Seco SpA

MIL:IOT

Earnings Call Transcript 2022-Q3

[Marco Parisi, executive]

Thank you very much, Rebecca. Good afternoon to everyone. I'm Marco Parisi, Head of IR. With me today, Massimo Mauri, the CEO; and Lorenzo Mazzini, the CFO. We will have the first part in which we will illustrate the results of the first 9 months of this year and then a second part with a business update.

I will leave immediately the floor to Massimo for the presentation. Please go ahead.

[Massimo Mauri, executive]

Thank you, Marco. So we posted the third quarter result that given to us the opportunity to look at 9 months of the business, we posted EUR 144 million in revenue, growing more than 116% versus the previous year. And over 50% of the growth is organic, while 43% if considering and performing all the acquisition we did in 2021 from the beginning in a like-for-like basis. Moreover, we posted over EUR 32 million of EBITDA with 22% of incidents on sales. And observing more in details, the Q3, we can find a strong acceleration of the revenue versus the previous year, but also versus the beginning of the year and -- which is very important, a more than proportional growth of the EBITDA.

EBITDA was equal to 23.6% of the sales in the third quarter, thanks to the operating leverage, was able to generate EUR 4.2 million in cash improving our financial -- net financial position despite the shortage in the clinical components and increasing in inventories, will still have so high also to support the future growth that we needed to face in the near future. The gross profit margin was stable even if we started to note improvement, I would expect them to continue later in this year a more important with a good improvement next year. Also, we were able to post around EUR 15 million on our clear business proven that the strategy to continue to scaling up the value chain and to add a software platform, AI IoT platform to our hardware is working and is working extremely well, of which EUR 5 million was related to the Q3.

Our order back would continue to be very strong with a good level of order intake observing in the last few months. It is now around EUR 170 million, over 48% on a like-for-like basis. Therefore, the guidance we provided in the very beginning of the year, still confirmed. I want also to say that all the guidance is already in our order backlog. So we are very focused in delivering and we are expecting to be better than the guidance in the end of the year.

Focusing on the Q3, we can observe 2 very important indicator in my mind. One is related to the gross profit margin, where despite -- the after cost and the shortage and the increasing of the cost of material, we were able to increase our gross profit margin by a couple of points in terms of incidents comparing with Q3 of the 2021. And also very important, the EBITDA jump at 23.6% already. This is a very good sign looking at the super strong fourth quarter that we are now building where we expected to see a further increasing of the EBITDA driven by operating leverage.

Also, the growth that we are performing is really solid and is giving us a lot of visibility also on the 2023 and beyond, because basically, this is something that you can look at observing the quarter-by-quarter trend. We are passing through around EUR 30 million in 2020, EUR 36 million in 2021. And close to EUR 50 million, I would expect it to be around EUR 50 million, at the end of 2022. This is driven by a mix of existing customers and new customers that progressively are starting and working with us and our business model that see a longer life of the other project around 5 years permitted to us to be extremely precise also on the future growth, but still strong. Well, I think Lorenzo can provide a full detail of the 2022 Q3 results. So please, Lorenzo go ahead.

[Lorenzo Mazzini, executive]

Yes. Thank you, Max, and good afternoon to everybody. Well, in this slide, we summarize all our financial highlights that Max some of that already mentioned. Again, our net sales performance year Q3 2022 respect to Q1, we recorded a really important growth, but what I would like to stress here is that the piece of the organic growth rate at 53%. And as Max already said, it is really important also our like-for-like growth demonstrating that also SECO Northern Europe is growing at a really important speed and at a really important pace.

For what concern net sales and other aspect that I would like to point out is the fact that our growth, as you can see from the next slide, is really well balanced across our geographies and across our end market in all areas and end markets we are performing and growing really well. For what concern the gross margin, as you can see here in the left of the slide, we recorded a really important growth in absolute term, obviously driven by sales, really, really important for us is the fact that we have been able to keep stable our gross margin in percentage of sales in respect to the same period of 2021, but more important for us is the fact that in adjusted Q3, we recorded 47.5% of gross margin increasing in respect to the level we recorded in the first half of 2022. And this despite the fact that the shortage condition on components is continuing.

