Nexi Spa Azioni Ordinarie

Good morning, this is the Chorus Call Conference Operator. Welcome, and thank you for joining the NEXE Full Year 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. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Paolo Bertoluzzo, Chief Executive Officer of NEXE. Please go ahead, sir.

Thank you, and good morning to everyone. Welcome to our call for full year results for 2023. As usual, I'm here with Bernardo Lombrone, our CFO and Deputy General Manager, with Stefania Mantegazza, who leads our investor relations activities, and a few other colleagues that may help in case we need for your questions. I will start with the key messages and commenting as usual volumes on our progress in merchant services. I will then hand over to Bernardo that will take us through the financial results and then I will close with the new year guidance and the outlook for the medium term. Let me jump to page three that summarizes the key messages of today. Three key messages, first of all in the quarter The last quarter of last year, we've seen continued volume growth in all geographies. While Italy and the Nordics have been trailing at around mid-single-digit year-on-year growth, we do continue to see strong double-digit growth in the DAC region in the quarter as well. The beginning of the year has been more or less in line with the end of last year, with growth across all geographies in January and in February so far, despite the macro weakness that we see around us. Second key message we've seen in the year and also in the quarter, continued top line growth, very strong margin expansion and cash generation. Revenue growth for the year has been at around 7%, with merchant solutions growing closer to 8%, and with Germany and e-commerce growing in the year double digits. On EBITDA, we've seen a growth of about 10 percent versus last year, with almost 150 basis points of EBITDA margin expansion, despite the inflationary pressure that we've seen on the cost base. Third, we've seen continued strong cash, excess cash generation that is closing at the year at around 600 million euros, slightly above 600 million euros, which was our target for the year. In this context, we've seen a continued debt leverage reduction. We're closing the year at about three times EBITDA, which is down from 3.3 at the end of last year. Last but not least, we had to take a non-cash technical impairment of goodwill intangible of about $1.2 billion to reflect the share price evolution and the current market conditions De facto, this is related to the NetSense emergence from 2021 that were done in shares with no cash component. The third message, given these strong cash generation and the outlook of continued growing cash generation, we have decided to propose to our AGM to start a 500 million euros of share buyback program. Overall, the strategy, our strategy execution is progressing well. We are seeing more and more opportunities for efficiencies and synergy delivery on the back of the group integration, and we'll take them starting from this year at an accelerated pace. The 2024 guidance and the revised medium-term plan are confirming continued margin expansion and strong growth in cash generation in a more uncertain macro outlook, at least in the shorter term. In this context, we've decided to evolve our capital allocation strategy. We will continue to reduce leverage that remains a key priority. We will always continue to cover the limited, actually, M&A opportunities that we see and that we expect to have in the near term. But at the same time, we entered a new phase for our company in terms of capital allocation, and we started returning capital to our shareholders. And given where the share price is today, and the management and board believes that the share price doesn't fully reflect the value of the business and its outlook, we decided to propose to our shareholders meeting a share-by-back program up to 500 million euros over the next 18 months. Consistently, what I just said, that in the year, actually over the next couple of years, we are confirming that we will pay down the 1.3 billion euros of debt maturities that would exist in cash. This will materially reduce our gross debt, our gross leverage, and obviously our cost of debt. And last but not least, we continue to progress on our ESG plan, and in INEX, you see a page that summarizes the progress that we've done during 2023. Overall, we have delivered guidance for last year, despite a macroeconomic environment that during the year has become much more complex and challenging than what we were expecting at the beginning of the year when we gave the guidance. Let me now move to page four. And where you see, as usual, the volume dynamics. As I did say last time, this is the last time we're providing all these details. This page was intended to help to understand what was happening during the COVID period and after the COVID period. Hopefully, this is history. And therefore, we'll move to a more simplified explanation of our volume dynamics. But to comment what we have in front of us today, Basically, you see all geographies are growing. Italy is basically moving at around 5%, 6% over the last few months. Nordics are seeing a similar trend. Well, actually, in DACA, we continue to see a double-digit growth over the last quarter and also at the beginning of the year. When you look at the different categories, it's good to see that we have a very solid growth across all geographies on basic consumption that remains strong and it continues to be a clear signal of the very strong cash to digital payments shift that continues to happen across all geographies. While you see that the category that is suffering the most actually is discretionary goods, as it is normal in a phase where macro is difficult and consumers need to rationalize the way they spend, and this is particularly visible in Italy and in DACA as well. Let me now move to page five that summarizes some of the progress we've done in the merchant services space. Let me just pick on a few of the points on this page. First of all, in SMEs, when we continue to see good volume and revenue growth, we have continued to expand our customer base similarly to what we've done in the previous quarters, with particularly strong growth in Italy, in Germany, and in Poland. Second, this is very strategic for us. We continue to progress on integrated payments, on this convergence of software and payments. with a good number of new SV partnership wins in the last quarter as well, both in the ECR space and in the vertical solution space with a special focus in the sectors that we believe are the most exposed to this dynamic, being retail, hospitality, mobility, and ticketing. Moving to e-commerce, where we've seen during the year a good double-digit growth of revenues, Now we've seen again also here continued customer base expansion with about a 7% growth with a strong continued focus on mid-market that we see as the sweet spot for us. And we continue to sign also in this space partnerships with key strategic e-commerce platforms. In the last quarter, we signed a group-wide partnership with WooCommerce. It is coming on top of the ones that we've signed in the recent past with Magento, Shopware, and Prestashop. Last but not least, on LACA, we continue to see a solid pipeline of customer wins and the cross-selling and up-selling opportunity. Here, our focus is more and more on mid-corporate and national large merchant space, where the local integrated capabilities are a key differentiator and where we are keeping as much as possible a strong focus on some key verticals like omni-channel retail, hospitality, and EV charging, and petrol. Let me now hand over to Bernardo that will take us through the financial results.

