Good Investing Talks - Why is Gruppo Mutui Online so different today, Marco Pescarmona?

Episode Date: January 25, 2024

It was great to have Marco Pescarmona of Gruppo Mutui Online back. The company has changed a lot since 2021.

We also had very interesting MNA opportunities and that kept us quite busy. The last two years the company is really different from what it was in 2021. We are not structured with an MNA team or anything. It's like the MN8 team is two, three people put together when there are opportunities. I would say that in terms of challenges, the biggest is probably dealing with. Dear viewers of good investing talks, it's great to have you, have you back today and I'm happy to have Marco Pescar Mona of Kupomutu Online back. It's an interesting time to follow up after two years.

How have you been the last two years? Very well. Thank you, Tillman. It's great to have you back. Regarding the last two years, what was your single biggest challenge in this last two years? Well, the last two years have been very busy years. So, you know, we came out of COVID, and basically that created a number of changes. We had some businesses slowing down, like things linked to e-commerce and so on.

But we also had very interesting M&A opportunities, and that kept us quite busy. And the last two years, the company is really different from what it was in 2021. So going into the now, here and now, what is the single biggest challenge right now as a business owner? I would say that in terms of challenges, the biggest is probably dealing with complexity. So we have a group that does lots of things and managing this is complicated and adjusting the organization to the increased complexity is an important challenge. What are you doing to address to this increased complexity? Well, this has to do with talent and the people that are managing the organization, starting from me and Alessandro, but we have a number of very key people.

We try to have the strongest possible team, and what was a good team for a specific configuration is no longer a sufficient team for a broader and more complex configuration. So we really have to find the best talent and organize these people in the most effective possible way. So is it mostly that you have the challenges on the talent side or are you also have to address structures, IT landscape, systems to fit together? No, I mean, we don't have such a big problem finding and hiring

retaining top talent. I think we have a very interesting project and especially in Italy, but not only in Italy, I think that there is more talent than opportunities and we have good opportunities. So the point is really designing the organization and adjusting the organization to allow the intake of new talent,

of new talent and also to fix let's say all these cracks that one could have like you know you need an acquisition and you have like duplicate systems that you would want to to eliminate or there are many things that when you have complexity and with MNA complexity comes very easily where you need to intervene in situations that are not so easy so it's not a clear-cut thing but you know, you know things can be improved. And the point is that the organizational design part, I would say, more than finding the right people. So you've spent roughly 250 million on acquiring new businesses.

Correct me if I get the number a bit wrong. Can you maybe walk us through what exercises you made? and, yeah, what chances came up for you? Yes, I think I'll comment on three acquisitions. One is smaller and was done, well, maybe earlier, the smaller one is a company is called Europa and it does cadastrial services, or not only cadastre like title services as well. So it's very technical services linked to real estate in Italy. And that was a nice acquisition. It was not big because it was about 15 million euros of enterprise value, but it was

a leader in its field and with a lot of potential and also we acquired all the technology behind it. And that's something which we are building. And it's a, it's a, it's a, it's a, an acquisition similar to the ones that we did in the past, so at a very good valuation, I would say, for a business that, you know, required some work. And so that's an interesting story, but I would say it's a bolt-on, where we, you know, we found an opportunity

and we liked entrepreneur and we thought, you know, let's do it. So that's one. But, you know, the more important ones are a company called Trebi that is that we acquire for 80 million euros and a bit more than that I think and that's a company that is the leading provider of software solutions for the leasing industry in Italy leasing being a regulated business and requiring very specific systems to operate and so the idea was that we had Agency Italia, which was the leading BPO provider to the leasing as well

as the long-term rental industry, and was also typically the main supplier to many of the players in that industry, and we could combine it with Trebi. Basically, our clients were using the 3B systems, at least the leasing clients. And so we could generate efficiencies of for ourselves and for our clients by having control over, like the software, the operating system, I would say of these businesses and the operational part. And also the idea was that, you know, we could leverage our knowledge of the rental industry,

long-term rental industry, which is like a sister of the leasing industry, but not exactly the same. and also develop a software solution for that sector. So it's the first time we really try to combine within BPO, technology and operations, and see if we can create value out of that. And we're still at the beginning,

but I think we are happy that we took that route and we'll see how it goes, but we are optimistic in the end. And that's the second acquisition. And then the third and the biggest, and really the boldest move, I would say, is the acquisition of a number of international assets that had originally belonged to Admiral Group. This is within the Brocking Division.

And these are some comparison businesses. It's Rastreator in Spain. Rastratu is the leading price comparison website in Spain. Then there is Le Lange, which is co-leader in France. It's mostly focused on insurance, and so I'm talking about insurance here. And then we also acquired as part of the package,

one of the co-leaders in Mexico. It's called Rastrianap or Mexico. These are three companies that are profitable when we acquired them. And we think have a lot of potential for two reasons. One, you know, we think, and this is also

what we are seeing, we are able to apply our best practices to these companies and the results are already improving in a substantial way. And this means higher profitability without killing growth. So with some revenue growth, significant EBIDDA growth. And this is the first reason why we like these companies and second these companies are in markets that are even less developed than Italy for comparison and intermediation and so there is also optionality meaning that you know this is outside of our control or only you know we can influence this only to limited extent but you know these markets could you know maybe in 10 years 15 years 20 years really unlock and they could become multiple of what they are in terms of market size.

So we have these options on the unlocking of the markets that we also got with the acquisitions and which we consider very valuable. It's time for a quick advert Tillman. Here we go. Are you looking for a beautiful and efficient way to analyze stocks? Then please check out what my friends at Stratosphere are building.

