NEXPF - Nexi S.p.A. (NEXPF) Q2 2023 Earnings Call Transcript
2023-08-01 20:20:20 ET
Nexi S.p.A. (NEXPF)
Q2 2023 Earnings Conference Call
August 01, 2023 02:00 AM ET
Company Participants
Paolo Bertoluzzo - Chief Executive Officer
Bernardo Mingrone - Chief Financial Officer
Conference Call Participants
James Goodman - Barclays
Justin Forsythe - Credit Suisse
Alastair Nolan - Morgan Stanley
Sandeep Deshpande - JPMorgan
Joshua Levin - Autonomous Research
Sebastien Sztabowicz - Kepler Cheuvreux
Hannes Leitner - Jefferies
Aditya Buddhavarapu - Bank of America
Antoine Hucher - UBS
Simonetta Chiriotti - Mediobanca
Alberto Villa - Intermonte SIM
Mohammed Moawalla - Goldman Sachs
Presentation
Operator
Good morning. This is the Chorus Call Conference operator. Welcome, and thank you for joining the Nexi First Half 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Paolo Bertoluzzo, Chief Executive Officer of Nexi. Please go ahead, sir.
Paolo Bertoluzzo
Thank you and good morning to everyone. Welcome to Nexi call for our results for the First Half of 2023. I’m here, as usual, with Bernardo Mingrone, our CFO; and Deputy General Manager; Stefania Mantegazza, who is leading our Investor Relations team, and a few other colleagues that are here to help us, in case of need.
As usual, I will start sharing with you the key messages for the first half of the year. I will briefly comment on volumes and key updates for the Merchant Services business. I will then hand over to Bernardo that will cover financial results. I will come back for final comments. And then, as usual, we will open to your questions.
Let me jump to Page 3, with the key messages of today. First of all, we see continued solid volume growth in the second quarter of the year across all geographies, and this is despite a tougher comparison year-on-year due to COVID last year, reopening summer last year was particularly strong, I would say, spring to summer last year was particularly strong, as the businesses across geographies were reopening for business at full speed after COVID. Despite that, we had good strong growth across all geographies in this year.
In particular, if you compare to pre-COVID levels, this is an important check that we always do, you see acceleration across geographies, all of them reaching 30% growth versus 2019, and this growth is consistent across all product categories that are now converging to more normal levels of growth, post all the various COVID effects.
Second key message in the quarter, in the first half of the year, we had a solid financial performance with continued margin expansion. Revenue growth has been at 8.1% in the first half of the year with merchant solutions growing close to double-digit at 9.8%. EBITDA grew 11.6% with 153 basis points EBITDA margin expansion. And as a combination of these elements, plus our very rational approach to non-recurring items and CapEx, the EBITDA minus CapEx and non-recurring cash items did grow 18%, a very high level, 18%.
Third and last key message, we continue to progress in creating the European PayTech leader. We are executing the strategy that we have announced at the Capital Market Day back in September last year, and we expect to generate €2.8 billion of organic excess cash in the three years ‘23 to ‘25.
Based on the M&A outlook for the next 12, 18 months, both in and out, we feel comfortable in saying that we plan to allocate at least €1.5 billion for debt reduction, still leaving plenty of room for returning cash to shareholders and very selective strategic and value-accretive M&A. Last but not least, we are progressing in our portfolio rationalization and we are in very advanced talks on Nets DBS and we hope to be able to announce soon something.
Overall, based on what we’ve seen in the first half of the year, we feel comfortable in confirming our 2023 guidance that as key expectations, revenues growing at least 7%, EBITDA growing at least 10%, and cash – excess cash generation, at least €600 million.
Let me now move us to volumes, Page 4. As I’ve anticipated, we see continued volume growth across all geographies. Let me take it one by one. Italy is the one that probably had the toughest comparison with last year, as we are going towards the summer. Nevertheless, we still had solid growth in mid-high single-digit. And if you look at it in comparison with pre-COVID, actually there is an acceleration at 35% compared to pre-COVID levels.
When you look at the Nordics, Nordics have been moving in the double-digit space throughout the quarter, also accelerating at about 30% growth versus pre-COVID. Last but not least, in our DACH region, we also saw a strong double-digit growth across the quarter. And also in this region, actually volumes are accelerating at 31% versus pre-COVID.
If you look at the bigger picture, you see that category, the markets are converging to more normal levels of growth after the various rebounds and the effects of COVID, the closing, re-openings, closing, re-openings. Very probably, going forward, we will consider to reduce the level of detail that we are providing on this page, also in order to simplify and making the understanding of the business simpler.
Let me now move to the key updates for our Merchant Services business, that is the largest in our portfolio. First of all, in the SME segment, we’ve seen in the first half of the year, growth of volume in the order of magnitude of 14%. We have seen continued strong customer base growth across the various geographies with a particularly strong growth in Italy and Poland. We have added in terms of terminal base, which is a good proxy of customer base, about 250,000 customers over the last 12 months.
Second comment I want to make, we continue to make progress in our software partnerships with ISVs and platform partners, and these are contributing strongly to our sales acceleration across the various geographies.
Last but not least, we are more and more rolling out capabilities and best practices across markets, from a market to the other, and we are progressing across all our geographies with the rollout of the SoftPOS proposition, which we believe has a great potential, given the many types of applications and use cases that it can be applied to.