Thanks, Paolo, and we'll go through these slides. You've anticipated the group results, so I'll try to leave as much time as possible for your concluding remarks and Q&A, starting from Slide 7, looking at the group as a whole, as Paul has already said, we grew revenues in the year by 7%. This was in line with the guidance we'd confirmed back in November, notwithstanding the market environment we spoke of. The fourth quarter was roughly similar to the whole year, albeit a little lighter. I think it's important to note how, notwithstanding the tougher market conditions, we still benefit from significant operating leverage, and as we grow revenues, EBITDA margin grew 146 basis points in a month, roughly 140 in the quarter, taking us to a 52% group-wide EBITDA margin for the year, which is in line, I would say, with the high historical performance and track record. In this context, our EBITDA grew double-digit, 10%, slightly lower than that in the fourth quarter, but again, very much in line with the guidance we gave for the year. Moving on to merchant solutions, we can see how top-line growth has been a little lower than what historically we have been used to, but roughly 8% for the year, a little softer than that in the first quarter, consistent with what we said with regards to performance. However, if we only looked at international schemes, we obviously benefit from the strong growth in international schemes we've highlighted, and more importantly, I think it's fundamental to look at our growth in Germany and e-commerce, which are two of the key pillars of growth for our strategy going forward, which are growing double-digit, and indeed e-commerce is probably growing twice the speed of the market. Moving on to issuing solutions on slide nine, again, we have guidance, which is, I would say, sorry, results, which are at the top end of the guidance we have always provided for this business unit, which is to grow made to high single digits, so growth for the year was 7.6%. And as we knew, as we had planned for the beginning of the year, a stronger fourth quarter than the rest of the year. And this is due to a number of things we've highlighted on the top right-hand corner of the page, where, as you know, a lot of work gets done for banks. These are primary partners in issuing solutions, and the phasing of the project work we did for banks was skewed towards the end of the year, as I said. It was planned, but you should think of it also as something which is hard to predict up front for next year. Indeed, I think one word of warning, the reason why I call this out is that given the more prudent environment we want to manage for next year, I think we've been a little more conservative in 2024 than in 2023 with regards to this kind of project work. The fundamentally important point I would like to highlight on issuing solutions are basically the first and the last in the page. The first one is that we've gone past the 6 million international debit cards in Italy. As you know, we've discussed this a number of times, this product for us is significantly more valuable than the traditional, simpler domestic scheme cards, and there was a strong push in the year which also contributed to this result. And the final point, which is also crucially important to our success and our strategy, we continue to upsell and cross-sell value-added services in different geographies from Italy also, in Italy clearly, but also outside of Italy. And this is important when we'll come to see progress in the DAC region in the fourth quarter as well in a couple slides. DBS, I think, had a very strong year. It is the business unit which least relies on growth in volumes. However, the exposure to instant payment growth in the European market, where we are a very significant player thanks to our Partnership with the EBA Clearing has helped basically offset the loss of customers in prior years. So we lost bank customers in Italy through banking mergers. And the loss of those revenues has been more than offset by the growth in the business. So a strong year for digital banking solutions, which grows about 2%, the top line in line, again, with our guidance for this kind of business. Slide 11 gives you the geographic breakdown of the growth in our businesses, Italy growing 7.5%, Nordic slightly lower than that in the mid-single-digit range. Dock in Poland is a key driver to the top-line growth, with growth in the year of 8%. The fourth quarter, I think, is more driven by some project work, again, as I was mentioning, on issuing and some customers. We won in Germany in particular. but in general, a strong year for the Aachen-Poland region, Southeastern Europe, and other benefits from the acquisition we closed in February this year of the Intesa book in Croatia, which also contributed materially to growth in the period. Slide 12 is an important slide for us to spend a moment or two on. It's cost performance. We've guided to costs being lower than 4%. in the year, at least, to discuss. That was our outlook during the course of 2023. And indeed, we closed the year at 3.8%. And this is notwithstanding significant inflationary pressures, which all of us are keenly aware of. And this is very much so in renegotiating labor contracts throughout Europe, and Italy in particular, where we have half of our businesses, just under half of our businesses in Italy, including the workforce. And as some of you might know, Given, I'd say, the strength in the banking market, thanks to the higher rate environment, we have the national credit contract applying to our colleagues in Italy. There's a very, very front-end skewed negotiation in terms of updating that contract, which impacted us at the back end of 2023, so much so that if we normalize for that big one-off we had to book in December, growth in HR costs in the fourth quarter would have actually been zero. In any event, I think through synergies which we continue to benefit from, efficiency programs which we continue to implement, we managed to contain cost growth on the non-HR expenses to 2% and overall to under 4% for the group, as I said, showing our continued commitment with regards to cost control. Moving on to CAPEX, the trend has inverted. We are down year-on-year by approximately €25 million, a 5% reduction. This is also thanks to the fact that we're completing, finalizing what we had earmarked as transformation costs following the mergers with NETS and SIA, which were announced at the end of 2020, but implemented ultimately from 2022 onwards, at least with regards to the merger with SIA. And we expect, and Mopalo will talk to guidance, we expect this trend to be consistent with what we discussed in the past with regards to CAPEX. It's important to highlight how, and we give you an indicator here of progress in simplifying our platforms, reducing them by number, and also data centers, even though we measure the number of data centers, and it should be in square meters, this is just a course measure of how we are gaining those efficiencies, synergies, and lower capex. Slide 14, as usual, highlights how the costs which are booked below EBITDA, because they are non-recurring in nature, because they're not related to the ordinary business, if you want, Transformation and integration costs, these are cash costs, are down 24%. You're near the trajectory. You'll continue as planned. On the right of that, you can see some other costs, including clearly the impairment charge Paolo spoke of, which is non-cash. We never paid cash for the mergers with NETS and CSO. All of this is an impairment of an intangible, which was not generated by cash acquisition. I mean, it's a I'd say it's obviously unfortunate we had to devalue the goodwill, but at least it wasn't paid for in cash. And we have the usual other buckets, which include non-cash costs like LTI or even those five years down the line. There's still some IPO-rated costs borne by the initial financial sponsors. In M&A impact fees and others, we have the impact of burnouts M&A carried out in the past and so on and so forth. Slide 15 is the walk to $600 million of cash generation a year as per guidance. This is a 27% increase year-on-year, taking into account as you knew that we had benefited from a higher cash balance coming into 2023 due to the deferral of cash tax components from 2022. Taking that into account, bottom-line cash generation was 500 million in year 600, less than 100 from the year before, compared to 400 million the year before. It's a 100 million increase, so in line with our expectation and our guidance. Slide 16 is about the leverage. We've come down from 3.3 to 3 times. That trajectory will inertially continue. This is a very highly generating cash business. The debt, you know, the debt stack was generated from the sponsors' acquisitions of NETS and NEXE. Very little of this is related to M&A activity, and in general, it's coming down. From April, we'll start reducing gross debt. We'll pay back the NASA notes in April as they come due and as we've committed to and so on and so forth in October with the publicly traded bonds, et cetera. I think it's important to highlight how rating agencies have taken a favorable view with regards to the progress on the leverage and cash generation with six upgrades over the last couple of years, which is clearly very pleasing from our standpoint. And I always like to highlight how the cost of our debt stack is limited, less than 3%. At current rates, it's as if we had half of the debt that we have on our balance sheet given the cost of this debt, and we will continue to benefit from this for quite a while longer. Slide 17 summarizes what Paolo has said, that we have reached a turning point in the company's transformation and journey. Now we are capable and able to start returning capital to shareholders. We believe there's significant cash balances we already have, plus the cash generation going forward, the high visibility we have on the business, on M&A, on the debt maturities that allows us to plan for this and we believe that the stock price gives us the best and most compelling opportunity to do so. So at the next EGM, we'll propose this up to 500 million buyback program, which will commence shortly thereafter and last up to 18 months. I think it's important to know the last bullet point we put on this slide, which is we believe this is the start of a capital restitution phase in NEXE's corporate life. We believe that after this initial 18-month period in 2026, will be at a point in time when we can consider other forms of capital restitution, maybe still buybacks, maybe dividends, but this is not to be considered a one-off. With that, I will hand the floor back to Paolo for his closing remarks.