They have built a great tool to visualize data, to get ideas about ownership of stocks, and many more information that's helpful in your analysis process. You can find the tool where the link below and feel free to sign up, it's free. Thank you for your attention. And now, Edward Tillman, and the... Can you maybe explain how the first two acquisitions we talk about the bigger ones a bit later add to your mode?

So how do the first two acquisitions add to your mode? Well, let's say the first two acquisitions, The first one, I think it broadens the offering that we have in terms of technical services linked to real estate and to credit. I think we have the broadest panel of services and we are quite often able to offer integrated solutions. And also we are able to come up with creative solutions that combine different elements together. So this ability to offer integrated solutions or come up with creative things is helping our mode. But again, this is a relatively small position.

So maybe it makes a difference, but not so big in terms of barriers to entry and so on. But when we look at, for instance, 3B, this clearly is designed also to increase our mode. Because we now are the, basically, we were already, you know, with Agency Italia, the leading supplier to our clients in terms of, you know, size and relevance for their business. And with this acquisition, you know, Trebi was typically the second most important supplier for the same businesses. So here we have an even deeper relationship.

with our clients and we can have a stronger partnership with them and there is no one in the market that we think can offer anything comparable and the synergies in terms of know-how in terms of ability to come up with commercial propositions that are really compelling and so on are potentially very high So I think within the leasing and rental industry, this clearly reinforces our position. And again, a position as a partner for clients, but clearly there is a motte there and it's now deeper. So why did this opportunities exist in the last two years? Well, I think in the last two years.

It's for all three opportunities. well I think every time there is uncertainty or some dislocations you know there are opportunities and I don't know it could be different things like you know a manager that wants to you know find a long-term home for its business and and you know after seeing COVID and realize that, you know, there are lots of uncertainties in life. Maybe, you know, thinking about new phase in life is important. That could be one or could be in other cases, I would say, you know, after, well, we not only at COVID, but we actually had a lot of stresses like, you know, we had.

the war in Ukraine, an energy crisis and so on. So interest rates jumping up because of inflation. And I think, you know, all these things increased the tensions in different places of the system. And these tensions were sometimes just psychological. In many cases, maybe they could have been also financial. So, you know, there are more in times of instability, there are more assets available for sale, I would say, and better opportunities for people, you know, that have the strength and the long-sightness to, you know, to look at opportunities in those moments. So I think it's a mixture and we don't really know the exact reasons, but I think it's a combination. Again, it's because I would say, you know, there are times when there are more sellers than buyers and times where there are more buyers than sellers. I think, you know, last two years, especially, you know, after the beginning of the war

and then the inflation and high interest rates, you know, it became more, you know, a time of, of sellers and you know more sellers than buyers I would say I'm actually surprised you know because for us it's more natural to buy companies I you know for me it's different difficult to understand you know normally why one would want to sell something especially good asset but clearly you know it's not the way most of the people see things yeah you're a builder so to say yeah maybe yeah um especially looking at the the biggest transaction you did, how were this transaction structured? Like, do you own always like 100% of the companies or is it also like that you have

different setups within the transactions? In these transactions, we ended up buying 100% in all the recent transactions. But that's because, you know, because of the situation, let's say. And basically because the ownership of the assets except in the small one was not in the ends of the entrepreneur. So there was a detachment between, you know, who ran the company and who was selling. So in that situation, it's better to buy 100%. And by the way, that was the only option available. But our preference in general, or, you know, we are quite used to.

to doing transactions where we work with entrepreneurs, where we acquire a majority. But then we run the businesses together with, you know, the founder or whoever was, you know, managing the company and they retain a stake. And then we have typically put and call, you know, a few years down the road that could be extended in case we get along well but you know that's our preference because it creates alignment of interest and so on but it's not always possible to do it and also you know sometimes we we see to them work with one person or another or a situation or another and sometimes you know people just want to to receive cash but for us you know we think that's the best

because it removes some potential tension over valuation. And also it allows us, it allow the entrepreneur to reap the benefits of additional value creation, which we could also help with synergies or knowledge transfer and so on. Let's do one small sideway because there was also another transaction you did into money supermarket where you bought 8% of the shares. Why was this also interesting for you to become a stock investor? Yeah, I would say you are getting to, well, one point is that in general, we are quite flexible.

So we really try to generate value for our shareholders and we do it by running businesses and allocating capital. And when we did this money supermarket investment, we did. did it. You know, we had, it was before the acquisitions, even before we knew these big acquisitions could be on the table. They were both a surprise, so totally unexpected. And so we had a financial position of net cash, which was sitting on the bank doing nothing, basically. So we thought, we had more flexibility and I had always been following money supermarket and the stock all of a sudden crashed in a very significant way that was explained by a contingent situation

in particular the energy crisis meant that all the energy supply disappeared from the UK market and so many super market which was making very good money from the energy vertical, it was one of its biggest verticals, had a big drop in income, at the same time was a change of regulation in the UK regarding motor insurance. And so there was a lot of concern about the company and the short-term financial performance deteriorated. It was still making very, very good money but significantly less than before and we thought that stock price didn't reflect the value of the company and you know not even at the level of profitability of the time so even at the level of profitability with you know energy not functioning insurance only you know

suffering you know the stock price was still too low compared to what the company was was able to generate and so we started looking at it in more detail no building models and so on like an investor would do and being from the same sector means it's easier maybe to understand exactly how things work or you know read through the words of you know the annual report and so on and come up with good expectations and the good model. So we really built a model, looked at the model, double-checked it, tried to speak with people and so on, and then we said, you know, this is a good investment

because the energy will come back and the company, by the way, just changed its management. So we also thought, you know, that the new management was a positive. And so we started buying shares and we bought 1% and then 2%, and then 3%, and so on. And in the UK, you have to disclose it every time you pass a 1% ratio. So we kept buying until we had enough, which was around 8%. And it's a financial investment in a company, you know, that is exactly in our sector,

even if in another country, so we are not competitive in any possible way. They are clearly domestic, so they're not an issue. even for our now international footprint. And we like it a lot. And I think so far it's been a good investment. The company has kept improving. The management has done a good job. And also, you know, with inflation, insurance has picked up a lot.

