Earnings Call: Q4 2018

Jan 30, 2019

Thank you all for standing by, ladies and gentlemen, and welcome to today's Q4 Report Conference Call. At this time, all participants I would now like to hand the call over to your speaker, Mr. Patrick Anderson. Thank you. Please go ahead. Thank you. Good morning, everyone, and thank you for joining the Q4 presentation from Loomis. My name is Patrick Anderson. I'm the CEO of Loomis. And with me here today to answer questions, I have Christian Akerbe, who is our CFO and Anders Hakur, our Chief Investor Relations Officer. So let's start the presentation and turn to next page, which is which are the highlights of the quarter. I will come back to many of the points later on. But just to give you a brief review of the quarter. So we closed the CPO acquisition in France just before year end. So now we have a very strong offer in the French market for foreign exchange, but also other precious metals. We after the quarter closed, we announced the acquisition of Siemann in Germany, actually yesterday. So that's on the acquisition front. The growth, the real growth was 8% in the quarter versus 3% last year. So we're seeing now that the acquisitions we have made in Chile, but also the first acquisition in Germany, Okuto is now adding to the top line. The organic growth in the quarter was 3%. So we remain the momentum in the U. S. Remained really strong. So we also signed a significant SafePoint contract in the quarter. We'll talk a bit more about that later. We also see positive growth in Europe. So 1% growth in Europe, which is really encouraging to see. The operating margin ended at 12%. So we see very much a general positive development of the restructuring programs we have both in Sweden, but also in France. We will see much more effects of that coming into 2019. But we see also that the demonstrations in France, which been going on for some months, is actually holding back that improvement in the quarter. And we should also keep in mind that the acquisition we have made in Germany, the first one is then margin diluted by 0.2%. Operating cash flow 144% in the quarter and we propose a dividend of SEK 10 versus SEK 9 last year. So these are the highlights. And then I turn to next page called acquisition of Timan in Germany. So as some of you could read in our press release yesterday, we have signed an agreement to acquire the company, Siemann, in Germany. And this gives us a really good presence in the German market. This company, Siemens, has a net revenue of $175,000,000 and a small part of that is actually guarding services and it adds approximately 70% growth in Europe and then 9% in total for the group. And we will have a 35% about 35% market share in Germany also disclosed and then if we combine the first acquisition we made with this one. And the turnover the combined turnover in Germany is €220,000,000 and we will be, as I said, market leader together with our competitor Prosegur. And I think it's very important to state that this is a very important acquisition. We get a strong foothold in the most cash intensive and the biggest economy in Europe. The EBITDA margin of this company is around 7% and enterprise value of 160,000,000 and it's also important to state that we now will become a national provider of cash handling service, which gives us a totally different footprint in the German market if combined the 2 companies. And we also see that company, Siemens, actually handles a lot of ATMs. Just to give you a comparison, we today have the 30,000 ATMs in Europe today and Siemens is on its own handling 11,000. So in that sense, a really good footprint in the ATM business. We also see a very positive trend for CMS, continued CMS outsourcing in the German market, and that will add growth, of course, to us. We also see a strong potential of launching SafePoint in the German market. I think that market is very suitable for SafePoint. And last but not least, we see significant potential for synergies. First of all, by implying what we call the Loomis model to our acquired company, but also tend to combine it and take out synergies with the previous acquisition. And we think that also that we see very competent and innovative management in the Siemens Group will which will help us to reach our targets. So very pleased with that acquisition being announced yesterday. So let's then turn to next page, which is USA. So we had another quarter of good and strong organic growth, 5% in the quarter. We see continued strong growth in CMS, ATM and SafePoint. And SafePoint now accounts for 14% of the total revenue. And we as we have mentioned, we have put a lot of attention and focus on activities supporting further growth coming into 2019 2020. So we added salespeople, IT resources and invested in support function and so on. So the positive momentum continues in the U. S. Our view is that we're winning customers, we're winning market shares in the U. S. Market and that's very encouraging, of course. Let's then turn to next page, which is focusing on SafePoint in the U. S. A. As maybe some of you have noticed, we have signed a new big contract. It's a 5 year contract with a big retail customer in the U. S. Market. And the total estimated value of that contract is 48,000,000 dollars And in that contract, it's including 12.50 units, of which 1,000 are completely new. So that will help us to reach our targets for SafePoint in the coming years. We now have approximately in total 27,000 installations and the revenue growth from SafePoint in the quarter was more than 17%. And we installed more than 1,000 SafePoints in the quarter and the retention rate, so we're keeping is very high. So