Investor Presentation - October, 2015 - EG A/S
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Investor Presentation October, 2015
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Agenda
Page
Introduction and transaction overview 3
EG’s business and market 8
EG financial performance 19
Introduction Silkeborg Data 22
EG’s acquisition of Silkeborg Data 25
Key investment highlights 32
Appendix – Risk factors 34
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Today’s presenters
Leif Vestergaard, CEO Christian Bamberger Bro
• Joined EG as CEO in 2004 • Partner at Axcel
• Previously employed with IBM for 16 years • Joined Axcel in 2014
• IBM’s representative on EG’s board from 2000- • Previously worked for Permira both in London and
2004 Stockholm (2006-2014), McKinsey in Copenhagen
• MSc in Business Economics from Aarhus School of and Nordea Corporate finance in Copenhagen
Business • Deputy Chairman at EG and Conscia
• Cand. oecon. from the University of Aarhus
Allan Buhl Møller, CFO Christoffer Arthur Müller
• Joined EG as CFO in 2009 • Director at Axcel
• Previous employment as CFO of International Health • Before joining Axcel in 2009, he worked at A.T.
Insurance Danmark A/S Kearney and Nordea
• MSc in Business Economics from Copenhagen • Christoffer is a board observer at TCM, EG and
Business School Silkeborg Data
• MSc in Economics from the University of
Copenhagen and has furthermore studied at
London School of Economics
Source: EG Group and Axcel webpages
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EG at a glance
EG is a leading Scandinavian IT software & service provider
In brief Strong presence in Scandinavia
EG is among Scandinavia's leading IT software & service companies with a strong Local presence with
market position within the SME segment more than 30 offices
throughout
Position based on close relationships with customers, deep sector knowledge and 75%
Scandinavia
value adding IT solutions
Strong footprint
22 acquisitions in selected verticals since 2009 securing proximity
and flexibility towards 14%
Prior to the acquisition of Silkeborg Data, EG had approx. 12,000 customers and
customers
more than 1,650 employees
Group management
2014 revenue of DKK 1,636m and normalized EBITDA of DKK 229m located in Ballerup, 11%
Denmark
Axcel acquired EG in 2013
Offices
Financial development Product offering
CAGR
EBITDA margin, reported normalised1 Consultancy & programming
Management consultancy, Implementation and Programming of IT
Revenue, reported
solutions 51%
Software
11.3%
Solutions are based on EG’s own software and configurations of the ERP
1,756
1,611 1,636 platforms Microsoft Dynamics AX and NAV and EG’s proprietary ERP
1,502
1,330 platform ASPECT4. Sale of own developed software is 55% of segment 27%
revenue
924 1,017 14.0% 13.1% Subscription based revenue
11.3% 12.1%
10.8% Operating the customer’s IT solution, either hosted from EG’s own data
9.4% centre or at the customers premises and service agreements (Technical, 17%
Hotline & Support, BPO)
9.1%
Hardware
Sale of infrastructure hardware (e.g. servers) and industry specific
20092 20102 20112 20122 20133 2014 LTM
hardware (e.g. POS and hand terminals) from external providers 5%
Q3 15
1) Management normalisation include restructuring costs and integration and transaction costs; 2) Reflects EDB Gruppen Holding A/S; 3) Pro-forma for AX IV EG Holding III Aps.
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EG’s acquisition of Silkeborg Data
Strong strategic rationale to combine EG and Silkeborg Data
Strategic rationale
Creation of clear number 2 player in the ~ DKK 17 billion
Danish public IT services market
Ability to engage in strategic dialogue with public sector
clients on IT
Increasing share of recurring revenue and EBITDA
Significant cost and sales synergies
Proven ability of management to integrate acquisitions
Business Business
Industry Citizen
Ready Application
solutions Solutions
Solutions services
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Situation overview
Refinancing of Silkeborg Data debt
Sources and uses Pro forma capitalization as at 30 September 2015
DKKm Existing Transaction Pro Forma
Sources DKKm
Term Debt 1,100 +300 1,400
New term debt at EG level 300
Other Debt 18 5 23
Total 300 RCF (drawn amount) 37 0 37
Cash -8 -802 -88
Uses
Net Interest Bearing 1,147 225 1,372
Refinancing of SD debt1 -285 Debt (NIBD)
Normalised EBITDA 230 67 297
(incl. synergies)3 (incl. DKK 17m
Costs and expenses -3
synergies)
Leverage Ratio 4.98x - 4.62x
Overfunding -12 (4.89x excl. synergies)
Total -300 Fixed Charge Cover 2.78x - 2.88x
Ratio4 (2.72x excl. synergies)
1) DKK 245m refers to drawn term debt and DKK 40m replaces Silkeborg Data’s existing RCF which is undrawn; 2) Includes existing cash at Silkeborg Data of DKK 28m; 3) Synergies over the next 12 months amount to DKK 17m; 4) Pro forma for
interest on additional DKK 300m in term debt. Interest rate calculation assumes same coupon levels as for the existing notes during the last 12 months. Also includes DKK 9m in interest rate swap cost
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Agenda
Page
Introduction and transaction overview 3
EG’s business and market 8
Business 8
Market 15
EG financial performance 19
Introduction Silkeborg Data 22
EG’s acquisition of Silkeborg Data 25
Key investment highlights 32
Appendix – Risk factors 34
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Understanding industry is our DNA
Our mission: Adding value to business through industry leadership
Logistics & Building & Retail Utility Public Professional
Production Construction Services
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New organization to improve performance
EG is improving its ability to refine operating models
From all business models in each …to business models separated by divisions to
customer vertical... improve operational efficiency
Customer Verticals Customer Verticals
Industry Citizen Business Ready
solutions
Tailored
Large enterprises Solutions Solutions Solutions
(+500 employees)
Packaged
solutions
Mid-sized enterprises
(100-499 employees)
Business Application Services
Business
in a box
Small and medium businesses Cross Business Application
(1-99 employees)
Managed Services
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Competitive landscape
EG has leading market positions across all four divisions
Divisions Revenue1 Market position Larger main competitors Smaller competitors
One of the strongest Microsoft
