SeSa S.p.A. (SES) Earnings Call Transcript & Summary

Welcome, and thank you for joining the Sesa Full Year 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Conxi Palmero, Investor Relations Manager of Sesa. Please go ahead, madam.

Good afternoon. I welcome you to Sesa Group's financial presentation of the annual results as of April 30, 2020. On behalf of Sesa, we participate myself as Investor Relations Manager of Sesa; and Mr. Alessandro Fabbroni, Group Chief Executive Officer. In the early afternoon, we made available our corporate presentation on Sesa's website under Investor Relations section that we can follow during the conference call. Mr. Alessandro Fabbroni will introduce the key points of the presentation.

Thank you, Conxi, and good afternoon, everybody, and thanks for joining our conference call. In the full year as of April 30, 2020, we achieved truly outstanding results and we improved all key drivers of our business. Sesa Group overperformed its long-term track record, thanks to a growing focus on the main segments of IT innovation by developing lines of business as a security cloud collaboration in order to lead digital transformation services to Italian and European [ listings ]. Thanks to our strategy of human capital development, that is the main driver of our growth. We reached a total count of 2,500 human resources as of April 30, 2020, up by around 700 people year-on-year, resulting from new recruitment and education programs and from the contribution of the external growth with the launch of Base Digitale new group sector that contribute with around 300 new specialized human resources. Full year consolidated revenues reached EUR 1.8 billion, up by around 15%. The EBITDA reached EUR 94.5 million, up by 27%. The EBITDA margin was equal to 5.30% compared to 4.80% of the previous year, while group adjusted earnings after taxes grew by over 30% to EUR 41 million. And finally, our net financial position improved to net liquidity and cash for around EUR 55 million from EUR 42 million of the previous year. That means that EUR 75 million of positive net financial position. That means cash and liquidity, excluding IFRS 16 adoption. Annual results reflected the really strong last quarter performance in the Q4, with profitability growth higher than the full year, despite the slowdown of economic cycle and the full lockdown that affected Italy over the months of March and April 2020. In Q4, we reported group revenues for around EUR 430 million, up by 7% quarter-on-quarter, with quarterly EBITDA results equal to EUR 25 million, up by 19%. The EBITDA margin in Q4 was equal to 6% compared to 5.30% of the full year, while quarterly earnings after taxes adjusted reached EUR 10 million, up by 32% quarter-on-quarter. Under COVID scenario, we supported digital innovation demand from companies and organizations, thanks to a growing group focus on the main digital trends as collaboration, cloud, security, cognitive analytics, where we have recently invested to reinforce our market position and our market share. All group sectors overperformed with strong revenues and profitability growth. System integration reported revenues for about EUR 400 million, up by 16%. EBITDA equaled to EUR 38 million, up by 44%. The EBITDA margin reached 9.50% in the full year and 11.90% in the all the Q4. The adjusted EAT was equal to EUR 11.3 million, up by 45% year-on-year, thanks to growing contribution of software, cloud and security services business unit. VAD sector reported revenues for EUR 1.45 billion, up by 11.6%. EBITDA was equal to EUR 53 million, up by 14.4%. EAT adjusted improved to around EUR 25 million, up by 24%, thanks to double-digit growth in revenues from security, collaboration, cloud and enterprise software. Finally, in the 2 months of consolidation, new group sector business services achieved revenues equal to EUR 8.2 million and EBITDA equaled to around EUR 0.6 million, with 7% EBITDA margin. The growth in revenues and profitability resulted for around 25% from the changing -- change in the scope of consolidation, thanks to recent corporate acquisitions that mainly refer to system integration sector. Sesa also achieved a strong annual operating cash flow for around EUR 95 million, thanks to positive trend on the operating profit and the working capital management under control despite the adverse scenario, with the year-end net financial position at Q4 EUR 55 million compared to EUR 42 million as of FY '19, net of EUR 45 million of investments, combining M&As and CapEx and EUR 30 million of dividend distribution, buy-back plan during this year. So a very positive set of financial results, not only for the full year, but in particular, for the last quarter. Now I give the floor again to Conxi to explain in details our M&A pipeline that we accelerated under COVID scenario and some of the main proposal in agenda, our timing for August meeting of August 28 and 29 on second quarter. Please, Conxi.

