Earnings Call: Q3 2020

Nov 5, 2020

Thank you. Good morning, everyone, and welcome to the 3rd quarter presentation from Loomis. I'm Patrik Andersen, CEO of Loomis. And with me here today, I have Christian Hakkeby, who is our CFO and Anders Harker, Chief Investor Relations Officer. So I will give a short overview of the quarter and then open up for questions. So let's start the presentation and turn to the next page. Just a few comments on the corona pandemic. I'm not going to go through all of the points on the slide, but just to mention a couple of them. So one is that health and well-being of our employees, of course, on the top of the agenda. We have actually spent quite a lot of money and resources to put the appropriate measures in place. I think we now are in a good position when it comes to the health and well-being of the employees. I will also ask many of the employees who are listening into this call or later at the taped version, I will just say that all Loomis employees done a great and fantastic job in maintaining high quality service despite a quite challenging situation. So all credit in respect to the employees. I also like to mention that there are quite a number of false rumors circulating around the fact that cash should spread virus spread the virus. And I would really like to stress that these rumors have been denied by all medical or certain medical experts. And there is more information available at our webpage where you can read more about that. And I just also like to say that we have taken a lot of other measures to safeguard the operational and financial health of the company. We are in good shape. The cash flow is strong, and we have a very strong position in the market. And we are also well prepared for the opportunities, which are now opening up as we speak, but also for future opportunities. A lot of things will happen in the market, and we are ready for that. Having said that, I'd like to turn to the next page and just go through a couple of highlights from the report. I will come back to some of these bullet points later in my presentation. But just in summary, as we have communicated before, we have now launched LoomisPay, which is a complete platform for merchants. We have started a rollout in Denmark, and I'll give a couple of comments on that later. And now the plan is or we will actually launch in Sweden at beginning of 2021, and then we will roll out in additional markets across the Nordics. You have also some of you might have seen that we sent out a press release yesterday and the LUMIX board now is proposing a dividend of SEK 5.5 per share. An extra shareholder meeting will be held at 10th December 2021 to decide on that proposal. I'd also like to mention that due to the corona pandemic, we believe that the revenue target of SEK 24,000,000,000 in 2021 will likely not be achieved. And that's why we have removed that target now from our plans and targets for 2021. In the quarter, we had a regrowth of 7%. We had an acquisition of Nokas in Sweden and that integration process is ongoing. The organic growth was at minus 9%, and we see significant improvements in the Q3 compared to the Q2 as business is opening up. Of course, now the situation is changing a bit, but I'll come back to that. We have a less negative impact in U. S. Compared to Europe, and that's the structure of the customer portfolio that makes that difference. We have had a very high quality of services in all our countries despite the challenging situation. And as I mentioned before, new opportunities are opening up in many different areas. The operating margin was at 11.5%, if you exclude LoomisPay. And we see that the operating margin is now trending in a positive way, both in Europe and the U. S. And just to mention, the U. S. Operations increased the margin by close to 2% in the quarter despite the pandemic, but I'll get back to that more later. The EPS is somewhat impacted by a restructuring program we're now initiating in certain European markets. That will be done at the end of this year and in Q1. And that will have a positive impact on the margins and the profitability in Europe in 2021. We also see a strong cash flow in Loomis, and that has to do with the cash management programs, less capital expenditure. And we have been also then very careful with OpEx, and that has had a positive impact on the cash flow. So these are the highlights. Let's turn then to next page, which is just a graph showing the margin development in a more historical perspective. And as I mentioned, we had a strong margin recovery in Q3 versus Q2, and this is then excluding LumiSpa, so it's easy to compare. Let's then turn to the next page, which is segment Europe. And the real growth was minus 12%. And as I mentioned before, we are now integrating or we are integrating Nokal that we bought some time ago. And that integration is ongoing, and it's expected to yield positive results during 2021. That integration is going very much according to plan. The organic growth was at 14% -14%. Of course, all is due to the pandemic, of course. But we see significant improvements compared to the Q2 this year in basically all our markets. And as I mentioned, several growth opportunities are identified, both when it comes to banks outsourcing more, when it comes to central banks wanting to outsource more cash operations. So we see that happening in many of our markets. When it comes to the operating margin, that ended at 9.4%. And of course, it's influenced by lower volumes, But we see a significant margin expansion if you compare them to the 2nd quarter. And the delta is actually as much as 12.8 percent. So that's a strong recovery. And when it comes to France, we have the integration process ongoing when it comes to Ponssegur