Thank you, Bernardo. Let me jump to page 19 to cover guidance and updated medium-term outlook. Let me start with the guidance for the new year. In terms of net revenues, we expect to see a mid-single-digit year-on-year growth in a macro environment that we expect to remain uncertain, fragile throughout the year. I just want to underline that as far as merchant service is concerned, we expect to see, in fact, a gradual acceleration towards a high single-digit. As far as EBITDA is concerned, we expect to see A continued EBITDA margin expansion of 100 basis points plus, which basically means a mid to high single digit growth for EBITDA. As far as excess cash is generated, we expect to generate more than 700 million euros. Actually, we hope to do materially more than that. These 700 million euros are already net of cash severance costs for about 70 to 80 million euros that we will have in the year that will support further efficiencies and synergies going forward. And if you embed these into the 700, this means that we have more or less a gross net cash generation pre-severance cost of about 800 million euros, therefore continuing our strong growth of excess cash generation. Last but not least, as far as net leverage is concerned, on an organic basis, therefore pre-M&A and pre-returning cash to shareholders, our organic leveraging would be down to 2.6 times EBITDA We embed already the announced M&A, Sabadella in particular, but also what we expect to have as effects of the share buyback program, and we expect also including these elements to be below 2.9 times EBITDA, and therefore continuing our deleveraging even if we return cash to shareholders. As far as the medium-term outlook is concerned, assuming that we will continue to see, which is our conviction, a robust cash-to-digital payments conversion, and we will have a macro environment gradually recovering in the medium term, we expect to have a gradual acceleration of the top line from the mid-single digit that we expect in 2024. towards a high single-digit space in the longer term. I want to underline that we see the full potential of the business, the underlying full potential of the business to be running at high single-digit in the longer run, hopefully after macro tensions are over, inflation is over, wars are over, and so on and so forth. In any case, we expect to continue to expand the margin above 100 basis points per year. And we expect to continue to increase our cash generation strongly, reaching about a billion euro in 2026. Again, if you look at what does it mean in terms of leverage on an organic basis and, therefore, pre-M&A and pre-returning cash to shareholders, this will mean about 1.5 times EBITDA in terms of net leverage. However, we believe that we want to operate with a target leverage of anywhere in between 2 to 2.5 times EBITDA, and we will reach that level by 2026 after the M&A that you speak to and after the buyback that we are announcing and potentially further capital allocation to shareholders in the future. Let me now close on page 20, summarizing the key messages of today for us. Number one, we continue to see growth across all geographies, across the last quarter, but also the beginning of this year. We are closing 2023 with very solid revenue growth, with strong continued margin expansion and cash generation growth. Last but not least, we see growth continued cash generation growth for the business on the back also of the updated outlook. And this enables us to basically develop further, evolve further our capital allocation policy, start returning cash to our shareholders. And we're starting now with a 500 million euro share buyback program while continuing to the leverage. Overall, we have delivered the guidance for last year, despite a macro environment that has been more challenging than expected. And as a consequence of all of this, we expect for the new year a mid-single-digit top-line growth, a continuing expansion of EBITDA margin, allowing us to deliver a mid-to-high single-digit EBITDA growth and excess cash for more than €700 million, as I commented a moment ago, you should read this as an underlying more or less 800 million euros pre the impact of cash severance in the year. Let me pause there. Let me stop there, actually, and let me open to your questions.