Moving to e-commerce. In e-commerce, we’ve seen an 8% volume growth with actually a double-digit revenue growth. By the way, an acceleration in the semester. Three points that I want to underline here, also for e-commerce actually this is performance of our e-commerce solutions in Italy and the Nordics and our account-to-account – own account-to-account solutions in Poland and Finland. We continue to be strategically focused on the mid-market that is we believe is the one with the biggest potential, and compared to where we were one year ago, we’ve seen a customer base growth of about 10% at the end of the first half of the year.
Second key message, we have developed a strategic partnership with Computop in DACH. Computop is the leading e-commerce provider in Germany, and this partnership is strengthening our online and omni-channel proposition, definitely in the DACH region but also beyond the DACH region, given the capabilities that Computop is bringing to our portfolio.
Last message that I want to underline, we continue to strengthen also in e-commerce our partnership portfolio. For example, we’ve signed a commercial agreement with Shopware across our geographies, and we’re already live in Italy and the DACH region, and a preferred partnership with Shopify in Poland.
Last but not least, our large merchant businesses that we grow 10% in terms of volumes in the first half of the year. Also here, we continue to see a healthy pipeline of commercial new wins and up-selling, cross-selling across multiple verticals and geographies.
Just underlying a few of them; omnichannel, retail, hospitality and restaurants, mobility and petrol. And here, as you may remember from our Capital Market Day presentations and discussions, our focus is more and more on the local and regional LAKAs that we believe are offering the best and most profitable opportunities.
Let me now hand over to Bernardo for financial results.
Bernardo Mingrone
Thanks, Paolo. Good morning from me as well. On slide 7, so starting with the top line growth, EBITDA and margin expansion. As Paolo was saying, I think we had a strong first half of the year. Notwithstanding, as we had anticipated the fact the first quarter was going to be the strongest and there’s going to be a reversion towards pre-COVID level growth throughout the geographies in which we operate. We closed the first half with 8% top line growth in the quarter. It was 7.3%. Again, we gross up for scheme fees as we normally show. We added a couple of percentage points to this top line growth.
Within this context, margin continued to expand. We had, as usual, between 1 and 2 percentage points of margin expansion, it was 153 basis points in the first half, growing the EBITDA margin to 49%. And EBITDA overall grew close to 12% in the first half and just north of 10% in the second quarter.
Moving on to Merchant Services. I think a touch lighter than what we might have expected, still double-digit top line growth if we gross up for scheme fees, and this is in the context of sustained growth, that’s the value of transactions throughout the Group. So I would say that even in Merchant Services, we had sustained top line growth, notwithstanding the tough comparison compared to the second quarter last year, which is probably going to be the toughest one in the year.
Within Merchant Services, we’ve just heard from Paolo how SMEs grew 14% faster than LAKAs and contributing significantly to top line growth. In addition, I think it’s important to call out how we benefit, not only from the structural growth in volumes, which as we’ve seen throughout the post-COVID years, have continued to – volumes have continued to grow significantly, but also thanks to the growth in our customer base and we call out how we added close to 150,000 terminals in the first half and e-commerce clients growing north of 10%.
Slide 9, on Issuing Solutions. It’s fair to say, I think, we had a first half and the second quarter above expectations with strong top line growth, which was supported also, and we call this from a one-off, I’d say, contribution of between 1 and 2 percentage points in the first half. This comes off the back of an M&A deal we closed at the end of last year. In general, I think focus that we’d like to call out is on up-selling, cross-selling of value-added services and the progress we’re continuing to make on advanced Digital Issuing Solutions also outside of Italy.
Digital Banking Solutions, notwithstanding the negative effect we suffered from banking consolidation in particular last year, we lost two client banks through banking mergers, we have growth in the quarter. So the growth, which is driven primarily through volumes, which were strong in EBA Clearing. This is the network of instant payments and bank transfer we manage across Europe, more than 40% of overall volumes.
The growth in network services, but also growth in other businesses within DBS more than compensated the loss of these clients last year. So I would say a very good quarter and a very good first half for Digital Banking Solutions.
Moving on to the geographical split of performance on Slide 11. We can see how Italy has grown high single-digit as has the DACH region. We pick up again those 2 percentage points, grossing up for scheme fees, being double-digit growth and for both geographies. Similar growth in the second quarter. Southeastern Europe, it’s important to call out, I could say a couple of factors, the first is through the war in the Ukraine last year, we lost the bank in the region that is depressed, let’s take the core second quarter growth year-on-year from a comp perspective.
The other factor to note is how the gross up of scheme fees here is much higher. This is due to the higher incidence of tourism and the proportionately higher incidence of tourism in the geographies in which we operate [Technical Difficulty] here, Greece and Croatia in particular. But I’d say, a good quarter in Southeastern Europe as well.
In the Nordics, a little softer here. Margin compression, I’d say, in the Nordics is one of the primary drivers. A little phasing on project work on the issuing front is also part of the explanation for the 2.5% growth in the second quarter, but mid-single-digit for the first half, which is in line with our overall longer-term guidance for the region.
If we move to slide 12 on costs, I’d say, as expected and as anticipated, we have the slowdown on the growth – year-on-year growth on costs. As for the first quarter – throughout the year, we will have four primary factors contributing to our cost base.
First one is investment we’ve made in our people, in our business, which has driven the growth in HR costs, in particular, in the first quarter where it has peaked.
The second impact is clearly coming from inflation. And as we’ve discussed a number of times, we try and I think are successful in managing the impact of inflation over time, but nevertheless, at some point inflation does hit our cost base and you see that reflected in ‘23 numbers. Don’t forget that last year we were flat year-on-year on costs.
