Cancom SE

XETRA:COK

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Cancom SE earnings call regarding the results of the third quarter of 2021. [Operator Instructions] The floor will be open for questions following the presentation. Let me now turn the floor over to Mr. Bucher. Please go ahead.

[Sebastian Bucher, Manager of Investor Relations]

Ladies and gentlemen, welcome to our earnings call after the third quarter of 2021. Thanks for taking the time to join us here. I have our CEO, Rudi Hotter; and our CFO, Tom Stark with me today, and they will guide you through the following slides. Rudi, please go ahead.

[Rudolf Hotter, CEO & Chairman of Executive Board]

Dear ladies and gentlemen, welcome to our earnings call for Q3 2021. Our CFO, Tom Stark, and myself will share with you in the following minutes a few remarks and explanations on the most recent financial results of CANCOM. As the financial results of the third quarter and the first 9 months of 2021, for the first time, showed the full effects of the sale of our U.K. and Ireland business, our main goal for today is to show you the new status quo after the deconsolidation of our U.K. and Ireland business and offer some insights on the most recent raise of our forecast. As already said, business development in the third quarter is, for the first time, officially presented without U.K. and Ireland. That means 2021 and 2020 figures shown are presented without the business results from the sold entities. Overall, 3 things stand out currently: firstly, the nice margin development in the Cloud and IT Solutions segment in the third quarter; secondly, the positive business development was the reason for raising our full year forecast; and thirdly, we have started a share buyback program to return a good chunk of the proceeds from the sale of CANCOM Ltd. to investors. We plan to be a buyer in the stock market for a rather long time. So please expect the program to at least be in place for 6 months with tendency to be longer. In total, we will return roughly EUR 230 million via this program to investors. This gives you some certainty about the use of the proceeds from the U.K. sales. Additional information on the topic of usage of funds shall be one of the main parts in our upcoming Capital Markets Day, which we will hold on the 29th of November in a virtual format. Ladies and gentlemen, the financial results for the third quarter 2020 show an increase in revenue of 5.6%. The figures show the operating business without U.K. and Ireland, so it's a like-for-like presentation of 2021 and 2020 figures. An increase of 5.6% looks relatively moderate in light of our historical growth rates. But the third quarter was very much influenced by the current bottlenecks in the hardware supply chain. On the back of only 6% higher revenues, the increase in EBITDA of 30.4% looks rather unusual. But if you keep in mind that the supply chain issues with long delivery times for hardware not only lead to reduced revenue volumes and a high order book, it also leads to price setting power for those who have access to hardware. And this is one of the major drivers for the EBITDA in the third quarter. A second and maybe more persistent factor in the rise of our EBITDA is the fact that we were able to increase our service revenues while, at the same time, improving our cost base connected to these revenues. So not only our trading margin was good but also our service delivery. Speaking about our service business leads me directly into the results of our Cloud Solutions segment. Revenues grew by 4.2% year-over-year in the third quarter. And just as I said, here, we see the EBITDA growth that is much, much higher than the revenue development. And that is based on the improved profitability of our service business. You can see in our revenue growth that we still do not see a lot of onboarding projects of new customers that would lead to a higher sales growth. But you can see that we do our homework with regards to the cost base and make ourselves ready for the return of a more usual supply chain situation and customers taking long-term strategic IT decisions again. Now let's take a look at the results in the IT Solutions segment. The IT Solutions segment was, so to speak, the star of the past quarter. While revenue grew rather slowly due to the already well-known reasons, we were able to achieve an extraordinary good profitability. EBITDA rose by 36.8% versus the previous year's third quarter. The EBITDA margin was at 6.7%. The segment's third quarter results showed to you the nice part of a supply chain crisis. If you can deliver rare goods, you can set the prices to a certain extent. Dear ladies and gentlemen, always, my favorite slide since quite some time is our ARR development. Here also, you can see the status quo after the deconsolidation of the U.K. and Ireland business so, again, a like-for-like presentation of 2021 and 2020 figures. The annual recurring revenue is the most important KPI for our strategic journey towards the hybrid world of IT and what I call Systemhaus 4.0. ARR grew with more than 23%. That means that despite a rather low overall growth rates in the Cloud segment, the development of our most profitable business, which is operating parts of our customers' IT environment on a day-to-day basis with operational responsibility, is really nice. And the development shows to you that the ARR growth in the DACH region was even more dynamic than in DACH plus U.K. combined. After these remarks, I hand you over to Tom Stark who will lead you through more financial details and effects from the U.K. transaction.

