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

Good afternoon on our update about Q2 results. Let us wait a few more seconds to -- for those who are still joining, and we will start in a moment. Okay. So let's start. Welcome again. So let's start with short highlights about Q2, how it went. So we see visible improvement in Dedicated Solutions business unit. It's mostly reflected in backlog for Q3 and whole year as well as for 2026. More about this in a moment, but it's growing quite significantly. Dedicated Solutions had a pretty good quarter with big growth year-over-year. But still, we see a lot of room for further improvement and result of -- results in longer period. As we mentioned during Q2, there was a construction of government in Serbia. So something -- what happened also during 2024. This is completed. The government is working, but it caused some delay in projects opening and effectively some things which we hope to do in Q2, they slipped over to Q3. In Payment business unit, we see slowdown in Q2, and it's caused basically by 2 areas. One is India and performance of this merchant business in India, where we -- following our quite strict accounting policy we have covered receivables with write-offs and discussed negative impact. And second is in -- also in e-commerce, but this enterprise part in Turkey, where one of the banks, major banks, we have one of those 4 biggest we have is moving towards in-house payment gateway solution. And this transfer of transactions to the in-house system is happening a bit faster than we assumed. And this has negative impact on Q2 numbers. It was a pretty good quarter for POS-related services with pretty many equipment deliveries and also positive for direct-to-merchant line, so electronic cash registers and IPD. This year is pretty good for cash conversion. And for those of you who monitor us a bit closer, you can remember that H1 in '24 was not strong for cash generation. But this time, it's pretty good, and we are satisfied. And this is despite those collection issues in India and Middle East where we were describing before. For banking, positive and the results are a bit higher than we forecasted, than we expected. This is mostly thanks to Core solutions and smaller new models we are currently implementing to various banks in the region. So it's not a matter of few big projects, but rather many of them but of smaller value. And traditionally, some insight about transactions in payments. So in e-commerce, we processed 570 million transactions during Q2, with 6% growth. Despite this transition of one client to in-force solution in Turkey, very good dynamics in IPD, 63% and pretty good in processing of physical card transactions on ATMs and POS. So let's move to results. First Q2 and -- just to remind you, first 2 columns are total numbers as we present them in our financial statements, and this includes hyperinflation reporting for the Turkish operations. And here we have some change year-over-year, which is related with lower inflation rate and bigger difference between average exchange rate of Turkish lira to zloty exchange rate on balance sheet [there]. And as in previous year, FX and operating profit of hyperinflation accounting was positive. This year is 200,000 negative. And the results generated in financial activity is mostly related with revaluation of goodwill. Last year, it was around EUR 1.4 million positive. And this year, it's only EUR 300,000. At the end, it's not bad that the economy is stabilizing and inflation is dropping. But for those adjustments, it has an impact, as I mentioned. So let's concentrate on those numbers, excluding this noncash hyperinflation reporting. And here on top line, we have growth of 11% year-over-year, mostly on our own activities. By activities, I understand services, licenses, maintenance and so on, but our own not [resell]. Around 84% of this increase is caused by own activities. On operating profit, 22% growth year-over-year and pretty similar 21% in Polish zloty. Previous quarters, there was always difference between euro and Polish zloty due to strengthening of Polish zloty, but now it's stabilized and already in Q2 '24, it was pretty strong. Below operating profit, we have a bit lower dynamics on net profit. And here, we have 2 reasons or 2 aspects. One financial activity here is positive. The result on financial activity is higher by EUR 900,000 year-over-year and this is mostly related with a revaluation of contingent liabilities and put options for minority stake. We have higher cost of dividends to noncontrolling interest in financial activity, but still the balance is positive. And when talking about taxes, here, here we have income tax higher by EUR 1.6 million year-over-year with effective tax rate higher by [6%] year-over-year. And what contributes to this EUR 1.6 million? About -- around EUR 0.5 million is simply related with growth of operating profit and pretax profit, so natural change. Another EUR 0.5 million effect of low base. By low base, I understand that during 2024, the recorded adjustment of corporate income tax for 2023, and they were positive. I mean they decreased taxes in '24. So it was kind of one-off. Then we have EUR 200,000 higher taxes related to dividends, mostly withholding taxes. Our dividend as is higher -- was higher this year. It was already paid. And obviously, we collected more from our subsidiaries. And some of the which are not in EU generate taxes. It can be