Asseco South Eastern Europe S.A. (ASE) Earnings Call Transcript & Summary

Welcome, everybody. Here we are to present preliminary results. We believe they are almost like final, but they are not audited yet, and we will show you what has happened in Q4 and in the whole year. And we have [Technical Difficulty] we have some technical issues, a second. Okay. Here we are. So a quick summary, very strong payments. They contributed very strongly to the growth of operating profit in the whole year. The growth has been driven [indiscernible] can you hear us guys? Can you hear us now? Just if you can put it on chat or that it's all [indiscernible] just to make sure... So summary of preliminary results, as mentioned, final audit will be next week. We don't expect major differences. And here, we have the major highlights, very strong highlights. Very strong payments contributed mostly to the operating profit. And within payments, e-commerce [indiscernible] from independent POSs, IPD and ECR that have shown the biggest growth. Dedicated Solutions, the other business line has shown a rather poor year, a weak year versus previous ones. We had some write-offs that we communicated during the year, most of them in the second quarter. And also, we've observed shift of projects to 2025. So this all contributed to very poor performance of this business line. Banking has been better than expected in '24. In the beginning of '24, we expected a bigger decline, but somehow some implementations were prolonged and also we won some additional channel solutions and security and compliance solutions, which contributed to that. Cash conversion is better in Q4, as we mentioned after Q3 that we expect [indiscernible] on next slide. Collection delays can be visible in Middle East and India, especially in Dubai in Middle East, we decided to do some write-offs. It's not that we don't expect these receivables to be collected. It's just that we want to put some discipline in front of other managers to have more pressure on and getting it back. There is a material negative impact of strong PLN versus Euro. So this appreciation of the zloty has negatively hit the PLN results, of course, not the euro results. And traditionally, we give you transactionality in a period. So you see still the dynamics up a lot. In e-commerce, 50% growth. In independent POS, its 52%. And in traditional card processing, 24% growth. Now instead of giving you the highlights of the biggest deals, which was quite important, we decided to summarize what is happening in each vertical. And again, as mentioned, this year was better than expected in banking. Channel solutions very much contributed to this and show significant growth. Within these, we developed a new product called financial gateway, new technology, unifying different payment methods for and connecting it to core banking, including SWIFT connectivity. And this has shown a tremendous interest in our region. Core banking solutions are expected to slow down. They slowed down already in '24 and '25 as well. So we will see more of these channel solutions as well as security compliance solutions where we see growth mostly in the application -- app protector -- application security technology that we have introduced as well as Spoofing Protector. This is something that helps to avoid fraud calls of fraudulents who try to pretend they are banks. In Dedicated Solutions, this already mentioned about the weaker year. Shift of projects has happened mostly in billing and intelligent transport systems. BPM has been slower in '24. We expect here also a slight acceleration. In Albania, not so big, but the results were much weaker in '24. We see already some projects signed, mostly for the post office as well as public administration. The Albania projects will contribute significantly to 2025. Life as a product collaboration tool has been good on acquisition of new projects, not so good on delivery. So we must optimize and improve the cost of delivery in that product. And we've seen drop in third-party solutions, which is quite in line with our expectations and strategies. So this doesn't [indiscernible], but this is very much visible. And in payments, payment very strong in the lines. As mentioned, e-commerce has been very strong in Turkey, Portugal and the Adriatic region. So dynamics very much visible in all places, but Turkey, the biggest operation. So the growth is, on nominal numbers, most impressive. Transactionality, already mentioned on POSs and ATMs. In POSs, we've seen decline. In hardware deliveries versus '23, which has been very, very high, all over our regions as well as Spain and Portugal. ATM, after a very weak '23, showed improvement, and this we expect to continue. And now the results, Michal please.

