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

So guys, preliminary results. Usually, they are the same or always the same as we published so far. A quick summary, and I will deep dive into details in a second, but we have a very vary, but we are quite satisfied with profitability, but that we don't expect to grow more but the profits go up despite pretty modest growth in revenues, and this is something we did say in the beginning of the year that this year, we expect slower, slower dynamics on the net revenues, but we hope to optimize the profits, which is already visible, yes. So operating profit is 30% here, growing year-on-year. And 1 of the key drivers is banking. So banking revenues, in this case, grow also and operating profit more than doubled. And we think it's not the end. This can continue in terms of a very good banking performance, and we want to keep it up that way. Payments, excluding PPA right of slightly growing. Yes, we had some write-off cleanup of the past investments finally, but the revenue slows down in traditional old-school business like POS and ATM. But it's offset by independent POS networks sold to the merchants and ECR businesses. As for e-commerce processing, we have some write-offs which hit and slowed down the dynamics. But overall, we are pretty happy with the organic growth over there. and in Turkey, where we had a huge pressure, as we mentioned, because of 2 customers going in-house. One is finalizing this second big customers. Second 1 is in process. We managed to compensate this very much by cost cutting, yes as we had acquired. Big team there, and we successfully are performing this exercise, which turns into a reasonably good effect on that market. Dedicated solution is absolutely not satisfactory yet. We have a slowdown on some of the tunnel road monitoring projects and shift to Q3, Q4 of these projects. So this is impacting the operating profit. The PPM goodwill write-offs, Mike mentioned more about it, but this is between operating profit and net profits affecting net profit on $3 million. So that's why the discrepancy in the dynamics between the 2 lines, cash flow excellent. We don't expect this to get worse, maybe only better. So cash conversion is very good and significantly improved to last 12 months, yes. And transactional business, this e-com drop that I mentioned also resulting from Turkey and some of the recognition from Middle East and India last year, which we reversed later on in following quarters last year, but this is cleaned and very nice dynamics of independent POS and processing of physical transactions. This is nicely growing. And let's look at the numbers we please.

