Solutions 30 SE (S30) Earnings Call Transcript & Summary

Hello, and welcome to the Solutions 30 Full Year Results 2021 and Q1 Revenue for 2022. My name is Judy, and I'll be your coordinator for today's event. [Operator Instructions] I would now like to hand you over to your host, Gianbeppi Fortis, CEO; and Amaury Boilot, CFO, to begin today's conference.

Thank you. Good evening, everybody, and thank you for being with us today for this conference call. I'm here with Amaury Boilot, our CFO, to present our full year '21 results and Q1 2022 revenue. As usual, we will open the Q&A session at the end of the presentation. Let's start with Slide 4, please. 2021 was a very busy year for Solutions 30 and our financials reflect only partially our key achievements. As I said earlier this year, in almost 20 years, Solutions 30 has never seen such favorable market conditions given the massive investments that are related to the post-COVID recovery plans. And I remain very confident that our Group will experience strong growth again in the coming months and years. We are currently facing markets with very different dynamics. On the one hand, in France, we are experiencing a mature market. FTTH rollouts, which have fueled our growth in telecom since 2015, have reached a peak in '21 and it is now the maintenance market that is slowly growing. While in the energy sector smart meter deployments are reaching an end and if the market linked to the energy transition and specifically the installation of charging stations for electric vehicles and installation of solar panels that are slowly taking over. All of this happens in the context where we are still facing the consequences of the pandemic, especially those related to supply chain issues and to the fifth wave of COVID with several people obliged to be in quarantine. These effects impact both our revenue and margins on a geography that was our main engine in previous years. On the other hand, we are experiencing great momentum in most of other European countries, and especially in Benelux, U.K. and Italy. These countries are what France was in 2015 before the revenue was multiplied by 6 in 5 years. Most markets have major potential for growth, but apart from Benelux, they have not reached the critical size yet, which has a temporary negative impact on margins. A new phase of growth is under preparation and growth is expected to speed up in the second part of '22. Next slide, please. In 2021, we have worked hard to put ourselves in a position to win significant market share in markets that are emerging. We are convinced that in H2 2022 and for many years to come, we will manage to get back to double-digit growth. As you can see from this slide, we have won significant contracts in Benelux, Italy and Spain. We have strengthened our position in the U.K., a market that has a great potential and where we are starting to experience double-digit growth organically. And on the business side, in '21, we experienced a tough year, but generally successful. In the meanwhile, we have to fight against the defamation campaign led by the short sellers which had a significant impact on the stock price and on our shareholders and which resulted in the disclaimer of opinion issued by our auditors last year in May. This is now over as our new auditors have not identified any statement during the full audit of the 2021 financials. These unjustified acts have caused almost 1 percentage point of EBIT because of the spending to restore our reputation in addition to EUR 1 billion in market cap and the time wasted by the crisis management team. I will now hand over to Amaury, who will start his presentation, give you more details on the work conducted by our auditors in '21.

