Strongpoint ASA

OSE:STRO

Earnings Call Transcript 2020-Q2

[Jacob Tveraabak, Chief Executive Officer]

Good morning and welcome to this fantastic yet rainy day here at Slynga in -- just outside Oslo -- StrongPoint's main office here in Oslo. I wanted to take you through the Q2 results for this year. Following that, Hilde will -- our CFO, will take you through some of the more detailed financial developments.I will start today's session by taking a short recap of what StrongPoint is and what we are doing before dwelling into the financial results for Q2. And for those of you that have been following StrongPoint, this will be, hopefully, old news, but not least continue to be important.So point number one, we believe still that the macroeconomics are very much in favor of StrongPoint. With COVID-19, of course, we've seen an accelerated development of e-commerce. And this e-commerce creates what we have coined the double opportunity for StrongPoint. On one hand, the e-commerce growth is creating margin pressure on stores, and with COVID-19, it's not only about upholding margins, but also creating a safe shopping environment. And on the other hand, it is about ensuring that you are able to deliver successfully and efficiently on e-commerce opportunities that are out there in the market. And StrongPoint is very well positioned to -- with its world-class solutions, to deliver on both these 2 opportunities.A very short recap of what are we doing in-store and what are we doing in e-commerce logistics. In the store, you will have seen our solutions when you have been shopping for groceries, whether it be on Self-Checkout solutions; you've been -- you've seen the electronic shelf labels or ESLs, from Pricer that we are a proud distributor of; you would have seen also our Vensafe solution for tobacco automation; and more solutions. So a short recap here of some of the solutions that we are offering that are our own solutions, but also third-party solutions.Secondly, within e-commerce or e-commerce logistics, it's more appropriate to say we are delivering the full service to the value chain except for the front end, basically meaning we're delivering everything you need as a retailer or, in particular, grocery retailer, to successfully deliver on the e-commerce promise to customers. And the 2 most prominent solutions that we are offering is, number one, the picking solutions that are applied both in stores, but also in dark stores or dedicated warehouses for e-commerce picking, and -- but also on the last mile to ensure that you get a cost-efficient delivery of groceries with our Click & Connect lockers. And with these solutions, we are, and it's easy to forget this, but we are serving all the major grocery retailers in Norway, in Sweden and the Baltics with at least one solution, if not a full sort of portfolio of solutions. So we have a very, very strong fundamentals, and we have a fantastic customer base to build on.Now going into the highlights of Q2. We have 3 main messages that I want to convey to you all. Number one is that we have a very robust financial development, in particular, in light of the COVID-19 situation. Number two, as we will see, our e-commerce business is really starting to pick up speed, and we have been growing at more than 70% this quarter compared to same quarter last year. And lastly, we have taken into account the -- or we've seen the impact of some very important partner agreements that we've been making and some larger customer wins that we've had.Going into the financials. First, looking at the overall revenue, this is actually the strongest second quarter in many years, and this is despite the fact that we have had a Cash Security business that has been very much negatively impacted by COVID-19, but also in Retail Technology in Spain, where there's been a complete lockdown for many weeks, if not months, of the second quarter and also in the Baltics for the non -- that have been impacting the non-grocery retail business. So overall, maintaining and slightly growing the overall revenue that we have at StrongPoint is something I'm very, very proud of. I'm very proud of the way that our employees have been, how should I put it, adapting to the situation. We talk often about the pros and cons about home offices, but a lot of the work that we are doing is also in the field or in the production facilities. And the way that our employees and leaders have been adapting to that situation has been nothing less than very impressive.Looking also on the revenue side on the different segments, or business areas, sorry -- business area Retail Technology, which is, of course, our key business area, has been growing slightly at 2%, again, nothing less than very impressive, bearing in mind the Spanish lockdown situation that we had for quite some time. And this is principally 2 reasons for this very good maintained and even increased revenue, and that's the Swedish operations, where we've been growing quite nicely; and actually, also the Baltics, which is very impressive, bearing in mind the lockdown that was there for a part of the time.Our Cash Security business, unfortunately, is continuing to struggle, basically because we don't have in this quarter big orders to deliver on. The SpareBank deal that we did announce is coming later this year in Q3, and we will be expecting to see that reflecting in the figures in Q3 as well. But for Q2, a decline as we've been notifying the market about.Lastly, Labels, very positive development there, driven by the need for more consumer packages and, as such, more labels to be used there. So 20% or more than 20% growth in Labels in revenue is nothing less than very, very impressive, again, in Norway and Sweden.So looking now at the revenue share. This is a picture or, actually, at that point in time, a pie chart we showed in February during the strategy update session. At that point, e-commerce was 5% of the revenue of StrongPoint, constituting the whole of 2019. In this quarter, we have seen the e-commerce part of our revenue coming up to 10%, so double that.And then if you look at the checkout efficiency or for our sake, Self-Checkout solutions, we've also seen that grow quite nicely now in Q2. So these 2 solution areas are starting to constitute a very important part of StrongPoint's businesses, and we expect that to continue going forward.Labels, close to making up for the revenue loss that