Thank you, Alessandro. The Sesa Group has actively supported a sustainable and long-term group growth. In fiscal year 2020, about 25% of revenue and profitability growth derived from the contribution of the recent acquisitions closed before April 30: Gencom, operating in digital security; PBU CAD-Systeme, operating in digital process in German market; Pico, operating in digital media solutions; and Base Digitale, since March 2020, operating in the new sector business services. Since 2015, Sesa closed 21 M&As, of which 5 in value-added distribution, 15 in software and system integration sector and 1 to launch the new group sector business services, investing about EUR 80 million and focusing on high-value segments of digital transformation. The M&A will generate, in the full year 2021, over EUR 300 million of revenue, EUR 29 million of EBITDA with over 1,250 specialized human resources. In 2020, we closed 9 acquisitions, of which 5 since May 2020. We boost our pipeline in order to attract skills and know-how and obtain deeper penetration in high-growth business segments. The targets have been quickly integrated with a strong commercial and operating synergies, reporting a significant improvement after the time of the acquisition, up by 15% in terms of average growth of revenue and up by 52% of average growth in EBITDA. All acquisitions were based on industrial and long-term vision, balancing key stakeholders' interest under a long-term commitment more than 5 years or 7 years we asked to be committed in the long term. On value-added distribution sector in 2020, we closed 2 main acquisitions, Clever Consulting and Service Technology. That [ January ] contributing in 2021, on a yearly basis, from EUR 12 million of additional revenue and EUR 1.2 million of additional EBITDA. In February 2020, we launched the new group sector of business service with 300 resources and about EUR 50 million of annual revenue, focused on business services, process outsourcing and digital transformation for financial [indiscernible] enterprises, allowing Sesa to penetrate on additional market segments with major customers. In software and system integration sector, Sesa has closed most of its M&A activity. On April 2020, we performed the acquisition of 55% of zero12 with about 20 resources focused on cloud computing and big data analytics with revenue from EUR 1 -- EUR 2.5 million and EBITDA for EUR 1 million. In May 2020, we acquired 51% of Infolog with 40 specialized resources and software solutions for warehouse management system with revenue for EUR 4.2 million and EBITDA for EUR 1 million. On May also of 2020, we bought the majority stake of Analytics Networks and SPS, companies focused on cognitive and advanced analytics with revenue for EUR 6 million, another EUR 1 million of EBITDA. On June 2020, we acquired 100% stake of Di.Tech with over 250 specialized resources, of which over 120 based in Romania, focused on software solutions in the food distribution sector with revenue for around EUR 20 million and over EUR 2 million of EBITDA. Di.Tech is the key digital partner of Conad Group, the largest Italian player in food distribution. In fiscal year 2021, we estimate additional revenues for EUR 90 million, with average EBITDA margin over 10% from change in cost consolidation starting from May 1, 2020. After reviewing our M&A pipeline, I provide some information about our shareholders' meeting plans for August 28 and August 29 in the second call to approve the following main proposals of resolution: Considering current emergency, investment to support digitalization demand and the acceleration of the external growth under the market consolidation, the Board of Directors propose to suspend dividend distribution for the current year and to allocate annual profit to reserves; Board of Directors also will propose to renew the buy-back plan for EUR 3.5 million. Under Point 1 of the agenda of the extraordinary Shareholders' Meeting, Board of Directors will propose to introduce the vote increase mechanism under Italian corporate law. The vote increase mechanism will attribute 2 right of vote for each share belonging to the same subject in case of a holding period not less than 24 months and starting from the date of registration in the special release [ recorded ] by the company. The resolution should promote long-term investors to participate to Sesa governance by strengthening group management focus on sustainable value generation in the long term. The vote increase mechanism that provides the long-term shareholders a double right of vote will not be applied to resolution of Shareholders' Meeting regarding remuneration of Board of Directors nor plans based on financial instruments. Now I'll give again the floor to Alessandro for our final conclusion.

