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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Sesa First Quarter 2020 (sic) [ 2021 ] 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 the Sesa Group financial presentation of the first quarter consolidated results as of July 31, 2020. On behalf of Sesa, we participate, myself, Investor Relations Manager of Sesa; and Mr. Alessandro Fabbroni, Group Chief Executive Officer. In the early morning, we made available our corporate presentation onto the website under Investor Presentation section and we can follow this during the conference call. Mr. Alessandro Fabbroni will introduce the key points of our presentation.

Good afternoon, everyone. Thank you, Conxi. As of July 2020, we achieved outstanding quarterly results. We improved consolidated revenues by 11% and profitability by over 30%. So we overperformed again our double-digit growth track record. Under pandemic scenario, Sesa Group boosted its focus on lines of business like cloud, collaboration, security, cognitive and digital services, continued to lead the digitalization of Italian and European enterprises. In the first quarter, we increased by over 300 people our human capital. With globe employees totaling 2,842 human resources as of July '20, up by about 900 people compared with July '19. Thanks to the internal recruitment of 250 young graduate people and to the contribution of over 600 people from standard growth that represents, I remember, a key driver of scheme and human capital development. After disclosing full year 2020 annual results last July 14, with annual revenues up to EUR 8.8 billion (sic) [ EUR 1.8 billion ], growing by 15%. EBITDA equal to EUR 90 million, up by 27% and group earning after taxes up by 31% to over EUR 41 million, we reported again record results in Q1, confirming our resilient approach to pandemia by all group sectors. In details, over Q1 2021, we reported quarterly revenues up by 11% to EUR 488 million. EBITDA up by over 30% to EUR 28.4 million, and earning after tax is equal to EUR 13 million, up by 31.9%. Quarterly EBITDA margin achieved around 6%, growing by 90 basis points compared to around 5% in Q1 2020 and 5.30% in full year 2020. The growth in EBITDA was mainly organic with a significant contribution equal to 42% from external growth, mainly coming from system integration sector. Software and system integration sector continue to boost its profitability, reporting revenues up by 12%, EBITDA growing by over 50%, with record results in terms of EBITDA margin equal to 12% from 8.60% of the previous year, while group EAT in system integration sector increased by around 70%. Value-added distribution sector recorded the quarter growth on top line equal to 6.5%, thanks to new partnership in cloud, collaboration and security, while EBITDA grew by over 10% and EBITDA margin moved from 3.60% to 3.70%, with a net profit after taxes up by over 15%. Finally, in Q1, new group sector business service achieved revenues of around EUR 12 million and an EBITDA margin equal to 6%, in line with the annual targets. Lastly, group net financial position improved from a positive balance cash and liquidity of around EUR 1.5 million at July '19 to around EUR 10 million as of July '20, thanks to the increase in operating cash flow and a growing efficiency in working capital management despite the COVID outbreak, net of investment for around EUR 25 million over the quarter. Over the last 12 months, we achieved a record operating cash flow equal to around EUR 100 million, net of around EUR 60 million of investment in M&A and CapEx and net of EUR 30 million of dividend distribution and buyback plan. I remember, we refer to the dividend distribution in September '19. Now I give again the floor to Conxi to explain details our M&A pipeline that we accelerated under COVID scenario with the 12 acquisitions since February 2020. Please, Conxi.

This is the operator. Sorry, is your line on mute?

