Earnings Call: Q2 2016

Jul 29, 2016

Morning, everybody, and welcome to the Q2 presentation of Loomis. My name is Patrick Anderson, and I'm the new CEO since beginning of May. Today, we want to talk about these points. So we're going to go through the highlights of Q2 'sixteen, of course. We're going to look in more in detail into the segments, the financials, of course, and then there is a possibility to ask questions. If we look at the quarter 2 2016, we had organic growth of 6% versus 1% in the same quarter last year. We had highest organic growth since the IPO in 2,008. And we had very encouraging growth in all segments and especially then to mention United States with a growth of 13%, which is impressive of course. We have continued positive development in several countries, Spain for instance, Turkey and Argentina. When it comes to the operating margin, we had a margin of 10.7%, which is then 0.6% better than the same quarter last year. We had margin improvements in all segments and we had increased revenue from especially CMS and SharePoint in the United States. And as always, we work on the efficiency and we see that giving results in the different areas of the business. And then EPS improved by 21% to 3.81% versus 3.14% in the same quarter. And we also divested the general cargo piece of our international business on July 1st. And I will come back to several of these points during the presentation. Two slides first on the margin and this slide is then showing the operating margin development in Q2 in the single quarter since 2009. And as you can see in Q2 2016, we had the highest margin in Q2 ever. And we should mention or I should mention on this slide that in Q2 2015, we had a ramp up of the Bank of America volumes in the United States, which of course had an influence on that margin that year. And if we look at the margin development in a different way and here we are showing the rolling 12 months development of the operating margin and that's measured by the end of Q2. Every year we see that it's been a steady and growing margin development year by year and this is very much according to the plan and to the strategy we have set out some years ago. If we then look at the sort of more underlying parts of the business, we can see that when we're looking at the branches and the development of the branches And this is very important for us that we improve the efficiency of the branches. We have about 400 branches in Loomis or more than 400 branch and the profitability. And we are measuring performance on a regular basis when it comes to the branches. And we also very much incentivize the people working in the branches and other people of course as well when it comes to the performance of the branches. And as you can see from this slide, we had actually the highest number of performing branches since the IPO in 2,008. So we had only 12% non performing branches and 88% performing branches. And I expect this to continue as Q3 and Q4 actually are sort of best quarters when it comes to efficiency. And especially here we can see that branches in the United States, in the UK and France have improved during this quarter. If we then turn into the different segments and let's start with Europe, We can conclude that we had an organic growth of 1%, which is about the same level as we had last year. There is a good development in, for instance, Spain, which is back on a growth track after some years of non growth and some factors behind this is of course sort of the macroeconomic situation in Spain is improving. We are taking retail customer contracts and we're also developing SafePoint in a very positive way in Spain. Another country which I like to mention is of course Turkey. Turkey is growing very fast more than 50%, I think it was 55% in the quarter. And we are continuously picking up new contracts in Turkey. And just a few comments on Turkey as it's been sort of in the headlines during the last couple of weeks is that the operation in Turkey, our operation in Turkey is working as always. So there is no impact basically on the operation nor the sort of the one we're having internally in Turkey or the international one, so transport going in and out of Turkey. And this state of emergency that's running right now, it's not impacting us at all actually. And we actually saw a demand for cash increasing in the beginning of this sort of Cooper tent. Now when it comes to long term perspective, I don't dare to speculate how that's, but we are sort of monitoring that of course on a regular basis. When it comes to the Nordic countries, we had as we have reported before a slight negative development of the volume and here we are working very hard on sort of getting the efficiency in place when it comes to efficiency in terms of routes, but other aspects as well. When it comes to SafePoint in Europe, we see more and more interest and demand from our customers through Europe. And I would say that this is very much close to my heart that we're going to develop this business even further. We see now good development in countries like Spain, France and Sweden, but here we will put even more emphasis on this in