Earnings Call: Q1 2018

May 4, 2018

Good morning. My name is Patrick Andersson. I'm the CEO of Loomis. And today with me here on the call, I have Anders Hacher, who is the CFO of Loomis. So welcome to the Q1 presentation. And this is the content of today's presentation. We turn to Page 2. We go through the highlights of the quarter. We look at the different segments. We take you through the financials. And then of course, at the end, we have the Q and A session where both myself and Anders will ask any questions you might have. Let's then turn to Page 3. And these are the highlights of the quarter. I'll come back to many of them during the next couple of slides. But just to summarize, we had a real growth of 8%, which we think is solid and good. We had an organic growth rate of 3% versus 3% last year. We had a very strong growth in the U. S. And we have a bit weaker growth or actually negative growth in Europe, but that's due to the Workday impact, due to Easter mainly, but also some other effects. The operating margin was at 10.5%. And if you compare it to last year, it was a bit down, but that's due to restructuring costs in France and Sweden, but also due to fewer working days. At the end of the P and L, we can see that EPS improved 10% to DKK4.22 versus DKK3.8 5 last year and operating cash flow was at 57%. We have in the beginning of the year down 2 acquisitions. We had talked about that during the Q4 presentations, but it's worth mentioning again that we acquired Qatar in Germany. It's a number 3 player in the German market. And we're very happy to enter one of the biggest cash countries in Europe, of course. But we also acquired Sequel, a diamonds and jewelry business, which is based in New York. And that's now going to be integrated into our business in the United States. We have also won a new contract in France. We'll talk a bit more about that at a later stage, but it's encouraging to see that our strategy to offer more value added products and move up the value chain as we say offering more complex and products or services with more technology is working. Now turn to page number 4, where we have a look at the operating margin. As I mentioned before, the operating margin was at 10.5%. And as you can see, we had in 2017 a really big jump in the Q1 from 9.3% to 10.8%. Of course, that's a very high benchmark, but we'll talk more about the composition of the margin in a couple of slides later here. I then turn to page number 5. Looking at the operating margin from a different angle. Here it's a 12 month rolling operating margin and it ended at 12.5%, which is 12.1%, excuse me, which is exactly the same number as we had when we went out of 2017. I'll go to Page number 6. And here you can see the different segments we're going to talk about U. S. A, Europe and then International. I turn then to page number 7. And talking a bit about organic growth in the U. S, which was very strong 8%. We had growth in all lines of business. In CIT, we grew by 4%. And in CMS, we grew at 7%. And SafePoint, as you can imagine, we had a very strong growth 18% and that's then adding up to 8% in total. SafePoint accounted now for 13% of the total revenue, up 1 percentage point versus same quarter last year. And we are increasing volumes and market share. We see that we are winning smaller and more midsized customers and contracts. And that's helping us also on the profitability side because these it's quite easy to assimilate that volume into our existing branches and it's not sort of disturbing the efficiency of the branches that much that bigger contract is doing. And we're also gaining volume from existing customers where we today have a split contract with 1 of our competitors and we see that some of that volume is coming to us. And we also have a strong pipeline of new potential customers that we're negotiating with. So on the top line side, a very good quarter in the U. S. If we then turn to Page number 8 and looking at the SafePoint sales. SafePoint sales, as I mentioned, we are now at 23,655 SafePoints installed. And again, let me be really clear on this. What we measure is the new net installed or net installed SafePoints. We had 8 80 new installed in the quarter and that's a bit lower than the run rate we want to have. But on the other hand, we had 855 refreshed or extended contracts where we have existing customer, which is having the concept. They have had it for some years and then they want to sort of extend and continue with the contract, which in itself is a very good thing, because that proves the efficiency and the stickiness if you like of the concept. So what we're doing right now is we are expanding or extending the sales organization in all aspects to be able to continue to push SafePoint in the U. S. And we have a very strong pipeline of new customers and the customers we are negotiating with. So we have good hopes for 2018. We are now over 2,700 customers and more than 200 provision on credit banks. So we are now sort of gaining even more momentum on