Hansen Technologies Limited (HSN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Hansen Technologies FY '21 Results Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Hansen, CEO. Please go ahead.

Darcy, thank you very much, and a welcome to everyone who's joined the call today for us to walk through our recent results. I'm sitting here today, I've got Graeme Taylor, our Chief Financial Officer; Richard English, our Global Financial Director; and Malcolm McNab, who's Head of Investor Relations. And between the 4 of us, we will walk through our presentation today and look forward to answering those questions which we can in explaining our results for the year. So my kickoff with another welcome again to everyone, a very, very pleasing result. This is Hansen's 50th year, which I think is a fantastic milestone for any business and certainly in IT to have a technology company which has reinvented itself and has become so relevant and grown to the size we are in the business. Clearly, it's a very, very pleasing result. I think we look across in this COVID and the Delta variant and what's happening around the world at the moment now. So I've got to put a special mention to all our hardworking staff, which have worked through challenging conditions from in and out of offices, working from home, et cetera. I think they've done a fantastic job. Certainly also to our customers who have stayed very loyal. We have such a low churn. We've had a very successful year in signing up some new business through the period of time. So overall, to be into 50 years, et cetera, the success we're enjoying and the direction where we're going has been a most pleasing result to all of our existing shareholders. I know there's probably some questions about the BGH bid on the table. As everyone would understand, unfortunately, the timing didn't work particularly well because BGH is not due to come back to the Hansen Independent Board Committee with how they're proceeding with their offer and due diligence until 5:00 today. So I really have almost no comment on that because I don't know anymore, but we look forward to updating the marketplace as soon as that becomes available. So just to move forward, everyone's busy, but we might just kick off. Perhaps Malcolm, you might want to now talk about the business, please.

Yes. Thanks, Andrew. So just as a brief reminder, Hansen is a global technology company serving the gas, electricity, water and communication industries in over -- with over 600 customers globally in over 80 countries, and we've really focused on the Tier 1 and Tier 2 customers. So there's bigger, more complex customers. Good diversification by region and by vertical. And that really sort of is all underpinned by the Hansen mission, which is to further grow our best-in-class core business through aggregating mature, entrenched and predictable businesses in the energy and communication sector, which then follows into our strategy, which is to leverage our very broad global experience to very much Hansenised aggregated businesses and diversification by vertical, geography and customer; and then finally, as mentioned, to capture any future opportunities with a disciplined approach to further aggregation opportunities. And on that, I'll hand over to Graeme.

