Earnings Call: Q2 2019

Jul 25, 2019

Thank you. Good morning, everyone, and thank you for joining the Q2 presentation from Loomis. My name is Patrick Anderson. As you heard, I'm the CEO of Loomis. And with me here today, I have Christian Akerbi, our CFO and Anders Harker, Chief Investor Relations Officer. So let's start the presentation and turn to next page, which are the highlights. So these are the highlights of the quarter, and I will get back to some of them some of these points later in my presentation. So we have recent acquisitions as we announced this spring, we have closed the purchase of Prosugo Cash in France. And we are now getting into a integration mode. The re growth was 4% in the quarter and what's supporting that are, of course, the acquisitions in Chile and the CPOR, the French FX business that was closed some time ago. The organic growth in overall was 3% in the quarter. We see a very positive momentum in Europe, where growth was picking up in the quarter. The U. S. Growth was impacted by restructuring programs in the international business and somewhat lower volume growth in the CEIT business. However, very strong SafePoint sales and SafePoint volumes in the quarter. Operating margin ended up at 11.7%, and we see very positive effects now also from the restructuring programs in Europe, especially then, of course, France and Sweden. And we expect further effects to be realized in the coming quarters. Business mix in the U. S. Was impacting the margins positively, very good and high margins in the U. S. In the quarter. And the EPS is then impacted by a nonrecurring item that we had in the Q2 in 2018. The operating cash flow was strong at 166 percent. And we also communicated in the quarter around the Danish media allegations, which I will come back to when I talk about Europe. So these are the highlights. So let's turn to next page. And this slide is giving you a historical perspective on the margin. So as you can see, a very strong margin for Q2. And actually in absolute numbers, if you look at absolute numbers also taking away the FX effect, this is the best Q2 we have ever had in absolute numbers. So a strong quarter in that sense as well. So let's turn to next page, which is United States. So the organic growth was 3% in the quarter, as I mentioned. We have and are still doing restructuring of the international business. We have closed some branches. We are terminating some contracts and driving the business in a more profitable way as you can see also in the margins. However, we see that the SafePoint concept is continuing to grow. So it was 18% growth in the quarter. So if we turn to next page and go deeper into the SafePoint concept, we have now in total 29,300 installations, and we had a revenue growth of 18%, and in the quarter it was 1036 net new installed. And as we see the retention rate is very high in the market. We as we have mentioned during the previous calls, we are now focusing very much on sort of keeping our customers. So in the quarter, were 375 refreshed or extended during the quarter. So contracts that are about to expire where we are able to keep the customers. So the activity level on the SafePoint side continues to be high. We have a very strong pipeline and demand for the SafePoint concept. So let's turn to next page and talk about the margins in the USA. As I mentioned before, strong very strong margin development versus Q2 last year. We see that the efficiency programs we're driving in our branches is supporting the margin expansion. And we also see that the mix of development with higher share of CMS and SafePoint is also positively affecting the margins. And we also see somewhat a very positive impact by the restructuring of the international business that we expect to continue also in the coming quarters. So very strong margin quarter in the U. S. So let's start let's turn then to the next page and talk more about Europe. Regrowth 6%. As I mentioned, the acquisitions in Chile and France are ongoing, and we are now focusing very much on integrating these businesses and to realize synergies. Organic growth has been picking up, and it was actually 3%. And here, I'd like to just mention that we have good effects from LATAM, also Spain, which is a, if you say, a more mature market, which is growing very nicely for the time being finding new business opportunities. We also have Turkey, Belgium and Switzerland doing very well on the organic growth. But also, I would say that in overall terms, many countries are supporting the top line growth in Europe. On the operating margin side, we ended up at 11.7%. We have positive impacts on the programs we're running in Sweden, France, but also many other places. And we expect further effects to be realized in the coming quarters. So what we're doing now in France is that we have more or less finalized their restructuring program. We will see more effects in the coming quarter. We have then the integration of CPOR and Prosugur France, which will happen as we speak. And I think that also we see France be becoming a more rational market with practically 2 players in the market. But we also continue to drive the efficiency programs in all our branches across Europe. And we also see positive impact or effect from the CPOR business that we bought some time ago. And here, the plans are, of course, to continue to expand that business. I just wanted to come back to the media allegations that was mentioned on the first page. So just to give you a short recap where we stand, we were accused of providing FX to foreign exchange offices in Denmark through our Norwegian FX subsidiary. And these customers in Denmark were then suspected to be involved in money laundering. Based on that accusation, we made 1 internal, 2 external investigations. And the conclusions are that even though we have