Earnings Call: Q4 2019

Feb 5, 2020

Hello. Good morning, everyone. It's Patrick Anderson here. And today with me here today on the call, I have our CFO, Christian Akerberg and also Anders Harker, who is our Chief Investor Relations Officer. So good morning, and welcome everyone to the Q4 presentation from Numis. So let's start the presentation and turn to the next page where we have all the highlights for the quarter. I will come back to many of them later on in my presentation, but let me just go through them quickly. So on the recent events, mostly on the M and A side, we have now acquired Nukast cash handling in Sweden from January 2020. We believe we can close that deal in April of this year. So actually, in effect, Sweden will be actually the first one player market, which we know of. Unfortunately, the German acquisition was stopped by the competition authorities, as we have announced before. When it comes to growth, we had a regrowth of 5%. And what's driving that is, of course, the 2 acquisitions we have in France, CPOR, which is the FX company, but also the acquisition of the French business of Prosiguro, which is then CIT CMS. The organic growth was 1% in the quarter, and we see that many countries in Europe continue to deliver very positive results on the top line when it comes to Europe, despite the fact that we had a protest in France and Chile. The U. S. Growth opportunities remain very strong. We see that there is a lot of potential still within the CMS and SafePoint side in the U. S. The operating margin was really excellent in the quarter, coming in at 13% versus 12% last year, that's all time high for the 4th quarter when it comes to margin, but also profit in absolute terms. We had record margins in the U. S. On 15.8%. EPS grew by 5% in the quarter, and the operating cash flow was 46% in the quarter and that's temporarily weakened by some timing effects when it comes to working capital. But if you look at the full year, the conversion was 81%, which is on a more normal LUMIS level, if I can express it like that. The proposed dividend is at DKK11 a share, which is an increase by 10%. So let's turn then to next page, which is operating margin development. And this slide is just to give you a historical perspective on the margin development. And as I mentioned before, we have all time high margin when it comes to 4th quarter, but also when we look at profit in absolute numbers. And when it comes to the full year, we are now on a 12.4 percent margin for 2019, so a very strong development indeed. Let's turn then to the next page and look at Europe. We had a very good development in Europe, I would say, also the quarter, real growth came in at 8%. And as I mentioned, these two acquisitions, which is really driving the top line in Europe. And FX will the CPO acquisition and the platform we have in France will be the platform for further expansion within FX in Europe. And so that's a very strategic move and now we're working full focused on developing that platform for the rest of Europe. We also acquired Prosiguro, as I mentioned before, cash handling, and the integration goes according to plan. And France will be in effect a 2 player market as we speak. But if we take Cross Gura into account and looking at the margin further down, we would be at about 13% or above 13% for the quarter. So that has a sort of a bit of a hampering effect, but that will change over the course of 2020. Organic growth was 1% in the quarter. We have a very strong contribution from Spain, Belgium, Turkey and Argentina in the quarter. Contribution from Spain, Belgium, Turkey and Argentina in the quarter. As everybody could read in the papers, we had some challenges in France and Chile due to political demonstration and strikes and protests. And when it comes to margin, I mentioned that before, we are now restructuring the French business and we are spot on when it comes to the plan we're having for integrating the business. Also to mention the German operations has a diluting effect on the margin and we expect also here that we will see gradual improvement throughout 2020. So indeed a really good and strong and solid performance in Europe. Let's turn then to next page and look at U. S. Also here, very, very strong results in the quarter. Organic growth was 2% and we are now we have had close to 18% revenue growth when it comes to SafePoint, really strong indeed. And now SafePoint accounts for 15% of the total U. S. Revenue. And if you look at CMS, CMS is also developing positively and 35% of the total revenue is now coming from CMS, cash handling, cash management services and that has of course a good effect on the margin. And as I mentioned before, we have a strong outlook for growth opportunities when it comes especially to SafePoint, but also to CMS in the U. S. Market. When it comes to margin, a fantastic margin, I would say, 15.8% versus 12.8% the year before. SafePoint, as I mentioned, is helping to expand the margin, but we're also now focusing very much on customers which are interested in high quality and high quality services and we are not sort of chasing the last contract with low prices. We also had a favorable net development when it comes to our medical and casualty expenses and reserves, which is good because that means that we have less casualties and less people being treated by medical people and that's a good