Hi, everyone, and welcome to NNIT's results for the first six months of 2024. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there'll be a question and answer session. To ask a question, please press five star on your telephone keypad. This call is being recorded. I'll now turn the call over to the speakers. Please begin.
Thank you, Rasmus, and good morning, everybody, and thank you for joining this webcast. My name is Pär Fors, and I'm the CEO of NNIT. With me today at our new headquarters at Islands Brygge, I have our CFO, Carsten Ringius, and together we will present the result for the second quarter, which we released yesterday afternoon. Please turn to slide two. I will walk through the key business highlights, including regional performances. After that part, Carsten will go through the group results, including our financial outlook for the full year. Before heading to the next slide, please pay attention to the disclaimers in the bottom of this slide. Let's turn to slide three. We are now one year into the first strategy period for the new NNIT.
We have taken a number of important steps to become a pure-play IT consultancy business within life science and the public-private space. We have become a more commercially savvy and resilient company over the past year with our internal non-financial metrics all showing us. Billability, billability is also improving. Attrition rate is at a low level, also compared with the industry, and our customers continue to value our services deliveries very highly. The latter part is not only evident through our own measurement, but has also been recognized by independent consultancy firms like Everest Group, ranking NNIT as a company with the highest value delivered. Another testimony of, to this are important strategic win we had during the quarter and also in the third quarter.
For instance, we've been able to grow and gain market share in Region Europe, mainly through expansion of existing engagements and customers. In Region DK, we have prolonged our contract with Fødevarestyrelsen, and we won the public tender with Kriminalforsorgen and expanded our presence within SKI agreements. We are also close to sign a large classic contract with a significant public customer. Last week, we also announced that we have signed the largest contract in the U.S. ever, worth approximately DKK 130 million. The contract is with a large existing pharma customer, which is really emphasizing the strong partnership we have. During the quarter, we have reached some important strategic milestones. Firstly, we went live with a new ERP and HR system in June.
Not only will these systems ensure stronger data quality, they will also enable more efficient work streams across the business, from controllers to project managers to consultants. Secondly, we have relocated offices in several locations. The new offices are modern, they facilitate a healthy work environment and are better located. We strongly believe that this will also support NNIT to continue to be an employer of choice. Lastly, we are finalizing the IT separation from Aeven, which has been ongoing since the divestment was announced last year. We expect this to be complete during the third quarter this year. All of these achievements are of great importance to us as they position us as a company to pursue future growth opportunities and act as enablers for improving profit margins over time.
Having leapt over more than a year since the strategy launch, we can now with certainty conclude that it was the right strategic choice we made a year ago, and we are on the right track on our transformation journey to support the long-term ambitions of the company. Please turn to slide four. I will not go in depth with this slide, as Carsten will go through the figures in more detail later. However, I want to highlight two things. First thing is that the overall financial performance continues to improve. We managed to gain market share and expand our profitability despite the headwind from the macroeconomic challenges in Europe and in Asia. The second thing is that we have confirmed our full-year outlook as the second quarter performance was in line with our internal plans.
We do believe that we have strong levers in place to continue to grow momentum and gradually accelerate the profitability. We also continue to have a solid backlog and pipeline for the remainder of the year. Please turn to slide five for regional performance update. Our financial performance in Region Europe was driven by our strategic focus on winning in life science. During the second quarter, Region Europe managed to grow its business to DKK 135 million, which translates into an organic growth of 12.3%. We're pleased to see that we are gaining market share despite the headwind from the challenging macroeconomic environment and the temporary decline in our data migration business, and when it come to data migration business, we're taking action and adjusting the data migration team to fit the forecasted demand.
In Europe, the growth is mainly due to our continued ability to expand engagement with existing customers. We can see that our existing customers value our services and our partnerships, and we have to cope with them, which will lead to more projects, something I'm truly happy about. The regions group operating profit margin is up almost five percentage point to 6.7%, driven by a few things. Our availability has continued to increase throughout the years, while we've been able to manage and also reduce costs. However, we still have a lower utilization rate as we have people on the bench in order to accommodate our progressing order entry. Those employees will be assigned to future projects in the back half of this year. Please turn to the next slide regarding U.S. performance.