the quarters and the years to come. And we now put up a dedicated project leader, which is working closely with the different countries to develop this business even further. When it comes to the margin, the margin improved by 0 point 7% to 12.9%. And of course, as always, there is a strong focus on efficiency in the European countries. And that's been very successful in this quarter. It is also very satisfying to see that U. K. Business is improving even though we are not sort of at the end, but we see quarter by quarter that it's the business is picking up. We have better quality when it comes to the operation. We have better service to our clients. We have a better efficiency when it comes to running our branches, etcetera. So that's very encouraging to see. As I said, we are not at the end yet. There is more work to be done. A couple of comments on U. K. When it comes to Brexit. And as we have said in the report, our operations in the U. K. Is very much a local one. So we're not transporting anything in or out. So we have a couple of Swedes there, but then the rest is U. K. People and we don't expect or don't see any effect on the Brexit on that right now. When it comes to our international business, which I will talk a bit more about later, it could be that the sort of turmoil around this situation when it comes to trade between Europe and UK, that could be sort of beneficial, but it's too early to say right now. I mean as with Turkey, we're monitoring the situation very carefully. When it comes to United States, we had a growth of 13% versus 5% in the same quarter last year. And what's encouraging is that all business lines in the United States are growing. So CMS, CIT and Safepoint. And as I said, we took over several contracts this time last year and that sort of we're fine tuning that volume getting more efficiency out of that which is also behind the margin improvement. And SailPoint is continuing to develop in a positive direction. We had a growth of over 22% in the quarter, but also the CIT business is growing about 7%. Operating margin increased by 1% to 11.2 percent. And of course, as you understand, the increased share of CMS and Safepoint is driving that margin expansion, but also the work on the cost control and the efficiency of course. With this growth rate we have in the United States, I mean, the challenge is very much to hire and train people. And that's sort of our biggest headache right now to get the right people on board and to train them in a proper way. When it comes to the CMS share in United States, there is no surprise that this growing and it's now on a 34% level. And as I said, it's helping us to expand the margins and this will continue as I expect. Some words around SafePoint in United States. We have now in this quarter installed about 1300 safes. They are installed not sold or both sold and installed in the quarter. So we have now a total of 17,200 saves and more than 2,000 customers and 170 provisional credit banks. And we have a pipeline of customers. We are working on a regular basis and we expect them to sell about 5,000 safes a year in the United States. And there are as communicated earlier about 300,000 points which are suitable to have a safe point. So there is much, much more work to be done of course on this, which is very encouraging. And as we see it, we are now selling the majority of the safes in the U. S. Market. International, just a couple of words on the international business. This is somewhat different business from the rest. It's impacted by politics, by macroeconomic events of course and also stock exchange movements for instance. So that has both a negative and a positive, sometimes a very positive impact on the business. And as the word says international, it goes very much across country lines and border lines. And here the thing is that we should all are working very much on getting this synchronization between the local business and the international working and we have made a lot of progress, but there is some work still to be done. And if you look at that business, we saw actually in the quarter a higher demand for transports of notes and precious metals. So for instance, that gold was taking from Asia back to U. K. U. K. Is acting as clearinghouse or the banks or the Central Bank is acting as clearinghouse for gold. We also saw some very much activity around the pre Brexit when it comes to wholesale sales of notes for instance. So these kind of events is impacting the business. We see however that the demand for gold deliveries to India is still on a lower level due to the import taxes that is impacting the business. So the higher volume in this business increased the margin to 5.5% in the quarter. And as you have some of you at least have read, we have now divested the general cargo piece of the international business on July 1. And apart from making a one off positive of CHF9 1,000,000, I think that this is now giving us even better opportunity to work on the interface between the local countries international and focusing on what we really want to develop, which is the storage and transportation of precious metals, art and notes. So