Sesa (Milan:SES) Q1 2027 Earnings Call

0:00 Good afternoon. This is the Corusco conference operator. Welcome and thank you for joining the SESA full year 2027 consolidated three months results conference call. As a reminder, all participants are in 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. Jacopo Laschetti, head of stakeholders Relations and Sustainability of CESA. Please, go ahead, sir.

0:38 Good afternoon, everyone, and thank you for joining CESA Group's first quarter results conference call. On today's call, CESA Group is represented by Alessandro Fabbroni, Group CEO, and myself, Head of Stakeholder Relations and Sustainability. This afternoon, the Board of Directors approved the consolidated financial results Alessandro will begin with an overview of the group's financial performance and key business highlights. I will then provide an update on sustainability, people and stakeholder value creation Before Alessandro concludes with the FY27 outlook and some remarks of our industrial plan.

1:36 I will now give the floor to Alessandro.

1:40 Thank you Jacopo, good afternoon everyone and thank you for joining us today. In a digital market sustained by strong demands for data management and data protection and increasingly driven by AI and automation, We started the full year of 2027 with a solid set of industrial and financial results, delivering high single-digit organic growth in both revenues and profitability at twice the market growth rate. More specifically, the first quarter confirms the effective execution of the new industrial plan 2027-2028 presented last July as we continue to strengthen our market share and to consolidate our role of digital integrator, combining technology, digital platforms and vertical applications with the progressive adoption of AI.

2:37 For the first quarter ended July 2026, CESA reported consolidated revenue and income for Euro 900 million up 6.5% year-on-year and fully organic. Consolidated ABDA amounted to Euro 65 million, up 7.6% year-on-year, with an ABDA margin achieving 7.23%, slightly improving compared with the same period last year. The group ended the quarter with 6,700 people, up 2.5% year-on-year, and flat compared with April 30, 2016. Reflected our continued focus on skill development, AI adoption and operating efficiency to sustain scalable organic growth.

3:28 Looking at revenues by business sector, performance was driven by positive contribution for our main growth area. ICT DAS sector reached euro 540 million up 8.1% year-on-year, fully organic and in line with the trend already achieved in FY26, driven by increasing demand for solutions dedicated to data management, data sovereignty and cybersecurity, enabling the adoption of private AI and automation. Green, the AI sector, achieved Euro 127 million, up 14.4% year-on-year, In line with a great double-digit organic growth trend reported in FY26, driven by increasing energy demand, linked to digitalization and in particular by the development of the data center market.

4:26 Software and system integration sector reported revenues for about 213 million, down 3% year-on-year, reflecting the disposal of selected non-strategic assets completed during FY26, and the ongoing organizational re-engineering process. Based on the current trend, we expect software system integration to return to grow starting from Q2 2027 in line with our industrial plan. And finally, business services sector reached Euro 41 million, up 11% year-on-year, confirming the expected return to double-digit organic growth in FY27. driven by the contribution of multi-year contracts acquired during FY26 and by the increasing focus on digital platforms and vertical applications.

5:23 Consolidated BDA increased by 7.6% year-on-year to €65 million, with EBDA margin at 7.23%, slightly improving compared with the prior year period. This performance was driven by double-digit profitability growth in ICT VAS sector, green VAS sector and business services, together with the progressive improvement in software system integration operating efficiency. In particular, ICT VAS sector reported EBDA for Euro 25 million, up 11% year-on-year, with an EBDA margin increasing to 4.6%, Green VAS sector achieved EBDA for Euro 7.7 million up 23% year-on-year, with EBDA margin improving to 6.0% from 5.6% in the prior year period. Software and system integration sector recorded EBDA for Euro 23 million down 2.5% year-on-year, while flat year-on-year excluding the impact of FY26 disposal of non-strategic assets and improving in terms of EBITDA margin which grew to 10.8% from 10.7% year-on-year

6:53 thanks to higher operating efficiency. Business Services sector reported EBITDA for Euro 8.6 million up 18% in a year, with EBITDA margin reaching 21% compared with 19.9% in first quarter 26 and 19% in February 30, 26, confirming the increasing contribution of higher value-added digital platforms and vertical applications. Group adjusted consolidated EBIT reached EUR 50.2 million up 6.2% year-on-year after depreciation amortization for EUR 14 million and provision around EUR 1 million. Reported EBIT amounted to EUR 41.4 million up 7.5% year-on-year after PPA amortization for EUR 8.7 million.