Dynamics AX partner’s in Europe
EG DKK
Industry 853m Scandinavia’s largest end-to-end
Solutions (49%) supplier of IT solutions for
production, logistics and retail
companies
EG DKK Solutions for the utility sector in
Citizen 291m Denmark and Sweden and the public
Solutions (17%) sector in Denmark
EG
Business DKK Leading provider of SaaS based
212m software solutions in a number of
Ready
(12%) small attractive niches
Solutions
EG Business Leading provider of infrastructure-,
DKK cloud solutions and managed services,
Application 460m cross business application solutions
Services (26%) (BA, CRM, etc.) and 3rd party software
Note: 1) Based on LTM Q3 2015. % do not add to 100%, due to group eliminations
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Our vision
We are building a Nordic IT services champion
Create market
Customer Verticals leader in
selected
Northern microverticals
Europe’s largest leveraging
industry Business-in-a-
focused ERP- box
house Industry Solutions Citizen Business Ready
Solutions Solutions
Leading top-line
growth
IT solutions
provider
(customer view)
Clear #2 in
Public in
Denmark
Business Application Services
Cross Business Application
Ability to deliver
Managed Services EG 360 in all
Nordic countries
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Recent EG client wins and business momentum
Accelerating organic growth underpinned by recent client wins
Recent client wins Organic growth
2.3%
0%
Average 2010-2014 2015 YTD
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Strategic themes
The three strategic themes are unchanged
Acquisitions to strengthen the market position in existing verticals
Continue the
M&A Focus on adding to CS, BRS and BAS
trajectory
Continue to add to existing ERP footprint in Sweden & Norway
Develop and deepen industry solutions including CBA
Accelerate
organic Implementation of One EG 2.0 to sharpen the go-to-market and delivery models
growth
Enable (cross) sales of Managed Services and Business Application Services
Reduction of scope creep and implementation of ODM
Improve
operational Building up Nearshore/Offshore capacity
efficiency
Lean, procurement and fixing the salary pyramid, and improved structural efficiency in shared service and operations
© EG A/S 14Click to edit Master text styles
Agenda
Page
Introduction and transaction overview 3
EG’s business and market 8
Business 9
Market 15
EG financial performance 19
Introduction Silkeborg Data 22
EG’s acquisition of Silkeborg Data 25
Key investment highlights 32
Appendix – Risk factors 34
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EG’s focus in the market
EG focuses on selected industries in the Scandinavian IT market where EG has in-depth
industry insight and knowledge of the value chain
Market position EG’s country focus
EG is one of the leading IT and software providers in Scandinavia 2012 2015
– Strong presence in Denmark with revenue of DKK 1,219m in 2014
– Critical mass in Norway accounting for DKK 269m of revenue in 2014 78% 75%
– Critical mass in Sweden accounting for DKK 147m. Acquisition of Medius strongly
increases EG footprint in 2015
Strong position in selected verticals where EG has deep industry knowledge
– Main industries in focus include logistics & manufacturing, retail, construction, utility, 17% 14%
local government and business services1
– Deep knowledge of industry value chain and business best practice provides for a good
dialog with both business and IT decision makers
Within its focus industries, EG is present across all market size segments, from small and
medium businesses with 1-99 employees to large enterprises with +1,000 employees 5% 11%
#1 Scandinavian and strong European Microsoft Dynamics partner with more than 350 AX +
NAV consultants Share of revenue Q3 2015 LTM (100% = DKK 1,756m)
Industry focus of EG EG’s segment focus
Primarily projects Primarily volume business Not in focus of EG
Large enterprises
Logistics/ Communication Focus Not (+1,000 employees)
wholesale
Local gov. / telecom
Banking of EG EG
Projects
Discrete Segment focus
manufacturing
Construction Central gov. Insurance (size) varies
Mid-sized enterprises
across verticals (500-999 employees)
Process Business
manufacturing
services
Education Other finance
Transport Health2 () Other services
Small enterprises
(100-499 employees)
Agriculture &
Volume
Retail mining
Small and medium businesses
Utility (1-99 employees)
Note: Scandinavian defined as: Denmark, Norway and Sweden; IT market comprise Software, Service and Hardware. 1) In the businesses services segment EG has a strong position within several niche segments including among others lawyers
and housing association administration; 2) Strong presence within practitioners
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The Scandinavian IT market
Healthy growth rates in the Scandinavian IT market – generally higher growth rates on
Norway and Sweden, but better trend expected in Denmark
Scandinavian IT market Scandinavian IT market growth1 Country growth1
The Scandinavian IT EURbn EURbn
market is expected to
grow with a CAGR of
2.4% from 2015 to 2018, +1.9% +2.0%
0.6% lower than the 9.4
8.4 8.9
historical growth from
2012 to 2015 which was +2.4%
affected by a rebound
32.1
from the financial crises +3.0% 31.3
30.6
Growth rates in Denmark 29.9
29.2
has increased from rates 27.8 2012 2015 2018
seen during the financial 27.3
crisis, but is still below
rates in Norway and +2.0%
+2.7%
Sweden 7.7
6.7 7.2
Growth rates in Denmark
expected to increase,
while growth rates in
Norway and Sweden are
decreasing towards the
level in Denmark,
especially driven by lower 2012 2015 2018
demand for hardware
products
+2.9%
+3.9%
15.0
13.8
12.3
2012 2013 2014 2015 2016 2017 2018 2012 2015 2018
Source: IDC . 1) IT market excl. tablets, smartphones and feature phones
CAGR 17Click to edit Master text styles
Market drivers in the Scandinavian IT market
Five primary market drivers expected to impact IT spending
Market drivers Perception of IT investments on productivity and profitability
Efficiency improvements from process optimization
and IT is an important factor in undertaking IT Does IT investments Do you expect “We obtain an annual
investments contribute to improved improved profitability saving of 9 million euros
1 Productivity and it is vital for the
Perception of IT as productivity enhancer drives productivity? from IT supported
survival of our entire
decision making upwards towards business decision process optimisation?
