Solutions 30 SE (S30) Earnings Call Transcript & Summary

Hello, and welcome to the Solutions 30 Half Year Results 2021 Call. My name is Rosie, and I'll be your coordinator for today's event. Please note this call is being recorded. And for the duration, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end. [Operator Instructions] I will now hand you over to Gianbeppi Fortis, Chief Executive Officer, to begin today's conference. Thank you.

Thank you, Rosie. Good afternoon, everybody. Thank you for being with us this afternoon for our first half '21 results. Please, let's go to Slide #5. As you've seen, we had a pretty good first half of the year, with revenues growing by about 20% and EBITDA growing about the same rate. So EUR 440 million of revenues, with almost EUR 50 million of EBITDA. Our cash minus debt position shows a positive EUR 43 million, which is pretty good. And in particular, we had a very good sales intake in the first half of the year with a little bit more than EUR 0.5 billion orders signed, which is pretty good given the circumstances, our clients and also new clients decided to trust us for their projects. We also began, as we already said, our transformation process and the objective is to get it done by first half of next year to be even stronger than before. Next slide, please. On Slide #6, I'm going to go through the main things that are going on across our markets. Let's start with Iberia, that is the most mature geographies in which we operate. We managed to grow in this geography, mainly gained market share. France, that is mature, but there is still a lot to do with a penetration rate of fiber that is 20%, 25%, so, still a lot to do. We have continued our progression in the telecom segment, in particular, in the fiber segment. And we've also grown our activities in the energy segment related to charging stations and other activities. In the UK, the integration of convergence has been successful, even though there has been some months not easy with the COVID lockdown. And now our main focus is to transfer knowledge from France to the UK to bring convergence towards FTTH activities. The good news is that the UK is preparing to invest heavily in fiber, so we are in a good position to take advantage of that. In Benelux, we are ramping up the contract that was won at the end of 2020 for the deployment of smart meters in Flanders. And also preparing ourselves for fiber deployment because that region is now in the process of launching quite a lot of fiber initiatives. We've also signed 2 new contracts in that region with Open Dutch Fiber and Fiberklaar. And we are now preparing to deploy these contracts, even though it will take some time. So the revenues related to those contracts are showing up in our numbers most likely in '22 and not in '21. In Poland, we have consolidated our activities with Orange, which is still our main client, but we also -- we've have also begun to work for other clients in the telecommunications segment, but also in the energy segment. So we have begun doing some energy activity just in Poland. And we also won some activities related to 5G deployment. Germany -- in Germany, we are preparing ourselves for the fiber deployments because Germany is also going like all the other countries towards fiber, but not as fast as the others. So our main focus today is to reorganize our current activities to move them from the coax activities that we are having today and we had in the past towards fiber, so some changes. In Italy, the main focus has been to ramp up the contract that we won with TIM at the beginning of the year. TIM has started pretty fast and put a lot of pressure on our operations, but we're succeeding in fulfilling their needs. And Amaury, you want to take over now from Slide 7 to talk about our financials?

