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 Half 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 financial presentation of our first half results as of October 31, 2020. On behalf of SeSa participate myself, Investor Relations Manager; and Mr. Alessandro Fabbroni, Group Executive Officer. In the early afternoon, we have made available our corporate presentation on Sesa's website under Investor Relations section that we will follow during the conference call. Mr. Alessandro Fabbroni will introduce the key points of our presentation.

Good afternoon, everybody. Thanks a lot, Conxi. Today, we have proved a record set of results and we launched a program to evolve in the long term our governance towards sustainable development and value generation for all our stockholders. In the first half of 2021 fiscal year, we outperformed the growth rate of the reference market and the group's long-term track record. We consolidated our role as a leading player in digital industry for SMEs and enterprises in Italy. Thanks to our growing reliability under pandemic, merchants in the first half, so we attracted new 600 talented and skilled human resources, closing 13 acquisitions since January 2020 and reaching as of October around 3,100 skill employees. First half results confirmed the resilience of SeSa Group and a strong commitment of our human capital under pandemic scenario by adopting a digital and hybrid organization model that granted us continuity of operation and providing technological innovation and digital services to Italian economy. Group SeSa, a 15% revenue growth and 35% operating profit growth boosted our first quarter performance. Thanks to a growing focus on the so-called digital enabling trends such as cloud, security, analytics, cognitive and AI solution, that characterized by a stronger-than-ever growing demand of digital services from enterprises that continue to be our core reference market. As of October 2020, group revenues grew to around EUR 890 million, driven by a 10% growth from VAD sector, and 19% revenues growth from system integration and a EUR 22 million revenue contribution coming from the new group sector business services. Thanks to the strong growth in value-added generation. Consolidated EBITDA reached around EUR 54 million, up by 34%, with an EBITDA margin above 6%, that is a strong improvement against 5.20% of the previous fiscal year. Thanks to positive contribution from all group sectors. VAD EBITDA was up by 18%, with an EBITDA margin equal to 3.90% compared to 3.60%. System integration EBITDA was up by around 50%, with an EBITDA margin equal to 11.22% compared to around 9%. Finally, business services EBITDA margin reached around 6%, in line with our expectations. Recent corporate acquisitions, 13 deals from January 2020, contributed to the first half group performance representing around 40% of top line growth and 45% at the operating profit level. Group earnings after taxes adjusted was equal to EUR 24 million, up by around 40% with an EAT margin equal to 2.74%. SeSa Group achieved also a strong set of financial results with a strong improvement of our cash flow generation. Group net financial position improved from a positive balance equal to around EUR 2 million as of October '19 to around EUR 23 million as of October 2020. Net of investments in acquisitions and technological infrastructures for over EUR 60 million and after the purchase of treasury shares for about EUR 3 million in the last 12 months. The adjusted group net financial position that is reported gross of EUR 37 million related to company acquisition deferred payments, such as earn out, put options or deferred prices was equal to around EUR 60 million that is net cash and liquidity compared to EUR 12 million as of October 2020. Now I give again the floor to Conxi Palmero to explain in detail our M&A pipeline, and also our recent evolution of our corporate governance that we propose to next shareholder meeting.

Thank you, Alessandro. External growth has, as we know, actively supported the sustainable and long-term group growth, with a strong acceleration over the last 12 months. Pandemic emergency have emphasized the need to bridge the digital transformation gap on businesses, organizations and ecosystems. And SeSa, as you know, is focusing its strategical development on the most innovative business areas through intensive corporate acquisition activities and investment in human capital. Thanks to this proactive approach, SeSa has consolidated the role of key player in the digital transformation landscape. SeSa has a long track record of M&A activities, and we have completed, as you know, more than 25 deals since 2015, investing always on high-value segments of digital transformation. Since January 2020, on the COVID emergency and thanks to the growing role of SeSa as a reference player for digital industry, we were able to attract new teams of talented people by closing 13 deals on this key areas of cloud, security, analytics and ERP and vertical software. All M&A, concluding 2020, are generating very positive contribution to our business, while we expect a positive impact over the next year as the result of business integration inside of our organization. For the fiscal year 2021, we estimate that M&A activity on key digital-enabled trends will generate EUR 105 million of additional revenue, with only 10% of additional EBITDA margin, enrolling more than 800 new specialized human resources to our team. All the targets after acquisition Di have developed a strong commercial and operating synergy, which is a proof on recording really a significant improvement. All acquisitions were based on industrial and long-term vision, balancing key stakeholder interest under a long-term commitment. It means more than 5 years, always under sustainability aim of our strategical view. Today, the SeSa Board has also approved a program of evolving over our governance to focus on sustainable development and long-term value generation for all our stakeholders. We remind our successful long-term historical track record in terms of component average, growth rate of all KPIs across 2011 to 2020. It means 10% on revenue, 12% on EBITDA, 15% on earnings after taxes and 14% only on human capital, of which 99% of them permanent contracts. Considering our long-term value generation commitment, the Board decided to submit to an extraordinary shareholders' meeting for January 27 of the New Year 2021, the following proposals. As point one of the agenda, integration of Article 19 in the institute to introduce sustainable growth for shareholders as director's commitment. As point two of the agenda, the adoption of the unitary board's governance model, together with implementation of board appointing diversity and independence rules under corporate governance best practices. The adoption of unitary board, one of the most widespread internationally, as you know, will allow a better integration of control activities within the Board. Thanks to establishment of the management control committee. This will further strengthen its commitment to reporting a long-trend sustainable growth and intends possible star operations and to obtain B-Corp Certification, internationally accredited by nonprofit entity, B Lab, in order to make sure our sustainability performance towards the holders and nonfinancial value generation for all them. Now I give again the floor to Mr. Fabbroni for our final conclusion.