The third is not all our costs are fixed. We have approximately 20% of our cost base, which is driven by volumes and the volume growth has driven some cost increases as well. And then offsetting part of this growth are the synergies, which we are on track to deliver in terms of our guidance, and help us mitigate this overall impact on our cost line.
However, I think the important point is, we peaked in terms of cost growth year-on-year in the first quarter and we are now reverting to a more normalized growth level for the rest of the year starting from the second quarter.
Moving on to Slide 13. We continue to invest in our technology stack to support the innovation and the transformation of our IT platforms. Indeed, I think we don’t give the details here, but R&D costs were down year-on-year this year, thanks to these investments we’re making in the platforms.
We have closed down overall five platforms of the 25, on track towards our four target platform level. And we’ve also decommissioned 11 data centers of the 45 we had and we have further obviously coming in the second half of the year, I think another five in the second half of the year.
I think it’s fair to call out how in the second quarter we had a bit more CapEx spend on terminals. This is clearly directly linked to revenue, so good, but we also had some infrastructure-related renewals, et cetera, which from a timing difference shifted or actually were booked in the second quarter, making the year-on-year comparison a little less favorable than would otherwise have been. Overall, we target still to have a 2 percentage point reduction in CapEx to revenues level for the year, which is on track towards our longer-term target.
Slide 14 shows the decrease in integration and transformation costs, or in general non-recurring items. We have a 25% reduction year-on-year in the first half. The target for the year was to reduce by more than 40% of this line. So if you look at half year number, €76 million, I think we are perfectly on track to deliver that reduction compared to 2022.
Slide 15; again, going back to Paolo’s comments, strong growth in EBITDA less CapEx, close to 20% growth, a very high-teen growth on that front. We also have an 8% growth in a normalized EPS.
And Slide 16, before we move on to the balance sheet, the cash generation in the first half was strong, €271 million – €270.5 million. If we account for seasonality of certain items, but most importantly seasonality of earnings, with the second half obviously being stronger than the first half, I think we’re well on track to deliver our goal for the year.
Finally on slide 17, the balance sheet or leverage. We closed the quarter or the first half at 2.8 times. If we include synergies, we’re just south of 3.2 times. So continued reduction in leverage. This was appreciated, or this trend is appreciated by rating agencies. We had an upgrade to BB+ by Fitch this follows the S&P upgrade, and we’re hopeful to continue on this trend in the coming months.
Two more things that I’d like to call out. The first is that we’ve activated the sustainability-linked clause on term loan. This will help not only save a little money on the interest margin, which is always important, but I think is a strong testament to our commitment to ESG and achieving our targets.
And finally, and maybe more importantly, just we have earmarked or identified or, let’s say, highlight how we already have more than sufficient cash on our balance sheet to meet short-term liabilities, both next year and the year after, but we call out here how 2024 maturity, so the [March] notes in April and the April notes in November would be redeemed or reimbursed using existing cash resources. And this will lead to gross debt reduction, which is a step in the right direction.
Paolo?
Paolo Bertoluzzo
Thank you, Bernardo. Let me just jump to Page 19. Based on the first half of the year, we confirm the guidance that we gave for the full year. Net revenues growing at least 7%, EBITDA growing at least 10%, excess cash generation at least €600 million. Net leverage going down on an organic basis at 2.9 times EBITDA by year-end; 2.6 times if you include run-rate synergies and normalized EPS more than 10%.
Let me close on Page 20, reiterating the key messages, continued solid volume growth across all geographies for the quarter. Second message, a solid strong financial performance with continued margin expansion. And let me underline again, the growth of 18% of our cash generation, EBITDA, minus CapEx and non-recurring cash items.
And last but not least, strong progress in creating European PayTech leader, and here we are adding to our previous comments the fact that based on the M&A outlook, both in and out for the next 12 to 18 months, we feel comfortable in saying that we plan to allocate at least €1.5 billion for debt reduction, still leaving plenty of room for returning cash to shareholders, and very selective strategic, value-accretive M&A. Overall, we confirm the guidance for the year.
Let us stop there. Let’s open to your questions.
Question-and-Answer Session
Operator
Excuse me, this is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from James Goodman of Barclays,
James Goodman
On great. Good morning. Thank you. Yes, first question for me, just around the merchant volumes and the outlook for the second half. I see that the volumes softened somewhat as we went through the quarter. I think there’s going to be less inflation across your geographies in the second half.
I’m just wondering what that run rate means for the merchant business in the second half. And maybe within that, you can comment on pricing, whether that’s been having an effect or whether you anticipate it to be an effect, given what we’ve seen in the market.
Other question, just around the Issuing business, if you could help us understand exactly what the one-offs were around the Bank’s M&A and maybe the materiality of that? Because more broadly, again, there seems to be some backdrop challenges in finding these larger issuing deals, yet your business is remaining very resilient there? Thank you.
Paolo Bertoluzzo
Good morning, James. Let me take the first and I will hand over to Bernardo for the second one. Listen, I think the outlook on volumes is something that remains pretty challenging to be forecasted. Based on last year and what we see, we expect, as I said before, the trends in the second quarter to continue into the third quarter because of the very strong comparison with last year, I would say, particularly in Italy and then potentially re-accelerating on a year-on-year basis in the last quarter of the year. That’s the perception and the expectation that we have at this stage.
While I think on Italy, the comparison was very tough and the nominal numbers versus last year may seem a bit lighter than expected, we have actually been surprised by pretty good volumes in DACH and Nordics. So there is also, if you like, an effect there on the mix.
