Earnings Call: Q3 2019

Nov 1, 2019

Gentlemen, thank you for standing by and welcome to the Loomis Group Q3 2019 Report. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you the call is being recorded today, Friday 1st November, 2019. I would now like to hand the conference over to your speaker today, Patrick Anderson. Please go ahead. Thank you very much. Good morning, everyone, and welcome to the Q3 presentation from Loomis. So I'm Patrick Anderson. I'm the CEO of Loomis. And with me here today, I have Christian Akerberg, who is our CFO and Anders Harker, Chief Investor Relations Officer. So let's start the presentation and turn to the next page, which is about the highlights. So these are the highlights of the quarter. I will get back to some of the bullet points later in the presentation. But when we look at recent events, we consolidated proscior cash that we bought in France as of July 22, 2019. We had also a Capital Markets Day in London some weeks ago. I'll get back to some comments around that in the next slide. We had in the quarter regrowth of 6% versus 8% of last year, and there are 2 acquisitions actually in France. That's a CPR acquisition, which is about foreign exchange, and the French business of Prosigore Cash, which is then affecting these real growth numbers. The organic growth was 3% in the quarter versus 2% last year. And the European business is really performing on a high level, so does the U. S, where we had an expansion of the growth numbers compared to Q2 2019. And we also see that the market opportunities that we highlighted in the Capital Markets Day remain intact. Operating margin reached 13.4%. So we see good momentum of the restructuring programs in Europe, but we also see that business mix and margin efficiency in the U. S. Is driving the margin. EPS was up 17% in the quarter and also operating cash flow was strong with 99% in the quarter. So let's turn to next page, which are the highlights of the Capital Markets Day. So these are the key messages from the 5th September. So we said that we're on our way to reach the 2021 targets, and we sort of highlighted the different elements of those targets. But we also see other growth opportunities ahead of us. 2 areas to just mention, 2 is the fiscal foreign exchange FX and ATM related services that we see will be important for our growth going forward. So if you look at the European FX market, it's we estimate it to be worth around SEK 10,000,000,000 and we say that within the next couple of years, next 3 years, we can reach 10% of that market reaching SEK 1,000,000,000. The other element is then the ATM market, where we see more and more banks and other independent players outsourcing more and more of the management of the ATM fleets. And here again, there is a possibility or the market opportunity of SEK 10,000,000,000 and we estimate that we can take 20% market share of that, reaching SEK 2,000,000,000 over the next 5 years. The European ATM market is quite stable when it comes to number of ATMs. It's about 350,000 ATMs in Europe. But we also talked about new payment systems where we can build on the strong base of connection to retailers. We have direct connection to 400,000 retailers in Europe. And here, we're looking at different ways of consolidating other payment methods than cash and take a stronger position in the total payment system. That is still in the beginning, and we're working very actively on this. So these are the highlights of that day. And then let's turn to next page and look at the a bit the historical perspective of the performance in this quarter. As you can see, we reached 13.4%, which is together with the margin in 2017, the highest margin we've ever had in a single Q3. But also on an absolute number, we are doing very good and making our best quarter ever. And also to mention that on the rolling 12 months basis, we are now above 12% margin, which is our long term target for 2021. So let's turn to the next page and look at Europe. So we had a real growth of 10%, which again is driven by France Acquisitions. We are now starting the integration of especially Prosegure cash in France. And France is now going to be a 2 player market, which we see in many of the European markets as well. We are now starting the work with the integration. I think that what we see or what we see is that, that's progressing according to plan. Organic growth was 3% in the quarter. And from my perspective, very strong number. We have strong growth contribution from many of the countries, but I like to highlight Spain, Belgium, Turkey and Latin America driving margin driving top line. But I also see contribution coming from other countries. I'd like to mention France in this case, where we had some issues last year, but that business is now growing top line as well. Operating margin reached 14.9 percent, and we see positive impacts from the restructuring programs we have been doing in both France and Sweden. And we can also see that further effects would be realized in the coming quarter. We'd also see that the efficiency programs we're constantly driving in countries to have a positive effect. And we also see positive effects coming from the acquisition we made in