The core business of Region U.S. and Excellis continues to grow in the second quarter. Despite the growth, it was not enough to offset the large decline in the data migration business, why organic growth ended at - 15%. We are seeing more Veeva-related projects incoming, and we are -tracking according to our recovery plans. We still expect this shortfalls, shortfall in growth to be temporary, and we will continue to have a negative impact on the U.S. for the reminder, remainder of this year. That being said, we are definitely not happy about the situation. On a more positive note, we signed our largest ever contract in the U.S. with a large existing pharma customer, as mentioned on the previous slide. The contract will start to generate revenue already from the third quarter.
The overall backlog and pipeline for the U.S. looks solid and promising for the rest of the year, and we do expect that we'll return to growth. We continue to scrutinize costs, and we have made hard efforts to keep costs at a lower level and reduce the number of subcontractors, which had mitigated effect on the decline from data migration business. But the regions group operating profit margin still declined to 4.2% in Q2. In early July, we have calibrated our cost base by reducing capacity to protect profitability with a strong focus on the data migration organization. We expect to see improvements starting from the third quarter. Please turn to the next slide.
During the second quarter, we have seen a step change in momentum in region Asia, where we delivered a 6.4% organic growth, excuse me, despite the sluggish macroeconomic environment in China. We have seen early signs that demand is slightly improving. In the first quarter, we took hard decisions and outlined a plan for what that it would require to do turnaround in Asia. The majority of this action were carried out in Q2, where we restructured organization and integrated a sales function into the delivery units. We also put much more focus on sales excellence and pricing strategies. We have also reduced our workforce, mainly billable employees, by more than 40 people and cut other SG&A-related costs to dramatically improve profitability.
Asia's group operating profit margin went from - 17% in Q2 last year to a +3.9% in Q2 this year, which I'm very pleased with. Even though region Asia is performing much better, we are not out of the woods yet. We will continue the work we have started to further improve the business in Asia. Please turn to slide eight for an update of region Denmark. The momentum in region Denmark continued with a strong organic growth, ending at 27% for the quarter. The growth was driven by all business areas, including our group company Scales. During the quarter, we have made solid progress on our strategic choice to win in public sector. The public business continued its good momentum from last year and now accounts around 30% of the total region Denmark business.
As mentioned earlier, we won some good contract and expect to sign a large contract with a large public customer shortly. The region's group operating profit grew from DKK 30 million in Q2 last year to DKK 18 million this quarter, due to top line improvement and focus on the cost base. Even though the profit increased, we still have a significant number of billable employees being dedicated to internal projects, such as the IT separation from Aeven. This has, of course, resulted in less leverage on the cost compared with normal circumstances. We still see further opportunities to increase profitability through improvements in billable utilization and sourcing mix. Please turn to the next slide. This concludes my part of the presentation.
Now I will hand over to Carsten for the group financial performance and comments how we are improving our business and the financial outlook. Please, Carsten.
Thank you, Pär. Please turn to the next slide. For the second quarter, the group revenue ended at DKK 474 million, entailing a total revenue growth of 11.8% compared with the same quarter last year. The revenue grew organically by 11%, and the main difference to total revenue growth is mainly due to sales toward Aeven, as it's being booked as inorganic, and this involves the month of April. The impact was 0.6 percentage point. Rate of exchange had a minor effect of 0.2 percentage point. We are pleased with 11% organic growth, as it tells us that we are gaining market share, even though the European and U.S. markets were challenged by the data migration business.
Overall, the growth was driven by us signing contracts with new customers and especially expanding our existing engagement, despite challenging macroeconomics. The group operating profit, excluding special items, increased from DKK 25 million to DKK 32 million. This was partly driven by the increase in sales, turnaround in region Asia, and a continued strong focus on costs across the board. We continue to follow our plan of reducing costs across the business and streamlining ways of working to become a more efficient IT, and with the implementation of the new ERP systems, we are currently seeing that unfolding. The group operating profit margin, excluding special items, increased from 5.9% to 6.7% during the quarter.
As Pär mentioned, the profitability increase has been dampened by the decline in the data migration business, billable employees with low utilization being kept on bench for future projects, and time spent on internal projects by billable employees. Please turn to slide 11. The net cash flow ended at -DKK 91 million, as free cash flow was -DKK 262 million, which is a worsening compared with last year. However, we do see large changes in our working capital, where the majority of them are non-recurring. We have made a bridge on the right-hand side of the slide, which I'll briefly go through. As you can see on the slide, there are several elements to the changes to the working capital, which the larger ones I would like to highlight, which is non-recurring.