[Thomas Stark, CFO & Member of Executive Board]

My name is Tom Stark. I'm happy to have you here on the call. Just as always, I'm happy to provide you with some more details on financial KPIs and on the impact basically, and that's the starting point for today, of the effects that we have seen from classifying U.K. as discontinued operations. So let me first comment on the things that Rudi commented on. Rudi commented basically on the financial KPIs that are directly related with the income statement. And they are all like-for-like, just the previous year's financial data as this year's financial data. Classifying something as discontinued operations means that this is a point of time transaction. We have reclassified U.K. and basically eliminated all the data from U.K. in the P&L and in the balance sheet as of August 2021. So let's take a look at the effects that we have seen in there and where can we find the actual impact of the transaction. While we have already commented on this transaction in the last call, we have received a cash inflow of approximately EUR 398 million. And we ended, consequently, the first 9 months of '21 with a profit for the period of EUR 260.9 million. You can see this on the slide in front of you. The profit from discontinued operations finally ended up as being EUR 229.6 million. We had some currency effects that were included that have even increased the profit from the transaction from EUR 225 million, as we have communicated to you, to EUR 229.6 million. So an outstanding result, and we are very happy with what we actually have achieved with the sale of the U.K. transaction. Nevertheless, I would like to show you the earnings per share. And this is something that we should talk about. We have an outstanding earnings per share from discontinued operations of EUR 5.96 in the first 9 months of 2021. Yes, clearly, there's a one-off effect included, the one-off effect of the successful sale of the U.K. business. Nevertheless, let me point out the earnings per share from continuing operations. And there, you can see an outstanding increase from operations that was from EUR 0.47 to EUR 0.81. So the operational performance was 72% based on actual earnings per share increase. Clearly, absolutely in line with this development is the development of the EBIT, which increased from EUR 30.5 million to EUR 52.1 million. So operations have been at a very good mode in the first 9 months of 2021. The operating cash flow is not affected the same way from discontinued operations. We are not adjusting the balance sheet. That means that this is simply accounting policies. That means that the operating cash flow is not changed in '20, and it's not changed until August 2021. So you can see the slide, and you can simply verify by comparing it with the financial statements and the interim statement as of 30th of September. We have added something on the top line, which means, well, without the transactional effects, the cash flow would have been different. So from real operations, so the like-for-like view, we would have had an operational cash flow of EUR 47.7 million negatively, and we would have an improvement from EUR 66.6 million in the previous year. So what does this mean basically? Basically, we have seen an increase of the inventories. I think Rudi commented on the supply chain shortages that we have seen in the third quarter. [Technical Difficulty]

[Operator]

Dear participants, we have lost the connection to one of the speakers we immediately. Thank you for your patience.

[Sebastian Bucher, Manager of Investor Relations]

Ladies and gentlemen, Sebastian Bucher speaking from CANCOM again. Sorry for the technical disconnect. We don't know exactly when we lost connection to our call, so we would start basically with the operating cash flow comment right away. And I hand over to Tom Stark, please go ahead.

[Thomas Stark, CFO & Member of Executive Board]

