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 Full Year Consolidated Results as of the 30th April 2022 Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Conxi Palmero, IR Manager of SeSa. Please go ahead, ma'am.

Good afternoon. I welcome you to SeSa Group's financial presentation of full year consolidated results of April 30, 2022. On behalf of SeSa, participating Alessandro Fabbroni, Chief Executive Officer, Jacopo Laschetti, Group Sustainability Officer; and myself, Investor Relations Officer of SeSa. In the late morning, we made available our corporate presentation on SeSa website that we will follow during the conference call. Today, our Board of Directors approved the 12 months integrated group result reporting an outstanding set of economic and financial and ESG performance. Alessandro will introduce the key points of the presentation.

Thank you, Conxi, and thanks to all of you for joining our conference call. In the full year 2022, we outperformed average consensus and our long-term track record, achieving revenues growth equal to 17%, Human Resources increased by 21% and net consolidated profit growth over 40%, thanks to our great industrial achievements. We continue to develop in a sustainable way of our human capital reaching the line of 4,200 employees compared to 3,500 1 year ago. We improved our customer set to 35,000 clients, of which over 4,000 abroad, mainly in DACH area, and we boosted our M&A path with 10 acquisitions closed since January 2022, 350 new people, EUR 70 million of additional revenues with 20% accretive EBITDA margin. In the full year '22, all key indicators improved over the rise of our long-term growth. Group revenues achieved EUR 2.4 billion, up by 17.3%, with over 16% increase in Value Added Distribution sector, 18% improvement in System Integration sector and 25% growth in business services one. Consolidated EBITDA reached EUR 168 million, up by 33%, with an EBITDA margin equal to 7%, up 80 basis points compared to 6.20% as of April 30, 2021, thanks to positive contribution of all group sectors. Again, VAD EBITDA increased by 41%, achieving EUR 91 million, with an EBITDA margin equal to around 5% compared to 4% of the previous year. Software and System Integration sector EBITDA was up by 22%, achieving the amount of EUR 68 million, with an EBITDA margin equal to around 12% compared to 11.5% of the previous year. While Business Services sector EBITDA grew by about 100%, with an EBITDA margin equal to 10% compared to around 6% of the previous year. Bottom line, group adjusted EAT achieved a total amount of EUR 82 million, up 42% year-on-year, with an EAT margin equal to around 3.40% compared to 2.90% of the previous year. Thanks to the group higher focus on business applications on recurring revenues, we reported also a strong improvement of cash flow generation, achieving an operating cash flow of around EUR 150 million, with a 90% EBITDA cash conversion, net of investment CapEx and M&A for around EUR 120 million. The net financial position as of April 30, '22 was active. That means net liquidity and cash for around EUR 245 million, improving by over EUR 50 million compared to around EUR 195 million as of April 30, '21. In the 12 months on the review, we also enlarged our size of operations with several strategic bolt-on M&A, which contributed to annual growth in revenues and profitability for about 60%, with additional EUR 210 million revenues with accretive 12% EBITDA margin, onboarding more than 500 additional Human Resources. Now I give again the floor to Conxi, who will explain us several details about M&A operations in the next August shareholders' meeting agenda. Please, Conxi.

