Solutions 30 SE (S30) Earnings Call Transcript & Summary

Good evening to all of you, and thank you for joining Solution 30 Q2, 2024 Revenue Conference Call. We will open this conference in English as usual. A transcript will be available on our website. Amaury, our Group General Secretary; and Jonathan, our CFO, are by my side to comment on the Q2, 2024 revenue. And as usual, we will answer your questions from the chat at the end of this presentation. Starting with the key points of the second quarter. Our revenue in Q2 was EUR 252 million, which represents a minus 4.5% decrease compared to Q2 last year. Over the entire first semester, our revenue remained broadly flat at EUR 517 million. In Q2, we reduced our exposure to some telecom contracts in France and Spain and prioritized margins over revenue, in line with the strategy we previously outlined. We, therefore, reduced volumes of interventions on certain contracts where margins were lagging behind group standards. And choose not to seek renewal of some of them at total costs. Market conditions have pushed us to be much more proactive than anticipated, but this thing should prevail. In Benelux, we experienced delays in the ramp-up of certain fiber activities because Belgian operators are holding some deployments while negotiating a possible neutralization of their investments with the Belgian regulator. These are just delays and the outlook for the Belgian fiber market remain excellent, as evidenced by our strong commercial pipeline, which is currently above EUR 300 million. On the other hand, our drivers of profitable growth are robust. In particular, our successful diversification into energy activities continue with a 29.5% increase in Q2 at group level and plus 56% in France. And also the ramp-up of fiber activities in Germany has started more gradually than in Benelux last year, and our growth in this country accelerated to 36% in Q2. Over the medium and long term, there is absolutely no doubt that our markets are attractive and that we can deliver profitable growth consistently. In the very short term, however, given the contrasted backdrop and our priority on improving margins, we are providing a more cautious revenue outlook for the full year, while confirming the improvement of group margins. I will elaborate on that at the end of the presentation. Let's now break down the evolution of our revenues in Q2. Group revenue decreased organically by 4.7%. Benelux was slightly down by 1.1% against a very high comparison basis as we grew 88% in Benelux in Q2 last year. Which means that activity remains at a high level despite the delays I just mentioned. France was down organically by 7.8%, and other countries decreased by 5.4%. As strong growth in Germany and Poland was offset by declines in Spain, Italy and the U.K. In addition, we had a EUR 0.6 million positive contribution from the consolidation of ELEC ENR a French company that we bought to enrich our offering in photovoltaic installation. On this slide, you see another breakdown of Q2 revenue evolution, highlighting the main building blocks. The connectivity business in France was down by EUR 9.5 million and this is due to the deliberate reduction of our exposure to telecom contracts, where profitability conditions were lagging behind group standards. Maintenance activities did grow, but not enough to offset. Same occurred in Spain, where the telecom market is also mature. Revenue in Spain decreased by EUR 3.9 million as we let go some business where profitability conditions has also worsened. In these 2 mature markets, selectivity is key, and we will continue to prioritize margins of revenue. The connectivity business in Benelux was down EUR 2.8 million due to the delays in the Belgian fiber deployments. As I just mentioned. Initially, telecom operators plan to build their own fiber network, but they are now negotiating with the regulator for possible mutualization of investment and infrastructure sharing similar to the French model. For us, it does not change the outlook, which remains excellent, but it is causing delays in the ramp-up of deployment work. Also, the comparison basis was particularly demanding as our connectivity revenue in Benelux doubled in Q2 last year. Therefore, this activity continues to deliver at a fast pace. Italy remained a drag similar to Q1. This was anticipated, and we have good news here, our negotiation with our main client found a positive outcome, and we now expect to resume normal activity during Q3. At better economic conditions. On the one hand, we are increasing selectivity on mature markets. On the other hand, we are prioritizing our development and focusing our M&A investments on activities that growth and margin prospects are attractive. This is the case of Germany, where, as I said, the ramp-up of fiber activity started in Q2, resulting in an avenue increase of EUR 5.3 million or 36%. This is also the case with energy activities, which I will now comment a little bit more. Our diversification in energy activities is continuing full steam. Growth remained very strong in Q2 with a 29.5% increase at group level and a remarkable 56% increase in France. In just a few years, we have built solid positions in energy-related services across Europe, and our business model is proving highly effective in this sector. We are increasingly recognized as a key partner by our clients. We have entered a new market segment in Belgium, where we have -- where we were awarded a contract by Fluvius to modernize over 1,000 kilometers of low-voltage power network. This upgrade is notably aimed at adapting the infrastructure to new usage requirements driven by the energy transition. In France, our clients tripled, renewed this confidence by awarding to us the second phase of a program to install photovoltaic power units on agricultural and industrial premises. And lastly, in Germany, we received an award at the [indiscernible] Partner Forum for achieving the lowest aero rate per photovoltaic installation in the country. This highlights the quality of our services and the value we provide to our customers in the solar sector. Revenue in Q2 reached EUR 36 million, while this remains a relatively modest contribution to our total revenues, it is growing rapidly and is set to become a significant part of our activity mix in the medium term. In total, for this first 6 months of the year, group revenue was broadly stable at EUR 570 million, Benelux achieved revenue of EUR 196.8 million in H1, up 9.4%. And France revenue was EUR 188.6 million, down 5.4%. And other countries posted revenues of EUR 131.6 million, down 5.8%. I will now hand over to Jonathan, Amaury for further details by geography.