France when it comes to FX. But of course, as we bought procedural cash in France, that has a negative short term effect on the margin. As I said, we're now working with integration and that should we should see effects by the end of 2020 when it comes to those two businesses. When it comes to Germany, that has a diluting effect on the margin, and we are now waiting for information from the German competition authorities when it comes to the 2nd acquisition we did in Germany, the Zieman acquisition, and we expect some kind of feedback from the competition authorities during Q4. So again, very good momentum in Europe, both when it comes to top and bottom line. So let's turn to the next page, which is then U. S. And also as with Europe, a very strong quarter for the U. S. Business, in my view at least, we had an organic growth of 4%. CMS is now 35% of the total revenue. And we also had a 17% revenue growth when it comes to SafePoint. So SafePoint is now approximately 15% of the total revenue. So in total, CMS and SafePoint is 40% of the business, which is driving, of course, also the margin in the right direction. We have a very strong pipeline when it comes to SafePoint, and we hope to realize many of these installations in the coming quarters. The margin was strong, 13.6%. We continue to focus on the branches and drive efficiency in these branches. That's a constant work we're doing every day. But also, as I mentioned, CMS and SafePoint is driving the margin in a positive direction. We have also a positive impact on the bottom line when it comes to the restructuring process we had with the international business in the U. S, and that's been very successful. So that's about United States. Let's turn to next page and just highlight some of the important parts of the P and L. As I said, the margin is now on a rolling 12 basis above 12%, which is a long term to our target. We also, on a 12 month rolling basis, are doing more than SEK 2,500,000,000 in EBITDA. And in absolute terms, as I mentioned, the quarter is very strong, €737,000,000 EBITDA coming from the business. So let's turn to the next page and then go to Q and A. And operator, we now open up for questions. Thank you. Thank you very much. Thank you. We will now take our first question. Your line is open. Please go ahead. Hi, it's Peter Tester. Can you hear me? Yes. Okay, great. Three questions, please. One is just if you could talk a bit about on SafePoint as your organizational changes to sort of build up a better pipeline, if you could give some sort of thoughts on how that pipeline is building and maybe also extend that to CMS and views on depth and timing to convert out of pipeline, please, in North America? Yes. That's right. I think that as we have now we have almost 30,000 SafePoint installed, and it's very important, of course, to keep these customers happy. So we have invested much more in a service organization and people focusing on the retention of these. After 5 years, as you know, then the contract estimate that we have a very, very high retention rate. We estimate that we have a very, very high retention rate. So that's working out fine. We also see that still that there is a lot of interest from customers on the safe point. So I don't see any change in the sort of the market development in that But it's a more complex business to run because we have a much higher installed base. When it comes to CMS, there is a great potential, as we mentioned on the Capital Markets Day. We hoped for more outsourcing coming to the market. We would like to see more contracts up for grab, but that is coming sooner or later. So, we don't see any change when it comes to the market possibilities. But on CMS, when you look at sort of pipeline and timing to convert, you have any sense as to whether there's any change in that pattern in one direction or another? No, no change. Okay. And then just a question on cash flow and CapEx. I mean, the cash flows conversion is really quite strong all year. And as you noted, your CapEx is lifted to in relation to depreciation slightly higher. Where is the capital investment going into? I mean, what is the opportunity that you're finding to put capital behind? Yes. Sorry, thanks. Christian here. So the cash flow and the CapEx we see in this quarter, it's more a timing impact. You can see that we had lower CapEx earlier this year and now we are catching up partly here. So if you look year to date, we are slightly higher than prior year in relation to depreciation, but not that much as we have in this specific quarter. When you look into how it spreads, it's to support the growth mainly. So we see countries where we have strong organic growth. We also continue to make investments. There is no significant change in how it's distributed among different categories. So for example, trucks continue to be one of the biggest spend for us. Right. And last question, just short one on France. As France now starts to lap the comp from the previous year with a contract loss, Can you give a sense as to what do you think France will continue to grow in, say, Q4? I should be a bit careful on Q4, but we see a very we see we are very positive when it comes to France. We see now that