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 Group 9-Months Consolidated Results as of January 31, 2022, Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Conxi Palermo, IR Manager of SeSa. Please go ahead, madam.

Good afternoon to everyone. I welcome you to SeSa Group financial presentation regarding 9-months consolidated results as of January 31, '22. On behalf of SeSa, participating myself, Investor Relations Manager; and Alessandro Fabbroni, Group Chief Executive Officer. In the late morning, we made available our corporate presentation on the SeSa website under Investor Relations section that we can follow during the conference call. Today, our Board approved 9-months consolidated results as of January '22, reporting again an outstanding set of economic and financial results in each group sector with record operating cash flow. Alessandro will introduce the key points of our presentation.

Hi, everybody, and thanks for joining our call, disclosing 9-months outstanding consolidated results that confirm again a great strategy of our group based upon continuous investment and development of human resources and skills in order to support digital services and business model evolution. On the industrial side, we develop our digital skills. We consolidated at the end of January, the line of 4,000 human resources, up by 20% year-on-year. We confirmed the accretive setup of Business Services new group sector that in full year '22 is achieving around 600 employees and EUR 65 million revenues, targeting a 12% EBITDA margin that we already achieved in the period under review, and targeting around EUR 100 million revenues in the full year '23. We continue to improve also our portfolio of about 30,000 customers, of which 3,000 abroad, mainly in DAC area. On the economic and financial side, in the 9-months period, we reported outstanding economic and cash flow generation results. The profitability growth rates were higher 35% at the EBITDA level and over 43% at adjusted net profit level with a strong set of results again, in the Q3 only. That means the period between November to January with quarterly revenues up by 12% and 38% operating profit increase in the only Q3 despite market growth acceleration in last months and weeks. In the 9-months period, the group revenues at consolidated level achieved the line of EUR [ 1.8 ] billion, up by around 15% year-on-year, with over 13% increase in VAD sector, 18% improvement in System Integration sector and around 25% growth in Business Services sector. Group EBITDA reached around EUR 125 million, up by 35% year-on-year with an EBITDA margin around 7.10%, up about 110 basis points compared to 6% as of January 2021. Thanks to positive contribution of all group sectors, VAD EBITDA increased by 38%, mainly driven by Digital Green business unit with an EBITDA margin equal to around 5% compared to 4% on the previous year. System Integration EBITDA was up by 27% with an EBITDA margin equal to around 12.10% compared to 11.20% of the last year, while Business Services sector EBITDA, as I mentioned before, achieve growth by around 200% with an EBITDA margin equal to 11.6% compared to around 5% of the last year. Bottom line, group adjusted earnings after taxes achieved EUR 62.2 million, up 43% year-on-year with an EAT margin revenues equal to 3.5% compared to 2.8% of the previous year. Thanks to group growing focus on digital services and recurring revenue business model, we reported also a strong improvement in our cash flow generation achieving an operating cash flow equal to about EUR 130 million over the last 12 months. Net financial position as of January 2022 was active. That means net liquidity for EUR 178 million compared to around EUR 100 million as of January '21. While net financial position reported that means net of EUR 147 million of IFRS liabilities was active for EUR 30 million compared to EUR 11 million as of January '21. That reflects the around EUR 130 million operating cash flow, net of EUR 90 million of investment and net of EUR 20 million of dividends and buyback plan over the last 12 months. In the 9-months period under review, we continue to enlarge our perimeter of operation not only in terms of human resources through internal hiring but also through several strategic bolt-on M&As. The external line contributed to our group growth by around 55% at the operating profit level. We underlined in particular 15 relevant M&As close in calendar year. So that means from January to December 2021, with a combined contribution expected in fiscal year 2022 equal to EUR 160 million revenues with a 12% EBITDA margin. And also the last 2 M&As that we closed in February 2022, with a 20% accretive EBITDA margin and welcoming 170 new human sources. So under a very positive trend of our performance and scenario, I give again the floor to Conxi, who will provide, as usual, some updates about our M&A programs and pipeline.

