Seco S.p.A. (IOT) Earnings Call Transcript & Summary

I now have pleasure handing over to Clarence Nahan, Head of Seco's Investor Relations. Please go ahead, Clarence, the floor to you.

Thank you very much for joining us today. So as you know, this morning, our Board of Directors approved our set of first half numbers for the year. And in the next hour or so, together with Lorenzo Mazzini, our CFO, who will run you through these figures, leaving ample time for questions at the end. We will also share an update on our recent business performance as well as some insights into the outlook for the rest of the year, confirming our positive sense on the rebound in 2025. But first, let me hand it over to Massimo Mauri, our CEO, for the key takeaways of these first 6 months.

Thank you, Clarence, and good afternoon to everyone. In the past quarter and for the rest of our years, we continue to navigate in a challenging market environment with inventories digestion still begin underway. This driving some prolonged weakness in demand across all the geographies and industrial verticals. As such, we saw the decline this quarter of the revenue, and it ended the first 6 months at EUR 95.3 million. This was largely expected, and we managed to mitigate its impact, thanks to the strictness and the resilience of our business model and client base. In particular, the expansion of CLEA, our software business, delivered a profitable steady growth with a contribution in excess of 13% of the revenue. And CLEA also allow us to improve again our overall gross profit margin by over 300 basis points versus the same period last year at 52.7%. As we are building our business for a long success, we have continued to invest in our structure in our OpEx. Therefore, the incidence of our offer had a negative effect this quarter on our adjusted EBITDA. For the first half of the year, this figure ended at around EUR 60 million, close to 15% of the revenue. I expect our operating leverage will play again in our favor as we will see revenue pick up into the next year. As we presented this number, I want to insist on the fact and in this tough context that our #1 priority is to continue to lead by innovation, create value for our customers and deliver long-term profitable growth to our shareholders. We are operating in a very fragmented sector with only few comparable listed stock. So I think we combined it together in a slide just to show to point against the performance of the 2 company listed in Taiwan, Advantech and ADLINK. I think from a revenue perspective, the strengths of our business model has allowed us to be significantly more resilient, both on the 2022, when we were growing more than the competition, also now when we are decreasing, yes, but less on the competition. I think this is also important to look at the gross profit margin, where thanks to our position as industry leading into innovation and our unique business model, was able to outperform the market. All in all, in the gross profit margin as well as the growth that we reached on over the last 2 years. This is also thanks to our unique business model that we build around the transition from module to system before and from system also to an end-to-end hardware-software solution, thanks to CLEA, we launched just 3 years ago. I will come back to it when we will talk about the business update later and as well, we will provide you the guidance for the end of the year, and we will share we view also a positive view on the 2025, where we are expecting to bounce back in a normal revenue of growth for our sector. But for now, I leave the floor to Lorenzo to present to you in more details our numbers. Please, Lorenzo.

