Earnings Call: Q2 2021

Aug 3, 2021

Good afternoon. This is the Corusco conference operator. Welcome and thank you for joining the Tinexa Group Consolidated Results at the 30th June 2021 Conference Call. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Joseph Mastragostino, Chief Investor Relations Officer of T Nexa. Please go ahead, sir. Good afternoon and good morning to the folks in the U. S. Thank you for joining Tenexxa's first half twenty twenty one results presentation. Here with me today, Pierre Andre Eschevalade, CEO of Tenexxa Odone Polsi, CFO. Good afternoon, everybody. As a reminder, all the relevant documentation of the first half twenty twenty one results can be downloaded from our company website in the Investor Relations section. For the purpose of this call, I will go over the first half twenty twenty one highlights and updates as well as provide all the relevant information related to the recently announced M and A. McDonough instead will go over the first half twenty twenty one financial results as well as the business unit performance providing us with deep dive. The last part of the call will be dedicated to Q and A. A recording of this conference call will also be available on the company website and it will be posted upon completion of this call. At this point, I will kick it off by turning to Page 3 of the presentation. The first half twenty twenty one results are on track for delivery, showing continuous momentum and providing support for growth. Please note that in order to allow as complete analysis as possible, 1H21 results are compared both at constant 2020 perimeter as well as on a 2021 perimeter, which includes all of the NexSys companies with the addition of the newly acquired ones. Revenues came in at $177,800,000 in H1 'twenty one posting a +43.6% increase versus prior year or 12.6% on a 2020 basis. For a matter of completeness, we are also providing EBITDA adjusted, which excludes stock options and other non recurring items as it is management's view that such indicator better represents the real performance of our business. For that matter, EBITDA adjusted came in at $42,300,000 in H1 posting a plus 21% growth versus prior year or a 6% growth on a 2020 basis. EBITDA reported, which is after stock option, came in at $40,300,000 in H1, posting a plus 17% versus prior year or 2% growth versus 2020. In terms of EBITDA adjusted margin, that came in at 23.8 percent and EBITDA reported margin was 22.6%. EBIT was strong and grew 22% versus prior year at $26,400,000 and EBIT margin was at 14.8%. Noticeable was net income, which was $20,600,000 or close to 30% growth versus prior year or 16% on a 2020 basis. Cash flow was solid at €29,700,000 in H1, growing on an LTM basis to €67,500,000 Net financial position was €205,200,000 and leverage was 2.4x entirely reflecting the recent acquisitions. In terms of key metrics, from a preliminary analysis conducted on 1H21 results, 66% of the NexSys Group revenues are recurring. Growth came from all of our business units, which contributed to growth versus the prior year. Digital Trust grew 14.9% in revenues with EBITDA growing 11.8%. EBITDA margin was 24.5%. Cybersecurity revenues reached $34,600,000 and EBITDA margin was above 10%. Credit and Information and Management increased 9.7% in revenue with EBITDA growing 12.5%. EBITDA margin was 29.5%. Innovation and Marketing Services posted a healthy 23.6% growth in revenue with EBITDA rising 14.6% and with an EBITDA margin of 41.1%. The group carried out considerable M and A activity in all of our business units. In fact, we completed successfully 3 key deals and one MOU between the month of June July 2021. In order, on the 21st June, we purchased 100 percent of Intesa Sanpaolo for value. This was a cashless transaction with Intesa Sanpaolo for value being conferred into Innova for a 25% exchange. The aim is to establish a single integrated domestic group for higher value added services to SME and also to strengthen the leadership of the company. On the 1st July, we signed an MoU with Leonardo SPA to collaborate on Industry 4.0 and data security projects for the country's manufacturing system. The objective is to provide the market with effective and comprehensive responses to reduce the risk of cyber attacks in the context of digital transformation. Then on the 16th July, we bought 100 percent of financial consulting lab and C Lab to further strengthen WorldHub's commercial presence in Lumbarria and Veneto, providing services mostly targeted to SMEs. Lastly, on the 21st July, we acquired the majority stake or 60% of Charity Europe in France, which is the 2nd largest market in Europe. Canexa therefore enters the French market with the purchase of 1 of the largest certification authorities. That means strong internationalization for InfoCheck, which is now allowed to sell its solutions in France. Turning to Page 4. Let's discuss a bit more on Inter de Sao Paulo for value. Just to give a little bit of a context to our group, this is a transaction under the Credit and Information Management segment. It is a cashless transaction with equity exchange at