4C Group AB (publ)

Good morning and welcome to this webinar, where we'll take a deeper look at 4C Strategy's second quarter results. I'm Jonathan Juruso, the Director for Sales and Marketing Operations here at 4C, and I will lead today's presentation. With me, I have Jonas Jonsson, our CEO. I will also ask Anders Nogren, our CFO, to take the stage during our Q&A session. And the ability to ask questions is now open in the chat. Please do that. At the outset, we thought that this would be a good opportunity for us also to look at the value we bring to our clients. And Jonas, could you please give us a few pointers on this?

Yes. No, thank you, Jonathan. And good morning, everyone, and welcome to this Q2 call. As Jonathan said, we thought it would be a prudent opportunity to have a little bit of a look at what 4C Strategies delivers. You can see some of it on the screen right now, but then going into a little bit more of a deep dive in the two key domains that we operate in, our public and corporate domain, where we work with corporations and government organizations, and then obviously our defense domain. So starting with our public and corporate customers, what are the pain points for that market today? Well, we can see that there is a complex risk exposure for all kinds of organizations, which is increasing in the security landscape that all types of organizations now actually need to operate in. We also see increased regulatory requirements, and these requirements are not necessarily only targeting large listed companies or multinational organizations. They are becoming more apparent and more relevant for all sizes of organization when it comes to ESG, when it comes to DORA, when it comes to operational resilience in the UK, for example. All of this is coupled with a very low tolerance for disruption, both in the business consumer realm, but also with organization to organization operations in terms of how acceptable are we for disruptions and for loss of delivery of service and so on and so forth. combined with a lack of digitalization and integration. So 4C Strategy's excellent resilience platform comes together in terms of guiding organizations through that process of looking at how do we do this better? How do we become better prepared? How do we look at our internal processes? And how do we take that crisis management team out of the conference room and into your pocket in a digitized way? The impact this delivers is a better prepared organization in terms of knowing what your capabilities are. It improves your decision making and your ability to make those right decisions at the right time with the right information. For senior stakeholders, it provides regulatory compliance and automated reporting in terms of what is it that we have to report on for all of these new regulatory frameworks that is coming in and how do we simplify that process for the organizations. And doing all of this while adding cost savings to the organization in terms of less manual labor, but also then from a longer term perspective, providing that preparedness, which will increase shareholder values and allow organizations to respond in a better way than they would have done otherwise. And this from a business to consumer perspective, but also from a shareholder perspective, as mentioned, will long term significantly increase the value of the company and the way that corporations can operate. If we look at the defense side of the house, very important vertical for forces strategies, obviously, and an area that we see growth in across the world in NATO and our allied country customers, the global demand for a rapid buildup is apparent. This is not only true for equipment, but actually also for the ability to deliver readiness at scale with trained troops and to be able to retake some of that ground which was lost in the 90s and the early 2000s. That comes at the same time as we see an increased cost of military training. The technologically advanced systems that are used, the expensive tools and the expensive weaponry that is used in live training is becoming more and more of a problem when it comes to actually deliver that training. And there is a high scrutiny on defense spending. So the external forces strategies, external training and exercise management system allows defense organizations to plan that training in a more stringent and coherent way. It allows your allocation of objectives to that training to ensure that when you're out in the live training environment, when you're in the field delivering your training, you're getting the highest effectiveness and the highest efficiencies from that training. It delivers more trained units with improved capabilities quicker. It allows greater visibility of that readiness throughout the organization in terms of not only looking at readiness as a whole, but also looking at the individual capabilities of units and how well are they operating and how well prepared are they to deliver on these vital missions, which the Western Defense Forces now stand in for. And then looking at increased visibility of that spending. So as our American friends would say, what's the bang for the buck? What do we get for that investment that we put in all this increased defense spending that is now being delivered by the politicians? What do you actually get out on the other side? Those questions are increasingly asked and using the external training exercise management platform. allows decision makers on the general's level, but also lower in the organizations to provide that feedback back up to say that you gave me this amount of money, I gave you that amount of capability back. So the connection between ROI for training is significantly increased when you digitize training and you build that link throughout and you're able to integrate all types of training from live to virtual and constructive training with a system like the Excellent Exercise Management tool.

