Earnings Call: Q1 2021

May 11, 2021

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Tenexxa Group Consolidated Results at the 31st March 2021 Conference Call. As a reminder, all participants are in a listen only mode. 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 Mastrogostino, Chief Investor Relations Officer of Tenexxa. Please go ahead, sir. Thank you, operator. Good afternoon, and good morning to the folks in the U. S. Thank you for joining Tenexa's Q1 2021 results presentation. Here with me today is Pirandrea Chevalade, Chief Executive Officer of Tenexa and Odoni Palsi, Chief Financial Officer. As a reminder, all the relevant documentation of the Q1 2021 results can be downloaded from our company website in the Investor Relations section. For the purpose of this call, I will go over the Q1 2021 highlights and updates. Odonto instead will go over the Q1 2021 financial results as well as the business unit's performance, providing us with a 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 our 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 Q1 2021 results provided a strong and robust start of the year. For that matter, a solid resiliency of the business coupled with a sturdy start in Q1 led to enhanced financial performance. Please note that in order to allow us complete an analysis as possible, Q1 2021 results are compared both at constant 2020 perimeter as well as on a 2021 perimeter, which includes all of Kinxis' companies with the addition of the newly acquired ones. Revenues came in at CAD82.7 million in the Q1, plus 50.5% versus prior year and even more importantly, increasing 17.6% on a 2020 basis. EBITDA, which is calculated after stock option, came in at CAD16.4 million in the Q1 of 2021, posting a +49.8 percent versus prior year and at 30.3 percent on a 20.20 basis, mainly driven by Credit Information and Management as well as mainly driven by Credit Information and Management as well as Innovation and Marketing Services business units. EBITDA margin was 19.8%. EBIT was CAD 9,500,000 growing more than 100% versus prior year, 74.7 percent on a 2020 basis. EBIT margin was 11.5%. Noteworthy, net income was CAD6.8 million, a 100 percent plus versus the prior year. The Q1 also generated a solid cash flow of CAD 24,800,000 in the Q1, growing on an LTM base to CAD 71,400,000 or 74 percent of 2021 expected EBITDA. Net financial position of CAD 187 1,000,000. Leverage calculated as net financial position over LTM EBITDA was 2.2x, entirely reflecting the recent acquisitions. The Q1 results provided material expansion of all of our business lines with all units contributing to growth versus the prior year. Digital Trust grows 19.4% in revenues and EBITDA grew 21%. Margins reached about 23%. Credit and Information and Management increases 10.7% in revenues with EBITDA surging more than 47 percent with a healthy 28% EBITDA margin. Innovation and Marketing Services posted a +-thirty 4.6 percent in revenue with EBITDA also rising above 47%. EBITDA margin was 31%. The newly established business unit, Cybersecurity, started strongly the year with revenues hitting £16,800,000 and EBITDA margin reaching above 11%. From a human resources standpoint, as of March 31, 2021, the group employed 2,153 employees, reflecting the recent announced acquisition. I will now turn to Page 4 of the presentation. Most of the data here has been commented. I would draw your attention to net income, which has grown to 8.3% versus the prior year. At this point, I will leave the floor to Adone, who will go over the Q1 2021 financial results. Okay. Good afternoon, everybody. Thank you, Joseph. I will walk through the results at Page 6. You can find the P and L of the group, and we may compare this on a same perimeter basis as well as the comparison with the prior year. If we go through as previously shared by Jos, we see here a very strong growth of the revenue compared to the previous year. The growth is more than 50%. But I would say that even more important is our capability to grow in the Q1 on a same perimeter basis of approximately 18%. And this basically happened, as we see later on during the presentation, in all the business unit of the group. The group was able to even accelerate faster in term of EBITDA When we compare EBITDA on a same perimeter basis, the EBITDA was growing at 34% and driving the EBITDA margin in the range of 23%, improving from 20% EBITDA margin of the previous year. The first quarter overall closed with EUR 82,700,000 revenue with EBITDA at 16.8% with 20.3%. If we go through the P and L, depreciation, amortization and provision are increasing compared to the previous year as expected as a result of the previous investment that we performed. And this is happening mainly in all the business units. Financial charges are above previous year. This is driven by the recent acquisition that we have completed. And if we go to the net income, the net income before tax, the profit before taxes is growing up to 10.5% on Q1 2021, improving from previous year. The net profit is EUR 6,800,000 and here that is 8.3%, much better