The reforms have not been negative actually. And now we are starting to see the beginning of the recovery of energy. We are at the very beginning, and so it will happen most likely in 2024, and hopefully that will bring the company back to a more reasonable valuation, given its strong brand, strong position in the market and so on. So it's been a financial investment, of which we are very happy, and we will see what to do it in the future, but for now we are very happy.

generally how does m&A at cupomotui work so are you sitting there reading reports yourself or do you have a dedicated team for this or do you just call some experts when something comes up and the team forms yeah i mean we this is something for which we are not structured with an mna team or anything it's like the mn a team is two three people put together you know when there are opportunities and by the way we are not even looking in such a structured way at M&A opportunities so we want to be ready to react if there are good opportunities and we so far we have been able to handle very complex transactions with this setup sometimes it's demanding like you know

when we did the international acquisition of, you know, Rastrian or Lelanx, etc., that was a very complex setup because there were entities in four or five jurisdictions, you know, the contracts had to be done under UK law and so on. So there was a lot of complexity, and of course we needed we had to hire lawyers to help us with that. But like for instance, for the business part, like business due diligence, we normally do it ourselves, and we do a lot of stuff ourselves and very much and so on, and quite involved in that part. I would say now that we, like I used to run, as you know,

first time at the Broking Division, then we hired a person who is basically a general manager or more even a CEO of the Broking Division and has full day-to-day responsibility. So I have more time, and this more time has been dedicated more to, you know, transactions. But, you know, you'd be surprised. It's super simple. You know, we are not many people.

We are very few, and sometimes it's very intense. That sounds interesting. Let me go to the transaction of the Broking Division. and I'm interested in how these businesses play together in Kupamu Online. Are there a lot of synergies between the Italian or the international broking divisions? Or is it how different interaction? Well, in terms of hard synergies, there are very few because it's difficult to put together any piece of the organization or of the systems or anything.

So it's more a matter of know-how. know how to run these businesses and it's like a lot of details it's i don't know i think it's possibly like a paper production plant or a steel production plant where it's a lot about you know tuning small details small secret recipes that you know make you better than others and so we We think we have a little bit of those ingredients and so far we have tried to apply them to the international businesses with good results. We still don't know if we have any particular advantage, but certainly the synergies are not hard synergies. They are much more difficult to find, let's say, and also, you know, knowing that a business you acquire could be improved. or not is not so obvious because again it's not you know costs that you eliminate

or you know bargaining power that you acquire or anything it's more like you know maybe you can do a better advert because you know what works and that advert sells more but you know it's it's it's very hard to say that you know a recipe that was working in a country will work in another one so You know, that's why I'm, you know, we are happy with what we did. We are seeing the results, but, you know, saying that we have a recipe, it's still a soft recipe. It's working, but it's a soft recipe.

Hey, Timon here. It's great that you have made it that far into the video and I think it shows a certain passion for investing you're having. If you want to dive deeper and go further down the right, at whole you're invited to apply to my community good investing plus it's a place that's very helpful to people who are ambitious about investing it's helpful to investment talent as well as experience fund managers so if you're interested please click on the link below and now without further do enjoy the conversation let me do a small follow-up on this so why are these businesses better because you own them well uh

I think we are a focused owner. So these businesses that were acquired come from a situation where they were not the core business of their owner, let's say. Before, they were owned by Admiral. An Admiral is a strong insurance company, but their aggregator businesses were possibly there to feed in a way their direct insurers or to deliver. the direct market, you know, in which they operated.

So they were enablers and not their key, their core business. Still, they were, you know, operated by good people and, you know, with good principles, etc. But they were not the core. And then the businesses had been acquired by a UK company that was, you know, that had acquired a bunch of assets all together, but they, including, you know, a large UK aggregator. And they were interested really in the UK assets because they were a UK company.

So the international part was not their core business again. And it was small for the complexity that it entailed. So I think, you know, the key difference so far, the easy one to say is that, you know, we like these businesses. They are really our focus. We put all our attention to them And we try to have a simple strategy and strong execution.

And I think, you know, this focus and this being a specialist, you know, with 20 years of experience in the sector, I think is what makes a difference. And as a better owner. And by the way, we are a permanent owner of these businesses. So these are businesses, you know, it's not like private equity firm that buys a company, it tries to, you know, pump it up, you know, make it grow, but also, you know, maybe gold-plated and so on to sell it later and creates or accepts fragilities.

We don't accept fragilities. We try to build, you know, to invest or, you know, to shape the businesses for long-term growth and profitability. And that also makes us a better owner. You already mentioned that there are differences. in the market between Italy and Spain and France now? What are these differences and how comparable are these price comparison markets? I would say, well, in Europe, probably the most advanced market,

not probably certainly is the United Kingdom, then possibly Germany and then Italy. I don't know really Central Eastern Europe though. And instead, if you like in Italy, more or less 10% of, say, insurance or mortgages go through price comparison. Whereas in Spain, it's probably between 5% and 6%. These are like very ballpark figures. And in France, it's maybe less than 3% for insurance.

