Ladies and 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. At which time, if you'd like to ask a question, please press star, then one on your telephone keypad and wait for an automated message stating your line is open. I must advise you the call is being recorded today, Friday the 1st of November, 2019. I would now like to hand the conference over to your speaker today, Patrik Andersson. Please go ahead.
Thank you very much. Good morning, everyone, and welcome to the third quarter presentation from Loomis. I'm Patrik Andersson, I'm the CEO of Loomis, and with me here today I have Kristian Ackeby, who is our CFO, and Anders Haker, Chief Investor Relations Officer. Let's start the presentation and turn to the next page, which is about the highlights. These are the highlights of the quarter. I will get back to some of the bullet points later in the presentation. When we look at recent events, we consolidated Prosegur 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, real growth of 6% versus 8% of last year. There are two acquisitions actually in France.
That's the CPoR acquisition, which is about foreign exchange, and the French business of Prosegur Cash, which is then affecting these real growth numbers. The organic growth was 3% in the quarter versus 2% last year. The European business is really performing on a high level, as so does the U.S. where we had expansion of the growth numbers compared to Q2 '19. 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 branch efficiency in the U.S. is driving the margin. EPS was up 17% in the quarter, also operating cash flow was strong with 99% in the quarter. Let's turn to next page, which are the highlights of the Capital Markets Day.
These are the key messages from the 5th of September. We said that we're on our way to reach the 2021 targets, and we sort of highlighted the different elements of those targets. We also see other growth opportunities ahead of us. Two areas to just mention if two is the physical foreign exchange, FX, and ATM related services that we see will be important for our growth going forward. If you look at the European FX market, we estimate it to be worth around SEK 10 billion. We say that within the next couple of years, next three years, we can reach 10% of that market, reaching SEK 1 billion. 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.
Here again there is a possibility or the market opportunity of 10 billion, and we estimate that we can take 20% market share of that, reaching SEK 2 billion over the next five years. The European ATM market is quite stable when it comes to number of ATMs. It's about 350,000 ATMs in Europe. 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. These are the highlights of that day, and then let's turn to next page and look at 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. Also on an absolute number, we are doing very good and making our best quarter ever. Also to mention that on the rolling 12 months basis, we are now above 12% margin, which is our long-term target for 2021. Let's turn to the next page and look at Europe. We had a real growth of 10%, which again is driven by France acquisitions. We are now starting the integration of especially Prosegur Cash in France. France is now going to be a two-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 is that's progressing according to plan. Organic growth was 3% in a quarter. From my perspective, very strong number. We have strong growth contribution from many of the countries. I like to highlight Spain, Belgium, Turkey, and Latin America, driving top line. I also see contribution coming from other countries. I like to mention France in this case, where we had some issues last year. That business is now growing top line as well. Operating margin reached 14.9%. We see positive impacts from the restructuring programs we have been doing in both France and Sweden. We can also see that further effects will be realized in the coming quarter. We'd also see that the efficiency programs, which constantly driving in countries to have a positive effect.
We also see a positive effect coming from the acquisition we made in France when it comes to FX. Of course, as we bought Prosegur Cash in France, that has a negative short-term effect on the margin. As I said, we're now working with integration, and that 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 second acquisition we did in Germany, the Ziemann acquisition. We expect some kind of feedback from the competition authorities during Q4. Again, very good momentum, but in Europe, where both when it comes to top and bottom line. Let's turn to the next page, which is then U.S.
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. We also had a 17% revenue growth when it comes to SafePoint. SafePoint is now approximately 15% of the total revenue. 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. 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. 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., that's been very successful. That's about United States. Let's turn to next page and just highlight some of the important parts of the P&L. As I said, the margin is now on a rolling 12 basis above 12%, which is a long-term target. We also, on a 12-month rolling basis, are doing more than SEK 2.5 billion in EBITDA. In absolute terms, as I mentioned, the quarter is very strong, SEK 737 million EBITDA coming from the business. Let's turn to the next page go to Q&A. Operator, we now open up for questions. Thank you.