business”
makers Peter Maarssø, IT manager,
12% 3% Orifarm Group
23%
Cloud computing has been taking market share in
many software applications and will start to affect
2 Cloud ERP market within the next 3-5 years 74%
Drives the opportunity for IT provided as a service 88%
IT decisions moves from IT to line of business
Analysis of large data amounts requires strong and Yes Don’t know No
well integrated systems to collect and store
3 Big data information
Scandinavian Cloud spending 2010-2016
Big data drives demand for Business Intelligence
solutions and provides for new types of IT services USDm
2,780
According to a recent Gartner survey, CRM is the top
CRM and software investment priority for 2013 (ERP is second) +30%
2,113
4 customer due to a stronger business focus on enhancing the
experience customer experience, which has a positive impact on 1,630
ERP spend 1,253
967
736
Mobile internet expected to be larger than wired in 538
367
2016 driving cloud-based business and revenue
opportunities
5 Mobility Large untapped productivity potential from mobility in
2010
2011
2012
2013
2014
2015
2016
2017
most sectors drive extended usage of ERP on other
devices
Source: IDC Black Book Q1 2013, May 2013
Source: YouGov, EG and Quartz+Co analysis based on Gartner, Constellation Research, IDC and industry observers
CAGR 18Click to edit Master text styles
Agenda
Page
Introduction and transaction overview 3
EG’s business and market 8
EG financial performance 19
Introduction Silkeborg Data 22
EG’s acquisition of Silkeborg Data 25
Key investment highlights 32
Appendix – Risk factors 34
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Q3 2015 financials
Analysing the financial performance of EG as reported
Reported financials Positive growth momentum – EG shows
organic growth YTD
DKK million Q3 2015 YTD 2015 LTM Q3 2014 31-12-2014 The increase in revenue from DKK 388 million
in Q3 2014 to DKK 400 million in Q3 2015 is
Realised: due to acquisitions and organic growth of
Revenue 400 1,280 1,756 388 1,636 2.3% year to date. Adverse currency
Costs of sales 76 251 366 78 354 movements of NOK and SEK had a negative
Gross profit 324 1,029 1,390 310 1,282 impact of approximately DKK 6 million on the
Staff costs 225 769 1,038 209 924 Q3 2015 revenue
Other external costs 31 116 150 52 181
EBITDA 69 144 202 49 177 Increasing EBITDA and margin
Depreciations 12 34 43 8 29 Reported EBITDA increased from DKK 49
EBITA 57 110 159 41 149 million (EBITDA margin 12.6%) in Q3 2014 to
DKK 69 million (EBITDA margin 17.2%) in Q3
2015. This development is attributable to
Normalisations: positive contributions from the acquired
Acquisition/sale of activities/companies *) 0 1 2 0 19 companies and from the Danish and Swedish
Restructuring expenses 0 1 20 3 26 business, whereas the Norwegian business
Costs related to EG's acquisition of companies 1 4 6 4 6 contributed negatively due to challenges in
Axcel's costs related to the acquisition of EDB Gruppen Holding A/S 0 0 0 0 1
parts of the consultancy business related to
the oil industry. Reported LTM EBITDA
Normalisations, total 1 6 28 7 52
amounted to DKK 202 million
Normalised EBITDA for Q3 2015 amounted to
Normalised EBITDA 70 151 230 56 229
DKK 70 million compared to DKK 56 million in
Normalised EBITA 59 116 188 48 200
Q3 2014. Normalised LTM EBITDA after Q3
2015 amounted to DKK 230 million
*Acquired companies may not have prepared interim financial statements according to the same accounting principles as EG. Normalisation of acquired companies
under "Acquisition/sale of activities" is therefore estimated on the basis of the financial due diligence performed in connection with the acquisition.
For 2015, the company expects growth in
PRESENTATION OF FINANCIAL INFORMATION reported EBITDA and normalised EBITDA as a
In this Company Description, the Group makes references to EBITDA and/or EBITA and EBITDA/EBITA margin, neither of which is defined under the Danish Financial Statements Act. The items
excluded from EBITDA/EBITA and EBITDA/EBITA margin are significant in assessing the Group's operating results and liquidity. EBITDA/EBITA and EBITDA/EBITA margin have limitations as
result of the companies acquired in 2014 and
analytical tools and should not be considered in isolation from, or as a substitute for, analysis of the Group's results as reported under the Danish Financial Statements Act. Other companies in 2015 as well as the restructurings carried out
the Group's industry and in other industries may calculate EBITDA/EBITA and EBITDA/EBITA margin differently from the way that the Group does, limiting their usefulness as comparative
measures.
in Q4 2014
Under accounting policies of the Group certain development costs are capitalized in the balance sheet and not expensed in the year they were incurred. This means that EBITDA is higher than
had such development costs been expensed. The development cost capitalized in the balance sheet will be depreciated over 3-5 year. EBITA includes depreciations on capitalized development
costs.
