Quest Holdings S.A. (QUEST) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Quest Holdings Conference Call and Live Webcast to present and discuss the 9 Months 2023 Financial Results. The event today provides the opportunity for participation via audio conference and live webcast where our representation deck is provided for your convenience. [Operator Instructions] And the conference will be recorded. The presentation will be followed by a question-and-answer session via audio conference only. [Operator Instructions]. At this time, I would like to turn the conference over to Quest Holdings management. Gentlemen, you may now proceed.

Welcome, ladies and gentlemen. My name is Alexandros Roustas, and I'm the Investor Relations Officer of Quest Holdings. And I'm sitting here with our CEO, Mr. Apostolos Georgantzis; and our Deputy CEO and Group CFO, Mr. Markos Bitsakos. We are here to present you the financial results of 9-month period of 2023 and answer your questions. Now I will give the microphone to Mr. Markos Bitsakos for his opening remarks.

Good afternoon. I am Markos Bitsakos. Quest Group in the 9-month period maintained the double-digit growth in revenue, although with a slightly slower pace than the previous quarter. Earnings before interest, tax and depreciation ended with an increase of 9.6% versus last year and earnings before tax were 2.7% lower than last year, being primarily impacted by the significant increase in financial expenses and depreciation of the new infrastructure in logistics and Courier central sorting hub. Speaking about the increase in financial expenses, I would just mention that on last October, Euribor was floating in the area of 0.2% compared to 3.9% today, creating a delta of 3.7%. This increase in Euribor alongside with higher needs in borrowings led to an additional cost of EUR 3.4 million versus last year. Depreciation additional cost for the period amounts to EUR 1.5 million. Apart from the increased costs in interest expense and depreciation, in last year results, there were capital gains amounted EUR 1.3 million, plus EUR 1.2 million one-off extraordinary profit. On an adjusted basis, this year's earnings before tax is higher versus last year, by almost 3%. To summarize in the 9-month period, our total consolidated revenues reached EUR 827 million, increased by 11.8% versus 2022. Consolidated EBITDA amounting to [ EUR 59 million -- EUR 47 million ] is enhanced by 9.6% vis-a-vis the EUR 44.5 million in last year. Consolidated earnings before tax amounting EUR 41.4 million is reduced by 2.7% versus last year. And lastly, earnings after tax and noncontrolling interest reached EUR 31.9 million at the same level as last year. The group net debt is EUR 23.7 million compared to EUR 27.9 million net debt in the same period of 2022. So it's slightly better than last year. Now I will pass you over to Alexandros, who will give us the sector overview.

Thank you, Markos. Now diving deeper into those segments, we observed that the commercial activity segment, which includes 2 newcomers, Epafos and Xiaomi, Romania continued to grow by 12.5% at the sales level while EBT decreased by minus 7% year-over-year, mainly affected by increased interest rates and depreciation, as Markos noted. It's worth noting that the segment's EBITDA increased by 21%, mainly due to the contribution of [indiscernible] . IT services sector sales, consisting of Uni Systems and Intelli improved by roughly 15%, while its EBT grew by about 7.8%. Demand for IT services continues to be strong due to the high number of digital transformation projects of the private and public sector. Roughly 40% of sales are related to international activities. Postal Services with ACS grew by roughly 6% in sales and 3.6% in EBT assisted by the growth of e-commerce. Q3 results were, however, adversely affected by one-off costs related to the floods in Central Greece during December. Last but not least, Quest Energy segment sales also were lower by minus 5% and by 2.2% in EBT. Reason for that is reduced some sign and in general, not favorable weather conditions during 2023. Now let me pass over to Apostolos to provide the outlook.