Yes. Thank you, Gianbeppi, and good afternoon. First of all, I would like to come back on the specific context in which our auditors performed a review of our half year results. As you know, EY, our former auditor did not issue an opinion on our 2020 financial statements. However, those were approved during the shareholders' meeting on 30th of June, 2021. And PKF, a global audit firm with more than 20,000 employees in the world, was also appointed as the new group auditor. Our 2021 half year financial statements, having been reviewed by our new auditor PKF, was also performed very thorough diligences on our opening balance sheet on December 2020. Due diligences confirm that there is no misstatement in the opening balance sheet. At the end of this review, PKF has not any observation on our 2021 interim financial statements. The conclusion of PKF includes a reserve, which is actually a technical reserve, which is made compulsory by professional standards, given the lack of opinion on our 2020 accounts. Having said that, we are disclosing today a strong financial performance for the first semester, which, as expected, reflects the significant ramp-ups resulting from the new contracts signed in Belgium, in Italy, and in Spain. Next, our consolidated revenue for the first 6 months of 2021 amounted to EUR 441 million, up by 20.9% compared to the same period in 2020. The organic growth stands at 17.5%. And our maintenance activities, which actually are generating recurring revenues account for 58% of total revenue. In France, over the first 6 months of the year, the revenue grew by 20.5%, purely organically due to the very strong dynamics of telecom market as well as the energy segment with actually a positive basis effect since smart meters installation were totally stopped last year during the first lockdown between March and mid-June. In Benelux, the revenue was up 13.1%. This growth was mainly driven by the rollout of ultra-high-speed networks and the start of smart meters rollout in Flanders. In the other countries, revenue went up by 28.8% in comparison with last year, and with notably plus 54% in Italy, and plus 44% in Spain. On the next slide, you can see that at the end of June 2021, the adjusted EBITDA was EUR 49.5 million, up 19.8% compared to the first half of 2020. The operating margin is 11.2% of the revenue, and is almost stable compared to the first half of 2020. This actually results from -- on the one hand, the increase of our operating costs going up by 1.7 points, and this was absolutely necessary in order to serve efficiently our clients on the new contracts, which are still in the ramp-up phase. And on the other hand, this EBITDA margin also results from the decrease by 1.6 points of the central organization costs, which are better absorbed, thanks to the growth of our activity. On the next slide, the EBITDA margin in France was up by 1.1 points, and which is 15.5%, while the EBITDA margin shrink slightly in Benelux by 0.3 points, and in the other countries by 1.6 points. It is actually in these regions that the group is investing the most in order to prepare the upcoming growth. On the next slide, the group's share of net income reached EUR 14.1 million, increasing by 35% compared to EUR 10.4 million in the first half of 2020. This net profit notably includes EUR 3.5 million of exceptional expenses related to the defamation campaign against the group. On the next slide, here, you can see that the structure of our balance sheet remains once again extremely solid. Our equity amounts to EUR 185 million, compared with EUR 170 million last December. Over the last 6 months, we reduced our bank debt by EUR 13 million from EUR 100 million in December, down to EUR 87 million in June. Our working capital remains negative at minus EUR 9 million. Even if our working capital requirements actually increased over the period in order to support the start of the new contracts and the significant ramp-ups in all the countries. The outstanding position of the receivables transferred to the factor is EUR 73 million at the end of June 2021, and our gross cash position stands at EUR 131 million. On the next slide, in terms of cash generation, the cash flow from operations stands at EUR 38 million, compared with EUR 35 million last year. As just explained, the ramp up of the new contract as well as a return to more normal payment terms from our customers generated a EUR 31 million increase in working capital requirements. And finally, this results in an overall balanced free cash flow, and illustrates once again the ability of Solutions 30 group to finance its internal growth with the cash coming from its operations. This is actually a pillar from our cash management policy. Next, as a summary on our financial performance in the semester, first, Solutions 30 showed its ability to operate a strong growth and manage fast ramp-ups in different countries at the same time, while keeping its margins. In addition, we do have the right financing policy to support the significant ramp-ups. We use factoring in order to limit our working capital requirements, and we use our own cash to finance the scale-up of new contracts. And finally, the normalization of the situation with our auditors sets very positive basis for the coming months, and this should allow us to restart our M&A strategy by the end of this year. I thank you for your attention, and I will now hand over to Gianbeppi, who is going to present our business outlook.

Thank you, Amaury. Let's go to Slide 17, please. I would say just one word on the transformation plan that is going on. We began during the summer to work with KPMG, so we have appointed KPMG to help us to put together this transformation plan. Things are moving ahead as planned. So the work has begun. And we believe that by first half of next year, the work will be done. So we will have a GRC tool in place with the proper GRC structure and stronger processes for internal control and compliance. Next slide, please. Concerning our goals for '21 and for '22, what we are focusing on now is basically to duplicate the model that has been working in France for quite a while in the other countries. That means, gain contracts in all of the geographies and then deploy them, which is something that is really happening now. So we confirm that we are going to have double-digit growth for fiscal year '21 with probably softer growth in second half, first of all, because first half -- sorry, second half 2020 was very strong with a catch-up effect after the lockdown related to COVID, and also because we are seeing now that some of our clients have some difficulties sourcing certain equipment. So not a major problem, but certain ramp-ups may go -- may move a bit slower than what we'd like to. And of course, the third objective is to continue to implement our transformation plan. For 2022, we will continue to push our French model across all of the geographies and to increase our activities related to new activities to new businesses, in particular, in the energy segment in the most mature geographies. We really see fiber becoming an important topic for all of Europe, and we believe we are extremely well positioned to take advantage of that. And also, as I said before, in the first half '22, we believe we will finalize our transformation plan with processes that will be stronger than before. The other important thing that Amaury touched upon earlier on is that we are now back to a situation where we can resume external growth, and basically go back to our traditional strategy of our balanced growth between organic and inorganic. Next slide, I would say, I do not have much more to say. I think best is that we leave the floor to you for any questions that you may have.