the effects of the restructuring we did some time ago is paying off. Top line is growing, margin is growing. On top of that, we have the CPOR, which will add both profit, but also when we've done the integration, that will be strong business. And then on top of that, we now have a ProScure cash that we integrate. So we're quite and again, it's a 2 player market. So we're quite optimistic about France going forward. Great. Okay. Thank you very much. Thank you very much. We will now take our next question. Your line is open. Please go ahead. Hi. It's Daniel from ABG. Can you hear me? Yes. Excellent. So a question on Germany. Are you loss making or breakeven in Germany the current stage? We're making at the current stage, we're making a loss, yes. And that's due to the fact that we haven't started really to, let me say, massage, if you like, the German business that much. We're waiting for the feedback from the competition authorities. We don't want to start that journey before. So that's actually, as I said, diluting the margins with a couple of 10ths of a percent. Okay. Yes, that makes sense. Can you say something about the magnitude? A couple of tens of percentage points, yes. Okay, on the European margin? Okay. Yes. Okay, thank you very much. And then a question on the U. S. CIT business. Can you say something about the margin development in that business in the U. S. During 2019? Is that turning upwards or downwards or flattish? It's going up. There is not a very I mean, the growth is not that significant in CAT because simply because we don't chase those contracts. We are putting all our focus on CMS and SafePoint. But there is a small growth and the profitability is increasing in and of course, also due to price increases in that field, but profitability is going up. Okay, That's good. And then the final one, just to confirm the SafePoint, net installations in the quarter was around 700,000,000, right, if I heard correctly? That's correct, yes. Okay, thanks. That was all from me. Thank you very much. We will now take our next question. Your line is open. Please go ahead. Yes. Hi there. Johan at Danske. Can you just talk about the contribution from South America to sort of European organic growth? Yes, we don't disclose the specific details, but first to start with highlights that, I mean, Latin America still is a small part of the European business. So, around sales in South America is around €50,000,000 €60,000,000 per year. So, that's the starting point. But it's good organic growth in this quarter. And if we look into Argentina, for example, even if we calculate that in hard currency, so to say, it's very good organic growth. But you shouldn't sort of think that all the European growth is coming from Latin America. That's not the case. It's a very solid growth for many of the countries. And we have a very strong growth in, for instance, in Spain, which is a more mature country. So the big effect is from the Continental Europe, if you like. All right. And then just on the efficiencies in Europe that you talked about. I mean, the easy comps, I guess, would be gone here after Q4. And I think, Patrick, you said that you expect a couple of quarters more sort of seeing these positive effects. Is that should we read into this that this integration this sort of benefit continue into 2020 for Terraform? When you say are you pointing at France or in general or Yes, France, Sweden restructuring mainly. I would think that the Swedish restructuring with sort of the big actions we're taking in Sweden, that's more over. So we still should see some effects, of course, but the big things both in France and Sweden are over. What we should see in France is the positive effects from the integration of especially procedural cash. That's what we're going to see during next year. That's very clear. Thanks. Also, I mean, you're giving a date here and the 2020 completed integration. Can you give us any more details with regards to sort of numbers that cost out activities, integration benefits? No, we cannot at this stage. It's still early days. It's still early days, but we have a restructuring plan. But as you know, in France, there are a lot of discussions going on with the unions. You never know exactly where those discussions end up. But of course, we want to drive very much the efficiency when it comes to that. This is a pure efficiency, a scale case. But exact numbers, I don't want to reveal today, no. All right. Thanks. Thank you very much. We'll now take our next question. Your line is open. Please go ahead. Henrik Moby from Nordea. If I understood it correctly, you are mainly targeting Europe with the ATM and FX strategy that you highlighted on your Capital Markets Day. Can you elaborate on why you are not seeing or not choosing to address the same opportunity in the U. S. As well, please? When it comes to FX, it's to drive a strong FX business, there needs to be different currencies, and that's the fact in Europe. You have some effect between Latin America and U. S, but that's not that significant. So that's the reason why we're focusing on Europe when it comes to FX. ATM, I think that we start in Europe, where I think the outsourcing trend from banks and