As introduced Alessandro in the fiscal year '22, we boosted our M&A investments and that contributed by 60% of the annual growth confirming our capability to aggregate skills across all business sectors. Among the 15 M&As class in the fiscal '21, we underline the great contribution of PM Services, leading Italian player in green technology, Value Added Distribution that achieved in the fiscal '22 revenue for about EUR 150 million and over 2,000 customers. Since January '22, we closed 10 new M&As with EUR 70 million revenue contribution expected in the fiscal '23 and accretive margin about 20% EBITDA margin, onboarding 350 skilled Human Resources. Among the last corporate acquisitions, we underlined in the VAD sector, we enlarged the DACH region coverage, thanks to Brainworks technology, targeting revenue for EUR 20 million in fiscal '23, with an EBITDA margin in line with VAD sector and 30 skilled Human Resources with 2,000 additional business partners. In Software and System Integration sector, we closed 5 small mid acquisitions. We integrated the digital consulting agency, Adacto, focus on customers and business experience with 75 Human Resources, EUR 5 million revenue and EBITDA margin of about 50%. In the Security segment, we acquired the majority stake of NGS company with EUR 6.5 million revenue, EBITDA over 20% and 20 Human Resources. We'll launch our skills in collaboration and digital work space with the 51% stake acquisition of Durante company with 140 skill Human Resources and expected revenue of about EUR 16.5 million, with an EBITDA margin of 12.5%. Last June, we closed the acquisition of [indiscernible] Focused on cloud and data center solutions, with annual revenue for EUR 4 million and 20 skill human resources. And in the last week, we announced the majority stake position of [indiscernible] Offering value-added services in data center and cloud solutions sectors with EUR 4 million expected revenue and 20% of EBITDA margin. In Business Services Sector, we launched the size of operations thanks to several industrial M&As, focused on digital platforms and business application segments. On February 22, we closed acquisition of Omigrade Group, skill and PM Vertical Applications for financial services industry with EUR 10 million on revenue, 15% EBITDA margin and around 100 human resources. Last May, we launched the perimeter of Digital Platforms business unit, thanks to the 3 acquisitions DVR Italia, Emmedi and Evergreen combining 50 skill human resources and EUR 8 million revenue with 20% EBITDA margin. We will continue to track on industrial basis as many companies with a skilled human resources, keeping under control over 5x multiple as entry value, which are now making some progressive residual stake acquisition to commit in the long term to keep people of the target companies. We also underline that in the light of the strong set of the fiscal year results, our Board has proposed to the next shareholders' meeting at August 25 by Chorus Call and August 26 by second call to distribute EUR 0.90 per share compared to EUR 0.85 per share on top of a new added plan for EUR 12 million compared to the previous year, buyback plan that was equal to EUR 6 million.

Thank you, Conxi, for our M&A program presentation. We closed a great first half of operation. We intend to maintain the same path also in the second half of the calendar year '22. For the first time in our history, in the full year '22, we presented the group integrated report combining both financial and ESG performance. I'm glad to introduce Jacopo Laschetti, our Group Sustainability Officer, worked a lot in the last months to improve our ESG path and who will describe us our main sustainability programs and achievements. Please Jacopo, go ahead.

Good afternoon, everybody, and thank you, Alessandro. We closed the full year 2022 with general improvement of our ESG performance, confirming our strong commitment to value generation for all stakeholders. We invested in sustainability and environmental protection through programs for the responsible management of natural resources and the development of services and digital technologies, enabling energy efficiency and production for renewable sources. Believing the future growth of companies and organization will be increasingly based on digital transformation and sustainability. The main goal is to achieve in the field of ESG programs focused on 3 main pillars: first of all, we reported a strong improvement of environment performance. We reduced emissions per capita, down by 31.8% year-on-year from 1.99 CO2 tons in '21 to 1.36 CO2 tons in '22. We increased the clean energy produced by our photovoltaic systems, 1.04 million kilowatt hours, up by 314% year-on-year. We increased the share of green electricity purchased from third parties about 90% with the addition of self-produced green energy. We decreased the consumption of water, down 14% year-on-year. Natural gas down 11% year-on-year as well as the waste per capita, 0.04 tons in full year '22 compared to 0.11 tons in full year '21. On the second hand, in full year '22, SeSa Group achieved a redevelopment of Human Resources, total 4,200 employees, up by 21% compared to year '21, confirming its long-term growth and development plan, thanks to our recruiting programs and M&As industrial pipeline. In terms of HR initiatives, we pursue intensive hiring programs, 607 hiring, up by 51% year-on-year, an investment for skill development with 61,000 training hours, up by 132% year-on-year, enlarging our welfare initiatives to support parenting, diversity, well-being and work-life balance of employees and continuing our programs in favor of diversity and inclusion. In terms of governance of sustainability, we established a Group Sustainability Committee to advise Board of Directors, targeting the integration of sustainability principles and business strategies. We extended ISO 14001 certification to the main group companies. We improved our Ecovadis rating to Silver level and confirm our United Nation Global Compact membership. For the new fiscal year, we will extend our ESG performance programs for the benefit of all stakeholders. Now I give the floor again to Alessandro for the final conclusion.