Look, this slide deals, and I think Andrew has really addressed this largely, but of course, just to summarize the BGH position. Offer came in on and around the 7th of June. Due diligence has been underway now for a period of time with that exclusivity scheduled to end at 5:00 p.m. tonight. Things are progressing, very detailed due diligence and quite a comprehensive look at our business. But all I can say at this point is the bid remains active. BGH remained very active in the data room and finalizing their position. And hopefully, we should know more by around 5:00 p.m. tonight. Okay. I think just moving on to our 50-year history and our track record in technology. I think that a lot of people on the call are probably very familiar with the history of the company. Founded in 1971, became a public company in 2000 and has very much built a history in the market spaces that we have talked to before, owning our own IP and continuing to develop sort of best-in-breed software across the globe. And as we reported last year, we are really focused on our growth trajectory towards $500 million by FY '25. And with a record set of results this year and really strong interaction with our customers through a global pandemic, it really does underpin our confidence as we look towards that $500 million. Organic growth, as we've said, we're not a double-digit organic growth company, but we're seeing some quite strong growth across various aspects of our business. And with such a diversified portfolio of products, we're not reliant on one particular industry or one particular geography at any point in time. And so quite a strong base to grow towards that $500 million. The headlines for the year. Look, this is very much in line with the guidance we gave the market and certainly underpins what we've always said about our business, that it's highly predictable, that we really understand largely where our customers are. But a couple of points to note. FX, of course, had a bit of a negative impact on our business this year. And as you can see, reflected in the constant currency numbers, the reported revenue was around 307 -- approaching $308 million. But on a constant currency basis, that would have been a little over $325 million. Really strong underlying EBITDA; again, 39.4% margin, which is a little up on where we think the business will be long term in that mid-35%. And I think most of you would understand with accounting and IFRS 15, we've been compelled to bring forward some of these revenues for a large contract, Telefonica, in Germany. And that's largely brought our margin up into that high 39% range. Great contract, Telefonica, and we're expecting to see a long-term relationship with that customer. And it's great to see the project underway and progressing well. So I think the other thing that is important to underpin again at this point is we own our own IP. Some 97% of our revenues are driven by the fact that we have products out there that our customers love and enjoy but interact with us, driving great revenue visibility, some 95%, once we sit down and start to have a look at budgets or forecasts. So further to the headlines, look, you can all read the slides there. Adjusted EPS, around $0.395 on a constant currency basis; dividend again this year up at our new level of around $0.05; and some wonderful paydown of our debt with net debt currently sitting at some $66.6 million, just a smidgen under $50 million down on the same time last year. So look, a great outcome with our free cash flow really underpinning the ability to be able to reset our balance sheet for the next acquisition. The next couple of slides, I've really summarized pretty well here. You can understand that the revenue growth has been great, a CAGR of 21%. Underlying EBITDA there, again, growth over the last period of time of over 25%; and our net profit after tax growing at a slightly greater rate. That's largely been because of an effective tax rate that's down quite a bit from our predicted levels, largely because some of the contracts we're able to sign enabled us to utilize tax losses that were sitting in jurisdictions around the world that we weren't perhaps anticipating to be able to utilize initially. But a great outcome for the business over -- well, since FY '15 to '21, great outcome there with the CAGR growing at 27%. EPS, of course, our EPS growth is exceptional. When you service a business or buy a new business in the likes of Sigma using debt, that certainly has helped our earnings per share. And then the underlying integration and performance of that business has been outstanding with the icing on the cake being Telefonica driving a great outcome from an EPS point of view. As previously mentioned, great cash flows from the business. Working capital has been managed well. And with that strong capital structure we love within our business, we've seen the net debt reduced to the levels mentioned before, some 43% reduction year-on-year, which really sets us up fantastically with a strong balance sheet, very well supported by our banks, ready for what we hope to be and know will be a fantastic future on the acquisitions front. Dividends per share. As I mentioned before, trying to find a balance there between returning some profits to shareholders, utilizing some franking credits around $0.027 a share and allowing us to have some strength in our balance sheet as we set up our business to reach that target of some $500 million by 2025. On Slide 12, you can see the breakdown of our cash flow. Look, again, it really does talk to the fact that the strong cash flow, gross cash flow of $73.1 million, free cash flow was $70.1 million. Other things to note, working capital is up a little bit on the prior period primarily because Telefonica amount there of some $20.3 million that will be settled pre-December. So great cash flow to come in the first half of FY '22. And look, this is a business that never ceases to amaze me with its cash flow abilities. And even through a global pandemic, our customers continue to pay us on time. And that sets us up, as I said, very well for the future. Look, key achievements in FY '21. It's great to see some new logos coming into our business, and these are of significance because of that growth, particularly in the telecommunications sector to Tier 1 and Tier 2 customers that really have quite a strong vision of their future and how Hansen fits into it, which is just great for us as we continue to drive a very strong and predictable business. We continue to make investment in technology, as we always have. We've continued to look at where we hold our staff around the world so that they best serve our customers both from a cost control perspective as well as delivering the technology into the core phase of our business. We have a cloud strategy. We talked a little bit about that. And it's very much driven by relevance for our products. Not all products are ultimately focused on becoming cloud-native. But certainly, as our customers require, we make the significant and -- well, the significant -- the strategic investment in bringing our products into that new environment. Look, I think the other point I'd make, M&A. The team we mentioned that we continue to grow and get focus on has done some great work over the last 6 months since we spoke to you, creating lists of opportunities for us, which has allowed us to look at a number of opportunities across the last 6 months. And it's one of those things you've got to kiss a lot of frogs before you find the right one, and we'll continue that process. Look, again, I seem to be drumming very, very hard the strong profitability and cash flows here. But certainly, it is a cornerstone of our business as we look to continue to target something in the 32% to 35% EBITDA range over the long term. Capital management. It's always a balance. Our Board takes a really good position in relation to that with paying down debt and so on and making our business deliver to its shareholders. But we've chosen to pay some debt down this year and declare a dividend that we think leaves us in the best possible position as we focus on $500 million in 2025. I think the other thing that's important to bring to the market's attention, we have been negotiating a new facility over the course of sort of May through into the release of these results. We've rolled our existing facility over for another 2.5 years. And whilst that's categorized on our balance sheet as current, I'm sure you can appreciate that with that renegotiation now complete, that debt is no longer current and should be viewed as a longer-term liability and something that's very, very well supported by our banks. I'll now hand over to Malcolm to talk a little bit about our longer-term financial targets and M&A and how that plays into our future.