we have now more even more time to work on that and that the one off positive will be reported in Q3. Statement of income, I mean, I've been through many of the points, but just to highlight that we had organic growth in the quarter of 6%. We had a margin of 10.7% and the earnings per share increased by 21% to 3.81. In 2014, 4 financial targets were communicated internally and externally. And this you see on the slide, which is then the revenue which should increase to SEK 17,000,000,000 by 2017. The EBIT margin or the EBITDA margin should be between 10% 12% during the period and the debt gearing should be maximum three times and the dividend should be between 40% 60% of net income. And these targets have been very much sort of in the center of the company both on a daily basis, but also on a quarterly and a yearly basis. And many people have worked along these targets. My task is of course to deliver on these targets until 2,000 end of 2017. But now we will start a process to develop an strategy and new financial targets beyond 2017 and that work will start immediately after the summer. And I expect to be able to have Capital Markets Day somewhere mid second half twenty seventeen. So by that slide and by that information, I hand over to questions. So maybe we should start with some questions from the floor. Hi, there. Staff Novo Berri from Handelsbanken. First question on disposing the general cargo operation. Were there any cost synergies between general cargo and national service? For example, did you split offices or vehicles, etcetera? There were, of course, some synergies when it comes to sort of back office functions and so on and so forth. But I don't I cannot go into detail how much that was of course, but there's some things were there. And we're now supplying services to the buyer, to Rynas when it comes to IT, when it comes to accounting and things like that for a period of 6 months. So that will still supply, but after that, that will end. And on that deal, how much of the 6% organic growth we saw in international service in Q2 was driven by the general cargo operation? To some extent, it was a bit was from general cargo, they did better. However, the majority comes from international. So both parts did well. All right. And you consolidated Cardtronics in the beginning of Q3 last year. So the European sales should be impacted by the additional sales from that acquisition. In Q2 then, Cardtronics had sales of SEK 176,000,000, which translates to 2% top line boost that should come in this quarter. However, looking at your numbers, you had a real growth of 2% and organic growth of 1%. What am I missing here? I mean, I think that if you talk about U. K, there is quite a volatile market right now. So the many contracts up for grabs, many contracts renegotiated and that is of course impacting the situation. We once we win some contracts, we lose some contracts, we have to renegotiate the price in some contracts. So that's impacting the top line in the U. K. Okay. But I still don't understand how it makes up the 2% real growth. You had a 2% contribution for Cardtronics and a 1% organic growth. Maybe you should fill in Anders, but that is the net of all the contracts and all the deals we have made. So that's the way it looks. Anders, do you have any comments on that? I mean, the 1% difference is the acquisition of the Cautronics retail business. I mean, that's what makes up the that's acquired growth in Q2 and not organic. Okay. But the total sales for Kartronics suggests you would have a 2 percentage points top line boost. On the Because you had sales of $176,000,000 from Cardtronics. So that's 2%. But it only impacted this quarter by 1%. Yes. But you have I'm not sure exactly that I can tie up the number, but you have you could have rounding differences in there and it's not as easy as 1 plus 1. Okay. All right. Finally, on Europe, excluding Turkey and Argentina, what would you say the organic growth for Europe was? We don't split it like that. But in general terms, you can say that we have very high growth in Turkey and Argentina, as you say. We are quite stable in many of the sort of core European countries and we have a slight decline in the Nordic countries. That's quite obvious. That's the way it is. Okay. Thank you. Henrik Knudsen from Nordea Markets. In the international business or general cargo that you're selling now, is there a different seasonality we should expect going forward now or? I would say, I mean, the international business is, as I tried to explain, is quite volatile. And I think that we have to expect some kind of volatility in that the piece we have still left. And that was the same with the general cargo piece we sold off that was quite volatile impacted by macroeconomic events, art exhibitions and things like that. So there is more volatility in that business, yes. Okay. Moving on to the U. S, you had a very solid margin trend there. But to be honest, I had expected even more given the past few strong quarters. Is there anything in the numbers here that is weighing on the profitability? I mean, I think that if you're growing at the pace like we are doing, I