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Selected balance sheet items September 2015
Selected balance sheet items The increase in trade receivables and contract work in
progress is mainly due to a major project that began in
DKK million 30.09.2015 30.09. 2014 2015, and for which payment is due upon final approval of
Intangible fixed assets 1,641 1,643 milestones. The first milestone was approved in early
October and payment was received in early October.
Tangible fixed assets 41 40
Financial fixed assets 0 0 The company's non-current assets amount to DKK 1,683
Non-current assets 1,683 1,683 million, primarily in the form of goodwill and other
intangible assets acquired in connection with company
acquisitions.
Inventory 16 16
Trade receivables 229 208 The company reported a negative working capital of DKK
44 million.
Contract work in progress 32 17
Prepaid rent and deposits 10 12 The company's net interest-bearing debt at the end of Q3
2015 was DKK -1,147 million
Other receivables 17 22
Prepayments 41 30
Trade payables -67 -58
Other payables -251 -215
Accruals -71 -76
Reported NWC -44 -45
Cash 8 43
- dividend 0 0
Securities 0 0
Bank loan -37 -36
Bond debt -1,100 -1,100
Employee bonds 0 -7
Tax payable -18 -15
Interest-bearing net debt -1,147 -1,115
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Agenda
Page
Introduction and transaction overview 3
EG’s business and market 8
EG financial performance 19
Introduction Silkeborg Data 22
EG’s acquisition of Silkeborg Data 25
Key investment highlights 32
Appendix – Risk factors 34
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Silkeborg Data at a glance
Leading provider of payroll and HR services for the public sector in Denmark
In brief Business split per customer type
Provider of payroll and HR services for the Danish public sector Revenue split 4 of 5 regions 29 of 98 municipalities
– Handles more than 400,000 salary and pension payments to employees in the
public sector each month Central Other
government 6%
Market leading positions and strong customer relationships with regions and 6%
municipalities
Regions
Headquartered in Silkeborg, Denmark 43%
– Approximately 207 employees
History dating back to 1966
Municipalities
LTM Sep-2015 revenue of DKK 276m and normalized EBITDA of DKK 50m 45%
Previously owned by Jyske Bank but acquired by Axcel in December 2013
Financial development1 Product offering
Revenue EBITDA margin adj.
300 274 276 20%
Employee tools Employees
251
236
250 18%
196 18.1%
200 170 17.1% 16% Shift planning
16.8%
150 15.7% 14% Managers
100 15.9% 12% HR tools
50 11.7% 10%
0 8% Payroll
2010 2011 2012 2013 2014 LTM Q3 Payroll tools specialist
2015
Source: Silkeborg Data. 1) Financials are adjusted to reflect normalisation adjustments for one-off items and in 2010-2012 there are also adjustments to reflect stand-alone financials of Silkeborg Data (then owned by Jyske Bank)
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High entry barriers in payroll services for the public sector
High entry barriers in SD’s market
Tender requirements
Legislative complexity Safe and robust solutions High switching costs
and market knowledge
• Complex market • Typical tender requirements • Payroll services are mission • Payroll service are closely
• Significant experience and require prior experience to critical for the public sector integrated to other IT
knowledge required qualify • Accuracy and stability is systems
• Large number of collective • Market understanding and crucial for customers • Large number of staff
and local agreements customer relationships are involved in the system
• Legislation important
• Silkeborg Data’s • Silkeborg Data’s market presence dates • Silkeborg Data’s payroll system has high • Changing provider is associated with high
software handles back more than 40 years accuracy and uptime switching costs
more than 250 • Good reputation and high understanding of
collective agreements the market
100.0%
100.0%
100.0%
99.9%
99.9%
99.9%
99.9%
99.6%
99.3%
99.7%
98.9%
98.0%
Core payroll system (“Basisløn”)
• Dedicated team of 6
employees focused
Uptime for SD’s
on reading, updating
and implementing First hospital First county 4 region and 29
relevant laws and customer customer municipality
rules into the customers
software as the okt-14 dec-14 feb-15 apr-15 jun-15 aug-15
collective agreements
evolve 1970 1995 2015
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Agenda
Page
Introduction and transaction overview 3
EG’s business and market 8
EG financial performance 19
Introduction Silkeborg Data 23
EG’s acquisition of Silkeborg Data 25
Key investment highlights 32
Appendix – Risk factors 34
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Overview of the Danish IT market
A total market of close to DKK 80bn of which DKK ~17bn relates to Public IT services and software
Total Danish IT market The Public IT market (services and software, EG estimates)
DKKbn Hardware Software Services Services
~12bn
90
CAGR
80
35.8
35.2
70 33.9 34.5 Software
~5bn
60 1.8% 2015
50
Commentary
40 IT market in Denmark is a large DKK ~80bn market with stable
17.1 18.0
15.5 16.3 growth
5.2%
30
EG is addressing the services and software parts of the market,
representing close to 70% of the total IT market
Services and software grow faster than hardware
20 23.7 23.6 23.7 23.5
In terms of the Public Sector, EG estimates that spending on the IT
-0.2% services amount to approximately DKK 12bn. In addition to this,
10 Public Sector spending on software is estimated by EG to an
amount of DKK 5bn
0
2012 2013 2014E 2015E
Source: IDC
Numbers are rounded and may not sum
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Key transaction rationale
Strong rationale for EG to acquire SD as a Group and to combine EG Citizen Solutions with
SD to create a clear #2 in the public Danish IT services market
6 1
Proven management team to
deliver the vision for a Step change for EG Group in
combined EG & SD terms of size and profitability
5
2
Substantial revenue and cost
synergies from integration of Significant expansion of
organizations and operations recurring revenue base and
EBITDA
4 3
Ability to create a clear #2 with Improved position in the
EG & SD becoming a strategic attractive DKK ~17bn public
partner to public customers Danish IT services market
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EG Citizen Solutions – overview
The combined EG Citizen Solutions and Silkeborg Data
EG Citizen Solutions
Combined revenues Combined EBITDA1 Market position Employees % recurring EBITDA1
DKK 600m DKK 105m #2 420 71%
(approx.) (17.5% margin) (in Danish Public IT) (approx.)
