Earnings Call: Q1 2020

May 7, 2020

Morning, ladies and gentlemen, and thank you for standing by. Welcome to today's LUMUS Group Q1 2020 Report Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to your speaker today, Patrick Anderson, President and CEO of the company. Please go ahead, sir. Thank you very much. Good morning, everyone, and welcome to the Q1 presentation from Lubitz. I'm Patrick Anderson. And today, I have Chris Anakteby, CFO and also Anders Harker, Chief Investor Relations Officer with me here on the call. I will give a short update or a short overview and then I open up for questions. So let's start the presentation and turn to the next page, which is called the corona pandemic. So just some short comments on the corona pandemic situation and how we have handled it. First of all, as many other companies, the well-being of our employees is on the top of our agenda, and we've taken a number of measures to safeguard our employees. We have disinfected the branches. We have handed out masks. We have worked on social distancing and also a lot of information to our employees. And I would also like to say that in these difficult times, the Loomis employees have done a fantastic job in maintaining the high quality despite the very challenging situation. I really personally would like to thank all the Loomis employees for their hard work and dedication. Thirdly, there has been a lot of false rumors circulating on in media, but also in social media about the cash that cash is spreading the virus. And these rumors have been denied by many medical experts also including European Central Bank, the WHO, the Swedish National Bank and so on and so forth. I just want to like to also to mention that cash in circulation both in Eurozone and in U. S. Never been as high as it is right now. So I'll just give you some numbers. So cash in circulation in Eurozone reached historic peak in March to €19,000,000,000 and that's the highest since 2,008. In the U. S, that's the same situation. We have cash in circulation has grown by €81,000,000,000 to €1,88,000,000,000 according to the Federal Reserve. This is also the highest level since 2,008 and 2009. So we see that every day in our work that the central banks are really, really, really pushing and making sure that the cash cycle is working. And then also connected to the next point that we have a very important role in a situation like this to see that the cash ecosystem is working. So we have actually a part of the infrastructure of a society, I would say. But it's also for us a good possibility to take advantage of the situation we're having and really see that all customers are getting served. And we are here to come out stronger after the crisis than we went in. That's our view. And all Loomis branches are working are working, but not all on full capacity, but all are up and running. We also see that the negative effects on LUNGIS in the Q1 were rather limited, but we expect, of course, as many others to have a bit more challenging situation, especially in April. We see increased volumes within food retailing, which is of course following the pattern, general pattern in society, but we also see that coming from ATM withdrawals and ATM services. We have decided to postpone the capital expenditure as much as we can, but we are not stopping any capital expenditure that is sort of building our future and long term growth. We have worked a lot on reduction of the variable costs, and we have a very good track record of doing that in integrating business, but also to, in a fast and efficient way, cut costs and that is our in our DNA and also in what we call the LUMIX model. We have also decided or the Board has decided to postpone the dividend, which was at SEK 11 a share, and the plan is to have extra ADM later this year to take a decision. We have also a new credit facility of SEK 1,200,000,000 signed to really strengthen the balance sheet even further. So we in short, we are well prepared operationally and financially to meet this challenge as we have seen. Then I move to the next slide, which is highlights, and these are the highlights of the quarter. I'll come back to some of these later in the presentation. As I mentioned, we have decided to stop the dividend for later. We have also announced the acquisition of Nokas Cash Handling in Sweden in January, Alto Masia, which is an ATM company in Finland in February, and we're waiting for approval from the local authorities on that, and that's expected later 2020. Re growth was 2% in the quarter and we have, of course, the acquisition in France that we did when we bought the Prosugore operations in France. We did that in July 2019, which is, of course, affecting the numbers. We had a good momentum, a good speed, I would say, into the pandemic. So organic growth in total was 0% in the quarter versus 2% last year. As I mentioned, there are some areas within food retail and ATM, which is growing. And we also see that Europe delivered a very good positive revenue growth in the 1st 2 months. But then, of course, the impact in March was there and pulled down the organic growth. And U. S, very positively impacted by the SafePoint growth, which is continuing, I come back