thing. So we also had a very positive impact of the restructuring of the international business in the quarter. That has been going on throughout the year and but also in this quarter. So that's U. S. Excellent results. So let's turn then to next page and just look at the statement of income. As I mentioned before, we are making the best Q4 ever and the best year ever. We have SEK 2,600,000,000 in EBITDA for the year and now we are in the range between 12% 14%, which was our long term goal for 2021. We're at 12.4%, which is really encouraging. And all in all, I would like to also thank all employees for their great effort during 2019. I also would like to thank all investors and other stakeholders for their support during 2019. And then let's turn to the next page and go to the Q and A. And operator, we are now open for questions. Sorry about that. Yes, we are open for questions. It is possible for you to ask a question. We have no questions. Oh, yes, we do have a question. Excuse me. Okay. Please go ahead and ask your question. Good morning. It's Karina Umgren at Handelsbanken. I have a few questions. The first one would be for the U. S. You say that you're refraining from entering a lesser profitable contracts. Should we view this as there is more competition in the market than perhaps price pressure? No, I wouldn't say that. I mean, there's always I think that what we have done just to take it back in history, I think that what we have done during the last couple of years is really improving our quality and improving our systems when it comes to IT and how we respond to customer requests and so on and so forth. We don't want to jeopardize that. Customers need to pay for that service and some customers are not maybe willing to do that and then they are not I don't think they are suitable customers for Lumen. So I don't think that in general there is any price pressure. It's just that some customer segments maybe are not suitable for our services. That's how we would express it. Okay. And given this, what would you say is a fair assumption for the midterm organic growth in the U. S, your previous mentioned 5% to 10% or 6% to 8% and what is your assessment at the moment? Yes. No, I think that I mean this always goes a bit in ways, but nothing has changed when it comes to how we look at the U. S. Markets, both when it comes to State Farm and CMS. So we are still saying that the top line growth should be between 5% 10% going forward. Okay. Great. Then on SafePoint installation, sorry if I didn't see this in the report, but how many did you install net in the U. S. And could you comment something about the pipeline in Europe? Yes. We did about 1,000 installations in the quarter and about 4,000 for the year. So now we are close to 31,000 installations in the U. S. In Europe, we are progressing very well. Actually, we have the same growth rate in Europe as we had in the U. S. However, from a much smaller base, but we are doing really good when it comes to Safeco in Europe as well. Okay. Then some other quickly before I leave over. You said the margin was impacted in U. S. By less medical costs. Is that something that will last in 2020 and be adjusted once a year? Or was it more of a one off in the quarter? Sorry. Hi, Christian here. Yes, this is a one time effect. It's when you do the recalculation of your actuarial assumptions based on your performance. So this should be viewed as a one time effect. But of course, if we continue to improve, it can have a further positive impact, but it should be viewed as a one time. Okay. And then the final question, maybe a little bit broader one. Your margin target for 12% to 14% by 2021. Now without Siemens, would you say that you can come up to closer to 14% percent or how do you look at the guidance range? As I said all the time, they had a margin between around 7%, 7.5%. They had a margin between around 7% percent, 7.5%. So I think that all in all, it's more likely that we get up to the higher range of the sector now without Siemens. Okay. Thank you very much. Thank you for your question. And we will now take our next question. So please go ahead. Your line is now open. Yes. Daniel from ABG. A quick one on Germany. Is it necessary to increase your size in Germany through more acquisitions to reach group margin? Or can you do that only with the Qatar business? I think that as it is right now, let's call short term, it's very much a CIT business and CIT business is very difficult to get up to group margin. So I don't think that in the near term, you should expect that Germany is coming up to group average. However, in the mid term, long term, it should because we believe that CMS, Outsourcing and Safecoant will I mean, the demand for SafePoint will increase and thereby sort of mid term, long term, they should be able to get to group average. Okay. And can you capture that part of the business with the Qatar platform? Or do you need to expand? No, I think that we can do that to a large extent with the footprint we're having right now. Okay. Excellent. A question on Argentina. You highlight that as a positive organic growth driver in Q4. Is that also when you adjust for FX? Yes, that's correct. We grow faster than inflation and also with FX. If you recalculate Swedish kronas, we have an increase in Swedish kronas as well. Okay. Excellent. And then a question on future acquisitions. Do you look