Thank you, Gianbeppi, and good evening, everyone. We'll start with Slide #7. As you may have read in our press release, PKF confirmed that our financial statements present fairly in all material aspects of our financial performance. And they confirmed that there is no restatements in our opening balance sheet. As expected and as already explained in September, PKF had to issue an opinion with a technical qualification on this. This is due to the disclaimer of opinion issued last year on the 2020 consolidated financial statement and only relates to the comparability of the income statement for 2020. This is a strict application of the IFRS standards. Our auditor fees have reached almost EUR 2 million again this year, which is more than the Group spent during our IFRS transition for the audit of 3 years of accounts. Therefore, the company has been under close scrutiny, and that is exactly what we wanted in order to confirm once again the integrity of our financial statements. This unprecedented situation has shown the strength of Solutions 30. A company with financial weaknesses would have not survived such difficult time of certainty and doubt. We are now stronger than ever to focus on business and growth hacking. Next slide. For the full year 2021, revenue reached EUR 874 million, up 6.7%. On a like-for-like basis, revenue is up by 3.6%. M&A activities were on hold in 2020 and for most of 2021. However, we resumed M&A in November this year with the acquisition of the assets of Mono Consultants in order to improve our coverage in the U.K. and our clients' portfolio in the field of mobile telecommunication networks. Compared to 2019, before COVID, our revenue is up by more than 26%. Next, let me now elaborate shortly on our current business context and its impact on our margins. The ramp-up of new contracts we are currently managing have a negative impact on our profitability in the short-term. In 2015, when rollout of FTTH network and smart meters started in France, the EBITDA margins decreased temporarily. In the long run, the effect of these contracts were highly positive on our profitability in France. They enabled us to reach the critical size in France and to improve the density of our network. Therefore, we expect the same to happen in all our geographies. On the slide you are seeing, we have explained the ramp-up of contracts and position current status in each geography and business segments. We are often operating on new markets. So the first phase, even sometimes prior to winning a contract, is to prepare our organization and to discuss the process that we'll be implementing with the client. Second step is to source and hire the technicians that will execute the job. We are currently in that phase in many countries and business sectors. In Phase 3, we start ramping up. We are currently experiencing this phase in the FTTH segment, notably in Italy, where we were on a contract with Telecom Italia one year ago. Phase 4 corresponds to the phase where we reached the cruising speed, meaning that we can optimize profitability. And we currently have only one contract at this stage. It's a contract signed with Fluvius for the rollout of the smart meters in Flanders. When the contract comes to an end, as is the case with the smart meter deployment in France, we start an operational transition either to the maintenance phase of the contract or to address new emerging markets. These ramp-ups, most of which starting at the same time, put pressure on the EBITDA margin, as you will see on next slide. At the end of December 2021, adjusted EBITDA amounted to EUR 82.4 million, down 23% in comparison with 2020. Besides less absorption of fixed costs due to falling revenue in France and a changing geographic mix, the benefit of countries which have not reached their critical size yet, this decrease can be explained by 3 factors. First, effects due to the COVID-19 pandemic and supply chain disruptions for EUR 4 million. Second, evolving business needs and the operational transition needed to adapt and to develop new activities in France for EUR 6.7 million. Third, ongoing and upcoming ramp-up initiatives, especially for new businesses and countries which have not reached their critical size for EUR 9.8 million. Excluding these items, the EBITDA margin comes to 11.8%, a decrease of only 120 basis points. Next, if we now look at this -- at the evolution of our profitability region-by-region. In France, revenue reached EUR 507.3 million compared to EUR 522.7 million the previous year. Adjusted EBITDA was EUR 66.5 million for a margin of 13.1% compared to 16.6% in 2020. This reflects the combined adverse effects of telecom market maturity, the shift from smart meters to new activities related to energy transition and also the COVID-19 consequences. Changing activity levels and preparations for launching new businesses brought down the EBITDA by EUR 6.7 million, while supply chain delays subtracted another EUR 1.1 million. In Benelux, revenue reached EUR 160.4 million, up 17.7%, of which 14% organic. Ramp-up [ Phase 3s ] are impacting the Group profitability in this region and adjusted EBITDA was EUR 22.9 million for a margin of 14.3% of revenue compared to 15.7% in 2020. In other countries, Solutions 30 2021 revenue amounted to EUR 206.3 million, up by 28.7%, of which 16.6% organic. Adjusted EBITDA was EUR 3.2 million, equivalent to 1.1% of revenue compared to 4.8% a year before. This mainly reflects the beginning of the contract signed with Telecom Italia and the reorganization initiative in Germany to make the most of expected growth in the telecom sector in the second half of 2022. Next slide. 