Thank you. Thank you very much, Max, and good afternoon to everybody. Let's look together to our key financial highlights in the first half of 2024. For what concern, net sales -- the net sales that we are projecting now is decreasing due to the market context featured by interest rate. It caused a decrease in demand and the destocking trends across all customers, all geographies and all the industries with really limited exceptions. So this is something related to the market, the macroeconomic trend. A thing that we would like to point out is, for sure, the growth we recorded in the first half of the year regarding our software business, which increased by 17% with respect to the same period of last year. Just a couple of words regarding our gross margin performance, in particular on relative terms. As Max already said, we increased the gross margin by more than 300 basis points, 312 in particular. This is due to mainly 2 factors. The first is the higher initiatives of the software business revenue that reached 13%, a percentage never reached in the past. And moreover, thanks to a more favorable market condition for what concern the components that reduced month-by-month their costs. For what concern, instead, our performance at adjusted EBITDA margin. On relative terms, you can see that we have a reduction. This reduction is explained by 2 main factors. Firstly, obviously, a negative operating leverage effect over our OpEx due to the decrease in sales. And secondly and importantly, we have, in particular, in Q2, another incident of direct production cost, so variable production cost over sales due to an unfavorable production mix in this quarter. Just last word regarding net income. You can see the figure relating to net income. I would like to highlight just a point on this matter, that is the tax calculation. Here, taxes are calculated with theoretical rate, so just applying the corporate tax rate of the different company with consolidate. So this adjusted net income do not include all the benefits that we can have in a full tax calculation that is usual we are going to perform for the end of the year. Let's pass to the next slide, and let's have a look all together to our breakdown of sales that we recorded in the semester by geographic area and by market. An important message that I want to pass here is that we have no differences with respect to the other quarter or to the other reporting period, so the decrease that we are facing in sales is equally spread in geographic area and in market. So that's defined that this comes from macro market conditions. Our customers stay with us. We are just highlight some exception that is vending and fitness that performed really well because these are two in which we have important and big customer that performed -- let's say, outperformed the particular market context. Just the last word on this slide is the performance of CLEA, 12.6 million in the first half of the year, 13% of sales with, for sure, a positive contribution to our profitability that will continue for the future. Adjusted EBITDA. Here, we reported as usual, the bridge respect to the first half of 2023. I want to comment two matters. The first matter is something that I already highlighted before. So the fact that this decrease in percentage term of about 7 points. Four points is explained by direct production costs that increased in the second quarter due to an unfavorable product mix in sales. The second comment that I would like to make is just a specification regarding the adjustment to EBITDA. As usual, we adjust the actuarial value of the stock option plan, and we adjust extraordinary transaction cost. You see that here, we recorded EUR 3.9 million. The biggest part of EUR 3 million is explained by an examination that we had from the tax authority starting at the end of last year, and we closed the agreement on June of this year for a cash payment of EUR 2.3 million, plus an accrual of EUR 600 million that our auditors asked. To us, what is important and what I want to highlight is that this examination covered the period from '15 to '22. So we have no tax risk up to 2022. And I think this is a pretty important agreement that the company reached for some that is for sure reasonable. Let's go to my last slide of this presentation, that is our performance in terms of adjusted net financial position that on the other hand, we can see the cash generation of the group in this period. You can see that we closed the second quarter with EUR 61 million in net financial position, adjusted with respect EUR 57.3 million, with, let's say, an increase of EUR 3.6 million. However, we have to highlight that these figures have been affected by extraordinary payment. One I have already said before, that is the EUR 2.3 million paid to the tax authority, Italian tax authority. Other than this, we paid a EUR 1.8 million dividend to our final minority. And moreover, this, we spend EUR 500,000 to acquire the land for our new plant. So adjusting these extraordinary cash-out in the period with respect to the first quarter of 2024, we generate more or less EUR 1 million of cash. Last word regarding our leverage that is absolutely under control. If we do the last 12-month calculation, we are at about EUR 1.4 million, despite the fact in this half, we are decreasing EBITDA. I leave the speech again to Max, and thank you very much for your attention.