mean, it costs quite a lot to start up sort of new contracts, hiring people, training them, you don't get the efficiency right away. And that's what I tried to highlight when I talked about United States that is costing something in terms of efficiency and so on. Yes. Okay. And staying in the U. S, I mean, underlying organic growth of 14%, very strong, but it's starting to feel like thin air here. Do you have a backlog to support this kind of highest level of growth going forward? Or can you guide us here because I mean, talking about United States, we expect United States to grow, of course. Now at what pace it's very different difficult to say because we don't know if new contracts when it comes to CMS will be outsourced. So that's one thing. We don't know at what pace we can take contracts from other competitors. So you say we'll grow, but at what pace it's depending on these bigger contracts coming out, how our competitors are doing. So that's the best answer I can give you right now. Thank you. Mikaela, Matanzky. First question on U. K. You sounded cautiously optimistic on the margin development there, and you had a good quarter in U. K. Is it fair to assume these improvements to stay on and be a good delta then for the coming quarters? I mean, our expectation is, of course, that we will continue to develop the U. K. Business. We had some ups and downs during the past year, so we are a bit cautious, but we expect to develop U. K. Even further, yes. Other risks, yes, there are of course, but there is more to be done in the U. K, yes, there is. And also a follow-up on the question about the U. S. Margin. I mean, historically, previous management has talked about the difference in terms of the mix of the business, CMS and CFT being the main explanation for margins being higher in Europe. And now, I mean, looking at trailing 12 months, it's not a major difference in terms of mix and still the European margins is 150 basis points, 160 basis points higher. Do you believe those 150 basis points, is that related to those costs to grow? Yes. Is that a fair assumption? Yes. That's a fair assumption. I mean, in Europe, we have had many, many quarters to fine tune the volumes, if you understand. I mean, that's still in the progress in the United States that we sort of take new contracts growing, but it takes some time to get the maximum profitability or the optimal profitability out of that. So that's right, yes. And my final question is regarding M and A. I mean, could you comment on what the pipeline looks like? What you believe is reasonable in what geographies you want to strengthen your position, potential size of any targets, etcetera, your thoughts on that topic? First of all, of course, there's been a lot of discussions on M and A. It's very high on the agenda, of course, and it's very high on my agenda and everybody's agenda. And I think that there are are 3 types or at least 2 types of M and A activities we like to look at very much. It's of course to get into new countries, which have the right setup and so on. If we're looking at the Latin America, for instance, can we do there more there? Can we look at Asia? And we are looking at those geographies where we don't have a base right now. That's one thing. But we shouldn't forget that there is also opportunities to make acquisitions in countries where we're present, which we actually can sort of drive efficiency even further because we have an operation and 1 plus 1 equals 3. So we'll look at all those aspects. And then when it comes to M and A, as you know, I mean, it takes 2 to tango. Sometimes there is a bit of emotions involved when it's a family company. So it's not like it's not that easy always together, but certainly very, very high on the agenda, yes. And then one more. I also do a question on the Nordics end. You mentioned a slight decline. And could you just give us your thinking about the price and volume development? Because I've seen that, I mean, it seems like you raised prices quite significantly to mitigate the drop in revenues. But I guess it's also a risk that you accelerate the volume drops by raising prices too much. What are your thoughts? Yes. That's a good question. That's what we're discussing all the time, what is optimal level. And at the same time as we because it's more expensive for us and then we need to increase prices, but there is also a limit to how far you can go of course. So we are very cautious on that balance, but I think that we are struck the right balance right now. Yes, I think so. But you don't see an accelerated volume? No, no, no, I don't see. No, that is not as of right now, as I can see, that is not sort of an issue. There are other issues when it comes to the volume decline and then prices, I would say. Victor Lindebe from Carnegie. A question on the U. S. Business. And looking at the ATMs in the U. S, there's regulation or mandatory change coming into ATMs that they should be upgraded in October later this year. I guess this mostly goes for the retail part of the ATMs, but I mean, it's quite costly. I heard about $3,000 per upgrade and potentially the retailers are not that eager to do this. Could