So thanks, Conxi. We show a very positive scenario in terms of market position and capability of Sesa Group to deliver more than 10 acquisitions over the last 12 months with very, very low multiple paid. We estimate a multiple on EBITDA paid on the last acquisition below 5x the EBITDA. In addition to that, Sesa may start the full year 2021 with strong contribution of the last acquisitions. We estimate additional revenues for around EUR 90 million and additional EBITDA for over EUR 9 million. And we continue to support the boost and the trend of digital transformation demand under a scenario of progressive recovery of Italian and European economies from COVID emergency. And so finally, despite the uncertainty and the slowdown of the economic cycle and considering the growing demand of digital services and also the Sesa Group growing role of reference player and leader in digital services market, we may confirm today our positive outlook for the new fiscal year 2021 and our commitment to continue to grow double-digit in particular in terms of profitability under the following guidelines. We will continue to invest in human capital and on the main digital trends as security, cloud, digital process for Italian and European SMEs and enterprises; to achieve group revenues and profitability growth rate in line with our historical track record that is between 10% and 15%; to continue to accelerate our M&A pipeline in order to try to overperform, if possible, our historical long-term track record. Group results confirm our value generation strategy with the consolidated EBITDA margin moving from 4.70% 5 years ago to 5.30% in the full year 2020, driven by system integration growing EBITDA for -- on total consolidated EBITDA from 25% in 2017 to 30% in 2020 and system integration EBITDA margin improving from 6% 5 years ago to around 10% in full year 2020. And among the extraordinary goals we reached in 2020, let me underline again the additional 700 people that we introduced in our organization with over 250 people from the recruiting of young, new employees from Italian universities that we introduced to group training and education programs on strategic business lines. And we do believe that they will strongly contribute to group growth on the coming quarters. So thank you for your attention. Now we stay available for the Q&A session and your questions.

[Operator Instructions] The first question is from Renato Gargiulo of Fidentiis.

Yes. Well, my first question is on -- is about your -- what you are seeing as the current business environment, because in your press release, you were citing a good trend for May and June. So just if you can give us any update about June and what you are seeing relating to the recovery, let's say, post COVID. The second question is about your cash generation, because you reported a stronger-than-expected cash generation in the last part of the year, the fiscal year, driven by -- also by working capital, which was 3% of sales in the last quarter. I was just wondering what are the main drivers behind the -- this figure and what are you expecting for this year, for the next fiscal year on working capital? And then the third question, just a clarification. I've seen that you booked almost EUR 4 million extraordinary provisions in the last quarter. I think that they are mostly related to COVID-19, but if you have any more detail, any more color on that?

So first of all, the question about the trend of revenues in May and June 2020. We are managing a full capacity recovery of our organization in terms of working hours. And the trend of revenues in May and in June was really positive, not only in terms of revenues, but also in terms of order. And that means double-digit growth over the 2 months of May and in June, including also the change in perimeter of consolidation that we consider, that we begin to consolidate some of the acquisitions we said, we announced. That means every relevant Italian sector, district, is recovery in progressive way from COVID emergency. That does not mean that the emergency is finished, but that the districts are recovering. The other point is the cash generation. We performed very well due to, first of all, strong improvement in the operating profitability. And on the second then, we continue to improve our working capital growing efficiency that we experienced since 2014. We moved from an average net working capital to revenues of 13% in 2014 to a 6% average in 2020. We performed very well in 2020, also thanks to a great set of procedures and great monitoring that we introduced on credit and collection due to COVID emergency. And as a result, we performed well in terms of working capital management. I don't remember the final question, Renato.

Yes, the last one was just a clarification, because I think you booked almost EUR 4 million of extraordinary provisions in the last quarter. I think that they are mostly related to COVID-19, but if you can give any more.

Yes. Yes. Yes. I think that we take several procedures. Also in terms of provision, we improved by EUR 2 million, not EUR 4 million, the provision in the last quarter in order to try to take under control also the trend of credit and collection and the risk of our account receivable portfolio. But as of today, the trend of credit collection is well-performing, really well-performing. And so that is a procedure that we introduce. And now we are trying to perform, to do our best in order to avoid that provision can generate losses.