And why is it different? And I think, you know, consumers are very similar. consumers, you know, they have the same more or less level of education, the same level of access to technology and so on. But, you know, for like insurance and financial products in general, the difference is normally more on the supply side. So like in Italy, we have highly competitive supply with, you know, a good number of direct insurance. insurers and that allows the market to keep growing. Still, we don't have the traditional insurers on board and, you know, it will take many years,

you know, before the penetration becomes comparable to the one of, say, not even the UK, but say of German. But if you go to Spain, still you have some large direct insurers where that, you know, don't really work with the channel, you know, to its full potential. And by the way, in this way, they are probably losing a big opportunity and the risk remaining behind. So in Spain, even the direct insurers, there are a number of them, and most of them work with aggregators, but not all of them.

And this is clearly an issue. both for the aggregator growth of the channel, but also for these players, I would say. And in France, it's a similar situation, but worse, I would say, because there are very few direct insurers in France. There are, you know, there are like two or three pure direct insurers. And then there are many traditional insurance companies, and they're being conservative, I would say. And so the direct insurers themselves are not enough to have a good development of the market.

There are also modern brokers that are helping, but they're not the same as a fully-fledged direct insurer. And so there is a big supply issue, and I think also, Also, you know, the aggregator, maybe in France, I have not done such a great job in, you know, speaking with insurers because the insurers, you know, they should benefit from aggregators. And even traditional insurers, they could learn and benefit from working with aggregators. And it's something that is happening anyway. But, you know, being these companies, like they wanted to acquire, but not only ours of, like Anglo-Saxon origin, they were possibly running, a way that was too linked to an idea of the market because the, you know, the UK model that was too advanced for Europe. So possibly, you know, we were not speaking the right language also

with insurers. So I think we would need to have a dialogue with existing insurers. We will need to see new players coming into the market, which is a very nice market. But again, I would say it's more it has more to do with the supply side than with consumers and finally it also has to do with your ability to execute so you know within a market the development of the market depends very much in this case where there are supply constraints on the supply side but it also depends on how good you are at serving the consumers so providing a good service an easy service making it well known and so on so probably also the operators are to some extent responsible for a lesser degree of development of the markets maybe you want to use the chance to drink something

because the next question question is a bit longer and acquiring a business is a bit like moving together in a relationship at the beginning it feel good but over time some challenges might come up that you haven't anticipated so coming back to the acquisitions what kind of challenges came up you haven't anticipated and how you're dealing with them no i i don't think we had many surprises so uh i think it's uh well we have uh um i think we had a very strong business in terms of also brand reputation, you know, positioning also in the labor market in Spain. In France, for instance, we have a smaller business and, you know, we want to make it grow. We will invest on it. But it's a more difficult market for talent, I would

say, and nothing that we were not expecting, but let's say also, you know, coming from an Italian background, I'm not saying you have a credibility problem in other places, but a little bit you have to prove yourself, and that's maybe less needed in a country like Spain, which has more similarities. In France, maybe it's a bit more difficult. And again, we are doing pretty well in France. So it's not a big issue. And possibly also France is a more complicated labor market.

But that's where we are, you know, sometimes it's taking us longer than we expected to recruit people, even if it's a very, very good opportunity. But it's very minor things, really. With these acquisitions, we were actually surprised that we didn't have so many surprises. So, you know, by the way, this is like a random thing. Sometimes you have surprises with acquisitions, but sometimes you even have surprises with your own businesses. That's a point of surprises, you know, because, you know, they could come from regulations

or like new entrants, you know, irrational things. So they could be anywhere so far, especially with the international acquisitions, I would say very, very few surprises on the negative side. What is your three to five years goal with the international brands, like making the market leaders, growing profitability, both or something else? well the goal is to develop them to potential that means increasing i would say making them growth in terms of revenues and in terms of percentage margins so we have not given any any target on this but you know these are businesses that could operate with ebidda margins of

say, you know, just looking at the international comparison, say 25, 30% is quite normal if you look internationally and we acquired companies that were doing much less than that. But more importantly, I think we can, you know, help to develop the market and you know, retain or develop a very strong position in each of our reference markets and

and accompany the market in its development and potentially see it unlock at a certain point. And these are becoming, the idea is that this will be domestic markets for us just as Italy is. And it's fun for us to look at Spain and France, Mexico and understand the markets and so on and help the companies develop. And, you know, we are really trying to become

on the broking side an international player we are at the beginning we really have to be successful here we have a lot of work to do but it's something that is it's a challenge we really like it's you know part of it we do it

for like the financial performance but part of it we do it for the fan of it for the fact that it's a new it's a new challenge and we want to see if you are good at it you mentioned ibnab margin how do i have to think about the d and a in this kind of industry well it's it's i would say the best way to look at it is is to try to to look at the cash ibidda what i mean is well, especially with the acquisitions, you know, the actual, the accounting is an impact on how the results are reported. You know, when you make an acquisition of a company that has intangible assets,

normally you have to do a purchase price allocation exercise whereby you allocate part of the difference between the price and the net equity of the company to assets and typically what you will see

in companies like the ones that we have acquired is that you recognize there are software assets that are intangible and there are trademark assets like the brand name and so on and so you make an acquisition and giving you illustrative numbers for 100 you know equity net equity is 20 so there