Let's go to numbers. So our traditional in yen numbers, first columns full numbers, including hyperinflation, then third and fourth, excluding hyperinflation reporting. And here, as we already mentioned, flat on top line, but with change of structure of revenues, growth of own activities by around EUR 8 million with a decline of third-party supervisor. Operating profit, excluding hyperinflation and it's 27%, 30% with high penetration as we commented. And net profit it's slightly lower than last year, 4% below. And this is mostly due to financial activities. So in balance of financial activity is change of balance of financial activity year-over-year is minus EUR 3.2 million out of this EUR 2.1 billion is write-off of remaining part of goodwill on Indian operations. So now Gobi is zero net value. And plus restatements of poor liabilities and earnouts. Here, we positive impact last year, around EUR 1.9 million. This was first type of restating liabilities related to India and Dubai. Now this year, we don't have this. So net, there is EUR 1.4 million lower result. From positive ones in financial activity, it's EUR 300,000 lower cost of dividends rate to noncontrolling interest in case of present ownership method. This is mostly related to Eastern pay, which paid dividend earlier this year in -- so on accumulated numbers, there is no -- the drop in difference between quarters. Taxes, Taxes are slightly higher, around EUR 400 more taxes simply because of higher operating profit and profit before tax. But when we look at results adjusted for those items, which are, by definition, not related with tax like goodwill write-off and so on. effective tax rate is slightly lower than in previous year. So let's have a look at results by business wins by segment, so banking. Here, we have the biggest growth or only growth. So top line, EUR 4 million bigger than in 2020 and '25, and it was delivered by all 3 business lines, which we have in banking core solutions, multichannel solutions and security portfolio. The growth is mostly like 65%, more or less on services, implementation and modifications. And the remaining part is recurring SaaS and maintenance revenues. Geographically speaking, growth is mostly in Southeastern Europe, in Serbia and Croatia is the leading ones plus in smaller values in Bosnia Herzegovina, plus in Central Europe, in Romania. This growth of revenues was 1:1 transform to operating profit, which increased EUR 4.1 million previous year and reached almost EUR 8 million with profitability of 35%. Dedicated solutions, here flattish revenues, but as already mentioned, we have some cases in road projects where -- and the work was done, but we are not able to recognize or to create some allowances due to some external factors and delays we've approved our for some sections of tunnels or highways, but with our strict policies we would prefer to do this way. So operating profit slightly lower than in the previous year in dedicated solutions. And the last line, Payment, here we have drop off revenues by almost EUR 4 million. in a moment, few words more on which product lines and operating profit, which is slightly lower, EUR 600,000 than previous year, but this includes write-off of assets recognized during purchase price allocation or PPA for Indian operations. If we exclude this noncash write-off, which was EUR 1.23 million, there is a growth of operating profit by around EUR 700,000. So in Payment, a very good quarter, as already mentioned, for ECRs and IPD, we have growth of revenues by million. And this is -- this is mostly Western Europe, Spain plus in Southeastern Europe, Croatia and Slovenia. E-commerce and process flat year-over-year. However, here, we have a drop of revenues in India in Dubai, around EUR 1.4 million, which was compensated by increase in Turkey, Portugal and Spain. For ATMs and POS related with lower deliveries -- in case of ATM business line, it's mostly Southeastern Europe, only Southeastern Europe Croatia, half of this drop and also Montenegro and Bosnia, and in case of POS, this traditional POS line drop of revenues is mostly related with Western Europe, Spain deliveries of Android post terminals were small. And let's have a look at geographic. Southeastern Europe, the strongest one, almost EUR 3 million growth of operating profit. mostly in Serbia and Croatia. And as I have mentioned, Serbia mostly banking crash banking, but also in payment ECR IPD business. press in this case, also the dedicated solutions was better than in previous year. Smaller growth in Macedonia, in banking and in the dedicated solutions, and some slowdown both on revenues and operating profit in Bosnia, and this is related with road projects, which I already mentioned as in previous year, this entity, which is responsible for utilities business, they had some projects already in Q2. And this year, there was no such product Central Europe in growth of revenues and operating profit. This is mostly Romanian banking as the biggest contributor. Western Europe, we have a drop of revenues due to lower deliveries of POS terminals and also drop of operating profit, which was partially compensated by growth of e-commerce, which what I already commented before. Turkey, pretty good growth of revenues and growth of our operating projects, so visible cost reduction actions, which we took in Q4 last year and beginning of this year to address the loss of to clients or maybe not us, but the fact that they switched transactions to their own payment gateways. And in Gauba, if you drop of revenues quite significant. I commented this on the e-com, but flat result. If we look at PPAs in a fat from the bottom, we have drop of result by EUR 700,000. And this is related with those write-offs of PPA assets, which I described if we exclude this cost like regular depreciation cost, we would be around say, EUR 1 million or lower than in previous year. This is nothing what we should expect for the coming quarters. So this is a difference about Q2. And now in accumulated view for 2 quarters. It is very similar to the 1 for Q2 only. As you see a slight growth on top 3% year-over-year. EBITDA, EBIT growth, 20%. The difference is that there is also growth on net profit. Here, what is what thanks to what is -- and that in 2025, Q1, there was loss recognized on sale of subsidiary in Turkey movement. This year, there is no such an event so it affects year-over-year dynamic positively. So this -- and I think this year, this is the biggest and the biggest effort taxes, of course, on accumulated data also are higher by EUR 1.3 million. But the same similar comment as for Q2 only, no growth of effective tax rate. When you look at segments, again, various picture. So big growth of revenues in banking, EUR 6.3 million EBIT higher by EUR 5.5 million, also improved profitability from 22% to 32%. And like about contribution by business lines or geographies exactly the same comment as for Q2 numbers. The dedicated solutions here, we have a growth of revenues. So a bit different than Q2. And slide very minor, but increase of operating profit. Impairments, drop of revenues and drop of operating profit by EUR 600,000. But if we are to adjust for write-off, it will be also slight increase. And when talking about drops of revenues in payment, ATMs and POS deliveries, exactly the same as in okay, drop on ATM is lower than in Q2 due to some deliveries which happened in Q1. E-commerce, here we have dropped on cumulated data, and this is due to TXOne is India and Dubai Q1 2025 was last quarter of high results. So there is a drop in year-over-year plus in Turkey, Q1 2025, it was also before clients switched transaction. One client already started to switch transactions partially, and the second 1 started this switch later. So this is why we had this drop year-over-year. ECR IT, very strong and growing for 2 quarters. And short view on countries. Again, very similar picture. So the strongest Southeastern Europe, more than EUR 5 million higher operating profit the growth mostly Serbia, Croatia and Macedonia, so exactly the same as Q2, a slight decline in Bosnia. Central Europe, EUR 1 million higher result and thanks -- and it's the same in Q2, thanks to Romania and banking. Western Europe, slightly lower also the same common growing e-com and shrinking traditional POS business, Turkey flattish revenues, but increase of results, thanks to those restructuring actions. we take Yes. And Midland India Curis this clearly visible this what I commented. So a huge drop of revenues due to Q1, Q1 2025 and the drop of operating profit by EUR 1.6 million. So this is about result. And let's move to cash flow -- it's very good. As already got mentioned, EUR 38 million operating cash flow for 2 quarters. This is EUR 13.5 million more than for the -- in the same period of 2025. So significant improvement with lower investments in infrastructure for outsourcing and own networks. Slightly higher expenditures on M&A. But these are not new entities. And these are managers for put call options, and now it's mostly put call on BS Telecom in Bosnia Road business plus other in Slovenia, which is in payments. When we look at operating cash flow EBITDA conversion rate last 12 months or first call 91% of EBITDA converted to net operating cash flow. So we believe a very good level and we are satisfied. Current balance sheet, EUR 61 million cash at the end of June. So EUR 30 million lower than end of last year. But we need to remember that end of June on 30th of June, we paid a dividend for 2025 plus, of course, we had those investments in M&As, which we have done during this period. Net cash or slightly higher than the end of last year and significantly better than the end of Q2 2020. As you see below in working capital, a drop of receivables, bigger drop of receivables than drop of liabilities. Of course, good, slightly increased POC valuation assets this is related to status of projects and realization. We expect more to be closely invoiced in the second half of the year. Okay. So this is about the balance sheet, and let's move to outlook for '26 and backlog. Piotr, do you want to take this?

