Earnings Call: Q2 2017

Jul 27, 2017

Come to the Q2 presentation of Loomis. This is the contents of today's presentation. First of all, we go through the highlights of the quarter, the different segments and specifics around them, financials and finally, Q and A. And during the Q and A session, I will invite our CFO, Anders Holke, to join me here on stage. So the highlights of the quarter, I will come back to many of these points later in the presentation, but just to mention a few. Organic growth was 2% in the quarter, operating margin at 11.9%, EPS improved by 16% to 4.41 percent and operating cash flow was at 85%. We are coming to the end of the strategy period and that's why it's worth mentioning also that the rolling 12 months revenue was above SEK 17,000,000,000 which is one of the targets, and the rolling 12 months operating margin was at 11.9%. Branches, we always talk about branches and we have, as you know, over 400 branches in the group. And the performance of the branches is, of course, a very important indicator of the margin development. Now, however, you see on this slide that the non performing branches are at the same level as last quarter at 12%. Now there in the gray area there's been a lot of things happening. Actually almost 61% of all branches performed or improved their performance in the quarter. And by among the larger branches, 75% improved. So a lot of things happening in sort of the gray area of the shirt. And especially, we had branches in the U. S. And the U. K. That improved, Atlanta, Houston in the U. S. And Dunstable in the U. K. To name a few. As I said, operating margin on a rolling 12 basis is at 11.9 percent. And if you look at the margin in this way instead where we have all Q2s during the years, we can see that this was a record quarter in terms of margin, 11.9%, all time high. We are, of course, obsessed by efficiency in margins. And one element here is, of course, the efficiency improvements we have in Europe. It is the SafePoint sales we have in the U. S, more CMS volume, efficiency in the CIT operation, especially in the U. S. So there are a couple of things driving this performance. Now if we look at different segments, we start with United States, which is 45% of our turnover. We can see that the organic growth is at 5%. We have always or the last of these quarters talked about that organic growth should be around 5% to 10% or between 5% 10% and there we are at this in this quarter as well. We need to just to mention I need to mention that during 2017, we were positively influenced by the Bank of America volumes, which is in the comparable numbers, which is which you can see that we had 13% growth last quarter the quarter 2 last year. So that has, of course, quite an impact when it comes to the organic growth. However, we were able to gain market shares. We're getting new contracts. We have a very strong momentum in the U. S. We grew all business line. We grew CIT by 6.7%, CMS 9.4% and as you can see on the slide SafePoint grew by 21%. So that's very encouraging to see that that trend is continuing in the U. S. We talked about I talked about SafePoint recently and we have now installed 20,656 since the program started some years ago. And year to date 2017, we have installed 1636. Now when you make the calculation, you can see that that's not sort of if you have this pace, it's not adding up to 5,000. But we still confirm the 5000 or 5000 to 6000 units in 2017. And why do we do that? We should remember that there is a lag between when we sell a safe point and when it's installed. And here we're measuring the installed safe points. And in Q2, we had very strong sales. In June, we sold over 1,000 safes and in the quarter 2, we sold 2,000 safes or more. And that's, of course, is going to be installed now during the next couple of months. And on top of that, we have a very strong pipeline for new contracts and new customers. And we have also strengthened the SafePoint organization in the U. S. On different levels. So we are quite confident that we will reach the 5,000 saves or more in 2017. We have now close to 2,500 customers and that's up from 2,400 last quarter. And we have now 200 provisional credit banks and that's up from 180 in Q1. So that is also increasing in the U. S. Looking then at the operating margin, which also was on a record high of 13%. I talked about Bank of America. And of course, we have now had the time to digest the Bank of America volumes and we're increasing efficiency as we had time now to work on those volumes. We see that that's of course one element which is important. But we also see then an increased CMS sales. We see increased SafePoint sales. We see continued efficiency in our branches throughout United States. We see improved efficiency also in CIT when it comes to routing and other efficiencies. And I think that there is even though we are having better efficiency in branches in the U. S, there's still a lot to be done in some areas, but it's very encouraging to see the 13% of course. Turning then to the different revenue lines and on this chart we show the mix between CIT and CMS in the U. S. And as you can see actually the CMS part dropped 1%. But the explanation here is that during Q1, Q2 last year we had a lot of equipment sales to a couple of retail customers, meaning that instead of leasing the equipment we sell them as one of the customer takes it over. And that's recorded as to a large extent as CMS sales. So I'm not too worried about that. And as I told you, CMS grew by 9.4% in the quarter. Europe. Europe had an organic growth of 1% in the quarter and we had also 1% the same quarter last year. And the growth is driven by Spain. It's very encouraging to see that Spain is recovering after a couple of years with financial crisis and macroeconomic conditions, which were not too favorable. So