What are the key drivers of this important growing of gross margin in a difficult environment. Firstly, for sure is all the actions that we put in place regarding the pricing of our product that are little by little revealing their full effect. Moreover than this is the fact that we are seeing the first little signs of reducing the price of some selected components even if the shorter situation is continuing. But moreover than this, and the most important factor is the fact that our software revenues are increasing and the percentage of our software revenues with respect to total revenue is increasing. And as you know, the profitability of the software is either with respect to the one of the [indiscernible].

For what concern EBITDA we recorded a really an important growth of 1 percentage point of EBITDA margin. And the main reason of this growth is, for sure, the exploitation of our operating leverage, thanks to the fact that we are able to deliver additional sales with a less than proportional growth of our OpEx. I would say really good performance also in terms of net income. Net income more than doubled from EUR 7 million to EUR 15 million on the year to Q3 2022 with respect to Q1, but really important is the net income margin that, as you can see, the net income margin has been stable comparing the 2 periods.

And this despite the fact that we have higher depreciation and amortization of EUR 5.4 million. And the main reason is the fact that obviously, in the consolidation perimeter is included here. So this year, second order Europe, on which have more or less EUR 2.5 million of D&A relating to SECO Northern Europe. And moreover, due to the fact that -- considering the fact that our financial expenses increased of EUR 2.7 million in year to Q3 2022 with respect to 2021. This is due to the fact that are included in our figures. Obviously, the interest relating to Garz & Fricke today's SECO Northern Europe acquisition financing. So really important results to keeping stable our net income margin despite this new item.

Thank you Max for moving for the next slide. Well, here, we can see a really important fact for us that is our breakdown of sales by geography and by end market. And the fact that we are growing in all geographical areas and in all end markets at a really good pace, a really good speed, demonstrating our strong diversification across geographies and across end markets. So we are -- we have no dependency by a single geographic area or by a singular end markets.

I think that I would like to point out relating to the slides and in particular, relating to the end market is the really, really important performance of growth of some end market that you can see that we are growing at a triple-digit in particular, in vending and distribution end market and in the industrial end market. For what concern, vending and distribution -- we are growing a lot both for what concern SECO customer and for what concern SECO Northern Europe customer. Seco Northern Europe as a niche in which is a really, really strong for what concern vending and distribution. For what concern is that the industrial end market, we are taking a lot of new customers, and we have been able also to penetrate most our existing customer base.

Well, let's have a view in more details to our EBITDA performance comparing the 2 period under analysis. So year Q3 with respect to Q1 EBITDA more than doubled from EUR 14 to EUR 32.1 million. Again, we improved the EBITDA margin of 1 percentage point and consider that this is a really important result due to the fact that we are comparing two periods that one is affected by shortage, while the Q3 of 2021 was not still affected by shortage, maybe we saw just the initial science, but shortage came initiated in the Q4 2021.

Just a comment regarding the adjustment that we reported on our EBITDA, we adjust the EBITDA by EUR 1.7 million relating to the 3 year stock option plan, actuarial value that the stock option plan is for the manager of the company. I would like to stress out that this is a noncash and nonmonetary item and by EUR 0.9 million, this is due to extraordinary transaction costs relating a little part to the acquisition of Garz & Fricke on the beginning of cost that was impacted on the beginning of the year and the last -- the other part was relating to the deal that we performed in July on Camozzi Digital business acquisition.

Well, our performance in terms of net financial position, this is on my point of view, a really, really strong results that we did also in Q3 other than in the first half of the year because here, we are comparing the net financial position for Q1 2022 with respect to H1 and Q3. And you can see that the net financial position as a decreasing trend, we're producing in total, EUR 4.2 million of cash, EUR 3.2 million in the second quarter and EUR 1 million in the third quarter.

But what is really important is in which content, in which scenario we have been able to reduce our net financial position that is the shortage situation and the fact that we have been obliged to continue to invest in our working capital and we have to do these even for at least the shortage is continuing. So this cash generation derived just from our EBITDA conversion, but not from a better management of working capital that for sure, can bring additional cash generation once the shortage continued condition will improve. Thank you, Max. I give the speech to you again.

