Earnings Call: Q4 2020

Feb 3, 2021

Thank you very much. Good morning, everyone, and welcome to the Q4 presentation from Loomis. I am Patrick Anderson, CEO of Loomis. And with me here today, I have Christian Akerbi, who is our CFO and Anders Hakkar, Chief Investor Officer. I will give a shorter presentation in the beginning of the quarter and then open up for questions at the end. So let's start the presentation and turn to next page. Just a few comments on the situation on the corona pandemic. We have been running all our branches across the world, but not everyone at full capacity. So the service level has been very good all through this pandemic period. I also like again to stress that there are still false rumors circulating around cash that spreads the virus. That is not true and that's been denied by medical experts. And there is more information available on our web Paige. I would also like to mention that we are taking advantage of the current situation. We are signing new customer contracts, especially in the U. S. And as we see it now, we're taking market shares in the market. And we also I'd like to I'll come back to that, but I think that during this year, the Loomis employees have done a fantastic job maintaining a very high quality of service despite a very challenging situation, as you can imagine. So I would say that we have quickly taken a number of decision to save the operational health of the company. One example is, as you can see, the free cash flow for the year, which is at 129%. We are well prepared to act on opportunities which are opening up right now, I would say, especially in the U. S, but that will happen also in Europe. So we are on our toes and we're ready when the European market is also opening up. So let's turn to next page, which is the highlights of the quarter. We'll get back to some of these points at the later stage in my presentation as well. So let's recent events. So we launched LoomisPay, which Giselle Complete Payment Platform in Denmark in October last year. And the reception has been positive, and we have signed already a number of contracts. And we are now launching or we launched on Monday in Loomis. So that's our 2nd country to follow. And the plan is then, of course, to roll out the more Nordic countries, but then later also in other Loomis countries. And to support and make it more transparent, LoomisPay will be reported as a separate segment as of Q1 2021, makes it easier for everybody to follow. Safepoint expansion is going very well. We'll talk more about that when we look at the U. S. Numbers. We signed the biggest contract ever, 700 units at the end of last year. We have now, in the light of the continuing corona pandemic, decided to remove the margin target, which is 12% to 14%. And we expected a quicker recovery, especially in Europe during Q3, but we're seeing now that Q1 will still be led by the pandemic. We are now also planning to have a Capital Markets Day at the end of this year to reveal some percent new numbers for the next strategy period. Real growth was at 7 minus 7%. And the acquisition of Alta Martia is completed, and that's the Finnish ATM company, and that's a very strategic acquisition, which I could come back to as well later on. Organic growth was at 9% minus 9%. So we can see that the improvements we saw in Q3 has slowed down a bit. And that's again due to the pandemic situation with the pandemic. However, we see now positive growth in U. S. Compared to negative growth in Europe. And as you know, we have a different customer structure in the U. S, but also we've seen that market is coming back in a nice way. And all our branches are open, as I mentioned. Operating margin, excluding LoomisPay, was at 11% and then including LoomisPay 10.3%. And as you will see later, U. S. Is really driving that margin. So if we then turn to next page, EPS was to a large extent then impacted by the restructuring programs. And Christian will come back at the end to talk a bit more about the different elements in the P and L, the operating cash flow in the quarter was at 80%. And our programs within cash management and managing the capital expenditures remain to be very high on the agenda, and that's what you see, of course, in the cash flow. And then the proposed dividend is SEK 6, which is then above 60% of net profit. Let's turn to next page. And just to illustrate the operating margin development, to put that into perspective. So you can see after a dip in Q2, we made quite a strong recovery and the margin is again on a more more normal levels. And of course, if you look at Q3, we should always know that, that is our strongest quarter because of the holiday period, etcetera, especially in Europe. So then let's turn to next page and talk a bit about Europe. We closed the acquisition of Automattia, the Finnish high quality ATM company with a very strong market position. And that is going to be our platform now 4 rolling out more ATM services to different customers, especially then across Europe. And then, of course, to win more advanced ATM business from our customers. And I think that, that would be very good initiatives in the coming months. We have now we have and are in the process of integrating the businesses we acquired in France, Sweden and then, of course, Finland. Organic growth in Europe was minus 17%. And as everybody can read about the pandemic situation in the newspapers. Europe is highly affected by this. And it's a bit tricky because it's very much on and off. We are then staffing up and then there comes new lockdowns and we have to reduce and back and forth. So planning is quite tiresome and difficult. But as I said in the beginning, there are a