in any geographies outside your current market that you think look more attractive than others? No, we actually don't. So we still stick to Latin America, U. S. And Europe for the time being. I think that we have enough targets in those geographies at least for this strategy period to meet the targets and that's still the focus. So the pipeline is full with acquisition targets from these areas, I would say. Thank you. We will now take our next question. So please go ahead. Your line is now open. Yes. Hello. It's Matti Gergollet from Goldman Sachs. A couple of questions for me. Firstly, I would like to dwell a little bit more on what happened to the U. S. Margins in the Q4 because it's a very sizable increase. We don't usually see many companies having this type of, say, big increases. I appreciate you have a little bit of a one off, say, tailwind in the U. S. Of 60 bps or 70 bps. But still, there's more than 200 basis points of margin improvement in the U. S. Now is it like a sustainable margin improvement that we should expect it will carry in the coming quarters or not really? If you can just elaborate a bit more on that. That's the first point. 2nd point is also say on the margins in Europe. So you mentioned that in Europe, ex Prosegul France, you were at 13% margin, also like a 50 basis points margin improvement. So again, is this like a sustainable level? And if I say from your comments, it seems that you would expect that the Prosegur France turnaround is complete by the end of 2020. So probably my reading, but here I would like to hear your comments is, okay, still some margin pressure in from Prosugo France in 2020. But by 2021, we should also expect a fairly sizable step up in margins. And then thirdly, which is also a sizable item, although I know it will probably be a bit annoying, on the working capital. So looking at your statements on Page 13, I see that I got EUR 230,000,000 of change in other operating capital employed on other items. Just if you can give us a bit more detail about what is that given that it is 20% of your operating cash flow in the quarter? Thank you. All right. I'll start with the 2 first question and I'll let Christian answer the third one. So when it comes to U. S, I think that what we have done in the U. S. Over this year is really been we've been driving operational efficiency in our branches. We have been driving a lot of systems and activities to improve performance, both in the branches, but also when it comes to systems and IT systems and follow-up systems when it comes to the headquarter. So I think that behind these strong numbers, there is a real effect of efficiency improvement in the U. S. Business. There's no doubt about it. And then we had some tailwind when it comes to medical and so on. So I think that there is an underlying improvement of the margins in the U. S. And I think that I should not guide now, but this is sustainable. There is an underlying improvement in the U. S. Coming from many, many, many activities. There is not just 1, there is maybe 10 activities driving that. So that's number 1. Number 2, on Europe, you're right. We have in Europe, we have an effect of Prosigore of France, which is quite sizable. That will change. We are quite certain that that will change during 2020. That is that we would take that volume coming from Postgres France and put that on a common platform. And that's been the plan for the year. And then now we also as we don't have any possibilities to buy FEMA, we're also driving the turnaround of the German business and that will also have an impact on the margin. So these are businesses that are not making any profits on the contrary. And of course, our main focus this year is to turn that around. And we're quite optimistic that that will happen. So all in all, the European margins should be able to improve out of 2020. So then I leave to Christian to answer the third one. Regarding the cash flow and specifically then Q4, you have quite a number of timing effects and in the line out there mainly impacted by movement in cash stock and also salaries in the U. S. If you look into the full year number, you have a more sort of level that gives you the indication. And there you also see its timing effect during the year. And if you look into the full year cash flow at this 81%, we have negative impact from these salaries and from accounts receivables. Underlying compared with the prior year, it looks a little bit better actually than the 81%. But I think it's better to look at the full year number here than the timing you get in Q4. And also to mention Q4 last year, we had a lot of positive timing impact that meant the comparison up a little bit. Okay. But so the biggest item is the timing of salaries, you say? The biggest impact you see in Q4 is the cash stock movement. Stock movement? Cash, cash stock. Yes. Cash stock. Cash stock. Cash stock. Cash stock. Okay. Cash stock. Okay. Sorry, just a quick follow-up on France. In terms of, say, when you move over the volumes to your platform, should we expect any further restructuring charges for the country, for the region during 2020? Yes. We have what you see in the income statement, we have reported that the transaction and integration costs, and there you will see also costs coming in during 20.50. So we do not report that to the newly acquired unit in the operational EBITDA in the transactional