Good afternoon. So first, Q4 results. The first 2 columns on this slide are total consolidated numbers for fourth quarter. And then third and fourth column is excluding hyperinflation report. So traditional view we show each quarter. On top line, minus 2%, so small decline of revenues, but change of structure of revenues. On activities, on services and software, revenues increased by almost EUR 10 million, while resale -- third-party resale declined almost EUR 12 million. As Piotr already mentioned, this is not something what worries us. On operating profit, year-over-year growth by 6% in euro numbers and 3% in Polish zolty, this is due to strengthening zolty year-over-year. And EBITDA growth is even higher, 8% year-over-year. While it is higher than EBIT due to depreciation, it's obvious, but this depreciation is related to mostly with assets recognized during purchase price allocation. We have recognized software, which now is depreciated. And this is around EUR 600,000 additional depreciation. Half of it is Dedicated Solutions, half Payments. Below operating profit, on net profit, 2% growth year-over-year, but if we exclude non-IFRS items, so mostly valuation of put options and conditional payments -- conditional considerations for acquisitions, and of course, depreciation of assets recognized as part of PPA, then this dynamics is higher, 16% year-over-year. When we look at financial activity, result on financial activity is around EUR 400,000 lower and we have a few items impacting this. One, it's positive valuation of contingents and [indiscernible]. It's more than EUR 5 million positive. But on the other hand, we have write-offs of goodwill on Dedicated Solutions plus write-off of goodwill related to reclassification of investment into [indiscernible] assets held for sale. And this is a negative EUR 6.8 million. On top of this, we have better higher result on foreign exchange gains by EUR 600,000 and EUR 300,000 higher positive income from interest. All this together give, as I mentioned, EUR 400,000 lower result on financial activity. When we talk about taxes, pretty similar, slightly higher effective tax rate in Q4. But when we look at annual taxes, effective tax rate is almost the same, but I will comment on this a bit later. By segments, so verticals. Profitability in Banking, as you see, declined. This is related to core banking, mostly Q4 '23, we still had core banking implementation, which were completed beginning of 2024. And this is why year-over-year, we have a drop of profitability and drop of result in banking. In Payment, pretty stable profitability, 16% and growing revenue by EUR 3.3 million. Growth is mostly in e-commerce and processing, and we have decline in ATMs and POSs. This decline is related with lower deliveries of devices in both lines. When we look at operating profit, it is also growing by EUR 400,000 with change of structure of this result. As you see on this pie chart, e-commerce and processing and independent networks generated more than half, 56% of results, whereas last year in Q4, it was 41%. And the last line, Dedicated Solutions, after a weak Q1, Q3, Q4 is better growth year-over-year and over EUR 4 million of operating profit despite declining revenues. It's related with change of structure of the business, growth of own software and services and drop of resale of third-party solutions. By geographies, good quarter for Southeastern Europe region, so Adriatic countries and biggest growth in Serbia, EUR 2.3 million, thanks to Dedicated Solutions on software and Payment. In Payment, growth mostly in e-commerce and processing, but also not bad for ATMs and IPD. And second country in Southeastern Europe is Bosnia with growth of operating result by EUR 1.4 million generated in Dedicated Solutions. As for other regions, Turkey, not bad quarter, EUR 2.7 million result and grew by EUR 300,000. And India and Middle East, they contributed together EUR 0.5 million, but we've included write-offs of receivables in Dubai. In this EUR 800,000 loss you see, EUR 700,000 is due to write-offs. We hope to recover sooner or later those receivables, but following our policies and then to be prudent, we included write-offs. As for drops, we have drop in Western Europe. This is mostly Spain and Portugal, drop in Dedicated Solutions last year, so '23 Q4 was strong, thanks to artificial intelligence projects plus good in BPO. So here we have dropped by around EUR 400,000, and in Payment, rest of decline, mostly in POS is related with lower deliveries of hardware. And Central Europe, here drop is mostly in Payment in ATMs area where in 2023 in Q4, we delivered bigger number of devices to one of the banks. And let's move to results for whole 2024. So [indiscernible] pretty similar, not only in how it grows, but also about the dynamics. Revenues are higher year-over-year by 7%, but similar contribution to this growth. So growth is only on own activities, so on services and software, which