Solutions 30 SE (S30) Earnings Call Transcript & Summary

Hello, and welcome to the Solutions 30 2022 Quarter 2 Revenue Call. My name is Riyan, and I'll be your coordinator for today's event. [Operator Instructions] For now, I'll hand you over to your host, Gianbeppi Fortis, CEO, to begin today's conference. Thank you.

Thank you, and good evening, everybody. Thank you for being with us today for this conference call. I'm here with Amaury Boilot, our CFO, to present our 2022 second quarter revenues, and as usual, we will open the Q&A session at the end of the presentation. Let's start with Slide #4. Solutions 30 returned to growth a quarter earlier than expected. In the second quarter of '22, Solutions 30 recorded consolidated revenues of EUR 221.7 million. That is up 2.7% compared with the same period in 2021 and stable on an organic basis. I remind you that we are comparing Q2 2022 over a high comparison base as the successful lockdowns due to COVID had a global positive impact on Solutions 30 businesses in the first half of '21. People took the opportunity of being at home to upgrade their Internet connections, especially in France, where fiber optics networks become -- became available almost everywhere, and this had a positive impact on our revenue. Despite its high comparison base, this quarter sets an all-time high for the second quarter. Business outside France has taken over the range of growth with a double-digit growth rate of 30%. The business in France remains under pressure and continues to be negatively impacted by the operational transition between certain mature activities and new activities that are impacted by the difficulties in the supply chain and don't ramp up as fast as they could. It's important to note that these new opportunities are not lost, but just delayed and we materialize in the coming months. Year-to-date revenues amounted to EUR 444.4 million at the end of June 2022, which is an increase of 0.7% compared to the previous year and minus 1.5% in organic terms. Given the current uncertain macroeconomic and context, we remain cautious about our short-term objectives. But in the longer term, we are very optimistic as we continue to experience favorable market drivers with deep underlying tailwinds and massive post-COVID recovery plans, supporting our digital transformation and energy transition. I will now hand it over to Amaury and will come back for the outlook at the end of the presentation.