Excuse me. This is the chorus call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. The first question is from James Goodman of Barclays.

Morning. Thank you. A couple from me, please. Firstly, just on the integration and transformation costs, could you tell us just what you're expecting there for 24, but more importantly, what the overall remaining bucket of those costs is? And just the 70 million severance costs that you just mentioned, Paolo, I mean, Are they being excluded from EBITDA this year or are they also within the EBITDA and the cash flow? And then the second question is just around EPS. I think you originally guided to 10% growth in normalised EPS for this year and delivered five. Just could you take us through what below EBITDA was a little bit higher than anticipated and why you've moved away from including an EPS guidance in the medium term outlook? Thank you.

Hi, James. Thank you for your questions. Let me go to Bernardo to comment on both.

Yeah. So the first one they called, James, was on the provisioning for the staff reduction, for the redundancies, et cetera. This is below EBITDA and those integration. We book that below EBITDA. The cash component will be mostly spent during the course of 2024, even though there will be a tail weight And the tail relates to the way we exit people in Italy, which is on a voluntary basis and based on early retirement schemes, which mean that people need to qualify for them over time. As I said, the vast majority, more than half, is this year, and that's about the 70, 80 million followers we're referring to. And then there will be a tail of the cash out in future years. From a P&L perspective, we'll book the vast majority this year, 100% of it, I would say, this year. And that's below EBITDA. The benefit, obviously, of people leaving will be within EBITDA. I hope that's clear.

Yeah, that's helpful. Thank you. Just the other part of it was just on the integration and transformation costs overall there.

Yeah, so I know it's a big ask, but if we ignore... What goes on with the things outside of the call-out on the left of the slide where we talk about integration costs, so if we ignore M&A impacts, which, as I said, comprise both fees, expenses related to M&A acquisition, but mostly in this case, or in the past as well, the booking of earn-outs related to past acquisitions, and so on and so forth. LTI, which is non-cash and it's primarily market-driven in terms of value, the IPO costs, which are just flowing through Nexium, paid by someone else and are always smaller. And then, obviously, the big devaluation this year, which we trust won't happen again going forward. and just focus on that €116 million for the year, we see that trajectory, as we had discussed at the Capital Markets Day in 2022, is continuing to unfold and will take us to roughly €50 million, which was our target back in the Capital Markets Day, probably with a year or so delay compared to then. But I'd say that the trajectory is firmly underway. It's fortunately very hard to predict 100% certainty of the evolution of these Which takes me to the EPS question. So what happened with EPS? Essentially, well, two major contributors that are missed on the bottom line. The first one is clearly we had, I'd say we were probably a bit more aggressive on the guidance we gave on EPS compared to the top line in terms of giving a more precise number. There's a bit more prudence in guiding to EBITDA given that we landed the year earlier. at the minimum, let's say, the floor of what we had guided to. We were probably a little more optimistic with regards to our ability to do better below EBITDA, which didn't work out. And that was one of the primary drivers. And the other one was, again, going back to predictability. On DNA, we had slightly higher DNA than what we expected. This is not the DNA on customer contracts, which we exclude because that's just the amortization of the goodwill related to the prior acquisitions of books, but on the IT spend effectively. And the timing of when we start depreciating these assets is driven by when project work, which is completed, actually goes into production, starts working. And that, again, there is a margin of error in that prediction. And therefore, we had slightly higher DNA, which is ultimately good news because we're quicker, let's say, than what we originally expected, but that impacted the EPS number. I hope that was clear.

Very helpful. Thank you.

The next question is from Josh Levin of Autonomous Research.

Hi. Good morning. Two questions. With regard to strength in the DOC region, do you think you're taking share from competitors, and if so, which competitors? Second question, have you considered changing NEXE's financial reporting so that the balance sheet and cash flow statement look more like those of other payment companies? it would make it much easier for investors to analyze the company, especially the cash flows. Thank you.

Good morning, Josh.

I'll let Bernardo handle the second one. As far as the tax regime is concerned, it's very difficult to have a 100% clear assessment of what is happening. However, our estimates are suggesting that, yes, we are taking action. some share there, which I think has always been our ambition, given the fact that in those markets we are actually challengers, starting from a relatively smaller position. Difficult for us to say who we are taking a share from, but I would expect from the larger players, which is a normal dynamic in this type of situation, I think. As far as the reporting is concerned, Bernardo?

Yeah. I hate to say this because we'd love to be able to change our reporting as a corporate, and we've looked long and hard into this. But basically, the tax cost for us would be too high. The reason why there's a tax cost, which is counterintuitive, is that the way Nexi reports or is classified from a tax perspective, it's a financial holding company that benefits from... from a certain tax regime, which allows us to tax-deduct interest payment on our debt, which is still very high, as you know, and we would lose that benefit if we reported as a corporate natively, which is a cost which we'd rather not bear for the time being. At some point when we've reduced the interest expense, there will be no opportunity cost, and we may well do that. But please note that when we publish our accounts, we've done everything we can to provide information the reconciliation from a balance sheet which is natively more similar to that of a bank than a corporate, and a cash flow which is the one a bank produces rather than a corporate, to what we publish. And this reconciliation is audited by our auditors. It's automated. It's not something which we produce manually. I understand it's not You know, it's not easy for you to, you know, to reconstruct the cash flow without this, but that's the best we can do.

