Nexi S.p.A. (NEXI) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Nexi Full Year 2019 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Paolo Bertoluzzo, CEO of Nexi. Please go ahead, sir.

Good morning. This is Paolo. Welcome to our 2019 Premier Results Call. I'm here with Bernardo Mingrone, our CFO, as usual; and Stefania Mantegazza, that I'm sure most of you know, in charge of Investor Relations; and a few more members of our team. Today, we will focus on our results for 2019. We'll also try to give you adjusted numbers but a little bit more in terms of business updates, similarly to what we've done at first half year results. We'll give an update on a couple of topics. We'll comment guidance. And we will, obviously have time, as usual, for Q&A. By the way, we're going to be in London for the next couple of days. We're going to be running out of Milan to London tonight, and therefore, this will give us plenty of opportunities to continue the conversation as usual. I will start covering high-level results and, if you like, the top line dynamics and the business updates, then I will hand it over to Bernardo, who will cover more costs, CapEx, net income, cash flow, debt evolution. And soon I will come back for the more specific updates and guidance. So let me start with the executive summary on Page 3 of the document. As in the past, 2019 and the last quarter as well has been dedicated with a strong focus on financial delivery. Overall EBITDA during the year about 18.5% to EUR 502.5 million, and this is ahead of the guidance we gave at IPO of 13%, 15%, and it's also a bit ahead of the updated guidance we gave you at first half results that was at around 18%, for EUR 500 million. Revenues grew in the year at 7.1% underlying, excluding some average selling zero-margin contracts from the past. Reported growth is 5.7% at EUR 984 million. Finally, we also improved our net financial debt position. That is now at 2.9x EBITDA for the year compared to a post-IPO target of 3.5x, and that we had updated to about 3x EBITDA at the first half results. Throughout the year and the last quarter as well, we continued progress on key business initiatives. I will cover them a bit more in detail as far as Merchant Services & Solutions is concerned, Cards & Digital Payments and Digital Banking Solutions, the 3 business areas that we have organized our business and we read the market through. Cost-wise, we continue to our cost initiatives and integration synergies, contributing to a nominal 4.9% reduction of our cost base that corresponds to a real underlying minus 2.9% of our cost base despite continued investments on several fronts, including people and capabilities. Our transformation cost below EBITDA went down 60% in the year, exactly as committed at IPO, and we've continued to focus our investments in technology and innovation with CapEx at about 17% of our revenues, and we will comment more in a few minutes. Overall, this performance is better than IPO guidance. As far as 2020 is concerned, we target growth in line with the IPO mid- to long-term guidance, starting, however, from a stronger 2019 and, therefore, from a higher bar somehow. So let me jump into the content, Page 4. Healthy revenue growth and strong EBITDA performance. Net revenues grew in the quarter at about 7.7% underlying, bringing the total growth for the year at about 7.1%. In parallel, EBITDA during the quarter, about 16.4%, bringing the overall growth for the year at around 18.5% with an EBITDA margin expansion that moved from 46% to 51%. As a reminder, we had a conversation with many of you over time, when you read our EBITDA margin, we should always take into account that given the way we report revenues, if you want to benchmark ourselves with other players in the industry, you should probably take out about 10 to 15 percentage points to make it comparable to other people that report gross revenues. We report net revenues, net of distribution costs, scheme fees, interchange and all of that. Despite that, clearly, margin expansion is definitely real on a like-for-like basis as well. Now moving into the 3 business areas. Let me start with Merchant Services & Solutions that accounts about 49% of our business. In this area, net revenues grew about 7.7% in the quarter, bringing total growth for the year at about 8.1% underlying. You also see the evolution of our volumes. This time, we've highlighted even more clearly the dynamic of international schemes volumes, why we've done it, because these are basically the key driver of value for us, given the fact that the total volumes also include national debit volumes, where actually the value that we capture is actually much smaller compared to what we do in international schemes as our participation in the value chain is narrower. Overall, the number of transaction of international schemes grew about 20% in the year, and the value of managed transactions of international schemes grew about 10% in the year at the same time. Moving to Page 6, trying to give you a little bit more flavor of the progress in the business at a more operational level here. I will comment, as usual, on the key business initiatives. SmartPOS is our leading proposition, in particular, for SMEs, and we believe, over time, will become the standard proposition in the market even if we are beating the crowd here in terms of innovation. The SmartPOS proposition has continued to progress with front book penetration up to 40%, sometimes higher than that, to be honest with you, during our campaigns, when we basically worked side-by-side with the banks in proposing this proposition to the merchants. Continue to see a lot of interest from all possible merchant segments from the smaller ones, actually, to the largest ones. SmartPOS is becoming a key component of our multi-channel propositions and solutions for larger merchants as well, and we continue to see interest across many different industries. Finally, in the past, we said that with a push -- with a specific effort, what we call SmartPOS Cassa, it's basically a one-stop shopping solution, where on top of the acceptance product, we also give the cash register, that is a software, into the SmartPOS itself plus a physical printer. And in the last quarter, this was accounting for about 24% of the overall SmartPOS sales. Second area, large merchants omnichannel. Again, a strategic area for us, an area where we'll be focusing a lot of our efforts and investments. We continue to release new omnichannel capabilities, including cross-border and other most advanced solutions that bring us at par with best around the world or definitely ahead of the pack. In Italy, we are further investing in our dedicated team. We have about 40 to 50 people now in the space of vertical industry experts and solution engineers. And we continue to see growing interest from large merchants for more advanced, sophisticated solutions across all possible industries. We want to point out that about 40 -- 50% of the customers, the brands that we engage with very often together with the banks, are actually international brands that are looking for solutions effective in Italy. As far as e-commerce is concerned, we continue to see good growth. The growth rate in the quarter, I didn't mention it, but it's been as high as 22% in terms of value transacted, bringing the total for the year at 19%. This growth continues to be supported by a number of measures we have taken, the cross-selling from physical customer base that is enabled by cross-channel contractual enablement that has been already put in place. Our financial developers and software vendors did actually work that we do on omnichannel merchants, and more and more also through public administration, that as [ low gin ] is accelerating more recently, PagoPA, that is a solution to enable e-commerce payments of public administration-related expenses. Fourth area, omni-acceptance. We said in the past that it was strategic for us to promote the concept through our acceptance network. You could accept not just the traditional schemes, but also the newer schemes, for example, the Asian schemes but also vouchers and, going forward, other payment and transaction products. We have continued to progress on this front. Over the last couple of quarters, we've been also rolling out the new national debit scheme capabilities, enabling contactless payments and mobile payments with more than 50% of the network now upgraded to accept this type of payment. Last but not least, we continue to promote Nexi Business data app. That is a very big strategic value for us because it is enables for the merchant to have a digital relationship with us but, most importantly, to control their acceptance product and