we're growing between 3% 4% in Spain, which is a very important country for us, course. Turkey is growing by close to 29% in the quarter, so continue on the same path as before and Argentina growing 68%. Of course, there is some inflation in that, but if you take that apart, it's still a very solid growth in Argentina. We had in the quarter the coin and notes exchange program in Sweden as many of you Swedes at least have read about in the papers and that's of course helping the growth in Sweden. And it's been a lot of volumes coming into our CMS branches at the end of the quarter and there's still some more work to be done. There is a backlog of work that will sort of continue into Q3 and we saw a very good growth in Sweden in the quarter, of course, then based on the exchange program. We have now for the first time seen a stabilization on the top line in U. K. We're around 0 or flat and that's very encouraging as we have seen negative numbers for some quarters now. So now we have a good bottom line and also a stabilized top line. So that's very nice to see. As everybody knows, Easter was in Q2 this year and that means that we have less working days. And then that effect is very difficult to calculate because it's different from different countries and the effect in certain countries is higher than in others. So it's very difficult to judge how that's impacting. It has not a positive impact at least, that's what I can say. So that's why it's encouraging to see the growth in the quarter in Europe in that perspective. When it comes to operating margin, it was at 13.1% and here we see efficiency improvement in many of our European countries. We continue with that. We see that the U. K. Profitability is continuing to increase. We are now all the measures we have put in place the last couple of quarters is now paying off. So it's now on a healthy and good level for a CIT based company. And as I said before, of course, also the margin is, all things equal, also impacted negatively by the number of working days. I can just mention one of the countries which are mostly impacted in the quarter is France due to the less working days. And we also said in the report that apart from some macroeconomic things sort of not working in our favor like the tourism, the level of tourism and things like that, we also saw some tenders coming to the market in the quarter and in the coming quarters and there is a lot of competition for those tenders. Now it's not dramatic. It's business as usual, but it's worth mentioning in this respect. And two things more about Europe, the integration of the Danish business that we bought 1 year ago and the Belgium business that we bought now in the beginning of this year is going very much as according to plans. We expect a lot of synergies coming out from the Danish operation and growth coming from the Belgian operation. That's going exactly as planned. So that's very nice to see. A couple of words on SafePoint Europe. That project is continuing. We have now updated software in Europe. We've taken the version from the United States, updated software. Customer is very pleased to see that, state of the art. We are continuing to build the organization, the sales organization in Europe. We have several tenders out in the market. We're actually selling some safes as well. So that project is going according to plan and hopefully can come back to more details during the Capital Markets Day on that. So that's Europe in Q2. International, as I've said many times, this business is much more volatile than the rest of the business and it's influenced by macroeconomic factors. And we saw in the quarter there was less demand basically for our services. There was quite some decline in the market, the overall market. So the decline in our top line was minus 8%. However, we increased the margin now in from 5.5 percent to 7.5 percent. In those numbers, you should note that, of course, that's including the 5.5 is including the general cargo business that we sold. But in the core of the Luminess International taking out the general cargo piece, there was still a bit of improvement in the numbers. So we try to stick to profitable contracts and profitable deals instead of running for top line and volume. Financials, a couple of things on the financial. I've seen many of these numbers before. Operating margin, dollars 11,900,000,000 for the quarter and rolling $12,000,000 as I mentioned, €17,246,000,000 in turnover for the rolling 12,000,000, which is very nice to see of course. And then EPS growing by 16% to 4.41%. And if you look at the financial targets that we set until 2017, I mean the 2 first ones I've talked about already and the 2 last ones, the debt gearing and the dividend, the dividend is then if you calculate all years in the strategy period on 49% and the debt gearing is at 1.3 versus the maximum target of 3.0. And to be honest, I would rather see it a bit higher, but that's what we're working on. And now the next touch point is, of course, the Capital Markets Day, which we have on September 28 in London, where we're going to update our financial targets for the next coming years and also update the strategy. It's going to be very interesting day, I think. So hopefully many of you have the possibility to join. That was it for me and then we go now to Q and A. And Anders, please if you come here on stage. So I guess we start with the floor. First of all, a question on CMS organic growth in U. S. A. You mentioned, I think, it was 7% growth in the quarter, but that, I guess includes positive FX effects. So I guess it should have been closer to 2% during the first 6 months and in Q2. Do you expect this figure to accelerate going forward as the Bank of America business now are in comps? That's the first question. Tom? I think the Bank of America contract is already rolled into the numbers. So I mean that will no longer have an effect on the organic growth or the comparable numbers. So I think those will even out now in when it comes to Q3 and Q4 going forward. Because I guess over time, CIT is a pretty stable business over there. So I guess if you would reach 5% to 10% organic growth, it must come from CMS. Is that correct? But I think that our expectation is still that CRT will grow as well, probably not to the same extent as CMS. But our ambition is to grow our market share on the U. S. CIT market as well. But we cannot comment on the split between the CIT or CMS growth. But what would take an acceleration of the organic growth for CMS considering that comps for Safepoint is also becoming tougher as that business grows? I think that we can expect I think we can see 2 things. 