Thank you. And for those of you who listened in during the last webinar, you presented, Jonas, your outline for changes in the organization on how to strengthen forces strategies. I know that a lot of this has been actioned. Could you present some of these key actions, please?

Yeah, no, absolutely. And as you're all aware, I took the role of CEO at the start of the second quarter. Since then, I've been working with the team across the world looking at how do we optimize 4C for the future? How do we streamline our business? How do we utilize the resources that we have across the globe to deliver a world-class service to our customers no matter where they are? And one of the steps that we're taking is looking at our organizational structure, taking a step away from our legacy construct in terms of streamlining into one clear cut expert services where we deliver our services to our customers. alongside our software, and then three regional areas where we focus 100% on selling, implementing, and delivering our external software platform. That will be APAC is in Asia Pacific. It will be EMEA here in Europe. And then one of our core markets, very, very important, obviously going forward as well in North America, both in the defense space, but also in the corporate space. And we're doing this to improve follow-up, looking at how do we How do we track our organization? How do we make sure that we're getting as much ROI as we can based on those investments that we've been doing over the last couple of years? And where do we invest going forward? And we can already now see internally the effects of that simplification and that streamlining when it comes to breaking these apart. looking at what is the effects that we're getting from those investments and making sure that we're not over-investing or that we're double spending in different areas. So we will be reporting this externally with new segment reporting from the third quarter, i.e. the quarter we're in right now. And in addition to that, I'm really happy to announce, as you've seen as well in our press release, the new management team. spread out across the world with a really great capabilities inside that team working together to continue to improve the 4C operations around the world. So very positive change, I think, and it will set us up in a very positive way to be able to move forward and to continue to grow the 4C operations across the world.

Perfect. Thank you. And that concludes this introduction. And let's now focus on the Q2 results, both your executive summary, of course, but also a couple of comments from your side on the results.