is 80 to be allocated and you end up maybe allocating i don't know 40 or 30 to the software another 30 to the trademark and the remaining part the 40 that remain are goodwill and the software and the software and the trademark you know under IFRS are then amortized and the software is typically in say in our case in five years the trademark maybe is in 10 years but you create a lot of depreciation in this example you would have like one-third of 30 so that's one-fifth of 30 is six six every year just for the software and another three for the trademark. So just this acquisition of 100 million

would generate 9 million per annum of depreciation of intangibles that, you know, you had bought together with the company and it's just an allocation. So I would say the best way to, if you want to get a clean look at the profitability of these businesses, the best is, you know,

to look at, say, EBIDA minus investments or EBITA minus CAPEX. That's one way to look at it. Or you look at the EBIT and you add back the TPA amortization. That's why we disclose the kind of information. Because that's closer to the cash generation of the business. And that's the best indication, I think, of the actual performance and the best way to make comparison. And when we make acquisitions also, we try to look at things in that way.

Shareholder sometimes have fantasies. And there was also a question that had the fantasy involved that you use with the newly entered market, the broken divisions to also expand the BPO division to these new markets like Spain and France. this an opportunity or what kind of opportunity do you see for the international markets on top of the existing brokerage? Well, I would say for now the strategy is that we stick to Italy with the BPO division because we still have lots of opportunities in Italy, both organically

and in terms of MNA. And so we are not looking. and we would not be considering normally opportunities abroad. We will consider opportunistically opportunities abroad for the Broking Division, even if now we are focused on developing the countries where we are present. Then, you know, in general, I must say we have always careful, I mean, you know, if someone comes and wants to sell us a super interesting BPO business in Spain for almost for free, we will consider it, but it has to be super compelling. So, you know, this is our view now, you know, that BPO stays local and blocking international, but, you know, possibly considering other countries if opportunities arise. But I would say, again, if there is a really compelling capital allocation opportunity that maybe means that we do something abroad for the BPO division, we'll consider it again.

But it's not what we are looking for. So any gift we take the gift. Another thing that changed in the last two years is the debt level. which is also a function of like acquiring new businesses. It's in the range of three to four times ebiter to debt. It's not a crazy debt double, but it's also like a different risk profile compared to 2020, 2021. How do you manage this debt risk also having the changing interest environment in mind? Yes.

Well, actually, that level is going to be around three times a bit done. at the end of the year and this is the report at that level then we of course have the participation in money supermarket and that's worth more than one time our Ibida and all of our banks now have covenants on the debt that consider the net financial position net of the money supermarket participation. So in the covenants, that level is considered to be two times a bit down or a bit less at the end of the year.

And of course, you know, the investment in money supermarket is, you know, cannot be sold immediately if we wanted to, but it's quite liquid. And it's something that if we wanted to do a really significant acquisition, you know, we could dispose of. So I think it's the right way to look at the situation. So I would say from our point of view as well, from the point of view of the banks, the real debt level is around two times EBDA.

And we have a business that continues to generate cash. And we will continue to pay low dividends as soon as we are with a significant amount of debt. So there will be a natural leverage. You know, I would say the most natural outlook is, you know, we sit on our money supermarket participation because we like it. And, you know, we use naturally the cash flows we generate from the business to progressively deliverage.

and so it goes down and then of course if there are many opportunities that come up we will instead you know spend the money to acquire the companies and so maybe we will not the leverage or we will go up a little bit but i would say our comfort level is between i mean we Where we are, we are in a comfort zone. We could have a little bit more. I would say up to three times including the money supermarket stake would be okay for a small period of time, but longer term we would aim to be,

let's say again, net of the money supermarket stake, aim more to be between two and 1.5 times a bit of that. because that's what gives you the flexibility to do things. Otherwise, you are focused on managing the debt, which is not what we want to do. We want to have the possibility to, you know, catch opportunities when they arise and to focus on, you know, growing our businesses. So I think a certain amount of that is actually helpful, it's efficient. exaggerating could be problematic, but we are not in that situation.

You asked about the interest rate risk, and of course interest rates increased a lot, and also our interest rate costs increased by, say, probably more than 10 million in a year, which is for us still manageable, but we wouldn't want it to be more than that. more than that. And by the way, you know, the other thing we have done so far is to stick to bank debt. And, you know, bank debt is relatively inexpensive compared to other alternatives. But of course, it's more conservative. So you could get in Italy very good terms for corporate debt. But, you know, they would lend you up to three, three point five times a bit down, difficult to do more. And we think it's a good equilibrium because it's cheap and we don't get too much

of it. And it's consistent with the way we want to manage our leverage. Also, sorry, let me say one thing. You know, in the past, but even recently, you know, we had situations in which, you know, very important pieces of our business suffered significantly. Like, you know, I still remember 2012 when the Italian stock market, sorry, mortgage market almost disappeared overnight, so it was minus 70% from 2011 to 2012. And, you know, those situations could happen. Now we are much more diversified, so it's less likely. but you know you know if you had that at the time you know it would have been a very difficult moment so you cannot have too much leverage also because you know if you have a serious problem then

you could be in deep travel but again the level where we are is I think appropriate finally I have right this this chart here where you see the lip in the mortgage market from your presentation. We will embed it in a higher quality that people can see it. And it also was one question, like compared from here to here, you have a way more diversified business now. Yeah, it's, well, you know, organic, by the way, this year, you see we are growing year on year, but of course we had the acquisitions.