1) Before synergies
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EG Citizen Solutions – customer offering EG and SD combined have at
least 4 active products with all
municipalities and considerable
business with 4 out of 5 regions
What do we want to create?
Value promise Current solutions
Citizens service Social and healthcare
Citizen self service Foster care
A supplier, which has the capacity to proactively develop digital
Utility self service Residence
solutions to address customer challenges
Marriage Management of aid’s
Funeral Healthcare (Helbredskort, tillæg)
Complaints
Salaary and HR
Economics Salary payments
Debtor controlling Management of shifts
Financial management
IT operations
A supplier, which has the domain knowledge to develop
Employment Hosting
reliable digital solutions addressing key customer pains
Communication between municipality and PC Lifecycle
general practitioners
Communication between municipality and Environment
region Public communication regarding infrastructure
Social benefits (KY) Public event management
Culture Internal efficiency
A supplier, which has the ability to form strategic partnerships Resource booking
Digitisation of journals
with regions and municipalities Allocation of funds Law information
Management of temps
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The vision for EG Citizen Solutions
EG Citizen Solutions & SD would create a real alternative to KMD and a clear #2 in the
DKK ~17 billion Danish public IT services market
Illustrative: Key commercial high lights:
• A real alternative to KMD and a clear #2 in the
DKK ~17 billion Danish public IT services market
Ability to drive the customer agenda
• Sales synergies from becoming a strategic
partner to local government
• Sales synergies from cross selling solutions to
existing customers
• Cost synergies and savings of DKK 17m1 from
integrating organisations and operations
• Strong platform for further M&A in the Danish
market
• Proven management team in EG to deliver the
vision
Number of customer touch points & access to
key decision makers
1) Next 12 months. DKK 9m from personnel savings, DKK 7m from external consultants and DKK 1m from board and audit
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Pro forma financials
Creation of a DKK 2bn+ IT services company with a higher degree of recurring EBITDA
Revenue, pro forma LTM Sep-15, DKKm EBITDA, pro forma LTM Sep-15, DKKm
>0
17
276 50
EG expects to realise
substantial revenue 297
synergies going 2,032
1,756 230
forward
EG SD Synergies PF EG SD Synergies 1 PF
EBITDA Q3 LTM – SD contributes with a large part of recurring EBITDA2 Pro forma capitalization
DKKm Existing Transaction Pro Forma
EG Pro forma Total debt3 1,155 +305 1,460
SD has ~83%
Cash4 -8 -80 -88
recurring EBITDA
Net Interest Bearing Debt 1,147 225 1,372
(NIBD)
Normalised EBITDA 230 67 297
(incl. synergies)5 (incl. DKK 17m synergies)
Recurring Recurring Leverage Ratio 4.98x - 4.62x
~51% ~56% (4.89x excl. synergies)
Fixed Charge Cover Ratio6 2.78x - 2.88x
(2.72x excl. synergies)
1)Next 12 months. DKK 9m from personnel savings, DKK 7m from external consultants and DKK 1m from board and audit; 2) Normalised EBITDA, excluding synergies; 3) Existing includes: DKK 1,100m in bonds, DKK 37m in drawn RCF, DKK 18m in
Other Debt. Transaction includes: DKK 300m new term debt and DKK 5m in Other Debt at SD; 4) Transaction includes DKK 28m of SD cash; 5) Synergies over the next 12 months amount to DKK 17m; 6) Pro forma for the new term debt
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Agenda
Page
Introduction and transaction overview 3
EG’s business and market 8
EG financial performance 19
Introduction Silkeborg Data 22
EG’s acquisition of Silkeborg Data 25
Key investment highlights 32
Appendix – Risk factors 34
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Key credit highlights
Leading Scandinavian IT service and software provider
Unique in vertical focus and deep sector knowledge
Diversified customer base
High cash conversion
Customised proprietary software solutions
Large share of recurring business
Experienced management team and lean organisation
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Agenda
Page
Introduction and transaction overview 3
EG’s business and market 8
EG financial performance 19
Introduction Silkeborg Data 22
EG’s acquisition of Silkeborg Data 25
Key investment highlights 32
Appendix – Risk factors 34
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Risk Factors
RISK FACTORS IN GENERAL
Prospective investors should carefully consider the risks described below before making an investment decision. Since the Issuer is highly dependent on the performance of the Group, the following risk
factors relate to the Group, rather than only to the Issuer. The risks described below are not the only risks facing the Group. Investment in the Bonds involves a high degree of risk and to the extent
any of the risks described below have a material adverse effect on the Group’s business, Bondholders may lose all or part of their original investment.