The non-recurring elements are, for example, if you look at the trade receivables, they are inflated due to some late invoicing to customers in relation to the transition from the old ERP to the new ERP. We went live on the new ERP in the beginning of June, and as which is quite normal, when you go live on a new ERP system, you have some processes that you need to restart on your new ERP, and that has caused some delays in our invoicing, causing this temporary increase in our trade receivables. Another element is, of course, that when your revenue increase, you also have a larger trade receivable proportion.
If we look at the work related to the IT separation from Avon, which was beginning last year, we have expensed that last year, but we see the cash flow effect of that now. So that amount sums to around DKK 40 million. Then we have a service framework agreement rebate pool related to the agreement entered with Avon, which we settled actually this year, giving a DKK 15 million cash effect on our working capital. This will, you can say, reduce our cash negative cash flow going forward, as the rebate agreement actually consisted of a larger double amount agreed rebate that we are now settled with this amount.
Then we had some bonus payments, and then we had a high amount of prepaid expenses related to IT licenses and IT costs of DKK 44 million, which is also a non-recurring payment, which was expensed in 2023. And then finally, I would like to highlight the earn-out related payments of DKK 51 million, which is also the last earn-out payments that we have committed to paying out related to previous acquisitions. So those are the bigger movements in terms of our working capital movements. As you can see, there are a lot of variables of non-recurring nature, which can be related to our transformational journey in terms of being the new NNIT. Please turn to the next slide about the financial outlook.
With the Q2 company announcement distributed yesterday, we confirmed our full year outlook for 2024, meaning around 10% organic revenue growth and a group operating profit margin, excluding special items between 8% and 9%. The organic growth is expected to be back-end loaded, meaning single-digit growth in Q3 and double-digit growth in Q4. We acknowledge that a group operating profit margin, excluding special items, of 6% for the full first six months of the year in sales and acceleration in profitability to reach full year outlook. On this slide, we have listed five key levers that will drive profitability up for the last half of the year.
The strategic important contracts we have won in the second and third quarter are, of course, of a great importance to the backlog and pipeline for the rest of the year. As we executed on our actions to turn around the situation in Asia during the first and second quarter, we do expect to see the full effect of the restructuring done, and therefore there should be an upside to Asia's profitability compared with the first six months. As mentioned earlier, we are rightsizing our data migration business in both U.S. and Europe. This calibration of capacity has been done in early July, with the largest cost saving to be expected in the U.S.. Despite us following our recovery plan, we believe it's the right thing to do in order to protect profitability. We have briefly touched upon the completion of larger internal projects.
We did initiate key internal projects last year for us to become the new NNIT. Most of the projects are done, such as the implementation of the new ERP system, and very, very few elements are outstanding. Some of these larger projects are now in their final stage, which would not only create synergies and efficiency gains over time, they will also free up billable resources to external projects. If we, for instance, look towards Region DK, we have had around 40 or more billable employees spending time on the IT separation from Aeven. As we are expecting to complete the project during the third quarter, we have a plan on every employee level to be assigned to external projects.
And if you recall the presentation from our capital markets day we hosted last year, we presented a slide stating that some of the cost reduction initiatives we were doing would come from new office locations. Now we have relocated several offices and the new facility costs come with a lower run rate going forward. All of these levers will positively support the uplift in profitability in the second half of the year. In terms of phasing, we expect the profit margin to gradually improve quarter by quarter, supported by the realization of the initiatives and key levers carried out in the first half of the year, and also the historical seasonality of our business. Per also mentioned it, but I want to reiterate, we believe we are on the right track and we can see that our business is improving.
We have a strong foundation for the rest of the year, with necessary actions taken during the first six months. Furthermore, we have a solid backlog and pipeline in place to support future growth. Therefore, we remain confident on our outlook for the full year. Please turn to the next slide. So before we head into the Q&A, we will conclude the presentation with some closing remarks. Please, turn to slide 14. The second quarter was an eventful one. We have delivered on several important strategic milestones, such as the implementation of our new ERP and HR systems. We have relocated our offices and are now on the verge to complete our IT separation from Aeven. We believe that these efforts are truly important for the future profitable growth of the company. On the overall financial level, the Q2 performance continued to improve.