we're keeping existing customers. They're quite happy with the offer we're having. And during the year, which is important to state, we refreshed, renewed 2,300 SafePoints during 2018. So if you compare, this year we installed 4,200 and last year about 3,700. So we're growing the installation base in the U. S. Market. Let's turn to next page, which is then the operating margin. As you can see, operating margin came in at 13 point 5%. We have to state that Q4 2017 was very much an exceptional quarter. So if you compare with last quarter, Q3, we actually grew the margin. And here last year at this time, we started to invest in the U. S. Market and that's what we said that's going to be during a short period hampering effect on the margin. We continue to focus on branch efficiency and we will see further improvements also going forward when it comes to efficiency and density and so on. Let's turn to next page, and that is Europe. So real growth, 10%. As I mentioned, the acquisition in Chile and Germany is adding to the top line. Organic growth, 1% and that's very encouraging to see that we're now growing in Europe again. We have very good growth in Spain, which is a very important market for us, both from a size point of view, but also from a profitability point of view. Argentina, of course, continued to grow strongly. Turkey and Belgium, which where we for this year won a couple of new contracts is growing as well and Austria. And it's also encouraging to see that France is now in the quarter turned into positive growth. We added quite some new customers in the quarter, which is also a good sign that the quality and the work we've done in France is paying off. Operating margin, 12.4%. So we have a very much general positive development from the programs we're running both in Sweden and in France, and we will see further effects in 2019. So those programs, which are then there to strengthen the margin is very much developing according to plan. Now I have to say that 2 things held back the margin in France somewhat. It's what we call the gel of jackets, so the demonstrations in Paris, but also in other places. These people that block the branches, it is very difficult for us to work, especially during Saturdays. But also as you have seen from television, retail shops closed on Saturdays, it's very difficult to give service. So that has had a hampering effect. We also had a negative effect what we call from the CICE program. CICE is subsidies from the government given to companies and actually there was a gap between 2 programs which had an effect in France. And so and also as we write in the report, the acquisition in Germany had a margin diluting effect of 0.5%. So if you take those 2 things together, the effect in Germany and the things happening in France, altogether, we are in the same level as we were last year, which is for us a step forward. International, positive organic growth, somewhat lower margin in the quarter. It is much more volatile here than the other business. And the main thing here is that now from now on, we are integrating the international business, both in Europe and the U. S. And we're coming back to what kind of impact that has on the reporting side. So then we turn to next page, which is statement of income. And the just a couple of highlights from that one. Real growth, as I mentioned, both for the quarter and full year, 8%. Earnings per share increasing to DKK20.45. So the main thing I also wanted to state is that with the acquisition in Germany, we have now done €3,000,000,000 out of the target of €3,500,000,000 So we will reach the M and A target, which we set out for 2021, and that's very encouraging. Now, of course, we need to work on the margin side and to get that up in Germany. But from a M and A point of view, we will hit the targets. And then we turn to next page, which is the Q and A page. And I say to say, operator, we are now opening up for questions. Hello, operator, we are opening up for questions. Yes. Thank you. We will take our first question. Please go ahead. Your line is now open. Yes, good morning. Kaleo van Bauneev from TMP Markets. Coming back a little to SafePoint, you obviously targeted at the start of the year to get something like 5,000 units installed in the U. S. And I guess you have not seen the big order during this year, but I guess that 1,000 order that you now have for next year, is that, in your view, you can say creating the acceleration opportunity to get, say, point up to the next level in the U. S? Yes, you're right. I mean, I think that we should have some bigger orders earlier in the year, but you never you can never control that. But I think that what I've seen now is that we have a very strong pipeline of big potential customer contracts. So I think that we will see in 2019 a significant step upwards in the installation of SafePoints. And looking at, say, net placement market share, what can you what do you believe you had in 2018? What part of the market did you capture? No. I mean, I think that we there are no official figures, but we estimate that we installed the majority of save points, which are placed in the market. So a hard time to give you, but let's say around 80%, 75%, 80% of all installations are done by us. Us. And when you're looking at the refresh units, what kind of, say, conversion do you have on old customers to retain the product and the service? Very high retention rate. I would say we lose very few safe points. It's about, I would say, 95% maybe or even higher. So a very strong offering. And we have actually started up a team sort of really looking more and more at just to refreshments and following up on