withholding taxes or some additional tax, which needs to be paid here in Poland on such dividend based on [ WTT ] agreements. So this -- and we also included some provision potential Pillar 2 tax. It's early estimation. It's not sure if it will be this or a bit different amount, but to be conservatively, we included EUR 100,000 provision for potential tax. So these are the reasons for this a bit lower dynamics on net profit. When we move to segments. And as I already mentioned, Dedicated Solution is the one which was very strong, and it drives the results in Q2 year-over-year or EUR 3 million higher and then in 2024, with pretty flat revenues. But the structure of those revenues is again changed. It's more on than in the sale of third-party solutions. Geography, I will comment in a moment, but most of this growth is in Bosnia, Herzegovina. Banking, pretty good, above our initial assumptions, growing revenues by EUR 1.6 million, slightly lower operating profit. To recall you, our cycle is that we increased compensations after annual appraisals from 1st of April and this is visible here those changes. And last, Payten, the biggest payment revenues growing by almost EUR 9 million as you see in all business lines we have increased. Direct-to-merchant electronic cash registers and IPD. So the first number one on the list growth is mostly in Croatia, but also in other countries like Romania and Western Europe. E-commerce, we have grown despite the situation in Turkey. Growth is from India, Middle East, Serbia and Croatia. And Turkey, it was flat year over year. In a more traditional business of ATMs and POSs, ATM is pretty stable, slightly increase year-over-year. Of course, some changes between geographies, more delivers this year in Croatia, less in Romania, but it's natural that deliveries do not happen each quarter. For POSs, big growth of revenues in Western Europe due to deliveries of Android [POSs], but with lower profitability, lower markets than it used to be into previous years. On top of this, pretty good POSs for Croatia and Central Europe, so Czech and Slovakia. When talking about EBIT, as you saw on previous slide, with total numbers, it's slightly lower than last year, and the structure is a bit different than in previous quarter, lower share of e-commerce and processing plus ECR and IPD. And this is -- this is mostly due to e-commerce, where we have dropped, and it is directly related with Turkey. What I've already touched, plus India, where we booked write-offs for receivables. So let's move to structure by geographies. Very strong Southeastern Europe, 3.6 million higher result year-over-year. As I already mentioned, good and strong big increase in Bosnia and Herzegovina. Thanks to Dedicated Solutions. Very nice growth. Croatia, EUR 600,000 higher result, mostly thanks to Payment and E-Commerce, I mentioned POS, I mentioned. So those lines and also in Dedicated Solutions, pretty nice with a bit lower results in Banking segment. Other geographies in Southeastern Europe, slightly higher -- lower, but no major things. Some recovery in Central Europe, mostly thanks to Banking and Dedicated Solutions in both cases in Romania. Western Europe, lower result despite higher turnover, but as I mentioned, bigger deliveries, but with lower marks. And on top of this, last year, we did have some AI-related projects, software projects. And this year, we didn't have them. So this Turkey, I already commented, the drop year-over-year is related with Payment and E-commerce. So we have obviously increase of costs, which in Turkey is obvious, and it happens every year. But we lost part of the revenues. So this -- and in India, this negative result is directly related with write-offs for receivables, which we have booked following our policy management there, they say there, this is the [indiscernible] should be recovered, but we want to be prudent and we do it always as our policy says. Good. And results for H1, so accumulated for 2 quarters, very similar picture. So I will not go that deeply into details. As you see on top line, we have a very similar increase 12% year-over-year. On operating profit, it's slightly lower 15% due to Q1 which was with lower dynamics than Q2. And here, we have bigger difference between Polish zloty the euro figures, I mean dynamics year-over-year. And this is due to exchange rate in Q1 when in 2024 in Q1 is what was not that strong as it is since Q2 2024. On net profit, only 1% growth year-over-year. But if you please remember about this one-off from Q1, the loss which was recognized on sale on disposal of Mobven, subsidiary of the group beginning of Q1, we sold and the accounting effects of writing of entries from equity and in P&L and it hit our result by EUR 1.5 million. If we exclude this, it looks a bit or significantly better. About other elements in finance activity, they are pretty the same as I commented for Q2. The same with taxes maybe with one extension comment about prior year adjustments of tax in previous year. So difference year-over-year. On Q2 only, it was EUR 0.5 million on accumulated data, it's EUR 700,000. So let's move to business units here on cumulative data, online shows growth year-over-year. Again, the strongest one in Dedicated Solution which generates most of growth, but also after a very strong Q2 is positive, EUR 200,000 year-over-year increase and payments, EUR 0.5 million increase year-over-year. For details in payment, again, I will not comment