systems and procedures in place when it comes to AML, KYC, know your customer, We have found some improvement there, which we now are working very hard to close and to fix. And we have also been in connection with the investigations in contact with the Danish and Norwegian authorities and told them about our findings and also also what we're going to do to close those improvement areas. We are under no suspicion from any authority. And this revenue is coming from these exchange offices in Denmark, which was less than 0.1% of the LUMES Group revenue. And we have terminated all the FX offices in Denmark. And we estimated that there will be no significant impact or effect or impact on our financial standing and position. I just also wanted to mention, last but not least, on this slide that we also have finalized an acquisition in the Canary Islands. We have been subcontracting to other suppliers in the islands, but now we have bought our own business, giving us a stronger national footprint in the Spanish markets. So it's a business with a turnover of €3,500,000, 150 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Feet Es and with 5 branches across which is the statement of income. I don't intend to comment very much on that, but you're saying that in my view, it's a good and strong quarter in all aspects. So then let's turn to next page, which is the reminder on the Capital Markets update that we will be having in London on September 5. It's a somewhat shorter and more condensed Capital Markets Day, you can say. We're going to talk about the progress in relation to our financial targets, strategic targets until 2021. But we will also look at the global markets and how the industry is developing in general. We're also doing some deep dives into new business opportunities in adjacent categories, but also new categories. So giving everybody a hint on what we can expect the coming years in terms of business opportunities. So all interested companies, people are welcome to the Capital Markets update. So let's then turn to next page, which is the Q and A. And I say, operator, we are now open for questions. Thank you. We will now begin the question and answer Our first question is coming from Daniel Thorson from ABG. Your line is now open. You can now ask your question. Yes. Hi. Daniel from ABG. Can you hear me? Yes. Excellent. Excellent. So a question on SafePoint installations. They are around 1,000 or slightly higher a quarter currently, but you have a target of 10,000 annual installations in 2021. What are your actions to improve that figure, both short term and in the next 2 years? I think that I think we are quite happy with the figure anyway. But I think that if we can be around $1,000 to $12.50 in a quarter, it's good. When it comes to what we do to improve, I think that to hit that number, we need to get some of the bigger contracts out in the market. And there are a couple of them out there. And if we get one of these, I think that we get we have a good chance of getting close to 10,000. But I would say that we also need to have some of the smaller customers and we're working on both. And I think that I cannot promise anything, but I think there is a good chance that we can increase the numbers. We are now looking much more on the revenue growth coming from the SafePoint concept, I would say. But in terms of installations, there needs to be some bigger contracts to get to that number. Okay. That's clear. Just to remind us, the target of 10,000 in 2021, is concentrated to the U. S? Or does it also include Europe? That was a number focusing on the U. S, yes. Okay. But now you're seeing a positive development across other regions as well, I saw in the report? Yes. There we are. There is a very good traction in Europe. Many countries have been successful in sort of explaining the concept to retailers. We have trained the sales forces across Europe. We are getting the technologies working software, hardware. And I think that we're seeing very good momentum in many European countries, yes. Okay, excellent. A final one on the organic growth in Europe. Can you split out what the growth was in France and also in Latin America, if possible? Sorry, we cannot do that. But I can say that the of course, there was a positive revenue growth in France. So we're growing in France, and that's a very, very positive sign. Okay. And nothing about Latin America. What magnitude roughly it is growing at now? It's growing at the same level as we saw very good growth rates in Latin America still. Okay. That was all for me. Thanks. Thank you. We will now take our next question. It's coming from Aymeric Poulain from Kepler. Your line is open. You can now ask your question. Yes, it's Emile Puna from Kepler. Thank you. The question for me is on the European business because it's obviously very difficult for the forecasters that we are to pin down the number coming from acquisitions versus organic on the margin side. So and of course, last year, you had this significant restructuring activity and with some payback that you mentioned in the first half. So could you split the margin coming from the payback of last year restructuring in France and Sweden as well as the contribution from M and A and what is actually the organic margin performance for Europe? And then going forward, there's even more acquisition to be consolidated in the second half and beyond. So I'm just wondering, would you be ready to provide a guidance in terms of the full year contribution from external, from scope in Europe as well as the EBIT contribution that you expect, bearing in mind that some of these acquisition may need some preemptive restructuring or maybe dilutive in the initial phases? Thank you. Thank you very much for the question there. Christian here. Looking into the margin, I don't have the split exactly as