Yeah, no, absolutely. And so Q2 and H1, obviously not the end of the first half of the year that we were hoping to be able to present. We have seen additional delays in our contracting processes in North America, which became apparent in the report this morning. And positive note, though, we can say that those contract negotiations are now in the final stages. We've made good progress over the last quarter since we were able to progress with the release of the US defense budget back in March. And we are moving forward with these contracts, but we have seen delays in terms of when they are being closed compared to where they were expected to be closed. But we are now in the final stages of those negotiations. and we're looking forward to share more information about that in the near future. During Q2, we delivered 60.5 million Swedish in net sales with a negative EBIT margin of 54%. We see that In addition to the delays in North America, the Nordics here in Sweden and in our neighboring countries delivered a consistent deal size. And we have had a retake or a bit of a growth compared to the previous two quarters, I would say, when we struggled a little bit to close out some of those deals. So we're seeing a positive trend in the Nordics. It's worth noting, though, that the comparison quarter is quite strong. We'll come back to that in more detail. In the international segment, we've seen a good performance in the defense space. And again, we'll go into that in more detail. And as I mentioned, we've also focused quite a lot on management changes and trying to restructure the organization a little bit to set us up better for the future. So going into a little bit more detail, then, if we look at the net sales per segment on a rolling 12-month basis from a historic perspective. So you can see here, obviously, that it goes a little bit up and it goes a little bit down. So there is some historic volatility, as I mentioned in the past, when it comes to looking at the quarters. What you can see, though, is from starting in 2019, the Nordic business has retained a relatively stable net sales top line. It's increasing slightly, which is positive, but it's also come with a shift when it comes to moving those net sales from expert services and into software and software related services. So we are increasing our software component as part of our total net sales. In the middle segment, you can see that the international trend is continuously very positive. Our position in the international defense space, but also growing in the corporate market is continuing on a very positive trend. We've invested quite a lot in the international segment over the last three years, but we can also see the output and the results from that. And then on the top, obviously, and this is important, and it is apparent when you look at this slide, the lack of that purple part of the pillars when it comes to the top line. And obviously not tracking in the way that we were expecting when it comes to the last four quarters, really, in North America. That is something that, as I mentioned, we're working hard to change now. And when we then look into the details of North America, as I said, the contract delays are still there. We've made good headway and we've made good progress during Q2. We are not the only ones working in the defense space in the U.S. who have been scrambling to close out those deals since the defense budget was released. But we are working with our partners and directly with the U.S. Department of Defense to be able to deliver on those projects which we've been scoping for so long now. So we have seen those delays. But we also see a growing pipeline when it comes to both the interest from the defense space and wider opportunities, but also in the corporate segment, which we launched last year, and which we are increasing our activities in, as there is a significant market requirement, both for our business continuity tools, but also from crisis management and exercising as well, when it comes to the corporate and the public government sector in the US. So, more to follow on North America in the coming quarters. Obviously, as I said, not the outlook or the outcome that we were hoping or expecting. If we then shift focus to the Nordics here in Sweden, our home market, we can see that our strategic projects, the ones we've been delivering for a long time with our customers in the Swedish Armed Forces, in the Civil Contingencies Agency, in large government organizations, but also with corporations are continuing to deliver. And in many ways growing as well. So we're shifting out some of those old expert services into new closer software related services, but also continuing our growth and continuing to deliver our support to the retake that is now ongoing when it comes to Sweden, for example, in total defense, but also resiliency at large in the Nordic sector. We've signed over 10 new customers for both software and expert services, i.e. organizations that we haven't worked with in the past, which is something that is really positive and we're super happy about. And that, I think, continues to drive our position here in Sweden and in the Nordics to be the leading provider of resilient services. for these types of organizations. And the retake that Sweden's doing on total defense, as I mentioned, is something that we expect to see further growth from in the future as well. Finally, then, when it comes to our three segments, the international component, as I said in the executive summary, a strong performance from Australia in the APAC region. We've continued some really key strategic contracts with the Australian Defence Forces, not only for their national exercising, but also supporting them in their regional activities together with North America and the US and also other partner nations down there. We see a positive development when it comes to Europe and the NATO countries in terms of their build up towards that readiness that I mentioned in the initial slides and how they will now work to actually increase force generation throughout Europe. In the UK, one of our key component markets and where we have one of our biggest defense footprints, we've signed new deals starting the process to work with the Royal Air Force and the Royal Navy, which is also very positive. It takes us out of a historically reasonably land-centric focus and gives us really good opportunities to build on for the future. So small opportunities or small deals at this point in time, but really building for the that expansion into the wider defence domain in the UK. I think it's maybe important to mention here when it comes to international and EMEA defense, as it will be called from Q3 going forward, is that when you look at defense spending and increased defense spend allocations, which comes from the governments and you hear about it in the media and so on and so forth, it's done in tranches. So first off, what the defense organizations procure is replenishment for everything that has been donated and delivered to Ukraine. So that's the first step. You have to replace what you've given away and you have to try and build up your own readiness again. Secondly, you buy equipment, you buy weapons, you buy body armor and helmets. You start looking at new platform systems, tanks or fighter jets or naval vessels. And then whilst you're doing that, you're also starting to look at what I've also mentioned when it comes to force generation. The products that 4C strategies deliver are not necessarily part of those initial tranches of how do we increase our spending and how do we increase our readiness? But actually, once you have done those steps, which we're now sort of entering the final stages of, you then start looking at how do we train? How do we deliver the force generation capabilities and the forces that are so required from the politicians and the public at large? And when you get to that point, you start looking at, okay, so how do we do exercising? How do we do readiness capability build up? And how do we track that? And that's where 4C strategies and the external platform comes in. So from an international perspective, we're now seeing that both NATO. And European countries such as Austria, the Netherlands, Germany are now starting to look at, actually, we spent all of this money, now we need to turn that around into actual training and exercising. So a positive outlook from a forces strategies perspective in terms of that continued spend, and then looking at how can we support those defense organizations.

Perfect. Thank you for this summary. And if we take a step back and look at some of your key priorities moving forward for the company.