integration costs. Okay. Got it. Okay. There will be There will be some costs, but that's more like a normal ongoing business growth. It's nothing exceptional, I would say. Okay. Thank you very much. Thank you for these questions. We will now take our next question. So please go ahead. Your line is now open. Yes. Hi, it's Johan Dahl here, Danske here. I was just curious to the problems you talked about, the effects in France, etcetera, on organic growth. Would you be able to give any sort of intel how much those problems in Chile and France impacted your growth? It's very difficult to give any numbers. What I can say is actually that we had despite these issues, we had organic growth in France for the quarter. And we have seen that organic growth has been ticking up in France the last couple of quarters after the issues we had in 2018. So we had organic growth. I don't dare to speculate about the effect. I mean, if you've been to Paris, you can see that the traffic is chaotic. It's very difficult to make the service business, but we haven't calculated. But there is some kind of effect. It's very difficult to say how much. And on the SafePoint in the U. S, I think you've been you've expressed yourself very confidently, I would say, throughout 2019 in terms of the future outlook for this. I'm just wondering, sure, Q4 was slightly better in terms of net installations, but what really gives you the confidence here to sort of repeat this message looking into 2020, 2021? I mean, we make careful analysis of the market and the market demand. We're looking at our pipeline of prospects. We're looking at the orders we have in our books and how much we're going to install and so on. Then there's always timing effect and it takes a bit more time. But the market is there, the pipeline is there, so that makes me still quite optimistic or very optimistic about the future. I think that also in the quarter, I mean to grow 18% with Safepoint in the quarter is really, really strong. What I've said many, many times and what we what is not a challenge, but something we need to look at is to protect the installed base. And that we have spent quite a lot of resources and building up the teams, building up systems to track and to monitor and to retain these customers as we want. And that is a bit of change because we have quite an installed base that of course that our competitors want to take. So that has been a bit of a change, but we are very much up running. I don't see any change in the prospect of growing in Safepoint for the coming years. Okay. Just a quick follow-up also. Would you say that you lost market share in the SafePoint niche in 2019? And secondly, I was wondering after the Silman acquisition not being carried out, what is the risk do you think that you will be slightly stressed here to achieve your group target here for 2021 in terms of M and A? No, I don't think we lost any market share at all. On the contrary, we are continuing to install a lot of safe points and the pipeline is strong. As I said, no change in that respect. It's always a bit like, is there a one big contract coming in or not? So that makes the change of maybe 1,000 or more than 1,000 saves. So you have to be a bit lucky, of course. But still 4,000 installed in the year is a very strong number, at the same time as we protected our base. The second question was again about sorry, the revenue target. No, we are not stressed. Of course, we shouldn't make any acquisitions, which are bad business for us. But we have a strong time line. We have a lot of things on our agenda to achieve. And as I said many times, I'm still very confident that we would make our the $24,000,000,000 So that is still that within reach. And as I said, today, we're doing really good on the margin side, and we are quite confident that we can hit the revenue target as well. Thank you for that. We have our next question. Sir, your line is now open to ask your question. Please go ahead. Hi. This is Johan Eliason at Kepler Cheuvreux. Just two questions. First, you mentioned the in the U. S. Business, the restructuring on the international part. Could that have any significant impact on your U. S. Margins in 2020? And secondly, in your M and A pipeline, are you looking at anything from Group 4S and the cash solutions business there? Or what do you see happening with that process? Thank you. So the restructuring of the international business is more or less done. I would say there will be some effect, I guess, but the big part is done in 2019. There's some effects. What is happening with international, we've been quite successful in driving the top line between U. S. And Latin America. That's been a very good thing. Hopefully, that can continue. So that will have that part can have or should have a positive impact, but the restructuring is more or less done. When it comes to again, my memory is what was I meant to? I mean, can you repeat the second question, please? Yes. Just any view on the Group 4S cash solutions? Are you looking at anything there? Or what's your view on that process? I don't know what's going on. They have announced that they have will have a strategic review. Of course, we are I mean, in this business, everybody is talking to everybody, of course, and we're looking at it. But to acquire the whole G4S part, cash part would be not in our interest, as I've said many