Thank you, Gianbeppi, and good evening to all of you. I'll start with Benelux, the largest contributor with 38% of group revenue in Q2. Revenue was EUR 96 million in Q2, a slight year-on-year decrease of 1.1%. This was driven by connectivity, where revenue decreased by 3.7% against a very high comparison basis as we had a record growth of 108% in connectivity in Q2 last year. As Gianbeppi explained, we were impacted by delays in fiber deployment ramp up. This does not change our outlook in this region, as we are much more focused to the Homes Connect business. where the work plan would remain broadly the same, whatever the outcome. This is only causing delays that impact our revenue by a few millions in Q2. Because some customers are slowing down on deployment operations while they negotiate. Despite this, the business remains on a solid footing with a strong commercial pipeline representing a total value of around EUR 330 million. As anticipated in our previous communication, the impact of federal elections held in June was minimal, thanks to efficient planning, and we should be able to achieve similar results with the municipal elections coming up in October. As these ones have -- in theory, a greater impact. In energy activities, revenue grew 9.2% to EUR 15.9 million, driven by the continued rollout of digital meters in Flanders. We are also successfully diversifying in power grid services with the previous contract already mentioned, this growth highlights our expertise in the energy sector and our ability to deliver solutions that meet the evolving needs of our clients. I will now pass it on to Amaury for a comment on France.

Thank you, Jonathan, and good evening, everyone. Revenue in France was EUR 90.7 million in Q2, down 7.2% year-on-year. Connectivity revenue was EUR 60.2 million, down 13.6%, the decrease in this segment was actually stronger than expected as we applied a stricter selectivity in the mature fiber markets where demand for home connect interventions recently slowed down. And our approach in such market dynamics is to strictly prioritize margins over volumes. This led us to reduce our exposure to some telecom contracts where margins were lagging behind group standards resulting in lower revenue in Q2 and going forward, but benefiting to profitability. This is totally in line with our value creation strategy and allocation of cash. And will not generate meaningful restructuring costs. On a full year basis, so for 2025, we estimate the revenue impact around EUR 30 million. Maintenance activities continued that progress in Q2, but not enough to offset the overall decrease. Our relationships with the main telecom operators are still very strong, and we remain among their preferred partners. Actually, we are now working with all 4 of them, which was not the case before. But we want our services to yield the right levels of margins. Regarding our energy activities, this segment continued to grow very fast in Q2 at plus 56% with a strong momentum in photovoltaic. We are quickly becoming a key player for many clients in this field. As we have built strong capabilities and quality of service. We are, for example, a reference to build floating solar farms. We are complementing such capabilities with acquisitions, ELEC ENR, for example, a specialist in photovoltaic installation based in the north of France is being successfully integrated to the group. And commercial synergies with So-Tec in which we acquired a minority stake in May are already emerging. The plan is to gradually increase our stake in So-Tec and therefore, consolidate approximately EUR 20 million of revenue from this company in 2025. The fragmentation of the market offers real opportunities here, and we want to stay in a position to save them. Lastly, technology revenue was EUR 15.3 million, down 16.6% due to continued low volumes in IT support services. The Paris Olympics should support growth in Q3 as we are involved in technical support for IT and payment systems at several Olympic sites. Back to you, Jonathan.

