IVS Group SA

MIL:IVS

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the IVS Group results at June 30, 2023 Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Antonio Tartaro, Chief Executive Officer of IVS Group. Please go ahead, sir.

[Antonio Tartaro, executive]

Thank you. Dear ladies and gentlemen, good afternoon, and thank you for attending this conference call of the IVS Group results for the first half of 2023. Antonio Tartaro speaking, and with me, our CFO, Alessandro Moro; and Marco Gallarati, our Investor [indiscernible]. As usual, in the first part of the conference, we will give you a comment on the result of the period and an overview on how you see the current situation, an update on the ongoing work on the integration with market and [indiscernible] we developed. And finally, some highlights on what we expect for the coming months and on the future strategy. Alessandro Moro will then give you more detail on the half year report and on the financial performance. Finally, we will be available for your questions. Well, as you know, in 2023, we'll be -- 2023 will be the first year of the full year including the effect of the business combination with [indiscernible] the first half of 2023 cannot be compared to the same period of 2022. As we have formally completed the large [indiscernible] business combination with the effect from the July 1, 2022.

So the increase of all the relevant financial data is very high. Sales were up by more than 80%; adjusted EBITDA by 55%; adjusted EBIT by 110%. Of course, we have seen evolution coming from the high [indiscernible] business. In [indiscernible] terms the dimensional IVS Group has almost doubled, but what is probably more important is that this new dimension has also strategic impact of the [indiscernible] level driving new relationships with other market players in the coffee and other sector of the food and coffee market.

On a [indiscernible] performance that was not technically available in the first half of 2022, but considering as the business combination were already in place at the beginning of 2022, the increase in sales was 10.5% since [indiscernible] EBITDA and more than 100% in EBIT. This number shows clear [indiscernible] the first improvement that we are generating from the business combination with [indiscernible]. Another important aspect that is not yet highly visible in the numbers, but that we consider very interesting is the presence in the [indiscernible] segment. That can be probably more profitable than we expected and where we think we could have some good cast to play for the [indiscernible] by leveraging on our logistics and [indiscernible].

Moreover, in geographic trends, the new presence in Germany and Poland are good, is a very small base today [indiscernible] a potential exposure to large markets. We're like around 100 new people and where we could offer best-in-class service in vending and Italian style espresso coffee that are more and more appreciated. Clearly, this represents a target for the next 3, 4 years. And now the priority is completing the integration with [indiscernible] months time frame has been declared at the beginning.

Overall, we consider this first half of 2023 quite [indiscernible] even if the external scenario is still quite weak for several micro factors that everybody knows. As far as our priorities are concerned, we are continuously increasing the selling price. And you can clearly see the total effect. Unfortunately, the use of technical people to set the new selling price [indiscernible] means also that we have fewer human resources for the normal technical assistant and this means a lower efficiency [indiscernible] on the loan side. And in general, human resource landscape and [indiscernible] especially in more industrial [indiscernible] countries and market. But scarcity of human resource is a common and [indiscernible] problem in any sector. This is another reason why the kind of business combination and the higher size of new group were imported as we have now allowed to seem to work on a larger ground that represent the source of the synergy, somehow compensating external [indiscernible] conditions. In terms of volume, you have seen that in the vending business, in the first half, we ended more than EUR 500 million. So we aim to reach a symbolic number of EUR 1 billion in full year.

[indiscernible] in the first half represents a good base for the rest of the year, even considering the difference between each quarter, the earliest period and the real [indiscernible] working days. Indeed, the third quarter has the annual minimum number of year working days, and we cannot know yet how we will be the last quarter of 2023. But overall, we will continue to improve our results. Below [indiscernible] EBITDA line, please consider again that we have a significant [indiscernible] related to a portion of the acquisition price that was allocated on tangible or intangible assets. For example, the client list [indiscernible] the acquired business. This part of amortization could be regarded as profit or better as a investment [indiscernible] more or less [ 60% ] of the total amortization per year.

Alessandro will give you more [indiscernible] on that. The new financial [indiscernible] decreased in the first half by around EUR 40 million, that would be EUR 24 million, considering that [indiscernible] already includes the dividend that was paid in July. This is an amount consistent with the generation of free cash flow of around EUR 40 million per year at the present capital [indiscernible] without considering other M&A or extraordinary investment. Profits in the second quarter increased compared to the first quarter but will go down [indiscernible]. Finally, as we already said in the last presentation, our tax rate is expected to remain very low for remaining years [indiscernible] to have accumulated substantial tax credit to pass for the Italian Industry 4.0 tax program. And for more [indiscernible] losses according to the current period. Going back to the integration [indiscernible] market, we are almost at the [ 37% ] of the work to be able to be done. The job [indiscernible] procurement is almost completed as well as the unification of the overlapping branches and the consequent savings for real estate and rent. We are now [indiscernible] operative and commercial procedure and marketing with one centralized system of control. This job eventfully compared to -- in 12, 18 months should generate an additional 2% or 3% of gross margin. Now I'll let Alessandro Moro to give you more details on the interim record and on the financial situation. Then we will answer to your questions. Thank you.