1 is that we get more volume from existing customers. So they're adding on more volume to us because of the quality and the work we have done. And then there are a number of contracts out there and we often talk about the big ones like Bank of America, but there are many smaller midsized contracts that we are fighting for as well. So I think that those are the 2 sources of growth we will see. And then, of course, we're looking for the bigger ones as well, but that's more hard to predict, yes, I would say. So you would expect I would expect CMS growth to continue in the U. S, yes. Because the question was rather if it would accelerate from the current levels because it only seems to be around 2% for the 1st 6 months this year. We don't comment exactly on those numbers. We stick to the sort of committed to. So I don't go into too much in the business lines. Yes. And also a question on organic growth in Europe. It was 1% in Q1 and 1% in Q2. Still, you had the Easter being a negative in this quarter. Could we interpret could we see that as a slight trend shift that momentum is improving a bit in Europe? Or is this Sweden thing boosting it? Or is it just quarterly fluctuations? I would say that that's a good question. I would say that the Sweden numbers, I mean Sweden is not as a huge part of the business anymore. So that has a limited impact. I think that what we can see is actually that the growth in Spain, Turkey and Argentina is higher than we expected and that's very nice to see. I would be a bit careful to say that this is a trend shift. I would be a bit careful to say that. But the growth rates in some of the countries are a bit higher than we expected in the quarter, as you can imagine, yes. And I could add as well that we do get contributions from the U. K. As we were in a situation in the previous quarters where we had negative organic growth in the U. K. But that situation is now improving and leveling out. And that's, of course, helping the organic growth in Europe. So we said in Europe, it's going to be flat to slightly positive in that area and that we stick to still. And my final question is just on the communication regarding SafePoint because you said that you have a strong pipeline, there is a lag between SafePoint sold and installed. I guess there should have been a lag then in the second half last year between installed and sold. So why weren't you more clear looking back that the first half would be, I mean, pretty slow growth and then it would accelerate if you had that kind of visibility? Yes. That's a good that's a that you can always say. We thought that actually we look looking back the weak spot we had was actually end of December. We had some turmoil in the organization and we should have been more careful looking at the figures that it would slow down. But we thought it would pick up faster than it did. So in that respect, we could have been more careful with the communication. However, we are where we are and I think that we have a strong pipeline and I think that we stick I think the more important thing is that we stick to the number we have communicated. And then but that's going to take a lot of effort of course in the quarters to come, yes. Hi, Karina Ongren at Handelsbanken. I'm just wondering if you have sort of any goals for SafePoint installations for next year? And how should we look at it as you would continue at the same pace? I think that if you talk about U. S. And Europe, we'll come back to that on the Capital Markets Day. But we just said that for the year, the only target we have communicated is U. S. And 5,000 to 6,000 and then we'll come back in September with some more updates on what we expect in the future. Yes. Thanks. Thank you. Victor Lindeberg from Carnegie. Follow-up question on Michael's regarding the Nordics and growth. And if we adjust for the volumes in Sweden that were extraordinary now, would you say that you are still delivering 1% growth? Or is it flat or negative? The 1% of course is a rounded number, but I don't think it's going to have it's not going to have a significant impact, but if that rounding would drop down to 0, we haven't made that calculation. So we don't know. But it would not have a significant impact on the European growth regardless. But the thing is that if you say that the 1% is just coming from Sweden, that's not true. Don't make that mistake. There are more as we said, Spain, Turkey, Argentina and especially U. K, which is more drivers behind that than anything else. And looking beyond these extraordinary volumes in Sweden and maybe also the Nordics as such, We often tend to focus on cost cutting potential to keep earnings margins up. But is there or are there any initiatives focusing on sales effort, what you can offer to the retailers, to the banks in addition to what you have today that we may not really take notice of? Or can you comment on that? Yes. I think that's a very good question, Victor. And we're doing things around that. For instance, we're selling more advanced