Sesa SpA

MIL:SES

Earnings Call Transcript

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Sesa Group's Full Year Consolidated Results as of April 30, 2021 Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Conxi Palmero, Investor Relations Manager of Sesa. Please go ahead, madam.

[Conxi Palmero, executive]

Good afternoon to everyone. I welcome you to the Sesa Group financial presentation of the annual results as of April 30, 2021. On behalf of Sesa, participating myself and Mr. Alessandro Fabbroni, Group Chief Executive Officer.

In the early afternoon, we made available our corporate presentation on Sesa website on the Investor Relations section that will follow during the conference call. Alessandro will introduce the key points of our presentation.

[Alessandro Fabbroni, executive]

Thank you, Conxi, and good afternoon, everybody. Thanks for joining our conference call. Today, our Board of Directors approved the financial statement for the year ending April '21. We reported again a record set of economic and financial results, driven by the strong demand of digital transformation and our impressive growth in skills and human resources over the last 12 months. We reached the target of EUR 2 billion revenues, up by 15%. We improved by around 20% of our customer base across our group business sectors, and we achieved around 30,000 customers, of which 2,000 outside Italy and 1,000 belonging to new business unit, Digital Green. We enlarged by about 40% our human resources over the year. We reached 3,500 employees as of April 30, '21, with new 1,000 talented people over the year, thanks to 400 new employees from internal hiring and about 600 new colleagues from pipeline of M&As.

Group revenues grew by 15%, achieving the target of EUR 2 billion. Consolidated EBITDA was up by over 33% to EUR 126 million, while the bottom line results, so the EAT adjusted, grew over 40% to EUR 58 million. Full year '21 EBITDA margin improved to 6.20% compared to 5.30%, thanks to positive contribution of all group sectors. VAD EBITDA increased by over 20%, with an EBITDA margin over the line of 4% compared to 3.7% year-on-year. System Integration EBITDA was up by about 50%, with an EBITDA margin equal to 11.5% compared to 9.5% from the previous year while Business Services EBITDA margin reached the line of 6%.

In fiscal year '21, new corporate acquisition contributed in a strong way to our group annual growth by around 25% in terms of revenues and 40% at operating profit level. The full year performance reflected the group acceleration in the Q4 only. But quarterly revenues growth equal to 16.6%, EBITDA up by over 35% and the record quarterly group EBITDA margin equal to 6.70%, driven by 12.5% EBITDA margin in System Integration and 4.15% EBITDA margin from the VAD sector.

In fiscal year '21, we also reported record operating cash flow, equal to over EUR 130 million deriving from the 30% operating profit growth over the year and the strong reduction in net working capital to revenues ratio from an annual average of 6% in 2020 year to an annual average of about 3.5% in 2021 year. The improvement of operating cash flow, resulting from growing group focus of [ accounting ] revenues and software as long-term drivers of business evolution. Group net financial position at year-end was active for about EUR 95 million, improving by about EUR 40 million compared to EUR 55 million as of April 30, 2020, after total investments for CapEx and M&A equal to over EUR 90 million over the year. The adjusted net group financial position, gross of debt deriving from M&A deferred payables equal to about EUR 60 million at year-end, [ was active ] for over EUR 150 million as of April 30, '21.

In the light of the strong set of year results, our Board of Directors will propose to show this meeting the -- of next August to distribute EUR 0.85 per share, up by 35% compared to the last distribution of September '19, corresponding to about 35% payout ratio on total group EAT, including the EUR 6 million of the full year '22 buy back program. The Board of Directors also approved the 2021 Sustainability Report, focusing on Sesa Group's sustainability programs and highlighting the great group achievement in ESG performance.

And now I give the floor to Conxi to provide more details about our sustainability and M&A programs that represent crucial drivers for our future evolution.

[Conxi Palmero, executive]

Thank you, Alessandro. In 2021, Sesa accelerated its path toward sustainability, enhancing social responsibility and environmental protection programs. We believe the long-term value generation for all the stakeholders represents a crucial driver for long-term value generation for our shareholders, starting with environment protection, economic growth and the wellbeing of our human resources and social communities. According to Sustainability Report 2021, Sesa has distributed an economic value of [ EUR 209 million ], up by 50% year-on-year, intensifying the initiatives on ESG and sustainability.

On January 2021, the shareholders' meeting approved the integration in the corporate bylaws of Board committed to sustainable growth and the group completed the assessment of its environmental impacts from their B impact assessment, which represents the first phase of B Corp Certification, one of the most important worldwide on the ESGF founders. Several ESG programs advanced over the year: ISO 14001 Certification for Environment Responsibility; SA8000 ethics certification achieved since 2015; United Nations Global Compact [ mandate ] achieved since 2021; as well as the achievement of Corporate Social Responsibility Rating issued by Ecovadis.

