This concludes the conference call. Thank you all for attending. You may now disconnect your lines.