lot of opportunities out there. The market is changing. I think that this will drive more outsourcing. I think that some of our competitors are in worse shape than we are. I think that we'll come out more ATM business and Safepoint business. I think that what we see is that technology and automation will also play a bigger role in the cash industry the coming years, and we can look at U. S. At a later stage here. Marty and Dan at 6.1%. And that's, of course, then affected by low volumes. We have a number of sort of Loomis cost cutting initiatives going on. It was more normal Loomis works, new Loomis work. But we also have then a more comprehensive restructuring a program ongoing, especially then in the U. K, where we will say, unfortunately, farewell to more than 900 people, I think it was around 920 people, which have or will leave Loomis in the period here, which has passed and will come. If we then turn to the next page and then to talk a bit about U. S. Overall very, very strong performance, of course. Positive organic growth in the quarter, 0.3%, but it's been sort of accelerating throughout the Q4. December was a really good month. We have signed the biggest SafePoint contract with 1 of our bigger customer, 1700 units. They have not been installed yet. They are about to be Stolz. We have State Point revenue continues to expand. We have had a 10% growth in Q4. And now all 18% of the revenue in the U. S. Is really coming from Safepoint, which is a fantastic number. And we expect also that this will and is going to increase in the period to come. We have had very high quality of services in the U. S. Market. And we see that, that has attracted new customers. We're gaining market shares a new customers, which is very promising for the future. And we see also that the trend with accelerating ATM revenue, that is continuing. So more and more banks have outsourced their ATM work to companies like ours, and that has been a good revenue engine for 2020. Operating margin is at 17.5%, which is absolutely fantastic, of course. For the full year, we are at 15.7%, which is also a fantastic number in the light of what's going on. That's all time high operating margin for the Q4. And of course, there are a number of factors driving that safe point, of course, is 1, but also that we are very careful on the customer side, which customers to onboard signed contract with. And we have been very successful in all these efficiency programs in the branches that is driving the margin. And also we have had, of course, as we have had less people and less people on the streets, the cost of medical expenses have gone down. So this is at least one positive effect coming from COVID-nineteen. So before I hand over to Christian, I would like to take this opportunity to thank all employees of Loomis for their loyalty and hard work during 2020. Really proud of the team. Many listening in now, I know. So thank you very much. So let's then turn to next page, and I hand over to Christian to comment a bit on the P and L. Please, Christian? Perfect. Thanks, Patrick. So looking into some of the items below EBITDA. If we start with the acquisition related costs, full year, this amounts to approximately EUR 160,000,000, which a relatively high number, and it's mainly due to the acquisitions in Sweden and France and the fact that they are bolt on acquisitions, as we call them. That includes a lot of overlap in the operations, which is good. It implies high synergies, but also cost to remove the fixed cost. So for example, in Sweden, both companies had more or less a full country coverage with branches that duplicates the setup, so many branches are being closed without any impact on the service offering. And that's, of course, part of our business case to acquire this operation. If we then look into items affecting comparability, we have approximately SEK200 1,000,000 full year. This is mainly the restructuring program of approximately SEK160 1,000,000 that we communicated in Q3, and it also includes the goodwill write off that we also have communicated earlier this year. Majority of the restructuring charges have not been recorded. And these programs are developing according to plan, and we expect to see the full impact at the end of Q2. And the reason here is, of course, that not everything has been in the detailed level yet. And that's also why we are somewhat careful to talk about exactly which countries that are included, Except from U. K, of course, because there it has been communicated. So then we move to the tax rate. Tax rate for the full year at close to 35%, mainly as a result of uneven earnings. Countries with relatively low tax rate have lower earnings, for example, than U. K. Coming back here again. And there are also some non deductible expenses impacting. Earlier this year, we expected that the tax rate would be around 31%. However, when the pandemic continued in the Q4, this number increased. So the very high tax rate you see in Q4. It's a catch up effect for the full year to get the full year ended correctly. As of today, our current best estimate is that we will come back to the same level as before the pandemic when the situation stabilized and volumes start to come back and as well as earnings in the different countries. So with that, I leave the word back to you, Patrick. Yes. Thank you very much, Christian. And then let's turn to the next page and to the Q and A. So operator, we now open up for questions, please. The first question is from Daniel Tujan of ABG. Your line is now open. Yes. Thank you very much. So my first question is to Christian. On the nonrecurring items of SEK14,000,000 in the quarter. That was way higher than I