to that. Operating margin, 11%, of course, then a higher impact in Europe, as I mentioned, in the quarter, but still margin is kept on a high level. And we have also then strong results overall from the U. S. Operation. Then last but not least, on cash flow, we had a very strong cash flow in the quarter and that is due to the fact that we had effect positive working capital movement. That's the main reason, but there are also some other movement. But overall, a strong cash flow in the quarter. So let's turn to the next page and just have a short view on how the margin developed in a historical perspective. So this is actually the 2nd best Q1 ever when it comes to operating margin since the IPO, which I think is showing strength in a very special time. So let's turn to the next page, which is then Segment Europe. As I mentioned, we are then working of course on the acquisition we did in France. And in effect, France is now a 2 player market, as I mentioned before. We have, of course, had to make a short stop when it comes to integration process to realize the synergies of the PersiGuru acquisition, but we will pick that up as soon as possible, and we're very sure that we will reach the targets from that acquisition. Organic growth, minus 2% in the quarter. As I mentioned before, end of March, we saw an effect in Europe until then a very good momentum. We have identified many growth opportunities in many countries as banks are now outsourcing even more central banks are looking for new opportunities, there are customers that's not being taken care of, etcetera. So we don't say in the last year or 2 for the bottom line, but to rather also invest for the future. We also seek a remarkable upswing when it comes to precious metals business in France, that's the CPOR business and that's lifting also the result of CPOR, but that's mainly based on then the precious metal business. Operating margin 9.7%, as I mentioned, negatively affected in the end of March, but also the French business that we acquired, we should keep in mind is also having a diluting effect on the margin for now, but that will, of course, change. So I would say Europe shows strength in difficult times. I'm very happy with the European result in these times. Then we move to next slide, which is then U. S. And U. S. Had a organic growth 2%, and we see that approximately 12% revenue growth for the SafePoint business, and we continue to have a very strong momentum and pipeline for the SafePoint business. And now SafePoint services accounts for as much as 17% of the total U. S. Revenues, which is, of course having an impact on the margin as you will see later on. CMS, cash management services, 34% of total revenue also increasing its share. And I'm really happy to say that high quality service have maintained during this period of time, and we see an inflow of new customers as we have kept everything open and we're really focused on servicing our customers. And we really would like to take this opportunity to grow with existing and new customers. Operating margin on an all time high level in Q1 despite these challenges. So a growing margin with 1.2 percent 1.1 percent really shows strength. And of course, SafePoint is having an impact on the margin, but also that we continue to focus on customers that are willing to pay for the quality and the service we are providing. We will not have any diluting contracts in the portfolio. We are serving customers in a good way, and of course, we want to get paid for that. And we have a very strong efficiency program going on constantly, but that we, of course, scale up when it comes to situations like this. So I would say that the LUMIST model is working very well in a situation like this. So a very strong result in Q1 in the U. S, very good from the U. S. Team. Let's turn to the next page, which is then the statement of income and then there is not very much to say. I mentioned many of these points before. In summary, we have kept growing and kept a good margin, a high margin in also a quarter which is highly affected by the coronavirus. So let's turn to the next page and then go to the Q and A. And I say, operator, we now open up for questions, please. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Thank you. We will now take our first question. Please go ahead. Your line is now open. Yes. Hi, it's Daniel from ABG. Just make sure if you hear me. Yes, we can hear you. Excellent. Okay. So my first question relates to Safepoint. Can you comment anything on net installations in Q1 so far? And then also give them I guess it is a physical sales model here where you actually meet your clients. How do you think of the rest of 2020? Can you give some kind of highlights or guidance on that in the U. S? So first question is we had a net new installation of about 1,000 safe points in the quarter. So in total, we have now 32,000 SafePoints installed. The base is 32,000 and 1,000 in the quarter. And then I didn't really hear your second question. Can you repeat that, please? What about the rest of the year? I guess it is a quite intensive physical sales model where you meet your clients to sell new. So how should we think about net installations for the coming three