Cancom SE

XETRA:COK

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the CANCOM SE Earnings Call for the Third Quarter Results of 2022.

[Operator Instructions] Let me now turn the floor over to Mr. Bucher.

[Sebastian Bucher, executive]

Dear ladies and gentlemen, welcome to today's earnings call.

And today with us, for the first time presenting the major events of the quarter, is Rüdiger Rath, our new CEO; and with him, Tom Stark, our CFO, who will guide you and lead you through the most significant events of the quarter and present the financial KPIs.

So without further ado, Rüdiger, please take over. The floor is yours.

[Rudiger Rath, executive]

Many thanks, Sebastian. And dear ladies and gentlemen, welcome to today's earnings call for the Q3 results.

My name is Rüdiger Rath, and I took over the CEO position from [ Rudy ] Hotter just a few days ago.

I am proud to lead this incredible company with a great business model and passionate employees with high expertise. From now on, as CEO and first of all, I would like to express my deeply felt respect for the success of [ Rudy ] Hotter, who was part of the CANCOM success story over more than 17 years. You as analysts and investors of CANCOM can expect from me that I will participate regularly in capital market events and that I will be available for investor dialogue as much as my schedule allows me. Nevertheless, the main part of our investor communication activities will still remain on the desk of my colleague Tom Stark, who you know already since many, many years.

I'm very pleased to be able to present to you for the first time the financial results and main events of the reporting period, especially as we the management team think that we see a business development to start in the right direction. The demand for IT and cloud solutions remains high. And the availability of infrastructure, as well services and skills, is crucial in the market environment; and the delivery capability in total has become a competitive advantage. You will see it later. We increased our inventory and our staff to be capable to deliver those and resilient in the competitive landscape. Clearly we benefit from our financial strength and also from our great relations to our partners.

We in Q3 went back, on the top line development, to the growth as we expected here early this year's. The public sector starts to normalize but yet has not fully returned but, we expect, to increase to a normalized level in Q4 and latest in 2023. The private sector continues in a good performance. And we see, as I mentioned before, the strong demand in our order books; and as well, here our backlog increased. And we see still an high demand, yes, on that. And we have on the cloud solution part, you will see later in detail, as well a strong growth -- and that it's followed, yes, by our [ strategic ] attention to drive the as-a-service businesses. We expect that the availability of products, services and skills here needs to be increased. It was unfortunately not enough, yes, in Q3 to allow reduction of the order book or overcompensate of -- the negative impact from the first half 2022.

You see, as you -- mentioned in earlier course -- calls here from Tom, yes, we did the acquisition of the S&L Group here, which is now included in the financial statements. And we sold the U.S. businesses from CANCOM. Clearly, in contrast, to improve the revenue, the EBITDA, as you see, is under pressure by higher cost. In particular, we [ wind back on ] other expenditures like travel and other items, yes, before the COVID level, but on the other side, we have increased normal energy and gasoline and other costs. And we have to focus on rebalancing in the next quarters of our income and cost base, during the next months, to show as well growth here not only in the top line, as well on the EBITDA. The main driver, as I like to repeat, yes, we have the normalization of the orders from the public sector, delivery capabilities here. We have, yes, and we see a strong, strong demand from the private sector. And we need to be able to fulfill that demand.

If I go to the cloud segment. We are on track, yes, with the ARR and showing a great growth spree -- speed. And that is a clear indication for our competitiveness of our managed and as-a-service offerings. And if you see, we are more than well on track. And the normalized view, we expect high growth. And that underpins the strategy and the market demand; that as-a-service solutions are expected from the customer base, from the market, from us. And we see as well in the next quarters that the demand will be as well high.

On the IT segment. Clearly, as you already know, yes, the impact of the current year -- we had the supply chain issues, which are not really over, but we see an improvement from several parts, from different vendors. And the revenue development is much more [indiscernible] for the customer demand than we showed in H1. And as you saw and see, the 10.9% or 11% gets closer to our expectations we had early this year.