customers and so on. So very high retention rate. And when you look at SafePoint in Europe during 20 8, I know that earlier you alluded to that you were going to comment on this on an annual basis as the base is so small. Have you seen any good progress during the year? Yes, we have. We have actually made very good progress in many of the markets, France, Spain, Sweden, to give you a few. So we're installing quite a number of safe points in Europe. But you're not giving us any number of days at this stage or something like that? Not right now. We don't. But I can just say that it's going according to plan and it's we're doing very well in Europe. Now the difference between Europe and U. S, as you know, is that in Europe, we changed from CIT to Safepoint, which from a strategic point of view is right. But it's not it hasn't that dramatic impact on the number, but it's giving us other benefits, I would say. Excellent. Looking at Siemens, I think you alluded to that putting it together with Kirtu, you have good synergies opportunities. How would you see the, say, the midterm margin opportunity here? Is it getting up to double digit territory or getting it up to European levels? Or what should we think about? I think that the first step now is to get this to, let me say, between 8% up to 10%. I would say the ambition is around that in that area. But that would take a bit of time, but that's the first step, get it in that range. But then, of course, over time, we should get up to European margins. And looking at Germany, if you try to put it in some perspective, how developed is it when it comes to CMS revenues? Is this just like an early U. S. Franchise for you in comparison? Or where are we? I would say that's I would say it's like U. S. 5, 7 years back, something like that, just to give you. So the banks have started to look at other possibilities of handling cash. I think that also the companies in the German market has developed, so they have a better offering. And I think that from a sort of a maturity point of view, I would say, as I said, USA some years back. Excellent. And Christian, I wonder if you could give us I've read the part you wrote about IFRS 16 in the report, but could you give us the main points of the implementation of it for you and what kind of impact it will have on the profit and loss and balance sheet? Yes, definitely. Sorry. So if you start by looking at the liability as described on Page 12 in the quarterly report, the liability will be approximately SEK 2,800,000,000. And of this, the majority relates to buildings premises, so to say, so that's close to 80% of this part. With the new standard, you will get to deduct. That means that we will get a positive impact on the EBITDA, slightly positive on EBIT and negative on finance net. And based on how the standard is built up, it is likely that the impact on net income will then be negative, and that is due to that the liability is highest in the beginning of the period, so to say. And also, I would like to highlight here that this is the opening balances, which means that if we and that will probably happen, enters contracts in January, February March, that will change this number. I hope that gives you a feeling for the situation. And can you give us some sort of thinking about how big the impact will be on the net level in the profit and loss account? On the net profit, is it a meaningful number down there also? Or is it close to neutral? So depending on what materiality you have, of course. But if you take an average interest of the debt, you will get the feeling for what the impact on finance net will be. And we have communicated that on EBITA, it will be approximately €50,000,000 But that is, of course, also a rough estimate, so to say, based on the information we have as of today. Excellent. Thank you very much. Thank you. Thank you very much. We will take our next question. Please go ahead. Your line is now open. It's Emile Poulain from Kepler. Just a clarification. You gave an indication of the miss on the European profit coming from the yellow vest movement and then Germany dilutive effect. So could you just clarify or confirm that we understand correctly that about 1% margin is due to these two effects and it's fit almost equally between the 0.5% margin dilution from Germany. And then that would imply that the yellow vest and sales effect are also up around 0.5% for Europe to stay stable otherwise on an underlying basis, just to make sure I understood correctly? And then on the consolidation of Seaport, is that right that this starts from the 1st January? And of course, have you seen any change in the contribution that you we should expect from that business in 2019? That's for the first question. 2nd question is on the synergy from Zieman. How fast do you think you can bring the German margin to the European average? And then the third question is on the consolidation strategy. Of course, you continue to add to your bolt on M and A targets, but there's obviously a spin off announced by G4S in the course of March. I'm just wondering, is that something that you could also investigate as a type of merger candidate for you on a medium term basis? Thank you. So let's so just on the first point, yes, you're right, 0.5 from CICE and yellow vest yellow jackets in France and 0.5 from dilution effects in Germany. So that explains the whole gap between this Q4 2018 2017. So that's right. And then next question was CPOR. CPOR, that's good. CPOR is now a Loomis company. And we are first of all, the effect is that, I mean, as we have mentioned before, the margin in CPR is significantly higher than the rest of the CIT CMS business. So