We are pleased with the strong growth in Europe and Denmark and the turnaround in Asia. However, we are not pleased with the development in U.S., even though the recovery is going according to plan. Lastly, we confirmed our full-year outlook due to all the improvements we are seeing within the business and due to the solid backlog and pipeline. This concludes the presentation for today. Thank you for joining the call. And now we will open the line and take your questions. Operator, please turn to the next slide and open for questions.
Thank you. If you wish to ask a question, please press five star on your telephone keypad. To withdraw your question, you may do so by pressing five star again. There'll be a brief pause while questions are being registered. The first question will be from the line of Yiwei Zhou from SEB. Please go ahead. Your line will now be unmuted.
Hi, good morning, it's Yiwei Zhou from SEB. Thank you for taking my question, and I have three, and I'll do one at a time. Firstly, I can see you are indicating that or guiding the low single digits growth in Q3. And could you please elaborate a bit here? I mean, you had a tough time in Denmark in Q3 last year. And apart from this, is there any other moving part? What do we miss here?
No, we expect to continue the growth, and it will be single digits in Q3. We expect still the data migration business to recover, but the full recovery will not be before we get into Q4. The effect of the last contract win in the U.S. will only, you can say, materialize late into Q3 and have full effect in Q4. This is why we see this phasing with double digit growth coming in Q4.
Okay, so the phasing is mainly due to the U.S. temporary weakness here?
Yes, that, that is one of the main drivers, yes.
Great, thank you. And my second question is on the Danish gross margin in Q2. I remember last quarter you had a sort of headwind from the time of Easter, and I guess this should have been reversed in Q2. Could you maybe comment on how much of the tailwind here in the quarter, the impact on the margin?
Yes. If you look across the two quarters, it is correct that Q1 had a higher gross margin. I think if you look at the underlying performance, we see it more or less being at the same level. What we saw in Q1 was a range of minor one-offs, sort of, improving the gross margin. We had a little bit of spillover of revenue on a client from last year coming into Q1, and we had some ongoing cases where we could potentially have some reservations that were reversed because of a good dialogue with the customers, not leading to any sort of, you can say, reservations being necessary to cater for these projects.
So we had a little bit of additional, you can say, tailwind in Q1 because of these minor one-offs. So the underlying performance is more or less the same between the two, the two quarters. And you can say that is, that is making up and, sort of, overshadowing the Easter effect between the two quarters.
Okay. I see. Thank you. And lastly, in Asia, region Asia had a significant improvement on the gross margin. Is this a sustainable level, or is there any one-off here in Q2?
So we believe this is a sustainable turnaround. We have taken some quite harsh measures into effect, reducing our organization with more than 45 employees. So it is quite a dramatic, you can say, calibration of our capacity that we have done, and we believe this to be a sustainable turnaround. Of course, we are monitoring the development closely on the macroeconomic development to see if we need to take further measures, but we believe that we have taken the correct measures for now.
Yeah, and talking of that, I mean, we haven't had the real full effect in Q2 of the measures we have taken. So the full effect of the cost reduction measures that we have taken is actually going to be in the third and fourth quarter. So, I mean, I think, at least, we expect improving margins in the remaining of the years as a consequence of the action taken in the first half. And that is actually based on the quite low expectation of improvement of the macroeconomic situation, but based on the backlog we have and the pipeline we have. So we have taken that into consideration.
Great. Very clear. Thank you, and I jump back to the queue.
Thanks, Yiwei. As a reminder, if you wish to ask a question, please press five star on your telephone keypad. The next question will be from the line of Poul Jessen from Danske Bank. Please go ahead. Your line will now be unmuted.
Thank you. I had a few questions as well, starting by APAC, where you had a surprising growth, organic in the quarter. Just wondering, do you see this as a one-off for the quarter, or have you seen a turn to the better in APAC in general, so expected in the coming quarters?
Yeah, yeah, we have seen some organic growth, partly countered by the development, the rate of exchange, but we have seen some positive momentum, and we also expect that to continue for the remaining quarters. So, it is something we believe to be sustainable.