As far as pricing is concerned, if you look at our net merchant fees, our take rates, if you look that as the average of the averages, they tend to be pretty stable over time. There is maybe some pressure, a little bit in the Nordics, but we see actually good dynamics, for example, in Italy. So there is not a one size that fits all, but that’s overall the dynamic, pretty stable take rates across the Group.
Bernardo, on Issuing?
Bernardo Mingrone
Yes, on Issuing, I think we called out, and I think it was fair to do so, this one-off – it’s called project work, but it’s related to an acquisition of a book at the end of last year. So I won’t name it, but I’m sure you can figure it out. At the same time, the bank that we did this M&A deal with was merging with another bank, which was our client.
And as part of the overall agreement, we basically allowed this second client bank to transfer its issuing book to the service model we had with the bank group buying the merchant book from, and this was project-related, let’s say, fees plus compensation for the fact that we were losing some cards on one bank and getting them on the other. So it’s work which happened during the first half of the year and was closed at the beginning of June or so.
And sorry, size-wise, I think we haven’t given a precise number, but it’s between €5 million to €10 million.
James Goodman
Understood. Thank you, Bernardo.
Bernardo Mingrone
You’re welcome.
Operator
The next question is from Justin Forsythe of Credit Suisse.
Justin Forsythe
Paolo and Bernardo, good to hear from you. Thank for having me. Couple of questions, if I might. First, just want to talk a little bit about guidance on the EBITDA side. It seems like you had quite a strong 1Q and 2Q. So if you could just – I know you mentioned a little bit, Bernardo, about inflation impacting the cost base in 2H, but maybe you could just talk about the implications behind reiterating the guidance and potential for incremental synergies to make that number appear even slightly more conservative as the Nets integration begins to ramp.
A second question, more broader, strategic, just want to hit a little bit on PSD3, which I’m sure you saw was – recently released their go-forward plans there. PSD2 was clearly a landmark piece of legislation, spread a ton of innovation in Europe. Looks like the new proposal hinted a little bit at the inequity between non-bank merchant acquirers and bank acquirers, particularly with access to payment systems. Any thoughts on how you could benefit from that would be great, or if there are any other aspects of the proposal that were intriguing to you? Thanks.
Paolo Bertoluzzo
Good morning, Justin, and thank you for the two questions. I will leave the first one to Bernardo, but let me comment on the second one, that – it’s good to hear this type of question that is actually something that will stay with us for some time.
Listen, there are many, many components on PSD3 and more in general on the package that was presented – the draft package that was presented by the ECB, that was also included in the Digital Euro proposed regulation and many other things.
I think your high-level comment goes in the right direction, or at least in line with what we believe. I think that there are measures that are kind of trying to make the life of customers easier in buying with digital payments, in particular online, and this is good. We believe this is just a good and will offer us the possibility to offer additional value-added services on that front. But I think in general will facilitate volume growth and user experience, the customer experience.
On the other side, there are rules that make the – basically, the requirements for being a player in this space more stringent, more important from different aspects, starting from technological capabilities, legal commitments, capital commitments and so on and so forth.
And while on the one side, this may be creating additional work for us to be done, actually, we welcome it because this requires scale to be able to invest on this front. This requires scale to be able to provide business continuity and perfect security, and this is our bread and butter, ultimately. This is one of the reasons why we are bringing a group together, the way we are bringing it and we make, I think, the entrance into the business to smaller and more marginal players more difficult. So I think your general comment is right. Overall, we welcome the direction.
Bernardo Mingrone
Yes. On EBITDA growth, hi, Justin, it’s – I think we stick by our guidance of delivering double-digit growth in EBITDA. We won’t revise that in any way. I think the way we closed the first half at 11.6%, obviously, suggests we have some room to do better, but obviously, we’re also facing inflation, which has to do with contract renewals and not just automatic impacts on our cost base to come in the second half.
I think, synergies, which we are delivering on will help mitigate this. But we’ve also made a bit of a step-up in terms of our capabilities which are fed through our cost base, which need to be managed through these synergies. So I wouldn’t expect – I wouldn’t want to change the guidance and stick to that 10%, knowing that we are in a good position to deliver it.
Justin Forsythe
Awesome. Thank you so much. I appreciate it.
Operator
The next question is from Alastair Nolan of Morgan Stanley.
Alastair Nolan
Great. Thanks for taking my questions. I’ve got two. Maybe first on the outlook into next year. You’ve mentioned obviously some tougher comps in the second half. Can you just talk about the levers that you see in front of you in terms of kind of reaccelerating that growth and back towards the 9% implied CAGR that you laid out at the Capital Markets Day?
And then just secondly, you talked about the €1.5 billion earmarked for debt reduction, but that’s still leaving some room for capital return. Can you maybe talk in a little bit more detail around what you’re thinking on that front? That would be really helpful. Thank you.
Paolo Bertoluzzo
Good morning, Alastair. Let me try to take both questions. Outlook in 2024 is early to talk about it, but said that, the way you should think about the levers to accelerate top and also bottom line and of course, also cash generation performance are – about these four. I think on the top line, I would definitely mention an acceleration of revenues in Merchant Services in the DACH region, and second acceleration in e-commerce, broadly across geographies.
As far as the EBITDA is concerned, clearly continuing the delivery of our cost synergies. As you remember, there is a multi-year plan and we are delivering according to that plan. And as we said in the past, there might be some more to be done in the longer-term.
And the fourth element that instead would impact cash generation is the trend that Bernardo has been mentioning as well in terms of going gradually down to a more normal level of CapEx spend and non-recurring cash expenditures. So the four things together, we expect that should generate revenue acceleration, EBITDA acceleration and cash generation acceleration.