much. But as you see, all lines show growth year-over-year and including ATMs where we did have deliveries, but this time more in Q1 than Q2. And for geographies, again, a bit similar, strong Southeastern Europe. Mostly thanks to Bosnia and Croatia. A bit of slowdown in Serbia, which accumulated is EUR 0.5 million. This is mostly related with Dedicated Solutions. So this topic I mentioned during highlights or some delay in contracting. But we hope for Q2 -- H2 to be better. Backdrop shows that it should be better. Good quarter for Central -- good half year for Central Europe and slowdown in Western Europe. And this is the same comment as I gave to Q2. So the same reasons on the bigger numbers due to 2 quarters. Middle East on Q2 only, it was positive. Here we have negative. But in case of Middle East, we also included some write-offs, the same challenge with collections still. So we included write-offs into our policy but in Q1. And Turkey dropped EUR 1 million year-over-year, but is a directly effect of Q2, which we already discussed. So let's move to the cash flow and liquidity. I already mentioned that it's pretty good, and we are satisfied. So as you see for H1 this year, operating cash flow was EUR 24 million, significantly better than previous year with also better conversion of EBITDA to operating cash flow, 67%. So it's pretty okay. Usually, in our case H1 is weaker than H2. This is somehow natural especially in enterprise business where we have big projects with big clients who have their budgets and they have bigger push for closing and approving some stages and invoicing in second half of the year than at the beginning. So better operating cash flow, some of this operating cash flow allocated to investments in fixed assets and intangible assets. So CapEx, around EUR 9 million, mostly this one related with projects for outsourcing and own network. Also some of it allocated to M&As realized during this first half of the year, plus payment of some earnouts for previous acquisition. When we look at last 12 months, accumulated data, accumulated operating cash flow almost EUR 70 million, so it looks okay, yes. After this week, previous year when it was EUR 48 million. It looks like we are back on track and operating cash flow is similar to the one in '23. And this one in '23 was, let's call it pushed by extraordinary events. When some clients paid us last day or last days of the year, and we have not settled our liabilities towards vendors. And this is reflected here in those KPIs for cash conversions like nominal one in '23 was 100% adjusted for those one-off almost H. And as you see now, last 12 months shows H. So it looks okay, and we are pretty satisfied. And this cash flow helped us to reach this current liquidity situation, EUR 68 million cash. Short term, increased by almost EUR 5 million versus end of the last year. Short-term loans, they increased by EUR 4.5 million, but it's not -- mostly, it's not due to taking additional short-term loans. Just those loans we've planned repayment schedule, they are closer to repayment and some installments are now presented in short term. No big changes on leases, but it's regular business. And dividend. Here, we have a pretty big dividend liability. The previous we paid dividend last days of June. And this year, we paid our dividend and also some dividend of our subsidiaries. They were paid in July. For M&A abilities, those in short term, they increased by EUR 14 million, but this is mostly again due to reclassification because these are put -- liabilities related with put options of minorities of [GSBS], [indiscernible] which were at the end of last year presented still in long term, and now they are falling into this 20-month window. So they are in short term. It doesn't mean all of them will be realized because it's only option, but we have to present here. So net cash, minus almost EUR 6 million. And then when we move to net operating assets, EUR 30 million plus. This difference between receivables and liabilities increased comparing to end of the year, and it's similar as half of the year in 2024. This, as I already mentioned a bit, it's kind of cycle where we do have more recognitions during first half of the year with approvals and invoicing coming later closer to end of the year. With inventory, we managed to reduce the balance and see some capital flow from this. And this will be commented after Q1 that we will be working to reduce. We have some orders coming for the delivery and it is visible. Of course, we will never reduce this to 0 because in payment business, we will have to have a stock. So this is about liquidity and let's move shortly to outlook for 2025. So as always, we present backlog. No big changes in overall 13% year-over-year increase of backlog in -- for Q3 and very similar for whole year. So it shows there should be a continuation of trend. As you remember, our revenues increased 12% year-over-year in H1. Backlog so it should continue similarly. And some changes between business lines, stronger backlog in Asee part. So Banking and Dedicated Solutions where we have 22 for Q3 and 15 for whole year. And it is a -- it's even stronger in Dedicated Solutions, a bit lower in Banking. And some slowdown in Payments part, 6% for Q3 and 12% for whole year related to this Turkey story I already mentioned. So this is it. And do you have any question? You can write on chat or maybe raise hand and you will be given [brief] with voice option.