Okay. And then, about cost reductions that you are doing now, can you give an indication if it's, gross margin, local cost or group cost that's going to move down in the coming quarters? Where should we see the improvements?
If you look at the restructuring that we have done in U.S., that will primarily be production costs as we are adjusting the capacity primarily in the data migration business. But if you look at some of the more you can say transformative projects, like the relocation of offices, that would reduce our corporate costs. If we look at the finalization of our IT separation, that would you can say free up resources that would go in and create a positive impact on our revenue and thereby improve our gross margin. So it will be different lines depending on what specific initiative we are talking about.
Okay. Then, coming to the ERP and HP, the cost related to those, have they been capitalized and therefore the improvement you are seeing is just more billable hours going forward more than it's a cost reduction?
If we look at the ERP implementation, we have capitalized the part that is, you can say, related to the development. Of course, there has been some cost that has not been, you can say, relevant for capitalization, and those have been expensed. But the resources that has been engaged in the project are both back office resources and, you can say, line of business resources. And now that we have completed these line of business resources, we'll be able to do external projects again and thereby pick up a margin going forward.
... Okay, then, two questions. The reliance on the data migrations, which are doing very poorly right now, do you see that as a temporary issue because there are activity in the market, or is there also an element of, for instance, Veeva integrating or taking a larger share of this business, meaning that you cannot come back to where you were once?
No, I mean, I mean, there are several elements in this. And, and if you start on the market and the demand, it's definitely there. Data migration is, it's a big issue, in the pharma industry, both are driven by regulatory, regulatory perspective, but also now in the commercial space, when there's a lot of things ongoing as well, right? So it, it's the demand is there. What, what - and of course, Veeva is a, is a, the big player who are affecting what's happening.
What happened sometime back, where our response to that change was not fast enough, was that they started Veeva say, "Hey, instead of giving all this business to partners, we will try to build those, we will build those capabilities ourselves." We underestimated the kind of speed with which they could do that. So they were fairly rapidly to build that capability, which means our revenue stream coming through Veeva more or less went down to zero during a fairly short period. Going forward, what we see and what we have done, we see already that some of the more complex migrations, they come back to us, because they. We see a pickup in revenue streams from that kind of channel.
But in parallel, we have also started to use the data migration capabilities in other areas, because there are migrations that are needed that is outside the Veeva areas. And this, together with the reduction of capacity, mean that we will come back to a profitable business, but at a lower level than we were when all of this started, like 18 months ago. So it is a big change, but we will come back to profitability, but at a slightly lower level than we were when this started.
Okay, thank you. And the final one, and guidance you give for the other remaining quarters and acceleration, both in revenue and net profitability. I was wondering, when we then look at where you will end the year, for instance, the profit margins in the fourth quarter, is that the margins that we should think of when we move into the future beyond this year?
When we look at the cost levels, we expect to be at a, you can say, at a run rate that you can extrapolate into the next year. But of course, you have seen some seasonality over the year, and I expect we will have the same sort of seasonality looking into 2025. But of course, it is a gradual improvement on the profitability, so it is an indication of how, at what level we will start at in 2025.
Okay. Thank you. That's all from me.
Thanks, Poul. To ask a question, please press five star on your telephone keypad now. We'll have a brief pause while any further questions being registered. And we have a follow-up from Poul Jessen, from Danske Bank. Please go ahead, your line will now be unmuted.
Thank you. That's just a simple one. Savings you're doing on your locations, net versus earlier, can you make an indication of how large they are?
When we talk about the facilities, it's expected between DKK 15 million and DKK 20 million. It's in that range that we are looking into-
Per year.
per year, yeah.
Versus the spend you had last year?
Yes. Correct. And we have, of course, some transition costs and moving costs this year that has been expensed.
In Q1 and Q2?
Yeah, I will have a little bit spilling into Q3, as we had some activities carried out in relation to the move, and also in Q3.
Okay. Thank you. That's all for me.
Thank you.
Thanks, Poul. As it seems, we have no further questions in the queue. I will hand it back to the speakers for any closing remarks.
Okay. Thank you very much for your questions, and also thank you very much for listening in. Please do not hesitate to reach out to either me or Carsten if you have any further question. I wish you all a good day.