On the capital allocation, I’m smiling because obviously when we give something there is always the request for giving something more. As I said, based on the cash generation that we expect to see for the business this year and next year, and the coming two years, and the outlook that we see for M&A, where we see opportunity for disposing non-strategic assets, and we see honestly limited opportunities of high-value additional M&A, and by the way, of limited size.
Today, we feel comfortable in saying that we will be allocating at least €1.5 billion to debt reduction, which is already a clear indication of direction on the back of our Capital Market Day strategy announcement.
And as we said, this leaves plenty of room of maneuver, which is the €1.3 billion remaining out of the €2.8 billion to do both, basically cash – returning cash to shareholders and doing net M&A. As I said, again, you should look at M&A as net, because the €2.8 billion we are generating are organic, coming from the current business. As we go forward, probably will be able to provide even more detail on this, but for today this is where we want to stop.
Alastair Nolan
Thank you very much.
Bernardo Mingrone
Yes. Thank you.
Operator
The next question is from Sandeep Deshpande at JPMorgan.
Sandeep Deshpande
Hello.
Bernardo Mingrone
Yes. Good morning.
Sandeep Deshpande
Yes. Hi. My question is regarding the growth, when we compare the growth between the different regions, we see Italian growth is 10% in volume, but Nordic growth is some low single digit. Clearly, there is difference in volume, but in revenue are you seeing these sort of growth differences as well?
Paolo Bertoluzzo
Sorry, Sandeep. Okay. You’re talking about the different growth rates in – yes, it’s what I was probably also mentioning a little before. The one region that is a bit an outlier there that despite good volumes, I would say on the strong volumes, is actually running lower than the volume growth on top line is actually the Nordic region. There are two reasons for that.
The first one is that on issuing, we are broadly speaking flat, or with a low single-digit growth, while in issuing most of the accelerated growth is coming from Italy. And let me underline the fact that in issuing, despite the one-off that Bernardo has been commenting on, the growth is pretty strong also net of that.
While still in the Nordics, on Merchant Services, we are more around mid-single digits. This mid-teen single-digit is still a bit below volume dynamics for basically two reasons. I think in the first half of the year, we had a bit less handset sales compared to last year this year. So there is a little bit of phasing probably there. And second, there is a little bit of margin pressure, mostly due to product mix in the Nordics. We expect, however, Nordics to reaccelerate in the second half of the year, at least for the outlook that we see.
Let me underline the fact that on the fourth region, Central, Southern Eastern Europe, also there you see a number that – for top line growth, that is not a strong as revenues are, but if you look at it in terms of Merchant Services, actually Merchant Services are in the double-digit space. And therefore, this lower number for the total is mainly driven by what Bernardo was saying before, a little bit of the effect of last year. Russia same, plus a specific agreed topic on a customer care business that was EBITDA negative and that is finishing.
Sandeep Deshpande
Another question quickly on your growth into the second half of the year. You’ve had fairly good growth here now in the second quarter when the comps were much more difficult in Q2 of ‘22, given the reopening. But then by the fourth quarter of ‘22, as you know that your growth did slow down. So the comps become easier later in the year. So do you expect your growth to accelerate now into the fourth quarter for instance?
Paolo Bertoluzzo
Yes, Sandeep, it is a little bit what I said before. Again, it’s very difficult, because the reality is that, when you see it from the macro data, I mean the outlook for the European economy across the different countries is still a little bit unstable and uncertain.
Said that, when we look at our current plans, we expect to have a third quarter pretty much in line with the second quarter because, again, especially when you compare it to pre-COVID, the third quarter last year with the summer in the middle, it was very, very strong, especially in Italy that is driving a lot of the volumes and the revenues for the Group, while volume-wise, we may have easier comps in the fourth quarter. So what you’re saying sounds very much in line with our belief.
Sandeep Deshpande
Thank you so much.
Operator
The next question is from Joshua Levin of Autonomous Research.
Joshua Levin
Hi, good morning. Two questions from me. So banks in the UK, or one in particular, are exploring options for their payment businesses. Is the UK payments market that Nexi would consider doing a deal in, whether it’s a JV or an asset purchase? And then the second question is, I was in Italy not too long ago, and I noticed it was possible to pay using a card just about everywhere regardless of how small the purchase, no cash was necessary. I know this is just limited personal experience as a tourist, but if you think about Italy’s cash to card transition, how far along do you think it is? Thank you.
Paolo Bertoluzzo
Good morning, Josh. Thank you for the question. I think answering the second one that I love, because it’s really based on a personal experience. You are right, I don’t know which part of Italy you were, which area, but the reality is that if you look at the metropolitan areas of the country is very much the way you have experienced. Personally, I’ve not been using cash for the last many, many, many weeks. It is probably left for tips and for small gifts on the street.
The reality, however, is that as soon as you go outside the metropolitan areas, there is still a lot of cash payments around, but also in the metropolitan cities. Again, talking about personal experience, I love to go to the local market in Milan on Saturday mornings doing my own grocery shopping. And the reality is that you see a lot of people, normally a bit older people that pay cash, which is nonsense from me, but it’s really what is happening because probably they feel comfortable like that.
Therefore, if you look at the overall penetration of digital payments in Italy, is probably today in the low mid 30s, which is still very much behind what you see in the rest of Europe, in particular, the UK, France Benelux, the Nordics. So I think there is a long, long run in front of us in terms of cash to digital payment conversion. It’s happening. It’s good it’s happening, but there is a long, long way to go.