times. That's because of different reasons, the overlap and things like that. Of course, there are parts of depressed that could be very interesting in some countries, of course, but also the cash solution. Now, we have launched our own recycling concept some months ago and we are making some progress at least on that side. So we are taking up that battle, but of course that could be of interest. Okay. Thanks very much. Thank you for that question. And we have another question as well. So please go ahead. Your line is now open. Henrik Moby from Nordea Equity Research. A couple of questions for me, if I may. On Europe, I mean, you commented that you still had organic growth in France, but there's still a 200 basis points organic growth slowdown. Is that mainly Chile then? Or is did France in Q2, Q3 have mid single digit growth rates? Or how should we look at that? Or have you seen a significant slowdown in any other markets? No, I think it's the trends are relatively similar if you look overall. I mean, it's like you have strong growth in Latin America in general, but now unfortunately, Chile goes from double digit growth in the 1st 9 months to close to 0 in the Q4 with the riots. France, as you mentioned, they come from having a couple of percent organic growth, low single digits and they are still positive, as Patrick said, but it's a very low number. So that gives us a negative impact. So we are now at this 1 percentage point, in the range 1% to 3%, and we see no reason to have any other opinion about that now. Okay. So should I read that as that you've not seen any weakness in the underlying portfolio and that this is mainly related to hopefully temporary factors in Chile and France? Yes, that's right. And I think that I'd like to mention like a country like Spain, as I mentioned many times before, doing absolutely fantastic both on the bottom line and top line growing nicely. We have Belgium growing, we have Turkey growing, Argentina growing. So there is no change. The difference, the delta is, of course, the riots and the things that we have experienced in Chile and France. Okay. And moving over to the U. S. I mean earlier during the year, Q1 to Q3, you had a very solid and accelerating growth trend. And then there was a significant slowdown there as well in Q4. How should we look at that? Have you lost any larger contracts? Or is it mainly that you've not been able to add enough new contract wins during the year? Yes. I would say that, first of all, there has not been a lot of major contract outs for Grab in the quarter. I think that, that is the main reason, bigger CMS contract that is. And then as I said, we have not sort of decided to go in for a low margin contract in some instances. But I don't see any big change in the on a macro level. I think that still that there are a number interesting prospects in the market when it comes to CMS and definitely also safe point there are a lot of possibilities. So I'm not worried about the midterm, long term trend in the U. S, that the growth will come back. I agree with you there, Patrick. What I'm trying to discern here is if we should be concerned that you had a contract loss in the quarter and that, that might feed into even worse organic growth in the coming quarters? No, it's nothing. I mean, as I said, no, I don't repeat myself. It's nothing that is sort of worrying on that side, no. Okay. Thank you very much. Thank you. Ladies and gentlemen, we will now take our next question. Please go ahead. Your line is now open. Hello. It's Karina from Genentanasbanken again. I was wondering a little bit about Germany and your organic growth prospects there. How much have you been growing in 2019 organically there? If I recall right, so Christian, you take that one. Yes. Organic growth in Germany is relatively flat. And that's, of course, due to that we have been in a process to acquire a company. So now we need to increase focus on our existing company and not the acquisition and integration phase. Okay. And do you feel that you could step up that growth maybe by taking market shares? Because I assume that the outsourcing of the CMS part still will take some time before it starts. We have a plan to grow both top line and bottom line in Germany for this year. So we would expect some top line growth as well, yes. And that's mainly because we think there are some contracts we can win. We have for the reasons that Christian sort of said, we have not been that active on the market focusing on other things. But I think that there is a very good chance that we can grow the top line also in Germany. Thank you. And we have another question as well. So please go ahead. Your line is now open. Yes. Hi, it's Peter Testa. I was wondering if you could just help us understand also whether there's pricing going on in SafePoint just to try to understand the growth in organic revenue versus the growth in installations? You seem to be growing revenue faster than installations. Is there anything going on on pricing or maybe just size, average size of contract? That's the first question. No, I don't we increase the price every year a bit, but that you shouldn't see that as pricing is that when the contracts come in, they are not that in the beginning they need some time to get them under the belt and then we see that topline is coming. So it's a bit of a delayed effect, but there is nothing like we are