Many thanks, Lorenzo, for this detailed review. And I want to take the opportunity to give you an update on our business and strategy. Let's start first from the industry, so our market. I think it's important to outline that we are at the core of one of the most exciting niche within the tech industries. The projection that we are observing are made by external analysts that are really foreseeing a structural growth that will benefit very soon for a very long term. I think the era of the IoT is still at its very early stage of adoption. Therefore, we will see plenty of room of improvement of the opportunities as well as the growth that we are expecting to see as a double digit for a foreseeable future, especially within the industrial application. Maybe we can go to another slide. Thank you so much. I think it's important also to outline the fact that we are -- and here, you can see an example of our important customer in the medical sector. Just to outline that we are basically perceived as a mission-critical partner for our customers. This is true, and this is why the long period of evolution with our customers is 1 of the key characteristic of our business. I think that is the key message of this slide, and I think it's important also to see that this is true across many different kind of vertical market with many different kinds of customers, where Seco is really growing with them for a very long time. And this is particularly true if we go also in this slide, where we summarize, basically, which was the pillar of our growth over the past 5 years. And you can see that we are growing because we are, of course, growing with the existing customer base, increasing our share of wallet. We are growing because we are getting new customers. And when we get new customers, we are growing because it's new, so it's generating an additional portion of revenue. But after it, we will continue to grow into these customers producing basically an additional layer of growth. I think this is important because our business model, it's a very strong business model, and we will already demonstrate it over a lot of results that we posted in the last 5 years. And we will continue to demonstrate it despite also the difficult market conditions that we are facing, which is something that is coming from -- after years of growth that we benefit. And maybe we can go to the next one. Here, we summarize in some way, which are the key, I would say, design win that we got in the last 6 months that we're starting to generate revenue already in 2025. As you can see, this kind of design win are made -- basically build across many different kinds of geography, many different kinds of end industries and also application, and is exactly how you can consider Seco as a technology company that is really able to win a business in Japan or a to win a business in Europe, to win a business in U.S. in a different market, penetrating new customers and creating a long-term, sustainable growth. I think it's important also to make a recap on the software side. And we need to come up to clear, we recognize that there was a lot of expectation on the market at the time of the IPO. But from there, our strategy has not changed, and we are continuing to believe this is the natural evolution of our industries and -- but having a complementary offering makes us much more relevant for our customers. And this is true, and this is something that will continue to grow as we go because this market is really in the very beginning of the development phase. So we would see as we go benefits that are coming from this, such of product and this such strategy more and more relevant. We are ahead of the competition. We stay now very ahead of the competition. And this is true because we are continuing to implement our product as we did a few days ago with the launch of CLEA OS, and we will continue to do it also by the end of this year. And the beginning of the next year, we are planning to launch very relevant innovation within our platform as well as we are working for providing a news flow in the near future about important agreement that we are closing and signing with big partners on this part of business. The business grew anyway in the -- 20% last year, and continues to grow close to 20% also this year. We are expecting it will continue and also will potentially further accelerate starting from 2025 also because we are working in some way to enlarge our ecosystem of partners, building a group of players at different level between the chip maker, the cloud partners and the system integrator channel that all in all are creating an ecosystem of players that actually enable CLEA working well inside the customers' infrastructure, providing us a lot of pipeline growing, a lot of new opportunity that this kind of ecosystem is actually producing quarter-by-quarter.

Thank you very much, Max. So summarizing this presentation and looking ahead, we are fully committed to going back to double-digit growth and capture the rebound in demand that we expect for our industrial sector. Our strategy, as you know, relies on 3 key pillars. Starting with our edge computing business, which on top of a normalization of volumes, will be fueled by design wins with both existing and new clients. The hardware side will also benefit from the tailwinds provided by the increasing need of computing power at the edge to run AI models, a product segment on which we have been one of the first movers. On the software side, CLEA will continue to get traction as it is gradually adopted by a larger share of our clients as well as pushed from a larger pool of partners within our ecosystem. On that topic, you should expect regular updates in the coming months. Finally, we expect M&A to be a key focus next year as we continue to position ourselves as a consolidator within the sector, like we have done successfully in the past 5 years. Touching upon the ESG topic. This is core to our strategy for long-term profitable growth and a key focus of our management team. In fact, we fundamentally believe that digitalization and sustainability go hand in hand. To our product offering, we pride ourselves to be at the forefront of helping our clients to increase their efficiency, reduce their waste production and optimize their energy consumption. As such, we are already recognized by two major rating agencies as amongst the best-in-class in our sector, and we will continue to work on improving these ratings. Finally, we feel it is the right moment to guide the market towards our forward-looking performance. We believe this increased transparency is necessary in order to continue building long-term and healthy dialogue with our shareholders and with the broader financial community. We expect the second half of the year to be broadly in line with the first as we see order intake gradually materialize, and this should allow us to end 2024 with revenues in excess of EUR 180 million. Our gross margin is expected to remain above 50%, an industry-leading level, which we are very focused on maintaining. Going into next year, the company is geared to capture the full benefit of the expected rebound in demand, which should allow us to go back to delivering 15% organic top line growth combined with a return to our historical profitable levels. And I want to stop here to leave enough time for Q&A and take this opportunity to thank you very much for your attention. The floor is now open to questions.