Thank you, Alexandros. Good afternoon from me too. I'm Apostolos Georgantzis, Quest Group's Managing Director. As already have been explained by Markos and Alexandros, most of our segments grew during the 9-month period, while some of them presented double-digit growth rate with the first quarter being the strongest. In more detail by sector, the outlook is the following: regarding the commercial activity sector for the full year 2023, we estimate growth in sales and EBITDA but lower versus last year EBT. Furthermore, we have proceeded with an expansion of Xiaomi operation in Romania as well as to other niche areas such as the Epafos acquisition mentioned, increasing Quest Group out footprint. These new operations are expected to mostly contribute as of the next year 2024. Regarding the IT sector -- services sector, this segment is continuing to be positively affected by the strong demand in IT services, while it has a high backlog of signed projects exceeding EUR 500 million, and growth and improved profitability is estimated for the full year 2023. Going now to the Postal Services sector. Our estimation for the full year include the growth in sales and profitability, mainly driven by e-commerce growth. Finally, for the Renewable Energy production sector and Quest Energy, we estimate an improved pace compared to the first 9 months and similar to slightly lower results compared to 2022 as explained by Alexandros just before. On a consolidated basis, our estimation for the whole 2023 is positive for revenues and EBITDA, profitability, which are estimated to grow at a pace similar to that of the 9 months of 2023. EBT is estimated to be close to the 2022 levels. Quest Group current cash position is solid, with above EUR 200 million in cash and available credit lines, allowing us to continue our planned growth investments and to endure hardships. We will also continue to pursue M&As in order to further [indiscernible] growth. Now let me pass back to Alexandros.

Okay. That was a brief overview for the 9 months of 2023 as well as the outlook for the full year. We are now happy to take your questions.

[Operator Instructions]. The first question comes from the line of [indiscernible].

Can you hear me?

Yes, but please speak a little louder.

Okay. Is that better?

Yes, it is. Yes.

Okay. Two questions, maybe the first one. Obviously, the 9 months numbers look good. Looking into more of the Q3 trends, what I'm seeing is, obviously, the IT services growth has slowed down significantly in the third quarter. Could you please maybe come back on why is that?

This is Apostolos Georgantzis. You said you asked whether you see a decline in the growth -- in the pace of the commercial sector, correct?

No, no. Let me reformulate. Looking into the Q3 numbers, you tell me if my numbers are right, but on the IT services, [ Uni Quest ] the growth has slowed down significantly to 4% on the third quarter. Is that correct? And if so, could you please come back as to why is that?

Yes. This is correct. If you just see the sector of IT services, the growth has slowed down a bit compared to the first 2 sectors. And the reason is because traditionally, this is also a period that includes August, which is not a very strong period in general. But it's something that we estimate to be improved during the last quarter of the year. First 2 quarters were both very strong, representing a growth rate of above 20%. The third quarter in terms of sales was a single-digit growth. Overall, they summed up to about 15% for the full 9 months. And we expect the last quarter to be much more strong compared to the third quarter, which is not indicative, let's say, of the whole period.

Okay. So nothing to worry about there. It's just a slow month of August.

No, no. Still the demand is quite high in this sector. And the challenge we have in this sector is to find the appropriate let's say, capacity in terms of head count and specialized people to execute the projects. However, yes, we haven't seen really some growth coming from the RRF projects yet. During the first 9 months, we booked only EUR 2 million in margin, though we have more than EUR 100 million in signed contracts. So most of the growth that you see here in this year comes from the remaining sectors and not the Greek private sector -- public sector with regards to very large technology RRF projects for the modernization of the public sector in Greece.

Okay. Perfect. And maybe just one question with regards to the backlog you published, you say more than EUR 500 million to be a bit more precise, how long is the -- do you recognize the backlog for? Is that only signed contracts? Basically, what is the visibility you have in terms of number of years or months with regards to the backlog?

Yes. The backlog we're referring to is only signed contracts. Some of these contracts could go, however, up to 3, 4 years down in the road. Of course, the first 2 years usually are stronger if you spread them out through the next years. And then you have a small sliding down of the curve, let's say, of these projects. But then on we have new projects coming out and this continues. And during the past 3 or 4 years, every year, we have experience to have a bigger backlog. The challenge here is to be able to find the personnel to be honest, to execute these projects. And we've been doing several actions to succeed on that as well.