Yes. Thanks very much, Graeme. So just sort of wrapping up on that element, which is to say that given these results and the strength of our strategic customer wins providing that sort of tailwind to our organic growth, we feel very confident that, that, combined with our active and proactive M&A team who are finding lots of very relevant opportunities for us, will drive us to that $500 million of revenue by FY '25. We've shown this slide before, but it's clear that historically, particularly over the last 10 years, that we've been very much focused on going through value-accretive acquisitions both in terms of different regions, different verticals and also growing in size. So we're very much looking forward to continue on executing on our M&A strategy to keep driving that acquisition growth. And I'll hand over to Andrew to conclude.

Malcolm, Richard and Graeme, thank you very much for the commentary today. So look, in conclusion, it's certainly another great year for the company. It makes me very proud to lead a company over this journey and the success we've had in a challenging backdrop of COVID. Certainly, some of the strategic wins we've actually had have been very, very positive internally for the organization as well, which validates where we're spending our money from an R&D point of view, acquisitions we actually do and just judging the market at the right time to where we can take advantage of those things there. I think as Malcolm's already detailed, M&A has always been a key part. I think as I've elaborated a number of times, it's not about having the best products, you got to have people on the ground. And we continue even in these challenging times to find opportunities where we can expand our footprint of people around the world to take advantage of these opportunities as we find them. And look, clearly, we're waiting for the BGH process to unfold, but we're very much focused on continuing to drive our strategic agenda, which we've actually put to people over and over again, and I'll deviate for a moment on that. So just in conclusion, look, we've been here since 1971. I'm very, very proud to lead a very talented and proven executive management team. This is an amazing business. We all look at business as profit, but to one which we can actually find. So clearly, where the cash generation has gone, the ability to pay dividends, pay tax, do R&D, but also pay down a substantial amount of debt is a credit to everyone's benefits. Certainly, owners of preeminent software. We own software which is at the very heart of our customers. Our churn of customers are less than 2%. I think most would be very, very jealous of that position. We are serving very mature and established industries, and those industries have stayed in place and no disruptors that we can see in the future. Naturally, there are high barriers of entry because it is all around proving as a company that we can actually deliver on time and on budget when we go to our customers. Subject matter experts in the field. We only make the success. Are we having some challenges about staff is the worldwide problem at the moment now, but we're doing our best to keep our staff engaged and hiring people to join the company and join the family, which is working well for us, but we keep on having to work very, very hard at doing that. I think to have your revenues coming from your own IP, we are -- we do own the keys of the car when we're actually driving it down the road. And just makes it so much more refreshing when you're making an investment, knowing that you actually own the outcome of what we're doing. 30-plus successful acquisitions. I'm not sure how many people can actually put their hand in their heart and to actually have delivered time and time again against all the forecast we did at turning companies, bringing them into the fold and actually making more margins than what they're doing in the past, which is a compliment also to the companies we acquired and the open-mindedness of the staff to adopting new business practices and processes also assist us in actually that growth. I think our playbook for large regionalization and competitors, that aggregation still stays very much about our business, and that helps us expand into new regions and new services. And as we've talked about in the past, the world is open for that. So once again, guys, we sit here very, very great long-term future. So on that note, look, I'll hand it back to Darcy. If anyone's got a particular question today, we'll do our best, between the 4 of us, to try and answer if we can. Darcy, back to you, please.