solutions across all possible channels and point of sales. We have now more than 220,000 merchants, rolled up 100,000 from 1 year ago, with very positive customer feedback. Overall penetration on addressable merchant base, the base of the merchants that -- of the banks that started to enable this solution, is at about 42% with some banks being particularly active together with us that are already at around 80%. So this is it in terms of Merchant Services & Solutions. Let me then move to Cards & Digital Payments. Again, here, we've also seen continued strong growth in the quarter. Growth has been at 7.7%, bringing the growth for the year at 7.4%. Similarly to what we have seen in the merchant services, here, we are highlighting the international schemes, volumes and transactions, again, because they are the key driver of value growth for us. The number of managed transactions on international schemes grew almost 20%, very similar to what happened in merchant services, with a value associated to it to growing at about 10% in the year. Moving on more operational updates on Page 8. On credit, we are continuing, obviously, the needed traditional activities on the more traditional consumer credit product. We have now fully deployed our new corporate proposition that includes, on top of the traditional corporate solutions with card, also the virtual accounts, business-to-business solutions and the large solutions for basically working capital optimizations, and we see a lot of interest from different industry sectors. In parallel, at the end of the year, we also launched our new premium card portfolio with leading capabilities, I would say, from all possible angles, digital mobile, enhanced loyalty, world elite programs and similar features that make this product a very profitable products for the banks for us and very valuable for the customers to begin with. In debit, we continue to grow on International Debit 30% year-on-year transaction value. Now more than 30 banks are active on the product and more to come in the year -- in the new year. We also continue to invest in National Debit. Also here, upgrading our capabilities to contactless and tokenization, while mobile features are now under development. The third key area, customer value management and more in general, value-added services. We did continue to invest in building [ distinctive ] capability to support banks in upselling and cross-selling the most valuable products to their customers. We have now off-the-shelf menu of about 200 available campaigns that create value for banks and customers, with about 90 banks engaged into this type of program. We did continue -- and although small, I want to just give you a data point here. We did continue with what is ioVINCO, that is our instant lottery, to promote seamless usage, in particular, micro payments. It works in a very simple way. Every single time you use our payment products, you have a chance to go on the app and basically play with an instant win. We did it already last year. This year, we saw -- on the latest version, we saw growth in active users of about 1/3. And what is the most interesting element is that these customers, compared to similar customers, see an acceleration of growth that is almost 13 percentage points versus similar customers. And finally, we redesigned our premium loyalty program with more than an additional 30% customers subscribing. On digital, we have now all banks active with some kind of mobile payments, all of them with Google Pay, most of them with Apple Pay as well. And we continue to deploy mobile payments, also wearables in the year, which extended to Fitbit and Garmin, who will continue to work on all new products then can be made payment products as well. In the more traditional digital space, we continue, obviously, to deploy and push the penetration of our own Nexi Pay app and Nexi portals, but in parallel, we work more and more with banks, in particular the larger ones, that want instead to integrate payment capabilities and payment control capabilities in their own digital properties by providing them more and more API gateway integrations and white-label products in synergy with what we do for our own product. Finally, the app that, as you know, is our payment app for millennial, mobile-only. Actually, if you want, you can ask for a plastic card as well in case you go somewhere where you don't find NFC or you want to withdraw from ATMs. Here, we have now 750,000 enrolled clients, up from about 100,000 at the end of last year, and customers' feedback continues to be pretty good in terms of both NPS and ratings on app stores. As we discussed in the past, we have been working to enable banks to participate to this and to promote this product together with us. We call it bank-connect. It's a technology solution. It's also a business model that we've built together with the banks, and we now have a few banks that have started to be active commercially and are also supporting the growth of the product and benefiting from it at the same time. Third and last business area, Digital Banking Solutions. As a reminder, this accounts for about 12% of our revenues. You may remember that in the first couple of quarters, the growth was negative for this business area, as expected. We also said that we were very confident to turn it around in the second half of the year also because there was the unwinding of certain contracts and certain one-offs that happened in the past. In the quarter, this business area grew 7.9%, bringing the total growth for the year on an underlying basis at 1.8%, and therefore, it has been positive for the year. Again, here, Page 10, let me try to give you a bit more flavor of what is happening in that area. Self-banking, we have just continued to roll out our new higher-value solutions that include both a very innovative front-end solution with high levels of personalization, speed and interactivity, but also our more complete back-end solutions that allow to have preventive maintenance and full-fleet solutions as well. In parallel, we continue to work with the banks that are taking a more and more active approach to their branch transformation programs in order to, over time, transform their ATM base from traditional ATMs to more advanced ATMs that basically allow a complete self-banking experience. In Digital Corporate banking, similarly, we continue to roll out our new advanced product and platform. We are now live with most banks that use our product with a mobile app that allows company decision-makers, for example, CFOs, to interact and to take decisions and control evolution from the app itself without the need of being in the office. At the same time, we continue to see progression in terms of installed workstations, and therefore, the penetration of these more advanced products is increasing in the market, thanks to the work that our partner banks do and we do with them. On Instant Payments, we are progressing. We see nothing really new in that space. Let me spend instead a few more seconds on Open Banking. As you know, as a company, we are firm believers on the potential of Open Banking. We did decide early on to invest and take a strategic position here. You may remember that last year, we launched what is recognized as the regulatory Open Banking Gateway together with the Banking Association, the PSD2 Open Banking Gateway. This is the gateway that basically implements the regulatory APIs and does everything that regulation is obliging us to do, that we have done. We now have 280 banks active. Almost 80% of the Italian market with more than 80 third parties are connected, and more and more are coming. On top of this, over the last few weeks, we won an evolution of this gateway, and that is called TPP Gateway. It's a gateway that basically integrates the other regulatory gateways, both at the national level and international level, and aggregating all the APIs and, most importantly, harmonizing all the APIs and, therefore, enabling new fintech services for banks and for third parties. In parallel, we are more and more active in terms of working also on the services -- on the products and services you can put on top of these gateways, thanks to the Open Banking business model. We are developing new products for our partner banks and for corporates, either alone or with partners that have specific vertical expertise in the different verticals that are enabled by Open Banking. And we really are now looking at this as an open ecosystem where Nexi can play a role and help partner banks and corporates, Italian companies from the infrastructure level to the services and the partnerships at 360 degrees. Let me now hand it over to Bernardo that will cover the other elements.