France that we bought earlier. And we are expecting that now to continue with full force, and we see we will see margin increasing in France in 2021. And as I mentioned before, we have now initiated a restructuring program in certain European markets And we will sort of implement that end of this year and in Q1. And then from Q2, that will have a positive impact on the margins in Europe. So just having said that, I'd like to thank the European and LatAm team for a great job despite the circumstances. Thank you very much. Let's turn to the next page, which is then United States, U. S. A, the organic growth was at minus 3%. But I have to say that we saw a positive organic growth actually in September. So during the quarter, we saw that the top line was coming back stronger and stronger. SafePoint revenue is expanding and accounted for 17% of total U. S. Revenue. And we see also that the revenue will come back as the pandemic situation is improving. We have a very strong pipeline when it comes to SafePoint, and this year will be a very good SafePoint year also when we look into Q4. CMS was at 34%. Of course, this is affected by the pandemic, and that will continue to increase as the situation is normalizing. And we also have had a strong focus on keeping a high quality of our service, and we have kept all our branches open during the pandemic. And we see now that we attract new customers who are coming to us because of the high quality of services. So that's a very positive effect of focusing on the service quality and keeping our branches open. We see also that revenue from the ATM business is actually accelerating and that is one of the reasons why we had growth in September. We see that that is one element, but there's other elements that's pointing that outsourcing in many different shapes will is happening now actually and will continue to happen. Operating margin was at 15.5%, all time high operating margin for the Q3. And there are 3 elements behind that. First of all, Safepoint expansions is helping the margin. We have focused on customer portfolios with high quality people or companies, customers that want to have a high quality, that's been our focus. But also efficiency programs, very strong efficiency programs in branches drives the margin and have, among other things, reduced the number of overtime hours that is helping their profitability. So having said this, I would like also to thank the U. S. Team for an excellent performance in the quarter. Thank you very much. Let's turn to the next page. And let me talk a bit about Lumi's Pay. As many of you remember, we announced the launch of LumiSpay some weeks ago. And just a short update, it's a on LoomisPay, it's a solution, it's a service that is supporting small and midsize retailers with all payments in store. So it's one contract, one contact, one settlement for all payments, as you can see from this slide. Let's turn to next page. And just to say that now, LumiSpay has been successfully launched in Denmark. We actually launched in on October 1, to be specific. And so far, I mean, it's early days still. So far, we have had positive merchant response in all aspects. What we see and what's interesting is that LoomisPay also drives cash and SafePoint growth. So some of these customers have had done their services when it comes to cash themselves and now they integrate SafePoint or other cash services into their into the offering. So next step is now to launch in Sweden in the beginning of next year, and then the rest of the Nordic countries will follow. And then, of course, the plan is to launch in more LUMIX countries as things evolve. That's let me talk a bit about more about LUMIS Bay and let's turn to the next page, where you can see a case, which is quite illustrative when it comes to LoomisPay. So just to be a bit more specific, this is a customer in Copenhagen. It's called the customer is Copenhagen Downtown Hostel, which I actually visited myself some time ago. And if you look at the left hand of the slide, then you had a description of the old solution. So we had 6 waiters. They shared 2 POS systems, just 2 POS systems. All orders were written by hand and that made the customer service and payment quite slow. So we actually lost sales in peak hours. People could not order as they wanted. And they themselves did a cash management. So they counted all the cash and then someone went to the bank to put that in. So the new LoomisPay solution is all waiters now have the own mobile POS system. All orders to the kitchen, to the bar are digitalized, and it makes the service very quick and smooth. And sales is up. They can serve more customer and the sales is up. And they have integrated SafePoint solution where we take care of the pickup and the cash management. So this is very promising and very illustrative for how we want LoomisPay to work. And this is actually what we have hoped for. And as we speak now, we are now launching this to many more customers. So that was a bit about Loomis Pay. And then I turn to the next page, which is the P and L, which I'm not intending to go through. That's more there as a service. So these are I think I've been covering the most important topics. And therefore, let's turn to the next page and to the Q and A. And I say, operator, we now open up for questions, please. Thank you. Our first question comes from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead. Yes, good morning. Thank you for taking my questions. Just a question about this revenue target 2021. How do you see the margin development? As we haven't changed the guidance on the margin, we keep that margin target as it is. And just remind me what it is. Between 12% 14%. Excellent. Then on Lumix Pay, it looks interesting, but I'm just a bit