The Issuer believes that the factors described below represent the principal risks inherent in the Group’s business and in investing in the Bonds. The Issuer does not represent that the statements
below regarding the risks of holding the Bonds are exhaustive. Additional risk factors not presently known, or that are currently deemed immaterial, may also render the Issuer unable to pay interest,
principal or other amounts on or in connection with the Bonds.
RISK FACTORS IN GENERAL
All of these factors are contingencies which may or may not occur and the Issuer is not in a position to express a view on the likelihood of any such contingency occurring. It is not possible to quantify
the significance of each individual risk factor, as each risk described below may materialize to a greater or lesser degree, or may have unforeseen consequences. The risk factors are not listed in any
order of priority with regard to significance or likelihood of occurrence.
Prospective investors should also read the detailed information regarding the Group, its business and industry in general as set out elsewhere in this Company Description, in the Issuer’s annual report
and otherwise available to the investors in order to reach their own views prior to making any investment decision with respect to the Bonds. Prospective investors are recommended to seek
independent advice concerning legal, accounting and tax issues relating to the specific circumstances of individual investors before deciding whether or not to invest in the Bonds.
Investors should be aware that the Bonds are exposed to market conditions of a general nature. Accordingly, the market price of the Bonds may be influenced by, for example, economic factors that
cannot be foreseen at the time of investment. Investors should be aware that the number of Bonds in circulation may fluctuate over the term of the Bonds and that the marketability of the Bonds in the
secondary market may change over the term of the Bonds, thus limiting investors’ ability to sell the Bonds. In conducting its business activities, the Group assumes risks of a varying nature, any and all
of which may affect the Group's performance and the value of the Bonds.
Each of the risks set out below applies equally to the Issuer and the Group and the occurrence of any of the following risk factors may materially and adversely affect the Group's business, results of
operations or financial condition and consequently have a negative effect on the Issuer and its ability to meet its respective obligations under the Bond Agreement.
Intra-group dependencies
A significant part of the Issuer’s assets are comprised of its shareholdings in its subsidiaries. The Issuer has limited income and a significant part of the Issuer’s income derives from dividends
distributed by its subsidiaries. The Issuer and its ability to pay interest, principal and other amounts under financial indebtedness are therefore dependent on the capacity of the Group to generate
earnings and distribute these within the Group.
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Risk Factors - continued
RISKS RELATED TO THE BUSINESS
Global Economy
The Group is operating in primarily Denmark, Norway and Sweden and to a certain extent also worldwide, particularly with Scandinavian based global companies. The Group's operations and
performance depend on economic conditions and the effects hereof on and within the Retail & Media, Logistics & Production, Public, Utility, Building & Construction and SaaS & Infrastructure sectors.
The global economy and the global financial system continue to experience a period of significant turbulence and uncertainty following the severe dislocation of the financial markets and economic
decline that began in 2008. The current market climate has until recently been one of continuing recessionary conditions and trends in many economies throughout the world and this has impacted the
commercial sector and the general financial situation of enterprises.
Uncertainty about global economic conditions poses a risk as consumers and businesses may postpone or reduce spending in response to tighter credit, negative financial news or declines in income or
asset values and other macroeconomic factors, which could affect consumer spending behavior and have a material negative effect on demand for the Group’s software, services and products. The
Group's revenues and gross margins are dependent upon demand for the Group’s software, services and products and if this demand declines or the margins decline, it could have a material adverse
effect on the Group’s business, results of operations or financial condition.
The economic environment, pricing pressure and decreased employee utilization rates could negatively impact the Group’s revenues and operating results.
The Group is unable to predict the likely duration and severity of the current economic downturn and adverse global economic conditions. If the current uncertainty continues or economic conditions
further deteriorate, it could have a material adverse effect on the Group’s business, results of operations or financial condition. Furthermore, if the economic downturn continues or worsens, the Group
may not be able to secure short-term and long-term credit or leasing facilities on favorable terms or at all, which could have a material adverse effect on the Group's liquidity.
Industry and market risks
Technology changes
Rising new technologies such as cloud-based solutions and mobile technologies are gaining traction. Today, a considerable amount of the Group’s revenues are derived from cloud-based solutions, but
other unknown technologies may arise and change the foundation for the software, services and products offered by the Group. Existing ERP-players such as the Group will have to adjust their
software, services and product offerings with the emergence of new technologies, and if the Group does not manage to adjust their software, services and products accordingly, then it may have a
material adverse effect on the Group’s business, results of operations or financial condition.
The Group’s financial condition is partly dependent on solutions based on large software platforms. These standardized solutions are offered in a highly competitive and specialized market.
Approximately 60 per cent of the Group’s revenues are based on solutions and services related to Microsoft Dynamics AX and Microsoft Dynamics NAV, both of which are increasing their market share
in the ERP SME segment. The Group is dependent on its ability to develop scalable best-in-class industry solutions that supplement these standardized solutions. Changes in the technical foundations of
the standardized solutions and/or changes in customers’ preferred ERP platforms may force the Group to alter its products accordingly. The Group is forced to invest time and resources on educating
employees and updating existing software, services and products to be competitive when updated versions of existing technologies and completely new technologies are launched. If the updated
versions of existing technologies or the completely new technologies do not penetrate the market, these investments may prove futile. Furthermore the updated versions of existing technologies may
contain errors and flaws, such as the 2012 version of Microsoft Dynamics AX, which are outside of the Group’s control. These errors and flaws may entail difficulties for the Group to price and budget
project offerings for customers. The Group’s business will suffer if the Group fails to anticipate and develop new services and enhance existing services in order to keep pace with rapid changes in
technology, in the industries and in the standardized solutions on which the Group focuses. This poses a risk that could have a material adverse effect on the Group’s business, results of operation or
financial condition.