are higher by more than EUR 30 million and declining resale by EUR 6 million. Operating profit growing by 2% year-over-year. In zolty, it is slightly declining 3%. So this 5% difference is resulting from a stronger zolty in 2024. In EBITDA, similar as it was for Q4, growth is bigger, both in euro and zloty and it's related to depreciation of assets recognized as part of PPA process. And again, a similar comment, more or less half in the Dedicated Solutions and other half in Payment. Below operating profit in finance activity -- result on finance activity is EUR 1.4 million lower than in '23. And there are -- on top of those 2 areas, which I mentioned for Q4, so valuation of contingent consideration liabilities and put options, which is positive, around EUR 7 million higher result on the revaluation than in previous year. We have write-off of goodwill in the amount of EUR 6.8 million. This, as I mentioned, has happened in Q4. But on top of those 2 big items, we have impact of dividends paid to minority shareholders for those entities, which are consolidated using present ownership methods. In this case, dividend [indiscernible] P&L and cost of such dividends are by EUR 1.2 million higher in '24 than in '23. Tax -- corporate income tax and deferred tax, effective tax rate is by 0.1 percentage point higher than in '23. So really immaterial. And result by vertical. So Payment, very strong Payment, EUR 30 million growth on top line and EUR 8 million on operating profit level with increased profitability by 2 points. And as you see, very similar picture to Q4 only. So growth is mostly in e-commerce and processing, very good also independent networks of ECRs and IPD. But on revenue, we have also ATMs are not bad, growing revenues and slightly growing operating profit, thanks to deliveries which happened mostly in Southeastern Europe, mostly Serbia, also to some extent, Croatia. And POS revenues declining due to lower deliveries of terminals. And talking about operating profit, e-commerce and processing plus independent networks, they generated 55% of operating profit. So something what we aimed to deliver, yes. After Q1, we commented that our goal is to exceed 50%. It is a bit more, but it's a pretty good growth year-over-year. Coming back to segments. Last segment is that -- first, let me start with Banking. So Banking, as you have mentioned, above initial expectations, but declining year-over-year. This is, as we already commented, due to less core banking projects. Those big projects, and they were completed and now we have more projects in channels than core banking and significantly smaller projects. And the Dedicated Solutions, Q4, as you saw, pretty good EUR 4 million result. But as you remember, after 3 quarters, Dedicated Solutions was negative. Partially, we recovered, but only partially and year-over-year result drop is more than EUR 6 million. All this is due to lack of projects, what we hope will change and improve in '25. And let's have a look at geographies. Southeastern Europe, pretty flat, slightly negative, lower result in Bosnia, better in Serbia to comment those most important. But the bigger impact is of Central Europe, which was weak this year, mostly due to Romania in area of Dedicated Solutions and Payment. And what was compensated by very good Turkey, and this we already mentioned in Payment, mostly e-commerce and also not bad Western Europe, where we have growth in Payment, but with change of structure of business. So a slowdown in POS, this traditional business, lower deliveries of devices terminals, but growing e-commerce and processing. And India and Middle East, they both contributed around EUR 1 million to results in '24. And just to recall, we consolidated for half year. And of course, it includes those write-offs, which we included in Q4, maybe we'll manage the recover in 2025. This was about results and a few words about cash position and liquidity. As you see, comparing to September, so Q3 end, we see improvement. Cash balance is higher by EUR 16 million. Lease liabilities is pretty similar. We paid back part of debt to banks around EUR 7 million and also deferred and contingent payments for acquisitions. So liabilities, they decreased. At the end of December, those liabilities are EUR 10 million. It doesn't mean that whole amount will be paid during the next 12 months, because there is half of this more or less is put option held by minority shareholders of [indiscernible] and it's not necessarily -- it's not sure if they will execute or not. So net cash, EUR 300,000 positive, as I mentioned, more than EUR 30 million improvement comparing to September. The all net cash, let me comment inventories. They are pretty high, EUR 26 million. Around 75% of them related to payment business. And some part of this, around EUR 5 million, are inventories, which are dedicated for installing as part of outsourcing business where we outsource POSs or ATMs to banks or part of independent