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

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Nexi First Quarter 2023 Financial Results Presentation 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.

Thank you. Good morning. Good morning to everyone, and welcome to our results call for the first quarter of 2023. As usual, I'm here with Bernardo Mingrone; and Stefania Mantegazza, who's leading our Investor Relations team, and we also have a few members of our teams connected to help us in case of need with your questions. I will make a few introductory remarks and comments on volume dynamics that we have observed over the last 4 -- 3, 4 months, and then I will hand over to Bernardo who will cover our financial results, and I will come back with Bernardo for your questions. Let me jump straight to Page 3 with our key messages as usual. First message across the quarter, across all geographies, we have seen double-digit volume growth. As we have anticipated, January has been particularly strong, benefiting from an easier year-on-year comp because of last year January was still a COVID month, hopefully, the last one. We've seen positive volume growth across all categories with a particularly strong contribution from what we defined the high-impact consumption, restaurants, hotels, travel, entertainment and the like. And also in April, which is instead a normal month with, I would say, more standard comparison versus last year, we continue to observe double-digit growth across all geographies. So overall quite strong double-digit volume growth. Second key message. In the quarter, we have seen strong financial performance with solid margin expansion. Revenue grew 9% in the quarter with strong performance across all geographies. Bernardo will comment more on this. We have seen double-digit revenue growth in Merchant Solutions with a particularly strong performance in Italy and DACH and Poland. Last but not least, EBITDA growth has been at 13.6% versus the quarter -- the same quarter of last year with a margin expansion of almost 2 percentage points. So strong financial performance across the quarter. Third and last message, we continue to progress the execution of our strategy. We are well on track with the execution of our strategy announced back in September at our Capital Market Day. That strategy, we want to reiterate is expected to generate about EUR 2.8 billion of organic cash over the 3 years. Over time, we will be allocating most of this cash to leverage reduction, still leaving a lot of room of maneuver to both return money to shareholders and of all the recently acquired assets, the merchant book in Italy, the book we bought in Greece, Croatia and also Spain that we plan to close later in the year. And last, but not least, we are progressing well on our non-core asset disposal plans, and we will tell you more over the next few months as we progress and we come to signing of these deals. Overall, we -- for confirming our guidance for the full year, with revenues expected to be at above 7%. EBITDA growth expected to be at above 10% and excess cash generation at above EUR 600 million. Let me now move to Page 4 and let me comment on the volumes that we've been observing over the last 3, 4 months. Now here, the comparison is with the previous year and therefore, with 2022, you see that across all geographies, we have been observing a total volume growth that is normally the blue line well into double-digit space with peaks in January. Italy, you see 18%, 13%, 13%, was supported by the high impact consumption sector growing above 20% and with a contribution from the foreign cards growth and therefore, international travel remaining very strong at above 50% growth. In the Nordics as well, we've been observing a stronger volume growth, especially again in January, and this growth is continuing also in April. Last but not least, the DACH is also here very strong volume growth above 20% across the quarter. I think here, the relevant line is the dotted blue line, 33%, 29% and 21% is still continuing on a more normalized April at around 16%. So across all geographies, we see the trends that we were expecting, and we see these trends continually according to our expectations also now in April. Let me now hand over to Bernardo to comment on the performance.