Thank you very much Jacopo, for our ESG performance presentation. My final considerations about our outlook and our trend in coming quarters. In the last 3-year period, we reported really strong growth. We moved from EUR 1.5 billion consolidated revenues 3 years ago, up to EUR 2.4 billion in full year '22 and from a consolidated EBITDA equal to EUR 74 million in 2019, up to EUR 170 million in the last full year. We closed a great full year '22 with strong industrial achievements and record growth in terms of revenues trend, up 17%, profitability up by 42% and ESG performance with positive trend confirmed overall in the fourth quarter. Now our job is to extend this trend to coming year, thanks to our strong competitive advantages and targeting to become the largest Italian system integrator for the business segment. Under a crucial phase of market evolution, the demand of digitalization remains strong, driven by the main digital transformation trends in security, network infrastructure, cloud data platform and vertical applications where SeSa Group has built a unique business model and offering. We are accelerating our M&A path with 10 acquisitions since January '22 and a great pipeline of additional opportunities, not only in Italy but also across Europe, in particular in the DACH area, targeting industrial skills and accretive EBITDA margin. Considering our market position and the positive start of the full year 2023 with around 15% revenue growth in the month of May, we confirm the positive outlook for the full year '23, with growth rates in line with our long-term track record, targeting 11% growth in revenues to EUR 2.65 billion and 20% growth in profitability, targeting EUR 200 million of EBITDA for the full year '23. We will continue to pursue sustainable long-term value generation for all our stakeholders leveraging on our strong competitive advantages. I thank you for your attention. Now we open the Q&A final session.

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

Well, my first question is on profitability. Looking at your new fiscal year guidance, it may seem a bit conservative, especially in terms of EBITDA margin, meaning that the bottom or the edge will be in line with the last year. I was wondering what could be the main drivers looking forward for the next year also in terms of segments? Do you expect still a pretty strong performance in terms of margin improvement from VAD? Or can we assume a stronger contribution from Software and System Integration and Business Services going forward? The second question is more general one. Looking at, yes, the current business trends, can you give us any indication about the start to the new fiscal year, if it's a good start? And if you are seeing any kind of, let's say, slowdown related to the macro trend from -- for some of your customers or some of your end markets? And third and last question is on M&A. You were recently pointing in a recent press interview that you confirmed that you should look also to Germany and Central Europe in general for potential new acquisitions. How is the competitive scenario there? Are you seeing many opportunities? And also in terms of valuation, if we can assume a similar policy like in your domestic Italian market?

Renato, thanks for your questions. First of all, about our guidance for the full year 2023, as usual, we prefer to stay conservative at the beginning of the year. We are working a lot. The start of the new fiscal year is really positive with the growth revenues over the line of 15%, that is the month of May. We intend to create to move on our great competitive advantages to continue to work in the long-term view. When we approved the first quarter results at mid-September, we evaluate again the guidance and the forecast we consider achievable the guidance of 11% growth in revenues and around 20% growth in profitability. We have really a great pipeline of new M&As, not only in Italy but also across Europe and in particular in Germany. Our guidance is considering the M&A that we already closed until now. So that means if we may able to improve our path of M&A in the second half of calendar year, we may also reevaluate our guidance. We intend to continue to work with the same path in the second half of the calendar year. And also in the terms of evaluation criteria, the competitive scenario is not so different from Italian one. There are really great fragmentation in the system integration area for the business segment with a lot of opportunity to aggregate and to try to take involve in the long term, the key people with the same criteria that we already applied in Italy. I remember that we are already operating in Germany with more than 15 legal entities. And so we already experienced our capability to aggregate in that area. We intend to continue to work in that direction. We hope to be ready to disclose 2, 3 acquisition in the second half of the calendar year in Germany.

The next question is from Aleksandra Arsova with Equita.

Can you hear me?

Yes, please go ahead.