networks. So we expect around EUR 5 million of this inventory to be transformed into fixed assets during 2025 and the rest is more for resale and deliveries to clients. Operating cash flow, here we also see improvement, but after a very weak first half of '24 and also 3 quarters were not spectacular. So almost EUR 48 million operating cash flow, what gives conversion of EBITDA in total operating cash flow of 65%, not high, but below expectations. But we need to remember that '23 was spectacular due to a situation where our clients in Serbia and Romania paid us for deliveries, and we have not settled our liabilities towards vendors because it was related to third-party business, and we paid those liabilities in '24. This is why we also calculate kind of adjusted operating cash flow to EBITDA ratio when we adjust for those 2 [indiscernible] untypical cases. This adjustment is still below, let's say, expected level. But as you see, the difference is not that huge. As you see in cash flow, in the second line from the top, the investment in infrastructure for outsourcing and networks in '24 was pretty big, almost EUR 14 million. And this is related with big investments in Serbia for ATM and POS outsourcing. These are projects which we have for 9, 7 years already, and we reached this moment in time when we need to renew the fleet. So replace ATMs or POS devices into new ones. And this is why this CapEx was bigger. When talking about regular CapEx, as you see, it is on very similar level as in previous year. Okay. So this was about cash flow and let's move to outlook for '25.

So as you see on the slide here, we have quite a nice growth in backlog, both for Q1 and the whole year even bigger. There's a slight difference in us, the growth is smaller. For the whole year, it's acceptable, 10%. For Q1, it's only 4%. In [indiscernible], it's very, very impressive. It's close to 20% for both periods. And generally, I would say that this is pretty optimistic. Yes, we are quite positive about '25 outlook, more than for '24 in the beginning of '24, and we see definitely some growth ahead in '25 in the upcoming time. So let's see, we would expect this in all business lines, in Dedicated Solutions and [indiscernible] as well. But maybe banking would be more flattish as I had mentioned earlier. And having said that, we are very open to your questions. If you have any, you can put them on chat or you can do it in voice, whatever would be more easier or suitable for you, please?

If there's any questions, please, please, type them or mention them. We're very happy to open. We'll be publishing the official results next week, audited ones, but we don't expect any major differences to the numbers published. Do we expect changes resulting from the change? No, actually, from the change of shareholding structure at the Asseco Poland level, we don't. At least we know very little about the transaction itself. But so far, we expect business continuity as is. If there would be anything, we would inform. For us as management, [indiscernible] very small shareholder, it is critical to keep up the motivation of the management and the dynamics of the group, which has been probably one of the highest in the Asseco Group overall, yes. So I hope the new shareholding structure will not deteriorate that, but I haven't had any meeting. So we didn't have any interactions with any investors. So we cannot comment anything. Okay, some more outlook on the growth? Well, basically, we -- on a clear, corrected non-inflation basis, we showed over [indiscernible] operating profit, yes. Also the same type of cleared profit, the analysts are expecting us to do 56%, 57%, something around this. And we think this number is absolutely realistic on a group level. If we can overachieve this number or not, we'll see during the course of the year, and we'll be informing you, yes. But this is on -- so we try to be pretty modest on our growth outlook as usual, not to have negative surprises, and we'll see in the course of the year how the backlog buildup and deliveries will be happening. As mentioned, Dedicated Solutions, also answering this part of the question, has been very weak in '24. Yes. We have had write-offs and we had movement of projects. So improvement on more projects, no write-off should be already a significant improvement for the profit of this business line. Whereas in [indiscernible], we have some investments to be made in not only market development, but also into some solution revamps, especially in Turkey, so this might eat up a bit of our profit in [indiscernible], but we do expect bigger dynamics there as well. So that's maybe answering. If not, please, please put some additional questions. There is a lot of talk about AI recently. Is there any impact of AI on the internal processing and cost of providing services? Can you automate more? What kind of AI solutions can be provided to clients? Well, first of all, I want to mention that we have a 50 