the U. S. Market when it comes to Safewaynt. Now I turn to Page number 9 and looking at the margin. Margin was then up to 14% in the quarter, up from 12.6%. And we have, of course, increased share of high margin services. We are doing more save point, more CMS. And that in itself is of course pushing the margin, but also we have economies of scales due to higher volumes in CMS and more safe point units, of course. And then also then improved efficiency when it comes to CIT, higher density, better efficiency when it comes to routing, routing and so on. So and then also we have a continued focus on branch efficiency. And we see that many of our large branches are improving the profitability due to the fact that I mentioned before the better mix, but also the higher volume. So many of our U. S. Branches are performing on a very high level. We are continuing to increase investments into facilities, into IT to be able to continue to grow and to handle higher volumes also in the future. I'll turn then to Page number 10. Just looking at one of the points I just mentioned that CMS volumes are increasing and as a percentage of the total is now up to 30 3%. And you can see that the trend has been growing since 2,008 actually. And this is very encouraging to see, of course. I then turn to Page 11. Talking about Europe, we had organic growth of minus 1% versus plus 1% last quarter. We see that many of our European countries are performing very well when it comes to the top line. So we have Spain, which is growing despite having less working days. Portugal is also growing 7%. Turkey is growing 26%. Argentina is growing 57%. And actually now we can add Austria to the one of the countries growing, growing more than 5% in the quarter. And I'd also like to mention U. K, which is even though on a lower level continued to grow. So many of the European countries are growing at a good speed. We have also positive developments when it comes to save points in Europe. We are selling more and more save points. We have a bit careful with mentioning the number, but we have especially positive development in France and Spain, where the concept is now gaining momentum. And that's very much in line with the strategy to really to push SafePoint also in Europe. We had a negative workday impact as we have less invoicing days and that is especially when it comes to big countries like France, but also other European countries having a negative impact. In France, we had low volumes due to the contract losses. I've been talking about that a lot during the last calls or quarters. And we are now working a lot with, of course, to meet that challenge and we're doing a lot of progress. Also when it comes to Sweden, we have lower volumes and that's because we had last year the note and coin exchange program, which we are now meeting. And of course, that creates a big jump down when it comes to the revenue in Sweden. The operating margin was at 9.6% versus 11.4%. And again, as I mentioned, the negative workday impact is, of course, then also impacting the margin and the profitability. We have quite substantial restructuring programs in France and in Sweden. And just to give you a couple of numbers, we are reducing the workforce in France with 150 FTEs. We are reducing the workforce in Sweden with 140 and we are a good way through those programs as we speak. And we think that by the end of the summer, by the end of Q2, we should be regaining momentum from those programs. And then if you adjust for the workday impact, restructuring costs and also the acquisition in Germany, which is then diluting the margins at least right now, the margin in Europe is in line with last year. If we then turn to Page number 12 and look at the international business, the organic growth was 0% versus plus 2% last year. But we see that at least the markets for a cross border transport, the forwarding business is more stabilized now than it was previous during 2007 scene. We also see a positive trend for the storage business. We stored in gold and other valuables for our customers and we see that that is now picking up again. I'm happy to say that the operating margin was improving in the quarter to 7.7% versus 4.6% percent last quarter or the same quarter last year. And then the improvement is really driven by the storage business. But also we have then a better mix when it comes to shipments of forwarding business in general. So the better margin, better deals with the forwarder businesses we're doing. And also we have worked a lot with the costs. When it comes to international, we see also the effect of a better cost management. And we have a number of integration projects as we have mentioned before in the U. K. And U. S. And they are going according to plan where we really combined international business in the local Loomis operations and we're really happy to see that that is working out fine. And we also have a lot of activities when it comes to the D and J business, which we are now pushing a lot, especially when it comes