Thank you, Gianbeppi. Good afternoon, everyone. For the first 6 months of 2022, revenue reached EUR 444.4 million, up by 0.7% compared to H1 2021. On a like-for-like basis, revenue is down by 1.5%. Contribution of required in 2021 and early 2022 amounts to EUR 9.9 million on this first semester. What can be noticed on this slide is that the decline in the French business is offset mainly by the strong organic growth that we are experiencing in the other geographies. Next slide. This graph shows the positive impact of COVID experienced in H2 2020 and H1 2021, followed by a consolidation phase in H2 2021. The quarterly trend shows that Q1 and Q2 2022 revenues remain high compared to historical performances with a quarterly revenue above EUR 220 million. The revenue of the second quarter of 2022 increased by 2.7% compared to 2021 and by nearly 40% compared to Q2 2019. We are then far above pre-COVID trends. We believe that 2021 has offset a very unusual 2020, and we now expect to get back to a more normal setting in 2022 and 2023. Next. In this slide, you can see the very different dynamics that we are experiencing in France and in the other geographies. While revenues are down by 18% in France, all the other geographies experienced double-digit growth. Benelux and the other countries have crossed the milestone of 50% and they now account for nearly 53% of the group's Q2 revenue. Next slide. I will now comment each geography in more detail. On the next slide, you have a view on the business segment in France, where revenue for the second quarter amounted to EUR 105.2 million compared to EUR 128 million a year ago. With EUR 74.7 million in revenue, the telecom business decreased by 18% compared to the second quarter of 2021. The telecom market has reached its maturity phase as fiber rollout has peaked in 2021, and the market for new subscriber connections is consolidating at a pace of around 1 million connections per quarter, which is high and not increasing anymore. In addition, one of our major clients has decided to review the way it works with its partners and reshuffle the allocations of its business amongst its partner through a major tender offer, which happened last year and that we have already spoken about. This new organization came into force in April and it's a major change that disrupts all of our markets. All players are impacted and especially the weakest ones. We anticipated the changes as much as we could, but the implementation of this new organization is putting a strain on the economic performance. Solutions 30 has kept the same market share and revenue as before, but we are now operating in new regions where we need to recruit and train people so that they get all required professional certifications. On top of this, we have to handle new constraints in the way we operate, mainly in terms of response time and expected KPIs. It disturbs the whole organization, and it impacts our efficiency and therefore, our profitability. As a consequence, the EBITDA margin in France will be lower than in the second half of 2021. For the energy business, revenue amounted to EUR 12.9 million compared with EUR 21.1 million a year before, representing a drop of 39%. The business has been strongly impacted by the end of smart electricity meters rollouts in France, which revenue went down by 77%. Other activities related to electric mobility and renewable energies are increasing, but not yet offsetting this decrease in revenue. The ramp-up remains actually delayed by the current supply chain problems. The IT business posted a revenue of EUR 11.9 million, up by 9% over the second quarter of 2021, while the security and payments business posted revenue of EUR 5.7 million compared to EUR 4.7 million a year before. Next slide. In the Benelux zone, revenue in the second quarter of 2022 amounted to EUR 51.8 million compared to EUR 37.9 million 1-year before. The revenue in this region is increasing by 36.7% after an increase of 26.3% in the first quarter of 2022. As expected, the growth is, therefore, accelerating, thanks to the ramp-up of the 2 contracts signed with Fiberklaar and with Open Dutch Fiber in the second half of 2021 in order to deploy FTTH and connect homes in several cities in Flanders and in the Netherlands. The telecom business grew organically by 30% and generated quarterly revenue of EUR 37.4 million. In Wallonia, we also announced a new contract with Unifiber in the beginning of July. The startup and ramp-up of this new contract will start in the second half of 2022. Revenue for the energy business amounted to EUR 10.2 million compared with EUR 5.4 million a year before due to the rollout of smart meters in Flanders, which began during the first quarter of 2021 and is now fully developed. Revenue for the IT business grew by 8% at EUR 2.3 million. And quarterly revenue for the Retail and Security segment was EUR 1.9 million compared to EUR 1.6 million for the second quarter of 2021. Next slide. In the other countries, the group posted a quarterly revenue of EUR 64.8 million an increase of nearly 30%, of which 19% organic compared to Q2 2021. In Germany, where revenue decreased by 11% in the first quarter of 2022, revenue declined only by a limited 1% in the second quarter. Return to growth is expected to happen in the second half of 2022 when the efforts made by the group in order adapt its organization should begin to bear fruit and when increase in prices negotiated with clients due to the general context of inflation will fully contribute. In Italy, revenue grew by 59% in the second quarter of 2022, up to EUR 18.4 million. In this country, growth remains driven by the contract signed with Telecom Italia at the beginning of last year. In Spain, revenue grew organically by 8%, thanks to a positive momentum in the telecom business, both on fiber and on 5G mobile networks. In Spain, the FTTH's market is major, and growth comes from gains in market shares and development of the 5G-related business. In Poland, the group recorded a revenue of EUR 8 million, up 34% on a reported basis and up 19% at constant perimeter. Poland is clearly gaining momentum and strengthening its relationship with Orange, as illustrated by the extension of the partnership to the [indiscernible] region that we announced last week. Finally, in the United Kingdom, Solutions 30 generated a revenue of EUR 8.7 million in the quarter, up 152% and 20% organically, thanks to the telecom sector where we are positioned in both fixed and mobile networks. I now hand back to Gianbeppi.