Thank you, Conxi. So in the first half, we reported again record set of results, despite the pandemic scenario and confirming our strong capability to bring value generation and in a sustainable way. The first half, 35% growth in profitability is a result after a 30% profit growth reported in the last full year and was driven by an EBITDA margin that improved over 6% boosted by 11.20% EBITDA margin recorded by system integration sector. Under a weak Italian economy, the demand of digital transformation and IT services is strongly accelerating with an expected average annual growth to equal to 5% over the next 2021-2023 period. That is significantly higher than the 2% historical annual growth before COVID emergency. While on the same time, the breakdown of IT demand will dramatically change mostly driven by the so-called digital members, such as cloud, security, cognitive and analytics, as I explained before. SeSa Group has strengthened its role of leading Italian player in digital industry was able to continue to attract human capital and to accelerate its pipeline of M&As with a target of around 3,500 employees of April 30, '21. So considering our positive trends in the first half and the great start of Q3 2021, so that means the month of November and the beginning of December that was really positive, we confirm our positive outlook for the full year '21, targeting a 15% growth for the top line and at least 30% growth at the operating profit level. That means around EUR 2 billion revenue and over EUR 120 million EBITDA for the full year. But the crucial point for us will be the long-term value generation. And so for the mid-term period, '22, '23, we will continue to be committed in overperforming our long term. That means the target of operating profit between 15% and 20% growth, and the target of EBITDA margin around 7% after achieving 6% in full year '21, coming from 5.30% in the last fiscal year 2020. We will continue to lead SeSa towards long-term sustainable business model. We will focus on a creative generation of value for all our stakeholder among them, in particular, human capital, boosting digitalization of enterprises and ecosystems as driver of long-term sustainability. The corporate governance evolution we will propose to our shareholders next January and B-Corp certification achievement will enhance our long-term path. We thank you for your attention, and now we stay available to answer your questions, as usual.

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

Well, my first question, starting from your full year outlook. You were referring to a good start to the third quarter for a double-digit increase in November and beginning of December. Just if you can give us any more indication color on that? I'm referring also towards the touch down between investor size. If you can -- strength to the one experienced to date? Then my second question is on profitability for the VAD division. I remember that in the past, you were pointing to approximately stable margin for this division. But you are -- but it is improving also on this side. So looking to the future, can we assume a stable EBITDA margin of around 4%? Or there is still room to further improve it? This question is also related clearly to your medium term target of around 7% you were talking about before. That last question is on the new business line of business services. Just I think if you can give an update about how is it doing, the division and about your expectations for next quarter?

Thanks for the question. So first of all, the Q3 start that was really positive for all group sectors. Not only for system integration, but also for VAD. The second question refers to our long-term growth in VAD. First of all, after down that we suffered for in 2015, 2016, we are recovering. And now we are targeting a 4% EBITDA margin that I always said represents the best-in-class and a sustainable long-term performance. The cloud evolution and the growing focus of our VAD sector on services and cloud may in future quarters here help us a lot in order to trying to improve also beyond 4% our long-term profitability. Third question refer to business services performance, that is a new business sector for our group. We started in under an adverse scenario because the pandemic affected a lot this kind of business, but the performance was really positive. We have a lot of opportunity. We will -- committed in long-term growth and that must be at least in line with the long-term growth of our group. Because as we did in the past, we will continue to target a sustainable business with an EBITDA margin that will target 10%, moving from the initial -- the starting point of 6%. And we show under this -- in a short period of time strong capability to attract human capital, and we are operating with a perimeter of 300 people and also new customers and business opportunity. And so we are confident to be able to deliver our long-term industrial targets that I remember 10% EBITDA margin and a double-digit sustainable growth in mid long-term.

