Good morning, everyone, and thank you for standing by. Welcome to the NNIT Q3 2023 Results Conference Call. My name is Chatch, and I'll be coordinating your call today. After the presentation, there'll be a Q&A session, where you can ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I'd now like to turn the call over to Pär Fors, CEO of NNIT. Please go ahead.
Thank you very much, and a warm welcome to our Q3 call. My name is Pär Fors, and I'm the CEO of NNIT. Our CFO, Carsten Ringius, is with me today, and we will cover the highlights of the quarter and our 2023 guidance. We look forward to taking your questions after the presentations. Please flip to slide 2 and a brief overview of the key figures for the quarter. We maintained the good traction in the Q3 of the year and delivered a 19% growth, out of which 11% was organic. The positive development was driven by good progress across our life science activities and the public and enterprise segments assignments in our Danish regions. We were very pleased to see a continuation of the positive trend after the launch of the new more focused NNIT early this year.
The good activity level enabled us to generate a group revenue of DKK 453 million and improved capacity utilization across the four regions. Our earnings and profitability level benefited from both revenue growth and efficiency enhancement in this quarter, as we are reporting an operating profit of DKK 26 million before special items. This means that we are delivering a profit margin of 5.8%, which is significant 5 percentage points improvement from Q3 last year. We booked DKK 60 million in special items in the quarter, mainly related to M&A earn-out payments, following a decision by Danish Business Authority concerning accounting treatment. As mentioned before, we have appealed this decision and are awaiting a final ruling. Overall, Q3 was a good quarter, marked by solid business performance and execution on our new strategy.
Let us turn now to slide 3 and a brief overview of a few other highlights from Q3. Please go ahead, Carsten.
Thank you, Pär. Based on the positive momentum in our financials just mentioned, I can add that we remain on track to realize our 2023 guidance, which was upgraded back in August. We had the pleasure of presenting our new beginning strategy in September at our Capital Markets Day in Copenhagen. It was a great opportunity to meet investors and analysts, and we got the chance to introduce the new NNIT and talk to many of you. We also had the pleasure of introducing our new financial aspirations and how we are aiming to deliver solid organic growth and significantly higher profitability in the 2024-2026 period, as we leverage a number of positive drivers. Please allow a very swift recap of the aspirations. We will pursue a compound annual organic growth rate of roughly 10% in the period.
The organic growth rate may vary quite significantly from year to year, but we aspire to reach the 10% level in aggregate. This means that we will also take market share. At the same time, we will expand the profit margin by leveraging the increasing scale of our business and reducing our cost base. We aim to report yearly average group operating profit margin of about 10%-13% before special items. Again, this is a guideline for the period, and we could, of course, see volatility from quarter- to- quarter and across years. We are executing on the new strategy to make NNIT even more attractive to investors, and we are confident that we have the ingredients that make NNIT an exciting investment case. Our industry is growing globally, and we are well positioned to tap into the growth opportunities.
We will pursue these opportunities in the new organizational setup, which provides the flexibility, agility, and accountability for us to succeed in each region and as a group. We have improved profitability and are determined to continue on the positive track to deliver strong results. We are focused on lifting capacity utilization and leveraging our employee skills as efficiently as possible. We're also reducing overhead costs, and the combined efforts form a solid foundation for improving margins. Our balance sheet is strong, and we have a very low debt level and good flexibility. This means that M&A is on our radar as well. We have a proven track record, which has showcased our ability to choose the right companies, and we'll be able to target and explore opportunities in the coming period. Let us briefly review the performance of each region on slide 4. Please go ahead, Pär.
Thank you, Carsten. So let's start with Region Europe. Our European life sciences business continued the trajectory from previous quarter and delivered a moderate growth of 3% and the revenue of DKK 125 million in Q3, which was still impacted by uncertainty and volatile macroeconomic development. On this backdrop, we were pleased to be able to expand existing customer engagement and delivered solid performance. We benefited from our efforts to improve capacity utilization and reduce costs, as we lifted gross profit quite significantly and secured a positive operating profit of DKK 6 million and a profit margin of 4.8% in the quarter. All in all, it was important to see that another quarterly sequential improvement, signaling that Region Europe remains on a positive track. The outlook is still positive, and we are committed to ensuring continued progress.
