Cancom SE

XETRA:COK

Earnings Call Transcript 2021-Q2

[Sebastian Bucher, Manager of Investor Relations]

Dear, ladies and gentlemen, welcome to the earnings call on the Q2 and First Half Year Results of the CANCOM Group. In addition to our usual comments on the business performance, we have included a detailed overview of the financial effects of our recently closed deal. So we have a lot to talk about. And so let's start right away with Rudi Hotter, our CEO.

[Rudolf Hotter, CEO & Chairman of Executive Board]

Dear, ladies and gentlemen, welcome to our earnings call for Q2 2021. In this call, my colleague, Tom Stark, and I will give you a brief update on the development of the second quarter, the most important factors of influence and a detailed insight into the effects of the most recent sale of our U.K. business on the financial KPIs. So let's start right away with the results of the second quarter 2021. The business development of the second quarter and thus the first half of the year 2021 marked for us a return to the dynamic growth trend of the recent years. With these results, we leave the very special year 2020 behind us and focus on profiting from the large opportunities that arose from it. Especially in the second quarter, we have seen outstandingly high growth rates, high profitability and encouraging demand from customers. Most important for us, we have seen no major impact of the current supply chain constraints in our half year results. We have been able to manage the situation well in the first half year and feel absolutely prepared to keep on doing so in the second half of 2021 as well. The major event after the end of the reporting period has, of course, been the closing of our sale of the U.K. business. The deal shows the value of our business model as CANCOM U.K. was basically a small reproduction of the CANCOM Group as a whole in terms of product offerings and service capabilities. On this slide, we give a brief overview of the important deal KPIs. The deal will lead based on preliminary estimates to a book gain of EUR 225 million. This will be recorded in our profit for the period in the third quarter. After this deal, we will fully focus on market consolidation in the DACH region and on strengthening our position as a leader in our core markets. As well, I'll tend to focus very much on financial KPIs in these kind of calls, which is absolutely okay. But it's very important to me that from time to time, we change the perspective and see how other stakeholders see CANCOM. This graphic shows the results of an independent market research by ISG, giving CANCOM the top position in the German mid-market for our hybrid cloud data center managed services offerings. As you can see, this market is characterized by strong competition. And this market is very important as it covers exactly what we think is the dominant trend for future IT. The combination of private, dedicated public and hyperscaler clouds and the management of this hybrid environment, this is the new normal for state-of-the-art IT. Thus, we are very proud that our experts are recognized for their great skills and dedication by this independent market analyst. But now let's take a look at our Q2 results again. We have achieved outstanding growth rates of 19% top line and 61% EBITDA growth in the second quarter 2021. The EBITDA margin was impressively 9.4%. We showed with this result that we can profit from the opportunities of enhanced digitization efforts in all areas of economic and public life. The organic growth rates are strong as well. So we are very happy with the outcome of the most recent quarter. The Cloud Solutions segment shows our managed service business. With 4% revenue growth and an EBITDA increase of 26%, we are able to reach an EBITDA margin of almost 32%. This margin shows to you of how the value of our existing service contracts really is. Please keep in mind that we have always characterized the segment is consisting of 3 parts: trading of hard and software in connection with service contracts; onboarding contracts of new customers; and, last but not least, the most important thing, and running multiyear contracts. The 4% growth means that customers are still reluctant to make strategic IT decisions and sign multiyear contracts. This leads to less low-margin hardware sales and less lower-margin onboarding projects in the segment and gives you a clear insight of the profitability of the already existing business. But will the trend towards more complex IT stop? No. Will the scarcity of IT experts to go away? No. Will customers return to signing new managed service contracts with us? Absolutely, yes. Consequently, we are very optimistic for the future development for the Cloud segment and the growth perspective here. The IT Solutions segment was simply very strong in Q2. Good top line growth, great profitability even without the special effects shown on this slide, and a lot of reasons to be confident for the second half of 2021. We are able to win projects and especially receive a good chunk of the additional funds being put into the public sector for digitization efforts. Overall, we have achieved a very encouraging development in the first half of 2021. With 13% revenue growth and 37% EBITDA growth, we can show that we are very well able to deal with the current supply chain issues. Based on this experience, we are very confident to be able to do so in the second half of the year as well. If we manage this, we have very good chances to outperform our forecast for 2021. The most important KPI for our strategic journey towards the hybrid world of IT and what I call system house 4.0, is the annual recurring revenue. ARR kept on growing year-over-year with almost 20%. So the development is fully in line with our internal targets. The EBITDA chart below points out the ongoing success of our decision to invest in the managed services offerings years ago. It is now by far the main source of our earnings. After these remarks, I hand over to Tom Stark, who will lead you through some more financial performance indicators and the details of the effects from the U.K. transaction.

