Econocom Group SE (ECONB) Earnings Call Transcript & Summary

Welcome to this presentation of our results in February 2022. I'm very pleased to see you here after our previous meeting in September, 6 months ago. Welcome to those of you who are physically present here in the room, and welcome to those who are following us online. Let me introduce myself. I am Laurent Roudil. I am the Group CEO for Econocom. So I wanted to share with you the -- today's agenda that we're going to present to you today with Angel Benguigui. So first of all, we'll have our opening words. We'll look at today, this year's main event, and then we'll have the presentation of the 2021 results. We'll look at our outlooks for 2022, and then we'll have a Q&A session. So Jean-Louis apologizes. Unfortunately, he is COVID-positive. Now is feeling well. We had a discussion yesterday with Angel and Jean-Louis. But today is the seventh day of his quarantine after COVID. So if, of course, you had some questions for Jean-Louis, Robert Bouchard is here with us to represent him, and he'll be able to take your questions. So as you know, we have changed our governance in January. Jean-Louis remains the Chairman of Econocom Group. And at the operational level, he will be involved in the strategic projects in terms of M&A and institutional communication. Then Angel was also appointed Executive Managing Director. Angel is still in charge of our international activity but is also in charge of DSI, where we are faced with true challenges in terms of transformation, and we need to also bring some partnership support across all business lines. And as I was saying, I've been appointed in mid-January as Group CEO. I've worked for 7 years at Econocom. I had 3 different positions. First, I launched as the Strategic Group Director. The idea was to work on cross-cutting activities, breaking down silos within the group to create a group culture. Then I was in charge of services for France, the main idea was to increase the profitability of this business line, which we have done in the past 4 years. And then for the past 2 years, I was in charge of the French activity with Samira Draoua, who is in charge of financing; and Mr. Goullioud, who is in charge of Products & Solutions; and Alexandre Lecomte who is in charge of applications. So altogether, we've worked on a new model. We've set up a partnership business model, which is very strong and which has allowed us to relaunch our activity across the territory. So what are the main highlights of 2021? Well, first of all, we had a sustained commercial activity even though it has been slowed down by tensions and pressures on supplies, especially for product center solutions and the financing of technological solutions. We had some issues, but we have a backlog, which is at EUR 100 million by the end of the year, and we're hoping that it will have positive repercussions and we'll be able to deliver these solutions by the second quarter of 2022, we hope. Second highlight, we have, once again, a dynamic activity abroad. We've worked a lot with Angel Benguigui in the past 2 years to get this dynamic. And a year ago, we had discussed this particular issue with the acquisition of Trams in the U.K. We've been working on this acquisition for the past 7 months, and we've felt the first positive results. It had a strong impact on our growth by the end of 2021. Then, of course, we worked across all business lines at the international level with Angel and his teams as our 3 business lines have come back to growth with an increase in recurring operating profit. And we had also shared some difficulties with you back in '21, and we've been able to overcome them, which means that we have now a strong structure for -- across our group. Now as I mentioned, we have managed to increase our recurring operating profit due to all the transformation programs that we have implemented in the past few years. Now we have managed to have a strong momentum as all of our business lines in France and abroad have managed to generate an increase in terms of recurring operating profit. And this is, in particular, thanks to our structural reforms that we have implemented. Our net result, our net income has also increased. We have managed to also decrease our overheads and financial expenses. And especially when it comes to nonrecurring operating expenses, we've managed to significantly cut them as well compared to 2021 -- 2020, sorry. And the last point that I wanted to share with you in terms of highlights, we see that we have managed to get control of our debt, which means that we've now -- we're now able to reinvest in some acquisitions. This is a part of our strategy for the future. And this will also mean that with lower debt, we'll be able to be more confident in the future. And that's also the message that we want to share in 2022. So we'll now look at the financial results with Angel. We'll look at the financial situation of the group and share the 2021 key figures.