people group of AI engineers, machine learning engineers, who sales and provides AI services outside to our customers. Yes. In terms of AI usage, it's -- probably the quickest effect we'll be seeing and we are seeing on testing level, yes, and quality of code level. And here, we already using it in different independent tools, and we'll see more usage of this, yes. But AI improvements will, in the beginning, improve and help in the lower value-added areas of our business. So yes, we are aligned. We are working with it, and we are also working how to commercialize the knowledge and capacity we have within AI in our group. And this has been -- initially, it has drawn a lot of interest from our customers. On the other hand, they are still seeing what they should do, especially banks on their own, how to use it, a lot of hesitation, a lot of questions. So the true commercialization of this, I think, will require still some time on selling point. On usage internally for cost optimization, already being done. Anything else that we should clarify. If not, we are really inviting you to direct contract after the close period, so after next week publishing date. And we have a question, one more. Just a second. Do we see pickup in activity? Well, in [indiscernible] very much in payment. In project-based basis, it depends in which REI. Customers are becoming more conservative. What we are commenting in banking, we had a wave that is shifting into in-sourcing very strongly and then moving to outsourcing. I think we have just experienced the peak of in-sourcing recently or we are just experiencing it now, and we'll see more movement to outsourcing. Also, let's say, whatever the weakness of European Union are visible, we are visible as well within the cooperation with the customers. So depending on geography, you see there is a preference to take services much more expense from more known or homegrown geographies by big international customers. I think this is slowly changing contrast to emerging markets, especially Central and Eastern Europe is growing. So we do expect more interest in our projects and especially in channel solutions, not in core banking solution. End of war, we are not that much affected by the war, either in Middle East or Ukraine that [indiscernible] ourselves, yes. I would say, quite universal answer, pretty boring, I would give is that any stability always is good for business and [indiscernible] stability is good for business. So in this case, for sure, it will help. But but we are not expecting any breakthrough changes. We don't know what the peace treaty in Ukraine will be. If it will be very humiliating for Ukraine, we expect additional immigration from Ukraine resulted from frustration of the nation. So basically demotivation, frustration and depopulation will continue if this will be as it looks, it can go the direction, but we don't know how it will look at the end. Labor market, labor market situation has improved since the pandemic. Our rotation numbers have decreased dramatically. The prices, the costs have not maybe decreased, but the pressure on salaries has dropped very much, on salary increases. So we see more pressure now on managerial level than on average IT levels and programming levels. The convergence from emerging markets to developed markets in salaries, I wouldn't say it has finished, but it's continuing all the time. So the difference is taking the purchasing power parity not that big in salaries anymore. So I would say quiet, quite stable, yes. The biggest challenge on the labor market, but resulting from exchange rates we have in Turkey, where all the employees are expecting inflation indexation basis, even above inflation indexation. On a regular basis, inflation is very high and lira is depreciating much less, 20% to 30% versus 50% inflation, and this is over the last 3 years. So in dollar, in euro terms, the costs in Turkey have became enormously high. So like doing and developing some things in Turkey maybe could make sense in the past. Now vice versa, we are discussing and concluding how to do it and how to shift to other markets from Turkey, some of the resources. Any other questions? Okay, I believe we good. Please contact us directly if there's anything additional. We don't plan any major mergers and acquisitions in '25, some small ones, yes, but not big ones. We want to consolidate what we have acquired and make it more corporate and leverage on organic growth very much. So this is an outlook in the near future. We know the -- sorry, answering your first question on the partner for Asseco Poland and the company who acquired a controlling stake or is acquiring now controlling stake. We know they are very acquisitive. We hope this will not limit our acquisition appetite due to their policies, but this we cannot tell until we see some things in reality. So thank you very much. Thank you for coming, and we will be in touch, I hope all the best. Take care.

Thank you.