quarters? It's very difficult to say. As you say, it's we have a good pipeline, of course, and we're working on the pipeline so we have signed and closed contracts and we're working to install that base and that will continue as much as we can. Then of course, we're trying to negotiate to customers in different ways than we did before. But of course, I expect to have some impact on that in the next couple of months. But we're trying to keep the speed up as much as we can. Okay, good. And then the second question, given the minus 25% decline in April and somewhat higher in Europe, Are you close to be loss making in Europe in April? We're a bit careful on giving numbers on the EBITDA because now we're working so much with cost cutting exercises and so on. So it's very difficult to give you a clear, a good answer on the bottom line. So I would pass on that one and just focus on 25%. Okay. Fair enough. And then the final one on the industry. Have you historically seen any pent up demand? Is that actually something that happens in the industry when you have kind of a lockdown or a slower growth rate that you see higher demand when you come out of that? That's a good question. I think that what we very much follow the general consumption in a country, so in a society. So when consumption goes down, we go down, maybe not as much as people think, but and then when it goes up, we follow. So I have a hard time to say anything that it should ramp up. I don't know. What we can see at least is a lot of activity from the central banks in all countries to really safeguard the cash cycle. And there is a lot of activities going on, which is sort of giving us a bit of a cushion when, of course, the general spending goes down a bit. Thank you. We will now take our next question. Please go ahead. Your line is now open. Hi. It's Peter Testa for 1 Investments. I have a couple of questions, please. I was just interested in trying to understand your opportunities to variabilize your cost base. And we have all the various labor programs from governments at this point in time. And I was wondering if you had any thoughts as to what the proportion of your labor costs you could move in line with revenue or how much of your cost base whether labor or you can use government programs to move into line of revenue and also your truck network base, you can cost base, you can move in line with revenue? I'll leave that to Christian to try to answer. Good. So thank you very much for the question there. Looking into our cost and personnel cost that you referred to, it's approximately 55% of our total cost base, the salaries we do pay. The movements you will see in short term will differ a lot from country to country. Some countries, it's much faster to make the changes when volumes goes down, like for example in U. S. And then in some other areas, like for example in certain countries in Europe, it takes longer time to take to reduce the workforce. But at the same time, you can get subsidies. So what we work with is, of course, to get subsidies where it takes longer time to get workforce reduced and take out the cost. I will not be able and will not give you a number about how variable we see it, but what you probably should expect is it goes faster in U. S. In Europe, it will partly be mitigated by subsidies, but you will have a timing impact in Europe compared with U. S. Okay. But on the labor side, do you think that you will within a balance of I will not I will not make a specific comment on that one. I cannot do that. Okay. I didn't know whether it was timing or magnitude. That was my question. Okay. And the question is also on the truck fleet, the extent to which you have your variable fleet costs that you can move at this time also? What proportion of your costs were in addition to labor were variable fleet costs? Yes. The fleet cost in total is approximately 8%, 8.5% in relation to revenue. And then it's, of course, partly related to depreciation or leasing costs depend on how they are financed. But really the sort of 100% variable cost is the fuel and the fuel is approximately onefour, onefive of the total vehicle costs that you can have in your estimation. Right, okay. And are there other steps you can take to manage your cost base outside of labor, I. E. Looking at some, for example, closing some centers at a time or other factors? Or is the labor flexibility your primary tool? It's a lot of actions ongoing in each and every country. And it can be, for example, like you are touching, it's people related, it's weekend related. And on weekend, it can be, for example, that we put them weekend not being used, put them on hold, so to say, so we don't we can reduce insurance costs, we can reduce fuel costs, but also some of the fixed costs when we put them sort of on hold. So it's a lot of different activities. Looking into what can we do on rent, of course, we will ask our landlords what can be done on the rent side and so on. So a lot of cost action activities ongoing. Right. And then on the other side, as you come out of this period of shutdown, if you had any conversations with your customers about their restart plans, I mean, there's some customers retail, large retail chains