2021 saw EUR 13.3 million in the non-current operating expenses, including EUR 7.1 million in Group spending in order to fight against the defamation campaign. The remaining balance came from restructuring operations to adapt our organizational structure to changes in the market, especially in Germany and France. Customer relationship amortization amounted to EUR 14.7 million in 2021 compared to EUR 13 million in 2020. Financial income rose to EUR 4.2 million in profit. This results mainly from the adjustment on contingent consideration values of EUR 6.4 million compared to an expense of EUR 4.1 million in 2020. After including tax income of EUR 5.4 million due to loss carryforwards compared to an expense of EUR 8.4 million one year before, the Group share of net income amounted to EUR 21.5 million at the end of December 2021 compared to EUR 34.5 million in 2020. Next slide. Regarding our balance sheet, the Group maintained a very strong financial structure with shareholders' equity amounting to EUR 191.6 million compared to EUR 170 million at the end of December 2020. The Group had EUR 129.8 million in gross cash compared to EUR 159.3 million at the end of December 2020. As you can see, the gross bank debt decreased by EUR 23 million, down to EUR 77.5 million as the Group was able to deleverage while financing bank debts in the same time. The Group had EUR 52.3 million in cash net of bank debt at the end of December 2021 compared to EUR 59.2 million at the end of December 2020. In terms of cash generation, on the next slide, in 2021, our operating cash flow amounted to EUR 60.8 million compared to EUR 89 million in 2020. The ramp-up of contracts and the returns to more normal payment terms compared with 2020 resulted in EUR 13.3 million increase in working capital requirements, which is still amounting to minus EUR 25 million at the end of December. Net investments reached EUR 15.1 million or 1.7% of revenue compared to 1.4% in 2020. This falls within a normal range, generally considered between 1.5% and 4% of revenue, and goes mostly to investing in the Group in IT infrastructure and technical equipment. Overall, this means that there was EUR 32.4 million in free cash flow compared to EUR 124.8 million in 2020 and zero in the first half of the year. Next slide. At the end of the year, we have normalized the situation with our auditors and we have maintained our financial flexibility. Our financial structure is in line with the business changes that we will be facing in the coming months as a new phase of growth arises. For the coming period, we will maintain the same fundamentals of our financing policies. The ongoing business working capital requirements will be financed through factoring at minimum cost less than 1%. The scale-up of new contracts will be financed with our cash. And our M&A operations will be financed through long-term debt. Now if we go to Slide 17, I will have the opportunity to comment on the Q1 2022 revenue. For the first 3 months of 2022, revenue reached EUR 222.7 million, down 1.1% compared to Q1 2021. On a like-for-like basis, revenue is down by 3%. The first quarter is actually a continuation of the last quarter of 2021, with on the one hand activity in France penalized by the triple effect of maturing markets, supply chain difficulties and the high rate of absenteeism, especially at the beginning of the year due to the pandemic. And on the other hand, business is growing strongly, very strongly in the other countries, and this positive trend is actually masking supply chain pressures and the impact of the pandemic. Next slide. The quarterly trend shows that Q1 2022 revenue is slightly up compared to Q4 2021, which is somehow unusual in our business. It is a translation of a low Q4 2021 on the one hand and of ramp-ups in some geographies on the other hand. The current level of activity remains high compared to historical performances with quarterly revenue above EUR 200 million. We hope that 2021 has offset a very unusual 2020 and we now expect to get back to a more normal setting in 2022. Next, on this slide, the graph shows the very different dynamics that we are experiencing in France and in the other countries. While revenue is going down by 17% in France, all of the other geographies are experiencing double-digit growth. Benelux and other countries now account for 48% of the Group's revenue. Next slide. In France, revenue for the first quarter amounted to EUR 116.7 million compared to EUR 142 million one year ago. With EUR 84.5 million in revenue, the telecom business decreased by 18% compared to the first quarter of 2021. The market is in the middle of an operational transition as fiber rollout has peaked and the market for new subscriber connection is consolidating after being driven by widespread remote working and measures to limit social interactions. These 2 market conditions are still only partially compensated by maintenance activities. For the energy business, revenue amounted to EUR 15.9 million compared with EUR 23.3 million a year before, representing a drop of 32% in the activity. The business has been strongly impacted by the end of smart electricity meters rollout in France, which revenue went down by 60%. Other activities related to electric mobility and renewable energies are not yet compensating for the decrease in revenue. They are growing by 8%, but the ramp-up remains delayed by the current supply chain problems. The IT business posted revenue of EUR 11.9 million, up 9% for the quarter, while the security and payments business posted revenue of EUR 4.4 million compared to EUR 4.6 million one year before. Next slide. In the Benelux now, revenue in the first quarter of 2022 amounted to EUR 46.7 million compared to EUR 37 million in 2020, up by 26.3%. The telecom business, which grew organically by 14%, generated quarterly revenue of EUR 33 million, with the start-up of contracts signed with Fiberklaar and Open Dutch Fiber in the second half of 2021. Revenue for the energy business amounted to EUR 9.6 million compared with EUR 3.9 million in 2020 due to the rollout of smart meters in Flanders, which began during the first quarter of 2021 and has now fully developed. Revenue for the IT business remained stable at EUR 2.3 million compared with EUR 2.4 million one year before. And quarterly revenue from the retail and security businesses was EUR 1.9 million compared to EUR 1.7 million for the first quarter of 2021. Next, in the other countries, the Group posted annual revenue of EUR 59.3 million, an increase of 29%, of which 19% is organic compared to Q1 2021. In Germany, where revenue declined by 11%, the return to growth is expected in the second half of 2022 when the efforts made by the Group to adapt its organization should begin to bear fruit. In Italy, revenue grew by 67% in the first quarter of 2022 to EUR 14.5 million, driven by the contract signed with Telecom Italia. In Spain, revenue grew organically by 24%, thanks to a strong momentum in the telecom business, both in the fiber and 5G mobile networks. In Poland, the Group confirms that it is returning to growth and recorded revenue of EUR 6.6 million, up 19% organically. Finally, in the United Kingdom, Solutions 30 generated a revenue of EUR 9 million in the quarter, up 129% and 23% organically, thanks to a very good momentum in the telecom sector and the start of new very high-speed Internet and 5G deployment programs in the country. I now hand over to Gianbeppi.