services. We are offering forecasting and things like that. But that is also a question which I would sort of rather save for the 28th September where we'll go into that more in detail what we can do more because I think that you're right. We should do cost cutting and things like that, but we also in certain countries need to work on the top line as well. But let me come back to that in September. Okay. And final from my side, looking at the revenue target of SEK 17,000,000,000 that you now have accomplished, I said, I think it was set 3 years ago now roughly. And one of the reasons why you are there is, of course, good organic growth, but also a quite favorable FX appreciation of both the euro and the U. S. Dollar. So I think if we adjust for the FX, we're not there. But still, I think the other component in addition to the growth is the M and A. And we have seen one of your biggest competitor being quite active now recently, both in emerging markets as well as here in Europe. Can you comment on how you look upon this? Is it timing? Have you been involved in bigger negotiations here, but it was not the right price, not right place or what is happening on that? So just the first part is you're right. But I think that when the plan was made, we're looking back, I think the organic growth had been higher than expected and the M and A activity has been lower than expected. And that in one way that's quite encouraging to see. I've said many times that M and A is very high on the agenda, it is. We have been fighting for some of these assets as well, but for certain reasons I cannot sort of go into, we didn't succeed. That doesn't mean that we'll not try again. We have M and A very high on the agenda. And I think that on the 28th, we will present some more new angles to that M and A agenda as well, which we haven't sort of maybe communicated before. I was standing here and promising a lot for the 28, I realized, but I'll have to live up to that anyway. So I think that, yes, it's very high in the agenda. We would like to have some of those assets, yes. We didn't succeed for certain reasons, yes. Okay, thanks. Henrik Niels on Nordea Markets. Coming back to the U. S. And more specifically, the comments you made of sales of equipments to customers in the comparison period, can you comment on how many safes that was? And if the value per safe was in line with what you've communicated is the price for you historically? We're not going to go into exactly how number of safes we talk about. But from our mathematics, really selling a safe point upfront or us leasing it has no impact on our profitability, but it's a timing difference. I mean, selling the safe point according to the accounting rules gives you higher returns at the front, but the leasing options give you higher returns over time. But all in, it's pretty much neutral to us. But it's fair to assume that it was a tailwind then of 1% to 2%, something like that, and then it's a headwind of, say, 1% to 2% on organic growth in this quarter. Yes. Yes. I mean that's a reasonable assumption. Okay. Staying with Safepoint, are the revenues per Safepoint in line with what you've communicated historically? Or are there any changes there? And also the price you pay per Safepoint, is that unchanged? That's unchanged. That's nothing. And we also what could be interesting to note when it comes to Safepoint is that the retention rate is very high. Now we're coming into what we don't talk too much about is these are the net installed and we now have a lot of renewals as well on top of that and that's not counted in the numbers, so that takes a lot of time. But and that's a good sign because then when they had the SafePoint for a certain number of years, they renew it and the retention rate is very, very high. So the solution we are offering is appreciated by the customer and it's very sticky, if you want. If you started, you don't go back to CIT, you continue with that. So that's very encouraging to see. So the retention rate is very high. Okay. And a follow-up on that. What happens to the revenue you get from the clients when that happens and what happens to your returns and margins? When we sell them, you renew a contract within the next year? Usually not very much happens. You write a new contract of 5 years. Maybe you update the software, you update the safe itself because it's 5 years, it's a bit less than 5 years, then it's a bit of worn out and they want to have a new safe and maybe we update the software with the new functions and things like that. But it's not you cannot assume that the prices or the margin is higher that you shouldn't we try to keep the margin, keep the price and so on and offer a good solution, yes. Okay. And how has the pipeline of CMS standards, if we exclude Safepoint, developed during the quarter in the U. S. Specifically? Every Every quarter, every month we meet with the U. S. Team, we have a long list of tenders or contract negotiations, a lot of things going on. We win some smaller ones. The pipeline is quite big. But as you know with all the customer negotiation, you never know when and if it's going to happen. But there is that's why we still say that there is a lot of potential in CMS in U. S. Because of the contract list, the potential contract list, the potential customer list is long and there are big customers out there still, yes. And I can just add that these are very long term discussions because it's really outsourcing of CMS is a dramatic shift for the customers. It means a lot to them when they actually take the decision to outsource the cash processing part. So it's very, very long and it doesn't shift from a quarter to quarter that it really grows or it declines. But the long term direction is very clear that the pipeline is getting bigger and bigger. Okay. And a couple of more questions