Solocal Group S.A. (LOCAL) Earnings Call Transcript & Summary

Good morning, and thank you for joining us here this morning. You're about to hear the Solocal performance for H1 2022. I'm going to start by taking you through the business update and give you an update on the strategic plan. Olivier Regnard will share with you our H1 2022 performance, financial performance, and then we'll have Q&A should you have questions for us. Now if you will allow me, I'd like to label for you a few highlights for H1 2022. The first development is that after 3 years of transformation of Solocal's business model, we have in the course of this first half year of 2022 managed to shore up our future model. We are now renewing our contracts by tacit renewal. And as you will see, this renewal model is extremely virtuous, and it's been tested out and carefully managed throughout the first 6 months of this year. Now along with this new model, I would like to report a high level of satisfaction, satisfaction with the ability of our incumbent sales force to own this model. Our generalist sales force who experienced the previous model while they have fully owned the end of the migration and the implementation of the acquisition of cross-selling and upselling. And as you will see, this high performance has contributed and will continue to contribute to Solocal's growth. Now these generalist and incumbent sales force did very well in H1. This is not so much the case for our hunter sales force. They were not in a position to deliver what we had forecast for the 2022 budget. They were not able to deliver simply because we had not sufficiently staffed that hunter sales force for H1 2022. As I had announced, we wanted 190 hunters and at the end of June we had reached 150 of hunter headcount and that is not sufficient. Yet our ARPA is stable. We're still growing. We're still creating value through our customer portfolio and our customer base stands at 300,000. That was the June 30 figure. There is a slight decrease and I'll come back to that later on. As a result, we have been led to adjust our 2022 guidance both for the top line and EBITDA which is now minus 5%. Now the EBITDA is stable. The recurring EBITDA is stable, which means that mechanically our profitability will increase and our cash position is well ahead of forecasts, as a result of which we will be able to make a cash repayment of the RCF in the amount of EUR 10 million as at September 30 of this year. Now if you'll allow me, I'll go into further details with you and I'll review with you this business model which is now fully shored up and implemented at Solocal for the long term. This H1 showed 65% of our orders achieved through automatic renewal. EUR 125 million are booked thanks to that automatic renewal. We grew by EUR 38 million relative to last year. Thus this model is fully installed and for the long term it is fully in place. It is the alpha of our Solocal model. And that being the case, the adjustment variable of that model will be the churn. The omega of the model is acquisition. Our ambition clearly is to acquire more customers than we lose. Now as you can see here on the screen, we have major channels which allow us to acquire new clients and unsurprisingly the most powerful channel remains the field sales which accounts for about 60% of our acquisitions. And it worked very well in H1, a bit more through the incumbent sales force sent through the hunters and it is our priority channel for acquisition. Telesales did very well in H1. It's growing, it's developing and it's ahead of its targets by 2%. Key accounts suffered slightly in H1. But we expect to recover our key accounts in a better situation in H2. Now as I was saying, this model at Solocal has an adjustment variable which is our ability to retain our customer base. We ended H1 2022 with a churn rate of 14.9% which is an increase of the churn rate of 1%. This was expected. We had forecast it and we had announced it when we gave our Q1 performance results. Now why did we expect that increase? Well, simply because this model is in the process of being settling in on an ongoing basis. Since 2019, the 12 month's cohorts have already been renewed on several occasions, which was not the case for the 24-month cohorts. And in 2020, the decision was made to contractualize 24-month contracts. So the first 2020 cohorts were managed. Their renewal was managed throughout the first half of 2022. Now those cohorts are quite large. In H1 2022, we almost doubled the number of contracts to be renewed relative to last year. As a result of that, I am quite satisfied with this journey because the stakes were very high. It was critical that we succeed. And we were able to contain that churn rate. Now the next critical step is to ensure that the 12-month and 24-month contracts are fully shored up as part of our routine operations. Now this churn rate will be contained and controlled and even decreased if and only if the customers are satisfied with our services. And I've always said this and I will say it again, customer satisfaction is all important. Now what have we done to ensure that this is successful? In June 1, we recruited customer journey manager who reports directly to me. And this manager is in charge of installing sustainable customer strategy that satisfies our customers. Concurrently, we undertook to change our sales approach, our tone. We now receive our customers more successfully. And we have 4 indicators which are flashing green. We are on the right track towards increased customer satisfaction whether it's onboarding, cross selling, retention and development. We are improving the quality and the customer satisfaction on every count. And concurrently, we have fully installed our communication tool which allows us to record our communications and analyze the dialogue to discuss what the pain points are for our customers. So we've acquired a lot of information and we're now in a position to make quick and effective corrections. The customer base as I indicated lands at 300,000 customers. That's a slight decrease of 4,000 customers. You will have understood by now we've lost fewer customers than at the same time in Q1 of 2022. Yet the critical issue is acquisition. 