to United States. I turn to Page 13 and we are looking at the financials. And then I turn then to Page 14 directly. Here you see the P and L basically. And just wanted to mention 2 parts of that. Revenue of €4,486,000,000 and real growth of 8%. And that is important for us as we have now target to reach €24,000,000,000 by 2021. We have also to grow inorganically. So that's for me at least a good and encouraging number to see that the total business is growing. And then finally, at the bottom, EPS is growing 10%. Those are the things worth mentioning when it comes to the P and L. So that's basically it for me. And I'll leave it to Q and A. And operator, do we have any questions on the line? The first one is from the line of Aymeric Polanyi. Please ask your question. Yes. Good morning. Thank you for taking my questions. There are 4 questions, if I may. The first one is on the margin uplift in America, very strong display in the Q1. How sustainable do you think this progression is, especially given some of the investments you mentioned on the sales and marketing side? That's the first question. Also on the safe point, you said there was a bit slower pace of installation in the last few quarters. But could you reiterate your plan for 20 18 in terms of the run rate of this investment and also in terms of CapEx spend that may that is it evolves? And on the U. S, again, G4S obviously has made given some color on the impact of some of their cash recyclers in terms of savings for some of the key customers. And I wondered if some of these big box retailers are adopting this machine, how impactful it could be for your CIT business going forward in America? And last but not least, on the European side, you mentioned a number of factors impacting the margin and the organic growth, but you did not quantify them. So could you provide a more clear quantification of the calendar effect and all the other moving parts affecting the European margin, please? Okay. So I'll start off. So how sustainable is the U. S. Margin? I mean, to be totally frank with you, I mean, what they have performed during the Q1 is a bit above or above our expectations. So the underlying business is in the U. S. Is stronger than we anticipated, so put it like that. So I have said before that we should see not as much margin expansion in the U. S. As we've seen previously. It's a bit too early to change that right now, but I just give you the our take is that the underlying business for Luminess in the U. S. Is stronger than we anticipated. So let me just put it like that. And the other point is safe point. We still are of the opinion that we can make 5,000 SafePoint this year, net new installations. So we haven't changed that. We have a very strong pipeline of customers now that needs to be contract signed and everything, but we still think that that target is doable. I'll leave it to Anders to talk about the CapEx in a short while. But then just to mention the recyclers and the 360, It's you're right. It's there is a demand for these type of recyclers in the U. S. Market. And we have, of course, seen that. So we're actually launching our own recycling concept by the end of this year to follow our cryotovics to meet the needs of our customers. And I think that that is a natural part of to extend our offering when it comes to intelligent machines from SafePoint to recycle. We should know that the customers for recyclers are a bit different. It's bigger retailers, which have a certain amount of cash. So it's a slightly different customer profile than the SafePoint customers. So I'll leave the CapEx question and EU margin question to Anders, who will answer that. Yes. Okay. Thank you, Patrick. When it comes to the safe points and the CapEx program in the U. S, it will not have a significant impact on our cash flow since most of the new safe points in the U. S. Are leased and we're on we are on a leasing program and so it does not have an impact on the cash flow. I'm not saying that all of them are leased, but the clear majority are leased. And when it comes to the drop of the European margins, we're not going into the details exactly of the restructuring programs and how much they cost. But what we want to communicate that is really that the underlying business in Europe is progressing according to plan and is at least on the same level as last year or even better. That means that you basically you need to back out France and Sweden and as well the less working days in Europe and also what Patrick mentioned in when he went through the slides that acquisition we made in Germany is margin dilutive. So that has an impact as well. But underlying is still around 11.4 for the first quarter. But given the fact the calendar effect, for example, will reverse in Q2, you don't provide any color on the reversal effect that we may have to expect for Q2? [SPEAKER JEAN FRANCOIS XAVIER BOUVIGNIES:] No, we don't do that. But it's going to help the margins, of course, in Q2. Okay. Thank you. The next question, it's from