Thanks, Paolo, and good afternoon from me as well. I'm going to go on from Slide 11 where we start talking about costs. As you can see, the performance for the year was strong throughout the first 3 quarters. It continued to be so in the fourth quarter as well, in particular with reference to non-HR costs, which were down by close to 8% in the quarter and closed the year down by 10%. And clearly, we had a bit of a benefit here, and this is highlighted in the commentary on the slide from IFRS 16, as we've been disclosing on a regular basis, of approximately EUR 13 million. But the costs were down in any event, thanks to continuous savings initiatives which were implemented throughout the year. A bit of, let's say, front-loading of some of the benefits we're expecting from merger synergies or integration synergies from the businesses we applied in the past -- we acquired in the past, and we're expecting to extract between '19 and '20. We had a bit more than we managed -- we are quicker, slightly quicker than expected and got a bit more of a benefit in 2019 than we had originally expected. And we also have some of the early impacts from the implementation of our IT strategy, which we'll talk about in a second when looking at the CapEx. On the HR cost front, I would say there's a bit of a timing difference which also impacts the quarter-on-quarter comparison with 2018, which is driven by the way we accrue for holidays, and the cost of this was borne in the third quarter of 2018 this year. We bore that cost in the fourth quarter of 2019, closer to the reality of the way people have actually used their holidays. And that increased the cost in the fourth quarter compared to 2018. And we also had a bit of an effect coming from the financial performance for the year that yielded a slightly higher level of variable compensation to be booked this year than last year. But overall, it's a very strong reduction in costs and non-HR cost of 10%, which more than offset the investment we've made in HR and which we continue to make in people capabilities. Slide #12 talks to our investment in CapEx and our IT infrastructure and the purchase of POS and ATM machines. Overall, capital expenditures were EUR 167 million, up year-on-year by 11%. As you can see from the chart, all of this increase was driven by what we term ordinary CapEx. This was up from EUR 85 million in 2018 to EUR 103 million this year. We have listed a few of the things that we've worked on in terms of our ordinary expense or in terms of continuous innovation and delivery. We have, I'd highlight, the SmartPOS ecosystem evolution.That was one of our key initiatives for 2019. In terms of the running and maintenance CapEx, we continue to invest heavily in cybersecurity and in terms of being able to monitor our solutions more effectively. More importantly, I would like to point your attention to the fact that 100% of the increase in CapEx year-on-year is effectively driven by the investment we've made in terms of POS and ATM purchase. And this increase year-on-year is driven effectively by the SmartPOS initiative, which contributes a significant proportion to the increase year-on-year. The rest is explained by, again, further investments in ATMs, in particular in upgrading the quality of the ATMs to the new next-generation ATM machines as well as certain deals we entered into with regards to our clients in the fleet management space. With regard to transformation CapEx, as you can see, it continues to track in line with plan, and we have a slide later on to show the progress. It's absolutely in line with our predictions, pretty much flat year-on-year in absolute terms. We have continued to invest in our Open Banking Gateway. This will continue in the coming years. We pretty much completed the new ATM front end, and we are working on our next-generation omnichannel payment gateway. With regards to next-generation platforms, I know we've spoken a lot about our Acquiring Core Platform, which is the main project outstanding in our overall transformation CapEx plan. We've completed the new GT POS platform. There's a migration to be completed during the course of 2020. We continue to invest in our next-generation platforms as per plan. Slide 13 gives you an overview of the progress to date in terms of our overall transformation CapEx. We were at just north of 30% completion at the end of 2018. We're now more than halfway there at 53%. We still have EUR 142 million to spend. This is a finite amount of capital expenditure to be made between now and 2023. It relates to approximately 15 projects, the largest of which, as we mentioned earlier, was -- is the -- actually, the core platforms for acquiring. And in general, as I said, we are tracking pretty much in line with plan as in the previous quarters. Slide 14 highlights how we have reduced transformation costs from the EUR 130 million mark in 2018 to EUR 52 million, which we had guided you to a 60% reduction of transformation costs in 2019. This