Thank you.

The next question is from Justin Forsyth of UBS.

Hey, Paulo, Bernardo, team. Thank you so much for having me. A couple questions here. First, a more strategic one. Wanted to ask a little bit about the longer term grand aspiration for Nexi and getting to that longer term acceleration to high single digit top line growth. Is there anyone you're emulating from a strategic perspective, perhaps Fiserv or others in the industry? And further on that point, given the acquisition of OrderBird, should we expect you to start pushing OrderBird through bank distribution channels in Italy to better serve SMEs? Second question, probably more for Bernardo. You talked to a 100 basis points EBITDA margin expansion going forward, medium term. Seems like you're implying low to mid single digit cost growth. Maybe you could link in the benefit that you expect to see from efficiency gains and decommissioning platforms and how directly that could benefit margins. And further, I believe you're still processing on a third party basis with Equens. When do we expect that contract to roll off? Thanks.

Good morning, Justin, and thank you for your questions. I will let Bernardo take the second. On the first one, listen, I think that the ambition that we have to gradually bring back growth to a high single digit is in fact as far as we assume basically two things. Number one is that the macro environment becomes more supportive than what has been last year and what we see Let's see what next year looks like as we go through it. And clearly, this has to do ultimately with consumer spending coming back to be robust and healthy across most of the categories, across most of the geographies, hopefully without macro tensions coming from geopolitical factors. situations that we are all aware of. Plus, obviously, having our initiatives kicking in materially and allowing us to accelerate growth. Just to give you a sense of it, we have clear growth engines that are supporting our performance are quite material that are, for example, the DAC region, Poland, e-commerce, and a few others. Hopefully, we'll be adding Spain soon. And these growth engines, while they're growing very nicely year on year, in terms of percentage growth, they're still a bit smaller now compared to the rest of the business. And as time goes by, these contributions will become more material also in absolute terms. Do we have benchmarks or references for our strategy and so on and so forth? You know, it's very difficult to say because every geography is very different. Every geography is its own dynamic. And by the way, there are not that many players similar to us out there. Clearly, we see a lot of similarity with what some of the American players are doing, especially when it comes to the focus on merchant services, SME, software convergence, and so on and so forth. Even if, as we discussed in the past, we see these dynamics coming to Europe at a much lower pace and a much more fragmented pace, the European market remains very, very different from the US one, and while this fragmentation has a big impact in making local presence in every single geography and local scale very relevant for payments, it is more so as far as software is concerned. If you look around Europe, you don't see a lot of software players being successful across many geographies at scale. So yes, that's probably the pool of companies that look more similar to us in terms of strategic direction. But again, we really need to adapt to the local market environment. And I think that your question around Ardabird is really well put in this context. As we discussed in the past, when it comes to software payment convergence, our core strategy is to basically partner and bundle with specialized players. on top of, and that's the reason why we're always underlying so much the evolution of our partnership strategy, the evolution of our partners' portfolio, the evolution of the tools, the digital tools and the neighbors that we make available to them and that we believe can be real differentiators in this space. There are, if you wish, two twists to this. The first one is as to do with Orderbird. Orderbird we own. As you know, Orderbird is one of the top three players in Germany, a bit in DAC as well, when it comes in particular to the hospitality space, in the software space. And for us, this is an amazing, amazing learning experience and laboratory, if I can use this word. We are already progressing in bundling the products and services and cross-selling and up-selling throughout the BERT Salesforce and through Nexi Germany Salesforce debt bundle. Will we export all BERT exactly across geography is something that we'll be considering, but again, as I said before, exporting cross-border software, SME software, is not easy. It's really easier to export across sectors in the same geography because you have to comply with a long list of local tax or administrative rules that make cross-border expansion a bit more complicated. The second caveat to the strategy is something that we have started to do more and more last year and we will be accelerating across all geographies this year, which is bundling in our core proposition across segments. Now, in every single market, a basic ECR proposition with our smart terminals and payment proposition to be able to provide an end-to-end solution for smaller merchants with more basic needs. We see these becoming relevant in the market, and we see these as a pretty material upsell and customer value growth opportunity. As far as the OPEX... Yeah, Fernando.

I think it's important to know that we speak with you guys, with investors, because we try and learn from others, learn what works, understand what doesn't work, what might work. So we always cherish those discussions with you, Justin, and the rest of the people listening in. On the margin expansion, so I think it's important to, again, I didn't want to dwell on performance for 23, but as you can see on slide 12, I mean, Admin or non-HR costs were going 2%. This is in an inflation environment where we're facing very high single-digit year-on-year growth of our supplier costs. It's a year in which volumes grew and not 100% of our cost base is fixed. Now, withstanding this, we managed to contain that growth to 2%, and a different story needs to be told about HR costs. IT costs within that were actually down year-on-year, going also to the question you had on platforms. And this is the benefit, as I said, of managing our scale as effectively as possible, consolidating suppliers, benefiting from synergies, which means closing down things we do twice or three times rather than just once. And we highlighted the closure of platforms and data centers. And all of this we will continue to benefit from. in the coming years for, you know, a lot longer than what we had originally guided to in terms of synergies because, you know, focus is always on the first few years, but the truth is there will be plenty of cost out coming well after 25, 26, and 27. And this will help us manage cost growth in the future to a level which is clearly significantly below revenue growth and therefore helps us accrete the the margin is in the past. Historically, we've always grown between 100 and 200 basis points. When we were buying books, we might have had an uplift in terms of the EBITDA margin, thanks to the nature of those acquisitions in Italy. But historically, we have delivered this kind of performance. In the future, we expect to continue to do so, including insourcing from external providers. Now, in particular, Equins is now relegated to very small amount of external processing, as is, I think, Fiserv in Germany, where we're almost complete in terms of the internalization of that, as is, you know, in the coming years, it's going to be the same in Greece, where we are relying on an external first data platform, which we're insourcing. All of this is well underway. In general, third-party processing costs now are a very small fraction of what they used to be for NETS and SIA in the past. and that has contributed to that reduction in IT costs, that 4% reduction we had in 2023. With the specific reference to Equins, we may well not insource 100% of what we do with them in the very short term, particularly on the issuing front. We've done that on the acquiring front, which was critically important to our competitiveness, but not so on some of the issuing products in Italy in particular, where we'll continue to have a relationship with them for a few years yet to come as we let's say, the higher contribution businesses to us in the short term and focus on those first.