Regarding human capital, actions and investments have been processed mainly to strengthen the corporate culture by investing in human capital technical skills. On 2021, Sesa achieved 3,500 human resources, thanks to internal hiring of more than 400 young graduated colleagues on different corporate acquisitions. Sesa enhanced also, despite the pandemic emergency, its education program, completing over 26,000 hours of training and technological innovation on soft skills, up by 50% and intensifying welfare initiatives aimed to improve the quality of work-life balance and the wellbeing of our human resources.

To boost our skills, Sesa Group invested intensively in M&A, as you know. The corporate acquisition contributing to 2021 growth by around 25% on revenue and 40% at operating profit level and focusing on digital-enabled trends for all our business sectors. Since January 2021, as you know, we have already closed 10 M&As, with contribution expected in the fiscal year 2022 equal to EUR 75 million of revenue and EUR 10 million of EBITDA, with an EBITDA margin high accretive equal to 15% and over 300 of new employees on board.

Among the main [ reason ] in corporate acquisition, [ I remembered you ], reinforced our Digital Engineering business unit, acquiring Cadlog Group and Cimtec, with annual revenues of around EUR 70 million, largely in our European markets. Thanks to this two acquisition, our Digital Engineering business unit will generate total revenue for EUR 50 million as of April 30, '22, of which 40% abroad, with an EBITDA margin double digit and over 200 specialized human resources.

On ERP & Vertical business unit, we completed 2 strategic acquisitions, Me.R.Sy and Palitalsoft, while our offering on proprietary software and securing our market leadership in software and business application [ for video ] and food retail, we have about EUR 50 million of revenue as of April, 2022.

We completed the acquisition of Fireworks in China, improving our digital market live platform to China's social and e-commerce channels, to both in European enterprises to penetrate on this digital media market. China, we know. We acquired the majority stake of PM Service, focused on digital green technologies, with revenue for about EUR 50 million on fiscal year 2022, 1,000 customers and great development expected in the coming quarters.

On April 2021, we enlarged also the perimeter of our Business Service sector, with 3 acquisitions in digital platforms for large and finance customers, with a total revenue of about EUR 15 million, an EBITDA margin over 25% and over 100 new digital employees. The Business Service sector, thanks to this acquisition, is computing for the fiscal year 2022 revenue equal to EUR 70 million and 10% of EBITDA margin, with around 450 human resources. We will continue to attract and combine on industrial basis, a smaller mid-company, with a pure human resources and low acquisition costs. Our historical entry value is around 5x of group EBITDA, with announced mechanics and [ profit appreciate lower stake up ] decision to commit in the long-term with key people of the target company. As of today, we are working on more than 15 targets under evaluation, and with combined annual revenues of around EUR 200 million, with EBITDA margin double digit.

Now I'll get to give the floor to Alessandro for the final conclusion.

[Alessandro Fabbroni, executive]

Thank you, Conxi. My final conclusion under a scenario that is a strong recovery of the Italian economy, with national gross product over 5% in calendar year '21. That is driven by the so-called twin transformation, so towards digitalization and sustainability. And in that scenario, we enforce the key role of Sesa Group in digital transformation of main Italian economic districts and also of some European manufacturing districts across Central Europe, in particular.

Our capability to attract over [ 1,300 people ] and to integrate more than 20 M&As improving by 15% on our revenues and by 20% group customer base, representing our view of great strategic achievements on the full year and in particular, crucial driver that will strongly contribute to our mid- and long-term growth.

The demand of digital services is accelerating in Italy, with a 6% annual growth expected in the 3-year period '21-'23 compared with the 2.5% downward growth before COVID emergency and that will be mainly driven by the so-called digital-enabled trends from cloud to data science and security, where we focus most of our acquisitions and key investments. 2021 on other side, confirm the resilience of Sesa Group, the strong commitment of our human resources by adopting digital and hybrid organizational model, providing technological innovation and value-added digital services to Italian economy on a so crucial phase of evolution for our industry.

So considering the very positive trend of our Q4 '21, the very positive performance we achieved over the months of May and June 2021; today, we confirm our very positive outlook for the full year '22. We are confident to achieve all the targets of current consensus. That means EUR 2.2 billion, EUR 2.3 billion revenue; EUR 150 million of EBITDA; and over EUR 70 million of adjusted EAT in EBITDA margin around 7% compared to 6.20% of the previous year. We will continue to work on a strong pipeline of potential M&As that as in the past, may boost our future growth, both in full year '22 and '23.

Considering the forecast of digital services demand and the achievements in launching our organization, we confirm also our commitment to overperform the historical growth track record in the midterm, leading Sesa Group to long-term sustainable value generation, with strong focus on skills and business capability to support digitalization and sustainability of Italian and European enterprises.

Thank you for your attention. Now we stay available for the final Q&A session as usual.

