Econocom Group SE (ECONB) Earnings Call Transcript & Summary

Good morning one and all. I'm delighted to see you back 6 months after our latest presentation, which took place in February. We're going to comment on our first half 2022 results. And to do that, we'll have 3 speakers mainly, but we'll also bring on stage a number of managers to show you the highlights of the first half of the year. Jean-Louis Bouchard is honoring us with his presence. Chairman, Founder and Majority Shareholder of Econocom Group; and Angel Benguigui, Executive Managing Director, will also be with me on stage to talk about the financial part. You received the press release on Tuesday night, so we wanted to comment on a few things and bring a few things into relief in these results. To talk about the results and the financial situation, share with you the highlights, I'll ask Philippe Goullioud, who is the CEO of Products and Solutions, to come and talk about our product care know-how. Then I'll ask Samira Draoua, who is in charge of the Leasing and Financing Business in France, to come and talk about an acquisition that was made in the second quarter; and [ Longli Jean ] who's in charge of Services in France will come and talk about 2 deals that were signed in the first half. So regarding our first results, we returned to organic growth which reflects all the work that was done in the previous quarter. So that was decent. Then we'll talk about acquisitions. So we had a continuation of external growth, and we also maintained our profitability level in our H1 results. That is translated in terms of figures into EUR 1.24 billion in revenue, so that's 9% organic growth. And so we had an increase in revenues. In terms of ROP, our ROP was EUR 59 million, 4.7% of revenues for profitability. So we maintained our profitability level compared to the previous year. Then regarding net income, we reached EUR 34 million, close to 11% in terms of improvement, that's an increase in net income compared to the same period in 2021. And then our NFD, net financial debt, is 1.5x EBITDA for the last 12 months. So our NFD was under control. I will now give the floor to Angel to talk about the financials before I take the floor again. Angel, over to you.

