Earnings Call: Q3 2023

Oct 23, 2023

Summary

Q3 revenue fell 15% to NOK 293m and EBITDA to NOK 4m as retailers delayed projects. Gross margin rose to 44%; cost reductions target NOK 20m annual savings from January 2024, while the Baltics grew over 16%.

Good morning, and welcome everybody to this Q3 presentation by StrongPoint. My name is Jacob Tveraabak. With me today, I have a new person, a new Chief Financial Officer, Marius, who you will be meeting shortly. As always, I will do a very short introduction of StrongPoint and the financial figures, along with some strategic highlights. Firstly, regarding StrongPoint, our mission is to ensure that we have retail technology in every shopping experience for a smarter and better life. Our solutions ensure a higher degree of efficiency with grocery retailers specifically, leading to better margins for our customers, and at the end of the day, a better and more efficient shopping experience for the end consumers. Today, we are facing a challenging macro environment. Fortunately, we at StrongPoint are serving grocery retailers, and as such, those are less impacted by the macro environment, but not even grocery retailers are immune to what's happening. The inflation that we're seeing is clearly driving central banks to drive up interest rates, and that is impacting the end consumers, having or seeing and experiencing their disposable household income being squeezed, which again leads shoppers to go to more discounters and private labels. Lastly, on e-commerce, which had a very big growth during COVID, we've seen that market retract somewhat, and in particular, in markets where e-commerce in grocery had not taken on a big percentage of the total market. All in all, we believe these markets' trends are positive for StrongPoint in a both medium and long-term trend. Positive in the sense that technology will play a vital role in solving these challenges and opportunities for grocery retailers. But in the short term, and as said, with grocery retailers not even being immune to this is affecting StrongPoint today. That leads me to the financial figures for Q3. In the third quarter, we have experienced a 15% reduction in revenue. We're getting to a NOK 293 million revenue. That is clearly not where we want to be, but it's a natural effect of the postponement and delays of projects that we see grocery retailers taking on. So, whereas the market fundamental is there, the current macro environment is creating a pause in investments, and that pause affects StrongPoint's top line. With such a top-line decline, that clearly impacts our profitability as well. EBITDA is down NOK 17 million to NOK 4 million, or 1.3% in the quarter. I'm pleased that we as a group manages to increase our gross margin from 37% in the same quarter last year to 44% this quarter. That's good, but it doesn't cushion sufficiently the decline that is driven from the return or driven by the decline in revenue. As this is a development that we've now seen both in Q2, we've seen it in Q3, and frankly, looking ahead, it's difficult to say exactly when the growth and improvement in market conditions will come again. As a consequence, we've had to take this unfortunate but necessary step to protect our profitability. That means that we are now initiating a cost reduction program, which leads us to a headcount reduction, unfortunately, that will be happening during Q4. That will generate some redundancy costs and restructuring costs during that quarter. Coming out January 1, 2024, we will be stronger with a NOK 20 million per annum saving. It's unfortunate, but it's also a necessary step to take given the macro environment that we're currently in. It's not all dark. Even now in Q3, we are seeing some very exciting new opportunities materializing. In our mature market, Norway, we announced the NOK 80 million electronic shelf label deal with one of the leading grocery retailers. This shows that the reoccurring nature of that kind of business really is present, and it shows that the importance of continuing with technology in stores to make them efficient still is very much alive. Secondly, in the U.K., our latest addition to the StrongPoint family, we've had a breakthrough with getting electronic shelf labels from Pricer into the market. We have recently both confirmed and installed Pricer electronic shelf labels in East of England Co-op and in OCNZ. It's a small but yet important step in bringing the StrongPoint portfolio to this new vast market that is in the U.K. Thirdly, what I would like to highlight is the operations in the Baltics. The Baltics, unlike many of the other countries, is in today's environment much less affected. The recovery following the Russian invasion of Ukraine has been quite stunning in the Baltic market and with StrongPoint. We're seeing a very nice growth of 16% plus this quarter on revenue, very healthy margins, and an increasing penetration and breadth of service with our customers. Strictly speaking, not in Q3, but still very important in that aspect is our announced agreement with Maxima, the largest grocery retailer in the Baltics, for self-checkouts from StrongPoint, more than 1,000 of them. So very pleased there. All in all, it's a severe macro environment. However, we do see the need for the technology solutions StrongPoint offer to our customers. Rounding off my piece, I wanted to talk about how we are progressing on the strategic ambitions, the NOK 2.5 billion and 13%-15% EBITDA margin. To do that, I wanted to talk about what we and I communicated following the soft Q2. Firstly, we were expecting that the financials following Q2, so into the second half of this year, would be improved. We're seeing now, following today's figures, that that is not the case in Q3. Looking at the macro environment, it's difficult to see how the macro environment is significantly going to change within the few months