Thanks, Paolo. Good morning. I'm on Slide 6. So moving on to how Nexi performed from a financial standpoint in the context of the growing volumes that Paolo has just described. So top line growth, we've seen grew 11%, if you look at it, gross of scheme fees, 9% on a net basis, whereas EBITDA, as we have seen, grew almost 14% with a margin expansion of just shy of 200 basis points, taking it to 45% at the end of the first quarter of this year. Moving on to Slide 7. We have Merchant Services, top line growth, again, double digit. Paolo has already called out the strong performance we've had in Italy and the DACH and Polish regions. This 11.5%, of course, is 14% gross of scheme fees. And this was sustained -- this growth was sustained by strong volumes, particularly in international schemes as we see in the charts on the page. But it's important also to notice how, it's not only the volumes growing that are fueling the growth in our top line, but also the expansion of our footprint in terms of growth in a number of customers, both in the physical acquiring and the e-comm space across all geographies and segments. We have strong wins in SME and LAKA and we are further expanding our partnerships and our footprint in terms of our presence of acquiring through ISVs. Moving on to Issuing Solutions, particularly strong quarter here. You can see top line growth of just north of 8%. Again, I would call out the contribution to top line growth of volumes, in particular here, we have, let's say, recovery in travel-related volumes, both in terms of cards -- Italian cards, in particular, being used abroad, but also commercial cards. We have to be -- to be fair, we have a slight benefit in this first part of the year in terms of a better phasing with regards to contract renewal we had spoken of in the past. So that has helped us. But most importantly, I'd say the key driver to top line growth being volumes and the overall advancement of our cross-selling and up-selling initiatives, in particular, in advanced digital issuing solutions. Page 9 on DBS here. In DBS in the past, this is only Italy -- or the, I'd say, the vast majority of this is Italy once we recast our numbers moving EID and available for sale. And this is a division which is most impacted in the past by domestic Italian banking M&A. So notwithstanding the fact that in the past, we've lost clients, you can see some growth on the top line, which is, again, benefiting from stronger volumes in the first half, in particular, on bank transfers and the EBA clearing framework we manage. If we look at the revenue performance, which, as I said, was strong in the first quarter in every business unit we operate. The same holds true on a geographical basis, which you see on Slide 10 with Italy and the DACH and Polish regions growing almost 10% top line, double digit, if you look at the gross of scheme fees in both Nordics and Southeastern Europe, which are growing above the minimum guidance for the year. If we move on to costs on Slide 11, you see the cost performance essentially should be thought of as being impacted by 4 key components. The first is the investment we've made in people during the course of 2022, and the start of this year. This is catching up in terms of the cost dynamics. The second effect is clearly with the strong volume growth we've seen, part of this speeds into our cost base, notwithstanding the very strong operating leverage we benefit from, we then have some effects coming from inflation. And as we had discussed back in September, when we looked at our projections for the 3-year period, we knew we'd be able to manage the progressive impact of inflation mitigating it, and we are starting to see some of it filter through this year. And then finally, obviously, we have the benefit of our synergies, which are helping to offset these trends and effects on inflation. Finally, if we look at leverage on Slide 12, we have some good news in the quarter. We've already spoken that we have an upgrade from rating agencies. We hope for more to come. I think the key point to remark always is that we have sufficient cash on our balance sheet to cover commitments up until the end of 2025, which stands us in good stead given market conditions. Overall, the book is -- our debt stack is I think -- and again, I apologize if I'm saying it about ourselves, but I believe it's well balanced in terms of the maturities profile, in terms of the mix of funding sources, in terms of the mix of fixed versus floating rate. So we see a leverage profile, which is substantially flat in the quarter, having closed the M&A deal in Croatia. And I think we are -- we have -- we benefit from a very sound balance sheet. So I'll hand over the floor back to Paolo for his concluding remarks.

Thank you, Bernardo. Let me move now to Page 14. As I've anticipated, on the back of these results and what we see in the market, we confirm our 2023 guidance that is, I want to remind is fully in line with our longer-term, medium-term Capital Market Day growth targets. On net revenues, we plan to deliver at least a 7% growth. On EBITDA, we plan to deliver at least a 10% growth. We plan to generate at least EUR 600 million of excess cash at the organic level. On the back of this, we expect net leverage to come down to 2.9x EBITDA organically, 2.6%, including run rate synergies. If you include the announced deal in Spain with Banco Sabadell, you should top it up by 0.1, and therefore, 3x EBITDA and 2.7x EBITDA, including synergies and normalized EPS. We plan to grow at more than 10% year-over-year. Let me now conclude reiterating the 3 key simple messages. Across the quarter, we've seen double-digit growth across all geographies, and we see this double-digit growth continuing in April. Second point, strong financial performance, 9% top line growth, double-digit revenue growth in Merchant Solutions, particularly strong in Italy and DACH and Poland. EBITDA at almost 14% growth with 183 basis points EBITDA margin expansion. And again last but not least, progressing well in executing our strategy, is expected to generate EUR 2.8 billion of excess cash that we plan over time to allocate mostly to leverage deduction still leaving a lot of flexibility to also give that money to our shareholders and focus on highly value-accretive M&A. Let me stop here, and let's open to your questions.

[Operator Instructions] The first question is from Justin Forsythe from Credit Suisse.