[Thomas Stark, CFO & Member of Executive Board]

Thank you, Rudi. My name is Tom Stark, CFO of CANCOM, and I'm very pleased to have you in the call. We will have some -- to some extent, the special call and quite some challenges. We are taking care of 2 topics. We are going to talk about the financial KPIs first, just as usual. And then we have to deal with the effects and impacts of the transaction that we have done in the third quarter. And I will provide you with the most important details on this transaction as a second step of my part. So let's start with the operating cash flow first. We have shown in the first half of '21 significantly improved cash -- operating cash flow compared with the previous year. Yes, given that last year, we had to face the challenge of the COVID-19 crisis that started, we all had expected a better inflow. Nevertheless, we are now -- we do now have to tackle the challenges of a supply chain shortage that we are mastering well. Rudi has already talked about the no significant impact on the revenue line topics, and I will comment further with the outlook on this issue -- on this topic. So in details, we have approximately the same volume of accounts payable, so no significant change year-over-year. We have a significantly improved accounts receivable position, which has improved from minus EUR 35 million to plus EUR 13 million. And we have a, well, increased level of inventories. Well, let me comment on the increased level of inventories first. We are all pretty much aware that we are not really aware of what the impact of the supply chain shortage might be. We have taken the decision to business first, we try to manage the business, we're trying to do things even if they might influence or have a negative impact on the operating working capital. We have a deterioration of the inventories that is even higher than in the previous year. And nevertheless, we have a significantly improved operating working capital. So from our point of view, we have very well managed the situation. We do still have a backlog of this 40% higher than our average or at the same point in the previous year. And that's a clear indication of the potential that we see in the business and underlines our optimism going forward. Rudi will talk about the forecast later on. What do we expect going forward for the third and fourth quarter? Well, again, business first. If we are taking the decision that we will do all the orders that we will procure products that are the enabler for our services and that are previous requisites to deliver projects on our customer side, then we will clearly do all the things that are necessary to get the product on board. So it's, again, quite difficult to give you a clear insight what's going to happen. Nevertheless, if you look at the previous year, we are very confident that we have a very significant improvement in the third quarter and that we will have a very significant inflow in the fourth quarter again. Finally, the net cash position as of 30th of June was EUR 265 million, so just in line with the development of the working capital that we -- that was required for the business. If you take a look at the CapEx, we have as well an improved position. We have reduced CapEx from EUR 17.3 million to EUR 16.5 million in the same year-to-date perspective. CapEx-to-sales ratio ended up with a 2.3% of the last 12-month sales. So again, we have an improvement and we are very confident to achieving our goal of a target of below 2%. Reasons therefore, will be, at the end of the year, we will have higher revenues. We are expecting clearly the -- just in line of the IT business industry development of having a better second half of the year than the first half of the year. And last but not least, we have already commented on a more long-term view of the CapEx requirements where we see a significant improvement to less than 1.5% going forward starting 2022, with reduced CapEx requirements for the introduction of an [indiscernible] and so on. Let me comment on the cash flow from investing activities with one additional topic. We have bought Anders & Rodewyk at the beginning of this year. It's in the consolidation since January 1. And you can see that we have finished our preliminary purchase price allocation, and we have disclosed the data in the report. You can see there a EUR 12 million share price outflow of investing activities for Anders & Rodewyk and the EUR 4 million earn-out position that has not yet become part of the CapEx. Before we come to the actual impacts and effects of the sale of the U.K. business, first of all, some technical aspects of the sale. Well, we have commented on in a statement that we have released mid-May that we are taking, well -- that we are trying to find