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

Let's start. Welcome, everybody. Sorry for the small delay. We will quickly go through the numbers of Q1 and tell you about the prospects for remaining part of the year. So highlights, the most important point, payments, Payten was very strongly contributing to the quarter 1 numbers in the operating profit. We've seen very good e-com performance, processing as well, much slower POS-related services and better ATM, yes. But you will see later on the slide that the contribution of e-commerce and merchant business is very much growing in overall payment environment, which is very -- we are very happy about it, yes. Banking was positively surprising, thanks to core banking and channel solutions, and this was good information for us. Dedicated Solutions still leave a lot of room for improvement. In Dedicated Solutions, we see that many of the projects we were counting that they will kick off from beginning of the year, they -- some of them were postponed to Q2, even Q3 of this year. A lot of this happening in Serbia due to the political turbulences. I will mention more by the end of the conference about it, but also some PPM projects in Romania and also Serbia also a bit delayed. ICE projects infrastructure, which are not that important, they also were delayed. So this was -- these were the things that negatively contributed to the Dedicated Solutions, yes. You can see and Michal will be showing we have much better cash conversion. So last year, especially in the third quarter, it didn't look too good. We said this will reverse, this will improve, and now we see this reversal. But one thing that we are observing slowly is that the nature of the business in Middle East and India is much different. The collections are not looking as we are used to European business and the payment official terms versus real payment differ very much. So basically, we decided to take a very conservative regime like we take all the time in ASE Payten, and we are making provisions for all such outstanding receivables. If this would not be the case, probably the results from that region would be even better. The currency, we've seen in the first quarter zloty strengthening. Michal will show it, but it had a zloty negative impact. Euro is pretty neutral for us. And last thing I would mention are the transactions revenues. You see the nice dynamics, the highest independent POS transactions because of very, very big market openings, especially in Romania, but also Croatia very, very dynamically growing. Processing nicely developing and e-commerce traditionally growing. So we do expect these lines will be growing in the future. And let's look at the numbers now, please.