others are more developed than in U. S. But I see that opportunity also in a couple of years coming to the U. S. That more and more banks and others stay outsourced more around ATMs. That will come also in Europe in the U. S. But that's a bit further down the road, I would say. Okay. Thank you. And just for us to better understand the phasing of acquisition driven growth in Europe, is it possible for you to specify the contribution of growth from Prosody Cash versus CPOR in the quarter? No, I think what we it's relatively evenly spread and we I mean both companies have a sales of approximately €40,000,000 on a rolling 12 basis. I think that can be a good approximation. Okay. Thank you. And 2 more questions, if I may. In Europe, you still have the large contribution from or a contribution from the large State Point contract you won a couple of quarters back. Can you how big contribution is that giving to organic growth in Europe? And when do that contribution phase out? And secondly, on procedure cash in France, was that geographical overlapping? Or was it a sort of a complementary region in France, please? So let's start with the second question. There is an overlap. We strengthened in some areas, but in general, it's an overlap. And that's why it's so attractive to us that we can build it on the same platform. So I think that's going to be an excellent synergy case. It will take some time, and then that will support the French business. But when it comes to the first question, I think that what you're aiming at is the SafePoint contract we got with Speedway 2018 in the U. S. Is that correct? It was not in Europe. I might have to check my details here, but I think you mentioned that you've won a large contract of 400 units in Sweden as well a couple of weeks. Yes, okay. That's right. That was with some of the bigger convenience retailers in Sweden. That's right. That's correct. That's rolled out to a large extent. Actually, quite a number of Swedish retailers that they are using SafePoint, but that's rolled out and that's helping both the top line but also the bottom line in countries like Sweden. That's correct, but that's rolled out. Okay. So it's not contributing to organic growth currently or it's the rollout is completed, you mean, so it's still contributing to growth, right? Yes. It's contributing to growth. It does, but it's all rolled out, yes. Okay. Okay. And when on that note, can I just ask also, how is your pipeline of SafePoint contract developing in Europe now? Very positively. Many of the countries are in Europe are now have built up their sales force to have the technology in place, the service organization and so on and so forth. So we are very optimistic. We're doing very well, but especially also optimistic for next year when it comes to SafePoint in Europe that, that will continue to grow. Now the base installed base is not the same, of course, like in U. S, but we would see continued growth coming from Save Point in Europe in the coming years. Thank you very much. Thank you very much. We will now take our next question. Your line is open. Please go ahead. Mikhail, your line is open. Are you on mute? Yes. Sorry, this was Michael at Carnegie in Stockholm. Actually, my questions have already been answered. Thanks. Thank you very much. In that case, we will take our next question. Your line is open. Please go ahead. Yes. It's Emile Puna from Kepler. Most of my questions have been answered, but I was wondering given the fact that pretty much all the lights look green at this stage. What keep management awake at night? And in particular, I was wondering if the competitive situation in America, if you see any changes. We obviously have the rollout of Cash 360 in the big box retailers going on. So I was wondering if you see an impact on your business coming in terms of the CIT business and possibility of some of the competitors reacting also with perhaps more price pressure to keep their market share? And what typically the implication for margin in your view would be in these scenarios? And secondly, on Europe, you obviously have been very acquititive at the core of your strategy. However, I was wondering in terms of the management capabilities, you clearly invested in compliance to deal with this situation in Denmark. But it seems that you may have a question maybe a question in terms of the capabilities and the need to hire more executive players people to execute on this M and A program. So is there also here an investment to be made in terms of staffing to execute this strategy? Good questions. I'll start with the last one because it's easy to remember. But the thing is that I think that what we see now more and more is that our core business will be more and more under sort of surveillance from authorities. But also as we're moving into FX and to new payments and so on, there will be a much higher pressure on us to follow certain rules and laws and regulations. So I think that we need to strengthen However, I would like to say that when it comes to CPOR and FX, we have a very strong organization in France that we will build on. I think there are close to 15 people working with compliance in France. And that on that organization, we