the segment level. The transaction sees Intesa Sanpaolo transfer 100% of its shares in Intesa Sanpaolo for value to Inova, exchange of 25% was valued at an equity value of €55,000,000 There are put and call options on the 25% share capital held by Intesa Sanpaolo and Innova subject to the termination of the partnership and or certain results with respect to planned targets. These good co options are exercisable in 2 years between the period of 2025 2026. There's an earn up of up to an additional 5% and you've entered certain planned objectives are exceeded and ratified with the approval of CoreValu's 2025 financial statements. In the final year of the plan, therefore by 2025, the transaction is expected to lead to additional revenues between €55,000,000 to €60,000,000 into an expected combined margin consistent with that of the various business units, namely CIM and IMS. We successfully completed the closing on July 21. Turning to Page 5, Leonardo and Kinetics signed an MoU to protect the Italian manufacturing sector from cyber attacks and in particular the sectors which have proven most vulnerable in these attacks in the past years. You're looking at manufacturing companies, financial and services companies, the textile and fashion services as well as utilities. Lornado and Connexa will integrate their respective vertical technology components in the areas of the Internet of Things, operational technology as well as digital truck. We have not provided any financials here because the partnership will be directed by a joint steering committee, which will evaluate and therefore identify all future initiatives. Turning to Page 6. Here it's about innovation and marketing services, in particular, Warrant, which purchased 100% of Financial Consultancy Lab and Financial C Lab. The enterprise value for these smaller acquisition was 100% of the capital was €4,500,000 Both of these companies are based in Brescia and there is strong commercial presence in the regions again of Lombardia and Benito. The companies mainly target SMEs and will strengthen warrants help penetration in these 2 highly strategic regions. Turning to Page 7. This is a very interesting and important deal, which brings a strong international footprint to Tenexta. The group purchased the majority stake or 60 percent of Certior, which is an extremely well known brand in France. It is based in Paris. It has a leading market share with 40% of ADA certification. It holds full authorization and accreditations for the issuance of all certificates in the French market. And above all, it has solid business and commercial relationships with important trade associations, namely lawyers and notaries, as well as large retailer retailers for digital services. From a strategic standpoint, Connect Savvia Infochett enters the French market and Infochett is therefore allowed to expand its services and products in France. The market is extremely attractive and exciting because the total digital trust market in France is valued at €150,000,000 and is expected to grow 23% on an annual basis, reaching €500,000,000 by 2025. The company we acquired is currently the 3rd player in France with about 10% market share. Let us give you some numbers. In terms of enterprise value, the 100 percent of the capital is 66,700,000 dollars Check Europe on a 2020 basis generated $14,000,000 of revenues and a pro form a EBITDA of $5,200,000 or more noticeably 37% margin. The 60% stake is equal to $43,800,000 which includes $3,800,000 of earn out relative to 2021 and 2022 performances and no debt is envisioned at closing. There are put call options on the minority interests that are exercisable by 2023. These put call options of the minorities are valued at $28,400,000 for a total investment of around €72,000,000 The 60% stake will be funded by existing cash. Closing is expected by Q4 of 2021. Turning to Page 8, most of these items have already been commented. So I will leave it to ODDO for his part. Okay. Good afternoon, everybody, and thank you, Joseph. As Joseph has already well tuned the comment of the performance of Q1 that is perfectly aligned with the objectives that the group indicated at the beginning of the year. So the revenue went up quite significantly during Q1, both on a like for like basis as well as with the change of premiums. On like for like basis, the revenues went up close to 13%, and this is a very encouraging and positive result. If we move to the EBITDA, EBITDA before stock option came at 41.2%, but this included also a portion of expensive, non recurring expenses we face in order to promote and manage the acquisition and M and A processes. So the EBITDA adjusted is 42.3%, that's very close to 24% and compared to the 26.6% of previous year. This is being driven by a change in the mix of activities compared year on year. Definitely, the inclusion of the cybersecurity, as expected, as we already communicated to the market, is squeezing a bit our margin profitability, while the rest of the business was keeping very interested and positive profitability. EBITDDI overall closed at 40.3%, growing on a like for like basis at 