out or assessing options for the business and what might be the best for CANCOM and for the business of U.K. and I going forward. The decision finally took place in the third quarter, which is pretty much in line with what we have reported to you. Such effects is that we can consider this business as discontinued operations only starting from Q3. But then having to eliminate and deconsolidate all the data starting from Q1 2020. That means we will now provide you and do our best in order to show you what are the impacts and the effects that you have to expect, what do you need in order to adjust your models, which is we'll hopefully do in a proper way for you, and that's what's the intention of the next slides to come. The first slide refers to the most important data, the financial KPIs, revenue, EBITDA, EBITA and EBIT. We have disclosed this to you in the most important segment. And group-wise, you have always have the same structure of the slide. We have group, we have U.K. and I and you have group without U.K. and I to provide you with the clarity that you might need. First of all, all the data are preliminary. Clearly, there might be -- they are not audited yet. There might be some currency exchange rate effects that have to be considered, but all the effects that we're talking about should be minor. There should be no material changes to come. And this is basically what you need in order to simply adjust your model. All data are in euro, it makes it easier for you to compare. And therefore, we can see the group effect of 2020 were -- that were allocated to U.K. and I were EUR 144.5 million in revenue, EUR 22.1 million in EBITDA and EUR 3.5 million in EBIT. So let me comment on the data that you see. We have sold the business, and Rudi has already commented on the multiple. We have sold this EBITDA of 22.1 for enterprise value of EUR 398 million. So again, we are very satisfied in what we have achieved in the sales process, and we're very happy with the results. Secondly, what is the most important for you to know and what we would like to highlight most, we have sold a EUR 3.5 million of EBIT only. This is something that is very important to know, and this is something that we think represents compared to the previous year's EBIT, just a few percent, roughly 5% of the overall EBIT. Just accordingly, the data for the first half of 2021 to give you some insights what we expect in -- with the Q3 figures. We will have to adjust them. And here are the data presented. Again, focusing on the most important KPI on this slide, we are -- we have a contribution of the U.K. and I business EBIT wise to the group in the first half of 2021 of EUR 2.0 million EBIT. In line with this development, we can show what the amortization and PPA effects are, as we see. We will talk about the balance sheet effects later on. We can see that we will have significantly reduced impact on amortization, both amortization and earnings per share. This slide illustrates that there will be a significantly reduced amount of amortization that will be deducted from EBITDA and from EBITA to get to EBIT. So we will have significantly improved figures going forward. EBIT will be impacted most. EPS will be impacted most. And this is something that we have to take into account. Let me, first of all -- finally talk about the financial KPIs. This is -- both EBIT and EPS are not the financial KPIs that we are reporting in our forecast. Rudi will comment on them later on. With regards to the annual recurring revenue, we can see and provide you with the split between the U.K. and I business and the group overall business. Again, you can see what the impact of the sale of the U.K. and I business are of the group. Clearly, we have seen an effect that is approximately EUR 65 million out of EUR 225 million that will be reduced going forward. And looking backwards, we, as a starting point, provides you with the data December '19. Nevertheless, important for you to know is the ARR growth, and these are the 2 figures on the right side of the slide, we have even accelerated growth after the sale of the U.K. and I business. So the transformation process is well in line with what you expect and what we expect from ourselves. We have an even accelerated ARR growth after the elimination or deconsolidation of the U.K. and I data. We are now at a point where we, first and foremost, have to talk about -- Well, we are not going to go through the slide in detail, but we are providing you with the relevant data. So we always strive to give you all the details that you might need. Hopefully, we will cover them to the best of our knowledge. Do not hesitate to get in touch with us if you have further questions. But with regards to revenue, EBITDA, EBITA and EBIT, we will have