from me if I have time. You have the mic, so see or maybe expect to see a similar behavior from Brink's in other markets? You said Brink's, so that's for you. No, in general, we actually the most competitive market we've had so far is the U. K. As I said, it's we have a lot of CIT business and that's more volatile when it comes to price discussion and things like that. In general, we don't see that much of competitive behavior in like in France to be honest, no. Thank you. And one last then. What was organic growth rates in Argentina and Turkey? And maybe also if you could comment on the growth rates in SEK. In SEK, that I cannot give that. I have to talk about 200. So we had in Europe, let me get back to my notes. We had in Spain, we had between 3% 4%, we had Turkey 29% in Argentina 68%. Thank you. Just a follow-up on the Lifto's question regarding M and A. It seems like Brink's is more interested these days also. Do you see competition for these potential targets increasing? Have you seen price tags go up in recent years? Let me answer a question like that. I mean it's been quite an interesting year in our industry 2017. Brings has a new CEO, new strategy. Prosegur has made the IPO. I think that the sort of competition is to some extent increasing. Yes, it is. Everybody has their own targets now and have higher ambitions. And that's quite natural and that also that the competition for these assets are increasing. It's very difficult to say if it's a general trend that the prices go up, Some assets it has been the case, but some assets I don't think it has. But rivalry among the players is getting tougher, yes. Okay. Then let's move on to the telephone conference. Operator, do we have any questions? We do. Thank you, sir. First question comes from the line of Daniel Thorson, ABG. Yes. Hi, Daniel from ABG. Thanks for taking my questions. The first one is regarding to Europe. As Spain, Turkey and Argentina are growing much faster than the other European segments, profitability should contribute to a larger extent. Can you comment anything on your profitability within those regions and within those countries, please? I mean, in general, I think your analysis is correct. I mean, particularly in a country where we have fantastic growth like Argentina, I mean, the more volumes, the higher the profitability. So that correlation is very clear. So I think that's particularly true from for Argentina and Turkey. Spain is much more in a stable situation where you I mean, the incremental growth you have, of course, contributes, but it doesn't have the same effect on the overall margins for Spain as it has for Turkey and Argentina. Okay. But the Turkey and Argentina margins, are they higher than the European group margins, I would say? I think we can say that Argentina being in Latin America has a higher margin than the average group margin, yes. Meanwhile, Turkey is more in the middle. Yes. So regarding the 2 most recent acquisitions that you have made in Denmark and Belgium, have you reached all of your synergy effects and improvements that you wanted to reach? Or do you some more short term that will come in the coming quarters as well? So if you start with Belgium, that's we put the flag in Belgium. So that's more of a growth case. So what we do in Belgium is very much sort of export the knowledge from the rest of the European LUMIX countries Belgium to get the growth in certain areas there. I think there's a big shift in the Belgium market. We like to take advantage of that. When it comes to Denmark, it's much more of a synergy case. We had before 4 branches in Denmark. We're closing down 2. I think that we see that we are working according to plan. The big effect as we think on the margin we will see in mid-twenty 18 something like that. It takes about 18 months to get the synergies out and we have an influence on the margin. Okay, excellent. A final question on U. S. Given the 5% organic growth on the back of quite tough comps and that we saw your competitor only reporting 2% organic growth, do you consider yourself gain market share? And if so, in which areas specifically, CIT or CMS or similar Safepoint solutions? That's right. We're gaining market share. According to our estimates, it's in all three business lines, so CMS, CIT and SafePoint. Okay. Thank you very much. That's all for me now. Thank you. The next question comes from the line of Alan Wells from Exane. Hi, good morning. Just a very quick one for me. We've seen some of your competitors, G4S, Brink's see significant growth from cash recycling offerings to things like Cash 360. Could you maybe provide some details how you're looking to build out your full cash solutions beyond SafePoint? What are your plans, timings, etcetera? And maybe perhaps you can talk a little bit about sort of profitability and margins around some of these more advanced solutions? Thank you. That's a good question. I think that what we have said is that we are very much focusing on our SafePoint solutions in Europe and U. S. We think we have a competitive advantage and we're driving that. And that's sort of different customers than the customers for recyclers. Recyclers are usually big retail outlets like the Walmarts and things like that. So it's somewhat different customers. Now we service a lot of these recyclers through CIT, CMS and we have actually very good business. We are still analyzing if and in which way we should go into that area. We are not certain yet. We're actually at the state of analyzing that. Meantime, we're focusing very much on our SafePoint offering. Okay. Thank you. Thank you. We have no further questions on the telephone lines. Please continue. Any more questions here from the floor? Then I say thank you very much for coming and hope to meet as many as possible on the 28th September. Have a nice day. Thank you.