But even organically, thanks to the diversification, we would have seen possibly like a loadable digit decline. So today in Italy, like in Germany, like in all European countries in the United States, the mortgage market is down significantly. That means most recent figures were like minus 40% year on year. not like 2012 but still a very deep contraction and despite that you know thanks to the diversification and at constant perimeter so without the acquisitions you know we would have seen a modest decline of our results so we would have been in a safe zone anyway and of course we wouldn't have the debt of the acquisitions

on this chart it says it's gone down from 30% of your revenues in this case to 18% the mortgage part but still the revenues are on the same level between 2022 and 2021 yeah by the way yeah the point is as you said that mortgages you know despite the fact that we are still called groupomuti online which means on-time mortgages mortgages are no longer a dominant part of the business. Actually, they are, I would say, less than a quarter. And so we are in a number of markets and businesses that are correlated. And that means, you know, we are a much stronger company today than we were in the past.

But nevertheless, I want to do a follow-up question on the mortgage part because it's also interesting to hear your perspective on it. Is it like how bad is it compared to like the 2012 scenario? No, it's not comparable. So 2012 was like, you know, Italy could be getting out of the euro, the euro could fall apart. There was a tail probability, I would say just a tail probability. but you know, we could feel it that, you know, the entire banking system would be nationalized and so on. In retrospect, maybe it was unrealistic that this could happen, but at the time,

you felt there was a risk, and that's what the financial markets were telling anyway. So it was a very, very difficult situation. Italy was at the center of the storm, together with Spain and Greece and first the banks and the state were in trouble and then

the measures that were put in place in terms of let's say reforms and fiscal discipline basically scared all the Italian consumers

who for like the next three, four years they stopped buying cars, they stopped buying houses, they were wondering if they would have a pension later in their life and so they were just not doing anything and they demanded frozen.

By the way, the reforms were not even to impact food. So it was just the thing that, you know, the country was in difficulty and to do serious reforms that really scared everybody. And we don't have anything like that. So today we have also reforms. Now the reforms that Italy is doing are possibly similar to the ones of the time.

And they are now linked to the resilience plan. So it's like Italy is getting money. And in exchange, Italy is doing reforms, which is a good deal for everybody, I think. and helps to give political support for the reform. So we are doing things that are, I would say, as effective. But people are not concerned because it's not the problem of Italy today. Actually, there is low unemployment, companies are doing well and so on. So in general, this is more like a recession that is not driven by a problem in the country.

but it's kind of important. It has to do with the energy crisis and so on. And so people, of course, you know, they're spending less. They're waiting to buy a house because interest rates are higher and maybe they cannot afford it. But there is not this element of fear that was present there. But I think, you know, having been in the business for 20 plus years, the one that we have now is a serious recession. serious recession or, you know, the behavior that you would see in a recession for mortgages.

But, you know, it's a normal situation, whereas the situation of 2012 in Italy was totally anomalous. It's one of those things that you see once in 50 years. So, I mean, it's not great what we are seeing for mortgages, for interest rates and so on, but the same is. But the going to pass and really doesn't feel like what we had in 2012, even just looking at the mortgage market. So having this 20 years of experience in data, is there any comparable phase you had where you might see a pattern that could offer a prognosis basis for the mortgage part? No, well, I would say the situation.

we see now in terms of difficult market it's not exactly the same but you know it's more similar to the situation we had in the financial crisis the subprime crisis it was 2008 2009 basically at the time we still had a lot of instability of interest rates a lot of issues as slow down like a global recession but this was you know coming from from from from abroad and so we had a decline at least in some parts of the business especially in the BPO part some of our clients were affected but in the overall mortgage market declined but you could see you know it was temporary and things would go back to normal at a certain point And also previous recessions, but now I couldn't tell the years, were similar.

So this is a situation that is, you know, you could see it as a fluctuation. And nobody in the country anywhere, you know, think that you know there is a risk for a permanent change, of a permanent change, a permanent impairment of the economy or whatever. You know, you feel it's like winter, but then the spring will come. Whereas in 2012, at a certain time, you had the sensation that, you know, maybe, you know, the spring would not come. So that it was a permanent climate change. Here it's like, you know, we are waiting for the spring to come back.

Thank you for the great picture. That helps. I have one technical questions on the BPO division. When do you exactly recognize revenue? Is it like only when a customer, like for instance, Alliance, pays or is it in advance? And if it's in advance, how much in advance? No, no, there is not much in advance. No, it's not when customers pay because it's when we render our service. services. So like, you know, of course we make an invoice and in Italy our customers

normally pay, say, two months after receiving the invoice. But in the great majority, you know, there are some very small areas where we have to recognize with estimates, but it's normally, you know, we perform an activity and once we have performed the activity, we recognize our revenue. And by the way, quite often we recognize the revenue when the activity is completed, so not halfway through. So I don't think we have overall this issue.

By the way, we have businesses where the activities are longer, but there are not so many. So, of course, you know, like mortgage underwriting that could take six months, and there you have the issue of potentially recognizing things that you have done, that are certain, but that you are not able to invoice. But that's minor, but like in many other areas, you know, the activities from when we get the task to when we have performed it, you know, it takes, say, a month or so, and you easily recognize the revenue. So I would say revenue recognition is, again, based on, you know, having performed the activity,

and typically the revenue is recognized. Then we issue an invoice right away, and then the invoice is paid. 60 days later. We have working capital because in many cases within the BPO division, we have an issue of reconciling things with our clients. So maybe the clients will pay us in 60 days, but before issuing the invoice, we have to send them a report and they have to look at it and so on. And it takes a couple of months to do that. So typically, You know, we have half of our receivables that are invoices to be issued.