The next question is from Andrea Randone with Intermonte.

Congratulations for the results. I have a couple of questions. The first one is related to the certification, the B-Corp Certification you announced. And you are, again, first mover in your sector in this important subject. My question is, how did you select the certification? And what do you expect in terms of long-term benefit in your sector from this kind of certification? And the second question is more -- to provide some more color about your activity in this precise moment. I read on the newspaper, there is an important investment plan announced by Conad. EUR 1.5 billion in the next 3 years. You are doing business with Conad, especially after the recent acquisition. I wonder if you can give us an example of your contribution on this kind of large investment projects in order to have a better understanding of the specific role?

Thanks a lot for the questions. So first of all, B-Corp Certification will represent a certification that may quantify our nonfinancial performances. I believe that is crucial for us when we speak about sustainability to be able also to show capacity and effects that may be delivered in -- maybe quantified. That means to deliver results in terms of environment, in terms of human capital management, diversity and also value generation for ecosystem where we are operating. We strongly believe that long-term value generation for shareholders may be sustained from a well calibrated value generation for all stakeholders that may be quantified and certified. That is the reason we would like to operate in order to achieve the B-Corp Certification. We see a lot of positives for us in terms of trust, credibility and capability also to attract new customers and new business opportunities. Don't forget that we -- as a leader in digital industry, we are crucial in abilitating several technologies for sustainability and recent investments that we did in refurbished technology and technology for energy improvement and efficiency. Our areas of business development that we believe really appealing for us in the long term. Second point, second question is a question about Conad Group evolution and investment in information technology. Obviously, we represent the major digital partner of Conad Group as of today, not only as a result of the acquisition of Di.Tech, but also as a result of several operations that we deliver in that area. And also the business of Base Digitale as a perimeter of operation in physical security for Conad. So you know that the way to deliver and to manage customers is completely changing and so we are engaged together with Conad in the change of retail management with several innovation in the way of payment, the way to deliver food, the way to manage people and customers inside the retail shops, for example, under the pandemic scenario. We are fully involved in all crucial process evolution of Conad. And not only Conad because as of today, we are growing market share in food distribution industry and in retail. And that is an area where we may also continue to invest in coming months and in coming quarters.

The next question is from Aleksandra Arsova with Equita.

A couple of questions from my end. So with regards to the new governance you are proposing in the next general meeting, so is there any implication from this Tier 1 -- sorry, yes, Tier 1 system mechanism on the composition of the Board and especially on key people? Since currently, there are, of course, for managers, which are part of the Board, namely you, Alessandro, as CEO; and then Mr. Moreno Gaini; and of course, we have Paolo, the Chairman, who is the Founder of SeSa. So do you think that in this new composition, your role will change in some way? And can you give us more color on this? And the second question is on the CapEx. I saw that you reported EUR 60 million of total CapEx, including M&A in -- over the last 12 months. So what is the number of total CapEx in the 6 months in the fiscal year of 2021?

Thanks a lot for the question. So first of all, governance. Today, we propose a governance evolution, not only with the introduction of sustainability as our commitment of Board of Directors, but also evolving the Board of Directors' rules. In practice, we introduced, we adopted rules about diversity. So that means around 40% of Board of Directors must be composed by female or male, so depending on the situation members. And on the other time, on the same time, a 33% of the Board of Directors members we must be independent. So that means we will open our Board of Directors. We will not work for a wider, more inclusive Board of Directors. On the same time, we will propose the adoption of monistic model of administration that means unitary board governance model. And so we will introduce inside Board of Directors, a management control committee that must be composed with at least 1 auditor. So that means we will target a wider and more, let me say, complete also Board of Directors with not only founders or managers, but also professionals with different skills. And I think that is a great opportunity for -- to improve our Board of Director skills, and that is crucial to lead a growing group in a sustainable way in the long term. So that is the target, the final target. In terms of CapEx, so I think that is reasonable to plan around EUR 60 million of -- EUR 60 million to EUR 70 million of CapEx, including M&As. So that may be EUR 10 million to EUR 15 million pure CapEx and around EUR 50 million from M&A. So that is the plan for a 12-month period. And so the end of 2021. We accelerated our M&As. So we invested EUR 20 million, EUR 15 million more than the previous year and the 2 years ago. But you know that the result was really positive because we accelerated also our growth. And I remember that the positives of our M&As will be recorded, not only in 2021, but at least 50% of these positives in 2022 fiscal year.