[Operator Instructions] And the first question comes from the line of Julien Fouché from Societe Generale.

Just 3 questions on my side, please. Firstly, on a 3-year view, so compared to 2019, could you give us more color on the margin decline in France? And maybe more granularity on the margin decline in other countries? And considering that now the ramp-up of [ Masmovil ] contract is behind, should we expect a significant margin improvement going into the second half? Secondly, do you have any update to share regarding the different legal complaints you filed over the past few months? And my last question on the auditors. Do you plan to have Big 4 as auditor for 2022?

Amaury, would you like to take these questions?

Yes, thank you, and good afternoon, Julien. So your first question was about the margins. Well, actually, as you noticed, margins in the other countries, outside from France and Benelux, are quite low, affected by the ramp-up of our new contracts. We are actually in the middle of this new -- of these ramp-ups. So we are still in ramp-up phase. So obviously, we are reaching and getting closer and closer from this critical size, which will allow us over time to improve profitability and push the profitability up. I would say that it should remain quite stable in the second half of this year and then improve once we are -- we have achieved this start-up phase. Because we also announced in the last week, several contracts, which will just start also during this second half. Regarding France, well, margins are not very far from where it has been over the last 2 years. I would say that that has been affected a little by the beginning of the decline of the smart meters installation, but they remain very high at 15.5%. Then you had a question about the auditor, well, taking up a mandate for PKF was not an easy thing, it's an important investment for us and for PKF. They now developed a very deep understanding of the company, of our business, and we cannot change every years. And we are very happy with the teams that delivered the audit, their professionalism. And you are talking about Big 4 firms. PKF has an international networks in order to support the development of the business across Europe. And recently, a division of PwC just joined the PKF network with more than 1,000 employees. So no reason to change on the short term.

And there was also a question concerning the procedure summary, you can take.

Yes. Okay. Well, regarding procedures, well, they are still ongoing. We don't have really updates on this topic, so that it takes time. But nothing new on our side.

[Operator Instructions] Okay. We have no further questions coming through on the phone lines. So we can now take questions from the webcast.

Yes. I see a question. Can you please give us an update on your search for an anchor shareholder? Yes. As you know, we have awarded Rothschild with the mandate to help us on this -- in this task. And we have spent the summer to do the preparation work. Now of course, everybody was expecting the outcome of this half year results audit, which is now done. So we will finalize the documentation and then we will enter a more active phase in the last quarter of this year for a process that we then continue also a few months in '22, I guess. So things are moving as planned, no problems there. Other question. Could you give us an update on the litigation process with EY, which -- with Court of Bobigny? Will you be able to get refund of part of the huge auditing fees? Well, I would say that the transfer of the activity from EY to PKF has gone well with the help of the court. And I would say that at the moment, that is our main objective, so to be sure that PKF is in a position of starting their work in a good way. And for the moment -- for the moment, therefore, we are not considering legal actions at the moment, even though that's an option that is still open. Other question. Can you please explain whether PKF will be in a position to offer an unqualified opinion for '21, if the 2020 period remains unaudited? This is a technical one. Amaury, can you answer this?