you referred to. But if we start by looking into the restructuring, the restructuring has a positive impact on the margin in Europe of close to 100 basis points. So if you take that isolated, that represents a large portion of the improvement we see now. In addition to that, you have an improvement related to IFRS 16 and CPOR, which has higher margin than group average. That is partly than offset, but related to that, we have the higher growth that gives us a lower margin in some areas where we have the higher growth to make sure since we get a slightly lower efficiency when we take on the new contract. So that is more from a, you could say, a temporary point of view. I hope that gives you a better feeling for the total numbers and what I have to give you now. Yes. Thank you. That's helpful. But just looking at the second half, it will be even more difficult to forecast given the demand and proceed your cash and the like. Would you have some indication of what analysts should expect for the year in terms of the European sales and margin improvement? We don't have that guidance to provide you today, sorry. Okay. Thank you. Thank you. We will now take our next question from KG Bohnediere from DNB Markets. Your line is now open. You can now ask your question. Yes. Hello. This is Kajou on Vonadier at DNB Markets. To continue on the last question on Europe, the 3% growth that you now see in Europe in the quarter is obviously a number we haven't seen for the last couple of years at least. And how do you see that number going forward? Is this a new level? Or was it some particular things happening in this quarter? Or easy comparables with all the problems you had in France last year? Or how should we see it? It's a good question, KG. But I think that what I've said in the previous quarters is that I think that in underlying, there is quite a good momentum in Europe. And that has been sort of shadowed by the problems we had in France. But I see that, 1st of all, we're good at taking market shares. We're good at getting new contracts in many of the countries. We are good at pushing the SafePoint concept. We take ATM business and so on and so forth. So I think that there is a good momentum in many of the European countries in general. And if that's going to continue, so but that's very difficult to speculate. But I think that we have a very strong organization in Europe and they are pushing like crazy for these contracts and new services and things like that. So I'm very optimistic for the future that we have a good foundation to continue. Excellent. And you just managed to close the cross your cash. How quickly can you integrate that French operation into your own operation, you think? We start immediately, and we are doing as fast as we can. So I think that let me say, by the end of this year or even faster, that should be integrated. So it's full speed ahead, I would say. Excellent. And what you have seen coming out of Ctrip 4 devices in France is also just confirming the old view on the company that there was a good growth business with very substantial margins. Yes, it is. It's both in terms of FX, but they also have a gold business doing very well. Margins are very high or let me call it, higher than we have in our the rest of our business. And we're now also going to integrate that business in the French operation in terms of getting the synergies, in terms of transport and things like that, buildings and so on. So I think that that's going to be very from my view, a very strategic part going forward in Europe with the FX business. And when you look and compare it to the FX business you were driving in Denmark out of Norway, is there any vedicrosses on the risks you are taking in the French operation on this side to what you experienced in Denmark? I think that if you compare the two businesses, I think that CPR has been around for a long period of time. It's built around the FX business. If you come in Nova, for instance, it's starting with the CIT, CMS and then going into FX. So when you look at the compliance organization and so on, there is a, I would say, a very strong backbone in terms of resources and people. But you should never say never, of course, but I think there is a good foundation in the CPOR business. Excellent. And just finally, on Europe. Siemens, how do you see that process and finalizing that acquisitions? Has there been any hurdles that you didn't expect at the time when you announced the acquisitions? Or is it still hopefully getting cleared here in the early autumn or late summer? Yes. No, it's the dialogue or the discussions going on with the competition authorities in Germany, it takes some time, but that's what we expected. So I would say, as you say early autumn that we can get some kind of reply back from the German authorities. That's what we expect. And when you look at Germany, obviously, it's a relatively new, renew country for you, if you put it like that. How quickly can you then hopefully integrate Siemann and Qatar to really get to, say, your normal kind of efficiencies in the business? I would say that we are focusing very much on I think that Germany in the short run is not going to be on the group average when it comes to margin. That would be lower because of the structure of the market and so on. So, I think that the first target is to merge these companies and get to 10% margin. That's the first step. But then I think that when CMS is continuing to be outsourced, SafePoint concept is on, we can get higher. But the first step is to get the combined business to 10%. It's going to take some time. Excellent. Just one final for me. Looking at SafePoint in the U. S, you thought earlier in the year that they were going to surpass 5,000 net installations. Do you still think that's a credible number looking at the development in the