[Alessandro Moro, executive]

Good afternoon, everybody. I'm Alessandro Moro speaking. As usual, I will summarize you the most important aspects of the profit and loss accounts, and then I will give you some more details on our financial situation and liquidity. Well, according to the reorganization of the business area, we have adopted our activity after the business combination. We have, first, the traditional vending business that includes all the IVS [indiscernible] activity in Italy, Spain, France and Switzerland [indiscernible] is only vending in Italy and [indiscernible] that has a vending operation in Italy, [indiscernible] and a small subsidiary in Germany. Total sales in the first half were EUR 281.6 million, [indiscernible] 52% compared to EUR 185 million as of June 2022. Vending sales can be further divided into the following markets. First of all, Italy, with EUR 236 million with an increase of 55%; France with EUR 24 million, an increase of 23%; Spain with EUR 19 million with an increase of 29%; and the other European market with EUR 6 million with an increase of 300%. Second, we have the reselling business, include [indiscernible] subsidiaries in Italy, in Spain and Portugal and [indiscernible] that operate in Italy and other minor [indiscernible] companies. Total sales in reselling business in the first half of 2023 were around EUR 72 million. This is new for IVS Group and therefore, the comparison of 2022 is not significant. The fourth is the HoReCa business that is also new for the group and included some new market businesses in Spain and some small Italian business owned by IVS Italia. First half of 2023 sales were closer to EUR 12 million. The fourth macro business area is in the Coin division that has no changes from the business combination with [indiscernible] business since -- but businesses since the last quarter includes [indiscernible] group. Total sales in the first half were above EUR 18.3 million with an increase of 45% compared to the first half of 2022. With reference to vending volumes, the total number of vends in the first quarter was EUR 550 million. As we already said, it is no more significant to say if this volume comes from IVS or [indiscernible] as we have closed some overlapping branches and moved clients and businesses. So overall, on a like-for-like basis, considering the [indiscernible], we can see that the increase in total revenues was around 10%, of which approximately 6% arising from increase of volumes and 4% from increase of selling prices. Average sales price per [ vends ] increased overall on average by around 2.6% compared to first half 2022 from EUR 50.10 to EUR 51.4. As we said in the formal presentation, we still had quite significant differences in the prices applied in the different legal entities and market areas. IVS still has higher prices compared to the other companies of the group. As you can see in the details of the presentation, the price increase was remarkable also in other foreign countries. But everywhere, there is a significant space for additional price increases, although for the time [indiscernible] required to complete the cycle or in some locations clients completing a second round of increase required at least another year or more. EBITDA growth is around 55%. Total adjusted EBITDA was EUR 57.4 million compared to EUR 37 million in the first half of 2022. And on [indiscernible] basis, the EBITDA increase was around 15%. In the presentation, you can find the details for each market area as today, we have businesses with really different margins, especially in the core vending business, we still have quite a large gap to be recovered by the new subsidiary to reach the best-performing area.

Looking at the [indiscernible] difference between EBITDA and EBIT, we have a substantial part of amortization that are a part of the prices paying in the business combination that was allocated to specific assets like real estate or client lease. The value in the first half is around approximately EUR 6.6 million, of which EUR 3.5 million arising from the last business combination that could be considered as a higher EBIT and pretax profit. Despite this [indiscernible] amortization, EBIT adjusted in the period increased by more than 100%, close to EUR 18 million and increase in percentage in pretax and net profit [indiscernible]. Going to the net financial debt, it is negative and equal to EUR 402.8 million from EUR 417 million. That is also December 2022. Net debt include also more than EUR 64 million of IFRS 16 effect and the decrease in net debt in the first quarter was more than EUR 14 million or -- EUR 24 million, including the dividend that paid on July, but already including in the net debt as of June 30, 2023. Total operating cash flow in the period was EUR 60.5 million from EUR 27.5 million in 2022. Payment for the total net investment as of June were EUR 26.6 million plus EUR 2.8 million for acquisitions. Finally, we still have EUR 11.6 million of credit and liquidity was around EUR 74 million as of 30 June, 2023. And today, we are approximately the same amount. So well, now we are available for your questions.

[Operator]

[Operator Instructions] The first question comes from Alessandro Cecchini of Equita.