[Massimo Mauri, executive]

No, thank you to you, Lorenzo. So let's focus now on the business. I think let me -- to recap, which is our strategy where we are going. I think -- we already completed the shifted from models to system. And we are adding now to our system, our IoT data analytics platform. Well, we are in the very beginning of the execution of this strategy and all the data and all the pipeline, the customer feedback, all the things that we are observing are providing us a lot of good feedback into the fact that the strategy is working.

It's working extremely well. It's producing and increasing on our key performance indicator, but it's in a very beginning, meaning there is a lot to be done and a lot of benefits that will be taken in the next future. We will launch also the CLEA App Store in end of March 2023. This is a further evolution of our software strategy. And thanks to our strategy, we can really provide a lot of value-added services to our customers, enabling them to basically offer this kind of value added service to their end customers. This is important because it's win-win business model.

So it's a business model that is something that can work long term speaking. So we are really transforming what we was a hardware company into a long term speaking, a service company that will provide solution to customers as a service. That's where we are going. This is the key of our strategy providing a lot of benefits to our customer because our offering is an end-to-end offerings. And it's so important in a B2B business space because we can provide and assure customers to really be able to offer them a complete solution, quality time to market, price, a lot of advantage make it with SECO.

Observing the KPI that we have on our table nowadays, we continue to improve our backlog. Backlog is growing. And in all the regions, as Lorenzo said, that's important because we are getting traction in all the world. And an important data on it is a good portion around in between 25% and 30% of the total backlog is coming from new customers. Customers that we are getting every quarter, and who will provide future growth in our growth path.

So observing the level of the design win which is in the range of EUR 85 million now, very well spread across many different kind of vertical markets and observing the total pipeline of our business, which is now in the range of already weighted EUR 420 million for the next 2 years. And again, around 30% of it is coming from new customers. Well, I can say that despite the scenario, the global scenario of economy slow down we still expect and still see a stronger growth as our organic growth also in the 2023 and going forward.

We have different kind of design win in different geographical area and in different verticals. I would like to underline the most important one, which is EUR 10 million per year for the next 10 years. which is related to a new concept of voting machine in the South America area. These customers will use starting from second half of 2023, a complete system of solution for voting machine -- electronic voting machine. We are, of course, now offering to these customers also to connect this solution to CLEA. Well, this is a good example for me of the fact that the strategy is working extremely well because these customers was a module customer 5 years ago and now is keeping the entire system from SECO.

Looking in the future, there are, of course, new verticals, and new kind of product that are coming. And I would like to show to you, which are the most [indiscernible] verticals that we are -- and product that we are observing. Basically, I think sensor, AI accelerator, cybersecurity these 3 will be, for sure, our future because many customers are now asking to add an AI accelerator to the hardware solution to maximize AI algorithm on the machine that can really improve the performance and provide a better and less expensive maintenance of the assets on the field.

When you connect a lot of devices on the field, you, of course, need to have a super secure infrastructure. This is important because you needed to have a cybersecurity tool inside to secure your data to secure our infrastructure and having a lot of sensors spread around the field can really provide a quantity of data that you will elaborate U.S. customers, of course, will elaborate on our machine having a lot of benefits in analyzing your business.

Well, if I look also in the future, I see 2 verticals that will become very important in the 2023, but will literally booming in 2024. That are the function of safety, this kind of sector will become bigger and bigger because any customers into the industrial feed is going into automatic and robotization their facility. And I think smart factory will be the reality in a couple of years.

In the EV charger, as you can see, in all the world, there are a lot of electrical vehicles that are coming and to maintain them working, of course, you need to provide a real capillar EV charger infrastructure. So we are very well focused and very well positioned to be a leader in these 2 new domain that are basically starting now and will provide a lot of boost to our future growth.

Well, here, you can see CLEA. CLEA is working, is growing a lot. We are expecting to see many customers that are now finishing the mobilization part of the algorithm coming into mass production, starting from Q1 of 2023 and going forward. It will provide a lot of increasing into recover revenue and into not only a recurrent, but incremental revenue year-by-year, that will come from our solution.