6.1%. Depreciation and Mortimations went really accordingly to our expectations like above prior year, but we have to consider that we increased the perimeter of our activities. Financial charges went up a little bit driven by the different perimeter we have and following the acquisition we performed during January 2021. When we move to profit after taxes, it's going up 15% compared to previous year. And in the income taxes, we got a benefit that we booked during the last part of Q2 as we had the opportunity basically to get the tax benefit by anticipating less than €1,000,000 cash and that is therefore the opportunity to deduct in the future in a better in a better percentage the relevant depreciation. So basically, the income tax were €3,800,000 and this linked to a net profit that is CHF 20.8 percent that is very close to 12% growing, close to 30% compared to the previous year. If we go to the balance sheet, we do see that increase of net capital investment. This has been driven by the acquisitions. The group performed more than €100,000,000 in acquisitions of Corvallis, Eurooil and Querio that occurred during Q1. And the group continue to handle in a very positive way the working capital that is even improved compared to December and much more improved compared to June last year to be negative by €50,000,000 in April. The net financial position grew to €205,000,000 compared to €92,000,000 of the end of the year. Like I said, we have basically acquisition for €130,000,000 We distributed dividends close to EUR 30,000,000 and we performed the full adjustment on the full adjustment on basically on the Cybersecurity acquisition, driven by better results expected from this company. Debt by debt program went up again. We acquired shares for almost €6,000,000 And as of today, that interest rates we bought are well below the current market price. When we look at share on the recipe, it went down a little bit, basically driven by the profit of the period, of course, is €20,800,000 is increasing. We distributed debited and obviously, the buyback program and the put adjustment is decreasing at the total value of the shareholder equity. The net financial position is, like I mentioned before, is increasing, but we kept very positive working capital improvement. The working capital improvement has been delivered also in Q2 despite the fact that we had to we faced a cash out for taxes in Q2 of $30,000,000 compared to the $6,000,000 of previous year. So this means that we were able to continue to keep a very high conversion of the EBITDA in cash. If you look at the last box at the bottom of Page 12, the last box is the right part. The LTM free cash flow has improved quite significantly, which you compare year on year. Last year, the same time of this year was basically €47,000,000 on an ATM basis. This year is €67,500,000,000 This includes basically an improvement, a cash generation from working capital in the range of €20,000,000 that is definitely a very, very positive result. At Page 13, you may see that the net financial acquisition EBITDA ratio calculated on LTM basis is at 2.4x and perfectly aligned with our expectation to land by the end of the year in the range of 2x. As you may see here, basically, the free cash flow is €30,000,000 that we distributed dividends and the acquisitions overall combined with the put agreement are calling for €120,000,000 or worse than the net financial position as explained before. On Page 14, you may see it on LTM basis. Basically, what is changing here is that the free cash flow overall is at 67,500,000,000 as I mentioned before. So very strong cash generation that is supporting our programs of M and A. And the acquisition over the last 12 months accounted for €145,000,000 Let's move now to the different business unit performance. We talked about the revenue going up on a like for like basis at 13% and 40% due to the change of perimeter, while the EBITDA is growing 6% on like for like basis and more than 20% as in total. Basically, as you may see here, all the business units were able to increase both revenues and EBITDA. And this is exactly what we do expect when we share with the market the projection and the expectation for the year and the following years. We will I'm going to deep dive in each business unit in the following pages, starting from Page 17. Here, you can see the digital traffic. We are very happy for the result of digital traffic. It was able to grow basically 14.9%. It means that total revenues amount of more than €60,000,000 is a very solid and important growth. And if we exclude nonrecurring costs and stock option costs that may fluctuate yearly on a same perimeter basis, basically year over year is growing 12% above the double digit. Here, the mix is driven slightly below EBITDA margin percentage, but we are not at all worried of this. This has been driven by a different mix of what we delivered and but perfectly aligned with our expectation. We do believe this solid growth is expected to continue during the rest of the year, having the right mix between of the share product and capability of delivering digital transformation