first half? Yes, I think so, yes. Thank you very much. Our next question is coming from the line of Katarina Elgren from Handelsbanken. Your line is now open. You can now ask your question. Yes, good morning. This is Karina Ovegren from Handelsbanken. I have one question regarding the CIT growth in the U. S. You say it's a bit lower than last year. Is this a trend that has started now? Or have the growth there declined for many quarters? And how should we look at this volume in 2018 in the U. S. Going forward? And I would say maybe yes, you're guiding previously, you have said that you expect to grow by 5% to 10% organically in the U. S. Is that still something that you have as your target? Yes, that's right. I think that what we've done when it comes to CIT is that we have we're actually putting, I would say, not all our resources, but a lot of the resources in the CMS and SafePoint concepts. That's what we really, really are pushing and focusing on because of obvious reasons, margins and everything else. So CIT will not be in that sense in focus. So that's I think that's and then I would say that in general, going from CIT and CMS and SafePoint, I think that it's the market is sometimes there are a lot of contracts coming out and then boom, there is we increase the revenue. And then there's a slower period and it goes up and down. So we haven't changed our view in the top line in the U. S. I think that when we look to take 2 steps back and look at the CMS potential, we look at the SafePoint potential. It's massive and it's just about timing that we need to get some of the bigger contracts in play. We need both when it comes to CMS and SafePoint. And in the meantime, we are working on the margins. And I think that the top line will come. And we haven't changed our view and the U. S. In any way. Okay. Thank you. Thank you. Our next question comes from the line of KJ Bonadier again from DNB Markets. Your line is now open. You can now ask your question, sir. Hi, it's KJ again. Christian, the cash flow obviously looked fantastic in Q2 on the back of, I guess, the reversal in the working capital challenge you had in Q1. Could you elaborate a little how we should see this going forward? Should we expect these kind of huge swings in working capital? Or is it something that particularly has hit these quarters? Related to the cash flow, it's correct, as you said. I mean, first, we had the Q1 with a negative timing impact, and then we get the Q2 with positive timing impact. So if you look into the number year to date, we are at 89% conversion approximately, which is more reliable number, maybe I should say, and looking into comparison with the prior year when we had closer to 75, percent. Still at the ending period here, we have some positive impact in the cash flow. So just looking from a timing perspective, we will probably have a negative here in July than related to cash flow and then it's related to the cash stock and gold stock. So for example, in CPOR, sometimes when we buy gold and cash that we then sell, we don't use a credit line. We use other methods to hedge it. So that's when we take it on our balance sheet in a different way. That's when you get the bigger impact on the cash flow. But long term, we have not changed our view. Then we see this as historically has been more in the 85% range long term. We don't see any change to that target. But basically, we should expect, say, bigger swings in working capital during between quarters, but the long term trend is unchanged. That can happen, yes. Excellent. And looking at your CapEx for the moment, is there a lot of needs for, say, building up the fixed cost structure in the form of new walls and bigger walls in different markets that, I guess, has burdened a couple of years back, but seems to be less of an issue now? Yes. Now we are when we exclude IFRS 16, which we have done here in the additional cash flow statement also to support the readers, we are at approximately one to 1 CapEx in relation to depreciations. And we see no real reason to why that should change significantly. When you have growth, of course, from period to from time to time, we will be above 1%, but we don't see any significant change compared with our most recent years in that item either. Excellent. Thank you very much. Thank you. Our next question comes from Miguel Medina from JB Capital. Your line is now open. You can now ask your question. Yes. Good morning. It's Miguel Medina from JB Capital. Just one question from my side. I have heard somewhere in the results release that you have attached an enterprise value to the French operations you have acquired from possible cash of around €39,000,000 Is that a good proxy for what you have paid possible cash for those assets? Yes. That's right. That's a number that is correct, yes. Okay. Thank you very much. Thank you. Our next question is coming from Henrik Maweu from Nordea. Henrik Morby from Nordea. Coming back to organic growth in Europe and more specifically, Argentina and in Turkey, I assume that a lot of that growth in those markets are related to inflation. Have you seen the inflation component of growth in those markets increase? And can you also comment a little bit about what you see on the volume trends in those markets, please? Okay. So Kristian, yes. So if we start by Argentina has, of course, very good growth, partly related to the inflation. What we compare is that we compare our growth with inflation. And if we look at that, we have a growth which is higher than inflation in Argentina as well. And then in Chile, the impact is less there. We should also have in mind that our business in Latin America, it's, of course, growing very well, but it's still a relatively small part of our business. So maybe we could simplify it and say that for it's less than 5% of our business. Understood. And