Okay. Let's move to numbers. I don't know how much familiar are you with our slides, but let me walk you through. So first 2 columns are numbers as they are reported in our financial statements for Q1. And then following 2 columns are numbers excluding FX of hyperinflation reporting. So this noncash purely accounting reporting of hyperinflation quarter. We are concentrating on those numbers, excluding hyperinflation on this slide and on the following ones. So as you see on top line level, we have 13% growth year-over-year. Here, majority of this growth, roughly 80% is generated by own activities, mostly in payment area and in smaller value in banking. As for resale, here we have growth of almost EUR 2.5 million year-over-year, but payment contributed with EUR 5 million growth and Dedicated Solutions in this third party in resale part of business dropped by around EUR 2.5 million, that was already mentioned by Piotr in highlights. On EBIT level, we have growth 8%-over-year in euro and in Polish zloty it is 4.4% year-over-year and this is due to the effect of Polish zloty during Q1. Similar growth on EBITDA, 9% year-over-year. When we look down below operating profit, we have a drop of result on level of net operating profit, and this is due to financial activity. Result from financial activities by EUR 2 million lower than previous year. And the majority of this drop is in amount of EUR 1.6 million is due to loss recognized on disposal of subsidiary, which is Mobven. On top of this, we had EUR 300,000 bigger cost of revaluation of contingent liabilities and put options, then balance of FX gains still positive, but lower by EUR 300,000 than in 2024. And this was partially compensated by interest, which were higher -- positive interest higher by EUR 100,000 than in previous year. As for taxes, here in absolute values, taxes are around EUR 100,000 higher than in 2024. But when we look at effective tax rate, excluding this loss on sale of subsidiary, which is not taxable, the effective rate is 0.4% points higher than year-over-year. So we can let's say it's on the same level. So let's move to results by segment. And let's start from banking. So in banking, flat profitability, 24% in the same -- in previous year, growth of revenues by EUR 1.7 million on revenue on activities and EUR 400,000 growth of operating profit. Those growth in banking are mainly thanks to core and channel solutions, core in Serbia and in channels in Romania, Serbia and Bulgaria. Dedicated Solutions, as I already mentioned, drop of revenues. You can see here EUR 2.2 million lower revenues. Drop is mostly in third-party areas, advanced infrastructure services in Romania, Serbia, Poland, and Bosnia and Herzegovina -- I am sorry, it is compensated by this business line responsible for own software, but still in overall drop of result by EUR 700,000 in Dedicated Solutions. And the last line, but the one showing growth pattern, EUR 11.6 million higher result in total and growth of EBIT by more than EUR 1 million with slightly lower profitability by 1 percentage point, what is related to change of structure of business. So let's go a bit more deeply in payment. The line showing biggest growth year-over-year, over EUR 5 million is e-com and processing, and this is thanks to operations in Turkey, Serbia, Western Europe and Croatia. So this generated 60 -- 70% of the growth, and additionally we have also effect of consolidation of India and United Arab Emirates operations, which were not part of the group in Q1 2024. In ATMs, almost EUR 5 million growth of revenues. This big growth in big part is thanks to deliveries of ATMs, which happened in Serbia, Bulgaria and Romania, those 3 geographies. Independent networks, ECR's and IPD, EUR 1.2 million growth year-over-year and here we have a big part in Croatia where we started with those business lines, but also a nice growth in Romania. This is what Piotr already mentioned, so new market and on top of this Serbia and Czech and Slovakia. And POS, here revenues very similar to last year, only slight increase, changes between countries, some a bit higher, some a bit lower, but in general, very similar to previous year, but lower result mostly due to Western Europe and in lower -- with lower impact in Serbia and Slovenia. What is worth to mention, we created some write-offs allowances for inventory, mostly in POS, but also in ATM following our quite strict policy about write-offs in case of overdue inventories, but we hope that we'll be able to deliver this in coming quarters and then to reverse those write-offs. Okay. So let's move to results by country, by geographies. Southeastern Europe, EUR 0.5 million higher result, mostly thanks to Croatia for which this first quarter was good for Dedicated Solutions. Overall, on group level, it's not good. But as I mentioned, drops in third-party business was partially covered by own solutions, and this is an example, in Croatia, year-over-year EUR 0.5 million growth in result on BPM solutions. In Serbia, talking about big changes in Southeastern Europe, EUR 300,000 drop. And this is a mixture of 3 changes. As I mentioned, good for banking, thanks to core solutions and increase of results. Also pretty good for payment, growing result in e-com and processing, but a weak start for Dedicated Solutions and drop of result for this vertical. Moving to Central Europe, here EUR 400,000 better result than in Q1 last year, mainly thanks to banking and payment and negative dedicated solutions. In banking channels in Romania, which I already mentioned, contributed to growth. And in payment, it's mostly thanks to Romania and Serbia in this traditional POS and ATM business, whereas in the Dedicated Solutions drops in Romania and Poland. Western Europe, here we have slowdown by EUR 700,000, mostly in area of payment, this is the only significant business we have in Western Europe and drop is on traditional POS business due to mostly lower deliveries, partially compensated by better performance of e-commerce and processing and IPD networks. And then we have Middle East and India, so together around EUR 1 million contribution to result, Middle East loss in amount of EUR 800,000, which was generated due to those write-offs of receivables, which we already mentioned. So we created them and this impacted on the result. And in India, positive result. In this case, we have some effect of reversal of write-offs, which were created during Q3 and Q4 of previous year. Let's move to balance sheet and cash position. So as you can see, it looks pretty good at end of March. Our cash balance increased by EUR 9 million and net cash increased by EUR 5 million. This increase of bank loans is related with investment loan, which we took to finance equipment and licenses, which we outsourced to one of clients in Romania, pretty big project with big investments and long-term outsourcing project for 5 years. So we financed this investment from external loan. And in case of lease liabilities, the growth of liabilities is due to amending lease contracts and signing new contracts in Macedonia. When we look down through operating assets, receivables liabilities, both declined, nothing special. What we are happy that we managed to decrease balance of inventory, thanks to -- this mostly thanks to payment and delivered or activated as fixed assets POS and ATMs plus this equipment for this outsourcing project, which I mentioned when commenting. When you look at cash flow, very nice quarter. Operating cash flow for Q1 2025 over EUR 50 million, whereas last year, it was less than EUR 1 million. So it looks very nice. Cash EBITDA to operating cash flow conversion, 83% for the last 12 months versus 65% and adjusted for one-off 76%. It looks very good, and it shows that this slowdown, which we had in -- during -- especially Q3 last year, now it's better. The investments in CapEx, it increased year-over-year by EUR 3 million more or less, and it's visible also on last 12 months versus previous year. This is due to investments into outsourcing of POS and ATMs and this Dedicated Solutions related project, which I already mentioned. Okay. So this is about cash. It looks good, and we hope that in next quarters, it will be also on nice level. So let's move to outlook for 2025.

