Strongpoint ASA

OSE:STRO

Earnings Call Transcript 2022-Q1

[Jacob Tveraabak, executive]

Good morning, everybody, and welcome to this first quarter presentation of StrongPoint's results. My name is Jacob Tveraabak. I'm the CEO of StrongPoint. And as always, I have Hilde Horn Gilen with me here today to present some figures as well.

We have an agenda that goes like this. I will be giving you a short recap of what StrongPoint does. We'll then go through the Q1 highlights and figures and then I'll leave it to Hilde for even more detailed financial figures. So StrongPoint is all about leveraging what we call the double opportunity.

We see -- have seen and are believing in the future, e-commerce to continue growing. And there are 2 effects of e-commerce. One is the margin pressure it puts on the brick-and-mortar stores, which leads the stores inevitably having to become more efficient and technology solutions is an obvious part of that. That's number one.

Number two is the fact that e-commerce in and of itself drives more demand for e-commerce logistics solutions. And StrongPoint offers the full range of last mile solutions as well as fulfillment solutions from manual picking to automated picking. And that is also the second opportunity for StrongPoint. So that's a double opportunity arising from the e-commerce growth.

At StrongPoint, we believe in purpose and our purpose given also this double opportunity, I'd say, is almost evident. It is bringing retail technology for smarter and better life, and that is both offline and it's online. And when you look at the amount of logos we have on this page, there's sort of an indication of the breadth that we have when it comes to serving customers in the core markets in Norway, in Sweden, in the 3 Baltic countries and in Spain, and as we're seeing also internationally.

Our focus is on both going wider, meaning getting more of these customers or retail customers on the client list of ours, but also to be going deeper and having a more significant relationship with these established brands and we're doing both. We have in affinitive to award the grocery retail segment, and that brings along with it a number of spillover effects to other very exciting retail verticals.

Before diving into Q1 figures, I want to assure this audience by restating our financial ambitions for 2025. A top line of NOK 2.5 billion and an EBITDA margin of 13% to 15%. And I hope that you will see that the Q1 figures are going in that direction to achieve this financial ambition. We remain very confident.

So then to today's -- next Q1 highlights and figures. First of all, financially, very exciting. We are tipping the NOK 300 million mark within 1 quarter. That's the best quarter on the top line ever in StrongPoint's history for the Retail Technology business. We're also doing a number of exciting progress or milestones with regards to our customers. We'll talk more about that in a second. And then there is a number of other, call it, enablers that needs to be in place to achieve the financial ambitions and the strategy that laid out in 2025.

Let me start with the top line. The revenue in Q1, just tipping the NOK 300 million mark , a 21% growth, a remarkably strong growth in a quarter in and of itself. This becomes even more strong when you consider firstly, the disadvantage we have had on the foreign exchange, which would otherwise have led us to a 24% growth. But also the ongoing component shortages that are pushing revenue out in time, so pushing the deliveries of order out in time, not canceling them, but pushing them out in time.

If you had not had that component constraints, we would have actually gotten up to a additional 6 percentage point or in total 30% growth. So just very, very strong growth in and of itself with 21%, even more so when you think about the situation globally.

The growth stems predominantly from very good sales of [ price there ] ESLs in Norway and in Sweden, but it also stems from a remarkably good quarter in Spain. Spain growing by more than 50%, 5-0 percent, this quarter versus same quarter last year. And we'll give Spain some additional attention as we have them for the last few quarters.

When we then move on to the EBITDA. You will see that we have a NOK 12 million EBITDA or just south of 4% EBITDA margin. Again, both the FX and the component situation would have left at some NOK 4 million, NOK 5 million higher. But more importantly is for this audience to understand that we're making a very conscious decision, a very conscious decision to invest in the future. And those of you that have been following StrongPoint knows that we are expensing the investments we're doing.

So you will find a very clean balance sheet. We're expensing this on the P&L. And this investment goes into marketing. It goes into product development. It goes into sales resources in particularly in e-commerce, but also in the new and existing in-store solutions. So I think this is very important to bear in mind that this is a very conscious decision to build for the future, to build a scalable business that will enable us to achieve the 13% to 15% EBITDA margin that we have laid out in the 2025 financial ambition.

So looking at the relative shares across the product offering or product segments that we share. This really is a story about a society opening up after COVID. So you'll see the in-store productivity portion of StrongPoint's revenue growing. It's a natural climate to start again doing more installations in store. It also reflects -- this is also reflected in the payment solutions, again, predominantly by Spain, opening up its society and allowing for more CashGuard sales in those communities.