[Operator Instructions] Your first question comes from Garry Sherriff from RBC.

How should we think about the FY '22 revenue and EBITDA growth given the high level of visibility that you articulated earlier?

How should you think about it? It will continue, Garry. I guess we've chosen not to give an outlook statement at the moment. Obviously, still time to remain a little bit uncertain with respect to the pandemic. But look, we think this year, we'll see some improved FX conditions across the year. I think that will -- with a great injection of some $20-plus million in FY '21 from Telefonica, it's a big deal. And so I think our revenues will sit slightly above last year or this FY '21, but you're not going to see huge growth in that respect because we're making up for that. But -- and margins, I think, will stay around that 35% mark.

Understood. Any comments on the contract pipeline? Maybe in terms of size of the pipeline or SKU would be interesting.

Look, we never probably detailed the pipeline. You'd understand the reasons why. This is pretty commercial, and we'd hate our competitors to know the size of our pipeline. But there's no change in our pipeline from this year to last year, Garry. It's across the board. Our pipeline looks encouraging through all the regions through America, through the APAC region and also EMEA. So there's no decline in the pipeline from our visibility at the moment now.

And are there any sectors in particular that, I guess, have seen increased margin perspective or maybe the pipeline in those sectors might be crystallizing sooner rather than later?

Good question, Garry. I think it's pretty balanced. I think the drivers from the energy markets still go around deregulation or market refresh, which actually makes sales and drive people towards upgrades. And that's probably been a constant for 10 years. Certainly, on the telco front, I think it is the deals in these last 12 months or so with Telefonica and DISH and et cetera has really been around 5G and telcos wanting to refresh their technology. So to tell you, there's not one more than the other. If I was sitting here 4 years ago, I would have predicted 5G. And 5G has delivered upon that, hence, our investment in Sigma. So it's really across the board, but that's pleasing for us that it's not -- not one particular product or country or sector at the moment. Now it's across the board is looking quite good thing.

Understood. And maybe last question on the $500 million revenue target for 2025. How much of acquired revenue is needed, do you think, to hit that target? Or maybe said another way, how much revenue organically where you think you'll be at 2025 versus the $500 million total target you've got?

I don't think our position has changed from where we were last year, Garry. It's still based on that 2.5% to 3% organic growth. It's slow organic growth numbers combined with a couple of acquisitions that I think everyone understands, based on our historical performance, they'll come. It's just a question of finding the right one.

Your next question comes from Nic Burgess from Ord Minnett.

Now apologies, I missed the first 5 or 10 minutes of the call. But just a bit of an update on the BGH bid. I guess what are the next steps and potential time frame on further news?

Well, I think on that front, Nic, good to hear from you. Look, 5 p.m. today is a bit of a critical time. Their exclusivity falls away at that point. So look, we expect that we might hear something after the market closes today. That's the next critical time frame. And look, we'll make the appropriate announcement should we hear something there. We did discuss at the start, Nic. And clearly, the timing is not helpful, but you understand as a public company at the moment, our auditors have been aiming for this state for some time. And the moment they sign off, we have an obligation to get to the marketplace, which happened yesterday. Unfortunately, the BGH timing just unfortunately didn't line up. It would have been probably nicer a couple of days ago. But look, from 5 p.m. today is an obligation. But we will be updating the market as soon as we hear.

Okay. That's great. And just one last question. Just the -- you mentioned you've renegotiated the debt facility. What's the total size of that debt facility as it's been renegotiated?

Look, it's -- roll the existing debt, I think from memory, it's around $135 million with mezzanine of another $100 million, I think. I don't have the precise number sitting in front of me, but certainly, a lot of capacity at the moment.

Nic, and to that point, this is not the banks doing that to us. We don't want to be paying for a facility we don't need to use. And so I think between certainly Richard and Graeme, that whole capital management, if we -- I think paying down debt has always been passing -- paying down debt is to enable us to draw down again. But besides the facility, we keep on reducing because you have to pay for that facility, be sitting there if we're not going to use it. Hence, the number will keep on dropping down as we keep on paying it down.