Please turn to slide 5 and a few comments on the development in the US. The US business generated solid growth of 40% in the quarter as we continue to expand existing engagement and welcome new customers across the regions in our group company, Excellis Health Solutions, which contributed nicely to the progress again in Q3. We kept production costs down and continued to lift the gross margin and improve efficiency with a higher utilization rate. The combination of higher revenue, improved utilization, and good cost containment resulted in operating profit of DKK 8 million, corresponding to a profit margin of 8.2%. We remain very confident about the US market, which is still expected to deliver high growth in the years ahead. We are pleased to report that we have a good pipeline and a bright prospect for continued success in the US going forward.
Please turn to slide 6. Region Asia was impacted by continuation of the tough macroeconomic conditions in China, and we saw a revenue contraction of 15% in the Q3 . This development was only partly countered by a solid 5% growth in activities in Singapore and expansion of our business with large customers in China. We had expected a slow demand in the Chinese market and adjusted capacity during the year. This meant that capacity utilization was higher in Q3, despite difficult market conditions, and we also have lowered our cost, resulted in a limited operating loss of DKK 4 million in the quarter. In Q4, we will see the full effect of the capacity adjustment already made earlier, in earlier quarters.
Needless to say, we are monitoring the development in the Asian market closely, and to assess demand and take further mitigation action, if deemed necessary, to continue to improve profitability. Please turn to slide 7 and the Denmark region. Our Danish region delivered good organic growth of 18% in Q3, and a very strong reported growth of 48% resulted in a revenue of DKK 196 million. The high reported growth rate was significantly impacted by sales to our divested infrastructure business, which is now named Aeven. This revenue is booked as inorganic after closing the transaction back in April. Overall, growth was delivered across the public and enterprise spaces, and we saw particularly solid development in custom application development, which is our public business, and Microsoft Advisory and Technology, including our assignment with the Danish National Bank.
The Danish business delivered higher gross profit in the quarter, very much in line with the performance in recent quarters. The margins was lower in Q3 2022, which was inflated by cost reimbursement of DKK 22 million for work performed for our infrastructure operation before the divestment was completed. Still, we lifted our operating profit to DKK 70 million and a margin to 8.6% from 6.5% last year. This positive development was mainly a result of reduced regional overhead costs and a great contribution to group profitability. The Danish business continues to be on track with a positive market outlook and good assignment for our colleagues. We'll now hand over to Carsten for a brief comment on the financials and outlook. Please turn to slide 8.
Thank you, Pär. We posted revenue of DKK 453 million after 19% growth, of which 11 was organic. As mentioned before, the difference, this difference was mainly due to the fact that we had booked sales towards Aeven in the Danish business as inorganic. Growth was driven by regions, Denmark and U.S. Gross profit was higher at DKK 136 million, with a slightly lower margin at 29.9%, as the comparison period was positively impacted by cost reimbursement of DKK 22 million for work performed for the infrastructure business before completion of the divestment. We reduced regional overhead costs and corporate costs quite significantly and lifted group operating profit to DKK 26 million before Special Items from DKK 3 million in Q3 2022.
On this background, the profit margin improved to 5.8% in the quarter from 0.8% in the comparison period. Special items amounted to DKK 16 million in the quarter and DKK 61 million in the first nine months, mainly comprised of costs related to our earn-out payments in connection with acquisitions. We grew revenue for the first nine months by 17% to DKK 1.29 billion, with an operating profit of DKK 72 million against a loss of DKK 31 million last year. We have lifted the profit margin to 5.6% from a negative margin of 2.8% last year, and will remain on this traction in the coming period. Please turn to slide 9 for a few comments on the 2023 outlook.