have talked about opening, not all of reopening, not all of their stores are accelerating some store closures. But can you give any sense of how you've got a comment with customers on the other side and restart and how much how quickly or how the magnitude you think they will restart? Again, that depends a bit on country to country, but it's very much following the sort of how the countries is tackling the situation. But I can say that all we have a constant contact with our retailer, customer and as soon as possible, they would like to open, because it cannot be closed for a long time. So as soon as the country has opened up, the retailers are there to open up as soon as possible as soon as they're allowed and then we are there to support them. So I think that it's all focused on getting open as soon as possible it's allowed. And last question please. If you look at the how your revenue line depends upon number of stops versus volume of cash, can you give any sense in terms of how your revenue line splits between say, those two categories and whether there's a big difference between Europe and the U. S? No, we cannot give you a number on that. But you're right. I mean, one thing is that we have a fixed we have for many customers, we have a fixed base price, and that's not changed during these crises. So that's also the cushion. Of course, then the variable cost the variable pricing goes down, of course, but I cannot give you a number which is relevant right now. Sorry about that. Okay. Thank you very much for the answers. Thank you. We will now take our next question. Please go ahead. Your line is now open. Yes. Good morning, Johan Dondre at Baskett Bank here. Just had a question. As society recovers here hopefully after April and forward, is there anything in the contractual terms with your customers that would sort of delay a recovery in your business volumes, I. E, certain cancellations, etcetera, here in March, April, which will sort of take time to recover. So is there any such thing we should be aware of? Of? No, no. You should not. I mean, as soon as as I said before, as soon as they open up, we are to serve them. So there's no delay or anything stopping recovery, no. Could you say something, Patrick, regarding SailPoint sales in April? As I said, it's a good momentum, and we have always a backlog on installations. And so that we're trying to keep the installations going as much as possible. So I think it's on a decent level, I would say, and continue. And then after that, after April, we don't really know, but so far so good. What are you seeing in terms of being through the trough here? Would you argue that as some of your competitors did yesterday that April was a trough? Or can you share anything with us there? No, April is just to be clear on April is I would say that in the end of March, we saw a sharp decline. First, as I mentioned, in Europe and then after that also in the U. S. But then it stayed on that sharp decline. So it's not a curve that's going down. It's like a it goes very short down and then you hit the floor and it's been staying in that level during April. So that's the shape of the curve, if you like. And then hopefully, as societies are opening up, we should then also be able to recover from that. We would now take our next question. Daniel Johansen at SEB. Two questions from me. First one on working capital. Are you being a bit more flexible now with payments term as I assume some of your customers could be suffering quite severely in this situation? Second question, you're alluding a bit that you're advancing your position in certain markets. Could you say a few words on the potential for market share gains? And will you perhaps prioritize a bit more of organic growth compared to M and A in the sort of medium term? Thanks. Then I start with the two last questions and then I hand over to Christian. I think that M and A, of course, we are working M and A, but there is a standstill when it comes to M and A. I think that first of all, it's very difficult to meet and talk about these sensitive things, but also what kind of valuation should you use in a time like this. Is it pre corona, post corona? What's happening? So I think that's a bit of a standstill, even though it's not a total standstill when it comes to China, I think that would gain momentum quite quickly again. And then of course, if you have a financial strength, that also gives you opportunities when it comes to M and A that some of our colleagues or competitors will have issues and of course maybe want to sell. So that's opening up other possibilities. I think that what we said also when it comes to organic growth, what we said from the beginning of this crisis is that we should not jeopardize the quality of the service or the interaction with the customer. We need to be there for our customers. We see that many customers have appreciated that and also that some other customers want to join us. And there are many examples of that. And that is very, very important for us that we take the chance to grow our market shares. And of course it's early days still, but that at least is the aim and there are a lot of opportunities I would say to do that, yes. Looking into