Thank you, Laurent. Hello. Let's talk figures with the first slide, the aim of which is to try and clarify, to try and give transparent figures in our communications and explain on what basis we are communicating. You've seen that for a while, we've been referring to pro forma figures and accounting rules make it so that we have to refer to restated figures. So on this slide, you've got the bridge between the revenues that were published at 30 June 2021. EUR 1,240 million which, as it happens, is exactly the same figure as we published at 30 June 2022, EUR 1,240 million. And you can see between what was published at 30 June '21 and the restated figures for 30 June 2021, we had a EUR 147 million reduction which are the revenues of businesses that were discontinued since and a few changes in accounting methods, but which are not very significant. So the scope of discontinued operations and a few changes in non-significant accounting methods. So we had EUR 1,093 million restated for June 2021, which you'll find in the half year financial statements and on a few slides in the appendices for this presentation. Then to go to the pro forma figures, we have the revenues up and down for the companies that were sold and bought. You can see that the EUR 52 million from acquisitions, that's the revenues for H1 2021 over the same period for the acquisitions that are in our revenues for the first half 2022. So when we're talking about organic growth between EUR 1,137 million pro forma and EUR 1,240 million, we're talking about organic growth from the activities that we already had and organic growth from acquisitions that were carried out in the past year. Growth in revenues -- overall revenues and ROP and also our profitability level. As regards revenues, the 9% increase is driven by the TMF business, and to a lesser extent, by Products & Solutions. ROP, however, grew by 12.6%. That's an increase across the board: Products & Solutions, Services and TMF. So that leads to a profitability rate, which is roughly equivalent to what we had last year. A very slight increase to 4.7% ROP versus -- over revenues compared to 4.6% last year. The split revenues by region, we have kept a good balance between French revenues and international revenues. You can see the biggest areas. France, 52%, EUR 643 million; Southern Europe, EUR 279 million 23%; Benelux and so on. It's worth mentioning that growth was generated mostly in the 2 main areas of responsibility, so France and Southern Europe. Now, business-by-business results. Products & Solutions, there was 2 -- double-digit organic growth. We talked about that. We already had a high level of backlog at 31st December 2021. In Revenues growth, we had a positive contribution from all regions. It's worth mentioning. However, one should point out that this growth was delivered with a high level of backlog because we had significant and persistent sourcing difficulties in the first half of 2022. As you know, we have roughly EUR 100 million in additional backlog compared to what we were used to having before these supply problems. So we have a lot of backlog mostly on P&S and TMF for roughly EUR 200 million. Now, our backlog is EUR 300 million. In spite of that, this positive growth -- there was positive growth in all regions from Products & Solutions. Regarding ROP, it's on the rise compared to last year. But not enough in order to maintain the same level of profitability. It's -- one should note that there were some price tensions, which meant that we were not fully able to maintain the same margins despite very strong growth in revenues. Regarding TMF, we've achieved growth since Q3 2021. So for the last 3 years and until Q3 2021, TMF's business had been declining, but this decline has now stopped and we've resumed organic growth since Q3 2021 and Q4. And for the half year, we had a 14% growth pro forma compared to last year. For TMF, the scope is exactly the same. There were no changes in scope, no acquisitions or disposals. For ROP, this increase in revenues was fully passed on, so we had a 20.7% improvement in ROP. So the profitability rate grew by 0.2 percentage points to 4.3%. This strong increase is related mainly to the strengthening of our sales force. In May 2021, we had a plan to recruit sales reps in all TMF activities in all countries of the group, and this program is now paying off. It's bearing fruit, although we are cautious. You could see that despite the increase in revenues, we are rather cautious about H2. We prefer to be cautious. Technology Management and Financing is a highly seasonal business where sometimes there are big major deals that are signed, and so it's not fully linear, not as much as Services and to a lesser extent as Products & Solutions. So we prefer to be cautious for H2, although we've got major backlog, as I said, for TMF, and we also had a strong increase in the number of sales reps. Still talking about TMF, for the first time in 3 years, we had an increase in our leased assets over -- by over EUR 100 million, which is a good sign with a residual value, which was at the same level as we had last year at EUR 170 million. So that means that our portfolio is derisked, that's 3% of the original price of all contracts that were signed, and that accounts for about half of what we statistically cover in terms of remarketing of equipment at the end of a contract or in terms of contract rollover. For Services, however, we are focusing on profitability over growth. So for a while now, we've been talking about the strategy. First of all, we're trying to focus on those service businesses where we have leadership positions, especially IT management of workstations in France. So we are increasing profitability quite strongly to 8.2% versus 7.1% last year with an increase in ROP, which is double digits, but revenues were down. However, there is certain lag between contract signature and implementation. So they will be implemented in the second half of the year, and we had a dynamic business for Apps, Cloud and Data, the recent new name, and it grew by 6% over the half year. The simplified income statement, because of accounting standards compared to restated figures for H1 '21, so revenue growth was 13.4% ROP growth, that we've already mentioned. Now talking about the major changes in the P&L, you can see that one-offs are growing, but we simply wanted to anticipate things, some exit costs. We anticipated them to H1 for activities that we're optimizing and reorganizing and there was a marked increase -- improvement in the tax rate. And so our net profit from continued operations is growing by over 40% and our increase in consolidated net profit, EUR 33.6 million, the increase was 10%. Between the 2, you have the result from discontinued operations. It's worth mentioning that last year, we benefited from capital gains -- disposal capital gains on a few businesses that were held for sale, and so we are not benefiting from that effect this year. Regarding debt on the balance sheet, EUR 217 million at 30 June '21, EUR 272 million at 30 June '22. There are 3 major elements in that, that I would like to tell you about. First of all, the fact that we invested EUR 40 million in treasury shares, share buybacks. We have the EUR 60 million decrease in factoring and reverse factoring. And also, we've increased our own-booked lease value, so adjusted net debt would be EUR 98 million. Talking about EBITDA and gearing, I think that we can come to the conclusion that debt, as we've already said at the latest meeting, is no longer any issue for the group. It's fully under control. By the way, over the first half of the year, we've lengthened the maturity of our overall debt. We issued a bond, a Schuldschein, for EUR 200 million for 3, 5 and 7 years with an average maturity of over 4 years, with a level -- with the rate that was set before the interest rate hike, which is 2%. This EUR 200 million Schuldschein will come and repay the OCEANE bond, which is currently at EUR 149 million, which is due in March 2022 -- '23, I'm sorry. And here, you can see the bridge between gross cash and debt. There's a EUR 71 million in short-term debt, EUR 149 million for the OCEANE due in March 2023, EUR 208 million for the new issue, plus EUR 8 million from the previous Schuldschein issuance with over 4 years of average maturity, and EUR 153 million are recourse financing on own-booked contracts, That leads us to a net financial debt of EUR 272 million at the end of H1 '22. And now, I will throw it over to Laurent for the highlights.