Paolo, Bernardo, good to speak to you again. I have a couple for you. Just wanted to first ask around the reiteration of guidance. I understand it wasn't a super [ size ] it would be, albeit [ a beat ]. Is that related to conservatism or perhaps a bit of weakness exiting the quarter. Just looking a little bit at back of envelope math, does appear perhaps a little bit of a slowdown on a [ worst ] 2019 basis and, I guess, on a year-over-year basis in Italy. So maybe you could talk a little bit about trends in your key market? And then I wanted to flip a little bit to a more longer-term question regarding the Nets and SIA integrations. I think SIA was expected to be mostly finished at this point with a little bit of synergy flowing through in '23 with the majority of the go-forward being related to Nets and a significant amount of revenue synergy coming from the e-commerce and omnichannel platform and the next-gen SME proposition. Now that you've had a year to evaluate Nets and the propositions they're bringing to the table, what is the progress on your thinking there? And do you expect to have those solutions integrated? And what is the kind of product map going forward for integrating them?

Justin, thank you for your questions. Listen, on guidance, we consider the first quarter bang on line with our expectations. I want to reiterate the fact that we didn't say that our guidance was 7% and 10%, but it was at least 7% and 10%. And the first quarter was expected to be a stronger quarter than the rest of the year. We've been also very clear in anticipating this when we did communicate the guidance back in February. And we continue to have exactly that view of that expectation. So we don't see at this stage any reason why we should revise this guidance if anything, being 4 months into the quarter, we have even stronger confidence in our guidance. As far as the volume dynamics are concerned, they are, broadly speaking, in line with what we were expecting. And now we are reporting them compared to 2021 because we believe this has become the real -- sorry 2022 because this is -- we are getting to a normal way of living and to a normal comparison as well. And I think this is really important and allows us to go back to also a normal way of looking at numbers. However, we still among ourselves continue to look back to 2019. And if you look at the volumes on Italy that you mentioned specifically compared to 2019. In the quarter, they were up about 40% compared to pre-COVID. And it's a solid 40% continuing also in April. So we don't see any particular dynamic different from what we were expecting. On the Nets, SIA integration, let me reiterate what we've said in the past because what you're mentioning around the focus on SIA and the focus on Nets was more around the organizational integration. As you remember, we did integrate since the beginning of 2022, organizationally, with SIA, especially in Italy, and we had decided to postpone a fuller integration also with Nets later on. This has happened on the 1st of January this year. So now we are operating as 1 company, fully integrated. That's also one of the reasons why it's becoming very difficult for us to talk about synergies because they are fully embedded now into the way we run the business and into our guidance, into our long-term guidance as well. As far as how the plans on the Nets side on the previous -- on the former Nets side concerned, they are basically moving according to plan. We are -- for example, let me give you a couple of examples specifically on e-commerce, as you are referring to that, and that's clearly one of the areas where we were expecting to have a stronger contribution. We have recently launched in Italy, a [indiscernible] solution that allows to maximize basically the probability of success of our transaction, the conversion rate for a merchant and this has been very well received by the market, and this is actually translated from the Nets experience in the Nordics that is now being rolled out also in Germany. A second example. There is a mid-layer that we talked about at the Capital Market Day that we call Nexi Relay that is [ de facto ] mid-layer that allows us to decouple the underlying processing platforms and the customer-facing acceptance platform, the gateways, and that solution that was originally developed to serve the Nets state is now actually being extended to Italy as well. And over the next few months, we will roll out, for example, certain new payment acceptance method in Italy on the back of that platform. So it's progressing overall according to our plans.

The next question is from Hannes Leitner from Jefferies.

I have also a couple of questions. The first one is if you look into your database and you calculate the basket, the average basket of transactions. Actually, you had a decline, which seems a little bit against the typical inflation trends we see. Maybe you can comment on that. And then the second is, could you comment on the Italian landscape. I think Banco BPM is looking to a similar increase the value of their payment assets and their fee income I think, similar to UniCredit. That's for now, then maybe a follow-up.

Listen, on the impact on inflation on overall volumes and so on and so forth, to be honest with you, we gave up to try to have a precise assessment because what we observed in our volume dynamics is a mix of very different things. Now you have the real economy, real consumption dynamics. You have the inflation and most importantly, you also have the cash to digital payments have continued their structural transition. I think inflation is supporting now the top line here, but we also have to consider the fact that real consumption now over the last several months on the back of pressures on energy, pressure on mortgages and pressure on many other things have been suffering quite a bit. I think overall, the mix is evolving in line with what we were expecting. I think -- on your second question, obviously, we cannot comment on Banco BMP and other banks statements. It's for them to comment. Overall, we see in Italy, the dynamic that we see everywhere else where banks continuously revisit their payments strategies and approaches, now realizing the fact that this business is becoming more and more of a technology-centric business and therefore they really need to have a stronger focus and work with dedicated partners, and this is not an Italian -- an Italy-only phenomenon. I think specialization in digital payments is becoming the rule of the game across, I would say, not just Europe, but across the world. So it's very consistent with what we see everywhere else.