And as I mentioned before here, we have to focus on the rebalancing of income and our cost base during [ the months ] to as well show an healthy growth on our EBITDA. [ Fortunately ], as I mentioned, you see now, S&L, yes, we acquired. It's a bold acquisition and enriching our portfolio with [ skills ] in security, compliance and managed services, but as well as in regional part, yes, we got some additional customers [ access ] for IT projects in general.

While revenue is returning to more normal levels, [ good process ] on profitability. 11% margin in Q3 2021 was extraordinary, so the 8.8% today is still okay, yes, yes. See, the group is still okay, but we clearly as a management team has the task now to manage the cost base as some of us, as I mentioned before, just returned to pre-COVID levels, like travel costs and others. But some of it is new based on inflation and rising costs for energy, IT products and clearly for skills and wages.

We already started, an example, to adjust our prices for services. We increased our price levels for consulting, yes, and for services as part of dealing with the situation. And we expect that -- to get a normalized level here in the next quarters.

The ARR. As I mentioned before, the growth from (sic) [ by ] 23.9%, wherefore it's -- 21% is organic, yes, shows that our offering, our capabilities are in line with the market demand on one side. On the other side, we've put a lot of investments in to build solutions to fulfill the demand and be able and capable to deliver, which I mentioned is crucial in the current situation.

And that goes in line with our strategic intention to drive the hybrid IT service provider, where as-a-service solution and managed service solutions -- getting bigger part of our businesses. And the demand in the market is still strong. And we see as well from our partners, yes, as well from our vendors, that they've put as well more and more necessary solutions where they expect we put managed services on top in the market.

[ The, I think ], Q3 -- the financial performance indicators here in Q3, yes, I would like to hand over to Tom.

[Thomas Stark, executive]

Thanks a lot, Rüdiger.

And my name is Tom Stark, CFO of CANCOM. And it's a pleasure for me to have you in the call with some insights focusing on financial KPIs and some selected relevant events in the third quarter of 2022.

Let's start with the toughest KPIs to talk about at the moment. Clearly operating cash flow and the corresponding operating working capital are the crucial things in the overall industry. All the peers are affected from those topics, and they are at least similarly affected. That can be seen in when facing the results of the peers and the peer group. We are facing an unusual development not comparable to the years before. You can see this pretty clearly by just taking a look at the slide, fiscal year '20 and '21 on the slide.

We have a total of minus EUR 169 million of operating cash flow in 2022, still heavily impacted from supply chain constraints, meaning unless all parts required for customer projects are available, we have to store the goods for the customers before delivering them. We additionally are often required to store goods on behalf of our customers, for assuring a complete rollout for our customers and so on. Still, supply chain issues have improved. Nevertheless, they are not vanished. They have not vanished. They are still in the market and we are all affected by those impacts. And that can be seen best when facing, taking a look at the operating cash flow.

There is a peak in Q3. It's not unusual. An operating working capital of about EUR 240 million, including an AR position of EUR 405 million and inventories of EUR 143 million, for us definitely is.

Well, apart from the supply chain issues, one more special one-off effect has to be taken into account. You all know that we are about to migrate our ERP system to SAP. Migrating to a new ERP system always is a severe topic to handle, and an organization always suffers from such a step. Q3 was the quarter with the biggest volume to migrate. Highly transactional business was migrated. At the end of the quarter, about 80% of the overall volume has been handled in the new ERP system, which is a big success.

And evidently, we are mastering the migration successfully, proven by a 10% increase in revenue handled basically in the new system. However, all the new processes and particularly order-to-cash are, first, less efficient than usually. And secondly, this means having to handle goods and processes redundantly in 2 systems. We are planning to have completed the overall migration, by the end of the year, to 95% and then be able to handle operations in one ERP system significantly more efficiently.

With regards to the fourth quarter, we are expecting a very strong positive cash inflow just as in the previous years.

With regards to CapEx, we can see a reduction. The development is well on track. For the course of the year '22, we indicated at the beginning of the year a decline, starting with Q3, which actually happened. EUR 6.4 million represent the lowest CapEx number in the last 5 years for a single quarter, which is just as foreseen. This level would equal a CapEx to last 12 months ratio -- sales ratio of less than 2%, which is pretty much in line with our expectations.