Based on the solid performance this quarter and year to date, we are confirming our guidance today after the upgrade back in August. We are aiming for revenue growth around 15%, assuming stable key currencies, and we expect to deliver operating profit margin before special items of around 6%. We are maintaining a strict focus on cost, and we'll see a positive impact of completed capacity and cost adjustments in Q4 and going forward.
This growth is expected across our life science activities and in the Danish business, focused on both public and enterprise assignments. The good development within custom application, management, and production is still seen to contribute to the progress in this financial year and the coming years as well. We still expect to report special items of up to DKK 70 million in 2023. The majority of these costs will be related to the earn-out payments in connection with completed acquisitions. Please note that we have appealed the Danish Business Authority's decision and concerning these earn-out payments, and are awaiting a final ruling. We'll continue to execute on our new beginning strategy in the coming years and look forward to reporting on our progress as we move ahead. Thank you for listening. We will now open the line and take your questions. Next slide, please.
Thank you. If you'd like to ask a question, please press star four by one on your telephone keypad now. If you change your mind, please press star four by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Poul Jessen , from Danske Bank. Please go ahead.
Yes, good morning. I have a few questions. I think we should start just by, if you could do a market update and then split it into, life science and the Danish market, what you see in, customer activity in general and the trends there.
I think it-
Sorry, uh,
Can you repeat it, Paul? I didn't catch the question.
Can you hear me?
Yeah, if you please speak loud, it's a bit noisy in the background.
Okay. No, it was on a market update on how you see pipeline and how the clients are acting, if they are having longer decision processes. So I can see in life science, you in Europe, you don't report new clients and so on. If you can do that on the-
Yep
O n the four regions.
Yep, I'd be happy to do that. And if firstly, it's important to understand that we address different segments of life science market. Part of that market is activities which is a necessity to execute due to, for instance, new regulation and compliance activities. That too meaning that it's investment that they really need to do, disregarding the market conditions. Those are not affected at all by what's happening on the kind of macroeconomic level. Then there are overall, I'm now starting on an overall level. Then there are activities which are affected by a tougher, you know, economic situation for our international life sciences customers, as they eventually, many of them are financed by the public wallet.
So there are some slowdown in the more offensive investment in the life sciences market. But if you look on the different geographies, we can see here in Denmark, where there's no surprise that we have one quite dominating client here in Denmark, which are, despite macroeconomic challenging, doing really, really well. So therefore, we are blessed by seeing a growth in life science also in life science here in Denmark, especially with the large client that we are working for. In Europe, that probably together with China, that's a region where you see more challenges, because of the slowdown for some of the big pharma companies.
So there you see more headwinds, but I think it's important to note that in Europe, we are a quite small animal on that savannah, meaning that we can actually find growth opportunities in our client base, despite that there are some challenges. Also, as I said initially, we are working with a number of activities, which is more on the defensive sides with many of our large customers, so we see a growth potential there as well. In the US, as we have demonstrated, we have a really, really solid position with our, you know, service portfolio, not the least within the Excellis Health Solutions, which is working with a high level of repeatable services and a very, very healthy growth margin.
There we see a good potential of continue to grow that business and also in the rest of the NNIT business. So in the U.S., we see a brighter macroeconomic situation, and we also see that our service portfolio is well positioned to take advantage of that kind of environment. In Asia, I said, in China, there is clearly a macroeconomic slowdown with a decrease in investment. Therefore, we have taken some quite big measures to adjust our cost base. But I do must say that among some of our larger clients in China, we are still growing, but there are other clients where we see a quite steep decline. So it's a mixed picture. And then lastly, but not the least, in Singapore, we are growing the business quite significantly with solid double digits.
So it's a mixed picture, but overall, I think that when we add all this together, we manage as a company to grow, and we expect that to continue in the coming quarters.
Region Denmark?