the line of Michael Horn. Please ask your question. Yes. Hello. First a question on the U. S. Back end on the Capital Markets Day last year. You showed a slide that basically pickup rates inflation adjusted was moving upwards. Could you comment a bit about this further in terms of price increases? Is that the main driver of the margin uplift currently? I'll just take this. I mean we are working very strongly with having efficient price increase programs in the U. S. And it's related to that we believe that if we can deliver good quality and keep the customers happy, they will as well be willing to pay premium prices for our services. So that's of course part of the organic growth, but we will not go into the details exactly how much that is contributing. But we need to as well to cover up the underlying wage inflation, which we currently have in the U. S. And I think we're doing a fine job there and we are protecting the margin and actually boosting the margins by increasing quality and thereby increasing the prices as well. And could you say something about the dynamics on when this happening? Is it normal that it happens during the I mean, in the beginning of the year that you raised the annual price? Or is it more, I mean, customer by customer? No, it's on an annual basis, Mikael, and it happens usually 1st January each year That's a general rule of thumb. Okay. And then I guess it's fair to assume that you will have a quite nice tailwind for the coming 3 quarters from this price increases then? Yes. That will I mean that will continue. Okay. And just But you should bear and just to add some more flavor on that, that in the U. S. It works on the wage inflation that when you have annual increases, it's on a contract by contract basis. So that's not always correlated to the 1st January, which is the case in other countries for instance. Okay. And just a clarification on Europe, the restructuring that you have done in Sweden and France over the latest two quarters, are they now finalized? Not yet. We as I said, we are about like 75% to 80% through those programs. So we have some more to be done during the next couple of months when it comes to reducing the workforce at least. But in Sweden also, we have announced that we're going to close down a number of branches and that's going also to being announced, but it's also going to take place. So there's several activities and we're 75% to 80% through that I would say. Okay. Thank you. Thank you. The next question is from the line of Daniel Thorson. I can start off with two questions. Regarding the market share gains in the U. S, is that mainly from rigs or any smaller competitors leaving the market? And the market yes, yes, you can start first. I'll take that. I have a short memory, so it's better I take it 1 by 1. No, when it comes to market share, it's quite clear that we are taking market shares from our biggest competitor, Guardant Brink. That's at least our opinion of it. So that's what we see. Those are the 2 main competitors we're taking market shares from. Okay. That's fine. And then the Swedish situation, did you say reducing 140 people in Sweden? Yes, I did. I'll give you the right the exact number, but that's the Yes, yes. And that is around 20% of total employees in Sweden. Is that the range you expect volumes to decline roughly in the coming 2 years? Or can this be margin enhancing if volumes hold up better? That's a good question. I think that short term, we're just there are 2 aspects, okay. One aspect is that we are reducing to meet just the difference now in volume versus when we have a note and coin exchange program. The other element of that is that we see through our European colleagues in the center of excellence and also benchmarking the Swedish business that we can improve even further. So I think that we should see we should keep our margins in Sweden or even, as you say, increase the margins in Sweden. Okay. That's a good answer. Regarding the French situation Brink's, they commented that they target a 12% margin in France already in 2019. Is that even possible given what you thought about their pricing last summer? Did you miss something in the procurement process? I should be very careful to comment on their plans and activities. I just can say that France is a tough market when it comes to competition, but also in terms of to restructure the business with strong unions etcetera. We I think that we have been quite successful in the last couple of years to be able to handle that. But I don't want to comment on the Brink's plans and activities, no. Okay. And then a final one regarding SafePoints, the 8.80 net installments in the quarter. How was that during the quarter? How was March and end of March? I think that it was quite even over the month, I would say, in the quarter. Just looking through my memory here, but that's what I see at least. It was quite even over the quarter. Okay. Thank you very much. Thank you. The next question is from the line of Carina Almgren. You may ask your