9,000 Customers will not suffice to cover our churn. Thus it is critical that we continue to work to quickly grow that customer base. Now our retention rate continues to hold its own; it stands at 53%. Since the beginning of the year, I've been driving for Solocal value creation. And you can see that the ARPA is stable relative to Q1 2022. It's grown over 2% relative to the same period last year. It stands at 1,350. So the value creation strategy is delivering results. And we're convinced that we can collect the dividend of all of these efforts in the upcoming weeks and months. This strategy is ambitious, it's true. And this ambitious strategy has been illustrated by the fact that we've been working hard on our websites. Now, for the last 4 quarters, we've been developing our website range both in volume and in value. What we do is try to combine in parallel acquisition and value cross-selling. As you can see, in Q2 of this year, we've increased significantly these results. Unfortunately for us and for the H1 landing, the websites are very inertial due to the fact that they have to be created. So you don't immediately see the results in terms of revenues. But as you will see in the next weeks and months, this strategy is indeed going to bear fruit when it comes to the top line results. As I've stated, we have been working hard to implement the October 2021 plan. It's a robust plan. It's a sound plan. And it's going to be deployed further and continuously. As you can see, we worked very, very hard. We've actually achieved a great deal when it comes to performance management. We have implemented everything that we had plans to, to make sure that this plan is in place for the long term. We have methods and solutions which are in place. Henceforth, it will be essential to improve our transformation plan, the organizational transformation plan for our sales force. Because in H1, we didn't fully achieved what we had forecast when it comes to the hunter sales force. So what occurred and what do we intend to do? Well, what occurred is that we had a plan to hire 190 hunters. And in fact, the headcount is 150 at the end of H1. So when it comes to the headcount, we had closer to our goal of 190 than 150. So the next step is to consolidate and flesh out that hunter sales force. What developed? For one thing, the labor market became very, very tough. It's very tough. This is not just Solocal's experience. The fact is that salespeople are very much in demand at the moment. Thus every potential recruit is faced with several attractive job offers every week. So if we want to retain them and make them loyal, we have to support them. And it may be true that we did not do everything we could to create that or to generate that loyalty and we lost some. We took 3 measures to offset this. For one thing, we worked hard on onboarding. Our new recruits told us that owning the totality of the range, Presence websites and advertising, was very complicated. So that since May, this has led us to focus very hard on 2 ranges, the websites and digital advertising, and this works because they sell websites and advertising. The second dimension has been to provide training and support. This will have to be improved. We need to really be right by our new recruits' sides. And we have to make appointments. It's difficult for newcomers who join Solocal to immediately pick up the phone and score hit. So telesales in the first few months we'll be setting the appointment calendars of our salespeople. We have a pay package, which is very competitive. The fixed portion plus the variable portion are quite competitive. There's no doubt about that. The pay package is very attractive. Yet in the first few months, the variable portion is not existent. So the new recruits have a difficult time of it in the first few months. Now with these 3 measures that we've laid out, we're going to improve the loyalty of our new recruits in H2. As I've said, the incumbent sales force, the generalists, 200 of them at the moment, have fully assimilated the attrition, the absence of the migration that they had to manage, that they have had to manage for the last reason, and they retained the same degree of productivity. They rolled over from migration to acquisition very smoothly, very successfully, and they performed very well. They're now cross selling very successfully. And it is quite evident that the recasting of our repay plan at the end of 2021 was not -- did have an impact on this performance. And I would like to recognize that performance like credit where credit is due. Now what needs to be done now to deliver our acquisition targets and our growth targets? Well, this needs to be examined at the micro economic level for greater clarity. So what you have here is a snapshot of our geographical organization regionally. As I announced when I announced the 2021 business plan, we operate on one leg. In fact, we're only addressing 50% of our market at the moment. When I announced that we've acquired 9,000 customers during the quarter, that's 9,000 customers during the quarter and 50% of the French market. And you can see this under the hunter heading, we have 3 regions which are very successful. The others are doing better but they're still lagging behind and they're under expectations. And so I'm going to ask our teams to focus harder on those laggard regions they need to progress faster. Yet, remember that for the hunters, the 6 regions all pulled ahead throughout H1 of 2022. Similarly, our sales force -- the incumbent sales force, the generalists, progressed. In Q2, they progressed relative to Q1. So they pulled ahead everywhere. Now the next step is to ensure that our commercial performance is homogeneous across the entire territory. So we've grown. That's the first message. And the second message is that the high-powered regions are selling all of our products and they're selling them very successfully. The powerhouses are doing very well. There is no quality issue when it comes to our digital solutions. The difficulty has been an organizational and a sales performance issue. Now this business plan that I had announced comprised my intention to restore trust, trust on the part of our customers and trust on the part of our Internet users. Now the customer has been approached by the customer success manager for the first range or the Internet websites. Now since July, we have had a customer success poll for new clients who've taken out contracts for websites, Internet websites. And this has been very successful. And gradually, we're going to roll-out the customer success manager approach for the other ranges of our offer in the next weeks and months. Now I had also announced that we needed to tell report, tell the story of what we provide our customers. And so we needed to quickly review our reporting processes, which were very difficult to find and, between you and me, very difficult to read. Now in the span of 6 months of product teams completely revisited our reporting materials. They're all fully accessible now through the digital assistant called Solocal Manager. Now I would like to note here that Solocal Manager has made a leap in usage of 20% relative to last year. So 1/3 of our clients today are regularly consulting Solocal Manager and this is something I'm extremely pleased to note. Then when it comes to PagesJaunes, as I've said before, we've changed the recommendation engine. We've, since last April, set up our new app and we're now labeling our professionals. This is now completely in place. Our professionals have been labeled PagesJaunes. The label is called Super Pro and it's going to be deployed along our first vertical, the housing vertical. So that was what I wanted to report. I'm now going to hand over to Olivier Regnard, who will take you through the H1 financial performance. Thank you Olivier.