Okay. That's very clear. And maybe a question on the commercial activities. I was pleasantly surprised by the good performance of Quest during the third quarter. Considering obviously a tough comparison basis and the macro backdrop, the numbers were, to my opinion, very good. Could you please come back on what were the underlying trends of outperformance in the third quarter? Were they mostly related to the climate sector? And also moving into, obviously, Black Friday week is a large significant contributor to revenue. Maybe could you tell us a bit more on how is basically everything evolving into entering into the fourth quarter with regards to demand trends but also stocks and supply chain problems, if there is any.

Okay. That's Alexandros. You're right. The third quarter was not bad in terms of revenues from the commercial sector. The main contributors to this are 2 companies. The one company is G.E. Dimitriou, which is the company which distributes the Clima and air conditions in the Greek market. There was also a program of subsidized, which subsidized the Clima equipment, and it went pretty well. That's a growth generator for our commercial -- for the EBITDA and our commercial G.E. Dimitriou and our commercial segment in general. The second company who did very well in terms of revenues is Xiaomi, Romania. It's this new company we've established in Romania at the beginning of the year. And it has started warming up, and it's going better and better every month. However, the other companies in Info Quest, iSquare did also well. They didn't do, but the aggregate results in revenues is what you see in the third quarter in general in the 9-month period. Now as far as Black Friday is concerned, it's too early. However, the distribution companies have already made the revenues from Black Friday, have done their sell-out one month earlier, which is in October. And although we have no final results, our opinion is that they did pretty well. Now getting on to the next year in terms of revenues, and first of all, we don't have any logistics or stock type of or supply chain problems. Now in terms of revenues in the next year, it's too early to comment on that, we'll see as the market evolves.

The next question comes from the line of Kalogeropoulos Yiannis with Beta Securities.

I have two questions. One regards the commercial sector. If you could please quantify out of the total commercial activity, I mean, on the top line, on the sales level of the EUR 563.5 million. How much does it relate in combination to the Xiaomi Universe business, I mean, both Greece and Romania? That's the first one. And the second one relates to your balance sheet and your cash flow. We see an uptick on your working capital requirements from the full year figure of EUR 40 million approximately to the EUR 110 million on the 9 months result. That's the additional working capital required to fund your expansion in your commercial business, I guess, and most probably the expansion on the Clima sector. Do you see that reversing and coming back to the normal levels of the EUR 40 million, EUR 50 million that we show in full year '22 or we will equalize on higher working capital requirements for 2023 and going forward, related most probably to your growth on the resale sector.

This is Markos. As far as the working capital is concerned, you are right that the working capital needs for the group is higher than last year. And you already answered partially, let's say, your own question by stating that there are additional needs for the expansion that we made in Romania plus the Clima sector. Now the trend for the working capital is always the same. During the first 9 or 10 months of this year, we have intensive capital needs for working capital to support, let's say, the business. And as long as the commercial sector is growing, it is logical that we should expect, let's say, a positive trend also in the working capital needs for 2023. The working capital was used to reduce first of all, trade payables by EUR 36 million and fuel the additional needs for inventory and trade receivables by EUR 22 million. Now altogether, this is summing up to close to EUR 60 million, plus the additional requirements that we have for the distribution of dividend of EUR 21 million. So about the working capital needs for the end of 2023. I suppose that it's going to be a little bit higher than last year. But definitely, it will be better than the one you see now.

Okay. That's very helpful and clear. And related to the Xiaomi business, the total contribution on the turnover of the commercial sector, I mean how much does it weigh on the EUR 563.5 million turnover of the commercial sector, the Xiaomi brand name?

Yes. This is Apostolos. I'm going to give you a number, but it's quite a rough chart of my head now. We don't have it as a quick answer. We can't provide it separately if you want. I think Markos -- give him a moment. For the 9 months, the number altogether for Greece and Romania rounds up to about EUR 90 million, just above EUR 90 million. So it's about, let's say, about 20%, some like that, out of EUR 560 million created in the commercial sector.

So it's very close and quite similar to the -- to the iStorm contribution, right? I mean not -- okay, Apple, also iSquare. But I mean just the pure retail of Apple, which is the iStorm which is around EUR 90 million -- EUR 100 million yearly sales. So Xiaomi is quite approaching that figure, that the number of Apple -- the sales you are doing for your network, the iStorm, correct?