On the UK front, to be honest with you, we are really, really focused on our organic plans. We believe that our organic plans do have a lot of value and we are focused obviously in making sure we get the most of the acquisitions – the recent acquisitions we have done and we are preparing, as you can imagine, very strongly for Spain to come into the portfolio. At the moment, we are not looking at the UK, we have other priorities and that’s not necessarily a market that we consider for us attractive.
Joshua Levin
Thank you very much.
Operator
The next question is from Sebastien Sztabowicz of Kepler Cheuvreux.
Sebastien Sztabowicz
Yes, everyone, and thanks for taking my question. Can you please make an update on the integration process of SIA-Nets, what have been done over the past few months, what are the key, I would say, point of focus for the coming months and where is the [synergy coming] at the end of H1?
And the second one is more on the M&A front, because we have seen more private equity gradually coming back to the payment market, bringing some kind of inflation on the multiple in the market. Is this something that you are seeing as well, and is it something that could slow a little bit your M&A opportunity in the coming months? Thank you.
Paolo Bertoluzzo
Good morning, Sebastien. Listen, I think the integration process is progressing exactly according to our plans. Again, we do not provide any longer detailed numbers for a very simple reason because since January 1 of this year, we are running the company as one company, and therefore, giving reliable numbers becomes de facto impossible because we are operating as a group. And therefore, everything – anything now could be considered a synergy.
Said that, we are progressing according to our plan. I think, if anything, this year we may be over-delivering a little bit on technology synergies, and we have more for next year. But again, as I said, so far so good.
As you can imagine that Sebastian, you have certain initiatives that are doing better than expected, certain others that are going a bit slower, which by the way leaves room for doing better in the coming years. But all in, we are in line or slightly better than expected.
Listen, on M&A, I guess you’re referring to – in particular to the U.S. Worldpay deal. I think, in general, we welcome interest from, in general, investors and private equities as well in the sector that I think is, by the way, underline the fact that the multiples that we see around these days are probably far too low, given the potential value generation of the sector.
Said that, we’re not particularly worried about private equities coming in and inflating price and so on and so forth, because honestly, buying additional assets is not our priority. So we are very selective on what we’re looking at and currently, we are looking at a very, very small number of potential small opportunities, where honestly, we don’t see private equities around.
Sebastien Sztabowicz
Thank you.
Operator
The next question is from Hannes Leitner of Jefferies.
Hannes Leitner
Yes. Good morning. Thanks me letting me on order. I also have two questions. So the first one is you mentioned here a couple of data points around platform and data center decommissioning. Could you remind us how many platforms and data centers you have currently running and what is the target here?
And then the second one is on issuing services. You spoke around a very strong market environment, that is a little bit against some other competitors. Maybe you could break that down in a little bit, let’s say, leading market activity ramp-up and then, let’s say, existing businesses and renewal business? Thank you.
Paolo Bertoluzzo
Let me maybe take the second one. I will hand over to Bernardo to complete the comments he was making on platform and data center consolidation. Listen, our issuing service, I think that in a nutshell, the dynamic is the following. We have Italy that is growing very strongly. Even besides the one-off we were talking about, is growing high single-digit. And that’s really well supported by a continued rollout of new products and services, international debit, in particular, but the more and more of those in the licensing model that we have in Italy.
We’re basically – now we own the product and we can do product innovation and customer management. And we see more and more engagement with the banks also, supporting them to upsell and cross-sell these products and services. And a core part of the strategy for us is to export this model that we call the Advanced Digital Issuing across the different geographies.
We also see a solid performance outside of Italy that is mainly driven by processing business. Again, the processing business, as we already commented in the past, we see good support for volumes. So there is a volume growth that is supporting growth.
We have a few smaller new deals here and there, but most importantly up-selling and cross-selling on the customer base of additional value-added services. And this is more than rebalancing same price pressure that we see here and there, that continues to be around our negotiation, so on and so forth, even if much, much lower than what it was in the past. So that’s the overall dynamic that we see at this stage.
Bernardo Mingrone
On the platforms, so we had 25 platforms issuing – acquiring e-commerce and so on and so forth. We have closed, as of the first half this year, five of them to 20. There’s a plan to close another five in the second half of the year, so further reducing towards our target, which is 4 in the longer term. And on the data center consolidation, we had 45 at the time of the announcement, we are planning to reduce that to 15. We have closed 11 of them and there’s another 2 for year-end.
Obviously, numbers don’t necessarily correlate directly and proportionately to costs on data centers. It’s really the square meters you close down that impacts the cost and not the number of data centers, but I think it’s a good proxy towards achieving our overall synergy target.
Just a final reminder of something I mentioned during the results, I think we are progressing very well on the synergies. We haven’t given you the full cash synergies for the year. I think in the first half, on the cost front, we had sufficient synergies, especially in IT, to make it such that overall our IT costs are actually coming down – the P&L IT costs. Yes.
Hannes Leitner
Thanks. Just a little follow-up here to Paolo. You didn’t speak now about – could you remind us around the activity in terms of lead times to projects? Is there a vibrant market in the banking space at this point compared to maybe the pandemic?
Paolo Bertoluzzo
Well, there is not – I want to say that it was, I would say. We see good project activity around, but I would not consider it – neither higher than normal nor lower than normal, we consider it more or less in line with what it was pre-pandemic.