Thank you very much, Laurent. So first of all, I wanted to congratulate Laurent Roudil for his appointment as Group CEO for Econocom. I think that this is a great news. It brings stability and continuity in terms of top management, and it is a well-deserved appointment. So I wanted to briefly present the figures for 2021. And then, of course, during the Q&A session, we'll be able to go more into details. So let me start with this traditional slide looking at the key figures for 2021. So first of all, our revenues -- our revenue is, rather stable compared to 2020 despite, of course, the fact that we are evolving in a very difficult environment in terms of supply. So altogether, we've managed to stand strong and to keep our activity at the same level even though of course, we have managed as well to renew with growth for TMF. It's the first time in 4 years. We had a very strong third and fourth quarter for 2021, which means that we are now on a good trend. In terms of recurring operating profit, more than EUR 135 million, we've excluded some expenses of EUR 2.7 million for 2021 that usually were included into the ROP. So with these expenses, we would have an ROP of EUR 138 million. So altogether, plus 16.1%, which is very promising. So we have a profitability rate at 5.4% if we compare the ROP to our revenues. In terms of net income, plus 40% growth. So if we keep this up for the next few years, it will be excellent. And now we'll go more into -- we'll look at this more into details later on. And in terms of net financial debt, they're 0.5x the EBITDA, EUR 66.8 million. So we are now in a situation where our debt is in control and is no longer an issue. Now looking more into details for our recurring operating profit and our profitability ratio. So our Products & Solutions business line comes first with EUR 54 million. It is the highest performing business line, biggest contributor. In terms of profitability, we see that services have performed extremely well due to the management of Laurent and the work carried out by his teams with 8.4% profitability rate. And in terms of revenues, I think despite the fact that we have a backlog for -- of backlog 60% for Products & Solutions and 40% for TMF, I think that we've managed to stay strong in TMF. And I think that's the key message that we want to -- you to take home here. Now this specific slide gives you a summary of the evolution of our financial results for the year 2021. We can see that our ROP is increasing and our profitability rate is also increasing. You can see that the Products & Solutions activity has generated EUR 1.07 billion in terms of revenues. For Services, we have here a share of 20% in terms of revenues; and TMF, 37%. So we see that all 3 activities have seen their profitability increase, which is very positive. So we now have to renew with growth with Products & Solutions and Services and to, of course, keep working on boosting our growth for the TMF segment. So here, we have our P&L account, which is a lot more -- which is coming back to a normal situation as the 2 previous P&Ls were impacted by our transformation program. So we see that our nonrecurring expenses have strongly decreased. So if you look at nonrecurring expenses, we see that they've been divided by 3, which means that we're now finished with our transformation plan and that our expenses in the near future will be much lower, which is why we had 2 P&Ls in the past that were heavily impacted by the expenses due to these transformation plans, and this was budgeted at the beginning of our transformation plan. So we see as well that financial expenses have improved due to our debt management, which means that we have net profit from continued operations, which is at EUR 77.7 million compared to EUR 50.3 million year-on-year. So we have some discontinued operations, which then we need to take into account to route our net profit at EUR 70.1 million. Regarding the net financial debt, even though it's no longer an issue for us, I'd like to say a few words on our NFD. We have -- in 2021, have an amount of share buybacks worth EUR 83 million. This has nothing to do with our recurring activities. Without these EUR 83 million of share buybacks, we would have a positive cash flow of EUR 16 million, so rather similar to the previous years. So this, of course, is the information that we want to share with you but it's a rather general presentation. If you have any more questions, so if you'd like to go more into details, we can go into it during the Q&A session. And I'll now give the floor to Laurent Roudil, Group CEO.