Thank you very much for that, Angel. Let's talk about some of the highlights as we work to round out Econocom's offering in the first half of 2022. We've taken steps towards a more European presence, and that can most visibly be seen in our ability to deploy across multiple countries where we already have present, synergies with partners through certifications that have already been deployed across our countries with those very same partners. This is something that was done through crosscutting meetings that we held, so coordinated meetings with Philippe Goullioud and Mr. Garcia working on the international front. And this has enabled us to renew successfully our partnerships and subsequent conditions with Lenovo and Apple in the first half, and we also have European presence, which is strongly anchored in our ability to rely on these partnerships. Lenovo and Dell for our partnerships, and then country certifications that are providing significant added value for our business as we offer Products & Solutions calls for tender. I'm going to ask the Director General of Products & Solutions in France, Mr. Goullioud, to come and tell us about this part of the business. If you just grab a microphone.

Good morning, everyone. Product Care is a service center for repairing, and it's a premium mobility angle working with brands such as Microsoft, Lenovo, Apple and HP. What we do in the center is exactly what it says on the tin. We maintain, we repair, and we extend the life cycle of mobile devices. Nowadays, mobile devices are extremely important for pretty much everyone, and it's no longer acceptable to have a mobile device breakdown for too long. So we've created this product care service for companies and administrations. And this has been very successful because we're able to keep smartphones, tablets and Ultrabooks and the like in operational status. And also, we're able to extend their life cycle by providing services such as repairs. And we can significantly extend the life cycle of these devices, and this has been very successful in our public and private sector market. As you can see on the slide, we had the honor and pleasure to host the French Minister in charge of Digital Transition and Telecommunications, Mr. Jean-Noël Barrot, that was last Friday. He dropped in a little bit by surprise, in fact, it was all set up in just 2 days. And the Minister was very happy to see that we were in line with the government's targets in this field, basically technological sobriety with the extension of life cycles of devices. And I was able to underline at this occasion 2 main things. First of all, our ability within the center to make mobile devices available at very short notice to public and private sector clients, so a very quick response approach. And also, there's a very social side to our Product Care Center, and the Minister underlined that as well. And this is that when you're working on mobile devices of this nature, you have to do very precise work. First of all, these are very small components that we're working on within these devices. It's almost like watchmaking, and there's a technological side to it. It's kind of like digital watchmaking, I suppose. So you've got these 2 skill sets. You've got digital and this watchmaking, and those skills are very difficult to find on the job market. Therefore, we've created an academy to help young people, more or less young in fact, people who are out to work or who are interested to learn a new job, learning how to repair mobile devices. And the first results are in, we have our first set of interns who have now been offered permanent contracts in Product Care, and that's something that the Minister appreciated, particularly. Thank you very much. So that is the kind of know-how that we now have in Products and Solutions. And as you heard, this also serves to meet some of the demand of society, in French society, is something that the Minister was particularly happy to note, the Minister for Digital Transition and Telecommunications.

I'd like to now call Samira Draoua, who is the Head of Financing in France, to tell us about another new feather in our cap.