Good morning. As Herve has told you, the revenue is down by 86.2%. For H1, revenue is down by 7.5%, slightly lower than what we had anticipated because the acquisition rate, as Herve has told you, is lower than anticipated. And the product mix is different. We've really stressed website sales because this is a powerful tool for loyalty. But the impact in revenue will only be visible over the next 24 months. The Booster Contact product had mixed results in H1. And that product, if we sell 100, is fully recognized immediately in H1. Similarly, we were penalized by less favorable performance for key accounts. And the renewal of products that had been forecast for H1 for the key account division should be significantly improved in H2. Now you may be wondering how we had reached stabilization and we're now declining? Well, similarly because the headcount has changed. As Herve indicated, in December 31, 2020, we had 400 salespeople. Now we have 200 of the generalists, the incumbents and the 150 hunters who are young, they are new recruits. They have yet to settle in to their positions. But we expect great things of them. Now how do the different product ranges perform? We have 3 types of products, the Connect range, which is a product which gives you digital presence. It's your appearance on the Internet. It's very buoyant. It's a retention, offer a loyalty building offer. It's buoyed along by our telesales channel. It's up 17% relative to the same time last year. And we've corrected the figure for the inertia of the website range. We are aware that for the websites, there has been a slight drift. But Booster is down 19% with 2 impacts were penalized by a key account offering, which has not yet been fully renewed. And we're expecting product launches for H2, which will buoy us up. And to that, you have to add Booster Contact, which gone off to a difficult start, but which is going to kick in successfully in the next half of the year as things settle down. So revenues end at EUR 201.2 million to be compared to EUR 214 million at the same time last year. The order backlog is stable relative to March. It stands at EUR 240 million and the secured revenue figure, which is a figure that we track throughout the year, it stands at EUR 339 million, which means that today if none of our contracts were to be renewed and if no sales were to be achieved, we would have secured revenue of EUR 339.4 million at the end of the year. Now this figure is down relative to last year by some EUR 25 million, which contain the hangover of our change in business model for some dozen million euro. And it also breaks down for a second component, which is the lag on the realization of our plans, and that's why there is that slight dip. Now revenue is down by EUR 15 million. That's been completely offset in EBITDA terms by significant savings. Now what savings did we achieve? On the one hand, we decreased staff costs by EUR 9 million and we decreased our external expenses by EUR 4 million. When it comes to staff costs, 1/3 of those savings were not chosen. They were simply the result of the fact that we were unable to retain as many of our staff as we had desired. So we spent less money on their salaries. We spent less money. It's true. But we would have preferred to have those people to pay to generate sales and revenue. The additional EUR 3 million are due to -- or achieved through good control and good cost containment through H1. So EUR 56 million in EBITDA, EUR 28 million in margin, gross margin of 90%, very high, and an operating income of EUR 29 million thereabouts. Now that operating income contains the interest expense, EUR 14 million. Those EUR 14 million, that's EUR 9 million in the cost of the debt, EUR 2 million of the cost of the debt incorporated into our leases, which are corrected according to the IFRS standard, and EUR 3 million due to the amortization of restructuring of the maturity of our debt. After-tax, the net income is EUR 10.6 million, which is very close to last year's figure which was EUR 11.5 million. This EBITDA made it possible that performance, the operating performance made it possible to generate a recurring operating cash flow of EUR 25 million or the EUR 56 million of EBITDA, EUR 15 million negative impact of working capital requirement and EUR 15 million of CapEx at. That EUR 15 million decrease in the need for working capital is due to a slight decrease in the working capital for our customers, which has leveled off. It leveled off in H1. It will deteriorate in H2 because of the seasonality effect. It's just a mechanical effect because in August, our sales force is off on their summer holidays. And there's also the impact of an order intake, which is lower than anticipated. The second contributing factor is that we have a change in the working capital requirement variation in the other category, that's minus EUR 7.4 million. And that is the reimbursement of the tax liabilities of EUR 4 million compared to EUR 2 million the previous year. We no longer have EUR 3 million to pay back for that tax and social liability, which will be fully paid off at the end of this year. And the working capital requirement is also seasonal in nature, which affects us adversely in the others category and the suppliers' category this half year compares to previous half year. The CapEx is stable, slightly down by EUR 15 million for the year. And we generated EUR 25.6 million in recurring operating free cash flow. If you take away the interest expense, EUR 9 million, and the end of our restructuring plan costs for 2018-2019, generates recurring cash of EUR 13 million. If you take away from that EUR 13 million, the payment of our rents and the reimbursement to the BPI as part of our ATOUT loan, the variation, net variation in cash is EUR 2 million, which allows us to post a cash position of EUR 80 million, which is quite sound. When it comes to the debt structure now, a few quick reminders. Our net debt stands at EUR 171 million, which if you factor in the EBITDA which is in the banking documenting results corrected for the IFRS, we have a level of 1.6. The ISCR is 5.2%, ISCR lever is 5.2%. And relative to the covenant, there exist a significant and comfortable amount of headroom, which is why we decided to pay back EUR 10 million in cash of the RCF that we were to pay off at the end of September with the maturity of 2022. We were expected to pay back between EUR 5 million and EUR 10 million. And the decision has been made to pay back the maximum allowed, which is EUR 10 million as per the banking documentation. I will now hand over to Herve who's going to give you a few words of conclusion.