Yes. Yes. So backlog, guys, is improving slightly. As mentioned, we do expect a slowdown on the revenue side this year versus past couple of years. even though you can see slight acceleration compared to previous conferences or previous outlooks that we have performed -- it's been patent, the growth and then the banking and dedicated solutions, so 8% roughly in Pat, slightly below that in the other ones, but we do expect this to grow a little bit still in the second half of the year. In terms of outlook, we do focus on efficiency, on profitability. And we were asking the morning on the product conference where the biggest upsides are, well, I would say, the quick ones, the biggest ones are on the loss bringing units, which we try to eliminate on the last year loss bringing units business units generated about EUR 12.5 million losses. So I cannot tell you that we will have no loss bringing units at all because some of them are on the early-stage investment phases where we want to develop the business and deliberately, we subsidize it in the initial phase. But overall, we do expect a big improvement on that side as well as on not the best contracts that we try to restructure, renegotiate and improve years. People efficiency, observing this, their workload and time tracked is another area which we try to squeeze and improve. So we are pretty positive about the second half of the year. Yes, the outlook is positive as before with less risk of negative outturn. And also for '27, we have pretty positive initial views, but this -- we will comment later in the future. And having said that, I'm open with Michal to your questions. So please -- you can write them on chart or you can voice them out. Let us know if you have any requirements for additional explanations clarifications or anything else that you would like to know. I think we can unmute so people can talk to us. Monti, I hope you can do that.