Thank you very much. As a reminder, if you'd like to ask a question today, please press star then one on your telephone keypad and wait for an automated message advising your line is open. Please then state your first and last name before you ask your question. If you wish to cancel your request, please press star then two. Once again, star then one if you'd like to ask your question today. Thank you. We will now take our first question. Your line is open. Please go ahead.
Hi, it's Peter Testa. Can you hear me?
Yes.
Okay, great. Three questions, please. One is just if we 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 then maybe also extend that to CMS and views on depth and timing to convert out of pipeline, please, in North America.
Yeah, 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. We have invested much more in a service organization and people focusing on the retention of these. After five years, as you know, then the contract expires, and it's very important to keep these customers. That's a bit of a new game for us. We're doing that very well. We estimate that we have a very high retention rate. That's working out fine. We also see that still that there is a lot of interest from customers on the SafePoint. I don't see any change in the sort of the market development in that sense. 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 hope for more outsourcing coming to the market. We would like to see more contracts up for grab. That is coming sooner or later. We don't see any change when it comes to the market possibilities.
On CMS, when you look at sort of pipeline and timing to convert, do you have any sense as to whether there's any change in that pattern, in one direction or another?
No. No change.
Okay. Just a quick question on cash flow and CapEx. I mean, the cash flow conversion has been quite strong all year, and as you noted, your CapEx is lifted to relation to depreciation slightly higher. Where is the capital investment going into? I mean, what is the opportunities that you're finding to put capital behind?
Yeah, sorry. Thanks. Kristian here. 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 quarterly here. 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's spread, it's to support the growth mainly. 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. For example, trucks continue to be one of the biggest spend for us.
Right. Last question, just a 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 whether you think France will continue to grow in, say, Q4?
I should be a bit careful on Q4, but 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're done the integration, that will be strong business. On top of that, we now have Prosegur Cash that we integrate. Again, it's a two-player market. 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?
Yep.
Excellent. A question on Germany. Are you loss-making or break even in Germany at the current stage?
At the current stage, we're making a loss, yes. 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. That's actually, as I said, diluting the margins with a couple of tenths of a %.
Okay. Yeah, that makes sense. Can you say something about the magnitude?
A couple of tenths of percentage points, yes.
Okay. Yeah. Okay, on the European margin. Okay.
Yep.
Okay. Thank you very much. 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. The growth is not that significant in CIT, simply because we don't chase those contracts. We are putting all our focus on CMS and SafePoint. There is a small growth, and the profitability is increasing. Of course, also due to price increases in that field, but profitability is going up.
Okay, that's good. The final one, just to confirm, the SafePoint net installations in the quarter was around 700, 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. It's Johan at Danske. Can you just talk about the contribution from South America to sort of European organic growth?
Yeah, we don't disclose the specific details. First to start with, highlight that Latin America is still a very small part of the European business. Sales in South America is around EUR 50 million-EUR 60 million per year. That's the starting point. It's good organic growth in this quarter. If we look into Argentina, for example, even if we calculate that in hard currency, so to say, it's very good organic growth.
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. We have a very strong growth, for instance, in Spain, which is a more mature country. The big effect is from the continental Europe, if you like.
All right. Just on the efficiencies in Europe that you talked about, I mean, the easy comps, I guess, will be gone here after Q4. I think, Patrik, you said that you expect a couple of quarters more sort of seeing these positive effects. Should we read into this that these sort of benefits continue into 2020 first half or?
When you say it, are you pointing at France or in general?
Yeah, France, Sweden restructuring mainly.
I would think that the Swedish restructuring with the big actions we're taking in Sweden, that's more over. 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 Prosegur Cash. That's what we're going to see during next year.
That's very clear. Thanks. You're giving a date here, end of 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. We have a restructuring plan. 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. Of course, we want to drive very much the efficiency when it comes to that. This is a pure efficiency, a scale case. Exact numbers, I don't want to reveal today. No.