is a trend which will continue as the transformation is pretty much over, and what will be left in this category of spend is essentially related through our YAP initiative. On the right-hand side of the slide, we have represented the overall below-EBITDA costs, which are a net positive. If you include the disposals from -- the proceeds from the disposal of our subsidiary OASI, you see that EUR 91.9 million in the second bar after the transformation costs. We then we add other costs related to the IPO and other nonrecurring items, we end up with a net positive addition below EBITDA of EUR 7.5 million. As part of the IPO process, we had highlighted how Mercury bore the cost of an incentive program for 100% of Nexi's workforce, EUR 51.4 million, which were entirely borne by our selling shareholder at the time, Mercury U.K., and our expense through our P&L and then recovered at net equity level. So overall, the net nonrecurring items below EBITDA end up being EUR 43.9 million, of which only EUR 7.5 million actually positive or relating to Nexi's P&L. Slide 15 gives you a bit of a breakdown with regards to interest expense. We thought it'd be useful to break it down in some of its components to clarify what effectively the run rate of the financing costs at the Nexi level are. In the year, we reported EUR 160 million of interest costs and financial charges for 2019. But we highlight how EUR 35 million of this are noncash items related to the write-off of the amortized costs, which have been capitalized with bonds which have been issued prior to our IPO and were refinanced during the course of 2019. Similarly, we spent a cash amount of EUR 38 million to pay the early call or the early redemption premium to bondholders as part of these refinancing costs. So in total, approximately EUR 70 million cost, which enabled us to crystallize this saving which you see here, EUR 44.8 million on a recurring basis in terms of our funding costs at Nexi level. So all that said, run rate, the cost of funding Nexi has dropped from approximately 3.8% per annum prior to IPO and prior to refinancing, to the 1.9% we currently have on our books implied in the term loan and the outstanding bonds, which is approximately EUR 43 million pretax of interest costs. Slide #16 gives you a walk from EBITDA to reported net profit and from a reported net profit to normalized net profit. We started with EUR 503 million EBITDA for 2019. Taking out D&A, interest expense, nonrecurring items, et cetera, and the cash taxes, we get EUR 130 million of net profit. Cash taxes are very low because part of the profits were generated through nontaxable gains. I mentioned earlier the disposal of OASI. We also had the tax benefit coming from the write-downs we took on an acquisition in prior years, which also reduced this cost. So EUR 130 million is the reported net profit. But we look at it on a normalized basis, stripping out all those nonrecurring, one-off costs we spoke of earlier, we get to EUR 222.7 million. You have it listed here basically what was summarized in the previous slides. And this is a 20% -- 19% year-on-year improvement in terms of our growth in terms of our normalized net profit. Slide 17 gives you our cash flow. We start again from EUR 502.5 million, the EBITDA for the year, which grew at 18.5%. We strip out ordinary CapEx and change in working capital, which you remember is rather small for us, EUR 11 million. And that gives you EUR 390 million of normalized operating cash flow. This is a 25% year-on-year increase, driven by the growth in EBITDA, and represents 77% in terms of overall cash flow conversion, which, again, is an improvement compared to the numbers for 2018. We then strip out the normalized cash interest expense and cash taxes, which are nothing other than 33% of pretax profit on a normalized basis, you get to our normalized cash flow, which is EUR 235 million. Slide 18 shows us the capital structure of Nexi, which clearly, year-on-year, has benefited greatly from the primary component of our IPO, which allowed us to pay down a significant portion of the gross indebtedness present on our balance sheet in 2018. We have reduced overall net financial debt from EUR 2.454 billion at the end of last year or at the end of 2018 to just under EUR 1.5 billion at the end of 2019. And this, overall, represents 2.9x our EBITDA, so slightly better than our guidance of around 3x at the end of 2019. Clearly, this is all pre the Intesa Sanpaolo closing. As part of our overall highlights, we underscore how our credit ratings remained unchanged, notwithstanding the -- after the acquisition announced of the Intesa book. And our debt structure is -- consists of a EUR 1 billion term loan, which is due to 2024, which -- whose cost is likely to improve following this reduction in leverage during the course of 2020 and a EUR 825 million fixed-rate note, which is currently trading inside the issuance level back in October. So with that said, I'll hand the floor back to Paolo.