project as we have done. Also, speed is doing very well. It's growing fast, even faster than our expectation, and this is partially affecting our margin, but the revenue growth is very solid. We move now to cybersecurity here. Also the cybersecurity, although we have no comparison to the previous year, even pro form a data are more available. As you know, the cybersecurity is a mix of 3 different companies, and one of the 3 companies was already a merge of different businesses. But at the end of Q2, we may say that both revenues and EBITDA are aligned with our expectation. Definitely, if we look inside the €35,000,000 we delivered the revenue, they are definitely core values, business part and system integration is still the most important part. But the revenues from Euronie and Swoscan are growing basically in line with what we expected. This is very important to us. Our 2 quarters, we are consolidating this business, and we do believe that this is the right track, is aligned with our expectation. EBITDA margin is 10.1%, aligned with our expectation. We do expect in the second part of the year the EBITDA margin growing faster. If we move to credit information and management, despite a still tough market because from one side, now at the beginning of the year, still we had some limitations in the business and the circulation. So I have we have to say that growth close to double digit is very positive and encouraging. We have to say that compared to previous year, our revenues related to business process outsourcing with reference to Concentration Guarantee are slightly below as expected. But from another standpoint, we do expect that this kind of business to continue also in Q3 and Q4 and to reach, certainly, the goals that we shared with the market in the early part of the year. The competitive Brazil, the real estate activity is improving quite significantly. We had a very solid growth here, and the management was really able to capture all the opportunity the market offered and was able to deliver the very solid growth and as well as a very solid improved and vigorous market. And overall, we will say that also the business pure business information and credit information business grew compared to the previous year, and this is definitely a very solid results and very good news for us as this is a market that is, let's say, at least shrinking. So we are also glad that also this part of business was able to grow both revenue and EBITDA at the double digit level. Let's move now to Innovation and Marketing Services. You know that here, basically, we have 3 main components. We have the components of wallet with the consultancy to Industry 4.0 services and opportunity. Then we have our consulting businesses to export. And then we added the newly acquired company that is where that is consolidated also from January 1. So overall, on the same perimeter business, the revenue was able to grow also here more than double digit. And this is definitely very positive. Comark start again to grow and compared to previous year. And the war rank also was able to grow compared to previous year despite the market that is offering to its client that, let's say, lower tax benefit compared to what was happening in 2020 and what is expected to happen in 2020. We knew that this year, we were facing this situation with lower tax benefits from our customers. And as part of our revenue is linked to basically to the benefit that our clients, we know that we knew that we made it softer. Edikates revenue went very well and also greater than we were in Q1, just 1 quarter €4,100,000 of rent. If we move to the EBITDA, also we are able to grow on a centimeter basis 3%. With the addition of value, we grew by 15%. So also we are glad for the results we were able to deliver. If we move to the closing remarks, after Q2, we may say that we are perfectly on track of what we shared with the market during February 2021. And so in comparison to our internal budget, we are totally aligned. So we are here to confirm basically that we plan to deliver revenues in the range of €370,000,000 and EBITDA at 96,000,000. Net financial position, EBITDA is expected to be in the range of 2 times as already shared with the market. I would ask the operator to open to Q and A, please. Excuse me. This is the Corusco conference operator. We will now begin the question and answer session. The first question is from Isakobrambila of Mediobanca. Please go ahead. Hi, good afternoon, everybody. Thanks for taking my questions. I have 3. The first one is on your guidance. If my math is correct, your €96,000,000 EBITDA target implies basically a flat EBITDA growth in the 2nd semester, excluding the contribution from the cybersecurity business unit. This would imply quite a marked slowdown compared to the trends seen in this semester. So I was just wondering if there is some element that you can specify in some of your business units, which make you so conservative in terms of its implied offer for the 2nd semester or if it's just general conservatism because of the macroeconomic context that we are living in? 2nd question is on the Sapth