[Technical Difficulty] kind of growth, as you know, our stimulus support of the sustainable and long-term growth with a strong acceleration over the last 12 months. And the [indiscernible] we have in and the need to break any detailed transformation gap on businesses, organizations and consistence and first by focusing its own strategical development in the most innovative business areas of the market through intensive corporate acquisition activity and investment in human capital. Thanks to this proactive approach, Sesa is building its role of key player in the Italian vehicle transformation landscape since 2015 as it closed 22 (sic) [ 21 ] M&As, investing about EUR 80 million and focusing on high-value segments of digital transformation, of which 12 acquisitions performed since February 2020 and the COVID emergency. All of our M&A activity is generating, in the fiscal year 2021, EUR 310 million of revenue, over EUR 50 million of EBITDA with over 1,300 specialized human resources. All 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 on revenue and up by 50% also on average growth in EBITDA. All the acquisitions were based on industrial, on tradition, on long-term key stakeholder interest under their long-term commitment. It means more than a year. In the period of May-July 2020, Sesa Group accelerated our own growth path with external life on all business sectors, closing 5 new deals, for example, the software and system integration sector. On May 2020, Sesa Group acquired the majority stake of [ zero12 ] with about 20 resources specializing in cloud computing and big data analysis, with focus on application development and SaaS architecture. On May 2020, we also acquire majority stake on Infolog, specializes in software solutions for digital warehouse management with over 200 customers operating in some of the main Italian districts, with a staff of over 40 people highly specialized. On May also 2020, we announced the acquisition of the majority stake of Analytics Network and SPS, specializes in cognitive and analytics enterprise segment, with a human capital of about 20 resources and consolidating expertise in data analytics to support predictive analysis, machine learning and artificial intelligence. In July 2020, we also purchased 100% of Di.Tech, a company based in Bologna with over 250 resources specialized in retail software solutions and digital IT service, with 100 resources also in Romania. Di.Tech is the reference digital partner for Conad Group, as you know, a leading operator in Italy in food retail sector with over 3,300 points of sale. Anyway, on August 2020, we announced the 55% of acquisition of WSS Italia, Worldwide Software Solution Italia, company based in Milan, with 50 specialized resources skilled on system management and application management on Italian and Swiss market. The company will enter in sizable consolidation areas in the Q2 2021 fiscal year. On the value-added distribution sector of [indiscernible], we closed 2 deals: Clever Consulting on service technology, operating and security solutions, and the Service Technology, respectively. The 2 companies will contribute, in fiscal year 2021, for EUR 12 million of additional revenue and EBITDA margin up by 10%. Now in 2020, we also announced a new partnership with PM Service, a technological solution company for digital energy and environmental sustainability. We are very highly focused on sustainability. Finally, in February 2020, we launched a new group sector, Base Digitale with 300 resources and about EUR 50 million of annual revenue, focused on process outsourcing, security and digital services for financial and large enterprise segment, allowing Sesa to penetrate in this additional market segment with major customers. Last week, business services announced its first M&A with the majority stake acquisition of Elmas, a company with 25 resources, highly specialized in physical and perimeter security converging to physical security, where Sesa is a leading Italian player for enterprise segment. In fiscal year 2021, we estimate total additional revenue from the last 12 M&As equal to EUR 100 million with more than 10% of average EBITDA margin. So now I give again the floor to Mr. Fabbroni for our final conclusions.

Thank you, Conxi. So we began the new fiscal year 2021 with one of the best quarter in Sesa Group history as for revenues, human capital and profitability growth, and these results that we achieved after 10 years of double-digit growth in a continuous way and in a sustainable way. Under pandemic scenario, quarter 1 record results have confirmed our capability to bring value generation with a consolidated margin that is moving to 6%, driven by a 12% EBITDA margin in system integration sector that represents a record performance. Thanks to the EBITDA contribution of business services new sector, for the first time, software and system integration sector and business services sectors jointly generated 50% of total consolidated EBITDA. For the full year, we will continue to support economic cycle recovery from COVID emergency and the growing demand of digital services. We may benefit from contribution of the last acquisition, 12 M&As since February 2020, that we'll fully consolidate starting from Q2 2021. We also continue to invest on the 2 main drivers of Sesa Group long-term growth: the human capital development and main digital trends. That means security, cloud, collaboration, cognitive and analytics. And among the achievement of Q1, let me underline the additional 300 people joining our group. And on second hand, the M&A pipeline that we boosted a lot since February 2020, reinforcing Sesa Group leading role as reference player in Italian digital industry. Considering the financial performance we achieved in Q1, considering also a record trend of revenues that we performed in August 2020, up by over 30% in the only month of August and assuming no relevant COVID disruption on the current scenario, we confirm a very positive outlook for the full year 2021, targeting growth rate in line with the achievement that we reported in Q1 with a top line growth between 10% and 15% and a target of about EUR 2 billion of revenues and an EBITDA growth around 30%. That means around EUR 120 million in the full year, with an EBITDA margin targeting 6%. As usual, we will continue to target a group management with a view of sustainable and long-term growth. We thank you for your attention. Now we are available to answer your question.

This is the Chorus Call conference operator. [Operator Instructions] The first question is from Renato Gargiulo of Fidentiis.