So we have performed the activity. We are reconciling so the invoice has not been issued yet. And then there are another 60 days, more or less, that are the invoices that have been issued but not being paid yet. But again, we don't have an issue of having significant revenues. receivables that come from estimates let me jump to a higher level and talk about business quality so you have the two business lines broken division and BPO division in terms of business quality what line has a higher business quality for you it's hard to rank but let's try it no well it's it's really hard to rank

and I think the two are both high business, high quality, like blocking as this, I think characteristic that I like a lot, that is a business that, you know, can be operated with a relatively small number of people. So it's a business of know-how, skills, systems and so on, trademarks like of intangibles and a small number of people then you know it's it is open to competition but also as barriers to entry so it's it's very nice BPO is a business that we have that is normally number one in all the important verticals in which we are present so we

have a strong position, it has the complexity that comes from, you know, needing not only technology, because we use a lot of technology, but also a significant workforce. And so it's a very strong business, it's a market leader in verticals. verticals are not so big so these are issues that are quite defensible i would say but at the same time you know again we have the complexity of a large workforce and you know when you have capacity fluctuations it's it's more difficult to adjust and so on so you know these are the plus and minuses of of the two businesses and then again Again, you know, they are about the same size.

By the way, in the past, this is maybe no longer the case. In the past, we prefer BPO from the point of view of being able to deploy capital because we could make acquisitions there and we thought we could not do much in broking. But this is no longer the case because, you know, we have been, now that we are international, we have possibly also opportunities for brokings. to allocate capital. For us, they are like half of the business each and we like both. Even if they have different characteristics and different investors,

you know, I value one part or the other. It's rare that they like both at the same time. What kind of market is the price comparison or the brokerage market? Is it like, will there always be a few players that compete and you need to spend spend an advertisement and to be on the intention side of the customer, or are there certain conditions where could be more like a winner takes most market? Well, I would say both our businesses, you know, both Broking and BPO are businesses that for different reasons tend to have a limited number of players.

And I would say this has to do with high barriers to entry. There are different types of barriers to entry, but this is common to businesses. And no, so I think they are really nice for that reason. It's also, you know, in that type of situation, it's more difficult to grow sometimes, because One of the barriers to entry that we have in both cases is normally the fact that capital is not, you know, a strong driver of growth. So, you know, you commit more money to the Broking or the BPO Division for organic growth and you don't really know who to do with it. So you spend it on blocking on advertising that has a very negative return. because it's all saturated, or in BPO, what do you spend it for to, you know, to develop IT systems, maybe, but we are already doing it.

It's difficult to, you know, accelerate growth with capital. This is the key characteristic of both situations, and this is a key barrier to it. It's interesting. Let me change to the most complex task. you have at the moment is capital allocation because you have so many new options so you have the buying back shares investing in italy investing the international business in different markets paying back debt taking care of opportunities that the market or the stock market offers how has your capital allocation framework grown or what is your capital allocation framework

Let's start with this question. Okay, it's hard to say that we have a structured capital allocation framework. I think, of course, we understand the concept of capital allocation, and we know that you know that are different opportunities, and they're not compatible sometimes with each other. And so we'll try to generate value for our shareholders. And we'll be flexible in our decisions and we'll consider things that are maybe not obvious. And the things we could do are anywhere from, you know, buying back shares to making acquisitions.

Like the investment in money supermarkets was, you know, capital allocation decision. In the end, it could be, you know, things like that. I and Alessandro are also owners of the business and we try to generate value for ourselves and all the other shareholders, treating everybody, of course, in the same way, by allocating capital in very rational but at the same time, sometimes a creative way, depending on the opportunities. So we don't have like a rule that says, hey, we want to make acquisitions first, then we buy back or vice versa, etc. We see where things are and based on that we decide. So, you know, if, you know, we only have expensive acquisition opportunities, we would stop doing

acquisitions. If the stock is super cheap, maybe we could become even more aggressive with the buybacks or, you know, if that is a super expensive. and we don't know what to do with the money, we repay the debt. It really depends. The key point is this is done to the limit of our ability in a very rational way. Let's talk a bit about the creativity in the capital location. Can you maybe explain one or two cases where this creativity plays a key role

and it's not only the rational key facts well the creativity well but one example one easy example are the investments that we made in the past in Chervet first and then in many supermarkets

so these are investments we made in companies we could understand pretty well because of our industrial activity but you know this was also a big out of the standard because you know normally you focus on running your business acquiring companies that reinforce your business or expand your business but you

know we did these investments to some extent working as an investor like you know doing the same things that people that come to our investor relations meetings do so they build models and they try to figure out you know whether the management is reliable or not if they are honest people and so on. So this was a bit outside of our standard, you know, the expectations that people had for, you know, as running the company. And, but we thought we had compelling opportunities and in the end, I'm saying it because, you know, in retrospect, I would say, but in the end, they generated a very significant value and helped us to grow because this thing.

have funded than or could fund in the future industrial growth of the company. And this is one thing. The other thing is, like in the past, there was this opportunity to, we had different situations like this several times, but there was an opportunity in Italy to revalue. intangible assets for tax reasons and it was a very, very nice law that they passed. And basically you could pay like a substitute tax and revalue some of your intangibles and then amortize them for fiscal reasons. So that's an investment in the end.