Thank you, Bernardo. Let me now give you a couple of updates on topics that we've covered in the past as well. Page 19. You may remember that in our call in the fall, early winter, we've been discussing the potential government initiatives that were considered by the Italian government to support digital payments in the intent to digitalize the country model, also to fight tax evasion. Those measures were still in a draft form. Now at the end of December, those measures have been approved by the government in terms of a fiscal decree and a budget law. Let me just give you an update of -- on the most relevant ones for us, starting from top left. There is going to be a cash-back bonus for consumers that pay digitally. This cash bonus will be applied on payments from the 1st of July. This initiative will last a couple of years, and the government has budgeted EUR 3 billion per year. It's very important to say that the operational execution, how it will work, still has to be defined, and it is something that is being discussed as we speak. Second area that has been confirmed is a lottery on receipts. This is basically a lottery system on the receipts that a consumer receives when they pay something in a store. The overall budget for this lottery is about EUR 50 million per year. It will be in place for about 3 years. The vast majority of this budget that will be spent on electronic payments, and therefore, as you can imagine, if you pay electronic, you pay digital, you will have a higher probability to win. Here, there is an initial implementation that has been defined, at least for fee cash payments. There is a discussion on how to make it simpler because the mechanism for the way it is crafted at the moment is a bit complex. And therefore, there is the opportunity to make it more effective, and it is also under discussion. Third area in Italy, as I guess in many other countries, citizens have the possibility to deduct from their taxes certain expenses, for example, in terms of mortgages, schooling expenses and sports expenses, medical expenses and so on and so forth. In Italy, there is a 19% tax deduction for these expenses. The government took the decision to basically make these expenses deductible only if they are done through traceable instruments, and clearly, cards and digital payments are the key ones. Medical expense has been excluded for obvious reasons, and this will start as well from 1st of July 2020. Moving on the item. The government has also confirmed a measure to support the merchants. They introduced a tax credit of 30% that will be given to the merchants on the merchant fees for digital payments. And this measure, this initiative is focused on the smaller merchants, the merchants that basically have a turnover of less than EUR 400,000 per year, and this is the vast majority of Italian SME merchants. This will be in place for a couple of years. Last but not least, the government has decided to intervene also on the use of cash in Italy. There is a rule that sets a cap pay. You cannot pay cash expenses that are above EUR 3,000. This cap will go down to EUR 2,000 again on 1st of July 2020, and we move down further to EUR 1,000 on January 1, 2022. Overall, we believe it's a comprehensive package that the government is putting forward. We've done a lot of work in trying to assess the best practices also internationally. Overall, it is a good setup. It's not easy at this stage to understand exactly what the impact would be because the mechanics of a couple of these very important measures, and particularly cashback and lottery, are still under definition and will have to be defined, obviously, by mid-year. Next, Page 20. This is mainly a reminder. You remember on the 19th of December, we've announced the acquisition of Intesa merchant acquiring business and, more in general, the signing of a broader strategic transaction that was also including the extension for the next 20, 25 years of the business that we do with Intesa. Obviously, this is a very strategic transaction for us as it is strengthening our role in the market and, in particular, on acquiring them. And at the same time, you may remember Intesa declared intention basically to buy from our major shareholder, Mercury, share for the company for 9.9% without any specific governance right. I will not go through all the terms of the transaction, but just as a reminder, we're going to be paying EUR 1 billion cash plus potential earnout. The business will have an incremental effect on our 2020 numbers for about EUR 206 million (sic) [ EUR 106 million ], EUR 95 million EBITDA and EUR 61 million of net income. There is something that it's important we clarify, the cash flow generated by this asset that will be transferred to Nexi at the closing date, whenever the closing date is, and therefore, we'll be benefiting from the contribution of this additional business area from 1st of January 2020 retroactively to be confirmed, obviously, on the day based on the day that the signature happens. As you may remember, we said that we expect the closing of the transaction to happen by the summer. Moving to guidance, Page 21. We are de facto reiterating our IPO guidance starting from a stronger 2019. So let me just go through it, and before I do it, let me just underline that this guidance is not including the Intesa transaction. As a reminder, we have put -- obviously we include it in the transaction once it's closed. We have put, as a reminder, in the annexes of this presentation, what we declared back in December in terms of impact on our guidance of the Intesa transaction. So before the Intesa transaction, this is now our guidance: 5% to 7% annual net revenue growth over the medium-term. This was the IPO guidance. Obviously, we'll be targeting the higher end of this range. EBITDA confirmed in the 13% to 16% annual EBITDA growth over the medium-term. Nonrecurring items below EBITDA transformation cost, we had committed to a 60% decrease in 2019 and rapid further decrease then -- from then onwards, and it's exactly what we are confirming. CapEx-wise, we just confirm the guidance that we gave is for 8% to 10% ordinary CapEx as a percentage of net revenues over the long term. With this transformation CapEx on top of ordinary CapEx, that now we update to EUR 142 million going forward to be spent in between 2020 and probably 2023. And obviously, total CapEx return towards ordinary CapEx over the medium to long term. 2020, as we said in the past, was a peak year. And the phasing, you will see -- start to see a slowdown, a reduction over -- in percentage terms over the next quarters and years. Capital structure-wise, we are also confirming what we said in the past. We plan to organically deleverage with target net debt of 2x to 2.5x EBITDA over the medium to long term. But by the way, we confirm also the life of the Intesa transaction. We'll continue to invest in organic growth, and as we have done in the Intesa case, we potentially consider creative and strategically compelling M&A. And finally, as far as dividends are concerned, we have -- we've announced at IPO, we confirm a progressive moderate dividend policy targeting a payout ratio of 20% to 30% of distributable profits in the medium to long run. Let me wrap up on Page 22. Overall, 2019 has been an important year for Nexi because it has been a good combination of a strong financial delivery and strong progress in building the company further. On the financial side, we just went through the numbers, our healthy growth in all business areas; overdelivering versus IPO guidance, including cash flow generation; and also actively managing our capital structure, obviously, capturing the opportunities that the market was offering to us as it was becoming more and more confident with Nexi at the same time. But most importantly, for our future, we've been able to invest to build a stronger Nexi. We accelerated penetration of key propositions. We strengthened our position in key strategic areas such as, for example, Open Banking, multichannel, e-commerce, mobile and so on and so forth. At the same time, we've continued to invest and progress our IT transformation exactly in line with our plan to continue to invest in people and capabilities that are key for our future. And finally, we extended our strategic position in acquiring through disciplined and value-accretive M&A through the Intesa transaction. So a very active 2019, a very important 2019, and clearly, we look forward to 2020 that will be at least as important. I will stop there and leave the floor for questions. We'll be able to take 0.5 hour of questions. Hopefully, we'll be able to cover most of your questions. If we are not able to do it, please send them over and we'll come back to you rapidly. And in any case, as I said, we'll be around starting from tomorrow morning and be very keen to meet you all.