Thank you, Alessandro. Yes, in the period under review, we moved our M&A investments, contributing by [ 55% ] to operating profit growth and confirming our strong capability to deliver quick and efficient integration of the company's acquired across all the business sectors. In our calendar year '21, we closed 15 M&As with contribution expected in fiscal year '22 equal to EUR 160 million of revenue and EBITDA margin equal to 12%, onboarding 550 new employees. Since January '22, we announced 2 more acquisitions to deal with contribution expected in the fiscal year '23 equal to EUR 20 million revenue with high accretive EBITDA margin near 20%, onboarding 170 new human resources. Among the main corporate acquisition, I underline in the value added sector, on May 21, I remember you, we acquired the majority stake of PM Service, focused on Digital Green solution. After the acquisition day, the company really overperforming quarter after quarter and targeting annual revenue equal to EUR 120 million with high accretive EBITDA and over 1,000 customers in the fiscal year '22. In September '21, we acquired the majority stake of Kolme with a customer set of 2,500 by business partners and annual turnover of around EUR 50 million, with EBITDA margin equal to 5% and a wide coverage of mobile-enabling communication services. On Software and System Integration sector in May '21, we acquired the majority stake of Cadlog Group and Cimtec in Germany. We joined the annual revenue equal to EUR 50 million, focused on digital engineering across Central Europe, including this deal, we reached a total perimeter in digital manufacturing of about EUR 50 million revenue with a pan-European organization with 250 people, mainly in the DAC area. In November '21, we acquired the majority stake of Datef, company operating in digital transformation, cloud and security solutions with a revenue of about EUR 50 million, enlarging our presence in SüdTirol and mid-European manufacturing districts. On the first of March '22, 10 days ago, we also announced the strategic partnership with Adacto digital consulting agency, focused on customers and business experience with 75 human resources, of which 25 in LatAm. EUR 5 million revenue and EBITDA margin really accretive near 50% that we will consolidate starting from March '22. In the Business Service sector, we enlarged significantly the size of operations, thanks to several industrial M&A. From May '21, we started consolidating the 3 acquisitions. I remember new the digital platform business unit. It means IFM Infomaster, Digital Storm and Tecnike with combined revenue over EUR 50 million, obviously, at the acquisition time, an EBITDA margin over 25% with 100 skilled human resources. From January '22, we consolidated A Plus and Citel company with combined annual revenue of EUR 6 million and double-digit margin expected, onboarding 40 human resources and boosting the business unit of security solutions for the financial services industry. On February '22, we also announced the acquisition of Omigrade Group, EUR 10 million annual revenue with EBITDA margin with accretive, more than 12% and 100 human resources its skill in IT consultancy and development of ERP and digital for banking industry. Omigrade will be included in our perimeter on the consolidation of our group since March '22. Thanks to quick and efficient integration of the last acquisition. Business Service sector is targeting for the fiscal '22 revenue equal to EUR 75 million with 12% of EBITDA margin, involving over 550 human resources, highest skilled and targeting the line of EUR 100 million revenue for the fiscal '23. We will continue to attract and combine on industrial basis small and mid-companies with skilled human resources, keeping under control our entry value around 5x of EBITDA, multiple enough. We did not make any progressive review of the stake acquisition to commit in the long term, the key people of the target companies. We continue to work on a strong pipeline of M&A across all sectors, with accretive EBITDA margin in order to expand our double-digit growth also in the fiscal year '23 and obviously, in the long term that do remain our main commitment. Now I give again the floor to Alessandro for the final conclusion.

Thank you, Conxi. So in the 9-months period under review and also in the only quarter 3, still great growth rates, thanks to a scalable group model, focused on vertical skills and able to support the strategic evolution of enterprises and organization. Again, a great trend, in particular, in human sources management with over 4,000 employees as of January 2022 and over 500 new talented people recruited in the last year. So that means in the last 12 months, taking under control HR costs and the attrition rate limited to about 5% in the last 12 months compared to 6% of the previous year. And despite growing mobility and growing gap of technical skills in the information technology industry. Under a global scenario, our currently impacted by high uncertainty with market growth deceleration expect in short term, our successful strategy and business model will continue to be successful and to generate sustainable value. In the last quarter of the full year '22, we will start consolidating new strategic companies as Omigrade in business services sector and Adacto in System Integration sector that will generate around EUR 20 million of additional revenues with 20% accretive EBITDA margin and with around 150 new human resources. We also target to close at least 1 additional strategic M&A within April 30, 2022. So in the light of great 9 months industrial and financial results, our increasing size of operation and positive digital market trend that we continue to expect in midterm, we confirm the very positive outlook for the full year '22 with an increase by about 30% in operating profit. So that means EUR 166 million of EBITDA in the full year as of April 30, '22 and grow over 35% at EAT level, targeting around EUR 80 million in the full year 2022. In a global scenario, where digitalization and sustainability represent in growing way crucial drivers for companies and organizations, we continue to be committed on our long-term growth track record, and we confirm for the full year '23, the growth expected according to current analysts' consensus. So we thank you for your attention. And now, as usual, we stay available for the Q&A final session.