[Operator]

[Operator Instructions] The first question is from Andrea Randone with Intermonte.

[Andrea Randone, analyst]

Congratulations. The -- I had a couple of questions. The first one is about M&A. You already talked about your programs here. I wonder if you can provide a bit more color about the pipeline you mentioned in a recent interview. And also, about where are the areas you are looking with more interest in terms of completing your offering?

The second question is about the cash flow and in particular, the working capital management. Once again, your results have been surprisingly good, suggesting a sort of fundamental trend. And I wonder if you can help us in understanding what are the remaining margin for improvement, looking to the year just started in this process?

[Alessandro Fabbroni, executive]

Thank you for the questions, Andrea. So first of all, our pipeline of M&A is -- as in the past, focused on small mid-companies, with low acquisition cost, [ skin intensive ] not only Beijing, Italy, but also across Europe, mainly focused on the so-called digital-enabled trends. In particular, in Software System Integration and Business Services divisions. As of today, we are dealing with EUR 200 million of revenues, with an EBITDA margin about 15% of potential deals, and we are confident to continue to deliver deals in the coming quarters. Our reliability and capability to attract new opportunities of business is growing. And the larger sites we achieved and the IR capability we have to improve our past in terms of M&A.

For net working capital management efficiency, we delivered in the last 7 years, tremendous improvement of net working capital to revenues ratio. As we show in the Slide 12 of our presentation, we moved from 13% average net working capital to revenues in 2014 to 3.40% of average in 2021. It is not a random effect, but the result of several initiatives that we take place but in particular, the result of our business evolution towards recurring revenues inside the VAD sector and software inside System Integration. So the Software Business Applications business is characterized by a negative net working capital to revenues while the recurring revenue business model inside VAD is characterized by net working capital to revenues close to 0. So we may have opportunity to improve in additional way the net working capital to revenues also in 2022 year.

[Operator]

Your next question is from Giuseppe Grimaldi with Mediobanca.

[Giuseppe Grimaldi, analyst]

I have two brief questions. The first is on the guidance. You mentioned that you feel comfortable with the current consensus at roughly speaking, EUR 150 million EBITDA. Do you think that the current payment there is enough to reach that level?

And the second question is on the M&A pipeline. Is it reasonable to assume that given the indication that you gave in terms of pipeline, you can spend something like EUR 50 million per annum over the next 2, 3 years for extra CapEx?

[Alessandro Fabbroni, executive]

Giuseppe, thanks for the call. First of all, the guidance. We consider our estimates for 2022 under a mid-low achievement of our pipeline of M&A. So if we improve the achievement to mid-high level, we may overperform the consensus. And so we plan to overperform the long-term track record, so that means about 20% of the profitability in the coming 2 years, under EUR 50 million of investments for M&A every year in the coming 2 years, as you mentioned in your question. So that is the right estimate of our investments under this guidance. So if you catch more opportunities of M&A than we plan today, we may improve our forecast. As of today, we prefer to consider the current consensus, the right for our group in the coming 2 years.

[Operator]

Your next question is from Matthias Durner with Discover Capital.

[Matthias Durner, analyst]

Yes, I have two questions, and it's also relating to the guidance. I understand that you basically have upside from a stronger M&A pipeline, which of course, is dependent on realization of the deals. But on the other hand, if I understood it correctly, this year, so financial year 2022, you should still have roughly EUR 130 million of revenues coming in on a run rate basis from the deals you did over the last 12 months or 11 months to be precise. So that brings basically down the organic growth quite considerably, which is included in sort of the consensus. So -- and then on the other hand, we have a strong growing IT market, which you have proven that you can still, given a flat or slightly growing actual markets, you can grow or you can outperform. So how does it fit together that you think it's reasonable to guide for like 6% organic growth rather than to your normal outperformance of a couple of percentage points above the market?

[Alessandro Fabbroni, executive]

The estimate we are considering is that 60% of our future growth may derive from internal organic growth, while about 40% will derive from M&As and external leverage. We prefer to wait the Q1 results in order to update that estimation. I believe that on September, we may be more detailed in forecasting our pipeline of M&As and as a result also, our guidance for 2022 and 2023.

We are working a lot. We are working on several opportunities. The acquisition costs that we confirm and that are in line with our historical track record, and that is really good news and a good opportunity to move on, on this side.

[Matthias Durner, analyst]

And could you comment on the organic growth?

[Alessandro Fabbroni, executive]

The organic growth is really strong in every sectors of operation. I mean, not in particular quantity but quality. So the capability to improve the value-added of services inside Software and System Integration, but also in VAD and Business Services is really well oriented. And in the beginning of the fiscal year, the performance in May and June are in line with our expectation, in particular in terms of sales mix, marginality and capability to deliver value, value added to our customers. That is the result of the achievement we had in human resources and in organizing several new lines of business in System Integration, from Data Science to Security, Digital Engineering and in VAD, in Digital Green, in Security and in Data Management. So -- and I remember again, I underline also the digital platform offering we are organizing in Business Services.