than 5.3% of the previous year. And here is also benefiting from a one off on the tax benefit that we got from government new rules that applied on 2020 IRAT tax. So very solid P and L, improving basically in all lines of the P and L and with very strict control of cost and improving on the operating margin. If we move to the balance sheet, we see here that following the acquisition that occurred during January 2021, our net invested capital is up to EUR357,000,000 compared to €265,000,000 of the end of the year. This is mainly driven by the acquisition, like we said, for more than €100,000,000 But we are benefiting of the continuous improvement in working capital that improved by more than €12,000,000 over the last 3 months. Net financial position improved from one side, like I said, from the acquisition for more than €100,000,000 but is benefiting from more than EUR 24,000,000 of free cash flow generated over the period. Shareholder equity is declining slightly declining around 2% as here we have from one side the profit of the period, but also we have the adjustment of the put related to the new acquisition. And this adjustment is mainly driven by the improvement of the planned results of the company and therefore the put has been adjusted. As you can see, if we move at Page 8, I will drive the focus to basically to the LTM free cash flow. As you can see here, since several quarters that our LTM free cash flow is improving and it is very, very important. Basically, it's doubled compared to the end of fiscal year 2019. And also in the last quarter, compared to the same quarter of last year, we have a generation of free cash flow that improved from €20,000,000 close to up to €25,000,000 definitely driven by the EBITDA, but also by a constant improvement of the working capital. As we may see at Page 9, basically, the quarter has been affected by significant investment that we have done, But the operating indicators are all positive and help to keep the net financial position as of the end of Q1 below the EUR 200,000,000. In term of ratio of net financial position EBITDA, this is drawn above 2x, but we have to consider that from now till the end of the year, we will have on one side a growth of the TDA. And from the other side, we will have the drop of the net financial position before any acquisition we will do, but by the free cash flow that the operation will generate. So we are perfectly aligned to the guidance that we released to the market during February. At Page 10, you would see on an LTM basis the same information as already mentioned by Joseph here. The free cash flow on LTM basis is very high. It's in the range of €70,000,000 and this is basically the best new that we have. So before deep diving into the business unit, we can confirm that as you have seen here, we delivered a very solid P and L improving all the ratios, improving also from the financial standpoint the free cash flow generation. And so we ended up a very positive Q1. Let's go to basically the business unit. I will jump. So as anticipated by Joseph, basically, we have an overall improvement in term of both revenues as well as EBITDA in all the business units. And basically, we improved also all the indicators that the EBITDA margin is improving in all the different business units. We have to consider that Q1 is the less important quarter in term of in absolute term, both in term of revenue as well as in term of EBITDA. But any case, I think we step in into the 2021 in a very positive manner with a significant and solid growth compared to 2020. Let's go to the digital traffic. Digital has started the year very well. The growth is close to 20% in term of revenue and above 20% in term of EBITDA, with the EBITDA margin jumping up to 23%. Let's say that here, definitely, InfoCher, that is the main contributor of this business unit, continue to grow in a very solid manner. We had the growth in term of off the shelf products well above in the range of between 10% 20%. And even more important, the enterprise solution we are delivering to our clients are growing as expected as shared with the market much faster than the off the shelf product. This has to deliver a 20% revenue growth. In terms of profitability, we are perfectly on track with what we shared as a guidance of the year, expecting EBITDA of digital trust growing faster than the revenue. If we move to the cybersecurity, the newly established business unit following the acquisition of early January, basically results are not it's not possible to compare to the previous year as they were not part of the group. But any case, we can say that the results delivered in Q1 are perfectly aligned to our guidance. And even GEA margin is aligned with our guidance at, let's say, slightly even better than what we were expecting. So also here, we are very confident that we have a solid start and this is perfectly on track with what we expected. Credit Information and Management posted an overall positive Q1 with the revenue growing more than 10%. Definitely, in this segment, we benefit we had a benefit from the business