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Risk Factors - continued
RISKS RELATED TO THE BUSINESS
Competition
The Group may face significant competitive pressure from other participants in the market resulting in pricing pressures, lower sales and reduced margins, which could have a material adverse effect
on the Group’s business, results of operations or financial condition.
A significant part of the Group’s revenues are based upon customized add-on solutions to standard software supplied by platform providers, primarily Microsoft, and to a very limited degree SAP. In
Scandinavia the platform providers do not deliver such customized solutions and the Group competes with smaller specialized companies e.g. CGI, Columbus IT, Fujistsu, KMD, Infor, iStone, NNIT,
Netcompany Tieto and Visma.
A part of the Group’s activities within standardized solutions is subject to competition from competitors based in countries with a lower level of expenses. As the global market place develops with
among other things the development of cloud technology lower market entry barriers are expected. If the Group does not meet these challenges it may have a material adverse effect on the Group’s
business, results of operations or financial condition.
Industry changes
The balance between insourcing and outsourcing is constantly changing. An increased focus on insourcing will lead to falling sales especially within service agreements, while a decreased focus on
insourcing will lead to rising sales.
If major platform service providers such as Microsoft seek downstream expansion in the value chain and increase their attention towards developing their own industry solutions then it may pose a risk
which unless mitigated by the Group may have material adverse effect on the Group’s business, results of operations or financial condition.
Operational risks
Innovation and software development
In order for the Group to remain competitive within its markets, it is important that the Group is able to develop and launch new software, services and products, update existing products and services
and expand new or redesigned products and services in a timely manner. Failure by the Group to do so might result in the Group falling behind its competitors. There are risks with launching a new
product on to the market. The Group’s software, services and products are complex and may contain errors, faults, performance problems or defects which were undetected in testing. It is important
that both the Group’s support and research and development teams become familiar with new software, services and products so as to be able to efficiently respond to any problems that may arise.
Once a product is launched, it is necessary to ensure that quality standards are maintained to ensure continuing customer satisfaction and confidence. If problems were to occur which are not
adequately managed it could damage the Group’s reputation and prove more difficult to market the product. If these risks were to arise they may adversely impact the Group’s business, results of
operations or financial condition.
Compatibility
In order for the Group to remain competitive within its market, compatibility with other significant components and general IT standards is a core value. Failure by the Group to be compatible with
other components might result in the Group falling behind its competitors and in loss of customers. If the issue of compatibility is not adequately managed it could damage the Group’s reputation and
prove more difficult to market the product. This may have adverse effect on the Group’s business, results of operations or financial condition.
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Risk Factors - continued
RISKS RELATED TO THE BUSINESS
Project Management
The management consultancy and programming part of the Group is a project driven organization that requires the Group to ensure that the offer documents have high standards as well as the
subsequent management of the projects and resources is closely supervised. It is of vital importance that the projects are carried through with high quality in accordance with the agreed price and
deadline. There are risks connected to marketing, sales, analysis and design, development, implementation and operation in the Group’s project planning. The Group has established well planned
phases and has experience with calculating the risk of budgeting, resourcing and quality. As fixed prices become more common in the industry there exist risks that a project exceeds the anticipated
number of hours based on a flawed estimation of the necessary resources needed. Furthermore there exists a risk when defining and describing the software, service and/or product to be delivered as
there may occur misunderstandings between the Group and customers on the customers objectives which may result in re-deliverance or disputes.
Connection with Microsoft
The Group’s business and operations are among other things based on sales of standard Microsoft licenses and individually designed solutions based on Microsoft products but the Group has not
entered into any agreements with Microsoft that are unusual or peculiar within the industry. However, if Microsoft’s market share decreases, it may have an adverse effect on the Group’s business,
results of operations and financial condition.
Customer Concentration
The Group operates mainly in Denmark, Norway and Sweden and has a large customer base. Currently the Group has a diversified customer base with low dependency on single customers. Based on
LTM Q3 2015, the 10 largest customers accounted for approx. 11 per cent of the Group’s revenues, while top 20 per cent accounted for approx. 17 per cent. The Group’s division Citizen Solutions is
characterized by having relatively larger customers than the rest of the divisions. Dependency on one or more customers within Citizen Solutions may have material adverse effect on the division’s
business and results of operations.
Attack by IT viruses
As an IT business, attacks by IT viruses are a threat, both to the Group and its customers. If the Group’s products or internal IT systems are contaminated with a virus this could temporarily prevent
the Group’s customers from conducting their business or the Group from providing adequate support and services to its customers. Failure to maintain sound IT infrastructure and virus protection could
therefore result in disruptions and if they were to continue for a considerable length of time they may adversely impact the Group’s business, results of operations or financial condition.
Fires and other natural catastrophic events
The Group’s servers, systems and physical operations are vulnerable to damage or interruption from earthquakes, volcanoes, fires, floods, power losses, telecommunications failures, terrorist attacks,
acts of war, human errors, break-ins and similar events. The Group may not have sufficient protection or recovery plans in certain circumstances and the Group’s business interruption insurance may
be insufficient to compensate the Group for losses that may occur. As the Group rely heavily on the Group’s servers, systems, the physical operations and the Internet to conduct the Group’s business
such disruptions could negatively impact the Group’s ability to run the business, which could have an adverse affect on the Group’s operating results.