Thank you very much. The first 2 things that I wanted to talk about were, first of all, the market trends when it comes to reconditioned devices. Right now, there's a demand. And I say right now, but actually that demand has been around for a while. The second thing is the number of devices, the number of assets that we have in our contracts that we are able to reuse not at the end of their life cycle, but actually are able to reuse as part of a second or third life cycle. In France, 250,000 devices, about 500,000 worldwide. And we've always had a system to refurbish them and to get them back on to the market. But as our clients become more demanding for the refurbishing of devices, and within that refurbishment demand, there are 3 things. Clients want high-quality refurbishment. They want high availability of equipment, and also they want all of that at a competitive price. And to be able to meet these 3 demands, we had to rethink our value chain and integrate that refurbishment value chain within TMF, within Econocom. So we screened the market, we looked at what was being done in France and in Europe, and we found a little gold nugget, SOFI Group, little gold nugget in my eyes. Because this is a French company that finds, refurbishes and resells equipment in France and just in France. Currently, they're specialized in mobile devices of all brands, so they refurbish and resell 120,000 devices per year with 2 distribution channels, a B2B and a B2C channel. They have a highly-skilled team. They have in-house training, working with the French job center because they train people in some difficult labor markets as there are lots in France. So they find and train their own employees and teach them how to refurbish these devices. And right now, we're extremely happy to see that not only do they have a very low churn, they also have 50% women working in their plants with working hours that fully match the life of a woman, or especially a mother. They have societal concerns at the forefront in their mind, and that's very important to us as well. When we purchased this company, we aimed to transform not all of their model, but to include other computers such as computers and laptops that could get refurbished by them as well. SOFI Group can fully adapt to this right now. They're at 120,000. And at full capacity, they could get up to 600,000. So we want to create a short circuit circular economy, so local to local, refurbishing -- purchasing, refurbishing and selling locally these devices. We want to then replicate this model in each of our European countries to become leaders in refurbishment of mobile devices and IT in Europe.

Thank you very much for that, Samira. So strengthening our skill sets in eco-friendly devices. We mentioned this briefly during the finances. We're also moving into Apps, Cloud and Data and strengthening our skill set there. This is a complete rework of our visual elements to support growth in that market. Right now, we're at about 6% growth, and that is a trend that is likely to strengthen over the coming months. It was important to rework our branding presence for a number of reasons. First of all, right now, there are lots of challenges in services when it comes to hiring. There really is a hiring war out there with a lot of demand over the last months, and this brand platform is going to be a way for us to create more loyalty in the people who are already working with us and also a way to get more talent on board. Thanks to this new brand platform, we're therefore further able to share with our prospective hires some of the key talking points and information for big data and cloud technology for our clients. To strengthen this, I created an agreement with OMNES Education. That's a group of 35 schools, 35,000 students. And in a very proactive way, they are able to join us as interns, as new hires or part-time workers. They can join the services teams, but also other teams around France depending on our need for salespeople and technicians. I'd now like to ask Angel to come up to the stage to tell us about a new acquisition this week. This is part of our audiovisual vertical development, and the company is called LYDIS.

Can you hear me? Okay. Now this is vis-a-vis heart of the press. We closed the deal 2 days ago. LYDIS is a Dutch company specialized in audiovisual businesses. Now in the Netherlands, we already had our presence through BIS. And now, thanks to LYDIS, we are going to become the leaders in that market. This will enable us to create a European vertical on audiovisual. This is a market that is growing strongly right now and has 7.3% estimated market CAGR between 2021 and '25, as you can see on the slide. We're very excited about this. This is a medium-sized company, currently EUR 25 million revenue. We think they can push that up to EUR 30 million next year. But the EBIT is greater than 10%. And thanks for synergies with other business lines, we're not only going to be able to benefit from this acquisition, but also this acquisition is going to enable us to improve margins on existing business lines in the Netherlands. This is a great acquisition that we're very excited about. And as I said, we closed it just last Tuesday, so day before yesterday.

Thank you for that, Angel. Moving on to business development for the past half and the coming half. We can share with you some points of information. As you've seen, we put in solid performance on TMF, pretty good with double-digit growth, and that was in the first half. And in large part, thanks to some big contracts. We have 2 examples for you today. First of all, we have a car manufacturer in France. This is a sale and leaseback for industrial machinery, digital equipment for EUR 14 million in revenue, EUR 11 million of which will be booked in the first half. And the second example comes from Germany. We signed a EUR 33 million contract that will be booked over the coming 4 years with Germany. And this is on financing of e-bikes with a partner called Baron. These e-bikes will be rented to the local administrations in Germany. These are some examples of new clients or new contracts that we were able to sign on with us in the first half.