Well, thank you so much. Very comprehensive. Appreciate it.

The next question is from Sebastian Stabowitz of Kepler Chevro.

Yeah, hello, everyone, and thanks for taking my question. Just as a clarification, how do you see your three divisions trending in 2024? What kind of net revenue growth should we expect in these three divisions? And a clarification as well on the cost savings. You mentioned 70, 80 million euros of cost impact in your, I would say, P&L and cash flow 24. What kind of cost savings are you implementing right now? Thank you.

Good morning, Sebastian. Thank you for your questions. As you know, we don't guide by view, but to give you just a sense of it, as I said before, we expect merchant services trialing towards high single-digit, while we expect issuing to have a lower growth compared to this year, as you understood from Bernardo. This year was affected, as expected, by a number of elements that, given the macro environment, we do not necessarily expect to see repeated, for example, bank projects into the new year. And therefore, we are taking a materially more conservative stance here. And DBS, the third business unit, we expect it to continue to trail, basically, a low single digit or thereabout. As far as the cost savings are concerned, let me first of all just make one point. The 70 to 80 million euro severance effect that I mentioned is a cash effect in the year. As Bernardo said, it will be followed by another more or less similar amount spread across the following two or three years, given the way these type of things work in Italy, where most of the exit will be through pre-retirements that are cash at the moment when the person basically retires. The P&L impact will be, therefore, the full amount of these flows. Therefore, it's going to be around 150 million euros that will happen this year. To cut a long story short, basically, the run rate impact of these investments that we are making should be anywhere around 90 million euros, and therefore you understand the payback is very, very, very strong. And a good part of this we will see this year because most of the actions have already started. You may have seen, for example, that we have announced already an agreement with the Italian unions a few days ago uh in this context okay thanks and one last question on the capex what should we model in terms of capex and specifically the transformation capex for 2024 as far as capex are concerned we expect to continue to basically complete what we have defined transformation capex this year should be around the last 30 40 million euros and we expect to reduce CapEx further this year, both in absolute terms and as a percentage of revenues, and we expect to continue thereafter to see CapEx going down both in absolute terms and percentage terms.

Thank you.

The next question is from Gianmarco Bonaccini of Equita.

Yes, good morning. A few questions on my side. The first one is considering the technicalities of the impact of the new labor contract. If you want to flag anything about the phasing of your EBDA growth in 2024, if we should bear in mind maybe some impact of lower growth, first half versus second half, given this started at the end of 2023. The second one is about your debt bridge. If you can... flag more items below EBDA impacting the debt in 2024 in particular what's the total M&A outlay considering Sabadell and maybe earnouts and other let's say non-recurring items and networking capital and the last one is on M&A if you can confirm that you are doing a strategic review of the digital banking asset. And then in terms of negotiation with banks, I tried to calculate what's implied in your leverage ratio. I calculated that you can spend about 500 million in M&A in the next couple of years, if you can confirm that. Thank you.

Thank you for your question. Let me try to cover two or three of them, and then I will hand over to Bernardo for the rest. As far as phasing is concerned, you're making obviously a good point. Yes, we expect the impact of the broader efficiency programs and not just the Italian severance effect. being more impactful towards the end of the year, even if some of the effects will have also at the beginning of the year, given the fact that we try to anticipate as much as possible, as you've understood, the key initiatives. At the same time, you should combine this with top-line growth. So what you just said is absolutely valid as far as OPEX growth is confirmed. And as far as top-line growth, we probably have a more difficult comparison towards the end of the year, especially in issuing solutions for what Bernardo has mentioned before in terms of the expected one-offs and phasing effects that we've seen in the fourth quarter there. And therefore, EBITDA dynamic will be affected by the combination of these two elements. But on cost, it is exactly the way you said it. As far as DBS is concerned, we can just confirm what we said in the past, and I'm starting from the Capital Market Day. It's a business that, in general, we like, even if there are areas, if the portfolio business is impacted, if there are within that portfolio businesses that are, for us, less strategic businesses, and that may have better owners, and therefore we will capture those opportunities as they arise, as we have done for EAD in the Nordics, the deal that we've announced a few months back and we expect to close more or less in the summer, and we'll keep you updated on how it evolves there. In terms of M&A outlook, let me avoid to comment on the number, And so on and so forth. Obviously, we have to make our own estimates. And by the way, it's not just in terms of what we may buy, but also in terms of what we may sell. And therefore, in our plans, in order to define the buyback and our leverage output and so on and so forth, we try to embed our best assessment of both. The reality is that when we look at the market out there, We don't see, I mean, I can only confirm what I said in the past. We don't see any major, large, and many opportunities that we are desperate for going after, to be honest with you. We see maybe a number of smaller things, mainly BAM books that we may decide or not to pursue, depending on value creation for our shareholders compared to alternative use of cash that we have. We really want to focus on the organic growth of the business and the implementation of our own initiatives. Bernardo?