The -- it's a totally different business, however. The Xiaomi business is a wholesale business for Greece and Cyprus with a small footprint with only a few retail shops, Xiaomi stores. While the iStorm business, a pure retail the business. IStorm altogether in terms of size is about on a yearly basis, close to EUR 90 million. The Xiaomi business altogether is above EUR 100 million. And now this year, it's growing -- seems to be doing quite well after the second quarter, to be honest. It's picking up as the models of the company are doing quite well, plus we have entered the Romania sector, which is now gradually getting more traction in order to further increase our sales through this expansion. And mostly, we're going to see expansion from Romania and small part also from the new acquisition, Epafos, next year as this has, let's say, been executed mostly during the second half of the second quarter let's say. So Romania expansion started only after the first quarter, during the middle of the second quarter. And Epafos was acquired, if I will recall, close to the end of the first half.

The next question comes from the line of Bourazanis Marios with Eurobank Equities.

I have two quick questions. The first one is, if you could elaborate a bit further on any investment plans going ahead? Meaning what you're planning to do going ahead? And also, how CapEx has evolved in the current year versus your initial expectations?

This is Markos Bitsakos. As far as the CapEx is concerned, we have lowered the anticipated CapEx for the whole year in the range of EUR 20 million to EUR 25 million. 1/3 of it is related to ACS and another 1/3 is for Quest Energy. The remaining is distributed among all other subsidiaries. We have lowered this amount, mainly because of delays that we had in the investments that we had planned for Quest Energy. And in the first 9 months, we have completed almost 40% of the annual budgeted CapEx, which is EUR 13 million, which is quite low, let's say, for the total amount that was initially anticipated. My estimate is for the entire year. As I said, we will fall short from the planned CapEx initially announced at the beginning of the year. Now the first part of your question was about new investments. We are always active and keen and looking around to finally say new alternatives for inorganic growth. We are not able today to give you something more concrete, let's say, but we are always looking for new investments.

Okay. Great. And if I could ask another question as well. if you could provide some more insights on the -- on how interest rates may look going ahead.

Well, this [ isn't any] regular question. I would say that at least our estimate is that these higher rates that we face today, which is close to 4% as far as the Euribor is concerned, plus the bank spreads. It's going to be with us for quite a lot of time. I mean it's not going to be decelerating quickly. I don't think that we will face another increase or at least a significant increase. The interest rates to our mind, let's say is going to stay in the same level as the ones that we are facing today, more or less.

I'm pleased from our understanding for the next 6 months, let's say -- it's more than that.

Maybe I would anticipate them to fall shorter than the one today in a year period from now, something like that. At least this is our plan, this is our budgets.

The next question is a follow-up question from the line of [indiscernible].

Two questions on the courier business. You mentioned some floods, obviously, in Central Greece, sorry, in Q3. You mentioned one-off costs. Has there been any significant disruption of the business? Obviously, in the third quarter, the ACS revenue was not growing year-on-year. So is it only the impact of the floods in Greece, and we should expect back to Q4 into more normal growth levels.

Yes. Thank you for the question. This is Apostolos Georgantzis. We've seen that during the -- I mean, in general, I would say the third quarter wasn't so strong. Our businesses regarding the commercial sector as well as the postal services were affected due to the following reasons. The first is regarding the consumption. The consumption increase in general during the third quarter wasn't so strong due to the reasons that we've had big fires during August and big floods during September. And this affected a lot the -- let's say, the psychology as we understand of the consumers. And we've seen them let's say, in several categories of products, let's say, the demand to be more flat compared to what we see in the previous period, which was a growth apart from that. So this also affected the commercial part, e-commerce and some of our retail business speed. Now regarding the courier part, apart from the, let's say, not so strong demand in consumption, which also affects the courier sector because it relates about 75% to e-commerce. It was affected due to the regions -- due to the floods -- big floods that happened during September mainly in the Central Greece. We -- the national road between Athens and Thessaloniki, which is the main, let's say, connection of the north to the south, we're interrupted for about 3 weeks. And this created a big hassle because we had to move to do another, let's say, 500 kilometers to go around this in order to arrive from Thessaloniki to Athens. And nowadays a big part of our volumes also come from abroad. It's a cross-border business. Therefore, the costs relating to that plus additional overtime and labor hours we had to execute in order to probably serve these volumes, created an additional one-off cost, which amounted to more than EUR 400,000, affecting also our results. So we see that this thing after, let's say, mid of October, gradually, this situation improved since we don't have any other floods or fires, thank God. And business is picking up together with the consumption. It's not very, very strong, but it's much better compared to what we've seen during the period of August and September and mid-October maybe. Hope I have answered the question.