Moreover, it's very important to underline that a lot of customers, new customers are testing CLEA and month by month, we are starting converting them into mass production into the D&A phase, which is the most important phase in the very beginning because it's the phase where we customize the AI model for customers. So again, this is a business that is a win-win-win. So it's a long-term business that is working, is working for SECO, is working for SECO customers and is working also for the customers of the SECO customer, which is definitely good.

Well, here, you can see some examples of end market where we are delivering now solution on CLEA. There are many of them really because we are enlarging a lot the sectors where we are present with the platform. But just to summarize, some new sector, we are doing a new algorithm from branding for boilers for electric motors, motion tracking in the fitness area, CNC machine, smart infrastructure. On the smart infrastructure, let me say that we are finally, observing a lot of business -- potential business that is coming from the PN area, which is the Italian part of the European funds, recovery funds, which is dedicated to the digitalization. So we are starting to see good prospects for the next 3, 4 years coming from this plan.

Well, just to complete the picture. As I said before, we will launch the CLEA store at the end of March 2023, it will be important because we create a sort of ecosystem, also enlarging the opportunity for our customers to find startups that will work into CLEA to produce AI apps and to publish them into the store. More important, we will provide an end-to-end solution also considering the App Store technology to enable our customers to sell the apps by themselves to their end customers, leveraging on the App Store technology that we are providing, creating private App stores for our customers.

Last but not least, of course, we already developed around 200 apps in many, many different kind of verticals. And thanks to the App stores, we aim to reduce the time to market of the new customers that can get already done and finalized up for various solution into CLEA. So that's -- I think, together with new product, we already launched over 40 hardware product from the beginning of 2022 up to now. And a lot of vertical apps on CLEA, the sum of these 2 positioning our company at the far front of the innovation and is very, very well positioned to capture the future growth and the secular trend of the digitalization.

I think that -- that's all from my side. Just let me conclude my speech with a very important point. Regarding the shortage, you all know that the shortage was something that affect negatively our results in the last at least 1 year. Well, we are serving our clear sign that the shortage is the situation of the market is improving. So we are starting for the 2023 and we are already observing decreasing into the lead time and slightly decreasing on the price of the material.

We are expecting to continue to see it in the 2023 as a consequence, a clear reduction of the working capital with a huge benefit in terms of cash generation and an improving of our margin in terms of gross profit margin as a consequence and improving of our EBITDA margin. So that's the future that is really, really near to us. I will expect to see a big impact on this kind of dynamics already starting from the first or the second quarter of the 2023. I think that's all from my side. We can now start with Q&A section.

[Operator]

[Operator Instructions] Our first question today comes from Ms. Frontani.

[Anna Frontani, analyst]

So Max, I have 2 questions for you. The first one is quite quick actually. If you can please quantify the impact of the shortage on Q3. So what's the value of orders that you have to postpone due to the shortage impact? And second question is maybe if we can talk a little bit about how do you see SECO in the context of a recession. Have you maybe seen any signs of customers being a little bit more cautious and maybe delaying or postponing some investments. And also which, again, in the context of recession, what do you think are the most resilient end markets and where maybe you would expect a little bit of softness?

[Massimo Mauri, executive]

Okay. Thank you, Anna, for your question. Let's start from the shortage, the shortage was in the level of EUR 6.5 million end of Q3, meaning, besides the strong growth that we posted, we had around EUR 6.5 million of overdue backlog. Backlog that we wasn't able to ship in the time over the quarter. We are seeing an improving on it, meaning that maybe we were starting to reduce the overdue backlog already in Q4, but definitely, the key acceleration factor we are expecting it for the first quarter of the 2023.

Regarding the slowdown, the potential slowdown of the economy, actually looking at all the KPI that we are observing every day inside the company, we do not see a sign of decreasing into our business. Beside it, we are now in the phase to build up a bottom line analysis for the 2023 business plan. So I will be, for sure, more specific in a dedicated session where we will present the guidance of the 2023 to the market. But just to give you a flavor, I think nowadays, what we are observing in the market, in our vertical fitness still growing and will continue to grow also because our important customers is growing extremely well in this project, to grow extremely well also next year.

In the industrial market, we are getting a lot of traction, thanks to the fact that we are getting new customers, a lot of new customers in this domain. So besides the fact that may be someone else of our existing customer will slow down a bit. We have a lot of new customers that will ramping up during the 2023.