But it's also, say, on the flip side, with the reopening of society, you would have experienced a slowdown or even, to some extent, the decline in e-commerce volumes versus earlier COVID-related quarters. That said, we believe this is a blip. The e-commerce fundamentals are very, very strong. But in this quarter, this comes out, both through not increasing the number of licenses or a number of orders going through our e-commerce picking solution. And it also affects the -- naturally, the franchisees or the chains, say, short-term willingness to pay in -- or pay up in Click & Collect lockers when the in-store solutions are again growing.

That said about e-commerce and moving into customer success stories, the first and very interesting customer success story in that respect is Salling Group. And those of you on LinkedIn that are following Anja Madsen, the CEO of Foetex, would have really like to understand what has happened during Easter. And I can assure you that when Anja Madsen did a fantastic commercial for StrongPoint lockers, that was [ not ] in StrongPoint's, sort of any arrangement, that was purely driven by the fact that Foetex believes in Click & Collect lockers and having the CEO stand up and talk personally about her experience with the lockers, I mean, there is no better commercial than that for both customers of ours and at the end of the day end consumers. So if you haven't seen it go to Anja Madsen's LinkedIn account, there's a fantastic commercial for StrongPoint and again, following the order of the lockers with the Salling Group.

We also had a continued good traction on self-checkout in the Baltics and with the agreement with Palink, so the IKI brand in the Baltics. And lastly, we also announced a framework agreement with e-commerce solutions, but actually also our cash management solutions. And in addition to being a hunting license, this is also a promotion of our solutions internally in the SPAR International network. So great progress here on a number of customers.

Last highlight for me. I wanted to talk a bit about the, call it, enablers also for the 2025 strategic ambitions. And firstly, Spain just deserves a little bit of attention. One thing is the 50% top line growth, which in and of itself is remarkable. As I said earlier, this is, to some extent, based on the fact that society is opening up, which is reflected in the cash management solutions being sold. But the Spanish organization has also been very good at pivoting towards serving the grocery retail market even more so.

So we are delivering a number of our e-commerce solutions there as well as our self-checkout solution. So very, very well, big credit to the Spanish team there. And we're actually now in Q1, close to a breakeven in Spain. And again, if you're following StrongPoint very closely, you would have seen that last quarter, we promised that we would be getting to a breakeven at the end of 2022 in Spain. So this is a additional hats off to the Spanish team for achieving this. So the future looks great for the Spanish operations.

We also strengthened the executive management team of StrongPoint with 2 very solid personalities. Chris Mackie, a British citizen, heading our e-commerce sales establishment; and also Magnus Rosen, a former ICA executive that will be -- or is heading our Spanish -- sorry, Swedish operations. And we're not sending him to Spain quite yet, but over Swedish operations and doing that in a very, very solid manner. So welcome to both of you. I know you've been in the role for 2 months already, and I'm looking forward to continuing the growth both in e-commerce and in Sweden.

Then lastly, we announced at the last Q or quarterly presentation that we had signed a nonbinding term sheet to acquire the shares of ALS, or Air Link Group. Air Link Group have operations in U.K. and in Ireland, that's due diligence following this signing on term sheet has been ongoing, and it's ongoing and it’s in its final phases. So we'll just settle now by saying that that due diligence is going very well and we will return when we have more information on that point.

So I think with that, I'll leave the word over to Hilde, please.

[Hilde Gilen, executive]

Thank you, Jacob. Good morning, everybody. I will start up as usual with my presentation of the rolling 12 revenue and EBITDA, following obviously the first quarter revenue performance that Jacob just showed you. The rolling revenue 12 months stem -- came out to NOK 1.033 billion. So we now crossed a magic line of NOK 1 billion in revenue for the retail tech only. That is an increase of NOK 50 million or 5% in 1 quarter. So we are very happy with that, Jacob. Looking at the right graph, you see that the EBITDA has declined when we are looking at the rolling 12, and that is something I will present more in the next slide.

We started off with this bridge with a gross profit increase of NOK 12 million, which is, of course, from the higher revenue in first quarter. Now the gross margin has declined in Q3 with actually 3.3%, stemming from more than one reason. First of all, the product mix. As Jacob showed in the relative share slide, the in-store productivity has increased while the e-commerce has declined a bit in the quarter. We have a higher gross profit on our own solution, logic [ not enough ]. And with that split, we have a decline in the gross margin. But we also need to comment on the inflation rates. With the component shortages that we experienced, especially within the payment solutions, we see that to get hold of the necessary components, we need to shop the components wherever we can find them, and that puts a pressure on price.