Okay. And then just a short follow-up on Justin's comment and your answer on it in terms of it goes according to plan, the integration of SIA and Nets. Maybe you can comment around that if there are more assets you have so far identified, you might want to divest or spin out looking into this after you had now moving a couple of assets is available for sale.

Hannes, I would reiterate what we said at the Capital Market Day. We had identified for sure, and therefore, made explicit with the market, our plans to sell the Nets DBS business, the electronic identity business in the Nordics and the Buy Now, Pay Later business that we have in Germany. But we also said that, especially in the third business unit, in the overall DBS business to be continuing to revisit the portfolio to make sure that all the different products and services and assets that we have there are really core to the strategy and we can continue to focus our investments also on them. So it's a continuous evaluation of options. And for now, there is no new news on that front.

The next question is from James Goodman from Barclays.

And the first one, just on DACH, where we a very strong volume acceleration in the quarter, I think up into the mid or high 20s depending how you look at that. But the revenue growth at 10% is quite similar to other regions. So the question is just why are we seeing a lower level of conversion of that very high volume into revenue in DACH, and then given the midterm outlook for that region to reach mid-20s growth? When and why do you the acceleration in the revenue side on that? The second question, is just around press reports again last month that the Italian government is meeting with, I think, banks and payment firms, retailers in order to discuss again potential additional taxes on transactions, I think up to EUR 30. Can you just talk a little bit about that regulatory backdrop and evolution in Italy and potentially if you've run any stress tests or otherwise around any sort of impact of that sort of legislation.

James, thank you for your questions. Let me take the second one, and then I will hand over to Bernardo for the one on DACH and Poland. On the Italian government side, I think that the only relevant comment is that the conversations are continuing across the different stakeholders on the topic, obviously led by the government. It's taking probably a little bit more time than what it was expected. But for what we see, we see pretty constructive approach from outside. For the outlook, we have at the moment, we honestly don't see any material impact on our growth and our financials. We should always remind the fact that since 3, 4 years ago, ourselves, we started a specific promotion to support micro merchants on, smaller merchants on smaller transaction. We're out in the market since 3, 4 years was basically the option for merchants to basically the app for free transactions below the EUR 10 and we use this to have the merchants on one side, but also to stimulate usage on the other side. And all in, we do not expect any negative impact of the ongoing conversation. On DACH, let me hand over to Bernardo. I think one element to notice is that probably DACH has been one of the regions where last year, COVID impact was the strongest. And therefore, this year, the rebound is also the most visible and the most positive on the link with revenues and over to Bernardo.

Yes. No, I think the first point to note, James, is that -- is DACH and Poland, actually, in Germany, it was growing significantly more than Poland. So that's an average of the two. And then the other point to note is that the rebound in volumes is primarily coming from travel, and this is probably larger merchants, lower average take rates. And finally, obviously, not all volumes translate into top line growth because we also have revenue being generated from the installed base, so you can just say, 20% volume growth, 20% revenue growth. However, you strip out Poland, Germany is much more similar to that top line growth.

Well, I think here, just to help you figure it out, actually German revenue growth in the quarter was above 20%.

The next question is from Sandeep Deshpande from JPMorgan.

My question, again, coming back to one of the earlier responses from Bernardo, you were talking about travel being a constituent of your growth in Germany. Are you seeing this travel being a constituent of your growth in Italy and particularly China travel, has it returned. And in terms of -- because you can see it with your card mix. That's my first question. And my second question is regarding the growth you're seeing. I mean, of the acquisitions you've done, I guess, only the Greek acquisition may have a 1-year period where you can see the growth. And can you comment on how you're seeing the organic growth within that business asset or in the acquired businesses?