Thank you, Amaury. Let's go to Slide 14. So last year, we announced that our long-term improvement plan will go 1 step further with a specific transformation plan dedicated to the improvement of our governance, risk management system and compliance. The goal was to strengthen and standardize all of our procedures and policies group wide. This project has led to the review of all the existing policies and procedures and do 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 end of June, the new GRC framework has been implemented giving strengthened guidelines to our teams throughout the organization. As an example, all of the group subcontractors and suppliers are subject to systematic and darmonized control procedures, and the dedicated team is responsible for monitoring the integrity and reliability of the group's partners. The whole organization is involved in this project. At the Supervisory Board level, new responsibilities were given to the strategic -- to the Strategy Committee and to the Audit Committee. The Strategy Committee has become the strategy and ESG Committee is composed of 5 members, all independent, Jean-Paul Cottet is the Chairman; Caroline Tissot; Francesco Serafini are joined by and Pascale Mourvillier; and Thomas Kramer as members. This committee will be responsible for ensuring that environmental, social and governance criteria are integrated into the group's strategy with the aim of building responsible growth. The Audit Committee has become the Audit, Risk and Compliance Committee. It is composed of 3 independent members. Yves Kerveillant is the Chairman of this committee, Pascale Mourvillier and now Thomas Kramer are the members of this committee, which has a mission to supervise the relevance of financial information and the viability of risk management and internal control processes. Thomas Kramer, who has a very long -- very strong reputation in matters of risk and compliance is a key addition to this committee. At the Executive Committee level, we have 2 work streams monitoring ESG and GRC matters and controlling related KPIs as well as following up on training, awareness, and change management currently being implemented in the organization. The whole system has been conceived to strengthen our organization without losing our agility, which is key in our environment. I strongly believe that our new framework will help us consolidate our commitment to compliance, while building sustainable growth and stronger relationship with all our partners. We are now clearly ahead of competition on issues that are increasingly critical to our customers. Next slide, please. The current macroeconomic context brings uncertainty and calls for short-term conservatism in order to protect our strength until the environment stabilizes. We will be very cautious with the management of our cash. This is our strongest asset to face expected inflation and increase in interest rates while preserving our ability to fuel expected organic growth. This approach will make us stronger to go on the offensive again in a few months as our markets remain structurally buoyant. And as most of our competitors had to and still have to use debt to finance their growth. In the long-term, Solutions 30 has a very strong outlook of growth, both organic and through acquisitions. In H1 2022, and as explained by Amaury, the operational transition in France and the ramp-up of contracts will negatively impact margins, which will be lower than in the second half of '21. But in H2 '22, growth is expected to accelerate, and we now think that it will remain below 10%. We should see the beginning of an improvement in our EBITDA margin, thanks to better absorption of the cost of new contracts and the operational processes that will begin to normalize in France. Priority is given to organic growth and operational execution. We have revised and are still revising our pricing policy upwards both on new and also on existing contracts. We've also put in place actions to strictly control our operating costs. I want to insist on the fact that maintaining a low leverage ratio and a conservative capital structure is key in order to increase our agility, strengthen our competitive advantages and preserve our ability to pursue the sector consolidation when the context will be stabilized. As I said it before, in almost 20 years, Solutions 30 has never seen such favorable market conditions, given the massive investments related to the post-COVID recovery plans. And this remains true and will have strong positive effect on Solutions 30 financial performance in the medium and long-term. Next, please. Our long-term target remains unchanged, and our key challenge for the years to come will be to reach the critical size in all of our geographies. We defined the critical size with 2 milestones, EUR 100 million of revenues and EUR 200 million of revenues. When a geography makes less than EUR 100 million revenue, the 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 a normative double-digit margin when the milestone of EUR 200 million is reached, unless we are implementing our transformation as it is the case in France at the moment. We do believe that we can reach the critical size in all of the geographies in the coming years as our markets benefit from very strong drivers. Next slide, please. Yes, that's the end of our presentation, and now we are happy to answer your questions.

[Operator Instructions] So I'll hand you back to Gianbeppi and the webcast questions for now.

Okay. We have a question. What is the share of new activities in electric mobility, energy transition 5G in your total turnover and in France? It's a question for you, Amaury.

Yes. Well, thank you for the question. All these new activities related to the energy transition, EV chargers, 5G activities generated a revenue of almost EUR 63 million in the first half of 2022. So the revenue of this activity is more than doubled in 1-year. And France out of this amount is generating some EUR 13 million out of this total revenue.

Okay. We have another question, which is, are you succeeding in gaining market share in fiber in the U.K.? And what is your turnover in this activity? So the answer to the first part of the question is, yes, we do succeed in gaining market share in fiber in the U.K. And Amaury, can you tell the turnover in this activity in the U.K.

Yes, absolutely. We started the FTTH activity in the U.K. at the beginning of the year. And on this first half of 2022, the fiber activity contributed to a revenue of EUR 1.8 million, which is actually 10% of the U.K. revenue in this first half.