will build. I don't think we will add a lot of people on compliance, maybe a few. But we will build on the existing base we have. But you're right, we will be much more under scrutiny from the authorities. But we have a good plan. I don't think we will see a lot of costs coming into that area. Some will come. When it comes to what keeps us awake at night, I don't think that there we have we sleep quite well during night. But in the U. S, I think we have a very strong team. We have a good plan. Of course, now where we have close to 30,000 installed SafePoint, that requires a different way of working. And of course, our competitors also want to take part of that installed base. So when as soon as contracts expire and so on and so forth, there are, of course, that are many that's chasing those contracts. But I think that we keep most of those contracts. So the losses are there are some losses, but they're not very high. So I don't see it's more complex, but it's not in any way that we that keeps us awake during night. So no, I see, as we mentioned on the Capital Markets Day, there are a lot of opportunities, both in the core business, but also, as we mentioned, in the adjacent categories and new categories to further drive growth. Okay. Thank you. Thank you very much. We will now take our next question. Your line is open. Please go ahead. Yes. Hello and good morning. It's Matti Gergolet from Goldman Sachs. Three questions for me. The first one is regarding the U. S. I think I remember that at the full year results, you hinted that you're going to have a bit more overhead costs in the U. S. And perhaps at this time interpreted that as a little bit more say prudent on the margin in the U. S. Now you're doing 80 basis points of margin expansion in the U. S, okay, IFRS 16 maybe is 20%, still a very good sizable margin expansion in the U. S. So my question would be, what is going better than expected in the U. S? Secondly, can you give us a bit of color about your current M and A pipeline? Is there anything major that now you're potentially looking at or not really? And thirdly, just a question on the numbers. Sorry, it's a little bit detailed, but no. When I look at your operating cash flow, you have basically the last line, which is the one called change in other capital employed and other items. I wouldn't usually ask, but in this case, roughly 10% of your cash flow from operations comes from this last line. What is it? Is it anything structural? Or is it just something that is happening, say, this year? Thank you very much. All right. I'll take the 2 first ones, and I hand over to Christian on the third one. So what's going better in the U. S? I think that what we see is the efficiency work so 2 elements. 1 is, of course, the mix. So now 35% CMS of the total business and 15% Safe Point. That is driving, of course, the margin in the positive direction. The second element, I would say, is the efficiency work at the branches. So we've taken another steps in terms of processes, procedures, efficiency, how to use technology to optimize routes, etcetera, etcetera. So I think that for me, from my side, these are the two elements that I think that is driving margin. And the second one is more prominent than I thought, to be honest. So the efficiency work on a daily basis is going better than I expect at least. So I would say these are the two points. When it comes to the M and A pipeline, we have a good and solid pipeline. We think that the consolidation of this industry is continuing. So more family owned business, bank owned business will come out for sale in different regions. We are part of all those relevant discussions going on. We have a pipeline, which sort of accumulates return of around €10,000,000,000 All of that will not happen, of course, but some of it will happen. So I think that we will see a further consolidation in the industry going forward, and we will take a very active part in that consolidation for sure. And now maybe the third question, Christian. Yes. When it relates to cash flow and the line for the other items, it's mainly related to timing impact. And the largest impact on this line is when we have movements in the cash stock, salary payments and accounts payable. So partly it relates to also, of course, the increase in operations, increase our accounts payable. But otherwise, it's mainly related to timing impact. So I think also to clarify, maybe also to say, I mean, we have said earlier that we believe that we will be in line with our historical average for cash conversion when you look at it in a longer period of time, which has been between 80% to 90% or around 85% or so. But you mentioned there's also an element to say, of say, stock payments in that line. I'm just trying to understand whether that line should theoretically going forward be closer to 0? Or should we expect structurally like a small positive number? I think structurally it will be positive if accounts payable increases. It will not be structurally positive due to that we have changes in our cash stock because cash stock is a timing impact when we buy and sell, for example, foreign currencies. Okay. Thank you very much. Thank you very much. We will now take