So moving on to the outlook for the coming year 2022. First of all, I wanted to share with you some of our upcoming offerings that we launched last year and that have significantly contributed to meeting the needs of responsible digital technologies. We have 4 components to that offering that were launched in 2021, the first one being EcoCarbon. EcoCarbon is a way through which we support clients in measuring their carbon impact. This can then lead to an action plan that we work on with them to reduce that carbon footprint and potentially to offset those carbon emissions through follow-up actions that would then improve their overall carbon impact. This is something that a number of our clients want to better control and manage in the medium to long term. For example, we have a client working in the luxury sector that signed with us last year. We've moved to the first phase of EcoCarbon to measuring their carbon impact. This takes into account their IT equipment, their industrial sites. It was about 25,000 assets that were measured for their carbon imprint last year, with 195 outlets also that were involved in this project. Next, we have EcoTwice. EcoTwice is an employee resale platform. We have clients that rent IT equipment and telecom equipment and then they can buy it at the end of the contract. In public transport, for example, we have a large client last year that led to 3 observations. The first of those observations is that it makes people feel far more responsible. The users, the employees feel far more responsible because as they can purchase the equipment at the end of the day, they look after it better. And that means that the clients have less churn rate on their assets as well. And this also creates volume. We have 18,000 iPads that were included in the employee buyback program as part of the initiative; 75% involvement rate for employees in the program, which is relatively high. And as I was saying, that then drops the damage rate of all of the equipment. So this was very important as part of our offering that we're positioning on the market. And as I said, this has been launched and available for about a year now. Next we have EcoLease. EcoLease is a financing system for refurbished equipment. This is a growth market, and it's something that we wish to further ramp up going forward. There's a strong dynamic around this idea with a strong increase in demand. Next, we have something that we mentioned a little bit last year. This is Product Care We have this offering in Products & Solutions. And this is a way through which we can repair equipment and offer an OTT solution for IT assets to our clients. This is based in [ Seine ] in Paris, Philippe Goullioud, who is right here. We recently had a regional committee meeting in Normandy. This is to work with middle schools and high schools and provide this extra service to them beyond the distribution of the equipment that we already had. So this is for laptops and other related mobility equipment. These 4 things feed into our responsible digital strategy, which is an important part of demand and also matches our legacy know-how within the group because, as you know, at Econocom, we have been involved in this trend. Back 30, 40 years ago, we were already repairing and reselling secondhand IT equipment. This is something that we're good at and we know how to do. Another thing that we launched last year with Alexandre Lecomte's team is to launch our digital transformation based on 3 integrated offerings: modern applications, in cloud with data management. We have some clients that need our support on these 3 things. The first thing enables us to specifically develop things for the client. We had hospitals outside of Paris, for example, that we're given the opportunity to develop an application tool set to help support their patients. This was a designing process, a co-designing process, working with them based on their specs and based on the in-house skills that we have so that we can meet those needs. And this is developed up to more than -- well, a number of million euros in revenue, and this meets an ever more foundational need for our clients. Second, using data. We had some clients who came to us last year and said that they needed to analyze and share the data analysis results, marketing information, for example, that could then be shared with their business units to improve their own go-to-market performance and to improve the agility that they had in the way they could meet their own customers' needs. This is, again, foundational, and we have a number of experts already in-house working on this, and we're continuing to hire skill sets on data analysis. And finally, cloud. We have more and more of our clients looking for hybrid architectures, so halfway between external clouds and also some data that's hosted in-house for them. So we are able to support them in the road map to achieve that and also help them analyze the costs and the governance requirements for that kind of thing. So we have 3 integrated components to the offering that meet the overall needs for digital transformation for all of our clients and services. Another thing I wanted to discuss related to 2022 is that, well, you know that we have a lot of experience when it comes to buying and integrating companies. Right now we have a pipeline coming from the last 9 months or so. And that pipeline is based on the targets that we set for each European country. We want to move forward on acquisitions. In last July, we acquired Trams based on Products & Solutions, Services and telecom asset funding. So our pipeline has significantly shifted over the last 9 months. We are concentrating on our European holdings. And as it stands, we have 2 targets that are likely to transform in the coming financial half, remembering that we wish to recenter ourselves on our core business and this may lead to divestment of 2 other businesses that are not at the heart of our strategy as it stands today. This should lead to 2 things. First of all, there will be no negative impact on our cash position. And secondly, we will be part of a trend. As part of our own fiscal management policy, we'll be able to overcome the challenges in the coming quarters. Econocom for the coming trends believes that we're in a strong growth perspective here. In the financial results that were presented by Angel, the recentering that we implemented, I think, was successful. We have been able to improve profit margins in our 3 core businesses and improved governance over the last years, especially in January. Right now, we believe we can now push for growth, both external and organic based on solid fundamentals and based on a market dynamic that we believe is a positive one given some of the issues that we had last year, supply chain issues being some of them. But we should see improvements in the second half of the year. What would this mean for our targets? Well, revenue growth, we're expecting between 4% to 5% growth in revenue. And as I said, we are expecting strong improvements in the second financial half. We observed this year as we observed last year some issues for suppliers for our equipment, and this applies to Products & Solutions and also for the financing side of things. As part of this dynamic, we're going to continue to drive up ROP. As I said, we had those solid fundamentals and the transformative work that we implemented over the last years has now -- well, were part of a positive trend for us last year and will continue to be going into 2022. And at this point, we believe that ROP, recurring operating profit, will be able to improve alongside the rest. Next, we have a major challenge to overcome. We need to accelerate our talent recruitment as we continue to grow. Alongside Angel, we hired some financial leads for countries, some executive leads for countries. We filled a number of job openings in the central support functions. We have Nathalie Etzenbach-Huguenin, who's joined us, as you probably know. And in the near future, we need to be able to support that growth and be able to ride the wave. We have a program that was set up that was supported by the Board and that will be broken down as we explained last year in each country business unit with succession plans that will be rolled out and high potential key people, job offerings will be filled again to support that extra growth. And this is very important and foundational for us for the middle term. So that's what we have for our guidelines for our priorities for 2022. We wanted to set aside some time for you for Q&A, so we are available, myself, Angel and Eric Bazile if you have any questions that you would like to ask about our financials. So feel free to ask any questions you may have. You can ask them online or you can raise a hand in the room. We have people tuned in online and with us.