On the vending machine space, the market is stable and will remain stable. This year, we got the benefits of recovery after COVID situation on the vending, and we expect to see vending to continue to grow after -- not at the same speed that we observed in this year. But keep in mind that we are still not at the level of the pre-COVID situation. So these guys have enough space to continue. Medical is growing. It's growing because we are getting new program, new customers and new program inside the new -- the customers that we already have.

Well, this market, I do not expect to see any impact. Actually, the defense market is more or less the same. So -- and these are the key verticals for SECO. Moreover, I think that -- as a paradox, there is an acceleration on the evaluation of the platform CLEA because companies are looking at CLEA to reduce cost and to cut people and to basically maximize their return of the assets. So as a paradox, we'll be looking many verticals further acceleration in curiosity around CLEA in new customers that are approaching us to look inside CLEA and to understand if CLEA could be a good solution for them looking forward.

[Operator]

So our next question today comes from Mr. Marco Vitale.

[Marco Vitale, analyst]

It's Marco Vitale from Mediobanca. I have a couple of questions this afternoon. The first one is on margins. We have noted an improvement in gross profit trend, and this translated to a very strong trend, remarkable improvement of EBITDA margin. If I got it correct, we expect this improvement to continue over the rest of the year, specifically in Q4. So I was wondering if you're still confident to deliver a further margin expansion last year on top of a margin expansion on a quarter-on-quarter basis for the next quarter.

Then the second is on cash generation. I got the message is that you don't expect any significant improvement in the [indiscernible] as long as the shortage is continuing. I was wondering when do you expect to normalize this next year, if you have already in mind what could be a target in terms of net working capital [indiscernible]

[Massimo Mauri, executive]

Okay. Let's start from the end of your question. We are expecting to see progress on normalization of the situation during the 2023 as a consequent, we'll see a decreasing into the inventories on sales, which is now so high. In a normal situation after 1 year, I think, in the end of 2023 or somewhere in 2024, I would expect it to see this KPI back to the normality, which is in the range of 28% to 25% on sales as an incident, inventories or sales. We will be there progressively.

On the question, which was the first question related to the margin, yes, as you said, I'm expecting to continue to see an improvement on the gross profit margin, which will be maybe not so big in the last quarter, but very, very progressive. So it will become more bigger in the Q1, Q2 of the 2023 providing, of course, a further expansion of the EBITDA. I would expect to see some expansion in EBITDA level in Q4. This is due to the fact that we will post the all-time record in revenue for sure on Q4. And thanks to our operating leverage, we are expecting to see the EBITDA growing in a very considerable way.

[Operator]

Currently, we do not have any questions queued. So we will wait just a few moments to give everyone the opportunity. Okay. So our next question comes from [ Mr. Bonizzoni.]

[Unknown Analyst]

Thank you, thank you Massimo. I was just asking you -- I was looking at consensus estimates for 2023 currently on the data provider Bloomerg, Factset and so on. So my understanding is that for the next year, the revenues -- the average of the estimate is in the range of EUR 250 million, with an EBITDA range between EUR 55 million and EUR 60 million. Do you have any expectation or comment, let's say, about this range of expectations?

[Massimo Mauri, executive]

I think it's too early. As I said before, we will provide the guidance at least on the revenue later in the beginning of 2023. So it's too early to make a comment for me. My only comment is our growth path now is stronger than this data. Let's see how it will come at the end of the business review that we are performing now and let's discuss it at the right time.

[Operator]

Our next question today comes from [indiscernible].

[Unknown Analyst]

Congratulations on a good set of results. I just wanted you to ask 2 questions. First one, I wanted to clarify on adjusted EBITDA margin for Q3 '22, it was much higher than in previous 2 quarters and was at around 23.5%. Do you think it's sustainable for the fourth quarter? Is it a good starting point? Or should we expect some extra costs to kick back in?

And my second question is on CLEA. You posted revenue of around EUR 5.4 million in the third quarter. How much of that is nonrecurring project revenue? And how much is it a recurring piece?