expected, at least some SEK 35,000,000 SEK 40,000,000 above my figure of SEK80,000,000. What did I miss there, really? Was it anything new that appeared in the quarter? Or did you do the U. K. Restructuring earlier than we thought before? We have included more or less the total restructuring accrual now already in Q4. We stated in conjunction with the Q3 report, we said mid this year. And that's also what we see now more or less all, I would say. It might be some small impact in Q1, but majority of restructuring is He's now in there. So the SEK 163,000,000 is the major impact you see in the SEK 114,000,000. Okay. So we shouldn't expect another $20,000,000 $25,000,000 in the first half of twenty twenty one then, I guess? No, not that much. You will probably seen some, but not in that magnitude. Okay, excellent. And second one on the acquisition related costs. I mean, they continue to be quite high, and now they are also increasing. And you haven't really done any large acquisitions recently. And in terms of acquisition contributing to sales, that is obviously very, very low now. So what is that really in this quarter? Majority part in Q4 is that we are merging the business in Sweden. So we acquired NUKAS earlier this year. And in the Q4, the operations are being merged. And by that, we also closed down branches. So that's the high cost in Q4. Should we expect that level going forward? Or should it come down significantly from next quarter? Yes. It will come down significantly. This is related to NUKAS acquisition, and that is more or less completed now. There might be also some small spillover, but not close to these numbers. Okay. Excellent. And a final question from me on the U. S. Margin. You write later in the report that if you adjust for the provision revaluation of CHF 26,000,000 that basically drove half of the margin improvement year over year. But you don't report that as a non When you report the margin on group level, why don't you do that? And should we expect to see positive support from that going forward as well? I mean, that's more part of the sort of day to day operation, and it comes as a result of very well done by the U. S. Team related to casualty and medical, so we can reduce the cost. If you look into the last 12 to 18 months, These costs have been included there. So that's the reason why we don't have it as nonrecurring when it's reversed because we have taken the cost in the operational result earlier. Okay. I see. But we should not expect that effect going forward, obviously? No, no. Okay. That's it. Thanks. The next question is from Danny Johansen of SEB. Your line is now open. Good morning, Christian and Patrick. A few questions from my side as well. First one, Loomis Pay. You said you were going to report it as separate segments now as of Q1. Do you plan to report other KPIs as well, for example, a number of customers installed you in it or is it just relevant to show the revenue costs perhaps at this stage? No, I think we will come back with some KPIs, but we haven't decided exactly what which KPIs. We have to be a bit careful to really report what is important and driving the business. But we will come back to that. So some kind of separate information apart from the P and L and the finance, yes. But exactly what, we'll need to come back on that. Okay. Interesting. A question on M and A. How high would you say it's on the agenda currently? Are you more focused on internally getting the operations into shape and then perhaps do M and A? Or do you have the capacity To work on both now in the short term. No, I mean, I think we have the capacity to work on both. Of course, high end, the agenda is, as you say, I mean, we have done a lot of work in the restructuring and taking down CapEx and cutting costs. So of course, we need to see that the top line is coming back. And I think the business is in shape, but we need to see that and manage that situation. There are a couple of very interesting possibilities when it comes to M and A, and we will pursue them. But of course, we have to evaluate each M and A case very carefully, of course, so it doesn't sort of take away focus from our day to day operation. But yes, M and A will be on the agenda, yes. Thanks. And what sort of M and A will be most Interesting to you, is it adding more other types of technology, adding to your ATM capabilities or adding more Scale where you perhaps are subscale today or what's prioritized in terms of M and A? I think that right now, as we bought the ATM company in Finland, we have that platform. We are also up and running with LoomisPay. So we don't need more technology there. I think it's 2 things. 1 is more bolt on acquisitions. That's number 1, to really drive synergies. Secondly is technology to drive the core business. Because there are many things happening around technology. I mean, Safepoint is one thing, recycler just one another thing, but there are other types of things you can do to support core business with technology. So I would say these 2 are right now highest on the agenda. Okay. And one final question, if I may. On the large Safepoint contract you signed with the U. S, have you already started rolling out here during Q4 or will it come into play now in Q1? And I think you said you're going to roll out Across the full stores within the next 12 months. Will it be a gradual rollout? Or should it be yes, or how do you view it? Now I think no, it's we start now from Q1, and it was really sort of gradually increase the number of installations. So a little bit lower maybe in Q1 and then gradually will increase, but nothing in Q4. But it will come now 2021. Very clear. Thank you so much. The next question is from