I think there is a broader long-term trend that we see on another front, which is connected to the fact that as the payments become more complex, more important for customers, and also now we just discussed a few minutes ago, a new regulation coming in, making it a bit more complex, not to think about new products and services to be managed, such as the Digital Euro, EPI and other things.
It’s very, very clear that banks reconsider their strategies and in general, they look for partnerships in order to have the support that is needed from a payment specialist, that have scale, investments, competence to support them into this journey, into this evolution. So it’s not necessarily connected to a pandemic, but it’s more around the long-term evolution of the industry. And from this point of view, we are having everyday conversations with medium and large-sized banks about their strategic evolution.
Hannes Leitner
Excellent. Thank you.
Operator
The next question is from Aditya Buddhavarapu of Bank of America.
Aditya Buddhavarapu
Hey, morning Paolo, Bernardo. Thanks for taking my questions. Just a few from my side. So, firstly, could you just comment on some of the trends you’re seeing across different geographies and end markets in terms of demand, or maybe just consumption trends, how travel is faring and maybe what you’ve seen in July as well?
Second, you mentioned that the Nets DBS asset is in advance talks. Could you also just comment on Ratepay, and I think the decision around that?
And then finally, I think Paolo, you also mentioned that in terms of use of cash, there’s also scope to think about disposals outside of these two. So can you just comment on that? Are there any other assets which you might look at as being slightly less non-core going forward?
Paolo Bertoluzzo
Good morning, Adit. Let me take the first and the last and then I will hand over to Bernardo for the second. Now listen, as I commented before, we start to see categories converging to similar growth rates. I think, Italy is particularly telling, because it’s a large market and our numbers are a good proxy to the overall number. So that’s where you see year-on-year growth rates are coming down at the same time to more normal levels.
Said that, it is important to say that, in general, we’ve seen a good recovery of travel and we continue to see a good recovery of travel. And today, travel – just let me give you a couple of numbers. Today, travel – and when I say travel, I literally mean airlines, transportation, travel agencies. So it’s not the traditional – it is not including restaurants and stuff like that, is up about 30% compared to pre-COVID. Also, the Nordics is up double-digit compared to pre-COVID. And our perception is that, that recovery is now coming to completion more or less.
I think, going forward, the macro environment will become more important, as people rebalance the way they spend their money, in the context of inflationary pressures that are on the nominal level starting to go down. But when you look at the cost spending, for example, food and beverages, groceries and stuff like that, are still at very high levels. By the way, other expenditures such as, for example, loans – cost of loans are going up. So we believe we will see, going forward, a more normal dynamic.
On disposals, again, we talk about what we do when we do it, but you may remember that at the Capital Market Day, we said that over time we’ve been looking at further opportunities for focusing, rationalizing our DBS portfolio besides the Nets DBS business that we put as asset for sale.
Again, for us, it’s all about having the ability to focus our energies and resources to the business that are more core and for our company with a stronger growth potential. At the same time, allowing the other businesses, where there are growth opportunity and capture their well-deserved investments with other owners. On Nets DBS, Bernardo?
Bernardo Mingrone
Yes. And Ratepay, I think – Nets DBS, basically, we are actually in advanced talks with buyers, as we’ve said in the past. On June 29, unfortunately or fortunately, European draft directive impacting electronic ID wallets throughout Europe was published ahead of plan. This needs to be evaluated by the bidders in the context of this process. So this has slightly delayed the timing. I would say that, however, we are in a very good position to close the transaction in the coming weeks, or at most, months given the summer period.
With regards to Ratepay, there it’s a different market. Obviously, we’ve spoken to that point in the past. It’s not the most ideal market to sell a consumer finance business. We are – even in this front, engaged in discussions, articulated discussions, I’d say, surrounding a multifaceted deal, which would entail more than just one agreement being struck. So a little complicated and taking a little time.
But in any event, I always like to remind us that we always have kind of put option on Ratepay, which is switching it off between €100 million and €150 million of indebtedness. So that – we have that option, which is in our hands as a backstop.
Hannes Leitner
Great. Thanks. Just maybe one follow-up. I think on the point on banks looking for partnerships as the payments business becomes more complex, I mean can you talk about, I mean, again your willingness to do those sorts of partnerships and where you see maybe some opportunities around that? Any particular markets which you think might be attractive?
Paolo Bertoluzzo
Listen, I think that we are having these conversations both with customers that are already with us and we are discussing with them on how to form the partnerships in – to the benefit of both, but also we have conversations in markets and – sorry, in line with the banks and geographies where we’re not necessarily yet the core partner. So I think this is happening in several different places and we see more of these coming out going forward.
We are not talking necessarily about books, I want to be clear. We’re not talking about necessarily M&A. Here we are really talking about having industrial projects, or co-founded industrial projects, especially for the large banks, where now we evolve towards – we have been evolving towards more advanced products and services and next-generation platforms. That’s, I would say, what we see around.
Hannes Leitner
Understood. Thanks a lot.
Operator
The next question is from Antoine Hucher of UBS.
Antoine Hucher
Hello, good morning. Thanks for taking my question. The first one is on the transformational CapEx. It was €78 million in H1. So could you give us maybe an update on your expectation for 2023 and where you expect that to trend in ‘24 and ‘25 afterwards?
And the second question is on the Ratepay. I think you are managing the decline of the business in 2022 to trim like [your excess bureau]. Could you give us an idea, maybe of what growth was like for Ratepay and revenue trends in the first half of the year?
Paolo Bertoluzzo
Good morning, Antoine. Let me hand over to Bernardo for both.