All right. Thanks.
Thank you very much. We will now take our next question. Your line is open. Please go ahead.
Hi, Henrik Mawby from Nordea. If I understood it correctly, you are mainly targeting Europe with the ATM and FX strategy that you highlighted on your capital market today. 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, to drive a strong FX business, there needs to be different currencies, and that's the fact in Europe. You have some FX between Latin America and U.S. That's not that significant. 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. 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 the U.S. That a bit further down the road, I would say.
Okay, thank you. 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 Prosegur Cash versus CPoR in the quarter?
No, I think it's relatively evenly spread, and both companies have a sales of approximately EUR 40 million on a rolling 12 basis. I think that can be a good approximation.
Okay, thank you. Two more questions, if I may. In Europe, you still have the large contribution from or a contribution from the large SafePoint contract you won a couple of quarters back. How big contribution is that giving to organic growth in Europe? When do that contribution phase out? Secondly, on Prosegur Cash in France, was that geographical overlapping or was it a sort of a complementary region in France, please?
Let's start with the second question. There is an overlap. We strengthen in some areas, but in general, it's an overlap. That's why it's so attractive to us that we can build it on the same platform. I think that's going to be an excellent synergy case. It will take some time, and then that will support the French business. 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 months.
Oh, yeah. Okay. Yeah. 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. That's rolled out.
Okay. It's not contributing to organic growth currently, or the rollout is completed, you mean? It's still contributing to growth, right?
Yeah, it's contributing to growth. That it does, but it's all rolled out. Yes.
Okay. 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 in Europe now have built up their sales force. They have the technology in place, the service organization and so on and so forth. 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. The installed base is not the same, of course, like in U.S., but we will see continued growth coming from SafePoint 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. Mikael, your line is open. Are you on mute?
Yes. Sorry, this was Mikael at Carnegie 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 Erik Paulsson from Kepler. Most of my question has been answered, but I was wondering, given the fact that pretty much all the lights look green at this stage, what keeps management awake at night? In particular, I was wondering if the competitive situation in America, if you see any changes. We obviously have the rollout of Loomis 360 and the big box retailers going on. 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. What typically the implication for margin in your view would be in these scenarios? Secondly, on Europe, you obviously been very acquisitive. That's the core of your strategy.
I was wondering in terms of the management capabilities, you clearly invested in compliance to deal with the situation in Denmark. It seems that there may be a question in terms of the capabilities and the need to hire more executive or players, people to execute on this M&A program. 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. 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 the sort of surveillance from authorities, 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. I think that we need to strengthen the organization. However, I would like to say that when it comes to CPoR in 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. On that organization, we will build. I don't think we will add a lot of people on compliance, maybe a few.
We will build on the existing base we have. You're right, we will be much more under scrutiny from the authorities. 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, we sleep quite well during night. In the U.S., I think we have a very strong team. We have a good plan. Of course, now when we have close to 30,000 installed SafePoint, that requires a different way of working. Of course, our competitors also want to take part of that installed base. As soon as contracts expire and so on and so forth, there are of course, many that's chasing those contracts. I think that we keep most of those contracts.
There are some losses, but they're not very high. It's more complex, but it's not in any way that keeps us awake during night. No, I see, as we mentioned on 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. As a reminder, to ask a question, please press star then one on your telephone. You can cancel the request by pressing star then two. We will now take our next question. Your line is open. Please go ahead.
Yes. Hello, and good morning. It's Matija 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 least I interpreted that as a little bit more, say, prudent on the margin in the U.S. 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. 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&A pipeline? Is there anything major that you're potentially looking at or not really? Thirdly, just a question on the numbers.