you is this something you've heard about? What do you think about this? Should we see this as an incremental negative perhaps for the CIT volumes? And how important is this ATM CIT for you in the U. S? Just to understand that. Yes. We had a full day session with the U. S. Team and they didn't bring that up. So I expect that that's not high on the agenda. Maybe Anders knows more about that, but I don't know. So it's what it was not on the meetings with the U. S. Team, not on the agenda. So I guess that's not high on their agenda either. So that's the only thing I can say. As they see it, there's no major impact, no. All right. That's clear. And also following up on Henrik's question regarding the growth in the U. S, I mean, it's now double digit, but in light of the Bank of America volumes now being in for basically 1 year, I guess, comps year over year would be much, much more difficult. So going forward for the second half of this year, would it not be quite prudent to assume that these growth rates will slow down dramatically? Just to understand perhaps this is more of a question for Anders. I mean, yes, maybe Anders, you have a go at this one. I mean, that's a very correct analysis. I mean, it will be hard to defend the growth rates, I would expect, in Q3 and Q4. I still think that we will have good growth in the U. S, but the comparables, of course, become much more challenging because of those volumes now will be organic and not. Okay. And final Nitigrid question for me. And looking at Turkey now, it's been growing quite nicely. How big of a portion of the European business would you estimate this is? It's not that big. It's Are you talking 5% or No, less than 5%. Less than 5%. Yes. Okay. Thanks. Just a short one for me. Out of the roughly 1300 SafePoint you installed this quarter, how many of those did you lease? That's a question for you, Anders, this one. Less than half. Any more here from the floor? No? Then let's move on to the telephone conference. Operator, do we have any questions? Thank you. And there are no questions at this time. No questions? There are no questions coming through. Please continue. Okay. Thank you. Last question on the cost pressure in the U. S. Business. You mentioned problems finding the right people and that's a mitigating factor to grow. But I mean, what's the risk of wage significant wage increases basically on the back of this? So I mean as we see the U. S. Economy because the labor is doing quite well. So it's in the sense that it's quite difficult to find people and train them of course. And then in some states there has been implemented as minimum wage levels. And what we have to do is of course one thing is, of course, to make the operation more efficient, but we have to raise the prices and that's what we're doing. There's no other way out. So we need to raise the prices when it comes to when things like a minimum wage increase. So that's what we do in many of our contracts that sort of we have written that in some context we haven't. So then we have to negotiate that, but there's no way out. A quick follow-up on that. So of the growth rate in the U. S. Now 14%, can you tell us how much of that is just inflation related to raising wages? No, I mean, I'm looking at Anders again, but the main majority is really underlying growth in CMS, CIT and SafePoint. There is a bit of an effect and I don't have that number, but it's not like pumped up by price increases, not at all. It's an underlying business doing well. Thank you. Thank you. Follow-up from Victor at Carnegie. Patrick, you've now been with the company for basically 1 quarter. Can you share some thoughts on your findings and what you think is I mean, if you were to mention, I gave you 2 positives and 2 negatives, and you don't turn the negative into a positive. So what is your findings so far of Loomis as a company and what you think about this? I mean, I had been traveling around meeting a lot of people, meeting a lot of customers and been around a lot. And I mean, I see a very strong operational driven company when it comes to really focus on your everyday activities, getting the best out of the people, the best out of the business. It's amazing to see and it's a very much sort of KPI driven, performance driven culture. It's very much a cost culture, which is incredible. Good management. Met a lot of really good managers, good people. I think that also that we are focused on what we're doing. I mean, we're doing this. This is what we do, CMS, CIT, Safepoint and whatever. I mean, that is giving us an edge. We're really a focused company. And on the negative side, I mean there is no negative, there are more opportunities. I think that what I mentioned before, we there's more to be done when it comes to international business, get that even stronger. As you saw from the figures, it's pointing in the right direction, of course, but there is a bit more to be done. So that's a clear opportunity. Another opportunity is Save Point in Europe, as I mentioned. We can be better at sort of driving that out. But that's not weaknesses in the sense, but it's more like opportunities, I would say. All right. Thanks.