Bernardo Mingrone
Yes. So transformational CapEx, I remind you that we entered the year with approximately €130 million to be spent in ‘23-’24. Most of it would be spent, I expect, this year. If you look at the target, or if you think of the target we’ve given to be just south of €500 million in terms of total CapEx and what we’ve spent in the first half in terms of transformation, I think most of that €130 million would be spent during the course of 2023.
The second question, Ratepay, I mean, we’re not going to disclose numbers on Ratepay, but I’d say the core business of Ratepay is growing and is expected to grow. If you exclude the Otto Group, which is the original parent company of Ratepay, from which Ratepay has been separated entirely, it’s including business volumes coming from Otto Group which were legacy, the core business is growing healthily, notwithstanding the fact that we are not – or we are limiting onboarding of new customers in light of the M&A process.
The bottom line, obviously, suffering from this growth, which isn’t as strong as it could be, and therefore, the cost base is what it is. And therefore, last year we managed to generate a very small profit. This year, we are likely – bottom line profit this year, we’re likely to generate a small bottom line loss.
Antoine Hucher
Okay. Thank you very much.
Operator
The next question is from Simonetta Chiriotti of Mediobanca.
Simonetta Chiriotti
Thank you. Good morning. Just one question on competition. How do you see competition changing in Italy after the agreement announced by Banco BPM and BCC Pay, and which could be the possible impacts for Nexi from this new JV? Thank you.
Paolo Bertoluzzo
Good morning, Simonetta. Listen, Italy is a competitive market, has always been a competitive market and will continue to be a competitive market. Honestly, we don’t know exactly what to expect from this new player. I think it would be fair to ask them and Banco.
The only thing that I underline, consistent with what I’ve said before is that, if you want to compete at scale in this market, you must have capabilities and ability to invest at scale. And this is what we have and, obviously, we’ll continue to do everything we can to continue to win and grow in Italy, regardless, the last competitor appearing in the market. So let’s see. There is for us no major new news compared to the past.
Simonetta Chiriotti
Thank you.
Operator
The next question is from Alberto Villa of Intermonte SIM.
Alberto Villa
Yes. Good morning. Just coming back to the previous question, can you give us an idea of what was the, let’s say, revenues and EBITDA generated by Banco BPM in first half 2023 for the Group, and if you think you will be able to retain part of the business in the future out of this, let’s say, new deal they are announcing?
And secondly, again on M&A, among the non-core asset disposal, there has been rumors about this national interbank network in Italy, potentially an asset you could dispose. Can you give us an idea what would be your idea on that asset? Thank you.
Paolo Bertoluzzo
Good morning, Alberto. Listen, I think on Banco is a bit early to say. I think the size of the business – we never give size of individual contracts or products and so on and so forth, but what we have read around is broadly speaking going in the right direction. The impact for us and we are working through our plans, as you can imagine, will be definitely zero this year and probably very marginal next year.
Then what the impact will be going forward will really depend on the ability of this new player to migrate customers, develop technology, develop products, be competitive and so on and so forth, and our ability and actions to defend customers that over the last many, many years have been used to Nexi products and propositions that are quite advanced for Italian standards, and quality of service. So, I think, over time that will be the key element to be watched. But again, no impact this year, and we expect marginal to no impact next year as well.
On the network thing, as you can imagine, again, we don’t comment on rumors. But I go back to what I did answer a few moments ago, I think, to the question from Adi that, in general, the area of DBS was an area, as we announced at Capital Market Day that we would have been considering for potential rationalization and further focusing of the business.
Alberto Villa
Thank you.
Operator
The next question is from Mohammed Moawalla of Goldman Sachs.
Mohammed Moawalla
Great. Thank you. Good morning, Paolo and Bernardo. Just a quick one from me. How would you sort of rate your visibility into the second half of the year? Obviously, cards digital payments going quite well. I know there were some sort of one-time benefits in there, but on the kind of Merchant Services side and particularly as you kind of move into next year, as we consider some of the kind of the macro concerns out there, and do you feel this is now a kind of sustainable growth rate that you’re at in the kind of high single digits? That’s great. Thank you.
Paolo Bertoluzzo
Good morning, Mohammed. And I think we are closing with a very difficult question, I think, here. Let me try to answer to you into different ways. First of all, we have the visibility that is sufficient for us to confirm our guidance, as we are doing today. At the same time, I think it’s fair to say that the visibility on the second half of the year is a bit lower than what it used to be in the past, probably at least pre-COVID now, because of the many macro elements that are mixing up in the various geographies.
So we had a good visibility of what we do and not the things that we can control when it comes to initiatives, projects, cost management, CapEx management, and all of that. Now when it comes to volumes, it’s a bit more difficult than over the last several years. But, again, it’s good enough to confirm the guidance.
Mohammed Moawalla
That’s great. Thank you.
Paolo Bertoluzzo
Thank you.
Operator
[Operator Instructions] Mr. Bertoluzzo, there are no more questions registered at this time, sir.
Paolo Bertoluzzo
Thank you. Again, thank you for joining our call this morning. We will see some of you over the next few days in conference calls and the likes, and we plan to see many of you – many more of you right after the summer break. Let us stop for the moment here.
So solid – very solid results for the quarter and for the first half of the year. Confirming guidance for the full year, and further clarity on the direction of travel of capital allocation going forward with a clear priority in debt reduction, but also plenty of room of maneuver to return cash to shareholders and for the limited M&A that we can see in front of us over the next 12 to 18 months. Enjoy the summer and see you soon. Bye-bye.
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Nexi S.p.A. (NEXPF) Q2 2023 Earnings Call Transcript