[Massimo Mauri, executive]

Thank you to you for your question. I think EBITDA margin at 23.6% is a level where you can think to see at least the Q4. Actually, I would expect to see something slightly better. And because, of course, of the operating leverage that we can have in the last quarter where we are expecting revenue above EUR 55 million for sure. And in terms of CLEA 85% of the total steel NRE project, which is very important in my mind, that because to show how big is the potential of this business going forward, because all the customers that now are in the nonrecurring engineer phase will be in a mass production phase in 2, 3 quarters.

And it will provide a further increase of course, of the revenue coming from CLEA, but the starting of the delivery of the recurring revenue part. That is, as you know, not totally recurrent, but also incremental. So it's a piece by piece that we'll add over every year. So that's very important because customers are paying on average in between, let me say, EUR 1 million per project, investing a considerable amount of money on the platform to develop together with our team AI models to maximize the return of the use of the platform.

As soon as they finish this job, they are entering into the rollout phase of the platform on the machine month by month. So this is a clear progression that we will start to see from the first quarter after 2023 and going forward and providing us a lot of visibility not only on the hardware, but also on the software side of the business, which is very important in my mind.

[Operator]

Currently, we do not have any questions queued. We will just wait a moment to give everyone the opportunity to raise their hands.

[Unknown Analyst]

[indiscernible] I have a question regarding the backlog. Can you just maybe help me understand you mention about the [indiscernible] times. But if I share the backlog, I know it is quite strong. I mean is also stable EUR 170 million since April 2022, what gives you the confidence that [indiscernible] will be able to grow like strong double digit in 2023, even being the backlog quite keep stable at this level, EUR 170 million.

[Massimo Mauri, executive]

Well, the backlog is stable, yes, but we are posting and shipping and delivering and consuming, of course, a portion of the backlog month by month to make the revenue, meaning revenue are growing at 43% like-for-like and 54% organically, and we are, of course, consuming a portion of the backlog, which is recovering by the organic intake. For me, the fact that the level of the backlog is stable is very important because sure the fact that we are ensuring our growth path also for the next year.

More important, year-on-year, same perimeter. You have a backlog up nowadays for 48% versus the previous year same period, meaning it is showing us the opportunity to have a super strong growth also next year. Let's see how the business analysis that we are performing would come out. But again, I think this year, despite the shortage, despite the integration of Garz & Fricke into the SECO Group, which is now completed. Despite the launch of CLEA, we was able to perform a good integration to successfully launch CLEA and to maintain what we said at the very beginning of the year provided a guidance that we are now in a position to be, of course, close to the guidance, beating it for sure.

So -- and providing a year-to-year growth path that is super, super solid for the future because it's coming for a good portion from a new business, which is CLEA and from a good portion from new customers, that are staffing right now.

So we expect to continue the growth path trend also in 2023. Of course, I will be more specific at the right time, but looking on the KPI design win backlog and pipeline -- weighted pipeline, I'm very happy.

[Unknown Analyst]

Okay. And the lead times, can you just give more level of detail or where they are moving into?

[Massimo Mauri, executive]

Yes. Yes. The lead times of the components was in the range of 50 weeks. Yes, you understood correctly, 50 weeks. In the last 3, 4 quarters, we are now down, the normality is 12 weeks. So there is a lot of space to -- and the gap is so huge. There are a lot of improvements that will come month by month. But it's a strong sign that something on the material supply chain is changing. And I would expect to see a slowdown, yes, in electronic components demand coming from B2C market, computers, smartphone, automotive and it will provide a lot of benefits to business-to-business market like SECO that need the components like CLEA and really can improve our -- not only our margin, but more important, our cash generation and reducing in a very important way, the level of inventory, but now are too high and not normal driven by this shortage problem.

[Operator]

Currently, we do not have any questions queued, but we will wait a moment just to give everyone the opportunity to raise their hands. All right. As there are no further questions, I will now hand back to the speakers for any final comments before bringing this presentation to a close. Please go ahead.

[Massimo Mauri, executive]

No, just as a final comment, I think we are really providing to our investors into the market, solid results and actually better [indiscernible] station and also my personal station. And definitely, we would be in line a bit the estimation by the end of the year. Thank you to everyone to be part of this call. See you next time. Bye-bye.

[Operator]

Thank you very much. This presentation will now come to close. Thank you.