in Turkey, the same reasoning basically on inflation, how is that looking compared to volume growth? Yes, it's similar. It's similar. Okay. Thank you. Thank you. Our next question comes from the line of Michael Laffdal from Cardenasie. Your line is now open. You can now ask your question. Yes. Hi. Most of my questions have been answered. But Michael Lofdaufali here at Carnegie. Just on the A and L investigation, where are you now? I mean, the you sent out the press release week, so the investigations are completed, I would assume. But when should we expect further information on how this may impact earnings? You're saying significantly or minor impact. But I guess there will be some costs associated with it. And you took €6,000,000 in this quarter for the investigations as such. Is that the complete number, those 6 $1,000,000 or will there be more and also on the reorganization of the compliance side? Thanks. I think that we will see some more this quarter, but then it's over. So we're not going to make any more investigations and so on. From our side, I think that we will not make any more surveys we are now we're doing 2 things. 1 is that we are strengthening the organization, strengthening compliance work, and then we have a dialogue with the authorities. And it's not like we are coming to the authorities saying we have done something wrong. It's a dialogue around our findings. So these are the 2 things we are actually doing. And if there is something coming out which are important, of course, we will communicate to this to the market. When it comes to the organization, I mean, we're running a very lean organization, and we are not sort of adding lots of compliance people. What we're looking for is a Chief Compliance Officer that can lead that work. But apart from that, I think that we're going to use the strength of the CPO organization, for instance, and use that competence to strengthen the compliance work. So, you will not see that the organization will grow a lot in terms of staff people in that sense. That's not going to happen. So that and then so that is where we are with this case basically. Okay. A follow-up on Europe. First, is it possible to give I know you don't want to go into specific countries, but some sort of spread between growth and margins from the weakest to the strongest country, perhaps excluding Hello. Hello? We lost you there in the end. Sorry. In Europe, I know you don't want to go into details on countries, but is it possible It's we don't want to do that too much. It's we don't want to do that too much. There is a spread between the countries. There is some potential in some of the countries, but we don't want to get into that. And I think that my comment is that if you're sitting here thinking that the Europe growth is pushed by only LatAm countries, that's not the fact. The fact is that we have a very, very strong performance in many European countries, especially I would mention Spain again. Very mature country, high margins and being able to grow quite rapidly. So I think that there is a good momentum in many European countries. And is it possible, I know it's hard perhaps in your line of business, but to speak about price versus volume, I mean you touched about upon the inflation effect here. I guess that has an effect from the organic growth. But how much of the growth in Europe is price versus new business, new contracts, new volume? I mean, I think that we don't want to get too much into that. But I think that in Europe, it's more it's not the price component, it's not that significant. We're just trying in Europe to get inflation and maybe something more, but not very much more than that. It's a good underlying trend in many of the European countries. That's the bottom line of the performance in Europe. In the U. S? In the U. S, it's the same basically the same thing. I mean, we the growth is coming basically this quarter from Safepoint, Safepoint concept. And I would say that it's basically the same story as in Europe. Final question on Europe and on Safepoint and Recyclers. Where are you? You're mentioning you're being optimistic on the potential here, but where are you in terms of actually installations and actually selling more in 2020 or I missed you again. But the question was around SafePoint in Europe. Well, I think that we're doing, as I said, doing very well on SafePoint Europe. We are working with the pilots with some of the bigger retailers. So I think there is a good momentum in Europe. And what we should keep in mind is that, of course, many of these European customers, they already have CIT. So, while in U. S, you're switching from nothing to SafePoint, you're taking customer from CIT to SafePoint, which is good for the margin. It's not driving the top line that much. But I would say there is a very good momentum in many countries when it comes to Safe Point. Yes. The question was, is that momentum based on your discussions with customers and the interest from customers rather than actual signings? We are signing we're installing and signing as we speak. And we have a good base, and that's continuing to grow. So it's not just plans and so on. It's actually installations, yes. Okay. Thank you. Thank you. We will now take our next question from Don Johansen from SEB. You can now ask your question. Your line is now open. Mr. Don Johansen, your line might be on mute. Please mute. Your line is now open for questions. Good morning. Don Johansen at SIBDA. I had a question in regards to the U. S. Business. The restructuring of the international business, what was the magnitude of the impact on organic growth? Was it similar to the impact you saw in Q1? Or was it higher, lower? Thanks. Same thing in Q1, I would say, yes. Okay. Thanks. Thank you. We don't have any further questions at this time. Sir, you can proceed.