Thank you, Amaury. As we are entering a new phase of growth, Solutions 30 is pursuing its transformation plan with the objective of implementing strengthened and harmonized risk management, compliance and governance procedures in the first half of '22. Let's go to Slide 24, please. At the beginning of April 2021, we announced the acceleration of our improvement plan that began in 2019 and led to the adoption of IFRS standards in 2019 to transfer of our shares to the regulated market and strengthen governance. We launched a governance risk and compliance project with the help of KPMG, aiming at improving and standardizing all of our procedures and policies Group-wide. This project has led to the review of all the existing policies and procedures and to a gap analysis against applicable laws and regulations. We identified several areas of improvement that we divided into 7 work streams, most important of them being to implement a uniform third-party due diligence process and uniform risk mitigation procedures. At the moment, we are in the process of implementing these procedures and policies and the training of the teams has begun. We have also recruited a new Group Head of Risk and Compliance, who will start working with us early next week. She will monitor and control the implementation of the GRC-related policies and procedures and their functioning. Such new set of policies and procedures will be audited, monitored and evaluated in the long run under the provision of the Group Head of Risk and Compliance. Next slide. This slide shows all the key deliverables produced in the course of this GRC project. You will soon see changes happening to the policies that are available on our website as the new code of conduct will be implemented and a new whistle-blowing platform will be introduced together with the new whistleblower policy. All other documents are internal guidelines, procedures, policies and manuals that are currently being implemented to govern the way we operate, especially when it comes to third-party diligences, internal controls and risk monitoring. Among other things, we have implemented a new IT tool to perform multiple compliance checks in the context of third-party assessment and due diligence, and we conduct [ KYC ] on all contractors. We now have a dedicated team for this task and for verification of all business partners. Next slide, please. Since 2019, we have worked to better address CSR issues and the bubble to better structure our CSR policy. In 2021, we issued our first non-financial report compiled in accordance with the global reporting initiative standards and we introduced ESG criteria in the calculation of remuneration for members of the management board as well as members of the executive committee. We also joined the United Nations' Global Compact. We have identified the UN sustainability goals on which Solutions 30 has most impact either directly through the achievement of its mission or indirectly. Within Solutions 30, growth in revenues requires growth in workforce. We are adding people who are comfortable with technology, and we aim at training them and developing their skills. Therefore, we are committed to both use employment and training. This is an intrinsic part of our business model. 41% of our new employees are under 30 years' old compared to 38.4% in '20. In 2021, 21% of our employees are younger than 30 years' old compared to 20% last year. In '21, we provided 23 hours of training to our employees compared to 19.2 hours last year. Last but not least, we are committed to good health and well being. The satisfaction of our team was 3.6 out of 5 compared to 3.5 the year before, and 67% of our employees are covered by the ISO 45001 certification, which is related to health and safety. We aim at bringing this percentage to 100% in 2025. Next slide, please. Slide 28. So our key challenge for the coming years will be to reach the critical size in all of our geographies. We define the critical size with 2 milestones, EUR 100 million in revenues and EUR 200 million in revenues. When a geography makes less than EUR 100 million in revenue, EBITDA margin is below 10%. When a geography reaches the first milestone of EUR 100 million, the EBITDA margin raises to double-digit and it improves to normative double-digit margin when the milestone of EUR 200 million is reached. We believe that we can reach this critical size in all geographies in the coming years as our markets have very strong drivers. Next slide, please. In the FTTH market, Europe experiences very different levels of maturity. As of today, 44% of all European households can connect to fiber. But if we take a closer look, we can see that some big European countries are lagging behind in terms of rolling out FTTH. The lower rate of connected homes in Germany and Belgium reflects widespread cable coverage, and amongst other things, the high upfront cost for deploying fiber networks as existing infrastructure cannot easily be used, and therefore, new bidding is required in these countries. In the U.K., full fiber penetration remains at the lower rate because of the early success of rolling out slower hybrid fiber. Though countries are now starting to implement new plans to accelerate full fiber rollouts, we have won some important contracts in Belgium and in Italy. We are starting to -- this business in the U.K. And we are doing all it takes to capture significant market share in Germany. Our experience in France and the strong relationship with telcos that we have built over the years across Europe is supporting our sales strategy. Next, please. The market for electric vehicle charging stations is still emerging and the supply chain challenges delay its scale-up. Nevertheless, there have been some very positive market developments for electric driving across Europe. Car manufacturers have significantly enriched their offer of electric vehicles as they all increase their commitment to the electrification of their portfolios. And second, there are multiple market incentives, both financial and regulatory, to support the transition to electric mobility. The need for an increase in electrical vehicle charging points has never been greater and prevents a faster adoption of electric vehicles. We will focus on homes and small businesses charges where volumes will be and where our know-how is particularly relevant. Our core business is to make small standardized installations, and this is exactly what this market requires. The addressable European market is currently still difficult to estimate, but it's worth several tens of billions for Solutions 30 over the coming decade. We have won several contracts in this market. The last one did Mobilize Power Solutions, which is the electrical mobility subsidiary of Renault. And we have developed a dedicated marketing program to gain market share in this sector. Next, please. The installation of solar panels is accelerating as solar energy will play a key role in the energy transition in Europe and the energy independence of Europe. 90% of European rooftops are in use and this will have potential could produce more than 600 terawatt hour of clean electricity. We see a strong potential in this market that is starting to gain traction. Our subsidiary, Sotranasa, has been installed in solar panels since 2006 in the south of France and has gained a significant experience that is useful today to manage such technology. In '21, revenues generated by solar panels represented EUR 11 million, and we expect this figure to double by the end of '22. Next, please. Given the strong potential of our markets and the positions that we have gained, we expect to return to double-digit growth in the second half of '22, while the first half will remain in line with H2 2021. Our goal for the full year will be to stabilize the EBITDA margin in France and to defend our margins as best we can as well in Europe, while ramping up the new contracts. We are also in the moment -- at the moment, negotiating price increases with all of our customers in order to compensate the effects of inflation. And as illustrated, with the acquisition of Sirtel in Poland and the assets of Mono in the U.K., we aim at doing targeted acquisitions and consolidating our markets in Europe. Next. So the key takeaway for this presentation is that the year 2021 was a year during which we consolidated our organization and prepared the new growth phase that is ahead of us. We are operating in markets which are driven by major secular tailwinds such as digital transformation and the energy transition. On top of this, the unprecedented seamless plan that had been announced in Europe will boost growth. Solutions 30 is well positioned to capture growth and meet challenges that are ahead of us, while market momentum has never been so strong all across Europe. Next. Yes, we reached the end of the presentation, and we are now happy to answer your questions.