In Q3, we've also seen an acquisition. Rüdiger has already talked about the acquisition of the S&L Group. The key facts, we have already explained when presenting the financial statements of the second quarter, about EUR 15 million of revenues and about EUR 1.8 million of EBITDA generated by 94 employees. The first-time consolidation was 1st of August, including 3 different legal entities. And the corresponding PPA is preliminary, and all the preliminary data are fully included in the Q3 statements. Effects on amortization are not significant. The total impact is [ 0.3 million ] in '22, fully allocated to the IT Solutions segment. Amortization is going to decline to a EUR 2.5 million in '23 given there will be no further transaction.

Finally, a view on EPS. In Q3, we also canceled 3.176 million shares. The new number of shares now is 35.37 million, with a positive impact on EPS going forward.

We have classified our U.S. business as discontinued operations in the course of the second quarter. In the third quarter, effective 31st of August, we actually successfully sold our U.S. business. The business did not contribute in a noteworthy way to the results. The '21 revenues were about 18.5 million. EBIT was about 1.5 million negative. The discontinued effect in '22 was minus EUR 1.8 million. And you can find this shown in the line discontinued operations in the interim statement as of 30th of September.

From a P&L perspective, except for minor adviser invoices, the divestment should now be fully included in the financial statements. And just as usually, we provide you in the earnings call presentation and, for sure, on the website with all the comparable data for 2021 and 2022, excluding the U.S. business on a comparable basis, to well enable you to model your models.

Finally, to end from my side, we would like to provide you with a quick update on ESG in the third quarter. As the rating cycle for '22 comes to an end, let's take a brief look at our ratings. We have improved our ESG ratings, taking into account our most importing (sic) [ important ] rating agencies. Sustainalytics and ISS have already classified CANCOM as one of the top performers in the ESG arena. MSI (sic) [ MSCI ] too significantly improved our score. We are participating in the CDP this year again and are confident to reach a C awareness level as well. Finally with regards to our sustainability strategy and our goals: We should achieve all the goals set and communicated in our statement as of end of April.

With that said, thanks a lot to all of you. And I would like to hand over back to Rüdiger.

[Rudiger Rath, executive]

Many thanks, Tom.

[ And I go -- or ] the next topic is the forecast 2022. As you know, we have already pre-released the group forecast. And in general, we were not able to overcompensate the development in the first half in total, but we are not far off either with regards to the segments' development or the total development. And as you see here, we have the 2021 figures adjusted due to the sale of the U.S., and U.K. business in 2021.

We expect that -- the cloud segments, yes, to be above EUR 280 million, so higher than expected, with EBITDA at least hitting the target of [ segment rating ] growth, and I explained it before, to fulfill the market demand. The ARR is, out of discussion, will be a perfect development this year and, we believe, as well in the future. The IT Solutions segment's topics have been discussed intensively with [ Rudy ] and Tom and -- Q1 and Q2. And this segment carries the lion's share of the weight of the higher cost base [ due to size ]. Our order book is still on record level. The order intake is good and shows no signs of any structural slowdown yet.

We will close the year as best as possible. December is always the most important month for us of the year -- and then push into 2023, with all the difficulties here of the first half of 2022 behind us. In total, it means we expect a growth in Q4 2022.

To summarize as well, I think, Sebastian, you will show now -- as I mentioned earlier, I'd like to be available for investor dialogue and as much as my schedule allows. I'd like to show progress on it. And we have the financial calendar here: On 15th of November, we are at the BNP Paribas mid-cap CEO conference in Paris; and end of November, on the analysts' conference at the German Equity Forum in Frankfurt.

Many thanks.

[Sebastian Bucher, executive]

Well, ladies and gentlemen, then, thanks for your time. And I hope to see you maybe in person again at some of the conferences. And if this is not the case, have a good rest of the year and -- yes, bye-bye. And talk to you next time, on the earnings call of the full year of 2022. Bye-bye.