[Alessandro Cecchini, analyst]

My first question is about trend in top line that you are experiencing overall. So if you expect in the second half, I mean also thanks to price increases to expand the business year-on-year. This is my first question. My second question is that about the pricing of -- price increases that you are launching in order to offset inflation or raw material or cost of goods sold. So I would like to have your idea how many clients, so you are still approaching in order -- to raise prices in order to better understand when you expect to catch up the full benefit of price increases? And then my final question is, if I understood correctly, we need to assume that next year 2024, we need to, I mean, increase your target to have better gross margin of 2%, 3% on EUR 170 million, roughly speaking, sales. So to add at least EUR 5 million of EBITDA, thanks to cost gross margin synergies.

[Antonio Tartaro, executive]

So what we are observing in terms of volume, it is almost in line what we see during the first half of the year. So I do not expect great changes in the trend and we had changes in the number of vends per machine per month per location per client, whatever [indiscernible] that we expect from our business. In terms of increase with price campaign, we talked during the last 18, 24 months more [indiscernible] less than 50 [indiscernible] part of our client. However, it is an activity that is increasing monthly by monthly, time for time more or less because it will become more and more and more automatic. However, it is not a process that will expire when we complete the run -- when we complete around and we start to gain [indiscernible] month around because the increase in materials, it is slowing, but it is still keeping.

So the process is running. And I expect that the next 12, 18 years -- 18 months will be around the prices continues. It is something that this industry experienced in the past when the inflection was high or whatever in place, of course, not like you have to go to the 6, 7 years to have an effect more or less close to what we experienced now. However, it's [indiscernible] something that we -- some experienced guys in our company already seen.

So it is something that we are used to do. The only thing that we need time or whatever we are working on that just to enable their [indiscernible] to change the price in the machines so avoiding the exit, the [indiscernible] of technicians that are less internal numbers and are higher in terms of cost because the technicians are paid more than refills. So it is an activity that will be normal activity in the next 2 years of life.

[Unknown Executive]

You are right. We expect that in terms of [indiscernible] efficiency the target we open about a lot of things and that you summarize in your question. So the answer for that is, yes, your analysis, it [indiscernible] correct.

[Alessandro Cecchini, analyst]

Okay. So basically, just to -- you stated about still couple of semesters to integrate. So in your view, what is your -- within the new structure so including [indiscernible], including reselling, vending, what could be the normalized your view adjusted EBITDA margin that you could extract from the company once it's fully integrated end of this year?

[Antonio Tartaro, executive]

Well, you have to divide because each of the 3 business as the [indiscernible], I have a very different EBITDA percentage on revenues. Vending, before COVID, IVS has more than 22% of EBITDA on the revenues. Of course, that is the benchmark that we used to reach. We have to work hard to, as we know, when we acquired [indiscernible] because they were pretty far away from that. I think that way we will -- in the next 12 months, we have to increase their percentage of EBITDA at least 4% to 5%. Then we have working to make fine-tuning to reach the same level of EBITDA at IVS now. Then we have to force the company to move the company to reach the 22% that we have before COVID in the industry of trading.

[indiscernible] discussion is in reselling, where we have an EBITDA [indiscernible] is 1 digit because that is only acquire and sell and so you have also difficult service because it is only -- make available [indiscernible] the stock at the warehouses and credit risk, it is quite safer because at least -- it means because the clients are more or less vending operator. If the vending operator will not pay, IVS will acquire their clients and they're not paying payment to clients and the clients and the machines of the vending operator. So the selling business will be -- will have a sort of credit [indiscernible] is a new one business, and the margin is something in the mid -- between -- we expect to have a margin something in the middle between vending and reselling.

And it is growing. And then there, we believe that we can have a good [indiscernible] because the -- based upon our expertise on technical and in our geographic footprint. Then we have the fourth business line of -- fourth [indiscernible] business line that is Coin service but this is something that everybody knows IVS and also the coin business. And as you can see, coin business is growing. I expect that also in this semester, coin business will grow and will be more profitable because the third quarter, contrary of the vending for coin business is [indiscernible] in the next quarter of the year. Then let me spend a few words about [indiscernible]. The Digital division, as you see, this division is growing. This business is growing well and we have a good prospective for the [indiscernible] project.

[Alessandro Cecchini, analyst]

Okay. So basically, just to sum up, you expect that it's possible to reach above 70% level of margins once the structure is, I mean, consolidated?

[Antonio Tartaro, executive]

As you know, we don't give any anticipation usually. However, what we say [indiscernible].

[Operator]

[Operator Instructions] Gentlemen, at this time, there are no questions registered.

[Antonio Tartaro, executive]

So if there is no more questions, thank you to everybody. Thank you to attend to our conference. Have a nice weekend.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.