our question. Your line is open. Please go ahead. Hello. This is Karina Ongren at Handelsbanken. Can you hear me? Yes, we can hear you. Okay, great. I was wondering the number of safe points that you installed in the quarter, could you give us that? Yes, it's SEK 700,000,000 Okay. And going forward, I mean or what is the reason for the decline versus the last quarter? And do you feel that the ambition for 2021 is maybe too high? So I think that the potential for SafePoint is there. It's no change in how we see the market as we communicate on the Capital Markets Day. It varies a bit from quarter to quarter. We believe that we would be between 4,005,000 safes this year. If it's a good quarter next quarter, we will be closer to 5,000 maybe and so on. So we don't see any maybe it's the only thing we don't see is the bigger really, really big contracts coming out. I think that $10,000 was a number we gave in 2017. I think that what we see now and that's why we have explained that it's a more complex business now to keep the installed base because if we start to lose out on the installed base, that there would be quite a big erosion. So we're spending quite a lot of time on keeping installed base and then adding space. So I think that the 10,000 number we gave some years ago was maybe a bit optimistic on the optimistic side, but we will continue to grow on the safe point And maybe and why not, if there's a bigger contract, we can get closer to 10,000. But we will see continued growth when it comes to SafePoint. Okay. Then a couple of questions more on Siemens acquisition in Germany. What is the reason for the postponement of this process? And the second question would be, were there any timing effects in cash flow this quarter? So when it comes to CEMA, it's the competition authorities in Germany have done a very thorough job or is doing a very thorough job. They are now looking into the overlap of the 2 businesses to see where the overlap is and which customers are potential customers could be affected. And that is taking a bit more time than we expected. We expect still that we will get some kind of feedback on that process during this quarter. But this is not in our hands. But at least we're getting closer and closer to some kind of decision or some kind of feedback. And then on the last question, I hand over to Christian. Yes. So on the cash flow, on the timing side, you have positive timing impact on the line for other working capital. And then you have negative, you could say, in the quarter related to CapEx since CapEx is built up during the second half of the year. So but year to date, that should be relatively in line. Then you have a negative impact on tax, and that negative impact on tax is mainly related also to payments relating to last year. So if you look into the cash flow last year and the tax, that is much, much lower than the income tax. So there you will find that explanation. Okay. Thank you. And that was all for me. Thank you. We will now take our next question. Your line is open. Please go ahead. Henrik Moby from Nordea again. One last question here. Of the pipeline of SEK 10,000,000,000 that you highlight, how large share of that is in market consolidation versus entering new markets or adjacent markets? I think that you can split that SEK 10,000,000,000 into 3 areas. 1, the biggest, I would say, is in market consolidation. So in the markets we are present, there would be further consolidation. The biggest part is I don't know exactly, but just to give you a number, 50%, 60%, something like that. And then there are one part, which is new markets. There is no secret that we want to expand in Latin America, to give you one example. And the third element is more tech companies, new paymenttech companies that can support our growth from a more technical area, move us into new areas. So that's the smallest part, I would say. But the biggest part is still within consolidation. Thank you very much. Thank you very much. We will now take the next question. Your line is open. Please go ahead. Yes. It's Michael at Carnegie again. On just a follow-up on SafePoint. It possible to sort of break down the growth, the year on year growth in the quarter? So what is organic revenue growth? And also how much comes from price and new installations? So how much is recurring and how much is from new installations? And what is the organic revenue growth? We cannot give you that number. I think that most of it is from new organic growth, I would say. It's new installations we've done some quarters back, which are pushing up the I don't think that there is that much price effect, to be honest. We have a fairly stable price model or constant price model, if you like. So I think it's basically installations that the new installations is driving the growth, I would say. I'm looking at my 2 gentlemen here, but maybe they have a different view. No, they don't. No. And just to be clear, the 17% growth year on year in revenue from SafePoint, is that organic? Yes. Thank you very much. There are no further questions. Please continue. Dan, thank you very much for listening in and all good questions. I wish you all a very nice weekend. Thank you very much. Bye bye.