the working capital and accounts receivable specifically, we're looking into Q1, we have first to say with the cash flow, we have a positive timing in accounts receivable in Q1, which was partly a backlog, you could say from Q4, where we had the negative timing of some delays in payments. When we look into the end of March, we have a stable DSO. So that is well in line with prior year and we do not see a significant or an increase in bad debt as of now and that are the most important parts for us now to follow. If we would change payment terms or not, that is totally individual and nothing that we will do from here. But that's the country to country decision when it comes to the payment terms and I think to be honest that in one some of our countries we have been a bit flexible when it comes to payments with some of our customers, but that's very much on a case by case basis. Thank you. We will now take our next question. Please go ahead. Your line is now open. Yes. Hi, it's Michael at Carnegie in Stockholm. Just one clarification. Most of my questions were answered. But one clarification on Safe Point, the growth you are reporting, is that growth number organic or is it in Swedish kronas? The Safeway growth is organic. We will take our next question. Daniel from ABG again. I got also a couple of my questions already answered, but I have a final one. Have you received any governmental grants so far in any countries? Yes. In some countries, we have I cannot give you detailed pictures, but we in some countries, we have, yes. So we have been very fast on sort of losing those possibilities, but that's been opened up, yes. Have they affected the Q1 profitability to any extent? Or and do you expect that to affect margins in Q2 to any extent at all? No significant impact in Q1. I think that we have an impact on Q2 to some extent, yes. And this is to clarify, I mean, a big portion is to support the on the salary side. Yes, thanks. We will take our next question. Please go ahead. Your line is now open. Hi. It's Peter Tester again. So just to go back to my question on variable versus pickups. Would it be fair to assume that CIT is roughly related to number of stops that the SafePoint is obviously a fee business and that CMS has got the variable component to volume of cash? I think we'll let Anders Harker, do you want your answer on these things? Do you want to answer that one, please? Sure. It's correct, as you say, that the CIT business is mainly dependent on the number of stops we do. And the CMS business is primarily a function of how many bags we count. It doesn't necessarily mean that if we make less stops that we count less bags. So you would probably see a more immediate impact when it comes to volumes on the CIC side than on the CMS side. But in the long perspective, they're all tied together. If we make more stops in the long term, we will have more cash to count for the CMS business. So it works both ways. Right. So as you pick back Please. Yes. So I mean, the short answer to your question would be that you probably see a more quicker impact on the CIT business than on the CMS business in these type of circumstances. Right. And then on the way back up, you would as stores reopen, they may not have all the shoppers. You'd see a rapid pickup in the CIT business and the CMS business would pick up as the volume of say sales through QSR or stores picked up. Is that fine? Yes. Fine. Confirmed. Okay. Thank you. And then the other question, you mentioned a number of times market share opportunities, customers talking to you about service and so on. Can you give any sort of comment or context of and banks outsourcing? Is there maybe how the pipeline has changed either in terms of retail customers or in terms of bank outsourcing? I didn't hear you very well, but the first one is, I think that some of our customers may be not really happy with this situation they're having with someone else and then they are reaching out to us. That's quite an opportunity, I would say, in many of the countries. That's number 1. Number 2 is that what I'm trying to say also in the beginning is this situation opens up some other opportunities like banks trying to outsource more of their services like ATM services or central banks are trying to find ways to outsource some of their cash services. And these opportunities that open is opening up now in these circumstances. It's not only about the gaining market share, gaining contracts from other customers, but also new opportunities opening up. So these are the 2 possibilities. And then I missed your second question, I think it was all about SafePoint. Well, it was just a general whether you could talk about this as a qualified pipeline at this stage and maybe also the SafePoint with retail customers, etcetera. Just trying to understand in this period where it's obviously more challenging to execute sales, whether you sound like you're actually getting a sales pipeline, I'm trying to understand if you would call it qualified pipeline or initial discussions? No, I think that, of course, if you cannot meet and negotiate contracts with customers when it comes to Safepoint, that is, of course, it's hindering. And also customers now have