7:52 Group Adjusted EAT achieved EUR 30.1 million up 7.1% year-on-year supported by Profitability Global in ICT BAS up 12.6%, Green BAS up 20% and Business Services up 11.4%. While software and system integration remain substantially stable, Down 1% year-on-year on a reported basis, but up 1% excluding the impact of FY26 disposal of non-strategic assets. During the quarter, net financial expenses amounted to around €7.5 million, improving by 11% compared with FY26, and in line with the assumptions of our industrial plan, Supporting the quarterly trend in group net profitability.

8:50 In the first quarter, we also achieved a solid financial position and strong cash generation. Reporting that financial position as of July 26 was equal to €23.4 million of net net, improving by around €40 million compared with July 25, after €120 million of investment over the last 12 months, including euro 20 million in first quarter 27 and after euro 40 million of dividends and share buybacks over the same period. Excluding FRS liabilities, group net financial position was equal to euro 150 million of net cash with a slight improvement year on year. Overall, the first quarter of 2027 confirms our ability to combine organic growth, increase of operating efficiency, Industrial transformation and strong cash flow generation.

9:48 With this positive first quarter performance, I will now hand over to Jacopo for an overview of our sustainability and stakeholder value creation priority.

10:00 Thank you Alessandro. In line with our purpose of creating long-term sustainable value for our stakeholders by promoting innovation, including digital innovation, across businesses and organizations, As well as people well-being, sustainability remains fully embedded in the execution of our business strategy and the new industrial plan 2728. The first quarter confirms the close link between digital transformation, sustainability and business growth. Our green BAS sector continues to deliver double-digit growth. driven by increasing energy demand connected with digitalization and in particular by the development of the data center market.

10:47 At the same time, our activities in data governance, cybersecurity, digital platforms and AI continue to support customers in improving efficiency, resilience and control over their digital processes. On the environmental and governance side, We continue to develop our sustainability programs and strengthen transparency towards investors and all stakeholders. We confirm our main ESG ratings, including ECOBADIS Platinum, MSCI Triple B and CDP Level B. In FY26, we completed the ISO 27001 certification process across all main group companies. for strengthening our information security and governance framework.

11:35 At the same time, we continue to extend group certifications and progressively increase the adoption of renewable energy. People remain a key enabler of our transformation and execution of the industrial plan. As of 31 July 2006, the group counted 6,770 people, up 2.7% year-on-year. and Stable compared with April 26. The stability reflects the first tangible benefits of the initiatives launched to develop skills, accelerate knowledge sharing, progressively adopt AI and automation across the organization and increase operating efficiency. We continue to invest in education, welfare, inclusion and work-life balance.

12:23 We are growing focus on the skills required in the areas of highest market demand. These investments support scalable organic growth, improve productivity and ensure that our people remain central to the group's long-term value creation model. Finally, our value creation model continues to combine sustainable growth with shareholder remuneration. The new industrial plan confirms a payout ratio of approximately 40%. In line with this policy, the dividend to be distributed on 23rd of September will increase from 1 to 1.33 euro per share, with the perspective of reaching up to 2 euro per share over the next two years, subject to the achievement of the industrial plan target.

13:19 Consistent with our shareholder value creation policy, we have already launched a 5 million euro buyback program and today the board approves a further program of the same amount. Additional purchases will be evaluated within the overall authorization of up to 20 million euro. In this scenario, we will continue to focus on sustainable value creation for our stakeholders, combining innovation, Financial discipline, people development and responsible growth. I will now hand the floor back to Alessandro for the final remarks.

13:56 Thank you, Jacopo. Two months after presenting our new industrial plan 2728, we are pleased to report to our stakeholders a solid start of FY27 Consistent with our strategic priorities, organic growth, operating efficiency, market penetration and the progressive adoption of AI and automation. The market environment remains supportive. The Italian digital market is expected to grow by around 3.5% per year through 2029, driven by AI, cloud, cybersecurity and data management. In that scenario, Selsa continues to grow at around twice the expected market rate.