Yes, it's unmuted.

Guys, any questions? I was asked is profitability of 20% on EBITDA level of moving from about 20 to 30 possible in the near future. I think it is possible. I'm not saying this year, but 27% should be achievable, yes. or at least moving very much north in terms of this target. Listen, if there's no more questions, we are inviting you to direct contact beyond the new compensation scheme that is currently discussed at ACP level. Well, I'd love to, actually, yes, I mean, I was hoping this would happen in '25 already, but this was a bit delayed by as component. -- net discussions. So we are sort of prepared and ready to do it from 26%, yes, unless our supervisors or whatever will stop this. We are very much happy to have ROIC based and net revenue growth-based compensation as management. People know about it. It was announced. Everybody knows we are moving into this direction. So it's more in that formal decision and approval for this decision than the organizational readiness. Yes. So we had 1 question. I am not sure I know what you mean by EBIT floor for us. The floor is the lowest level we can have because do I know the EBIT floor for us? Can you specify more by what floor you mean? You can do it on chart or the lowest EBIT expected, but if it's the lowest EBIT expected, I wouldn't go there, but definitely, we expect growth compared to last year, as mentioned before, yes.

So I think you unmuted me, right? Just a quick question on that one. First of all, congratulations on good numbers and definitely very nice to see how the business is improving on the profitability side. I'm just quite curious about -- if you think about the current compensation scheme that's now coming as this passed at AC I was wondering, I know there is some EBIT floor in terms of margin that the business has to have. So you receive the majority of your bonus -- so I was wondering, I know that the bonus scheme is not in place yet. That's something to discuss in -- I mean, in the general meeting next month. So I was wondering if you already know what's the target or second Southeastern Europe when it comes to EBIT margin floor that the parent companies are expecting you to be at.

First, I'm not aware. And second, to be honest, I don't think this is being even discussed because I never heard about a floor level or something like this, yes. I mean I can say, internally, we are probably overperforming the numbers compared to what we said most probably will do, and I never heard any disappointment or a concern of it is, yes. So basically, for us, the major driver is willingness to do more, get higher and better. And we want to do it actually a bit quicker. -- then may be assumed. So let's see how it goes. But we are undergoing a major transformation this year, and I hope will continue next year, but it will be much more visible in the next year, yes. But we didn't get any floor on EBIT level, yes, nothing like this was mentioned.

And no EBIT thresholds, right?

No. No. Okay. No, no, no. Now there isn't actually the thing which is being disputed is that our variables are much bigger than for example, TSS or CSI standard, yes, in proportion of the total compensation as the question is how to address this, yes. So whether to increase the fixes or to have a different split of share-based payments and cash-based payment in existing variables something like this, yes. but this is 1 of the topics being discussed and disputed, yes. And yes, that's it. I hope I answered you, roughly, yes. I appreciate I would just send you the proposal that I've seen and maybe that helps a little bit what I'm talking about that it is used -- we have a formula that is used in TSS and it's been discussed a Secopoland, and we have tested it, looked at it so there's nothing that I think would surprise us, but I don't remember any floor topics there, no.

Yes. I mean just have it in footing.

And there is something it's called minimum EBIT threshold -- so that's what I was relating to. And I know that's the reason why TSS is doing that is usually because they want to make sure that the businesses are not doing everything to just keep growing recurring revenues. -- but as well to maintain some minimum profitability, and that's why they usually have this the threshold -- and I mean, that's -- maybe you have a differently soft -- maybe this is a nuisance just to control because in the formula, you have a formula of net revenue growth and also the return on invested capital. So they want us to be compensated by pure revenue growth without having the ROIC in place. So maybe this is about having this minimum return on invested capital or proportion of EBITDA to the capital invested to make sure that we don't have units, businesses or operations, which just focus on growth and they are notoriously losing money or the inefficient, yes. So probably, this is some safety valve or something like this for these purposes.