Yes. Thank you, Sebastian. And sorry for the technical issues. And hopefully, we catch up at the point that you are not missing anything. We will repeat the things that we've commented on the operating cash flow. Basically, the operating cash flow is not affected by discontinued operations. That means we have not a like-for-like view on that what you see in the interim statement. That's why we have commented on this slide with the line that is called without transaction effects and compares basically the operating working capital of the first 9 months '21 with the operating cash flow of the first 9 months '20. We can see we have an improvement from minus EUR 66.6 million to EUR 47.7 million in terms of operating working capital. And the effects are very, very sophisticated, but this is the basic outcome. If we focus on what actually is behind the operating working capital, then that we are certainly all pretty much aware of the supply chain shortages that we are facing and the way we have to handle and to manage it. I think we have seen in the financial performance, as Rudi commented on, that we have done a very good job in managing the networks, managing our vendor relationships properly to benefit from the situation; to increase the margin profile; to get the products, at least most of them; and to, by the way, outperform in our margin profile in the third quarter, so exactly what we expected to do when actively managing these things. Nevertheless, we have an impact on the working capital. We have an increase, a significant increase, on the inventories of about EUR 30 million. We have a positive effect on AR side. Accounts receivables developed well. But we have a negative impact on the accounts payable as well. We have a minus EUR 30 million impact on the accounts payable. But the reason therefore, clearly, is we are networking with the manufacturers, and we are paying them directly. We have to pay earlier than usual. But we get the products, and we are benefiting that way from the position that we're in at the moment. If you look at the business results and the business first strategy that we have, not taking into account in this exceptional period the working capital management too tightly, we have been very successful, and you can see this in the margin development of the third quarter. What's the outlook for Q4? Clearly, we expect the best quarter for the working capital and the best cash inflow in the fourth quarter just as in the previous year. Again, it's difficult to predict what's going to happen. We have, on the one hand, a very good management and a very good vendor relationship management in place. But on the other side, clearly, we have the highest backlog ever. So as of end of September, we've seen an increase of the backlog compared with the backlog of the end of second quarter 2021 of 20%. So this is something that we are facing. However, the uncertainty about the fourth quarter is still in place. But we think we will benefit from a margin profile point of view, but it's very difficult to predict at what point of working capital we will end up as of the end of the year. CapEx is the second slide and the second set of data that is not affected by discontinued operations. And so just the accounting policies, it has not changed in the previous years. We have commented approximately the same way as we have commented on the CapEx in the working capital slide. You can see the effects that we have seen without U.K. or without the effect of the transaction, the effect is minor only. We have a CapEx-to-sales ratio of 2.7%. But let me comment one thing on this, and this might clarify the ratio that is slightly above the level that you are used to seeing from us. We have generated in the first 9 months exactly EUR 300 million of agent revenues. This is something that we have changed in our accounting policies as of the beginning of the year. And given that, we would have ended with a CapEx-to-sales ratio of 2.1%, pretty much in line what you are used from ourselves. Next slide is the used amortization slide. You can see a sharp decline or reduction of the amortization going forward. We will have another reduction in 2022. That means we will have a significant positive impact on EBIT and earnings per share. And this is something that is changed just by transactions to come, but it gives an outline for your models on a basis going forward. One new slide, and this is also already related with the Capital Markets Day that we are looking forward to. We have just recently announced our new sustainability strategy. We have also released a new website, sustainability.cancom.com website, where we are collecting and gathering all the data and information that are required from you to get an impression about how are we actually handling the topic, what's the awareness of the topic from the management, from the Board and, of course, of all of the employees that we have. And we have, for the very first time, quantified and measured and defined measurable ESG targets in the company's history. So we will, from our point of view, achieve some significant improvements going forward, absolutely in line with what we expect from ourselves, with our stakeholders and shareholders would expect from us and what we want our employees to take care of. We've also defined our net zero goal, achieving CO2, carbon-free neutrality in 2027. And we have defined other social and environmental goals as well. We will talk about these things in more detail on the Capital Markets Day. It would be great to have you here to talk with you about everything we are having in place and all the initiatives that we have taken in order to, well, cope with the challenges of climate change and so on. That leads me to the financial calendar and the upcoming events. You can see the next 2 events that are to come. The analysts' conference at the German Equity Forum will take place on 23rd of November, and our Capital Markets Day that we have already talked about will take place on 29th of November. Personally, I think it's a pity not having you in a direct context. But I think, if you look at the development at the moment, it's difficult to actually plan events or venues that are held on site in London, Frankfurt and Paris at the moment. So we have decided to make an online event. Rudiger Rath, our new COO; Rudi Hotter, and myself, will be available for you. We will have a nice agenda for you, and we will have a Q&A session at the end. So please feel free to participate. And if there would be certain things you are interested in, you can send the information to the [e-mail]. We cannot promise to answer all of your questions, but it gives us some insights in what we might be interested. And if possible, we will take into account what you're talking about or what you're interested in. Last, but not least, another event, preliminary full year results of 2021 will be disclosed on third of February. The financial calendar will be released, and just as you are used to from us, in mid-December. And with those being said, I will hand over back to Rudi. Thanks a lot for your interest.

[Rudolf Hotter, CEO & Chairman of Executive Board]

Thanks, Tom. The following slides show the status quo after the end of the third quarter, these 9 months results for the group. For the group, we see in the first 9 months a revenue growth of 12.9%; organically, 10.9%. The EBITDA to grow by 39.7%; organically, 35%. And we could increase the EBITDA margin from 7.2% to 8.9%. Let's move to the Cloud Solutions for the 9 months results. So the revenue growth, 3.8%; organically, 2.6%. EBITDA, 20.3%; and EBITDA margin, on a top level, 31.3%. The first 9 months of the IT Solutions segment. Revenue growth, 15.2%; organically, 13%; and the EBITDA to grow by a record level of 35.7% by increasing EBITDA margin compared to previous year, 4.6% to now 5.4%. At the end of this call, I just quickly want to show the current forecast for 2021. It was raised on the 27th of October with regard to revenue, gross profit and EBITDA development for the group and in the IT Solutions segment. And just to be clear, yes, we still see good chances to reach our revenue goal in the Cloud Solutions segment as well.