Thank you, Laurent. Good morning, everyone.

Any questions? Yes, in the back.

Two questions. The first one on your M&A strategy. So divestments, acquisitions. Can you tell us what kind of multiples you're looking at? Given the publicly traded company situation, what are you looking at to sell? And what are you looking at to buy. And then finally, on the accounts. On the ongoing business, there was a loss of EUR 7.7 million in 2021. Was that just cash? You said that there wasn't much from the discontinued business. Is that a cash loss? Is that write-off? And what is that situation going to look like in 2022?

Well, let me answer that first question on the multiples we're looking at for M&A. As I said, as part of the presentation, we are looking to acquire in our core businesses, so looking at multiples that match what we already have for distribution services, financing. That's the kind of logic that we're working on based on the M&A pipeline that we're working with right now. Secondly, there aren't many legacy assets still around. Angel mentioned those discontinued business lines. We have restructured things to better leverage the assets, which explains the delta with 2021. We have some questions on the webcast next. a question from Degroof Petercam. Two questions. The first one on factoring expenses and reverse factoring expenses that went down in 2021. What will be the trend in the future for these? And what will be your means of action for future M&A? And then on the growth outlook for revenue, 4% to 5% you mentioned, is that just organic growth? Or could that include some external acquisitions? I can start by answering the first question -- the second question, then I'll leave the first one to Eric. So that includes external and organic growth, that 4% to 5%.

On the first question, so factoring and reverse factoring, indeed, dated 31st of December 2021, we have recorded a drop of about EUR 40 million of our use -- we were about EUR 320 million, and we ended at EUR 280 million, and we're going to continue along that trend. So we're going to look to use factoring and reverse factoring solutions less and less as this seems quite expensive and also -- and especially in fact because we have worked a lot on our WCR in France and abroad. Our average WCR over 2021 dropped by EUR 100 million versus 2020, and that means that we are less reliant on those factoring and reverse factoring solutions. And as you saw in some of the figures that we presented just a minute ago, This has enabled us to draw down our gross debt position and therefore, our financial expenses as well. That was the first question.

Another question from the webcast, yes.

One question by Nicolas David, ODDO Securities. Is there -- so there seems to be a positive outlook for the ROP. What about your margin ratio? Do you think that there will be an improvement there as well? And what are the main leverages?

Well, as Angel mentioned, we have a margin ratio which is above 5% for the whole group. So our ambition is to remain above this 5% in the future.

Another question as well. David Vagman, who is asking regarding this operational -- operating margin for 2020, what are the trends for the next coming years? What is your outlook? And what will be the impact of employee inflation for 2022? And in terms of WCR, what are your projections for 2020 in terms of cash flow?

So we're not going to give you any more information regarding 2022 than the ones that we've given you. But in terms of wages impact, yes, there is some pressure and tensions regarding the employment market. But so far, we've managed to either keep our staff or to attract other talents as well, but we're trying to work on partnerships so that we can increase our sourcing activities. So we can work either in -- with partners in France but abroad as well. So we're working on concluding these partnerships, especially on applications as well. And for the last part of the question?