Thank you very much, Olivier. Well, to conclude, and this is something that I had announced when I announced the business plan, 2022 is and has indeed proven to be a year of consolidation. I was right about that. This H1 of 2022 is a historic H1 for Solocal because we had to manage the phasing out of our transformation plan. We needed to roll over from a model of renewal to a subscription model. And this model was fully closed out on January 1 of this year. And we discovered, developed and managed what was to become our target model at Solocal. Solocal's teams were very, very successful at this. I would like to thank them for their performance because this was by no means a foregone conclusion. And so now that the subscription mode mechanism is fully confirmed and stabilized, we now have a renewal of the 12-month cohorts. We now have a renewal of the 24-month cohorts behind us. So we're fully covered when it comes to our customer contract scope. Indeed, the hunters, our acquisition model, will be ramped up more slowly than we had forecast. It will be slower because, again, we're up against exogenous market factors. And also, it's necessary to give our new recruits time to settle in on the ground, particularly in what I would call fragile territories. And this takes time, support and training as well as onboarding. So that the revenue figure was adversely affected this H1. We will continue to work hard to control costs. This is not our priority. Our priority, as Olivier has told you, is to grow, to grow our customer base. But we will be very careful to carefully tend to our competitiveness and keep costs down as much as we can. The free cash flow generation, we forecasted EUR 30 million at the end of this year. And this is a slight decrease relative to what had been forecast in the 2022 budget. Yet, the cash position is very favorable. EUR 82 million is an excellent piece of news. That was the figure at June 30 of this year and the debt ratio is 1.6. And this simply means that Solocal is in very good financial health indeed. Our strategy, our medium-term strategy is unchanged and that medium-term plan is growth. And we will be adjusting our targets as we go in H2. Thank you very kindly for your attention. And we're now very happy to answer any questions you might have. Thank you.