Yes. Yes, sure. Well, actually this reserve is a technical reserve, and it only relates to the comparability of the data of the P&L for the period of 2020 because of this disclaimer issued by EY, as there is no opinion on this for. According to the professional standards, PKF is obliged to have a reserve on this topic. What we can say is that they did extensive work on the opening balance sheet of 2020. There's no observation on this. They did a deep review of our financials in 2021, no observation as well. And so except this topic of -- this comparability of the data for the P&L 2020, we can expect to have the same observation from PKF at the end of this year. But the report should look very similar at the end of this year.

Other question. Have you seen any change in your shareholders base before and after smear campaign? Yes, we have. There has been huge swings during the summer. And basically the outcome was a lot more of retail investors and less institutional investors, I guess, for compliance reasons. There was also a big change in the short positions that went down from about 12%, the peak was in July, to now about 7%. So yes, these have been main changes that we're seeing. Other question. You said the situation is becoming normal in terms of financing the bank. Could you give us more detail? Amaury, I think this is for you.

Yes. Actually, yes, we did work a lot with our banks over the last 12 months. We had ongoing discussions with them, and I would like to thank them for their support during this period. The first thing was to confirm that the business was going well, and that was the reason for the banks to see that the cash was too low, going in the -- on the bank accounts from our customers, and that the business was going well since our salaries, the amount of salaries we've been increasing, so the amount of payments was increasing. The number of cars we were leasing were increasing. So this was very important for them. So obviously, as you know, in a loan agreement, there is always a clause making it compulsory to have satisfied a financial statements, as it was not the case for our 2020 financial statements. We had a slight increase of our interest rates, until we get a new audit report from PKF. So this was the last box to tick. This -- we should now -- with a report from PKF yesterday, so we should get back to normal. And as we said earlier with Gianbeppi, we want to reactivate our M&A strategy.

Yes. The next question is, indeed, on the M&A strategy. Can you give us more colors on your M&A strategy? What kind of companies are you targeting and where? Well, as we said before, we put the M&A on hold to make sure that everybody was comfortable with the way we were managing the situation, and also because we had a very strong organic growth in the first half, double-digit growth. So we prefer to give the priority to managing the organic growth, signing new contracts, which we did. And now we are ready to go back again to M&A also because the COVID situation has improved in the first half. There were some uncertainty related to the Delta variant. So now we are ready to go back, and it's going to be much of the same. So basically our objective when we acquire a company is get access to new clients that we do not have or cover better certain geographical area, or acquire certain skills, whether it is in the energy sector or mobile networks or other segments that we want to address. And at the end of the day, the objective is just to reach faster critical size in each of the countries in which we are. So we are not considering opening new countries. We are happy with the countries we cover today. But we want to make them grow, both organically and through external growth. So the focus will be mostly outside France, but we are also considering targets in France because our markets in all of the countries, we continue to concentrate also in France, and we believe that we are in a leading position, and therefore, we can be enactor of the concentration. So basically, we are looking for opportunities of M&A in all of our geographies. What about Germany? When do you expect the market to actually start? Well, we have been saying that for quite a while, but we now have the feeling that Germany is ready to start. We had some signals that are quite positive. We are working on some, I would say, pilot projects on new initiatives, and also the new elections, I think would be beneficial to get Germany eventually to invest in infrastructure. They really need it. So we are quite positive in Germany. And even though Germany will remain the slowest geography in which we operate, other countries much faster. But we expect good news in Germany most likely '22 -- beginning of '22, so basically we are preparing ourselves. And then, the potential of the market is really huge. Could you give us more details on your opportunities in the British market in the short to medium term? Well, British market, the opportunities are the same than the other geographies. But U.K., contrary to what we were saying for Germany, has been very fast now in pushing companies to invest in infrastructure. So basically, we are seeing a continuation of the projects related to 5G that Comvergent was already working on. And now there is lots of initiatives coming from the national operator, and also from other fibercos to deploy fiber. The country is really serious about it. They do want to have a better fixed infrastructure with fiber. And then we are well positioned because we bring this knowhow that we have developed in France for the last 5, 6 years. So we expect good news in the UK, end of the year and also 2022. Can you give us more detail on the exceptional expenses? And do you expect other exceptional expenses in '21 linked to the defamation campaign against the group? Amaury, you want to comment this?