Nielsen Dull of Bank. Your line is now open. Yes. A couple of questions, please. Firstly, on the restructurings going on in Europe, it just seems as if we focus Slightly on U. K, that you're setting an organization in U. K. For the long term, I. E, not only responding to the sort of pandemic weakness as of currently. But will you be thinking in similar ways with regards to other adjacent markets, Which you are unable to sort of communicate the details around. I think that what we've done is, I mean, U. K. Has been very hard hardly hit by the pandemic, and it's been in close down for a long period of time, and our volumes have suffered. We are quite sure that, that will come back. We are a bit uncertain exact to what level. So we first of all, we have tried to adapt the cost base to the current situation, but also look a bit into the future to see what we can expect. But we don't think that we think that the market in the UK will come back, for sure, for sure. And then maybe it's a slightly different market than it was before, but we think that we will have a very good business in the U. K. Going forward when the pandemic is over. Yes. But looking at the plans for the other sort of European countries, I very much respect the fact that we're unable to talk about the detailed numbers. But I presume you will be setting an organization in connection with this restructuring activities that sort of are sustainable for the long term? Or is it more of a sort of Response to current lockdowns. Did you understand the question? Yes, I see. No, no, of course. Now we're looking into the future, of course. Made different analysis on scenarios on how the market could look like. And I mean, I think it's also fair to say that when you have a situation like this, you review the business in a different way and look for all opportunities you can save costs. Sometimes you get a bit maybe too many costs in certain areas. And this is also a chance to review that and take away those sort of extra cost, if you like. So it's many different aspects, but U. K. Market will be very fit for whatever will come in a couple of months. Okay. Just on the outsourcing trend, cash cycle in ATM, Joe. You've talked about that for a couple of quarters, Patrick. What tangible evidence can you actually see in Loomis and in sort of the business as such? I mean, I think that you can see what 2 very clear evidence is that the Safepoint market, if you take that as an outsourcing, is really taking it's going very well. So despite not being able to meet customers and so on, I think that we have been able to land a lot of contracts when it comes to SafePoint. And I would say that one part is, of course, due to the pandemic that you optimize, you look for synergies, you look for efficiency. The other one is very much Tieni AGM, where we're very clear that I mean, one of the driving forces behind the revenue growth in U. S. Is ATM business. So banks are saying, no, we don't want to do this ourselves. Our employees should not do that. We outsourced that to companies like Loomis. And I think that when the pandemic is over, we will see that in Europe as well. What we also clearly see a third party is that central banks also more and more starting now to outsource their business to their business to companies like us. They say, okay, we are not really equipped to do that, and now it's time to hand that over to companies like Loomis. So there are 3 very concrete examples what we see happening in the marketplace. All right. Just finishing off, where can you guide for CapEx 2021, please, And a sort of interval. And finally, you talk about acquisitions. We're looking at the Loomis share price and valuation. And When will you guys consider buybacks? Of course, it's a question for the Board, but it's very relevant at the moment, I I can start with the last one. Of course, this is highly relevant. There is an ongoing discussion as we speak, not as to speak, but in the Board, of course, around this, we see the same thing as you are, but we need to have an approval by the AGM to do that. But that's very high on the agenda. But again, I cannot decide that myself. It's the Board and the IDM, but high on the agenda for sure. Then looking into the CapEx number, when it relates to CapEx, that's partly related to the question for how long we would see the pandemic. When the pandemic continue, we will continue to, I shouldn't maybe say squeeze, but we will keep CapEx low as possible. But when it starts opening up, we will start sort of investing again, but no significant increases above what we have had historically. But as long as the pandemic continue, we will continue to keep as low as possible. So as I interpret that as perhaps 2020 is a good indication of where you're sort of planning currently for 2021? Hi. That's probably a good indication depending on how long the pandemic continue. Of course, of course. Thanks. The next question is from Corjuan Bonadilla of DNB Markets. Tech margins in the U. S. And I guess also the comparison for last year, you had some accrual write backs. I guess even if you look at it from the perspective of a similar effect this year, tremendous development. How do you see what is the opportunity in the U. S. To take margins even further from this level. Is it further growth 8 point, further growth ATMs that is supposed to drive this? Or where do you see it go? I think that thank you very much for that. I think the margins in U. S, it's very on a very high level, as we said, I mean, it's 15.7% in total. We don't expect that increased and I've said it many times, I've been wrong before, but now we're at the level around 15%, 16%, which is very high. I don't think we