Yes. Well, my first question is just a clarification on your outlook. Just trying to understand what kind of visibility do you have. You are talking -- you were anticipating a further strong sales acceleration in August, plus 30%. Do you expect this trend to be likely confirmed also in the remainder of the second quarter based on your current order backlog? My second question is on profitability. Clearly, the major driver of margin expansion in the quarter was the software and system integration division. But we have also seen some slight improvement for VAD by 10, 12 basis points [ year-on-year ]. Just trying to understand, is this also mainly attributable to business mix or also to some operating efficiencies also in the first quarter? The last question is on working capital. You reached probably the lowest level for working capital on sales in the first quarter, looking at your past figures, 4.9%. What kind of expectations do you have for this item going forward? Do you have still room to improve it? Clearly, also taking into consideration the seasonality of the business.

Thanks a lot, Renato. First of all, the question about the outlook. So we are facing a strong growth in digital services demand and in particular, in the month of August and September. We are planning a growth in Q2 in the second quarter higher than the growth in first quarter, considering also that in the first quarter of 2020, we grew by over 40% in profitability and after the Q1, we managed a slowdown. So we are strongly committed in 30% growth rate. Over the second and the third quarter, we may evaluate an improvement of our outlook. But considering the scenario and COVID environment, the outlook as of today is grow by 30%. The second point, I understand, is the trend of profitability in VAD. We grew by around 40% in software and system integration sector. Software and system integration is growing by an average of 45% over the last 5 years. VAD is a sector that is recovering a lot. And the VAD EBITDA margin over the last 3 years is moving from 3.30% to 3.70%. And we consider this improvement sustainable also in the mid-term. The driver -- the main driver is the sales mix, so the quality instead of quantity revenues, and obviously also a strong focus on efficiency. We are trying also to take advantage from the driver of digitalization projects that we started inside our organization, probably in value-added distribution in all Sesa Group organization, corporate and software and system integration. The final question refer to net working capital management. So we reached 4.9% net working capital to revenues ratio in Q1 compared to 6.70% of the Q1 '19 -- of the full year '19/'20, and 9.2% of the Q1 of the full year ending as of April '19 and 10.7% of the previous year. So we have experienced a continuous improvement. One driver of this improvement is the different sales mix. So an higher share of recurring revenues, software and consultancy revenues, that means an improvement of working capital management. On second hand, we continue to take under strict control our accounts receivable and we improved our effort under COVID scenario. On the other hand, we are benefiting from a strong set of customers. And so the customer portfolio of Sesa Group is really good with a lot of good companies operating in sectors and industries that are healthier than the average.

If I may, just a final question. Actually, a general question about the new macro trends on digitalization and particularly on the potential effects of the new European recovery plan. Just if you can share with us your view on that?

We believe that the European recovery plan is focusing on 3 main areas that are digital services, education and sustainability and environment. In reality, education and environment and sustainability are really depending on digitalization. So that means a strong investment that will be available in short term in our industry. And it will be our effort to be able to follow the demand of digitalization coming not only from enterprises but also from government, public entities and all the institutions that now are requiring digitalization.

The next question is from Andrea Randone of Intermonte.

The first one is about your compensation schemes. Your business is growing, particularly in the software and system integration, which is much more human-intensive. So also during the presentation, you highlighted the increase in the number of people working for the group. And considering the recent M&A transactions, I wonder if you can elaborate the mechanisms you put in place to create long-term incentives to the key people in your group. And the second question is a more general comment. If you can provide this kind of comment in order to highlight the distinctive features of your market positioning, again, in the software and system integration compared to other peers in Italy? Since your scale is now very significant, exceeding EUR 400 million turnover, so now you can have your distinctive positioning.