And these teams that we developed in digital transformation trends and in different geographies that we disclosed in the Slide 5 of our presentation, is really interesting to understand better. As of today, we have 1,250 people involved in software and vertical application, most of them proprietary for Italian business; 400 people skilled in digital security; 400 people skilled in digital platform and business process engineering; 300 people skilled in digital engineering, and that is a business unit we developed across Europe; 500 people skilled in digital cloud and managed infrastructure services; and I mentioned, I underlined also 100 people in data science and AI; and finally, 40 people in China in digital marketing. So these are the drivers. We are delivering the value-added services and as a result, higher marginality that is the main point that we focus on.

[Matthias Durner, analyst]

Sorry for following up with it again, but could you help us to quantify a little bit the trends you have seen in May and June? Just to get an idea, because, of course, you also go into higher comparative periods now in the coming quarters, just to get an idea.

[Alessandro Fabbroni, executive]

The growth is, let me say, higher than the expectation on the full year, but we have to wait the closing of the quarter before evaluate to improve our forecast and our expectation, but the beginning is higher than expected.

[Matthias Durner, analyst]

Okay. Understood. Very clear. And one last thing on -- have you already seen some effects from basically, let's say, governmental spending or incentives resulting from recovery funds money in Italy? Or would that rather be -- or would you expect that if it could have an impact on the market rather at the end of this year or even next year rather than currently?

[Conxi Palmero, executive]

Matthias, this is Conxi speaking. As you know, they are really important huge figure of funds that will be really oriented to sustainability, also in terms of digitalization. We think that this effect will be more obvious in the next year, in the sense that it still has not arrived and unspecific assets to the type of companies. We are working with private companies, with [ business ] and it still has not arrive in details here. But obviously, we think that when this will arrive, we can all reduce our capability to provide services to the market. So we understand and when these sales will arrive to the market, we will have also positive effects in our plans. This is a bit the point I long to underline. But you are right, not in this year, but probably in the next one. So this is the point.

[Operator]

Your next question is from Aleksandra Arsova with Equita.

[Aleksandra Arsova, analyst]

And two questions on my end. The very first one, just a follow-up on the numbers, organic versus M&A. So from your presentation, we see that the M&A contribution was more or less 25% in total revenues and 40% in terms of EBITDA on -- at the group level. Can you just specify what these percentages was for the VAD and for the SSI? I imagine that most of the inorganic growth is related to SSI, but just to have the right figure and to know how much of the almost [ 22% ] of growth in SSI was organic and how much M&A. This is the first one.

The second one is a follow-up on foreign activities. You mentioned that you have more than 200 employees abroad, which is almost 6%, 7% of your total employee's base. So can you also specify what part of your revenues is generated abroad? And did you have a figure in mind of target of what could be in the coming years, the generation from abroad?

And the very last one, it's a more general one. So you continue to hire people in value-added segments of cybersecurity, cloud and analytics and whatever. But one of the main issues in the tech sector right now is the shortage, I would say, of people, of skilled people. So do you foresee a gap between demand and supply of skills and how you manage it? And if you see it as an issue or it's not an issue for you?

[Alessandro Fabbroni, executive]

Thank you, Aleksandra. First of all, the question about the M&A contribution by sector. So the contribution from external leverage was mainly focused on System Integration. So about 60% of operating profit improvement of this year derived from external leverage, it is Integration sector, while just 5% to 10% was the contribution in VAD sector.

In terms of hiring of human resources, we are working with about 250 human resources of South Italy. We are planning to double this figure in the coming 12 months, 12, 18 months. Also thanks to small mid acquisition, in particular focusing on Central Europe and German-speaking areas.

The question about the hiring human resources and digital enables, so we worked very well in 2021 fiscal year. We managed to recruit about 400 people. To take under control the churn rate that is below 6%, that is a really great performance in our industry. We are continuing to improve our capability of hiring. So 200 people, 2 years ago, 400 so we doubled in the last year. So we are improving our team of hiring and recruiting and we are launching our [ private operations ], so we are confident to be able to improve.

To take high the level of professionality, the skills require a very wide, distributed organization with factories of specialization, as in security or in data science that we are building, around key people, stable and committed in long term with strong focus on diversity and capability to improve our inclusion and our effort in hiring. So we are confident, considering the results we achieved in 2021 fiscal year.

[Operator]

[Operator Instructions] Ms. Palmero, Mr. Fabbroni, there are no more questions registered at this time.

[Conxi Palmero, executive]

So thank you to everyone who participate to our full year conference call. As you know, we remain always available to support you in any further questions you can have around our business core and model. So thank you very much to everyone who participate today.

[Operator]

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