should expect see that sort of expanding very much beyond that. I think that it can go up a bit, but we should be a bit careful because we our focus now is very much to gain new customers, to push the safe concept, to gain more customers when it comes to CMS and so on and so forth. So really driving top line growth. What we also see, which is having a can will have a bit of a hampering effect is, of course, that it's very hard to hire, even though there is a high degree of unemployment in U. S, it's not easy to hire for different reasons. And I think that, that would push a bit a pressure on the salaries. But also, if we cannot hire, that would put pressure on the overtime. And that's what we've been good at handling right now during 2020. So these are some of the effects we see in the U. S. Markets right now. And if you now you obviously changed your margin target for this year that you had set already back in 2017. And if you look beyond, say, the current challenge in the pandemic, going back, obviously, Europe had a higher margin than the U. S. Is that feasible With the current structure to get up to those margins again in Europe? Or where do you see this thing, say, balancing out if Take 12 to 18 months, you or maybe longer than that. No, I mean, I think that you're right. I mean, if you look back, if we'd had if we had a pandemic where I think we'd be very we're quite sure that we would be in the margin bracket. Now that Jason, isn't there anymore. I think that Europe will come back. Margins will come back to historical levels. I'm Cord, we have a management team in Europe who is really experts in driving margin expansion. And that will happen. If it's better than the U. S, that's a different question. I think that U. S. Has sort of done a great job as well. But they will come back Europe will come back to more normal European margins when this is over, I'm quite sure. Excellent. And looking at the pandemic, has that adjusted your rollout ambition for Loomis' pay, so to say, that you're not getting access to the sales That you would have hoped for in the early rollout of it. No. It makes life tougher for us because it's difficult in Denmark to meet customers. So you have to do that via Teams or Skype or whatever. So it's a more challenge situation. But rollout speed, the business plans are to a large extent unchanged. Excellent. Thank you. The next question is from Bertrand Paropolo of Santander. Hello. Good morning, Patrick, Christian and Anders and all the Lumi's team. It's Tom Pallapour from Santa Lucia Spey. Congratulations for the strong year and difficult situation. I have three questions. First one is regarding opportunities. If you could go a little bit more detail of the size of the opportunities and what's your confidence on, Let's say, executing opportunities and seeing your balance sheet. 2nd question is regarding share price. I think All of your communications are, let's say, always conservative. And when you see, for example, your share price against, let's say, your U. S. Competitor, too much, let's say, conservative communication. And of course, us as a shareholder, we will be Very happy about, let's say, a little buyback to show the confidence of the management team. And then the second question regarding the 2021 targets. Of course, if the pandemic is ongoing, it's very difficult to achieve it. But maybe, again, communication and the conservative communication, maybe you would have been better, let's say, to postpone or to say it's difficult to achieve. But How you communicated, it seems that even though when the pandemic is not here, that the targets will not be achieved. So Yes. Those are my key questions. All right. Let's start with opportunities. I think that there are different types of opportunities. There are one is on M and A. I think that there as I mentioned before, I mean, there are some companies will be in trouble and will be sold. So there is further consolidation in the industry going on. I think that we can see also technology is one very important ingredient for driving the core business. So there is a number of examples for that. So I think and then organic opportunity. I talked about the ATM opportunity. I talked about I mean FX, when FX is coming back. That's also an opportunity. We talked about the central banks outsourcing more and more. So there are several organic opportunities right now and it's so when will that happen? I mean, it's happening right now as we speak in the U. S. And I think that it will come to Europe as soon that the markets are opening up. So just to give you a couple of comments on that. The share price, it's always we are, of course, want to have a higher share price. As I said to you, we are having a very intense discussion about a possibility to buy back. However, that's not only up to me. It's only it's up to the Board and to the ADM. But let's see we need to be very strict on how we communicate, and we cannot speculate too much. And right now, it's a very uncertain situation. The only thing I can say is that Loomis will come back in a very good shape. It looks a bit it's a bit tricky now in Europe, but I'm 100% sure that Loomis in Europe will come back and Loomis U. S. Will continue to prosper, and we will roll out Loomis Pay. So if anything, if you want to have my view, I'm very optimistic about the future. But right now a couple of more months or 1.5, 2 quarters will be more difficult. Okay. Thank you very much for the hard work and for the answers. All our support for VF and Spain. Thank you. As there are no further questions, I hand back to the speakers. Thank you very much for listening in, and thanks for all the good questions. Take care. Bye bye.