Yes, yes. That's very perfect. So that means you have EUR 400,000 more in costs in Q3. So retreating from that, the margins were up at 18.5% without the EUR 400,000 cost additional. Maybe the other question also relates to that is, can you maybe come back on the progress you've made with regards to your new sorting hub or are things doing right now? Are you fully operational or not? And maybe give us a longer-term perspective as to the economies of scale you will be able to manage with the new sorting urban on the ACS business. What kind of margins can we expect in the longer run, let's say, the next 3 to 5 years when the new sorting hub is fully operational?

Thank you for the question. I would start first talking about what we see during this year for this business. We're talking about the postal sector and the courier and the parcel business. We've seen a growth, but it's not as strong as initially we thought that it would grow. And the reason for that is due to the fact that the market is, we're in the post-COVID period and the following 2 years of very big growth that we had during the period of 2020 and 2021. The next 2 years, 2022 and 2023, we see, let's say, not so strong in terms of growth in the e-commerce, also affected due to the, let's say, consumption trends due to the reasons of high energy, interest inflation, let's say. And we estimate that the growth going forward from next year would be much better for the next 3 to 4 years since e-commerce penetration to retail is still at low levels compared to what we've seen in more developed countries such as the U.K. or even if we see China, it could be 4x or 5x higher than what we experience here in Greece. Therefore, the outlook is still very positive for this business. We've done this big investment in the new sorting hub. It's been completed nearly. We're now on finalizing some automating -- automation, let's say, small automation investments with regard to robots and -- but they're relatively small. And the more -- the more the volume grows, the better the return is from such an investment because it's automation investments and it increases the productivity, the bigger the volume you have. So we are quite positive on our outlook for this business. Of course, in the medium -- in the short and medium term, such as 2023. We've seen that it wasn't such a strong year in terms of growth of the whole market because of the peculiarities I've just explained. Now going to the margins. You've seen during the first 9 months, an EBITDA margin of above 16%. We believe that this is going to continue and slightly improves, but it's not -- cannot really go a lot higher than that. It will grow -- gradually grow as we grow in terms of revenue. So after 5 years, could arrive to 20% -- be a bit above 20%, but it couldn't, let's say, double as it's a volume business. And the more the volume grows, the more the -- let's say, economies of scale and productivity coming from the operation in the new installations would kick in.

Okay. Yes. Perfect. That's a very clear answer. And maybe another question with regards to the M&A activity. Obviously, there has been a lot of noise since the summer with the sale of Kotsovolos. Maybe can we have an update on the situation? And from what's been told, you were not necessarily in the favorable position to take the deal. Maybe if -- could you come back a bit on the strategy going forward into what are you currently looking at? Are you seeing any interesting targets outside of that and everything?