other things to think about than installing SafePoint. So of course, I think in the short term, that will have some kind of impact. That's naive to think anything like that. Having said that, we have a very strong pipeline when it comes to SafePoint opportunities. Right. But the conversations with banks and central bank on cash services, banks and ATM, are those turning into pipeline type conversations or are they sort of initial exploratory? No, no, no. I mean, I think that both some of these have happened. I cannot quantify that, but some of these opportunities turn into reality and but there are a lot of discussions going on at the same time about these things. Yes, that's the pipeline, yes. We will take our next question. Hello, everyone. Do you hear me? Yes. Great. Just are you developing anything similar to we heard the Brink's Complete that they mentioned. Are you looking at any similar solution to that? I haven't told the details about the Brink's solution, but we are constantly working on innovating our SafePoint offering and also in terms of how we can finance that and find the best solution for the finance of our customers. So I don't know exactly what it is, but I can assure you that we are doing a lot of work when it comes to the SafePoint offering, both on the technology platform, but also on the financial services around that. So that's high on the agenda, I can say. Okay, great. It's Thomas Graf here from Handelsbanken Eilert. Just one question. I came in late to the call. I don't know if you mentioned, but are you seeing any sort of behavioral worries with the corona situation that people are worried for cash and so on. I know you stated that experts and WHO says that you shouldn't say, but any behavioral changes? Have you noticed that? No, we haven't seen that in general, any behavioral changes. We see as I said in the beginning, I mean, I think that what we very much we follow the development of the society, so the economy goes down and we go down with it, of course, but nothing specific when it comes to people afraid. There's been some campaigns around not using cash and so on, but that has not as we have seen any impact on our business so far at least. We will now take our next question. It's Michael at Carnegie again. Just a follow-up on the question regarding CIT and the impact now short term and medium term from COVID-nineteen. If I mean, if a customer closes down, let's say H and M closes down a store, obviously, there's no need for a pickup as the store is closed. But you still have a contract with that customer. So first question is how have you sort of has that contract been honored? Or I mean, are you still getting paid regardless of the stores being closed since there's a contract? That's one question. Second question is, if then a store is closed and then as it opens up now in some countries in the next couple of days, we have Germany, we have Denmark, I think, on Monday and so on when shops are will be opened up. Have you sort of changed in discussions with these customers? Have you reduced the number of stops initially because the customers are foreseeing a lower activity in the stores? So no need for maybe twice 2 pickups per week, maybe just 1 or so. So yes, that's my questions. I think we leave that to Anders again. He's an expert on these models. I think that Anders, if you like, can you please answer? Yes, sure. The I mean, the effect we saw in April is, of course, that there are fewer stops and fewer bags to count on the CMS side. And it's each individual contract with each customer needs to be discussed on an individual basis. But in general, if there are if the shop closes down, there is no pickup. But the price that we discuss and agree with each customer is at the end based on expected volumes. I mean, the more services you get, the higher the price or the lower the price you pay. And if those volumes change over time, then we need to discuss pricing with the customers. So it's an individual discussion, but there is a time lag, of course, that we get quickly affected in these type of situations when the customers demand their services. But there is also a quick recovery when the economies go back to a more normal situation. Correct me if I'm wrong, but the fee per stop is very, very small for a store, for instance. So the amount that the store can save from reducing the number of stops from 2 to 1 a week, for instance, is extremely small in the whole sense. Yes. So therefore, there's I don't think that it's the first it's not the top priority for our customers to cut down on the number of CIT stocks because there are so many other items in the cost structure of our customers that are more important than our services. But of course, I mean, in the long run, our customers need to look at their total cost structure. So therefore, there is we are affected as well. Thank you. There are no further questions at this time. Please continue. All right. I heard there is no more question. I thank you very much for joining the conference call. And as I say to my employees, take care out there. Be careful. Thank you very much. That does conclude our conference for today. Thank you for participating. You may all disconnect.