14:42 In the first quarter of 2027, we deliver a solid disengaged digital organic growth, we improve our profitability and cash flow generation, and we continue to invest in our industrial transformation. The first quarter confirms five key messages for our stakeholders. First of all, revenues increased by 6.5% and RDA by 7.6% fully organically. ICT VAS sector confirmed strong momentum, supported by data management, cybersecurity and data protection demand, and driven by private eye and automation. Green VAS and business services sectors continued to deliver A strong double-digit revenue and EVDA growth. Software and system integration show improving operating efficiency with EVDA margin increasing to 10.8% of revenues and a return to revenue growth expected from the second quarter of 2027.

15:50 Group cash flow generation remains solid with reported net financial position that improved by around €41 million year-on-year after €40 million of distribution shared by BEC last 12 months. We are also progressing towards models increasingly focused on organic development, integration and group transformation with continued investment in higher value-added capabilities and digital platforms. Based on this positive start and the current order trend we confirmed the full year 2027 guidance of our industrial plan revenue growth in the range of five to seven and a half percent targeting euro 3.8 to 3.9 billion APDA growth in range between five to ten percent targeting euro 274 287 million and adjusted group EAT growth in the range of 7.5 to 12.5% targeting Euro 115 to Euro 118 million.

16:59 Looking ahead, we will continue to execute the planned strong commitment focusing on organic growth, operating efficiency, cash flow generation and the capability to promote innovation across businesses and organizations. Our strategic priorities remain clear to grow at around twice the market rate to improve our skills and capabilities and continue to extend our track record of consistent revenue and profitability growth while creating sustainable long-term value for all our stakeholders. Thank you for your attention and for your continued interest in SESA Group. We are now pleased to open the Q&A session.

17:45 This is the Econosco conference operator who will now begin the questions To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question comes from Alexandra Arsova with Equita. Please go ahead.

18:23 Hi, good afternoon. Thank you for taking my questions. So, a couple of questions on my end. The first one is maybe some clarifications on the software and system integration business. If I'm correct, you mentioned that you saw an organic net of disposal flows, basically flat both over the first quarter and do you expect to return to growth already as soon as in the second quarter of the fiscal year 27? So my question is what has changed between the first and the second quarter that makes you believe there will be a significant or let's say material improvement already in the second quarter?

19:10 And the second one is maybe Again, a little bit of color on trading update and visibility on the full year guidance. So if I remember correctly, during the July call with the fiscal year 26 results, you mentioned that, as usual, you are a little bit maybe conservative with the guidance and that there could be some room for ending up in the upper end of the guidance. Do you still see room for ending up in the upper end and which are the main moving parts you see in the coming quarters? Thank you.

19:50 Good afternoon. Thank you for the call, Alessandra. So, first of all, our view of software system integration is a very positive view due to the backlog order and the strong So, first of all, we highlight that the first quarter results are fully in line with our industrial plan that provides an estimate of low single-digit growth both in revenues and profitability. It's true that in comparison with the last quarter Q1 26 we reported Thank you very much. Thank you very much.

21:32 We started the first quarter overall with the path that is in the middle of our guidance. So the trend, the strong momentum we continue to have in the ICT, VAS and the positive performance of business services, the expectation of recovery in software system integration are positive signs for the and the future potential upgrade of our guidance that in any case is confirmed today. Thank you for the question. The next question comes from Thomas Ogneto with Kepler Chevreux.

22:18 Please go ahead.

22:22 Hello and thank you a lot for taking my questions. Both my questions are on margin. They are the main highlights of these results. The first one is on business services. I mean, we are seeing continuous margin gains in that segment. So at what point do you think the segment's margin should normalize versus continuing to expand structurally? The first one and the second one is on digital green bus. As we expect continuous margin expansion as well as you are integrating green sun. and the comparison with last year is to an expansion of 40 basis point.

23:08 Is 40 basis point the run rate we should expect throughout the year? So 2027 versus 2026. Thank you.

23:16 Thank you for the question. And so in effect, we perform really well in business services and green VAS. Not only in terms of volume, but also in particular in terms of profitability. So the good news is that in the business services, first of all, we grew double digit in terms of revenue. That is a pure and organic internal growth. That is the first time in that sector we grow double digit organically. And so that is the reason we managed to improve the marginality close to 20%. So in particular, we improved to 21% the BDI marginality and around 10% the adjusted profitability of revenue. So we believe that it is crucial in that area to continue to perform so well in terms of revenues.