Europe deal. Can you provide us more color on the top line synergies, which may be potentially unlocked for InfoChet and for the other business units of Kinexta Group? And the very last question is on M and A. You have been very, very active actually completing 8 deals, by the way, in the last month. Should we expect your M and A campaign to be put on hold in the coming quarters? Or you have further targets currently under evaluation? Okay. Let's start from the guidance. No, we do not believe at this stage that this is conservative. We shared with the market the $96,000,000 target based on our internal projection and budget. And as of the end of Q2, we are perfectly aligned. So we know that the 2nd part of the year is the most challenging part, as we have still a lot of room to do. But we do not believe it is conservative. That is great. If opportunity will come, as usual, the group is going to take them. But as of today, we think that our projections are very balanced. If for the second question of Set Europe, that's a decision acquisition of InfoCheck. So it is in the digital draft area. We do believe that there could be opportunity of synergies between the 2 companies, as you mentioned, basically on the revenue side. We do believe that InfoJect, compared to many other companies around Europe that are operating in the same arena, InfoCher has developed a very strong digital transformation management activity. This is what is making Infocher one of the most interesting company around Europe, and this is what Infocher is looking to bring to the French market its capability, working together with a very solid baseline, very solid customer relationship of Sales Europe. We do believe that Infocerci will be able to help the company to enter also the market of projects, the market of digital transformation management, having the opportunity therefore to trend a very solid growth during the time. M and A. M and A. We are not as usual, we are not disclosing the end target in advance. But as usual, as Mr. Shevallard has done over the last 10 years, the group was able to pursue and to achieve very important target in the M and A. We do believe that the group is a solid track record. The group has a solid cash generation. Banks are there to support us in the acquisition. So as shared during the So as shared during the planned presentation, we will continue our process of M and A looking for target mainly in the digital trust and innovation marketing services on international basis and talking about significant target. Then we may get some add on as we have done for the projects that we have at this small team. For other business unit, we will see. If the right opportunity will come, we will be ready. But the priority is what we already mentioned, the peking angle there. And so we will continue. We absolutely the goal is to have InfoChef very well positioned in Europe, at least with Brazil to France, sustain or if other countries may have an interesting target when you look at it. And the same thing, definitely, may happen for more ranking innovation and marketing services. Thanks very much, Odonto. Thank you, Isaac. You're welcome. The next question is from Russell Quenton of Edison. Please go ahead. Hello, everyone. A couple of questions from me. First of all, on Digital Trust, I think I asked this question in the last quarter too. But your 2 year growth rate on Digital Trust now is over 20%. I'm more interested in actually where you're seeing the growth, which is coming through, which is stronger than expected. Could you give some talk about which products are doing better than you might have expected at the start of the year? And the second question is which combines 2 divisions really in credit information and management and innovation and marketing services. There was a bit of margin compression Q2 this year versus Q2 last year. I appreciate the margins in these businesses move around a bit quarter by quarter basis, but this time last year, we were right in the middle of the pandemic and lockdown. So could there may be some business mix changes in there, but could you just give some better feel for why there has been that margin compression? And the third question is on cybersecurity. Obviously, you're looking forward to much higher margins in the second half than the first half. Is that really because the first half has just been a bit of integration expense, that kind of thing? And is therefore the second half this about accelerating revenue momentum and those costs swapping away? Thank you. You're right. Let's talk about digital class. We never mentioned to have digital class growing 20% a year. A year. We always mentioned that also the plan that we shared in February was a growth in the revenue below double digit and the increase of EBITDA above double digit. This is our long range plan. If we look at just first half results, definitely, we may not we have not to judge the performance on a couple of quarters. This has basically been driven we grew in terms of revenue above expectations, and we had a slight contraction of the margin. What is certain is that we had a