process of choosing vision that in term of number of manager requests by the group that remain very high in relation to access to central guarantee fund. This is an improvement obviously compared to Q1 last year where this activity was really a very starting point, but Q1 of this year is basically substantially aligned with our expectation. This help to deliver a very solid profitability. As we have seen at the end of 2020, the profitability of this business unit jumped from 24% average 2019 to 28%. And in Q1, we delivered exactly 28%. That's at least the amount of business in relation of the business information is still aligned with the performance of the previous year, but this is the part of business that is not growing compared to the remaining part of our business. The part of real estate started well delivered, and we have a growth in the range of 5%, and this is perfectly aligned with our expectation. So also in this area, solid growth of the revenue aligned with a much better improving of the EBITDA driven by the revenue mix that we delivered. Let's move now into Page 16 to Innovation and Marketing Services. This is a very important area. It's the area where the group delivered the largest part of the EBITDA. Also in this area, we had a very strong start. On an organic basis, the growth is more than 20%, mainly driven by war and while the part of consulting services for internationalization is basically flat to previous year and this is a good news and is aligned with what we expect. Warant has a very good and strong start. And as with the different revenue mix between the business units, but definitely very positive start. Also, Querio, the newly acquired company active in the digital marketing business, started the year very well with EUR 1,300,000 posted in Q1. And the overall profitability improved significantly more than 30% with the EBITDA margin jumping above 30%. Overall, also in this area, we are positive of results delivered and also this is aligned with our expectations. So overall, as you have seen here, results are, as George had anticipated in the early part of this presentation, are very solid, very robust. And overall, we say these are aligned with the guidance that we released to the market during the month of February. To Jorge, thank you. Yes. So on Page 18, we have some closing remarks. Oden already went through them. I'll just repeat them in order to emphasize the strong quarter that we had. So we had a very strong start of the year with all business lines contributing to growth. Obviously, cash flow and cash generation remains a key and clear objective of the group. NXP fortunately was in line with the expectation and the focus is still to delever and Tinexa confirms the 2021 full year guidance of revenues of about €370,000,000 EBITDA of about €96,000,000 and an expected net financial position at about 2 times. I will leave it to the operator to open Q and A. Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. The first question is from Russell Pointon from Edison. Please go ahead. Hello. Good afternoon all. Nice to hear from you. A couple of questions, please. You haven't provided any underlying growth rates for cybersecurity on a pro form a basis. Is it possible to do that? If not, looking at the numbers you reported, the cybersecurity revenue is about is just over 20% of the full year guidance that you gave earlier in the year. So does that imply some seasonality? Or will do you expect the growth to ramp up through the year once you've owned the company for a longer period? And my final question is on Digital Trust. Your 2 year growth rate looks very healthy, well above the 7% that you were talking about at the start of the year. And when we spoke about this early in the year, you implied that you're quite cautious about the rate of recovery in the economy, etcetera. So are you now more optimistic? If not, why do you think the growth rate will tail off for the rest of the year? Thank you. Okay. Good afternoon, Russell. Donnie here. I will go through your first question about the cybersecurity. Unfortunately, we may not really compare to previous year the cybersecurity as also the company, we are proud, are not good companies that at that time were so it's a combination of different part of other companies. Any case, I can confirm you that the revenue is growing at the pace of the market on a same perimeter basis. So this is aligned with our expectation. And I can confirm that overall, the full revenue coming from cyber security is in the range of 20%. So overall, the 3 companies are performing exactly aligned with the plan that we developed. And also, the margins of the 3 companies are perfectly aligned with what we were expecting. It's just the Q1, but this is, for us, a very good news. This is very aligned to our expectation. And so as of today, we have no different indication. About digital trust, you were basically meaning if you think that potentially the results delivered are a bit cautious compared to the guidance. As already anticipated, I would say that Q1 is not the major quarter of the