Sorry, it's a little bit detailed, but 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 two first ones. I'll hand over to Kristian on the third one. What's going better in the U.S.? I think that what we see is the efficiency work. Two elements. One is, of course, the mix. Now 35% CMS of the total business and 15% SafePoint. That is driving, of course, the margin in the positive direction. The second element, I would say, is the efficiency work at the branches. We've taken another steps in terms of processes, procedures, efficiency, how to use technology to optimize routes, et cetera. I think for me, from my side, these are the two elements that I think that is driving margin. The second one is more prominent than I thought, to be honest. The efficiency work on a daily basis is going better than I expected, at least.
I would say these are the two points. When it comes to the M&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 over around SEK 10 billion. All of that will not happen, of course, but some of it will happen. 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. Now, maybe the third question, Kristian.
Yeah. When it relates to cash flow and the line for the other items, it's mainly related to timing impact. The largest impact on this line is when we have movements in excuse me, the cash stock, salary payments, and accounts payable. Partly it's related to also, of course, the increase in operations increase our accounts payable, but otherwise it's mainly related to timing impact. I think also to clarify, maybe also to say, 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 80-90 or around 85% or so.
You mentioned there's also an element of, say, stock payments in that line. I'm just trying to understand whether that line should theoretically, going forward, be closer to zero, 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 next question. Your line is open. Please go ahead.
Hello. This is Carina Holmgren at Handelsbanken. Can you hear me?
Yeah, we can hear you.
Okay, great. I was just wondering, the number of SafePoints that you installed in the quarter. Could you give us that?
Yeah, it's 700.
Okay. Going forward, 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?
I think that the potential for SafePoint is there. It's no change in how we see the market. As we communicated on the Capital Markets Day, it varies a bit from quarter to quarter. We believe that we will be between 4,000 and 5,000 safes this year. If it's a good quarter next quarter, we will be closer to 5 maybe, and so on. 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, there would be quite a big erosion.
We're spending quite a lot of time on keeping the installed base and then adding safes. 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 SafePoint, and maybe, and why not, if there's a bigger contract, we can get closer to 10,000. We will see continued growth when it comes to SafePoint.
Okay. A couple of questions more on Ziemann, the acquisition in Germany. What is the reason for the postponement of this process? The second question would be, were there any timing effects in cash flow this quarter?
When it comes to Ziemann, 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 two businesses to see where the overlap is and which customers or potential customers could be affected. 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. At least we're getting closer and closer to some kind of decision or some kind of feedback. On the last question, I'll hand over to Kristian.
Yeah. On the cash flow, on the timing side, you have positive timing impact on the line for other working capital. You have a negative, you could say, in the quarter related to CapEx, since CapEx is built up during the second half of the year. Year to date, that should be relatively in line. You have a negative impact on tax, and that negative impact on tax is mainly related also to payments relating to last year. If you look into the cash flow last year and the tax, that is much, much lower than the income tax. There you will find that explanation.
Okay. Thank you. That was all for me.
Thank you very much. Once again, as a reminder, it is star then one if you would like to ask a question today. We will now take our next question. Your line is open. Please go ahead.
Hi, Henrik Möller from Nordea again. One last question. Of the pipeline of SEK 10 billion 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 billion into three areas. One, the biggest, I would say, is in market consolidation. In the markets we're present, there will be further consolidation. The biggest part is, I don't know exactly, but just to give you a number, 50%, 60%, something like that. 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. The third element is more tech companies, new payment/tech companies that can support our growth from a more technical area, move us into new areas. 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'll now take the next question. Your line is open. Please go ahead.
Yes, it's Mikael at Carnegie again. Just to follow up on SafePoint. Is it possible to break down the year-on-year growth in the quarter? What is organic revenue growth and also how much comes from price and new installations? 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 done some quarters back, which are with pushing up. 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. I think it's basically new installations is driving the growth, I would say. I'm looking at my two gentlemen here, but maybe they have a different view. No, they don't know. No.
Just to be clear, the 17% growth year-on-year in revenue from SafePoint, is that organic?
Yes.
Okay. Thank you.
Thank you very much. Once again, star then one if you'd like to ask a question over the phone today. Thank you very much. There are no further questions. Please continue.
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.