So you put up a front certain amount of money and you get significantly more over five or ten years you can calculate the NPV of this and the internal rate of return and so on the way we looked at it was as a very attractive capital allocation. By the way

this was a law that was very friendly to any company that had intangible assets but many companies didn't really realize that it was an opportunity or didn't look at it the way, you know, with the same attention we put into it. And it was capital allocation.

Another example of capital allocation, which is just an opportunity, it's not something we are currently doing, is like there are situations in which you could buy tax credits in Italy because they did some like state-sponsored property renovation schemes that generated a lot of tax credits for companies in the property sector and these credits are transferable and normally you have plenty of companies that have all these tax credits

that are in excess of their tax capacity and so they might sell them. So you might be able to buy a relief on your future taxes at a discount. And so if this comes at 5% it's probably not very interesting, but if it comes at 20% IRR and it's very safe, this could be more compelling. So there are many things that could become available that have to do it in the end, you know, investments are about cash flows,

that, you know, could generate attractive cash flows, you know, given the price, etc. And all these things are competing for each other. And our focus is, of course, on, you know, developing our businesses in a way that people can understand, that it is predictable, where, you know, we don't buy a pizza chain, of course, so we do things that are predictable. But within, you know, our area of activity will be creative. This is, you know, with investments like money supermarket that maybe, you know,

will be financial only, or with things that have to do more with the debt management or asset management side of the company. So you mentioned this IRA of 20%. Is this kind of your hurdle for the capital location decisions or? Well, it's, it really depends. By the way, sometimes when you start calculating hurdles and so on and look at acquisitions, it's also a matter of what you put into the calculations. Because if you start estimating on the synergies, this and that, you know,

you can convince yourself always that you are doing an incredible deal. But I would say, so sometimes we don't get to the point of doing an expected IRR or having maybe a safe IRR and then taking the synergies or the external benefits as a plus so that we don't overpay on the explicit part and then we have a part that is maybe not fully quantified that we get as bonus. But, you know, I think like 20% is a good number anyway. It's an aggressive number. So like private equity firms would normally aim for 20% more or less.

You are not always able to do that. I would say, yeah, ballpark, I think the things we have done are, in that area but we could do things that are lower or you know where the explicit part is lower because you know when there is option value for instance it's very difficult to give a value to i don't know the option that the french market for insurance broker broking will unlock it's a lot you could do formula like black and shawls or more sophisticated but it's very theoretical. So you make sure that you are buying the company for a fair price and then you get a free option sometimes. When you already mentioned the cash flows of Copomutui, I think at the

beginning it felt like you had two kind of cash flow streams and now it feels more like you have like a lot of cash flow streams that come into the company. Is this picture, does it make sense? Well, yes and no, I would say because it depends on how you look at things. It's still the Broking and the BPO division. Then, of course, both of the two divisions are much more diversified. So if you look at the diversification aspect, I think it's true. Because you have many things that are linked to different parameters, are something that benefits from inflation,

something that suffers from the inflation, something that goes well when the economy is going well, something that goes well when there is like a natural catastrophe. So we have things that are very diversified, so the average cash flows will be, I would say, more stable. Then the way we look at it is still, you know, we have two main businesses, blocking and BPO. So for us it's still, this is the no part, we still see, you know, two main separate businesses that are each generating cash flows.

But the verticals and like the correlation between these cash flows in the units is way different compared to 10 years or? No, it's very low correlation. So, I would say, insurance has nothing to do with mortgages, which has nothing to do with energy, staying on the broken side. So really, this is, you know, what I was saying before, the quality of our business is much better, not because it's more diversified. So now we have a number of quality businesses individually, and to that we have the quality, of diversification. And that's true for both divisions. By the way, diversification works both ways.

So, you know, no single issue is going to kill you, but you're always going to have issues in one place or another because you are playing many different games. But like there's no ultimate like 2012 where you had this big crisis with Italy, this is something that's harder to imagine for you to have such a risk coming. It's very hard to imagine. I mean, 2023, maybe it's not obvious from the results,

et cetera, because the results are actually good, but was potentially a very difficult year. It would have been a very difficult year for the company that we were 10 years ago. So we have already proven in 2013 with a very significant. severe shock on the mortgage market that we could perform quite well and sail through it. Then, you know, again, if you have a nuclear war, we would have problems, but everybody would have problems. Yeah.

So that's that's clear. Then thank you very much for the interview and the insights. I'm done with my questions. So, but for the end of the interview, I always want to give my guest the chance to add anything. So is there anything important over the last two years structurally with the business that you want to add? No, I would just add that, you know, we have changed the group in a very significant way in the last 10 years and we'll keep doing it. And it's fun and we create value, we think. And we have more opportunities today than we had in the past because we can look at more things.

and if we are able to execute well as we have done so far I think it would be we'll make our shareholders happy so maybe one question that came up for me so you're a bit in the acquirer face right now or how would you react if I call you a Syria acquirer no that's not correct we are an industrial operator no we really see ourselves as an industrial operator

like our key skill is execution and being an industrial operator. Then that skill enables us to also make acquisitions and create value through acquisitions. And also we are long-term and friendly to, you know, entrepreneurs, acquire companies and so on. That also creates value for the long-term. But this is only because we are an industrial operator. that all that likes its business. Then thank you very much for making this clear for the end of our interview and thank you for your time. Thank you.

To the audience. Bye bye. Bye. Thank you. I really hoped you enjoyed this conversation. If you did, please leave a like and a comment and for sure subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer. So here you can find the disclaimer.

it says please do your own work this is no recommendation what we are doing here is just a qualified talk that helps you but it's no recommendation please always do your own work thank you and hope to see you in the next episode bye bye