So in backlog coverage, as you see, it's pretty good. Actually, it is a coincidence, but this graph looks the same for us and Payten for all business lines. So you can see the Q2 and the rest of the year coverage is about 13%, 14% roughly for all the businesses. What is the takeaway from this? I mean, we sustain our pretty positive outlook for the rest of the year as in the beginning of the year. So we don't see major reasons to worry. If I may comment some additional observations. So, in Serbia, we have some delays like last year due to political upheaval and some problems there were protests throughout the winter, some strikes, reconstruction of the government, everything paused for decision-making, especially in public administration and related entities. Now it seems the government is reconstructed and it's slowly back to life, but let's see how this will continue to develop. Second observation is Turkey. I'm sure you followed the imprisonment of counter candidate to Mr. Erdogan in the upcoming presidential election, the mayor of Istanbul was imprisoned and this has created a lot of protest, including silent strikes or like decisions not to buy goods on e-com once a week. So to what extent this will impact the economy and some things in Turkey, it's hard to say. We believe it will be step-by-step back to normal, but we've seen this weakening of lira happen recently after this imprisonment took place, and let's see how this will develop further, yes. For Dubai and Indian market, we have a very rapid revenue expansion, which is good news, but with very poor collection capacity. We are still learning this market and checking to what extent this is market-specific nature of the market, to what extent there are some mistakes made. We are putting much more focus on collections. But just in case as mentioned in the beginning of the presentation, we are taking a conservative stance on this and doing some provisions for outstanding receivables like we have for in the past for this type of business. So as mentioned, these numbers maybe could be better, but we prefer this approach, a bit more conservative. In Dedicated Solutions, in billing, we see already new projects and it's happening in intelligent transport systems, so tunnels, highways, monitoring systems. This was delayed, as mentioned in the beginning by 1 quarter. We think Q2, Q3 will show quite nice contracts, long-term contracts. So this should also strengthen the Dedicated Solutions system. In Serbia, we don't know how quickly it will open up again, but we are positive, yes, here. So this is -- in payment, overall, we -- as mentioned, we expect continuity of the trend, very good prospects in Romania, where we are increasing dramatically our market share in independent POS, the merchant business. So this -- we hope to see some nice growth this and next year. And overall, this business is nicely expanding. We are planning on a business plan how to expand with e-com and invoicing business and independent POS business to Spain now from Portugal. So this is a plan. We've made a small acquisition of fiscal register player in Spain. So this will help us to open up the merchant business on the Spanish market. And I think that's it for the summary, and we are open very much to your questions. So if you want to use the chat or you can use the voice, we'll unmute or I don't know if Michal, we can unmute everybody, and you can just ask us the question, yes.

Yes. The microphone is available.

Yes. So you can use mic or chat, please ask questions if there are any.

Question, are we actively acting -- working on acquisitions currently? Yes, we are. We had a small slowdown because of major acquisitions done by the end of the year. But yes, we're working on the pipeline. We don't plan to change our policy with that respect, and we'll be continually acquisitive, yes. Prospects in India. Well, I would say this is very strong business. Latest acquisition, we bought Middle East and India, yes, Middle East is more white label software solution business, but we are entering also merchant business aggressively. On both markets, we are -- where India is much more merchant business. On both markets, we are waiting for -- or applying for licenses in India, which will definitely take much more time as the market is much more regulated and difficult. In Dubai, we expect to get this license maybe this year even. Still in all our business models, we plan to do it through intermediaries, which leaves some commission to the intermediaries, but we expect this to generate sufficient profits for the company. So basically growth potential is quite big. What worries us only is that we have a lot of outstanding receivables even from very reputable customers and big banks, but some of them exceed half a year, sometimes even 1 year, and that's why the provisions we started to make just in case, they, of course, will be reversed as the payments are made. But here, the integration with these companies is increasing. There's more interactions, more visits, more joint systems that we use in reporting, in sales, in finance. So this is -- we are very positive about it so far. I don't know if I answered your question about prospects in India, but please feel free to narrow it down, if you wish. On the Polish conference, we got also questions. I can just help out here that, what is the consequence of Constellation acquisition or that is in process of Asseco Poland. I said we had no interactions with Constellation so far. But after our study, we see some similarities and some differences. The major similarities that they are very acquisitive so as we. So we are looking at the differences that our acquisition targets, we are -- they are looking at everything that moves in the software domain, any industry, any area, any geography, whereas we are narrowing down the industries. So if I look at 10 years past and now our focus is more focused. Yes, we are definitely looking at smaller amount of industries trying to increase concentration in the verticals where we are strong, and second difference is, we are always working on integration, very much on the synergies, which come in next 2, 3 years on the moment of start, but we see them after a couple of more years, bringing very nice effects. So we have common financial systems, sales systems, reporting systems, HR, marketing. So this is creating like a corporate group, which is our policy, and we rebrand the company long term and create like Asseco or Payten brands on respective markets, yes, so that's the difference. Any questions? Anything additional you'd like to ask? You can use chat/voice. We hope to follow on the stock market of Asseco Poland and in terms of especially PE valuations. So let's see if this will be observed or not. If no more questions, we invite you to directly contact. If you want to contact, if you want to call, the close period is finished, over, we can talk much more openly. So if you would like to set up a call with me and Michal or either of us, for sure, one of us will be available, just let us know. Thanks a lot. Enjoy the rest of Friday and the weekend. Thanks, we will be in touch. Thank you. Bye-bye.

Bye.