pushing prices like crazy on the SafeMoon side. No, it's not. Okay. And then just looking in terms of organic growth in Europe around 1%. I mean, you said that Argentina, Chile, France are all positive. Have you seen any particular change in Spain or Scandinavia or some of your other important markets in Europe in terms of growth trajectory during the, say, end of the year? No, no change. It's very much the same trends we have seen before that we have a slight negative top line in the Nordic countries, especially Sweden. And then we have a very good momentum in many of the other European markets. I also like to mention Austria, Switzerland and the others I mentioned. So it's the same trend we have seen the last year, I would say, so no change. Okay. And then on the recent acquisition you've announced in Sweden and previously we talked a bit about the ATM opportunity in general in Sweden. Can you give any sense as to how you put all these together and maybe with legislative progress to understand whether there's a significant revenue and profit opportunity building there? So the latest acquisition is the acquisition we bought to Nokas in Sweden and that is not ATM. It's a pure CIT CMS that we are now waiting to close. So that's number 1. We are focusing very much on the ATM business and we have built up a team that is working very hard to get new contracts when it comes to the ADEM. So the idea is not only to do the CIT service, but to expand that service into CMS, first line maintenance, IT and so on and so forth. So that's what we're working very hard on. And I think that that is the major growth opportunities for growth opportunity for LUMIX going forward. That will be outsourced much more from independent ATM deployers, but also from banks. So that will happen. Okay. Thank you very much. Thank you. We will now take our next questions. Yes. Hello. Karl Johan Bonhoeffer from GMB Markets. Patrick, just to start with, just so I understand it fully. Have you decided not to challenge the competitive authorities' decision in or indication in Germany and walk away from Siemon? Is that deal totally close from your point of view now? Yes, it is. We decided some time ago after many discussions with our lawyers that we will not appeal the decision. The reason for that is that is a long process. It can take up to 3 years and we don't know then what puts if there's anything still to buy, of course, but it also costs quite a lot of money. So taking all these consequences into effect, we have decided not to appeal the sentence or the decision by the competition authorities. Makes sense. Makes sense. On the Nokas transaction in Sweden, is that a completed transaction now or is that still pending some the approval from the financial inspection? Yes. So the thing is that we need to have approval from the financial inspection, but that is used to check that we are the proper owners of it. It falls below the threshold of SEK 1,000,000,000 in turnover as a threshold. So it should not be tested from that point of view, but it's only tested that we are the right owners that we are under the supervision of the financial inspection, yes. Excellent. And then Christian, just to understand the rollback of this accrual you made for the medical and casualty in the U. S. Do I understand it right? Obviously, I see this, obviously, as a one off for the rollback in Q4. But aren't you using the new lower level as the base for 2020? So you can say what you have pulled back from the 1st 3 quarters is something that's now going to be positive during the 1st 3 quarters of this year in comparison? I think this is a longer accrual, so to say, that reaches for many years depending on what kind of medical or casualty it relates to. But it's true that now we have a closing balance that will be the opening balance for next year, but then the New Year starts, so to say. And this the release that is being done now does not relate entirely to this year. So I mean, the change in the outgoing balance. Is that helping? Okay. Then I understand it better. And looking at those kind of accrual levels in different countries, are you now basically on the same kind of risk level and same kind of cost level across your footprint? Or how does that look? No. This is more U. S.-specific thing based on how the legislation is and how you work with your employees, so to say, and how the social security system works in different countries. Excellent. And Patrick, just to come back to the earlier question on your view of getting back to 5% to 10% growth in the U. S. Footprint, Do you see any signs of this, say, 2nd, 3rd wave of CMS outsourcing materializing for the moment? Or is still a quiet market out there? I think that there are opportunities when it comes to both CMS and Safeguard. It's been a bit of a slower year, especially when it comes to CMS. This year, there's been a bit bigger contracts out for that. So but we see that the prospects are still there. There are opportunities and I think that in the short term or mid term, we will get back to our growth levels. Excellent. Thank you. Thank you for your question. There are no further questions at this time. So please continue. All right. Thank you very much everybody for listening and asking really good questions. Take care. Thank you. Bye bye. Thank you. That does conclude our conference for today. Thank you for participating.