[Operator Instructions] The first question is from Lukasz Wojcik with Goldman Sachs.

This is Gautam Pillai on Lukasz' line. I have 2, if I may. The first question is on the organic growth guidance for 2020. If you look at the 4Q exit rate of growth excluding the zero-margin contracts, all the divisions have accelerated in growth and you are tracking closer to 8% organic in Q4. Is there any reason why that should slow down into 2020? You have kind of commented that you expect to be at the top end of the 5% to 7% guidance. But what are the kind of factors which need to happen for you to exceed the top end? That's question number one. Question number two is on consolidation opportunities in the payments landscape. Obviously, you've announced the acquisition of Intesa. There have been -- another major M&A has happened in Continental Europe. So from Nexi standpoint, how do you see participating in further consolidation in the market? Would you -- do you see further opportunities in Italy? Or can you comment on how do you see opportunities outside of Italy as well? And one related question to that is, is your current balance sheet position a limiting factor to do more M&A?

This is Paolo. Thank you for the questions. So on organic growth targets, I think your math is obviously right on Q4. However, we really have to underline that the nature of our business, the portfolio of the businesses that we are in very often are affected by one-offs, accelerations, decelerations. And therefore, it's very difficult to predict one quarter on the basis of the last one. Basically, to cut the long story short, we see next year very similar to this year. This year, underlying growth has been around 7%, and that's what we'd like to target for the next year. As well, this is why we are saying we are targeting the upper end of that range if market growth remains positive as it has been and if everything else goes well. So there is no projection or expectation of slowdown. It's just a matter of one-offs and discontinuities that happened in the fourth quarter that make it a bit higher than the yearly average. On your point on what should happen to more than that, I think that -- I mean it's a baseline for our plans. We expect the market to continue to grow -- the underlying market to continue to grow broadly in line with what has happened in 2019. By the way, it's been similar to 2018 as well. Clearly, if there is an acceleration in the market, we will be benefiting from it, and I think it will be interesting to see what happens when the various initiatives planned by the government go in place in the second half of the year, so depending on how they go in place. On consolidation opportunities, I can only reiterate what we said in the past. Number one, as a company, we are a great believer of scale and we're a great believer of local scale to begin with because while certain customer segments are more global, the vast majority of the business, at least the vast majority of the business we're in, in Italy is highly local and with a lot of local complexity from schemes to payment mechanisms, integration with the local acquisitions and so forth. So a -- number one, we are great believers in scale; number two, we also said that -- at IPO time that we were highly committed to stay focused in delivering our organic plans because we are convinced we are sitting on a large, high-opportunity market. As we said in the past, we believe that the cash market of Italy is the largest opportunity in Europe. So we are right there. We really don't want to divert energy or resources or attention from there. At the same time, we also said that we'll be open to do further M&A. Don't forget we've done M&A, a lot of M&A in the past. Already, we said that we've been very keen to consider further M&A if it was clearly strategic and valuable for our shareholders in 3 spaces, consolidation of books, merchant books, and product and technology. Those -- and the local market as well. Clearly, we've done a move with the Intesa transaction that has been a good opportunity both for us and for Intesa. So we decided to take that opportunity and -- for many reasons that you know and I will not go through again now. Obviously, we remain open to similar opportunities. As far as consolidation is concerned, we did comment in the past that -- I mean there was an official communication in the part on the potential SIA conversation that was happening at the shareholder level, and that's still -- we're still at that stage. As far as information is concerned, we also said that over time, we'll be looking more at that space but, again, without losing the focus that we have on Italy. And we see the evolution of the market, but we really want to stay focused. As I said in a past call, we are starting to invest a bit more time in looking at these dynamics, but again, our position is not changing at this stage. And I think it is demonstrating there are good opportunities to be captured that create value for our shareholders. We just go for it and make it happen faster. The -- on the balance sheet component, I don't know, Bernardo, if you want to comment.