[Operator Instructions] The first question is from Andrea Randone with Intermonte.

And congratulations for the results. I got a couple of questions. The first one is if you can comment on your M&A pipeline, you several times, stated that there are several companies that you are constantly scouting for. But I wonder if you are taking particular businesses -- particular segment? And second question about your B Corp certification, if you can update us on this process. And related to this topic, if you can give us examples of how sustainability can become also a business for sales? And the last question is just an update on key metrics on your human capital, we know that you got a strong performance in terms of churn and retention, if you can provide us an update and your plans for the future.

Andrea, thanks for the questions. First of all, our M&A pipeline continues to be positive. We are confident to make target the same pace that we had in the 2021 calendar year. So that means 10 to 15 M&As, combined revenues of around EUR 150 million and targeting an EBITDA margin at least double digits. So the last 2 acquisitions that we made, developed a combined EBITDA margin over 20%. In terms of sustainability, we consider that the global landscape are demonstrating that the combined transformation. So energy and transformation towards sustainability is a parallel phase of digital transformation. So we are really confident to make the right choice when 2 years ago, we decided to invest in that area. We are developing EUR 140 million revenues from Digital Green with marginality higher than the group average. And we continue to stay focused, not only in developing business but also in our internal plan. In the B Corp certification program, we completed at June 2021 the B Corp impact, so the first step of assessment. Now we are working in order to deliver within 12 months, the first certification, we are targeting to start by certification with several strategic companies inside our group perimeter. And the -- the management of HR in our industry is crucial and the performance we achieved in the last 12 months are great. The churn rate of 5% that is declining compared to 6% of the 12 months before is really a great performance. That is the result of several programs that we develop in HR management, welfare program, education program and also, let me say, result of unique group business model that is federative, focus on vertical and digital skills and able to retain key people and all HR of our organization. And also, let me add scalable. So we show that we are able to add the size of operation and improve the churn rate performance, so that means to reduce churn rate and to improve loyalty rates. So that is what we intend to do in coming quarters and in coming months, so to target a progressive development of our size of operation, progressive and sustainable. So that means to continue to hire people inside of our organization in a sustainable way. So with the right pace also in terms of new human sources, new skills in order to be able to retain and to develop in the long term, the value generation for all our stakeholders.

The next question is from Aleksandra Arsova with Equita.

Thank you for your presentation. Brief follow-up question on M&A. First of all, apart from the general guidance on revenues and EBITDA margin as expected, also in terms of M&A CapEx, do you still expect around EUR 100 million in CapEx for the coming year in terms of M&A and gross maintenance CapEx. And then you were mentioning a rich pipeline. I further understand, you still consider the idea of bolt-on M&A, but maybe since you're increasing in size and in business, are you also thinking of something bigger, maybe in the future and also a broad expansion. So your pipeline involves also some other acquisitions abroad apart from, I mean, the latest one you did or do you expect the geographical expansion to go ahead?

Thanks for the question. That is interesting in terms of, in particular, M&A staff evolution. We continue to stay committed in our trend and strategy of bolt-on M&A, so that means small, midsized M&As. Skill in terms of human resources, so that means the combined investments that we may have in the coming 12 months maybe around EUR 100 million of which EUR 80 million in M&As and EUR 20 million in maintenance and CapEx. We are exploring also as in last 12 months, M&As in German-speaking area, as we did in 2021. We hope to close 1 to 3 deals across Europe. We continue to be focused on Central Europe. So German-speaking areas, where there are a lot of small medium enterprises and a lot of potential synergies between our operation in Northern Italy and the size of operation we may develop in Central Europe. As of today, we are not evaluating M&As with size -- with different size compared to the average that we performed in 2021. The pipeline is very, very, very wide with several opportunities in any group sector and that is positive. And the other -- the other color that I may have is that we are focusing on value-added areas of our business. So cloud computing or digital security, consultancy with an EBITDA marginality significantly higher than the group average.