Thank you, Andrea. First of all, the question about our human capital. Human capital development represents the main driver of our business. And we work a lot in terms of improvement not only of quantity but in particular of quality of human capital. We improved in the last 3 years from around 1,500 people to around 3,000 people in -- so in 3 years, we doubled our human capital. We managed to keep under control the average salary. So the average salary per employee is around EUR 50,000 despite growing value-added that we reached in the last 2, 3 years. Our positioning is 70% -- 75% of people are consultants or people involved in software or digital services delivery, while 10% to 15% of sales and 10% to 15% of back office or corporate people that we target is long-term involvement of human capital. We developed one of widest plan welfare in Italy with a lot of facilities, not only tangible but also intangible facilities that we grant to our employees. All key employees are under retention program in the long term. So last year, we recruited 250 people from internal way. That means the net recruiting, so the incoming net of upcoming people. And all key people, as you know, are involved in group ownership through our holding that is IPA share, and that owns 53% of Sesa Group capital, so myself, Mr. Paolo Castellacci, the founder, and the 2 Deputy Vice Presidents. And working this way, we keep under strict control the monetary compensation also of the Executive Directors. And we develop incentive programs focused on equity instead of monetary compensation. And as a result, we are operating with a really strong loyalty rate. So the churn rate for IT industry is really low, below 5%, also considering young graduated people. And we are performing well also in terms of average monetary salary that we managed to take under control despite so huge improvement of our value added. The second question refers to system integration. Our system integration changed a lot our market position over the last 5 years. So we improve our skills and offering in software. We develop new lines of business in digital cloud, in security. Now Sesa Group represents the leading cybersecurity services player in Italy, where we developed 150 people that are working on cybersecurity. And we also developed a business unit for digital process, so smart industry solution and digital manufacturing that is a pan-European platform, not only in Italy but also in Germany, in Spain. And also, we develop a lot of vertical solution and applications. I remember recently, we acquired Di.Tech. That is a software and vertical company focused on retail software solution for food distribution industry, and that is the digital partner of Conad Group. That is the largest food distribution player in Italy. So that means a strong improvement in quality, skills and capability of our human capital. One driver was the driver of M&As that we manage not as acquisition of financial metrics but as driver of human capital development. We acquired the company under a program of 5 to 10 years of loyalty of the key people. So the founders of the company are planning before the acquisition synergies and the capability to integrate the targets in said organization. And the key point is to take loyal in the long term, the key people. And as a result, we managed to improve our human capital on system integration and software sector, over 2,000 employees with a target of 2,500 employees at the year-end with an EBITDA margin that will be around 12% in the current year.

Thank you, Alessandro. Very clear and congratulations for the results.

Thanks, Andrea.

The next question is from Matthias Durner of Discover Capital.

Alessandro and Conxi, first of all, congratulations for the great results. Starting off, I would like to go the questions one-by-one, if that's okay. Just for clarification, the growth rates you mentioned in August and the good stats for September, was that on revenues or on profitability or EBITDA?

Revenues, Matthias. Revenues.

Revenues? Okay. Would you say that because August is normally a more quiet month, that it was some pent-up demand which basically spilled over from the first quarter and basically some COVID effects which basically dragged into like some holiday time? Or is that really new business and so on you acquired after the COVID crisis?

There's a rebound effect due to some companies and enterprises in Italy, the nonstop operation in August. But that is a trend that we are observing also in September and we are planning for October. And so that is really positive because a 30% improvement on revenues means around 50% in profitability.

Very impressive. My second question would be on the profitability of SSI. I noticed that the gross margin -- so the absolute gross margin in the first quarter basically increased by roughly EUR 9 million, and the revenues increased by roughly EUR 11 million. So your gross margin basically skyrocketed in that quarter. I was wondering, was that due to remote delivery efficiencies and so on, so less travel time within projects and delivery? What's the reason why the gross margin now that a ...

Those have changed in sales mix due to the fact that this quarter, I remember, was affected a lot in my math of May from COVID situation. So the revenue from infrastructure went down, and we improved a lot services, software, vertical application. And also, we benefit from a positive effect from starting consolidation of new target companies such as the Infolog, Di.Tech, SPS, Analytics Networks. All companies that we started consolidating in Q1 '21, our company with an EBITDA margin around 20%. And so the net effect was an effect of strong improvement on gross margin in absolute value, with an improvement as a result also, EBITDA by around 53% and EBITDA margin from 9% to 12% of revenues.

Would you say that sales mix is more sustainable now because basically now, as you explained, the first wave, let's say, due to COVID was the infrastructure, which -- the infrastructure demands. So now it's going to be more high-value and more value-add, let's say, going forward?

Yes. It's sustainable because we do not follow an emergency demand of infrastructure and physical technology because we work on digitalization project and digital transformation services. And so these are -- that is a sustainable trend. It is possible to accelerate the growth in revenues with the minimum effect of dilution on EBITDA margin but an improvement of growth rate of EBITDA margin itself. So it is possible to observe a 40% growth in EBITDA margin -- in EBITDA, sorry, instead of 30% in terms of EBITDA in absolute value with the slow dilution of EBITDA margin, so 5.70% instead of 5.90%. But in that case, we will improve over the expectation the absolute value growth in EBITDA and in net profit.