that should have a positive impact. And then on top of that, of course, we're now seeing we're now working with Synodys. One part is, of course, where can we find common branches, common head office, how can we integrate back office and so on and so forth. And that's what we're starting with right now. That's in the middle. So that will have an effect as well on the combined business in France. We also now having CPOR as a basis looking for new growth in other European markets. So but that's, of course, a top line effect, which is quite difficult to estimate. But that's a more strategic thing that we will expand FX part in other European countries. So have the passport, so to say, to work with FX. Timan, I think that the first stage we are looking at is really to bring this company, the German business, closer to the 10%. Don't forget that the Kesto business is very close to 0 as it is right now. So we have some work to be done when it comes to bringing the margin. So the first step is really get closer to 10%, and that will take, I would say, 18 to 24 months after the closing because it's not easy always to do these kind of things quickly. But then I think that when we get SafePoint in place, more CMS outsourcing, more density, there is no reason why this the German market should not be on group average or at least the European average. But that would take some more time, I think, after that. So I think we have great prospects in Germany. G4S, that's a good question. We also see that they are looking into strategic options for the cash business. Of course, we are following the development as anyone else. We think it's an interesting and good company. I think in general, it's good that there are more sort of stand alone cash companies, but we haven't done anything. We're just following the development. They have a strong footprint in the U. K. As we have, so that's a bit complicated. But of course, as I said, we're following the development. Thank you. We will take our next question. Please go ahead. Your line is now open. So am I next up? Yes. Okay. Sorry. It's Michael Loeffler at Carnegie. Most of my questions have been answered, but one more on France and the CICE effect because this, judging from other companies, have been actually a gradual change during 2018. And this sort of tax deduction will be eliminated as from 2019, if I'm not mistaken, or replaced by some other deductibilities. So how will this affect LUMIS in 2019? Related to CECL, what's just to clarify what's happening with the subsidies in France, the CECL system ends end of November. So that's why Loomis and other companies get a negative impact on the effect from December and also partly due to the system they call the 13 month. When you look into 2019, they will change the system, but they will still have the system as a subsidy on social security. The difference will be that the CEVA was nontaxable and the new subsidy will be taxable. So you will get a tax effect. But if you look on an EBITA level, we do not expect any significant change in 'nineteen compared with 'eighteen based on the information we have today. Okay. And also on the yellow West and the impact in Q4, I guess it's not really settled yet in France. Have you seen an impact also in January so far? That's a good question. We it's not settled. Our judgment, at least, when talking to the French management, is slowing down a bit. It's not as active as it was before Christmas. But as you say, there's still some demonstrations going on, but not on the same level as before Christmas. It's a bit difficult to judge. I think that the big spike has slowed down, I would say. Okay. And final question for me. In the U. S, the sort of investments in growth or growth initiatives, how is this something that we should expect to come gradually? Or is it more that you employ and invest now in the last two quarters and perhaps one more and then it sort of will plateau out and we see margins expand faster again? Or how should we look at it? You should see that. I mean, we are through the big investments in maybe there is something more to come. I just wanted to maybe also in this to give you some practical example. We have launched our own recycler concept in the U. S. Market, which has taken sort of some resources, time, money and people. So that's one example of what we've done. I think that we are not going to continue to invest. Maybe there is something more to come, but the big investments are taken in the U. S, maybe a bit in Q1 as well, but then it should be over. Okay, thanks. Thank you. We will take our next question. Please go ahead. Your line is now open. Hello. This is Karina of Granath Handelsbanken. Can you hear me? Yes, we can. Great. Most of my questions were answered, but I'm wondering if the government shutdown in the U. S. Have some impact on your numbers? Not really. Not on we have had some of course, some issues getting the permits for different things, but there is no P and L impact as such, no. Okay. And then maybe if you could guide a little bit on how much you expect of integration costs for Siemens? We there would be some integration costs. They are not significant, I would say, but there is some integration costs to come. I don't cannot give you any numbers. But I mean, it's the integrate I mean, there's quite a small company, the one we have in crypto. And so I don't expect any significant numbers. Otherwise, we would have the flag for that. But something will there will be, but not significant. There are no questions coming in as of this moment, sir. Please continue. Okay. Thank you everybody for joining and have a really nice day. Thank you very much.