Thank you, Amaury. A quick focus on Germany now, where the fiber market started to deliver on its promises. Our revenue growth accelerated in Q2 to 36.4%. Compared to 12% in Q1. The ramp-up of fiber activities has begun. For example, we started deploying in the city of Iserlohn near Dortmund in Q2. As well as in some nearby villages. And we are starting in tumor cities this quarter. Although there has been minor delays, there too, growth is set to continue at a high pace throughout the year. We invested in our capabilities in Germany in Q2 with the acquisition of the operations and assets of Gaertner, small company specialized in home connect and maintenance. This acquisition will enable us to manage turnkey fiber deployment projects and to increase our presence with Deutsche Telekom. Germany is clearly a strong growth driver for the group and is expected to become, in the medium term, our third pillar in Europe in terms of contribution to the P&L. In total, including Germany, other countries turned in revenue of EUR 65.1 million in Q2, down 5.4%. As already mentioned, we voluntarily reduced our fiber activity in Italy in Q3 last year due to poor organization and planning from our main clients. On this, we have some good news. The negotiations have found a positive outcome and therefore, we expect to resume normal operations at better economic conditions during Q3. In Poland, we continue to roll out our business successfully and revenue in the country was up 15% in Q2 at EUR 13.9 million. In Spain, revenue decreased 27% to EUR 10.4 million. In the mature Spanish fiber market, we applied strict selectivity measures just like in France. Priority given to profitability led us to sharply reduce our exposure to some contracts where margins were insufficient. On a full year basis, so for 2025, the revenue shortfall is estimated around EUR 20 million. Lastly, in the U.K., revenue was down 30.7%, also reflecting increased selectivity and focus on margin improvement. With that, I will hand over to Gianbeppi for the outlook.

Thank you, Jonathan and Amaury. Here is what we expect for the rest of the year. In Benelux, the ramp-up of fiber deployment should remain slow as long as the discussions between operators continue. Regarding the local elections coming up in October, we expect to keep their impact limited. Thanks to efficient planning with municipalities and customers, as previously indicated. In France, the selectivity measures taken in Q2 should result in further revenue decrease in connectivity. As mentioned by Amaury, the total full year revenue, we exited is around EUR 30 million. So obviously, the impact in '24 will be lower, and the remaining will impact 2025. On the other hand, we expect the strong momentum. On the other hand, we expect strong momentum in our energy activities to continue. In other countries, Germany is expected to grow significantly as the ramp-up of fiber activities continues. In Italy, normal activity should resume during Q3. In Spain, revenue should continue to decline due to the selectivity measures taken in Q2. And on a full year basis, the revenue impact would be around EUR 20 million. Here again, the impact in '24 will be lower. So altogether for the full year, this will result in a slight decrease in revenue compared to last year. Group EBITDA margin is expected to improve compared to 2023, as previously indicated. Translating into an increase of our adjusted EBITDA in value, thus demonstrating the benefit of such selectivity strategy in terms of value creation. This year, again, we are navigating a somewhat mixed environment in which we are committed to strict discipline, meaning that we -- without compromising with our strategy, we will manage our activities like our portfolio. And we'll be ready to reduce activities that are not profitable enough in a very disciplined way. But as I said in the introduction, there is absolutely no doubt that our markets are attractive and that we can keep delivering profitable growth in a sustainable way in the medium and long term. Lastly, before turning to your questions, we would like to remind you that we will hold the Capital Markets Day on September 26 in pairs. And just before on September 18, we will publish our full financials for the first half 2024. In light of this year's development, the Capital Markets Day will provide an excellent opportunity to discuss in detail the outlook for our markets, our business model, our strategy and all the components that we shape the future of our group. Thank you very much for your attention, and we are now ready to take your questions from the chat.

Okay. First question. Is there a change in your strategy where you won't see growth as much as in the past that prioritize margins? I wouldn't say that we changed our strategy. We believe that it's important to have a certain size in the geography. So that remains unchanged. But on the other hand, with an activity that is now worth EUR 1 billion, being present in 10 different countries on 3 different type of activities. It's normal that we consider the whole group as a portfolio of activities. And therefore, we just apply common sense, and we do not stay exposed to activities that have low margins. So basically, we are just applying common sense while keeping our strategy intact. But indeed, for the coming -- for the near future, our focus will be on margins of cash. Other questions. What is the expected profit for 2024? We are 7 months down the year? Well, we do not give a guidance now on the short term. So I'm sorry, but we will publish the first half profit on 18th of September. When do you plan to reach a positive net result to create value for shareholders, can you pay for the acquisition of companies and shares instead of cash? So as we said, we are committed to improve our margins. And you will see that it's going to be the case when we will publish our results on 18th of September. And then to the second question, pay any shares instead of cash. Well, yes, of course, we can, but -- paying in shares implies a dilution for the shareholders. So we are not sure that this will be in the best interest of our shareholders. And we prefer to use cash when we have cash and we have the possibility to finance it through bank debt. So it's a much cheaper way to finance external growth. Other question, what could be the consequences of material increase in French minimum wage, for example, plus 10% for your top line margins and how we are capable to absorb such inflation. Amaury, do you want to take this one?

Yes. Well, first of all, we consider that this is very unlikely to occur or to be a significant increase in the minimum wage. But keep in mind that we have in all our wages a variable part. So we could have some room there. If the fixed minimum wage was to increase, we could use this variable part to absorb part of this increase. And obviously, if this scenario materialize, we will go and talk with our customers since it would be -- something to take into consideration for everyone in the market.