curious about the development in Sweden, for example, where we see the main banks, Swedbank and also Handelsbanken now putting their pay solutions up for sale. Why do you think that is happening? Is there a threat coming from Ingenico, World Wild Bambora, etcetera? What's happening from that point of view, you think? I think that what I understand is that banks that's not core business for the banks. They don't focus on sort of merchant payments. And I think that also what I heard is that they don't want to invest in IT systems and so on to continue that development. So that's a natural step that they're stepping out. And that opens up for many other players, both Fintech players and players like ourselves. So I think that in itself, it's positive for us and for the other competitors in the market. Would you be a buyer of those businesses? No. We are building our own platform from scratch. We don't want to have any legacy systems. We want to have a modern up to date system, which is cost efficient. Excellent. Thank you very much. Our next question comes from the line of Daniel Thorson of ABG. Please go ahead. Yes, thanks. I start off with a short one. Could you please provide that with the net installations of SafePoint in the quarter? It would be very helpful. Yes, it's more than 1,000 installations in the quarter. Okay. Excellent. And then a question on the restructuring program in Europe. Can you please explain more what actions you will be taking? I guess it is not really around closing branches, but what could it be? No. So it's we have now taken the opportunity to adjust the cost base in some countries, especially in the UK, where we actually close a couple of branches. But we need to reduce the workforce, and we would reduce the fleet. The most of the restructuring will happen in the UK, but also in some bits in some smaller parts in other countries as well. The total restructuring cost is SEK 160,000,000, which will be taken in some parts in Q3. The which will be taken in some part in Q3, the most part in Q4, and that will have a payback time, which is below 1 year. We will see the effects all the effects should be seen in Q2 2021. Okay. That's clear. And related to UK, a question on that, we saw a 40% decline in UK revenues in Q3 now. I guess that you are adjusting cost base based on the lower volume. But what is really reasonable to expect here going forward? Is it come back to maybe 20 percent to what we saw historically? Or how do you think? It's very difficult to say. We don't I think that the if you look at the whole all EULIMIS countries, the one that is sticking out to some extent is UK because of the closing down of big parts of society. And we believe that it's necessary. We don't think that the volumes will come back exactly to the same level. We think that maybe 20% minus is a bit too pessimistic. But we take note that we need to adopt the cost base also when we look into the future. Okay. Excellent. A final one on Lumispay. If I read the accounting tables here correctly, did we see a SEK 3,000,000 revenue from LoomisPay in Q3? Yes, that's correct. That is right. Excellent. Thanks. Our next question comes from the line of Mikael Lufthdal of Carnegie. Please go ahead. Yes, hi. Follow-up on LoomisPay. As we move forward now and if this becomes a success, when it comes to you've said that the costs or the net effect on results will come in the other segment when it comes to reporting. But how when it comes to sales, because I guess, I mean, you will have in some cases, you will drive the safe Point and the cash services. And in some cases, there could be some cannibalization perhaps on existing cash services. So how will sales be reported in will it come in Europe? Or will it show in the other segment? Or how will that be reported and handled? Sorry, it will be dependent on what kind of sale it is. But I mean, when it is related to LoomisPay, it will be reported as LoomisPay, so to say. And currently, we report LoomisPay in other, and that is due to the size of it currently and how we run the business. That could, of course, potentially change. And when you look into Save Point sales, for example, if there is a Save Point, that is part of the more CAT, CMS business, and then it's more related to the Europe and the U. S. Segments as we have the reporting today. So if you sign a LoomisPay contract with a customer, part of those revenues will then come to Europe and part will come to the other segment? Yes. It would be I mean, it would be it might be technical now, but you will then you will get both internal sales and external sales. So it will be part of the consolidation. So you will have more if you look into Luminess in general, we have relatively small amount elimination on the sales line since we have a little cross border or little between the segments, but that might increase due to what you are referring to. So yes, part of the sales we go into LumiSpay and part of the sales we go into Segment Europe, yes. Okay. On the sort of current trading, could you say something about the monthly trend, both in Europe and the U. S? And maybe if you can touch upon October as well? We haven't got any numbers for October yet, and we're not trying to guide on a monthly basis. But what we can say is that we don't I mean, U. S. Operations in U. S. Is very stable, and we don't foresee any changes from what we have seen before. It's a very stable operation right now. In Europe, we see now the 2nd or the 3rd wave, whatever you call it, of the pandemic. However, we don't foresee any fall back into April mode or June mode. We are much more prepared now than we were before. However, where the top line goes, it's a bit difficult to say right now. But we as of now, we don't see any that we're going