this data in the slide set that is released and published on the website and do not hesitate to ask you if you have further questions. We are just flipping through the slides, and we will end up with some other KPIs after those splits in terms of quarterly effects. Finally, just a little look at the balance sheet effect that we see. Basically, we will -- we have done the following or the transaction effects will be as follows. The goodwill and intangible assets will be reduced by: on goodwill, EUR 110 million; intangible assets by EUR 19 million; and in contrast, we will get the cash inflow, which is EUR 392.9 million to be more precise on this point. And the difference basically in very easy words is the increase of the total equity, which is the book gain that we have achieved by the sale of -- by the transaction. One last. So we have converted intangible and goodwill into cash and book gain, and that basically leads to the effect on the balance sheet side. Let me comment on the tax issue that is related with the book gain. Just to make it clear, the tax rate for the book gain will only be applied to a 5% of taxable amount that are actually to be taxed. So 1.5% approximately should be the tax rate to apply on the EUR 225 million book gain. So the after-tax effect will be very significant. And clearly, we will have a onetime effect that will be in the earnings per share. We've already talked about the topic of discontinued operations. We will not show the effects in neither EBITDA nor EBITA nor EBIT. It will be a profit from discontinued operations and will nevertheless contribute in total to the earnings per share. Finally, and this should be the end of my part. We will -- we have some upcoming events in the financial calendar, but we are pretty much aware that the question of you might be, what are you going to do with the money that you have raised, what is the strategy going forward? What are you plans if you divest the U.K. and I business, what's the focus and what are you doing in order to grow shareholder value and so on. So that is something that would be -- well, too much for just a call like this one. We are going to prepare all this and we would like to invite all of you to our Capital Markets Day, which should take place mid-October in 3 locations. So separately, we will be in Paris, in London and in Frankfurt. We will have -- And with us, our strategy, we will be available for you in person. This will be Rudi and myself. And in addition to ourselves, it will be with our new COO, Mr. [indiscernible] And it's a perfect starting point to get to know you and to talk about what are we going to do with the funds that we have received and what is the strategy going forward. I'm happy to introduce you -- to invite you and we'll be great to meet you in person. Hopefully, the COVID-19 situation will allow this event. So we are still hoping that this can take place, and this is something I would like to invite you. Apart from that, on 11th of November, there will be the quarterly statement as of 30th of September. And clearly, there's an official analyst conference at the German Equity Forum in Frankfurt on -- at the end of November. So with those words, I would like to hand over to Rudi, and I'm will -- I'm happy to -- I hope to have fulfilled your expectations regarding the effects and impacts of the transaction.

[Rudolf Hotter, CEO & Chairman of Executive Board]

Thank you, Tom. Dear, ladies and gentlemen, we think that 2021 offers more chances to us than risks. This is how I commented our forecast in the last earnings call. Since then, we feel even more sure that the opportunities will prevail. But even on the background of this great first half of the year, we left the forecast as it is for 2 reasons. Firstly, we believe that CANCOM has always been better off with a more defensive stance towards forecasting. This is how you should understand this forecast as well. Secondly, we clearly see very good chances to outperform our forecast. This is simply based on the fact that we have been so successful in the first half of 2021. We have been able to manage the current supply chain and the ongoing corona issues quite well, and we feel well prepared to do so also in the second half of the year. But we want to have just a little bit more visibility into the supply chain situation in Q3. This is a factor we cannot fully control ourselves. And this is what we want to be absolutely sure about before talking about our forecast again.

[Sebastian Bucher, Manager of Investor Relations]

Well then, thanks a lot for your time and your questions. And yes, I hope to see you again. The earliest, in our call for the Q3 results. And yes, until then, stay safe.

[Rudolf Hotter, CEO & Chairman of Executive Board]

Bye-bye.