Investor chat – summary

Last Updated November 2, 2015

Krzysztof Zdanowski, Chief Executive Officer, participated in an investor chat organized by journalists of the Parkiet daily and website. During the chat, anyone interested could ask about the company’s current situation and future outlook.

The answers to all the questions asked during the chat are presented below.

What was Q2 for your Company like?

Our results were worse than we would like them to be and a little worse than those in the previous year. This year is specific because it is a year in which elections have been held. For us, one of the main sources of income are public institutions awarding contracts under tender procedures. Public institutions are not launching new tender procedures now. A certain amount of income is, of course, being generated, yet it is less than in a regular year. I would like to note, however, that the volume of signed contracts is even greater than last year.

When will investors see this volume in the Company’s results?

I hope that as early as in Q4.

What sort of customers do you prioritize?

At present we are focused primarily on corporate customers because they provide for higher margins and long lasting relations.

Consolidation of the translation services market is supposed to be one of the key elements of the Company’s growth. Can any developments in this regard be expected this year?

Acquisition of subsequent translation agencies is our concept with respect to growth. For this reason, we are the only Polish translation agency present in the capital market. Of course, we do plan further acquisitions, which has been described in our earnings guidance. In the near future we are going to take over two translation agencies. We have already signed a letter of intent with one of them. We have also arranged virtually all terms and conditions of the transaction. In the case of the other agency, the terms and conditions of the acquisition are still being arranged. I do not know if we will manage to acquire any other agency still this year, it may be rather difficult. The beginning of the next year seems to be a more realistic date.

How is the Company going to finance the acquisitions?

We seek funding on a permanent basis – we are on a road show all the time. We have two basic ways to finance our acquisitions. At present, acquisitions are being funded primarily by debt. To date, we have issued two series of bonds – bonds issued within one of them are listed on Catalyst and will mature in mid 2017, and as regards the other series – we are going to pay the bonds off by the end of this year. Another way of financing, which we hope to enhance, is equity financing. We have talked to investors, both individual and institutional ones. As regards the third way, i.e. funding through equity, we do not feel strong enough yet.

Can we expect issue of the Company’s shares in the near future?

I think so. We are considering private placements, so the number of potential investors is limited, but there will be room also for both individual investors and funds.

What makes up Summa Linguae’s goodwill?

We are asked this question repeatedly when we talk with banks. We have no fixed assets except for two rented offices and computers. Our goodwill, as in the case of most companies providing services, is the portfolio of our clients and the profits and revenues generated on contracts implemented for these clients. We are a company which does not need to allocate funds for investment, we need to settle acquisitions only. Thus, we can share our profits with our shareholders.

When can the investors expect to be paid dividends?

Not this and the following year yet, particularly in the context of the planned acquisition. The year 2017 is more likely, but first we would like to pay off the bonds. Our dividend policy is simple and clear. If there are surplus funds, and payments related to the acquisitions have been settled, I will recommend to the General Meeting of Shareholders payment of a dividend of up to 100% of the profit.

Do you plan to move from NewConnect onto the main market in the near future?

Our this year’s IPO on the alternative market had a considerable effect, as we have become recognizable for large customers. Of course, like most companies listed on NewConnect, we would really like to move onto the main market. I think it will be possible as soon as we meet the criteria set out by the stock exchange. This may be possible in two, maybe three years. At this moment our Company is too small for that.

Does Krzysztof Zdanowski – as a CEO – have time for hobbies? If so, what do you do in your spare time?

I am an airplane pilot and I also play golf and squash. Recently I have also been quite occupied with my German Shepherd puppy. I like watching NHL games and reading books on the financial markets. In my free time, which is very scarce, I try to be with my family.

Is it possible to render from Poland translation services in the major language pairs, i.e. German –English, at a quality level sufficient to render such services from Poland on the German market?

Of course it is, although we do not focus on such services yet. Larger companies generally seek partners among translation agencies on the local market, hence in this case – translation agencies operating in Germany. What is more often the case, is the Polish customer ordering a translation into German in connection with, for example, expanding its business onto this very market. At this point, we seek to develop through co-operation with large foreign LSPs which may subcontract to us translations in language pairs including Polish. We are only beginning to work with other translation agencies on this basis, but we do plan to invest in this form of development.

Is it difficult to win a large and long-lasting customer on the translation services market?