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Risk Factors - continued
RISKS RELATED TO THE BUSINESS
Acquisitions
The business segments within which the Group is active are subject to continuous consolidation driven by the increase in cross-border trade and the search for economies of scale. As illustrated by the
acquisition of Silkeborg Data, the strategy of the Group is to participate actively in this consolidation process. This strategy for long-term growth, improved productivity and profitability depends in part
on the Group's ability to make acquisitions and to realize the expected benefits from its acquisitions. While the Group expects such acquisitions to enhance its value proposition to customers and
improve its long-term profitability, there can be no assurance that the acquisitions will meet the Group's expectations within the established time frame or at all.
Acquisitions involve a significant number of risks, including, but not limited to, risks arising from change of control provisions in contracts of any acquired company, local law factors, pending and
threatening lawsuits and risks associated with restructuring operations. The integration of acquired companies may result in unforeseen operational difficulties and costs, and the Group may encounter
unforeseen difficulty in retaining customers from and key personnel in acquired businesses. The Group may not be able to realize the expected benefits from a certain acquisition or the profitability of
the acquired company may be lower than expected or even result in a loss.
To successfully manage the integration of acquired companies or assets, the Group will need to maintain high standards of service and manage its employees effectively. The Group's successful growth
will furthermore depend on its ability to manage its expanding operations, as well as the operations of the networks of its local partners, including its ability to establish and maintain an adequate IT
infrastructure, to integrate new qualified personnel and any newly acquired businesses on a timely basis, and to maintain robust financial and management control and reporting systems and
procedures. There is a risk that the Group will not succeed therein.
If the Group is unable to expand its operational, financial, and management systems in a manner that supports the expected growth, or is unable to attract, motivate and manage a skilled workforce,
the Group may not be able to continue to satisfy customer demands. If the Group expands the business too rapidly in anticipation of increased customer demand that does not materialize, the increase
in operating expenses could exceed revenues growth and as a result reduce net income. Thus if the Group is unable to manage its growth, it could have a material adverse effect on the Group’s
business, results of operations or financial condition.
The Group has built up considerable goodwill on its accounts due to acquisitions. Notwithstanding that the goodwill is impairment tested annually the rise of new “game changing” or transformational
technology may entail that the goodwill must be immediately written off.
Risks related to employees
Attracting and retaining employees
To a large extent the Group relies on human know-how. The employees of the Group have specific sector related know-how, which is valuable for the Group. The Group has not generally entered into
non-competition or non-solicitation clauses. If employees with specific sector related know-how leave the Group, the Group might lose valuable knowledge and the employees might be hired by
competitors or establish their own companies.
The customers of the Group require deep sector knowledge including supply chain knowledge and understanding. To ensure the Group continues to offer high level advice and solutions, including
further development of software, services and products, thereby ensuring profitability the Group depends largely upon highly skilled technology professionals and the Group’s ability to hire, attract,
motivate, retain and train these personnel. Key employees might be attracted to opportunities in rising market, i.e. Norway. A failure to attract and retain competent key employees could have material
adverse effect on the Group’s business, results of operations or financial conditions.
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Risk Factors - continued
RISKS RELATED TO THE BUSINESS
Invoicing rate
The Group is highly dependent on the employees’ invoicing rate, which equals the billable hours. The invoicing rate depends on the composition of the staff as well as how the individual employee
spends his time. In 2014, a change in the invoicing rate of 1.00 percentage point across the EG group will result in an increase in the gross profit and thus in EBITDA of DKK 15 million (taking into
account fixed price contracts). A decline in the employees’ invoicing rate across the Group could have material adverse effect on the Group’s business, results of operations or financial condition.
Increased wage pressure
In certain industry sectors and countries there continues to be a significant wage pressure due to the demand for skilled employees. In a positive economic environment the wage pressure will rise as
well as the employee turnover. This may cause heavier expenses for training of new employees. If the Group does not comply with the wage demands within these industry sectors and countries, the
Group may lose valuable employees. The wage pressure and employee turnover may have an adverse effect on the Group’s profitability
IPR and Legal Risks
Contractual liability
Typically a service agreement contains provisions requiring a high percentage of uptime as well as other service requirements. In connection with the contract negotiation phase the Group seeks to
draft provisions that mitigate the size of potential liability claims and penalties. The Group has established internal controls to secure reasonable liability provisions when entering into agreements.
Nevertheless, the Group is exposed to contractual liabilities, which could have a material adverse effect if such exposure materializes. Moreover, human errors in judgment may cause the Group to
accept contractual liability provisions inadvertently or outside of internal control systems established to secure management approvals.
Under some contracts or legal regimes the Group may have unlimited liability for losses caused by its own negligence, and such liability may not be covered by the Group’s insurance policies.
Litigation and disputes
The Group’s software, services and products relate to extensive, complex transactions often involving considerable sums. Customers or other parties may file claims for compensation for loss or
damage alleged to have arisen due to reported faults or defects in the Group’s software, services, products and management or the Group may become party to judicial or administrative proceedings
relating to the Group’s business, including, responsibility for software, services and products as well as contractual interpretation and intellectual property rights. Any such claims against the Group or
the Group’s involvement in any judicial or administrative proceedings in respect of such claims could mean that the Group is forced to expend considerable sums and resources in defending such
claims, whether or not they have legal merit, and this could adversely impact the Group’s business, results of operations or financial conditions.
Insurance
The Group believes that is has a normal, market standard insurance program. The insurance program is reviewed once a year. However, the insurance program contains provisions on own risk and not
all types of losses and liabilities are covered. If a loss occurs that the insurance does not cover, it may have material adverse effect on the Group.
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