I think it was in general on the dead web. So just to also try and recapture what Paolo was saying. So please bear in mind that the 700, at least 700 million of cash Generation is obviously after, for instance, the restructuring costs that we mentioned earlier. So it's free cash. It does not include M&A. It does not include debt repayments. It does not include earnouts and the likes. So going back to what to expect, I think, in the next couple of years from this cash flow generation, the use of this cash flow generation, as Paul was saying, limited M&A. You estimate $500 million. I would argue that given what's out there, it's unlikely, given where we are in March, the discussions which are or aren't happening, it's unlikely that there would be, I would venture as far as saying, it's unlikely we'd have a net $500 million out, including the fact that as Paul was saying, we might be sellers of some businesses going forward as well. Even those, they might not bring cash in in the short term given the overall environment, but that is probably an ambitious amount to be able to think about and cash out We have signed a number or are about to close in the next couple of weeks, hopefully a couple of deals which were announced in the past. Think of Sabadell in Spain, and that's 280 million cash out. That would come out of the 700 million of existing cash balances. The 500 million of buyback will come out, clearly, of existing cash balances and the cash generation. Earnouts don't hit us this year. They hit us next year. we might have an additional small, we're talking tens of millions of euros of investment in things like CompuTop that we have invested in in the past and may wish to shore up. But that's really about it.

Thank you.

You're welcome.

The next question is from Hans Littner of Jefferies.

yes thank you for letting me on i think a lot of questions have been answered but maybe you can drill down on the project revenues you mentioned that you have been here more conservative maybe you can remind us about the impact of project revenues of in 2023 and then what it means was how much you expect in 2024 and then just on capex you mentioned you have decommissioned various platforms. Maybe you can remind us here how many platforms you still have to decommission and then how many platforms you plan to have at the global stage. Thank you.

Thanks, Hannes. With regards to project revenue, let me describe the nature of these project revenues first. I'm not going to give you the detail of what we put into our plan next year, but the nature of these, I would divide it into two kind of categories. One is kind of M&A-like driven project revenue. So I'll give you an example. A few years ago, a bank called, well, I don't think I can make names, but a small regional bank was bought by another big client of Nexi's and they migrated their card portfolio from the former bank's setup to the new bank's setup, always a customer. And we gain and lose on these things. We gain on the project work because it requires migrations, it requires bespoking of the products to the new target platforms, etc. And we earn money on that, and that is what is the positive contribution I was referring to earlier. In this respect, ultimately, we tend to offset this positive gain, unfortunately, because when M&A happens, it creates bigger customers that on a per-card basis or per-transaction basis pays less. Anyway, so that's one kind of project revenue, which is very hard to predict, given the difficulty in predicting banking M&A. I think for 2021, Four, given what we know in the market, there's unlikely to be this kind of revenue because there's not a huge amount of banking M&A which happened during the course of 2023, whereas there was in 2022 and the years before. The second part is more related to, I'd say, ordinary business project work, which has to do with the way we manage and price products and services for the bank. So, I don't know, the loyalty program, the distribution fees we pay the banks and so on and so forth, which is more, I guess, predictable and manageable. because they are kind of customer value management initiatives, as we call them. On both of these fronts, we've been slightly more conservative in terms of our ambitions for 2024 compared to 2023. And this hits us almost 100% on issuing, I would say, which is why you had a very strong performance in the fourth quarter of the year, and in general, a very strong year. With regards to the platform, so the capital markets, they've given you some KPIs or some indicators which were 45 data centers and 25 platforms, 25 plus. Now, with regards to data centers, it's a lot more, it's a lot easier to be precise, right? There are sites and there's square meters that need to be rationalized, closed down, and we have given you the number of data centers which we have closed down since then, which is 15, and we will go to the target level of 15, if I remember correctly, we'll take time. I think the two biggest closures are expected in in July this year, which are the former CI data centers. Charlie and Mike, which are the biggest in terms of square meters, et cetera, and hence of savings going forward. With regards to platforms, we're referring to the core processing platforms. There's 25 more or less of them, but we have more than 25 platforms, particularly if you include DBS and if you start including the fragmentation in e-commerce, et cetera, which were not really, let's say, the ones that we were highlighting, which doesn't mean we're not closing them down or nor focusing on them, It's just that we wanted to make sure that you had clear that at the target stage, when we get there, we will have two core processing platforms for issuing and two core processing platforms for acquiring, and we're en route to that. And they will be the former NETS UNI platform for the authorization and the former NETS Wave 4 platform for card management and the former NEXI platform for core acquiring and a new or see a platform called PowerCard in Central and Southeast Europe.

Actually, on data centers, the more we look into it, the more we find opportunities to rationalize even further and more than the target we gave ourselves when we spoke at Capital Market Day. Thank you, Ernest.

Thank you.

The next question is from Deepshika Argawal of Goldman Sachs.

Hi, good morning everyone. Thanks for taking my questions. I had two actually. So one was basically this medium term target in terms of re-accelerating to high single digit. We understand like macro would mostly be reflected in merchant services. So how should we think about the issuing business over the medium term is one thing that was our question. And the second one is basically we have excess cash expected to go to around $1 billion, which is roughly around $200 million being added to the excess cash. So what are the various moving parts in terms of thinking about where basically is this growth coming from broadly if we think about over and above the EBITDA growth?