Region Denmark, then if we move outside the life science, we can see we have two pillars in our Danish business. One pillar is the public business, meaning the custom application development for public clients, where we do custom application development, but also work on the T&M market, providing resources to our client base in Denmark. Here we see that client that revenue actually increasing, so we are very happy to see that we are, you know, continue to grow our Danish public sector, and we also look positive into 2024 because there's a number of new opportunities coming up, and as you know, that's public knowledge. So there is a number of great tenders coming out in 2024. Out of some of those, we think are very well fit for the service offering that we have for NNIT.
The second pillar in the Danish business is based on our very, very strong position within Microsoft. Denmark is Microsoft's country, and we see a really, really impressive growth in our group company, SCALES, where we are providing ERP solution for the Danish markets across different industries. And then around the ERP solution from SCALES, we also have a Microsoft consulting business also delivering solid growth. So as we see in the numbers today, and also when we plan for the future, we think we can further strengthen our position and create growth in the Danish market.
Okay, thanks. Then, two follow up. One on North America, where growth slowed in the Q3 . Is that due to a strong phase last year or is the growth slowing?
Well, if you look at the comparison to last year, we are looking into a growth in the U.S. region, and we also expect this growth to actually continue. So if you look at comparing to the previous quarter, you see a slight decline in revenue, but this is something we don't see as a trend, but will pick up towards the end of the year going into next year.
Okay. And in Denmark, the inorganic growth coming from the Aeven consolidation, how should we look at I assume next year everything will be organic, but how should we look at it in the Q4 ?
In the Q4 , you should also look at it as inorganic. We will consider it inorganic until April next year. Of course, we will be able to grow this business also going forward, reporting it as organic, when we, together with Aeven, take in new customers or expand our working relationship with existing customers. But due to this, you can say split, where it has previously been considered as cost center now being converted into external revenue, we have, for this coming year, will be considering as inorganic revenue.
Now the inorganic part from Aeven is larger in the Q2 . Is that supporting your margins or are they the thing that we should adjust for?
No, what you can say is that the operational split of NNIT and Aeven business end of April has been quite a complex process, as you can imagine, and implementing new processes and procedures, both on Aeven and NNIT, NNIT side, has been quite complex, and this has caused some phasing on both revenue and cost. But year to date, we expect to have caught up. So you should consider Q2 and Q3 more as you can say an average as to what you should expect in Q4.
Okay. Thank you. I will step back in the queue.
If you'd like to ask any further questions, please press star one on your telephone keypad now. It appears we. Sorry, we've just got a follow-up question from Poul Jessen . Poul, please go ahead.
Okay, thanks. Moving to the corporate costs, which at least versus my expectations for higher, I understand that there are some options. Could you talk about these? And secondly, how should we look at the corporate cost level going forward?
Well, if we look at our Q3, we have some one-off elements in the corporate cost. We have both on the IT side, had some one-off costs related to some hardware. We have some costs related to our current facility here in Østmarken, as well as some larger arrangement that we have hosted during Q3. This is considered, as I said, a one-off cost, and you should expect a Q3 corporate cost in line with the previous quarters, with a small decline into Q4.
Okay. Now I know it's not part of the report, but there's a lot of investor focus about the cash position. Could you talk about the cash position, how it is developing?
Well, I can say that-
The total free cash flow for the period was positive DKK 51 million. I can also share that we now have non-current financing in place. We have entered into a new credit agreement with Nordea running for the next 3 years. So you can say we have non-current funding in place, and we see also going forward our business generating positive total free cash flow for the coming periods. Okay. And can you-Will you say anything about how large the credit facility is?
No, I will not go into that in this call.
Okay. That's all for me. Thank you.
We have no further questions from the phone lines.
Okay. So, then, thank you very much for listening and also for your interest in NNIT. Of course, please feel free to reach out if you have any follow-up questions. Thank you and have a good day.
This concludes today's call. You may now disconnect and enjoy the rest of your day. Thank you.