Thank you, Angel. I'd now like to call to the stage [ Longli Jean ] for Services in France, who's going to tell us all about that business for the first half.

Good morning, everyone. Thank you, Laurent. First of all, I'd like to start with Thales. Now we mentioned data earlier, and we are investing a lot in innovation in the workplace. Thales is an interesting case scenario. We presented this contract 1.5 years ago. It's a 4-year contract, 45,000 users within Thales. At the Thales Supplier Conference last March, there were 1,200 suppliers present. There were 3 awards handed out, and we won the Innovation Award. Innovation is, of course, technological in nature. First of all, we were able to provide a range of technological innovations through our partners, but we were also able to innovate on societal and ways of working concerns. We transformed the information system for our client to become an engine for acquiring and retaining talent. We made infrastructure and services and equipment available to all of the people working at Thales. When Thales' Director General told us that we were able to be part of their talent retention, and therefore, part of their competitive edge, that was a significant way for them to underline the innovative nature of our business. Innovation was fully integrated with the information systems client-side and also with their users. This meant a lot of communication and serious work. If you want to be credible in innovation, you need to have high quality of service. The fundamental here, and what we've worked on over the years, is to be excellent when it comes to performance and operations. And when you are flawless in that way, you can work in an integrated way and then start to reap the fruits in ways that are noticeable to the top management of the company. Thanks to this award, we were able to pitch the same approach to another big player in the market, a French player at this time, EDF. The contract was even bigger than Thales, 100,000 workstations across EDF. The tender process was long, and we were able to win it in a proactive way by taking the same innovative approach on technology, on ways of working and on the kind of impact that we want to provide to our clients, going beyond IT, improving their competitiveness.

Thank you very much [ Long ] for that presentation. We've talked about Products & Solutions. We've talked about Services. Now, we're accelerating our synergies on that basis between our various businesses. For historical reasons, we had synergies between Products & Solutions and the TMF business. But here, [ Long ] and Philippe just agreed that was in H1, and we started this process with all our operations people and our salespeople. We'll capture market share with some customers where P&S is not present, but where we have a strong presence for Services. And conversely, P&S is strong with some customers where services is not big, so we could offer commercial convergence by getting leads from products and services. So on these activities, the one digital company approach that we launched a year ago is transformative in terms of value-add offered to our customers with end-to-end support and the ability. We gave you examples in February when we are helping regional councils, equip high schools and middle schools with PCs. You've got both businesses that have end-to-end synergies to provide all the added value, and we are now the only ones who can offer such complementarity, such positioning in services for key accounts and central and local administration government. A year ago now, we acquired the Trams company. So with Angel, we wanted to share a progress report on this acquisition.

We are very happy with the acquisition of this company because as you can see, last week, we celebrated 1 year since the closing. And as you saw, there was a 40% revenue growth between H1 '22 and '21, and the ROP for the first half is now double what we had in H1 '21. So why are these results so good for the moment? Well, let's stay cautious for the moment? Well, first of all, because it's a beautiful company, and the company with a lot of intrinsic potential and also because there was brilliant integration with the TMF team. So when we explain our development strategy in Europe, looking for products and solutions companies in the countries where we already have TMF activities, I think this is a brilliant example. A good observation that such as synergy is extremely favorable, and the investments that we are making on acquiring such companies yield great returns not just in terms of results for these companies, but also the synergies that we can achieve and deliver with our TMF team. So now, I'm going to talk about another acquisition that was recently completed. This is a general distribution company in Spain, with revenues in 2021 of EUR 78 million. It's multi-brand, HP, Apple, Lenovo, Dell, with over 130 service points in Spain. It's a reseller on the peninsula, which is well-known and established. And in Spain, they'll make sure that our revenues reach EUR 350 million to EUR 375 million next year because this is going to be a business that is going to be integrated, and we are launching the integration plan with the Spanish products and solutions affiliates.