Good morning, Dicica. So, medium-term targets, the business that we see accelerating the most is, in fact, merchant services. That is the one that should benefit the most from macro recovery, but also where we see most of the growth opportunities. As Bernardo has mentioned, as I also mentioned before, we see issuing a bit more affected by specific bank-driven dynamics, and therefore we remain more conservative on growth there. We continue to believe that the longer term this is a business that can grow mid-single digit, mid-twice single digit, but in a healthier environment, but it will take, we think, some time for that. As far as Mixed Cash is concerned, The dynamic is fairly simple. We continue to expand, to grow revenues and expand the EBITDA margin, and therefore you have the EBITDA growth component contributing to it, number one, and that's normally the biggest driver. Number two, you have CAPEX, sorry, you have no recurring costs going down. As you have understood from Bernardo, in 2024, it will go down, but less than what we were expecting because of the severance cost. But then after that, it will re-accelerate downwards on a cash basis. I'm talking about cash basis here. Third, CapEx, as I said before, we will continue to drag them down. So both not recurring and CapEx are a contributor to excess cash generation. And then, sorry, the third element, interest, as we pay down gross debt, you should see also a reduction of interest. Unfortunately, the one thing that will go up, but it's a fact of life, but it is actually positive, are taxes, that as we grow, our net profit will go up. So this is the dynamic that should bring us to this, about a billion around 2026.

Thank you so much.

Thank you.

The next question is from Aditya Budavarapu of Bank of America. Yeah, we can hear you now.

Aditya? Okay, great. Sorry for the delay. So just a couple from my side. Just going back to the potential for further disposal, you did mention that within DBS there might be certain assets which might have better on the screen. Maybe a bit more detail on because there are a number of assets within that. What do you think actually could be maybe a bit more non-core for you and what could be more attractive to keep? I guess there's been a few press reports around this, of course, in the recent months. And then secondly, could you also just give us an update on the renegotiation of the uni credit? I think that is something which is probably still ongoing, so maybe any update on that. And then maybe if you want to just talk about some of the accretions we've made over the last year, so the performance of those and how they're contributing to growth as well. Thank you.

Thank you, Diteo.

So on disposals, allow me not to be specific here because this is something that we are testing the market with, but if you go back, to what we discussed in the past. There are a few activities into DBS that are quite strategic. Just to mention one, we are partners with partners to EBA Clearing on basically clearing services and instant payments in particular. And this is something that, especially after the new ECB rules being implemented and so on and so forth, we see having a great potential and a clear strategic synergies is what we are doing. and other areas that clearly are strategic as we look forward to the implementation of the digital euro where we're being very active across the board. Others, honestly, are much less so, and there are players that are much more focused on what we can be on those businesses. But again, let us come back to that as we explore the market and we can give you a better and more realistic outlook. As far as Unicredit is concerned, I can only reiterate what we said in the past. We have a long-term relationship with Unicredit with a contract to 2036. We are having very constructive conversations with Unicredit on how we can support them to evolve their strategy, but actually we let Unicredit talk about their strategy when they will believe it's appropriate. As far as acquisitions are concerned, we normally see good level of performance across all of them. That, by the way, may create some earn-out cash cost going forward. I would say across all of them. In general, we see good volumes, normally a bit ahead of what we were expecting across all of them, I would say. We see good repricing opportunities in many of them, sometimes ahead of what we thought. Depending on the specific market, sometimes we see some margin pressures that are not really price pressures, but we see some margin pressures because the mix of volumes is different from what we were expecting. For example, a case of this is Greece, where the touristic dynamics have changed quite a bit after COVID-19. And this we recover in the medium term as we reprice the business to reflect the new nature of the volumes that we are managing. But in general, they are trending fairly well.

Thank you. Maybe if I could just ask one follow-up on the cash returns. I think you've said there's probably scope for further capital returns in terms of that 2026 excess cash generation number. Could you also comment, you know, if you do have more disposals, you know, would that probably be redirected more towards, you know, cash returns, you know, given, you know, your views on the, you know, where the share price is? I guess. Yeah. Yeah.

Aditya, we take a very pragmatic approach exactly as we have done in the case of the buyback, the alpha billion buyback that we are announcing today that we propose to our shareholders meeting down in April. And the approach is very, very simple. Basically, we look at the outlook of the business and its ability to generate cash organically. We'll look at the M&A and both for acquisitions and disposals that we will have when we get there. When we get there, it's very difficult to foresee what will happen in 2025 and 2026, especially in 2026, and we'll see where we are in our journey of the leveraging and where the markets are in terms of interest rates, cost of debt, and general expectations around it. then we will decide what is the most appropriate way to return capital to shareholders. Clearly, if we have material excess cash from the net M&A activity, that would be a positive to do more, but it's really too early to say. I think the key message that we're trying to deliver today is that on the back of the performance of the year, the growth of cash in the year, the outlook, even in a more difficult macro environment, that we are really entering into a new phase for the company. where we will be able not only to continue to leverage and serve the M&A that we expect to have going forward, but also to start returning cash to our shareholders. And in this exact phase, given where share price is, we believe that the most effective value-creative way to return cash to our shareholders at this stage is through a buyback program. And we continue to reconsider this as we go along But that's the mindset that we have.

All right, that's very good. Thank you.

Thank you.

Once again, if you wish to register for a question, please press star and one on your touchtone telephone. For any further questions, please press star and one on your telephone.

Mr. Bottoluzzo, there are no more questions. Register this time, sir. Would you like to make any closing remarks? No. Listen, thank you to all of you for attending our call.

As you've seen a number of very important messages today, strong performance in 2023 in a more difficult environment. I will really underline what also Bernardo said, strong performance in terms of a bit of margin expansion, strong performance in terms of cash generation, and Let me just reiterate what I said before. We remain very optimistic about the future of the business, even in a more difficult environment that will be with us probably this year, hopefully not next year, but let's see. And for this reason, we start to give back value to our shareholders through the program that we are announcing today, and we continue to do so with the most appropriate ways in the longer term. Thank you to all of you. I'm looking forward to meeting many of you in the coming days and weeks as we go around. Thank you.