Thank you, Herve. Thank you, Olivier. A few questions about the sales force. We're being asked where the telesales force is located, what are their intervention and expertise levels? And another question about telesales, for the Internet websites, because we have a dedicated sales force for our websites?

All right. So to answer the first question, you want to know where our telesales force is located. Well, it's located in France, in mainland France. And some of them are in Portugal and some of them are on Mauritius island. So we have deployed a value strategy; our high value, our very high-value clients, our middle value or medium value clients and our low-value clients. I'm not sure we will continue in this manner. This is something that we're currently considering. We're currently reviewing how to best deploy our sales force to address our customers and support them most effectively. So the situation I've just described to you is the current situation, but it may very well be adjusted throughout H2. As to websites, while the customer success managers have been recruited and have been established in [indiscernible] near to where the websites are actually created, so that they're very close to the production warehouse of these websites.

What's the sensitivity of your business model to a perception for a recession that's announced for 2022?

Our business model is shored up by a very large customer base and they are very diversified in nature. We only have 1% receivables, which is extremely low. And it's just another expression of how robust our customer base is. Now of course, we have to remain cautious. We have to be conservative when it comes to the macroeconomic context, which is very complicated to contend with. But our customer base diversification is a significant strength. And should there be a recession, we are convinced that SMEs will need clients and they will need to do business. And so clearly, they will need our services. We have exactly the services they need to acquire those customers that they need and retain them. We are convinced that we have the assets and the ability to withstand a possible recession.

Question about your 2023 guidance and the recruitment of salespeople in H2.

I can answer the first question about guidance for 2023 and Olivier can answer you about recruitment in H2. Now as we've indicated, the deployment of our business plan has continued and will continue. It will be rolled out as expected. It will be a bit slower than expected particularly when it comes to the territorial development of our hunters. And that's why we made the necessary corrections in the revenue forecast and our medium- and long-term goals will be again adjusted once the hunters are fully established and once we have better visibility. And year-end, we will adjust our medium-term goals without in any way decreasing our ambition when it comes to growth and growth of the top line in particular.

To answer the question about recruitment, well, we will continue to recruit. As I've indicated, we've 154 hunters at the moment in place fully operational. And the plan is to add to that team add new salespeople, particularly in those fragile areas; the center of France, the west of France, the east of France and the Lyon area, the Ron Alp area. Those are the territories, which will serve as real growth drivers in the future. And our new recruits will have to be retained successfully to ensure that all of these plans materialize. The better a job we do supporting our hunters, the better they perform. So it's absolutely critical to support them every step of the way and ensure that their loyalty is very high.

Question about the debt, what's the interest rate that you anticipate for the next 3 years? And how does the company expect to renegotiate that debt?

As to the interest rate, as you know, we have an interest rate, which is very sweet. It's Euribor 3 months or floored at 1% to which there is a 7 point margin -- or 7% margin attached rather. And we have a non-call period on the bond of -- which is March 2023. Refinancing will be a priority in 2023. Clearly we will be considering that right from the end of the year. All options are open at the moment when it comes to refinancing private debt bonds. We will be open to any possibilities. And as indicated previously, the refinancing will be a combination between the market context, which is not very favorable, and the financial performance and the sales performances Solocal will have managed to achieve.

Communication campaign had been planned for PagesJaunes. Is that still in the cards?

Yes, it is. That campaign has been scheduled for Q1 of next year. We have produced it. It's now being tested out. The concept has been run by a few consumers. It's been tested out with some potential clients as well and it will be fully operational early in 2023.

We have a few questions about customer satisfaction. Could you say a few words about how you address it and whether or not you publish your survey results? Are they available?