little bit more than expected revenue from on the shelf products And as well as we have one of the largest customer in Italy, a big deal that includes also a reseller software. So the combination of the two things in just one semester has increased the revenue above expectation and depressed a little bit the EBITDA margin. On the full year, we are here to confirm that we are just one half. If we talk about innovation and marketing services, we have to consider that last year, basically, the activity of Comarch was really depressed during Q2 especially. And so the weight of warrant business increased. This is the reason why also the margin has increased so much at 44% as a trend. This year is growing, is regrowing our core market that has embedded lower margin. So the mix is penalizing a little bit. On top of this, but we will expect this during this year, warrant business is going to be impacted, as I mentioned before, by the different tax benefit that the client may have driven by the current budget loss. We do expect in case in the second part of the year that is the most important part of the year for warrants business, particularly in Q4 is the strongest quarter. We do expect the margin to be restored and even more importantly, value in the EBITDA in absolute value to be delivered. So I would say that this is a tiny situation. And already, the budget law for 2022, for example, is expected to be very different. So we get an increase, significant increase of tax benefit for our customer. If we talk about cybersecurity, we have no comparison that we may share with the market as they are not certified and they are not data that we consolidated previously. But the revenue is perfectly aligned with our target. And the EBITDA margin is what we were expecting. Definitely, the 2nd part of the year also here is the part where we deliver more revenue and definitely we deliver more margin. So the profitability is going to increase. And so also, yes, overall, we think to deliver what's expected. So by the end of the year, The next question is from Carlo Maritano of Intermonte. Please go ahead. Good afternoon, everyone. I just have a couple of quick questions. The first one is on the tax rate. Mine was wondering what do you expect in the notes tax rate at year end, excluding some of the nonrecurring items you're releasing in the 1st part of the year? And the second one is related to the small acquisition in the Innovation and Marketing Services. So what is the contribution in terms of revenues and EBITDA of the 2 acquisitions of Financial Consulting and Financial Lab? Thank you. Okay. Looking at tax rate, I will make it very, very simple. Last year, we got a 1.1 benefit from the Credit Sustainability related to ERAP. And this year, on the same subject, we had $0.18 So year on year, you may consider this as a standard as you may apply them when you calculate the year end tax rate. Then we had a one off benefit that is net is €3,400,000 that you may deduct when you run the usual tax rate. This €3,400,000 is what is called in Italy a francamento. We had a cash out of €800,000 and we recorded a benefit of €4,000,000 So if you mix the 2, you have a one off benefit of €3,200,000 euros That's all. So normal tax rate will this benefit from what we call here at San Clemente. About the small acquisitions in the innovation marketing services, here we are talking about headcounts that we'll perform in order to complete our offer in order to cover better some areas of the tier territory. So we do expect EBITDA margin in the range of normal margin of pro Santas that may be in the range of 20%, 30%, but nothing significantly to consider also the cash out we had. And the market for that in a very, very low Mr. Master Agostino, there are no more questions registered at this time. There's a follow-up from Isakobrambila of Mediobanca. Please go ahead. Hi. Just a very final question from my side. On the performance of Comark, can you give us some more details on the performance in the 1st semester and also on the outlook for the overall business, which should be supported, I guess, in the future from government measures to support international expansion of SMEs? Yes. We have to say that Comarch last year suffered a very difficult, especially in Q2. Then the company was able starting from Q3 to being able to combine a remote support with the physical support with the company. We have to say that Comark during basically Q the first half was able to deliver results, growing positive revenue, EBITDA compared to previous years, not yet the level of 2019, but definitely very good result. And we do expect also the second part of May year to continue to grow compared to previous year and to deliver at year end the result definitely better than previous year. But again, also we are expected aligned with what we expected at the beginning of the year. Mr. Mastragosino, this was the last question. Back to you for any closing remarks you may have. Thank you very much for connecting to Tienxis conference call. If you need any additional information, please don't hesitate to contact us. Have a good evening. Bye.