Yeah, I know for sure. And as I mentioned, one quarter in as CEO, we've done a lot of focus, we had a lot of focus on the organization and making sure that everybody's pulling in the same direction and working as optimized as we can. So really working, going forward to drive the organization to regain that lost ground from the first half. deliver a strong end towards 2024, the end of 2024, but then also looking at how do we continue to build for the future? How do we grow our corporate segment when it comes to delivering that impact and that value that I talked about? How do we get that message out to the customers in Europe, in Nordics, in North America, in Asia, in Australia, and to get them to understand the values and the impact that we can deliver as a corporation and as a company? we're really focusing in on exceptional customer service and enhanced product delivery. How do we build and even better product? How do we ensure that our services that we provide to the customer are the best that they can be and that we deliver at that quality, which is required in the segment that we're operating in? And then working with continued technical innovation and transformation through AI and other means, and also adding key resources to our team. This is super important in terms of making sure that we stay relevant. It's super important in terms of making sure that we deliver value to our customers. And our whole development organization spread out through Malmo, the UK and the US is looking at how do we incorporate these new technologies? How do we utilize all of these opportunities which are available in the market today through technology? large data, machine learning, artificial intelligence, and incorporate that into the delivery of our software and services. So from my perspective, right now is the time for 4C strategies to really hunker down and work hard in terms of making sure that we close out those deals that are outstanding from H1. We work to progress all of those customer interactions, which we're now seeing across the world and build an even stronger 4C. and working really closely with our existing customer base to make sure that we are delivering on our promises and we're delivering that value and that impact that I've been talking about throughout the day. And that we do that with a really, really strong focus on the end user and the customer. So I'm really excited about where we're going and what we're doing and the impact that 4C can deliver to the market. And I'm looking forward to hopefully be able to share stronger numbers during H2 and to take 4C strategies across the finish line for 2024, but also then build for the future and beyond. This is a long race. We're in it for the long run. And we can see that the interest in the products that we're delivering is continuously increasing. So a positive outlook after maybe not the H1 we were hoping for. But again, as I said, the organization is now fired up. It is ready to go for the end of 2024. And we're really looking forward to that. executing on those contracts and turning the trend around towards the future.

Now we'll let those words conclude this part of the presentation so thank you the audience for your attention and also thank you for all the questions that has been posted in the chat. I will now invite Anders Nogen our CFO to take the stage and then we'll cover all of your questions.

Right, thank you and welcome Anders. Thank you. Yes, so we have a couple of questions come in during the session here this morning. Obviously, quite a lot of heavy focus on the US. As I mentioned, we will be sharing more information as soon as we can. But if we take one here, considering the performance in the North America segment in the recent quarters, what should we expect in the US going forward? And what is your view on the potential market? Well, i mean as as we've said throughout and as i said both in in the last quarterly call and and this morning we are now in the final stages of the negotiation with a number of deals that we've been working for quite some time uh we are expecting those to proceed well in the near future but more importantly i think as well is that we are seeing an increased interest and a continued interest and probably a bigger reach from 4C strategies into the US defense market. We're also working with the Canadian defense in the North America segment. And we are seeing that our core offering is becoming more and more relevant and the interest for our core offering is increasing, which is really positive. And I think that for the future, will give us a little bit of a better position compared maybe to where we've been historically, where we are still obviously working these big programmatic deals that are hard to come by and takes long time to sort of develop and get to fruition. But in the meantime, we're also seeing that we have now progress on a number of trials and starting projects and so on and so forth, which will hopefully and which will lead to a sort of more even curve over the North America segment in the near and mid term future, I would say. So all in all, it's a positive outlook. It has taken longer than we thought, but it is about timings and delays. So working hard to resolve that and the new US team that we have in place is working really hard to progress this. So looking forward to share more information about that in the future. Anders, we've got an OPEX question here. I think I'm going to hand that one to you. Can you elaborate a bit around your OPEX and operational expenditure and what we can expect from this going forward? Sure.

OPEX or operational expenditure in the second quarter, I would say it was according to our expectations. We have, as communicated several times before, invested into our sales or revenue units, our segments, during the last 12 months, something that is visible if you look at our segment reporting in the report. It is within these units we see cost increases compared to last year, and especially within the international segment. If we look at our development department and group function, they're flat compared to last year, which is according to our plan. If looking ahead, I don't expect OPEX or operational expenditure to significantly drop. However, I don't expect any increases. What I expect is that we see ROI, returnable investments, of the investments that we have made in the revenue teams, I would say.