I think, Paolo, we mentioned this in other calls or at the time of the Intesa deal. We are pro forma for the Intesa transaction at 3.25x leverage as a percentage of -- or as a multiple of our EBITDA. This is 3.4x, sorry, leverage as a portion of our EBITDA, which is within the range we had identified at IPO. We have shown over the past year that we are quick to delever. So if no M&A happens, this 3.4x will come down very quickly. If something comes up at the time or we have gone back to where we are today, I think the market has shown that they are believers in Nexi and be willing to lend us money if we want to borrow by way of bond. And sellers of assets, they can -- these have invested in the equity of Nexi so we'd be able to use our shares as acquisition currency if the case is there for this to be done. So I wouldn't say that our balance sheet constrains us if the right opportunity arises.

The next question is from James Goodman with Barclays.

A couple of questions, please. Just on the Intesa transaction, I wondered if you could comment on some of the stakeholder reaction there maybe among your larger banking customers or some of the larger merchants. And if it would be possible, give a commentary on the performance of that business maybe in the last quarter, how that might have affected your overall performance had it been part of the business perhaps. And then just secondly, just looking at the numbers within the merchant services division. Just a question on the transaction volume there, where the growth I think was a little slower than prior quarters. I'd expected that sequentially to sort of increase more for the Christmas period. So any commentary there around just the direction or travel on the volume.

Thank you for the questions. I'll take the first one. I will hand over to Bernardo for the second. I think on Intesa transaction, clearly, we cannot comment on the dynamics of the last quarter for that business precisely. Instead on the reaction of the banks and ecosystem, I think it's very clear that -- I mean it's, by itself, a strong signal of direction, the fact that the largest one -- or the largest Italian banks takes a decision, the strategic decision to partner so deeply with a payment specialist of such scale like Nexi in a space that is a very important space for banks and for Intesa themselves. So I think the other banks are looking at the strategic move with a lot of interest. On a different level, Intesa investing in Nexi is new given the fact that there is no governance rights associated to it and the company remains completely independent and able to serve perfectly all banks in Italy. As far as the volumes are concerned...

Volumes, yes, James. Thanks, Paolo. The volume question is well put. But what we've tried to do is highlight how the growth in international schemes has actually been very strong in the year. And in the fourth quarter, the same applies. And this is where we derive the vast majority of our revenues from. The money we make on the domestic debit scheme is small. And the shift in volumes coming from international debit and us pushing this product in the market, which actually siphons off volumes from national debit and transfers it to international scheme, is actually very good news for us in terms of our revenues. So if you actually look at -- into focus on international schemes, which is our primary, I'd say, contributor to revenues, those volumes are growing healthy and they're benefiting from the switch in product, which is good news for us. Then there are 2, I would say, smaller elements which affect national debit on the acquiring side. We actually -- one of our clients has shifted on the domestic debit scheme from us to another provider of clearing on the domestic debit scheme. We're actually not losing revenues on this for the time being at least because we're charging a fixed fee for this, which was tiny. But that impacts volumes, to a certain extent, on the domestic debit. And on the card, this is on acquiring on cards instead. I think we mentioned this some time ago. One of our clients in servicing had actually decided to migrate away from Nexi 3 or 4 years ago. They actually implemented this migration in -- during the -- I think it was April and May this year. And so on a year-on-year basis, we have the effect of this migration. But again, these are small compared to the fact that -- in fact, I was mentioning earlier the fact that international schemes are actually growing healthily and benefiting from the shift from domestic debit to international debit product, which for us is ultimately good.

The next question is from Hannes Leitner with UBS.

Yes. Also, congrats to the good results. Maybe I can -- you can elaborate more on the international schemes on what is your estimated additional growth you are having from that shift from domestic schemes to the international. That's the first question.

We're not giving -- Hannes, I'm sorry. We're not going to give you a breakdown of the various scheme growth and more details than we are already giving you.

Okay. And in terms of your total transaction volume and value, what you reported, can you help us how much was the benefit from the shift to the new ATM versions, which caused the doubling of the CapEx for that part? And what is the overall volume on -- in cash transaction?