[Operator Instructions] the next question is from Marco Vitale with Mediobanca.

I have a follow-up on the guidance. I understand that you've confirmed your target to grow by 30% your EBITDA. Looking at that 9-months trend that looks quite conserve but due to the implied growth rate in Q4, I was wondering if this -- what was reason behind this confirmation and guidance is it just your approach to remain cautious? And also linked to that, what do you expect by -- from the ongoing crisis in Ukraine in the sense that do you expect any potential implication on GDP spending -- in digitalization spending? Or so far, you are not concerned on this kind of issue?

We don't expect a decline in performance in the fourth quarter. We prefer to be cautious as usual -- and -- but I think that our main focus must be on mid and long term instead of the last quarter of 2022. The performance we are developing after January 31, and so also in last week's continue to be positive and with growing trend of revenues and also of profitability. We believe that the global landscape is reinforcing sustainability and digital transformation path of any company and organization. So it's crucial in growing way, the role of SeSa Group for Italian economy. In the last days, a lot of companies ask our help against cybersecurity threats and risk. And so that is just one point of business development that we are progressing in these days. And so we are confident also to perform well in the fourth quarter and maybe to outperform the target for the full year. But I underline again, our main focus continues to be long-term -- mid- and long-term performance, and we stay committed in generating sustainable long-term growth, so that means in full year 2023 and also 2024.

[Operator Instructions] The next question is from Hugo Mas with Sycomore.

My only one question is regarding your performance in Q3 in terms of growth. I was wondering if you could explain us why we have seen this kind of slowdown in terms of growth in Q3 compared to H1? If it is only an acquisition base effect? Or if it is still also the organic growth that decelerate?

In Q3, we performed -- grew in revenues by around 13% compared to 15%, and an improvement in EBITDA by 32.7% compared to an average of around 35% in the 9 months. So we may consider that a slight decrease in our growth pace, mainly due to lower M&A impact on the only Q3. And so we consider the new acquisitions that we are delivering, we may continue to perform well in the fourth quarter. And so the decline is not deriving from problems of ordinary business. So consider that to the sector where we perform with lower growth rate compared to the consolidated growth rate in System Integration. In System Integration in the 9-months period, the internal growth contributed by over 75%. So the growth in System Integration was mainly organic. So that means we continue to perform very well in terms of organic growth and the decrease in growth was mainly referring to the only Q3, was mainly due to lower contribution from M&As and external leverage.

The next question is a follow-up from Aleksandra Arsova with Equita.

Yes. I have a follow-up on the previous question. In terms of the guidance you provided actually for 2023 fiscal year, the coming year, you provided a range both for EBITDA and for net income adjusted. Can you maybe clarify and give a little bit of color of what are the drivers let's say, leading to a lower -- to the lower range or to the upper part of the range? And then if the coming growth you're expecting in terms of revenues, there is more growth related to upselling of services and, let's say, activities with existing clients or is more driven by acquiring new clients in new businesses?

Yes. We provide a range of target for the full year 2023 that would be impacted by the different contribution that we may have from M&As and external leverage. So the -- for example, for EBITDA, we provide the range between 14% and 20% of growth rate in full year '23. 14% is considered with lower contribution of M&A around 20% while 20% growth rate represent a higher contribution of M&A around 30% to 50%. So we consider our organic growth at least equal to 10% and driving not only from new customers, but also driving from an improvement of our portfolio and the enlarging of our portfolio that we did not only in value added distribution with the new Digital Green business unit, but also in system integration with new lines of business in terms of consultancy, cloud and security services.

[Operator Instructions] Ms. Palermo, Mr. Fabbroni, there are no more questions registered at this time.

Thank you to everyone for participating to this conference call. As always, we remain available for your additional queries, and you can contact us in order to support you in understanding our business model evolution. Have a fantastic weekend to everyone, and thank you for your time.

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