24:23 because the possibility to develop revenues on the same platforms and applications is a potential driver of additional development of marginality. So now what we expect is to be able to confirm the good marginality ratio in terms of the BDA achieving Q1 and maybe to be able to increase quarter by quarter thanks to a so good past in terms of revenue. I remember that the so positive trend in revenues was driven by several multi-year agreements that we signed in 1996 and so we started benefiting from these new long-term agreements so it is Thank you very much.

25:45 So we increase 40 basis points thanks to the synergy coming from the merger between the MS Service and Greensun. We believe that 6% may be a good VDI margin combined with 3.5% of net profitability of revenues. We have a good leadership Okay, thank you. Thank you. The next question comes from Pier Andrea Randone with Intermonte.

26:45 Please go ahead.

26:49 Thank you and good evening. My first question is about the impact of a rising cost of capital on your business model. I try to be clear. In the past, when the cost of capital suddenly raised, you were impacted by some unexpected costs that were affecting, in part, your cash generation. Then you worked on this problem, you implemented the cash pooling, You rationalized the structure, but you also benefited by the fact that the cost of capital was going down. Now that the cost of capital is ranging up again, how is the new corporate structure?

27:59 We expect that you will face... in case this trend will continue in a better mood with a stronger approach to this possible headwind. But, I mean, this is my expectation, so I wonder if you can elaborate on this factor. And the second question is, in general, I mean, you are mentioning Again, this is a positive, the good expectations for the ICTBAS. If you can go back to what are the main drivers suggesting this kind of confidence for the coming quarters. Thank you.

28:58 Thank you for the questions, Andrea. So first of all, the point of our cost of capital. So I remember that today we are in a situation that is completely different from the situation we was three years ago, in particular in terms of cash flow generation. So it is the fourth consecutive quarter that we confirm the last 12 months Operating cash flow of around 200 million euro. In the last 12 months we generated around 80 million of free cash flow. We improve our net financial position constantly and we distributed last 12 months around 40 million euro including by debt and dividend distribution.

29:51 A different situation because our group is generating cash flow in a significant way. The second point is that finally is changing also our group structure because we are reducing a lot the number of legal entities and so we are in different conditions in terms of balancing potential increase, additional increase of cost of capital, obviously. We were working in the last quarter in that condition because the cost of capital has been already increased in the beginning of last quarter. And in the Q1 27, in any case, we had 7.5 million of net financial charges with a decline of 1 million euro in comparison with the fourth quarter 26 and with a very slight increase 300,000 euro in comparison with 7.2 million of 2126 so it's clear that we are not completely out of the effect of an increase of interest rate but we have in conditions completely different of the condition we was three years ago another point so the positive trend of our ictvas We are performing really well in terms of growth, in terms also of

31:23 gaining profitability and marginality. So there's a new market scenario with a great demand of data management and also data protection. And so the progressive adoption of AI is generating structural demand for data strategy. In particular, there's more and more clear the necessity for any company and organization to develop a data strategy and private data management. So the so-called digital sovereignty does not mean to be independent in the management of technology and infrastructure.

32:12 So that means in particular to be able to orchestrate and to be able to integrate different layers of technology. So the role of the distributor is more and more strategic because the distributor is the ideal partner in order to aggregate, to enable this particular phase of the market. The expectation of the market is to grow Many thanks Alessandro. I just have a very quick additional question.

33:07 I saw that there was a merger between the two holding companies into the new holding now is Sesa Holding. Do you have any particular comment on this kind of transaction or is it just a simplification?

33:29 There is a simplification but also a strategic reason to be identified as CESA holding as long-term strategic long-term owner of CESA and in the same time we like to underline that we have continued to increase our share as CESA holding in CESA starting from the 52.8 percent of 18 months ago we achieve around 57.1% and we will continue to increase our stake.

34:11 Thank you. Thank you.

34:12 Thank you. As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, Please press star and 1 on your telephone. Mr. Fabbroni, there are no more questions registered at this time.

34:45 So we would like to thank again all participants and we will stay available obviously for any additional request of information. and tonight and also tomorrow we are organizing several calls with our stakeholders who are available together with Jacopo for organizing them and so thank you again and good evening everybody. Thank you very much. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.