Sandeep, let me try to address both of them. Then if Bernardo, you want to add something more on the specific M&A performance, please do it. On travel, I mean, you see it clearly in our volume page that now the high consumption is clearly not sustaining a very high level of growth. And you see clearly that when it comes to the contribution of international travelers, you have the example of Italy, this is particularly stronger and continue to be particularly strong. And we expect this to continue throughout the year as international travel fully recovers plus honestly, at least my point of view is that in the new economic environment post COVID, I think whatever has to do with social activities and services, we see a very positive dynamic potentially, rebalancing a lighter spending on a more discretionary spending type of goods. Specifically when it comes to China or Russia and the impact of all these elements, I think we said in the past that both China and Russia were very small part of our total volumes, low single digit of the international travel component. And therefore, now that at least the Chinese volumes are recovering, it's true that they are recovering. They are already -- they are -- sorry, I'm just looking at the numbers here. The China volumes are still below -- materially below the pre-COVID, but actually growing almost 2x what they were last year. But again, the impact on the total numbers remains pretty low. On your second question...

Yes. No, if we look at it, I think Paolo called it out at the beginning, I think we're very -- we're extremely happy with the performance of the assets that we acquired and closed during the year. But -- then I spent a word on some of that as well. But if you look at the performance of Croatia, which we signed in the first half of last year, only closed at the end of February because of the, say, the lengthy process due to Croatia entering the euro area and the approval process took a little longer, but we were accruing cash on -- as part of the agreement, we basically took the benefit of the performance from signing until today. In Croatia, the book there is growing 30%, I think, in the first quarter year-on-year. If we look at Alpha Bank, Alpha Bank is also growing like 15% or so. I mean we won't be giving the details every quarter. But given that we've disclosed and I got the question, I thought it would be helpful to highlight how -- and by the way, BPER, which is an entity as well, is performing much better than any other merchant book, say, we acquired. Why? Because in the first quarter, we normally go and work on those customers that are loss-making. We price them and get a benefit early on in the process. And if we look into Spain as well, I think Sabadell made comments to that effect. Of course, we don't get the benefit of that. We haven't closed the transaction, but that book is also performing better than our average. So the 4 acquisitions I've just mentioned on average are all performing better than the average of the portfolio, which is clearly good news.

The next question is from Sébastien Sztabowicz from Kepler Cheuvreux.

You mentioned healthy price dynamic in issuing contract renewal in Q1. You explained a little bit the reason behind that. And also attached to that, in the Nordics, where are you standing in your contract negotiation and specifically the price adjustments that are materializing there? And the second question is on the business trends for the second quarter. We are only 1 month into the second quarter, but what kind of net revenue growth do we expect for Q2? Do we expect growth more or less in line with the middle of our guidance, above or below, depending on the ups and downs?

Sébastien, let me try to take the two questions. I think, in general, we see -- I mean we tried to point it out -- to point out this positive and healthier dynamic of price renegotiation in the issuance space because that's actually what we see. I think this is driven by a combination of elements. On the one side, I think that the flow of those contracts that were very old and that were maybe highly priced on the back of the acquisition debt repricing has already happened, and now we are actually moving into a more normal market dynamic. Add on top of it the fact that more and more, when we renegotiate contracts, we were able to add more products and services, more value-add and more components of the value chain. And last, but not least, obviously, inflation is making everybody more price aware. And clearly, we can also justify a certain type of dynamic. By the way, in most of the new contracts, we're also including inflation-linked annual repricing, which we believe, given the fact that the future is a little bit unclear, now what the normal -- the new normal level of inflation will be -- we believe is super important and super strategic. As far as the Q2 business trends are concerned, allow us not to give a quarterly guidance, sorry, if I put it that way. But it's also very, very difficult because you're starting to discuss a few million euros shifting from one quarter to the other both in terms of revenues and cost. Again, let me just reiterate the fact that we continue to see all elements to confirm with confidence our full year guidance. Obviously, the first quarter is stronger than the rest of the year because of the easier comparison with last year. But let me stay on this statement without getting into the specific quarter dynamics, more than that.

Okay. And just to the Nordics, most of the contracts have been renegotiated and repriced and there is no more lingering impact moving to Q2, is it a fair assumption?

No, I think we are mentioning in the comments in the page the fact that we still have some impact from one legacy contract, and that impact was expected to be more material this year but maybe instead postponed to next year. But again, in the big scheme of things, given the size of the group and given the size of what we are talking about, these type of things, the overall performance of the business are actually pretty much diluted and, therefore, much less impacting.

The next question is from Gianmarco Bonacina from Equita.