Also, the COVID situation in China has led to price increases on raw material and on freight. So we are affected by both those elements in addition to the product mix. We have accrued in the first quarter, NOK 2 million as cost of the due diligence ongoing in the U.K. And then I wanted to just show you the figures on the investments that we are doing in e-commerce.

Now the bridge is showing increased cost on top of what we had last quarter, the first quarter in 2021. And you see there is an equal split between R&D cost and sales and marketing cost, NOK 3 million each. The e-commerce R&D spending are shared between the picking software and the Click & Collect development. We have in the quarter finalized the Q-commerce part of the generation 3 of the picking software.

Finally, hitting or affecting the EBITDA is other payroll and OpEx of NOK 6 million that are very much linked to increased number of personnel. We are 18 more people than -- now compared to year-end last year and 28 more compared to first quarter last year. So we are doing what we have said we are to do, increase the number of sales resources. So we ended up with a Q1 EBITDA of NOK 12 million.

If we look further down the P&L, we come to the net profit and the earnings per share. And as you see on the screen, we have an earnings per share of NOK 0.11 from first quarter this year. That is down from last year of NOK 0.23. And it also are influencing the rolling 12 months earnings per share.

Looking at the cash position. We have a very solid cash position in StrongPoint. And we had a cash at NOK 174 million at the end of last year, and it has increased by NOK 11 million. All the elements on the screen in the bridge, I would like to comment on 2 specific items. First of all, the change in working capital is increased by NOK 6 million, increase in cash that is, so it has declined. And to some extent, we are a bit -- we are not too happy about that. I have instructed the purchase organization to get hold of the components that they can get hold of in the market and we are willing to invest or to buying capital on inventory more than what we have achieved.

So it just shows the pressure we have on finding the components. The inventory has declined, obviously, because of the high revenue and that has moved to an increase in trade receivables. As normal, we are not worried about the risk in the trade receivables as that is just -- that we have a very good track record of regaining all that cash.

Secondly, and the largest number on this slide is earn out received. I want to point back to December 2020 when we sold the Cash Security business. The purchase price of that is not revealed. But we agreed that a part of the agreement was that we had an earn out situation for EUR 4.7 million for the period 2021 through 2023.

The results for 2021 came up to a maximum level of earn out for the Cash Security business, and that has given us a positive cash element of NOK 20 million. For those of you really following us, you know that we did not accrue all of that earn out as gain as there is a risk always attached to earn out. So I can assure the investors that there are only upsides for the next 2 years of earn out for that.

So we ended the cash position at NOK 195 million and the net interest-bearing debt continues to be negative or positive. So we are in a positive cash situation. Based on this and the forecasted liquidity needs going forward, the Board has proposed to the Annual General Meeting following this quarter presentation, a dividend of NOK 0.8 per share. The ambitions of the Board has been to continue to pay and increase the dividend year-on-year. And this year's proposal follows the trend since 2012. So we welcome you to join in the Annual General Meeting starting at 9:00 today.

The financial calendar for the rest of the year is that we meet up 13th of July for the Q2 and the 26th of October for the Q3 presentation. As always, we are available for direct meetings with investors that would like to see us. That was my slides. And now Jacob, do you want to come in and help me with answering the questions?

[Jacob Tveraabak, executive]

Absolutely, of course. So any questions incoming Dominic?

[Dominic Robinson, executive]

Yes, we have 2 questions, both related to e-commerce, we'll ask them at the same time. Why is e-commerce not scaling faster? And a sub question to that, specifically a question on why we’re not further on locker sales?

[Jacob Tveraabak, executive]

Okay. So first of all, this is a quarterly snapshot of what is going on, and we're comparing this quarter with same quarter last year when we were in the midst of COVID basically everywhere. So that's one part of the answer, Dominic. It's about there has not been an increase in the number of licenses or volume going through the picking solution. So that explains the flat software sales that we had.

And when it comes to lockers, I think it's a reflection of the grocery companies priorities. I mean with society opening up, we have seen that the investments have been going into in-store solutions. That's not to say that there's no investments in Click & Collect lockers and such, but a lot of it has been going into in-store solutions and both medium term and, of course, long term, we're expecting that to grow. But this Q1 was a reflection of society opening up.

[Hilde Gilen, executive]

No further?

[Jacob Tveraabak, executive]

Okay. But I think with that, we'll thank you all for watching and wish you a continued great day. Thank you.