Thank you for this question. This is Apostolos again. Our strategy behind Kotsovolos was our continued -- let's say, continued view that which would become -- have a bigger, let's say, footprint on the retail business. Our retail business at the moment is not our biggest part of the commercial business. With regards about altogether, including iStorm, you.gr and [ Xiaomi ] stores and all the rest, about EUR 150 million for 2022. It's about 20% of the total. The rest, 80%, mostly regard to wholesale business. Therefore, the view -- the strategy behind going after Kotsovolos was that should ease, let's say, a good opportunity also in terms of valuation to enter -- to have a more stronger footprint on the retail as well. We didn't, however, we weren't so aggressive on that part because also it's a market that has a lot of peculiarities and risks. And therefore, we gave a bid. We participated in the tender, but we weren't the most aggressive one in terms of valuation. Apart from that, our strategy in terms of M&A and inorganic expansion mostly regards to areas where we see either making us more strong. This was the case of Kotsovolos and retail or areas that could make us to grow faster and -- or to increase our margins. For example, the entity that we've done a couple of years ago in the Clima sector, related to both because we've seen that the Clima sector is very promising, this year is proving that. Yes, this is quite profitable and helps us include a lot, if you see in the EBITDA margin of the 9 months in the commercial sector improved a lot, much more than the increase in sales. And also, we expect that during the coming years, we can have a much bigger penetration of increase, let's say, of this market because it's been at very low levels for many years. And only in the replacement of about 3 million units -- old units in the Greek market is a big opportunity for us. And we're one of the big players in this sector, we have a footprint through 2 big brands, Toytomi and Gree and we're quite optimistic on that. Plus, we will be able to exploit the opportunity to grow this business abroad as well. Our view is to first try the Romanian market in which we entered through the Xiaomi business last year, and we believe that there could be opportunity. Therefore, sometime next year, we will be able to do that. I hope I gave you a good answer. Answering all the questions, if I forget something, please come back to me.

Yes. Perfect. And maybe a more longer-term question because obviously, you have -- there is a lot going on in the commercial activity sector. You have increased penetration with the Xiaomi products. You have the climate sector that is developing well. The willingness to develop a bit more retail compared to wholesale. Maybe could you give us a vision, if you can, into the commercial activities sector -- segment, sorry, within in the next 5 years, basically, how do you see the mix evolving in terms of, I guess, the Clima will take more space in the mix and that will be helpful to the margins. But with regards to Xiaomi, Apple, et cetera, retail wholesale, how do you see basically the mix of the segment evolving in the next 5 years?

Yes, this is Alexandros again. In terms of the commercial segment, we are planning in expanding in other consumer electronics sectors, like we have started doing during the last 2 years. Clima sector is an interesting sector. Other sectors like [ SDA or MDA ], with new brands to be launched are coming. We think this sector is interesting because it's very close to our knowledge of the market. The customers are more or less the same, the large retail networks, and the margins are more appealing than in the technology sector. So since we did start, I think that there are more opportunities coming to this. Now as far as retail is concerned, we are examining opportunities. And if we are to make a move, it will be thoroughly thought and balancing all the risks as Apostolos said before. So more or less, this is -- those are the guidelines on which we are moving through the next period.

Okay. Yes. And we're positive about the sector. We believe that it's going to grow, hopefully, at similar growth rates while we're growing over the last 3 years. We've managed to do double-digit growth rates and already this sector -- this is Apostolos. This sector is being developed by many individual activities. We have about 12 different companies with this sector. And if sometimes one is not doing so well, but the others are doing. The overall sector is performing quite well, as you've seen even last year and this year, especially in the operational profitability and sales, which are growing with double-digit rates. Of course, this sector due to working capital is affected in terms of the bottom line. We hopefully be able to do better after we've seen also interest rates going down, it could be maybe the second half of next year, as Markos explained.

The next question is a follow-up question from the line of Bourazanis Marios with Eurobank Equities.

Another question for me. If I could circle back to IT sector -- IT services, I'd like to ask how much of the current backlog of Uni Systems is related to RRF projects?

This is Markos Bitsakos speaking. The amount is approximately EUR 100 million. And in general, I would like to clarify that out of the EUR 500 million backlog, 50% or a little bit more than that is coming from abroad -- from European Union and several institutions. So it's 50% Greece, 50% international and out of the Greek backlog, EUR 100 million are coming from the RRF project.

[Operator Instructions]. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Apostolos Georgantzis for any closing comments. Thank you.

Yes, thank you. Dear ladies and gentlemen, we all would like to thank you for your participation and interest to our company and its prospects. We wish you to have a nice afternoon. Thank you.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling. Have a good afternoon.