Okay. So a brief follow-up on the previous questions. So just to recap, do you expect margins improvement in the coming months? Since we saw our fourth quarter of the full year 2022 with slightly lower margins than the previous 9 months. So should we be back to above 7% EBITDA margin for the group or even improving to 7.5%? And just to check for how costs are evolving in terms of special personnel cost and the other costs. And then on the M&A, so as far as we understand, you continue with your bolt-on M&A strategy. But maybe I was wondering are you also looking to a more, let's say, transformational deals since you're -- including your size, your market share in Italy and also you are starting to expand also outside Italy?

Thank you, Aleksandra, for your questions. In the Q4, we were more or less in line with our expectation. But in terms of marginality, we had down compared to the average full year and the previous 9 months because we invested and we work without any kind of capitalization of long-term investment. And so we believe to be able to recover and over 7% EBITDA margin trend in the new fiscal year, in particular. In the full year 2022, we worked with the 7% -- 7.02% of EBITDA marginality compared to 6.20% of the previous year. So that means 2021 year. Now we are targeting an EBITDA margin in the range between 7.20% and 7.50%, and we expect a positive contribution from Business Services sector and also from Software and System Integration one. So the other question refers to our trend of market share in Italy. The market share position we have is really different considering the different sectors. In Software and System Integration in Italy, the market fragmentation continues to be very high. Our market share is around 7%. There is a great opportunity to continue to grow also through bolt-on M&As, and so that is an opportunity to improve our size of operation as we did in the last 3-year period. In Value Added Distribution, we earned a market share of around 45% that more or less was stable last year. We achieved a new cluster of business partners and technology areas and ecosystem. In particular, we started operating in the green tech, and we developed more than EUR 150 million revenues in that area. So that means that we have an opportunity to continue to grow in Value Added Distribution, thanks to our capability to withstand our perimeter of operation to include new technology ecosystems as we did now with green tech. Outside Italy, we are observing great opportunities in particular in the DACH area where the fermentation in particular, in information technology industry for the business segment is high. And so we have the opportunity to work in the same direction we made in Italy, starting consolidating the perimeter that we intend to enlarge quarter-by-quarter in a progressive way as we did in Italy.

Okay. Just to be sure, so no transformational M&A deals at the moment, only bolt-on M&A, right?

No, not transformational deal in -- if you consider just a single deal. But obviously, the path we intend to promote in green tech or in DACH area is if you consider the combination of different consecutive small mid deals may be considered a transformational evolution also for our business model.

The next question is from Andrea Randone with Intermonte.

Congratulations for the results. I have been covering the stock for many years, and I am pretty confident that you set a conservative guidance also this year. At the same time, I wonder if you can help us in providing some elements that make you pretty confident the business is able to grow even in case the Italian economy will suffer a bit in 2023. You mentioned a number of factors already in your speech, but if you can give us some other ideas. And also, if you can comment on longer term, your ambitions of becoming the largest system integrator in the business segment you mentioned before in terms of potential market you are addressing. The second question is a very small one. I mean, the tax rate was quite low, lower than the year before. I wonder if you can -- we can take this level as a proxy also for the current year.

Thank you, Andrea, for the question. First of all, my view of Italian scenario is that despite general worsening of macro scenario, the digital demand and the requirements of digitalization and also sustainability from companies and organizations continue to be really, really strong. And recently, the analyst forecast have been improved from 6% to 8% in the 2-year period -- the coming 2-year period 2023, 2024. So that means despite and worsening of scenario, we are facing new waves of digitalization and some macro trends such as security or data platform, our network infrastructure. Again, Vertical Applications continue to be really, really strong for any mid companies across the different districts in Italy. I think that we have to continue to work to a larger perimeter of operation in particular, in Central Europe, in order to become the largest Italian system integrator. As you know that I consider a system integrator operation, not only the perimeter of system integration and software but also the perimeter of Value Added Distribution because what we are delivering through Value Added Distribution is an integration of technologies towards a channel of more than 15,000 business partners, integrated with educational training and technical support services with more than 75% of technology that is intangible technologies. So that means no 100, but software -- enterprise software in the main area of data platform, data management and security. And so we are in the right direction because if we managed to start in a significant way the coverage of DACH region, we may, in a short-term period of time really become the larger system integrator -- Italian system integrator for the business segment. The final question about the tax rate. It's true that we work with lower -- slightly lower tax rate. That is an advantage of an higher income before taxes. So as we improve the size of income before taxes, we may work with a slightly lower year-after-year taxation. And so I'm not sure what is the -- in terms of basis points to the improvement. But we -- in effect, we may take advantage for this trend also in coming quarters and coming years.