Thank you, Angel. To wrap up, I'll talk about the outlook for the second half of this year. We are confirming our guidance that was shared in February. Organic -- well, revenue growth at 5%, we talked about that in the press release in Q2. We are confirming recurring earnings per share at EUR 0.50. And as I said, there are a lot of challenges related to human capital and talent. Jean-Louis himself is fully involved in the recruitment of managing executives, which is essential for the good management of the company. Earlier, I talked about partnerships signed with schools or groups of schools, and also on expert communities that we're developing in order to develop notions of co-opting. So we are really firing on all cylinders to really attract talents, but also with interesting projects for European development and business synergies and more mobility within the group and trying to retain all of our employees right now within the group. So I suggest that we move on to the last part, which is the Q&A session. We could get questions from the floor or from the streaming room. We are here with Jean-Louis and the group managers for each business, and we're here to field all your questions. Thank you, Jean-Louis.

Good morning, everyone. Who'll shoot first? Well, unless there's a question from the room, I'll start with remote questions. A question from 1 of our 3 questions, from -- 2 on discontinued operations, especially on strategic and financial aspects. A question from our analyst, David Vagman. On discontinued operations first, David says that they had 7% margin, and they accounted for 40% of ROP in distribution, 15% of group ROP in H1 '21. He asked why dispose of such businesses from the strategic and financial standpoint? Well, that's not a very good strategy, I'm sorry. But it was started already 2 years ago at time when we wanted to deleverage to restore the trust and confidence of the financial world and having 0 net financial debt is a way to earn trust. We are there now, and so we started a number of actions, including this disposal. And at some point, if you keep changing what you're doing halfway through, people can't understand that anymore. So as we initiated this process, we saw it through. We thought that we held it for sale at 15th June. And as you know, the markets have sort of turned around and there were 2 phenomena. The interest rate market flipped and the private equity market flipped violently. And at the same time, there was the lock -- the lockdown in Shanghai and the whole region, and this business works a lot with Cisco and with China. And so this lockdown of the Shanghai region performance meant that this company, which is now going to make over EUR 8 million -- EUR 8.2 million, they had months of May and June which were positive, but much below what we expected. Laurent and I had dinner with the manager of this business a couple of days ago. It was a very great dinner, but they confirmed that they would deliver on the budget, but there was a lag of over EUR 40 million in deliveries that were postponed to September. So I'll admit that this is not a brilliant strategy, but sometimes when you have to make an overall choice, the overall choice was to significantly strengthen our financial situation. And let me tell you now, you saw the figures earlier. Although this disposal was not done, we're still in a very comfortable situation, and the fact that we have EUR 45 million of our own shares puts us in a very comfortable situation. As soon as the share price comes back to better levels, although we are doing better some of the competition. So when our share price is back to levels of EUR 4, EUR 5 per share, we can find a partner. We're looking for a banking partner that would get 20% to 25% of the group. So buy these EUR 45 million in shares to strengthen our equity by EUR 250 million. So that sale for roughly EUR 200 million plus EUR 250 million, that will enable us to either make an acquisition, thanks to Angel's talent for roughly 10 small companies for EUR 20 million to EUR 25 million a piece. And that would be in Northern Europe, Germany or Italy. We're in talks with potential targets in Italy. Or maybe a couple of big acquisitions with Laurent. We've looked at 2 big ones this year. At the end of the day, we decided not to follow suit, but we are preparing the road map for the next 10 years until the end of the decade in order to have significant growth again, and at least double our size by the end of the decade. Another question may be from the room or remotely? Yes, please.

In finance connect, there were several questions. The first one, you talked about your deleveraging, which sort of suffered from the fact that you used a less deconsolidating factoring or reverse factoring. Could you give us an idea of the magnitude of deconsolidating, reverse factoring or products that you still have on the balance sheet?

I cannot answer right now, and we'll take questions one after the other. I'll give you the floor immediately after. Eric? I hope you can hear me. Well, the level of factoring and reverse factoring, deconsolidating factoring that we have at the end of June this year, it was roughly EUR 200 million. So down significantly compared to last year, as we said. That was your first question. There are more to come. I'm not forgetting you.

Yes, I had a second question about the share buyback, but you've sort of alluded to that. It seems that in the second half, if the share price stays at the same level, there shouldn't be a big share buyback?