Okay. You offer a wide range of different products and services. So what are the most important product services, core products in different segments? And the Constellation [Group] has now acquired additional shares from [Asseco] Poland. So far, you've been very [researched] about this? Are there any remaining of factors or restrictions? And are any regulatory approvals still required? Okay. Let me start with the second part. I think this is honestly more question towards Assecon Poland than ask me. We are not involved in the process. We are not part of the process or this process. Okay. We know this what is from the press that they -- the Constellation needs to get approvals from European Commission, some local regulators. This is in progress, but I just really know nothing to share about this status. So please contact us Asseco Poland for this. And about the products and services, what we offer. Okay, this a bit longer story for a longer discussion, but -- let me start with payments, yes. So in payments, we have basically those 4 business lines, which I presented on the slide with results. So let me maybe go there. It will be easier to describe. And those results are -- sorry, those business lines are product-based, yes? So in first-line ECR and IPD, we offer directly to merchants. So small restaurants, cafes, retailers, electronic cash registers and POSs. So terminals for payment. But of course, with this service of processing the payment. And this is something on the line which is strategic for us, where we want to grow with direct to merchant. Then we have e-commerce and processing where there are 2 main areas. One payment or payment gateway, which offer to enterprises, so banks and big fintechs where we provide in mostly in software-as-a-service mode, our payment gateway. So they use our payment gateway solution. Second is payment aggregation mode where we work on the e-money license, where we -- where we are -- process transactions directly for merchants. So again, our clients are not big enterprises, but the different smaller or bigger clients. And third one is related with processing of transactions than our ATMs or POSs again, in SaaS mode directly for enterprise clients. So mostly banks, but also some independent players like independent ATM networks for example. Then we have third line ATMs where we provide ATMs and related services. So we can offer ATMs as a simple delivery and maintain mode. But also an outsourced mode where ATM, software, everything stays on our balance sheet. And we provide to banks a complete solution, which includes ATM software and services related. So we provide working devices. And the same is with POSs, where we can deliver POSs together, of course, with software and always software is our own solution, own application. And we can deliver [self] to banks or some other players and then maintain them or to provide them in outsource. So they stay on our balance sheet. And for monthly, we rent them to banks. So this is for -- in few words for Payment. Then in banking, we basically offer everything, what banks needs to operate. Yes, starting from big core banking modules, those basic ones for omnichannel to security. So we can offer everything, but we can also offer only selected module, which covers some part of processes or functionalities banks need. This growth here this year is on, for example, thanks to new model financial gateway which we offer to various banks in Southeastern Europe region. And the last one, most difficult is Dedicated Solutions. Then we offer different things. We have still declining, but still we have this part where we deliver third-party solutions. So equipment, infrastructure and third-party licenses. This is not our strategic focus. And the second part where we have our own solutions and own software. Here's [big money] different ones, but those which are most important where we focus and we put attention to are intelligent traffic solutions. So these are systems to monitor traffic on highways, in tunnels, on solutions for traffic controls, regional traffic control centers. Based on the same platform, we also offer smart city solutions to monitor traffic in the cities. So this is one. And second is from those most important is solutions for utilities, mostly energy sector. So this is [billing] solutions, smart metering solutions with managed surrounding solutions around. But this platform is pretty flexible. So it can be used also for gas industry or water providers. So different ones where there is this metering need and calculating billing to many huge numbers of clients. So those are 2 most important, a bit less solutions related to business process management, which are also reported in Dedicated Solutions. I hope it you clarified a bit. If you would like to get more, please contact me directly on one-to-one. I can go a bit more into the details, but it will take -- pretty more time than we have here. Any other question? If not, if not, then I invite you to direct contact. Whenever you have questions, please feel free to contact us. We'll be happy to organize call or meet if you are in Poland and we can discuss in more details. So thank you very much for joining, and welcome you to direct contact or join our Q3 conference. Thanks.