group. So and so as the numbers are not so big in this part of the year, sometimes slightly better results in turn from some 100,000 revenue can change the percentages. So this is the Q1 is very positive, but we still stay on the guidance for the full year. This we may go through after the Q2 to have some better dip dive, but as of today, we perfectly confirm. Again, Q1 is just probably is less than 20% of the full year, so it's too early to have a different indication. So we are very confident of what we shared with the market, and we are very happy on how the year started. Great. Thank you very much. You're right, Thomas. The next question is from Isakobram BilaVid, Mediobanca. Please go ahead. Hi, good afternoon everybody. A couple of questions, actually three questions from your side. The first one is on the outlook for this year. I appreciate your usual degree of cautiousness, especially in this context, but can you provide some flavor of what could drive sort of a stop of organic growth in the next quarters, which is what is implied from the remainder of the year to just to match your EBITDA guidance for 2021, so which are the main risks to the current sustained organic growth you are experiencing? 2nd question is a more general one. I would be curious to understand in your 3 years assumptions to which extent you are factoring in tailwinds from recovery plan measures approved by the government recently, wondering in particular to innovation and marketing and digital trust? And the last one is on tax rates. You have been mentioning some incentives recorded in the Q1 of this year. Can you provide the guidance for full year 2021 and for a sustainable tax rate? Now to Filippo Sapo, Fakanda. Isato, thank you for your question. So today, as I already answered to Russell, Q1 is not the major quarter of the year. So again, we are glad of results that the group delivered and even more, I would say, all the business units, including the cybersecurity that as is included in our press release started the year in the expected manner. We will we are perfectly on track compared to what we are expecting. So as of today, we have no different indication of something decay. I would say this is very solid. So the level of risk of delivery is slightly lower. But as of today, happy with the results, and we confirm totally our guidance. With reference to the second question of recovery plan, in our guidance, there were no basically included any effect of the recovery plan. We are monitoring very strictly what is going on, but we are already at mid of May and really no precise indication what is going to happen is available definitely to us or to anybody. So I would say, but any case, our numbers, when we developed the plan, when we shared the plan with the market, we did not include any effect of the recovery plan. We don't expect sorry, we don't expect any impact from the recovery plan on our P and L for this year. Maybe next beginning of next year, we will have some impact. But for the time being, we don't have any information which could be useful in order to consider some impact already this year. If I go to the third question, we had this one off as probably all the companies that are reporting today are doing. We had this one off that for us accounted for €900,000 If we exclude this, as of today, we fully confirm our previous indication of a tax rate in the range of 30%. From that, you have to deduct the one off impact that I mentioned before. Gentlemen, Mr. Masta Gostino, there are no more questions registered at this time. Excuse me, there is a question from Gabriela Berti with Intesa Sanpaolo. Please go ahead. Hello. Good afternoon, everybody. Thank you for your presentation. I have just one quick question. Looking at the digital cost business units, can you provide a portion of growth related to the Enterprise Solutions, please? Yes. So like I said, and as also Mr. Catano shared during the presentation of the plan, we were expecting an overall growth, but with a different revenue mix between Optechanical and Enterprise Solutions. As anticipated, we have a Q1 with a growth in the range of 20%. I would say that off the shelf grew below 20%, let's say, in the range of 15%, while the Enterprise Solutions grew much faster in the range of 30%. Let's say that, again, we are talking about Q1 and numbers that are not so big. So at any case, the first indicators are perfect and perfectly aligned with what we were expecting. So the trend is there. We are growing in a very solid way here, and this is fully aligned with what we were expecting. So we confirm the trend, we confirm the revenue mix, and this is obviously helping us to deliver an improvement of the EBITDA margin. Thank you. Gentlemen, there are no more questions registered at this time. I turn the conference over to Mr. Mastragostino for the final remarks. Thank you, operator. We would like to thank you for connecting to Tenexus conference call. And if you would like any additional information, please don't hesitate to contact us. Thank you very much. Have a good evening. Thank you. Thank you.