back to Q2 numbers in any way. Yes, sure. But is it possible to give some more flavor on the monthly month by month trend, July, August, September? And I guess also where yes. I think that both in Europe and U. S, it's an increasing trend, both in the top line and in the bottom line. It has improved every month since April. And as you saw also in the report, September is we're showing organic growth in the U. S. So that's I think it's a very positive sign that things are moving in the right direction in the U. S. And in the U. S, just on the ATM side, you're mentioning that you are seeing things happening now on the outsourcing side. Could you perhaps quantify what kind of the potential deal sizes are we talking about here? No. I think that if you just touch on the ATM side, I think what we see here is that banks the bank branches either closed down or have limited operational hours. So what they do is that they direct people into the ATM to a larger extent. And at the same time, as they do to increase the traffic to the ATM side, they have outsourced the services. They somehow sometimes they did some of the services themselves or and now what they do is that they outsource to players like us. So it's a double positive effect in terms of the ATM side. And also a strong focus on keeping the service level at the the ATMs must operate at all time. So that is driving the increase in revenue in the ATM side. But we also see a huge interest also in SafePoint due also to the outsourcing and to the pandemic and so on. So there are many positive aspects when it comes to the U. S. Market and outsourcing. Okay. Thank you. Our next question comes from the line of Johan Dahl of Danske Bank. Please go ahead. Yes, good morning. On that same topic of outsourcing, I think you referred to also the European market being sort of being upside there in terms of outsourcing. Could you just talk about what tangible sites you're seeing in Europe in that respect? And that's again the same thing that we're seeing that central banks, for instance, that they are outsourcing more and more of a cash operation due to that they are either closed down or that's not been the focus right now. We see also that banks, more commercial banks are outsourcing more of the ATM service or intending to outsource. We see that and we also see that based on the service we have been providing that some customers coming out over to us. Now that's not outsourcing, but it's market taking market share, if you like. So just to give you a flavor on the opportunities we see in the market that's both coming from outsourcing, but also that we are able to take market shares in certain markets. Our next question comes from the line of Karl Johan Bonavier of DNB Markets. Please go ahead. Yes, good morning. First coming back to the ATM business. I saw you mentioned it on the U. S. Slide that revenues are accelerating. How much of your revenues could you say today are related to ATM Management? It's very difficult to say to have that split. But I mean, we see we actually see September that I mean, if you just give you a number, try to give you a number, I mean, 20% of the revenue in if you take U. S, it's coming from ATM service. And it's actually growing double digits as we speak. So it's quite a sizable portion of our business, and it's growing quite rapidly. And on that topic, obviously, you announced an acquisition in Finland in the same space. And I understand you've got some partial clearance for that. How do you see the time line for that being completed and integrated into your operation? So we hope and plan for a positive reply before year end, I would say, this year, to be precise. But we think there are 2 elements into that. One element is, of course, to take over the business in Finland, and that's good in itself. But actually, that this business should be in platform to be able to have the competence to take over more ATM business, both on a European scale, but also on a global scale. I think what we see here is that we need to have a stronger competence to be able to show to the banks that we have the competence when it comes to all aspects of ATM management to be able to take that opportunity. And that's been in the strategic plan for at least 3 years, 3.5 years to do that. And we realize now that we need to have the platform. And Automate in Finland is that platform that will help us to be able to grow in the ATM business. So if you say you have the rough estimates for 20 percent of revenues related to NTAV ATMs in the U. S, what was the similar number for Europe? Can we can we can try to come back to you on that, KJ, in a separate? I don't have the numbers, and my CFO is shaking his head here. So can we come back to that in a separate session then, Corjan? Splendid, splendid. Looking at the efficiency program that you now initiate in the UK and some other markets, obviously, you did something similar in France and the Nordics, if you go back to 18 months in time. Is it similar kind of actions that you're now trying to implement in these markets as you did in, say, in those historic actions? And what kind of yields did you get out of those actions in the Nordic and France when you look back? That's right. I mean, basic I mean, for us, it's we have the people cost or cost related to people is a big part, of course. So when we do restructuring, it's mainly about people, but also about branches and vehicles. And that's in the same situation here that we are reducing the number of employees, unfortunately, for those who lose their jobs. But there is no other way. And that is sort of the standard procedure, of course, is to do that, but also looking into how we operate the business, how we can do things more efficiently. But it's reducing the