Yeah, no, absolutely. And I mean, we're obviously tracking and working really hard in making sure that the, as I mentioned, we are doing optimizations in terms of the structure of the company. We are doing optimizations in terms of how do we get more out of the team. I know that the whole organization is... is really geared up and ready to go and wanting to take this forward. And I believe that the numbers and the situation that we presented today is going to continue to engage the organization. And we're now going to be working really hard to make sure that we get the whole team together and that we focus on getting money back on that investment. Because I think that's the key. And that's, you know, we're not going to necessarily do significant cost cuts in the near future, we are looking at optimizations, as I said, but it's about getting as much as we can out of the organization and now getting the product out to the market. And so Right. We have a question here. If you sign those significant deals in North America, will those impact cash flow directly or when will you get paid? Well, I can take that one and you can fill in. It varies quite a lot between how the deals are structured. So some of the larger deals that we're working both in North America, but also in the defense segments across Europe and in Australia are multi-year deals. Normally that comes with a year on year payment. So we will obviously see a positive cash effect, but we won't see 100% cash conversion on those deals. The good thing is that the size of those kind of deals and those contracts give us a boost in terms of our cash conversion. and of course when we look at the development over the last four quarters that has significantly impacted our current cash position but we are now tracking a positive development towards the the midterm future and and It's important to understand as well, I think, that when it comes to these defense contracts, the procurement cycle isn't necessarily something that is what everybody's used to. And the way that they are purchasing, especially in the situations where we work through prime contractors, such as the large defense corporations, our ability to impact those deals and our ability to frame exactly the structure and cash conversion and cash profile of those deals is relatively limited. which is also something that we're obviously struggling with when it comes to the delays in those deals. But it is looking better. And I don't know, Anders, if you want to add anything on the cash?

No, I think you covered most of it. I can just add that looking into Q3, we know already now that we have realized substantial balances from our contract assets, which will impact the networking capital in a positive way. And it will also help us balancing the weaker consultancy or services month just due to vacation periods, especially here in Sweden. Overall, I expect our cash position to remain on a similar level in the short term. However, when we see a stronger sales performance, which we anticipate, we will see an improved cash flow and a cash position in the mid and long term.

Right, so we have one question here about the operational structure. Considering change of leadership and new operational structure, can you elaborate on the impact of these changes? Well, I think it's, I mentioned a lot of it in the call now, and I think it is, for me, it's about optimization. For me, it's about looking at How do we bring the company into the whole of 4C Strategies into one core team and deliver together and make sure that we utilize the success that we've had in Australia, that we've had in the international segment, that we incorporate that and that we take those winning themes into the American concept that we look at. How do we make sure that all our efforts that goes into our research and development, our P&I team, that all of that is focused on delivering the right things, the things that the market is after, and that we do that in an as quick way as possible to make sure that we get the new technologies out there, we incorporate AI into what we're doing, and we bring the best possible products to the market. So in terms of leadership, I mean, obviously this is the end of the first quarter for me as a CEO. I'm really excited about what lies in the future and how we're going to make the organization better and how we're going to work harder together and really now push forward and push through this bit of a slump that we've had in H1 and take 4C above and beyond where we were planning to go. So from a long-term perspective, I'm really excited about where we're going. And I think the new leadership gives us the ability to do that in a good way. Right. Anders, anything you want to add on any of the... I think we had a couple of similar questions, which we have covered, actually. Yeah. All right. Well, in that case, I would like to thank everyone for joining this morning. I hope you have a nice sunny day wherever you are, at least here in Stockholm and in London. It's quite nice and Nice and bright for once this summer. I hope you're not out flying today. That seems a little bit complicated, but I do hope you get an opportunity to enjoy the rest of your summer. And we look forward to speaking to many of you in the near future again. So thank you very much for dialing in this morning. Have a lovely summer wherever you are. And we look forward to speaking to you soon again. Thank you very much. Thank you.