Okay. The first question -- let me first start. Just to clarify, there is no problem at all with regards to the CapEx spend. We are just trying to explain why we spent EUR 16 million more on ATMs and SmartPOS, et cetera, in 2019 than we did in 2018. And this was largely in line -- or actually entirely in line with our budget. On ATMs in particular, if I remember correctly, we spent approximately EUR 4.5 million more in 2019 than 2018 on ATM machines. And this was, one, coming from, say, a new contract, a new way of serving one of our customers that underwent a banking merger. And the other is just in general, the ATM machines we are now buying and selling as a service to our clients are newer, more involved, more expensive, effectively, machines that carry higher revenue. So there's no problem. It's just an explanation as to why we're spending more on CapEx on ATMs and POS terminals. Sorry?

I would not say that there was any problem. I would have just expected that you generate higher revenues on those ATMs, which are state-of-the-art. As you mentioned in the IPO meeting around more functionality, you can use more things and you get higher revenues.

Hannes, this is Paolo. You're absolutely right. That's exactly our plan. We are happy to see this evolution happening. It's part of our plan. We are supporting our private banks in their branch transformation projects. And these higher CapEx somehow that are associated with more sophisticated hardware and products, over time, generate higher revenues, a part of, if you like, the better performance in the latter part of the year, and the future expected performance on our Digital Banking Solutions unit are driven also by that.

Perfect. And just a quick follow-up on the guidance for 2020. How should we think about those ranges? What has to happen in the macro environment for Italy that you reach the lower end or the higher end? Or is it about more OpEx stream?

No. Listen, for what we see at the moment, what we see in the market and the outlook we have at the moment, we're confident in confirming this guidance, 5% to 7%, but also to say that we plan to target the upper end. As I said before, if the measures that have been decided to go in place are very effective in second half of the year, we may see some upside in the second half of the year. But we said that it's difficult to identify the one thing that may make the difference in one direction or the other. That's I think what we could comment on this stage. These -- our plans are very much bottom-up starting from underlying growth; adding our initiatives; deducting, as we said in the past, the market risk that we perceive out there. Including what is already happening, we will let the impact going forward. So our planning is fairly detailed, and I really believe that the main shifts may be -- in the short term may be driven more by the market.

The next question is from Adithya Metuku with Bank of America Merrill Lynch

I had 3 questions. Firstly, maybe for Bernardo, when I look at the free cash flow, CapEx was broadly in line with what I had been expecting, but your free cash flow came in much stronger. I just wondered if you might be able to give some color around what -- where the improvements were versus your expectations maybe 6 months ago. I'm just trying to better understand what drove the beat in free cash flow. And secondly, on the transformational CapEx, it feels like it's -- that CapEx will peak this year, and a lot of the investors I talk to look at the headline free cash flow yield. But if this were to peak and if investors can get some confidence around that, I think they'll start to look at the underlying free cash flow yield. So I just wondered if the assumption that it will peak this year is correct. And finally, just a question on the value of transaction flows that we've seen in the merchant services business and the Cards & Digital Payments division. Your -- the value of transaction flows is growing in the low to mid-single digits. And my understanding is that the market is growing in the high single digits. I know, partly, the growth you're delivering is driven by the e-comm exposure. But is there anything else that's driving this growth to be lower than the market growth? Any color around that would be much appreciated.

Okay. I'll take the first part of the question and then hand over to Paolo on more the market dynamics and growth rates. So just in terms of the cash flow, the improvement, the 25% improvement is deriving from the growth in EBITDA essentially. I mean there's no real other reason for this. If you look at it on a normalized basis, if you look at the underlying cash flow, the improvement comes from a reduction in the transformation spend that has come down from EUR 130 million to EUR 50 million year-on-year. But this is, in general, in line with our budget. I mean we're doing slightly better than our budget, and we did slightly better than the guidance but not materially different to what we guided you to. So I think this is a very predictable business in terms of the cash flow growth. We expect this to continue to grow in line with EBITDA, the cash flow and the cash conversion to improve over time in line with our guidance. And going back to the CapEx. I mean the purpose of Slide 13 for us is exactly the point you were making, hopefully convincing investors and sell-side analysts that the way to look at our CapEx spend is this run rate of 8% to 10% of revenues, which may shift by a percentage point or 2 in any given year on items such as, for instance, the acquisition of terminals, et cetera, but is ultimately pretty predictable and stable at that level. And then there is EUR 142 million, not more than that, possibly less, that will be spent overall between now and 2023 on completing our IT transformation. But this is not a recurring item. It's a one-off, cumulative EUR 142 million spend, which is 47% of what was left from initial plan, which we started back in 2016 to spend approximately EUR 300 million on overall IT transformation. So the way we view our business, our cash flow is definitely on the underlying basis and normalizing for this extraordinary spend, which will come to an end in a few years' time. Paolo, on volumes?

No. Sorry, on -- Adithya, on volumes, I mean just to reiterate what Bernardo said, that, yes, you're right. The market -- or the overall market is growing more in the mid-, high single-digit space. The -- as we said in the past previous results announcement, there are some low-value national debit volumes that are moving away from us both on issuing and acquiring. It has happened...