left of Q4. Secondly, I stated that we would be sharing more information on the very exciting cash management solution, new cash management solution to a very significant Iberian grocery retailer. Unfortunately, I haven't been able to communicate more information on that opportunity, but I want to assure you that the customer is more committed than ever on this major opportunity. The delay, or postponement you might argue, but the delay that we're experiencing in the project is purely down to StrongPoint and operational challenges that we have been attacking. The solution itself, to take a short recap on that, is ensuring that the cash can go directly from end customer to the back office of the store, a fully contained, fully automated solution, which means that it's not only faster, more efficient, and safer for both customer and employees, but it also gives the retailer a massive financial benefit. Most significant in that respect is the savings on the cash-in-transit pickups that is needed to keep the business operating efficiently. We can now allow the grocery retailer to have on-demand cash-in-transit calls rather than having cash-in-transit transport get to the store five or even six times per week. Massive savings for the grocery retailer. Thirdly, I also said that I would be extremely disappointed if we are not able to, within this year, to announce major wins in the U.K. We are closer than ever on achieving just that. I will not be revealing more now, but I will be extremely disappointed if we don't do that very quickly. Why do I go to the second quarter communication to explain how we're progressing on the financial or strategic ambitions we have? Well, firstly, given the macro environment we're in now, we need to see more of a normalization of the macro environment. When is that going to happen? Is it going to happen in 2024, in 2025, or 2026? Nobody really knows. But it will improve some point, and we will have to also experience and see a more normalization of the macro environment for grocery retailers, even them, to start picking up the investments as we've seen in the past. Secondly, why am I bringing up these two specific opportunities? Well, the opportunities in themselves are vast. They're vast opportunities in the biggest markets for StrongPoint, Spain and the U.K. Not only are they important to get StrongPoint in getting into a proper foothold in these countries, but they're so important because we know and believe in the virtual effect or viral effect, sorry, of these deals, because of the solutions, but also because of the sheer size of these companies. I look very much forward to be sharing more about these opportunities, then not as opportunities anymore, but as proper deals in not too long time. With that, I'd like to hand over the word to Marius. Welcome, Marius. Thank you, Jacob. And hello, everyone. My name is Marius Drefvelin, and I'm extremely pleased to be here today as the new Chief Financial Officer of StrongPoint. I will now go through some of the other financials for the third quarter. To start off, we have our earnings per share in the third quarter this year, which was negative NOK 0.21. This was impacted by the soft financial results, which we have already discussed. As shown on the figure to the right, the 12 months rolling earnings per share was NOK 0.17. If adjusting for amortization of intangible assets, mostly due to historic M&A transactions, the 12 months rolling EPS was NOK 0.45. That was our earnings per share. What were the cash flow movements so far in 2023? This chart shows the changes in our cash position from NOK 47 million at the end of last year to NOK 37 million at the end of third quarter this year. There has been a negative impact from working capital of NOK 19 million, which includes a lower inventory turnover than expected. Furthermore, we have had planned capital expenditure of NOK 25 million so far this year. We continue to expense our R&D costs over the P&L, with the exception of the full cash project in Iberia. This is capitalized in the balance sheet. Finally, there was a dividend payout of NOK 40 million in the second quarter earlier this year. These are the main cash outflows and have been financed through our EBITDA and increased bank overdraft. If we look further into the working capital development year to date, there has been a positive net effect of NOK 10 million from accounts receivables and payables. Due to the solid customer base that we have, the loss on receivables continue to be low. Moreover, there was an increase of NOK 9 million related to a large e-commerce project, which was prepaid last year and delivered this year. With the increase in inventory, as we just mentioned, the total working capital has increased by NOK 28 million to NOK 249 million. The working capital level will vary during the year, depending on volume and the type of deliveries. Turning from our main working capital changes in 2023 to the development in net interest-bearing debt and the leverage ratios. When looking at the development in net interest-bearing debt, we should exclude the effect of IFRS 16 liabilities. This is because they are not interest-bearing. The net debt level has increased to NOK 84 million at the end of the third quarter. The net leverage on our 12 months rolling EBITDA was 1.6. This net leverage is well within our covenants. Moreover, our balance sheet remains strong. We had a 49% equity ratio and disposable funds of NOK 83 million at the end of this quarter. These were the other key financials for the third quarter. Looking ahead, we will present our fourth quarter results, and we will have a strategic update session on the 12th of February next year. In the meantime, if you have any questions, please do not hesitate to reach out to us either through the investor email or to myself. With this, we thank you for your attention and wish you a great day.