[Operator Instructions] The first question today comes from [ Danilo Macari ] (00:25:54). His question is, in terms of order level, do you see a recovery?

Well, looking at the order intake book, first of all, it's due to the different kind of lead time in terms of material. It was 45 weeks 1 year ago, and it is now 12, 11 weeks. So it's very difficult to compare the level of orders. Anyway, we had enabled a first sign of recovery with a monthly order intake. It was over 10% growth versus the 2023, and with a book build ratio back to 1, which is the first sign of recovery. I would say it's too early to say that it's a clear sign of it, but it's a first sign. Let's see how September and October will go, and at that point, we may be more specific on it in the next conference call that we will host later in November. Thank you very much.

Our next question today comes from Mr. Marco Vitale.

It's Marco from Mediobanca. The first one is about the outlook. You were mentioning that you are planning a second part of the year to be broadly consistent with the first part. This implies still a negative trend in organic growth. I was wondering if you could provide us some details about where we are in terms of customers destocking and what is still driving this negative top line growth, waiting for a rebound in intake. The second question is about profitability. You mentioned earlier that you don't see any need to adjust your OpEx base as you're confident in demand recovery. I was wondering if we should expect a similar level of EBITDA margin in the second part of the year, similar to the first part or there is room for doing something better? And then third, the last question is about the CapEx plan, if you see any need to adjust your plan or you're broadly confirming the around EUR 20 million CapEx for this year?

Thank you, Marco. So let's start from the last question, so it was about CapEx. We decided to stop basically any extraordinary CapEx. So we did it already one month ago. And so I would expect to see a decrease into our CapEx level. It will be materialized for sure in the second quarter of the year. In terms of profitability, we are expecting to have the same kind more or less profitability. Even if we could have rumors of improvements in the second half because, as Lorenzo mentioned it before, we had a certain kind of cost that was in some way an extraordinary cost that we suffered during the first half of the year, in particular, in the second quarter. So we still see a room of improvements, and we are also making a spending review. But I would like to say that we have a good level of OpEx in the medium and long term speaking, and I really focus the company now in restarting and building a stronger 2025 and hopefully, we could leverage a better end market. And so let's see how the order intake will be in the next quarter, but I would expect are rebounding in 2025. It was -- so looking -- just to complete my answer on the profitability, let's assume the same kind of profitability even if we can have some room to improve it for sure. About the first question, it was regarding the 2025 growth. So we have already secured a list of new customers that will start to generate further revenue, additional revenue, I would say, in 2025, both on the hardware and on the software side. A part of it, I can make to you a clear example. We have a bigger customer, one of the biggest of the company, top 3 customers in terms of level of revenue that is acting on the medical side of the business. It is a 25 years old customers, and this year, this customer is down by 80% from the normal level. As you can imagine, it is only driven by the level of their inventories, but due to a combination between the core and the shortage reached on a very normal level. Well, we just received yesterday a confirmation from the customer that this is over, finally, and the customer will start to go at the full speed already in the first quarter of 2025. Let's keep it as an example. We need it happens basically in any customers. I would say at least 60%, 70% of our total customer base was in this kind of situation this year. Our capability to generate new business was definitely destroyed by the negative growth that we performed on a very long-term customer base that we had, which is at the minimum level of spending with Seco across the -- and over the last 10 years, which is, by the way, a very uncommon situation that we were forced to face. I'm thinking it will progressively be out by the end of this year, early next year, so let's see. Maybe I can be more specific again in November, but we are definitely positive about the 2025 pushback -- pullback, sorry.