number of employees, branches and vehicles. And the payback, when you look back at what you did in the Nordic, that yielded what it was supposed to yield and then you got the payback from it? Yes. I mean, I think that it's something Lumis is good at is really to manage the business and the cost level of the business. And yes, it's been it's always we always achieve the targets we have set when it comes to restructuring in all aspects or more or more. Excellent. And just one final question. On those financial targets you put up for 2021, you also had the Safe Point rollout kind of ambition of getting up to 10,000 units per year or something like that in speed towards the end. How do you feel about that given the current situation? No, I think that we were a bit afraid when let me let's start with U. S. I mean, that's the big bulk of the SafePoint business. I mean, I think that when the pandemic hit, we were a bit afraid what will happen to the can we meet customers? Can we talk to them? Can we make proposals? But I think that it has shown that, that is possible. And it's shown that, if anything that the demand for SafePoint has increased because people looking for all opportunities to make the business more efficient. So if anything, I think that this year will be a very good save point here. Where the numbers end up, I don't dare to speculate, but it will be a very good year. And I think that if anything, the pandemic has given sort of the Safe Point business that push forward together with all the things we have done internally. I mean, we have invested quite a lot of time and money into the sales force and to the concept and so develop the concepts. So all in all, I'd say that the outlook for SafePoint is positive. Excellent. And Chris, just on the cash flow as well. Is there any timing effects that has helped you, say, rate social costs or tax payment or something like that, that we should expect rollout of the numbers? And looking at the lower investment CapEx you have done during this year, have you do you feel that you have built up legacy cost to some extent that needs to be coming back into the numbers over the next couple of years? Okay. So if I start with the cash flow and the timing in taxes and VAT and so on, that amounts to approximately $300,000,000 So that could be expected to be seen over the next, say, 12 to 15 months coming back. And we also have a positive cash stock, as you know, is moving from quarter to quarter. And this quarter, it was a little bit lower, so you might have additionally $100,000,000 in that one. Looking into the CapEx, it will be a mix of things that needs to be done later, but also a mix of things that have been stopped for now. And since when the business go down, you need less vehicles and so on. So that will be part of the future, of course, to start changing and improving again, but not the full number. Excellent. So nothing major at least? No. Thank you. Our next question comes from the line of Thales Maimonakis of Tallahas Partners. Please go ahead. Hi. Thank you for taking my question. Could you please help us understand the effect of the current cost tariff exercise on fixed costs? In other words, out of the €160,000,000 exercise, like what is fixed, what is variable? And in the end of the day, if we look at next year's margin, what would be the main drivers behind this expansion in margins? Thanks a lot. Casey, if we start with the restructuring program, we can say that it's approximately twothree that will be cost out and onethree that is write offs. So that gives you the feeling for that it's approximately onethree that is fixed cost and the other one is mainly related to labor and salaries. And this should be, of course, be then with a less than 1 year payback important for the margin expansion. Yes. And then I think that this will absolutely help the European business get back into stronger margins into 2021. We don't really give you any numbers on that because we don't guide on the different segments, but this is a boost to the margins in Europe for next year, I would say. That's brilliant. Thanks a lot. Our next question comes from the line of Thomas Graf of Handelsbanken. Please go ahead. Yes. Hi, everyone. Most of my questions have been answered. But I'm just curious, I saw that drinks were if Biden would win the election, they would they estimate pretty negative effects. One is regarding the that the stricter emissions regulations would affect their fleet, the truck fleet and also that the country would go into more shutdowns and so on if Trump wins and so on. Can you just comment a bit about the election? What do you think, especially in terms of the truck fleet? Of course, we discussed that with our U. S. Management team. We don't see any major changes. If one I should be not be careful what I say now, but we don't see any big shift if someone is winning or the other ones win. We have a when it comes to emission and so on, we have a program already that we're working with to reduce the emission and that is goes into biofuel. We are buying electrical trucks and that will not change. We're driving that program independently of who is going to win. I think that also the lockdowns and so on, I'm not sure if that's going to happen one way or the other. I don't think there's any big differences. And to be honest, we are quite prepared for anything that will happen in the U. S. Market. So I don't see or the management team in the U. S. Don't see any big changes when it comes to who is going to win. No. Okay. Thanks. That's all for me. Thank you. And there are no further questions at this time. Please go ahead, speakers. Yes. I just want to thank everybody for very good questions and listening to our presentation. Thank you very much and take care.