question. Yes. Hi. Can you hear me? Yes. Yes. Yes. Just a clarification. You're right in the report that the margin in Europe would have been flat year on year excluding the calendar effect acquisitions and extraordinary items. So are you referring to the restructuring in France and Sweden when you say extraordinary items? Yes. Correct. Okay. And then a couple of more questions. What was the oil price increase impact on the organic growth in the U. S? And also, how do you see that the margins are going to be for recyclers when you start to provide them? The fuel price impact on the organic growth was less than 1%. Okay. But it was positive. And when it comes to the recyclers that we believe in that concept strong then and that long term we should be up to the same margins as we have on the save points. But as this is in the U. S, this is a new product for us. I think it will take some time to get full efficiency and how we work with the machines and build it our how we can build it into our current structure. But long term, it's no different from the safe point. Okay, great. Thank you. Thank you. The next question is from Henrik Moby. Please ask your question. Hi, good morning. Thank you for taking my questions. Just a clarification on the restructuring. You mentioned 140 people being laid off in Sweden. Was that in Q2 alone? Or was that what is planned for the overall or throughout the program? It was for the total program. So that will be ended in a during Q2. So that's the total program for the restructuring in Sweden. Okay. And just coming back to this restructuring program at all. If when you take the decision to go ahead with it, aren't you supposed to provision for all of that and take the margin impact immediately in that quarter? So if you now have decided to or you know that you've done 75% to 80% of the restructuring and some of that will happen, it will happen in real life in the No. I No. I mean, the accounting rules here is that you can only provide for it when you have a definitive and signed agreement with the workforce. So as we do in this on a gradual basis, it's not happening on a specific date. It's a program that goes on for quite some time. So you basically make agreements with each individual. Okay. And when you sign that agreement, that's basically when you provide for the cost. Understood. Thank you. A couple of more questions from my side, please. As you state, you're winning market shares from competitors in the U. S. And that is despite these price hikes. I mean, to me, it sounds like an indication that you're still very competitively priced. Would you say that this market share gains combined with price hikes gives you further confidence to continue to raise price further going forward? I mean there are 2 components of the price. 1 is, of course, to forward wage inflation to our customers. That's one part. And then, of course, we like to take a bit more if we can, but that's based on quality. I think that the key factor is the term the type of quality or the high quality we provide that makes it possible to increase prices a bit beyond wage inflation. And I think that our quality is really, really good. So I think that we can continue to increase prices beyond the wage inflation, yes. Okay. Thank you. And then if you look at your gearing now is estimates, you'll be coming down to pretty much all time lows. So two questions on the back of that. Firstly, how's the pipeline on M and A developing? What are your expectations for the coming quarters and years? And secondly, you've been keeping a fairly consistent payout ratio around 50% of EPS, but you have you're allowed to go up to 60% according to your financial targets. How should we view dividend or the potential for share buybacks going forward? Just to start with the last part, we are not planning to have any share buybacks. We are not planning to have any extra dividend. And then if we move up to $60,000,000 that remains to be seen. I don't have any view on that right now. But the main point is that we want to use that war chest if you want to buy companies. And we are working very much with that. We have made some acquisitions. We actually made acquisitions for SEK 600,000,000 since we announced the strategy on the Capital Markets Day. We are continuing to work with a number of cases and the pipeline has actually been increasing when it comes to interesting targets. So I'm confident that we will reach the target for M and A, which we have set to SEK 3,500,000,000 by 2021. So that money is going to be used for that, nothing else really. Okay. Thank you. Thank you. And the line of Michael Holm, we just ask questions again. Your line is now open. No. Henrik asked my final question, so that's fine. Okay. There are no further questions at this time, sir. Please continue. Okay. Thank you very much for listening in, and wish you all a great day and a nice weekend. Thank you very much. Thank you. That concludes our conference for today. You may all disconnect. Thanks all for participating.