We now have three questions from Arianna Terazzi. Her first question is, just to avoid misunderstanding, the guidance on 2025 guidance is referring only to the organic growth. Am I right?

Yes, it is correct.

Our second question then is, could you please share more details, at least for your confidence as of today, about double-digit growth in 2025 on top of the design win you mentioned, which if I understood well, could not become revenues entirely in 2025? And aside from the expectation of the market growth, is there any additional indication or figure you can share in terms of order intake?

Yes. I think I already covered previously all this such elements that are posing the questions. So I would like to go to the next one. So thank you very much for the question. I think it's already covered.

Perfect. She just has one more question, which is and also how the mix you expect would allow to reach the gross margin you see for 2025?

I think as we observed already in 2024, our gross profit margin is expanding, but is expanding because of structural evolution of our offering from 1 side in the hardware driven by the switch in between boards to system, and from another side on the software driven by the adoption of the recurring revenue base, which is growing basically every quarter on CLEA. And the mix in between the two is giving us a situation where we are extremely confident that this kind of expansion of the gross profit margin can be sustainable also for the 2025. And thank you very much for the questions.

Our next question then comes from Philip Popatini. His question is for 2025, will we see also a recovery in margins as well as revenue as given by your outlook? And also, can you give more color on the debt situation and its evolution?

Right. So first of all, in terms of margin, as you may know, 70% of our OpEx are fixed cost, mainly wages, people. And therefore, when we will see your revenue bounce back to the normal level, at that point, we will see the margins coming back where we were at a historical level during the 2023, 2022. That's something that is mathematic. In terms of the other question, it was related -- I don't remember well now. Okay, the net debt. Okay, the net debt expectation is to be more or less stable/to be able to generate some cash also in the second half of the year. As you see, in the second quarter, we're actually generating EUR 1 million of cash, net-net, meaning excluding the extraordinary investments. We are not planning to have further extraordinary investments, which are not planned in the second half of the year, so I would expect to see a positive contribution on the cash generation. Therefore, I would expect to see a net financial position fully under control by the end of the year. And thank you very much.

We now have a question, which is can you give more examples and explain why they are key? Before this, I'm sorry, there was -- you are mentioning your ecosystem for the software and how it is helping to push more adoption. Can you give more examples and explain why these are key?

Yes. Just to give a couple of examples of it, we are now have a good pipeline with a very advanced discussion with 4 new customers that are coming from Google, which is our partner on the platform, Google Cloud. It's providing us some new customers that we won in table to touch directly. And thanks to Google, we have now 4 very well advanced discussion with 4 important potential customers for the platform, as well as some of the system integrator that you are observing on the slide, also them are basically providing customers' application and market opportunity that we are following. So these are two clear example how we are playing on this such of ecosystem. Just to be more specific, I can mention you a couple of examples also of the kind of end user experience we are working on. One is on the car wash opportunity. There is a big carwash company in the U.S. that is looking for monitor with an IoT infrastructure all of their shopper. We are talking about something in the range of 5,000 to 10,000 points, which is an example, and we are facing it with one of the system integrator that are on the slide. On Google, we are talking with 2, 3 customers in the sector of the energy sector as well as consumer sector as well as coffee sector. So we have different kind of application where our platform, it's important for the customer to build a full IoT ecosystem from the edge to the cloud. That is basically the kind of contribution that the ecosystem is providing. And I would expect to see a sort of snowball effect on it as we go as much as we build such case, epic customers, we will have more adoption and more pipeline to build. Thank you very much.

Currently, we do not have any questions queued. So we'll wait just a few moments to give everyone the opportunity to ask a question. As there are no further questions, I will now hand back -- the word back to the speakers for any final comments before bringing this presentation to a close. Thank you very much.

I think thank you very much for everyone for connecting with us. Clarence is, of course, at the disposal for any further follow-up you may need. Thank you again, and good afternoon to all. Bye-bye.