[Operator Instructions]

I see one for -- first question, which is, can you please give an update on the process to find an anchor shareholder? What about recent rumors concerning paying capital? So at the moment, we do not have any offers, because otherwise, we would have communicated that. So we don't have much to comment concerning this rumor. But as you know, we have launched this process with Rothschild a few months ago and we have spoken to a certain number of third-parties that are interested. Everybody now is basically waiting for the audited accounts, which we have now, and they are clean. So now we are in a good position. I would add a word of cautiousness, because when we started the process, we were in an environment where interest rates were particularly low. Now the economic environment is completely different, we have a [ roar ] at the door of Europe and inflation and interest rates are rising. So we would be very cautious in evaluating the best options for us in the future, because as you have seen, we have a lot of growth coming in several countries in Europe and we want to have the leverage of debt available to continue to finance our growth. Another question, can you please give more colors on profitability in H1 2022 and H2 2022? Amaury, can you please take this one?

Sure, sure. Well, actually, as I told before, we are managing different ramp-ups in different countries at the same time. So basically, our business context is quite similar as the context we had on second half of 2021. So I would say that for the first half of this year, we should expect margins in line with the end of 2021. And these margins will improve in the second half of 2022 as we will get -- as this project will enter into a more mature phase and we will improve the level of industrialization of our operations on all these new contracts.

Other question. Can you confirm that the reservation is just a technical issue and that it means your accounts are audited and certified? Amaury, another one for you.

Absolutely. I confirm that we have the auditors' report, which is by the way, available on our website, which confirms that there is absolutely no misstatement that our figures, our 2021 figures are okay, that there is no misstatement into our opening balance sheet. And by the way, if you allow me a word on that, we have one auditor confirming that the opening balance sheet of 2021 is okay. We had the former auditor who confirmed that the opening balance sheet of 2020 was also okay. So basically, that means that everything is okay. And the new auditor did not notice any misstatement of our accounts because of 2020. So yes, they had to use a technical reserve like in September. And this is a pure application of IFRS standard due to the disclaimer issued last year on 2020 accounts.