Congratulations, again.

Thank you, Andrea.

[Operator Instructions] The next question is from Paolo Cipriani, Private Investor.

I have a question regarding the guidance 2023. Is there implied any inflationary cost on in the personnel in the guidance...

Mr. Cipriani, this is the operator. Can you get closer to the receiver, please, because we cannot hear you.

Okay. I would remove the phone. Regarding the guidance for fiscal year 2023, is there implied any inflationary cost from the personnel point of view? On the cost personnel, or is not considered anything?

Yes. Obviously, we are taking this driver into consideration. Consider that we closed the full year 2022 with an average cost of personnel, more or less in line with the cost -- the average cost of personnel of the previous year, that is as a result of the good work we did in terms of hiring. We managed to decrease the average age of our personnel as a result also to take under control the cost. We work a lot in terms of retaining human resources. We improved a lot the hours of training up to the line of 60,000 hours every year in the last 12 months. And so we also may disclose that we work with a churn rate in the last 12 months around -- that is around 7.5%. So really lower both compared to average IT industry and average Italian product sector. Thanks for the question.

The next question is from Emmanuel [indiscernible] with Quester.

Congratulations on the earnings. A question on Value Added Distribution. Given the changing macro environment, do you see some softening in this business?

Sorry, may you repeat the question to be sure to have understood well.

Sure. So concerning the Value Added distribution, do you see some softening in these activities, maybe selling IT equipments to your customers, do you see some softening given the macro environment changing?

So our perimeter of operation is mainly focused on enterprise software that is embracing several technology areas from security to data platform, our data management or analytics and several technologies that we offer or offer under as a service program. And we added also technology for networking and technology for data center, and we recently added in our portfolio, green tech technology.

And given the possibility that economy going into recession, do you see some signals that there is softening in selling those projects?

So the demand of these kind of products is really strong. And also in the beginning of the new fiscal year, we are improving by over 10% our trend. We are working well with a good backlog. Our final users belong mainly to, as I explained, the several Italian districts in the business segment. So we don't cover consumer needs of technology. And we observe in our history that we always face very well also a period of recession with a continuous path of development. So we are confident to be able to face also a period of slowdown of economic -- macroeconomic scenario. Even though the IT analysts are forecasting until now, so the forecast refers to last week, an improvement of the demand of information technology and digital and not a decrease, despite the general scenario.

[Operator Instructions] Miss Palmero, gentlemen, there are no more questions registered at this time. Excuse me, there is a follow-up question from Paolo Cipriani, Private Investor.

Yes. Just a follow-up on the fiscal year 2022. So especially over the last few quarters, is there -- in the organic revenue, is there any price increase on the revenue growth on the top line due to price adjustment, I mean, of the -- of your -- of the goods that you resell?

Consider that as we mainly distribute in -- because the question and intend is referred to Value Added Distribution because we mainly distribute software, the trend of prices was not so unstable. So we observed slightly increase, but not a change -- dramatical change in the price. And so we expect a similar situation in coming quarters. So the problem of the supply chain for hardware that were relevant in particular 1 year ago are more or less disappearing and they continue to be relevant in the supply chain of networking. But most of our business refer to enterprise software or cloud programs combined with system integration services and consultancy. And so obviously, we may also adopt the pricing level, but we are working with the situation that is overall, more or less stable in terms of pricing because we are mainly focused on software.

[Operator Instructions] Miss Palmero, gentlemen, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.

Thank you very much for all of you. We are available for providing additional questions together with Conxi, our team of Investor Relations. Good afternoon to everybody.

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