The next question is from Matthias Durner with Discover Capital.

Thank you so much, first of all, for again the great results you keep delivering. My questions, I have 5, if I counted correctly. So my first questions would be on the results just announced. I was just thinking or wondering if there's any, let's say, non-normal or one-off provisioning included in basically your provisions over Q1 and Q2 as well this year? Or would you say that's a normal course of provisions?

Now the trend of provisions is improved considering the new store grand plan and the improvement of revenues.

Okay. Okay. Understood. Only these 2 elements, and these are recurring, I guess?

Yes.

Okay. Great. For basically your guidance of this year, could you just quickly talk a little bit about mix between SSI and VAD? We now have seen a continued acceleration in SSI. And VAD is still growing well, but SSI is accelerating. Would you basically say this trend continues? And secondly, would you also see a further margin improvement above 12% EBITDA margin in SSI? Or would that be too early?

For 2021, we may expect a growth rate in EBITDA of SSI between 14% and 15%. And for the EBITDA growth rate from VAD between 10% and 20%. I do not consider the EBITDA margin equal to 11% in system integration result that we reached too early. That is the consequence of the different margin mix. And I always say that we are not a lockdown company, in particular, in software and system integration. So we were affected by lockdown because we were affected by the first lockdown and the second lockdown. And in particular, not only in revenue from technology. And so thanks to several acquisitions we made, the new human capital we introduced in the digital enablers that we improved in a positive way, the breakdown of revenues from system integration. That means the 11% that we already reached in quarter 1, and we secured in quarter 2 is sustainable also in the next quarters and in the next fiscal years.

Okay. Okay. Very good. Could you give us some color or more color on the November and basically the start to your fiscal Q3? You basically, I think, set a great start. Is it -- I think your Q2 started with like 30% growth rates, but ended maybe with 20% growth rates. Is that in this sort of range? Or would you say -- see a little bit of, let's say, just a little bit slower growth?

I must say great start means a trend of revenues and profitability higher than the first half one.

Okay. Okay. Great. I would ask some question around your midterm ambition, I would call it. Just to confirm what I heard, you would see a continued revenue growth over 2022 and 2023 of 15% to 20% with a 7% EBITDA margin, is that correct?

Yes. That's correct. That is an ordinary evolution of our business model, growing share from software and system integration, considering the different growth rate that we will continue to have in '22 and '23 years. And also the positive effects from the M&A that we already closed and that we will -- reported as a change of perimeter consolidation not probably over '21 fiscal year, but also for the first half of new fiscal year '22. And obviously, we will continue also to consider new opportunity of M&As that we continue to evaluate on current days and weeks and within the end of the fiscal year '21.

Is, in this expectation, roughly a similar mix of organic and, let's say, growth from M&A? So I think over the first half, as you mentioned, or second quarter, it was like 40% on revenues was, I think, due to M&A. Is that like a similar range what you included in the 15% to 20%?

More or less, but lower than 40%. We are consider 22% to 30% or to 33% as in '20 full year -- 2020 full year.

Okay. Very good. Very good. And my last question would be on scalability or margin trend. The 15% to 20% would be a high level or even some acceleration, especially if the share of M&A is a little bit lower. So the organic growth is a little bit stronger. I -- basically, the range of EBITDA growth would be 24% to 30%, if I had my math right over 2022 and 2023. That's sort of a little bit slower than we have seen, for example, in the last 2 quarters of drop-through and scalability and margin improvements from the growth. Would you say you just put the 7% conservatively? Or are there any reasons why, for example, the EBITDA would not grow as fast as it has, for example, in the last 2 quarters where you already showed as sort of similar growth rates or at least growth rates in that direction?

I think the 7% may be conservative if we continue to close M&A as in 2021 fiscal year. So the capability to identify new targets may be crucial to move above 7%. Obviously, more investment that we may identify and close and higher growth rate we may achieve. I think that it's also crucial to understand better the trend of the different group sector. Now we are evaluating a double-digit growth rate in terms of EBITDA and profitability from system integration and business services and meet the, i.e. it's better to say, a high single-digit for VAD. And so the combine of the 3 effects maybe does to around 7%. And long-term growth higher than the historical long-term track record. That is our commitment.

[Operator Instructions] There are no more questions registered at this time. Gentlemen, would you like to add any further comments to conclude the conference, please?

Yes. Thank you to everyone for participating to our first half call from SeSa. Our best wishes for the New Year, Merry Christmas all. Thank you to everyone to participate to this call. Thank you very much.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.