Like in any other industry, winning a loyal customer is a difficult task. At Summa Linguae, such activities are enhanced by the marketing and sales departments. It takes a lot of time and effort to persuade a large company to choose our translation agency as a regular provider of translation services. However, if such a customer has been won and is provided with invariably good services, long-term cooperation can be generally expected.

What is your dividend policy like?

After the settlement of acquisition transactions and repayment of the debt, we want to pay out up to 100% of our net profits. Once profit has been generated, it can be allocated either to further acquisitions – purchase of another translation agency, or the payment of dividends to shareholders. The decision in this regard will depend on the situation, among others, on the size and attractiveness of the potential acquisition and, of course, on the plans of our shareholders.

Is the Polish translation services market attractive to investors?

It is difficult to answer this question as at the moment we are the only translation agency listed on the stock market, so investors simply have no ways to invest.
We try to popularize this trend as we know that investors active on overseas markets are keen on investing in the translation market, which grows a dozen percent or so every year. The recent acquisitions of the CLS translation agency and the Darwin Zone marketing agency by Lionbrigde, or the acquisitions of Agostitni Associati (Italy) and Park IP Translations by WeLocalize can be used as examples in this regard.
It is estimated that in the coming years several billion dollars will be spent worldwide on M&A. What is more, the last two years have seen tremendous progress in this sector: during this period, the greatest number of takeovers ever was recorded. This further confirms that this trend will continue to grow.

What do you do to prevent the customers of the companies taken over by you from resigning from their services?

The earn-out model adopted by Summa Linguae safeguards to a certain extent our interests and those of the previous owner, and guarantees that it will continue to cooperate with the company. For the customers, this indicates that the quality of the services will certainly not deteriorate. Moreover, we believe that the larger the company the greater capacities it has: a large and experienced team can take care of the customer more effectively, while cooperation with numerous translators means that we are able to accept more jobs and get them done in less time.

What level or revenues generated by the Company will you consider to be optimal in Polish conditions, i.e. when will it be possible to recognize that you are the market leader? How will it translate into profit margins in the Company?

The largest domestic translation agency in Poland generates revenues of a dozen or so PLN million annually, so to be recognized as the leader we have to exceed this threshold. The market consolidation potential in Poland is in the range of PLN 30 to 50 million of annual revenues. Entering the European market, as the next step, and acquisitions of overseas translation agencies should give a margin varying from 40 to 50%.

What is the risk that there will be no need for translation in the future? Can technological developments make the professional translator redundant?

The market is constantly evolving – there are changes as regards industries that generate the greatest demand for translation services and popular language pairs, but the general trend is growing. The demand for translation services is bound to continue to exist – people migrate increasingly more often, economic ties between countries are becoming stronger – and these are factors that enhance the demand for translation services.
Machine translation is great help for people as it facilitates the translation of long and specialist texts, allows for delivery of the order within a shorter time while ensuring consistent terminology. Yet machines are not able to grasp linguistic nuances and e.g. make the register suitable for a given situation, addressee or medium for which the translation is meant. While it is true that technologies are being constantly improved, there is no chance for them to completely replace humans in this industry.

There are over 30 major translation agencies on the Polish market – are you considering any mergers or acquisitions within this group?

At this stage of our growth we focus rather on acquisitions of smaller and medium-sized Polish translation agencies. We are currently analysing the possibility of acquisitions on other markets and thus entering foreign markets.
The majority of Polish companies consider acquisitions in the Central and Eastern Europe. Why not enter the German market? It is possible?
Of course, we are interested in acquisitions abroad. At present, we are analysing a few potential transactions, but this is only the initial stage of talks with advisors and partners. Our potential targets include primarily the USA, UK and Central European countries: the Czech Republic, Hungary and Slovakia. We do not focus on the German market as our analyses show that it is not the optimal direction of development for us.

What does the Polish translation services market look like from your perspective?

In our opinion it is a very attractive market for investors. Translation industry is constantly evolving, translation agencies do not deal with translations only any longer, but keep extending their offer with localization services, transcription of recordings and linguistic consulting. An investment in the translation industry is therefore an investment in a sector with very good prospects. Our Company benefits from the niche and the fact that we are the sole representatives of the LSP industry on the Polish stock exchange, but we try to popularize the model of growth through acquisitions and take measures to improve the quality of services provided on Polish translation market.

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