we've seen in Cash Security, but all in all, this is moving directionally in the way that we've also portrayed earlier, that we will be growing more in e-commerce, more in checkout efficiency going forward.Then the profitability. And again, I'm very proud of the fact that we have improved our profitability. So we've had a maintained top line, but we've improved the profitability. And again, this is the strongest Q2 we've had in years. So again, very, very pleased about that type of performance, clearly.And dwelling into the different business areas, our Retail Technology business is pretty much maintaining its profitability, again, something I'm very proud of with the fact that Spain has been down for quite some time. Cash Security is, I would say, almost -- of course, with a massive revenue loss, also decreasing its profitability, but more glad to see that Labels is really picking up its bottom line improvement here as well.It should also be said, we have, at StrongPoint, not been receiving any sort of government compensation whatsoever. What we have, though, is a NOK 3 million of compensation for temporary layoffs or -- that you've had in Sweden and in Spain. NOK 2 million of these millions is related to the Cash Security business. So the Cash Security business would have been NOK 2 million less if it wasn't for this compensation, and the rest is -- the NOK 1 million rest is within Retail Technology split between Spain and Sweden. All in all, very pleased with the performance that we are getting or showing here.Then to the second point I wanted to bring up here, which is the strong or very strong performance in e-commerce. I think most of you have -- or most investors or people in general have seen that e-commerce is growing rapidly, and StrongPoint is no exception here. The exception, I guess, is that whereas pure players or direct players are able to sort of showcase very impressive growth figures, clearly, for a company like StrongPoint in a B2B world, it takes a little bit longer to get the orders in place, but making it nonetheless impressive, with a 70% growth versus same quarter last year. And this growth comes both from new customers, but it also comes from deepening the relationship with the existing grocery retailers in principle that we have in the key markets that we are serving.The solutions we're offering, again, the Pick & Collect solution, is mostly a software solution. So that's a revenue and profitability uptick we're expecting to see in the months and years to come, whereas on the Click & Collect lockers, there is a substantially larger one-off revenue impact from actually doing the sales of those.We are now seeing also a, what I would call an unprecedented interest in our e-commerce solutions. We've hosted 3 webinars on the topics of e-commerce, how to make it profitable, how to make the picking and deliveries as efficient as possible. We've received tremendous positive impact from that, and the level of discussions, both in terms of companies but also in terms of levels, in the organizations we're having is second to none and unprecedented in StrongPoint's history. So I'm very positive about this development and also the future forward for e-commerce.The third highlight I want to bring to your attention is the -- first of all, the partnership agreements and then secondly also the subsequent customer agreements. So in Germany, we've had successful transition into PartnerTech Europe, taking care of our service obligations and support obligations for the customers that we have had in the Germany and [ Dutch ] region. And as a new partner, it's, of course, also very satisfying to see that PartnerTech is really running with our solutions and being able to sell our solution, our strong -- sorry, our Self-Checkout solution through the Polish retail chain, Stokrotka, with more than 100 Self-Checkout solutions just announced now in Q2 that's being delivered in Q3.Also, again, as earlier mentioned, we have continued a very strong and good relationship with SpareBank on the Cash Security side, where the deliveries of the 350-plus cases will be coming in, in Q3.At the end of the Q1 results, we also showed a similar type of matrix to give you as investors a sense of where are we expecting to see growth in the immediate future and where do we expect to see more sort of tough demand conditions. Cash Security, I mean despite the SpareBank deal, unfortunately, as long as the global retail market is affected and, as such, the cash usage is affected, then we expect to sort of see struggling times in that business. I guess on the other hand, if you take Labels, as already seen in Q2 and to be continued, if not as strong as Q2, is a very strong revenue and also profitability expectation for Labels.And then, but not least, for the big chunk of what StrongPoint is doing, now close to 80% of the revenue, our Retail Technology business is really having the right conditions in place to grow its in-store solutions as well as the e-commerce solutions for the grocery retail business. And -- whereas we know there are significant spillover effects to certain retail segments that are not within the grocery retail, it's a bit more, how should I put it, dependent on both the retail segment you're looking at, but also the country you're looking at to see whether there is growth coming there. But the majority of the StrongPoint customer base, meaning the grocery retailers, will be expecting or will be seeing a very strong growth going forward.I want to round off with the one overall slide that we had at the strategy update session to both reiterate but also reaffirm you about the strategic ambitions that we have as StrongPoint. Despite COVID-19, the NOK 2.5 billion turnover in 2025 still holds, so does the EBITDA margin of 13% to 15%. And although this is not something we've seen in Q2, when you look at the sort of pillars to get us there, we believe that we are very much in shape. If you look at how we are working with the existing grocery retailers, you will see that we are strengthening the relationship. And just last week, we announced a new deal with NorgesGruppen for Pricer electronic shelf labels worth some NOK 70 million with additional options for more stores to be rolled out. And if you look at the rollout of proprietary technology, again, we've seen that being the case, both in e-commerce; we've seen that being the case for our Self-Checkout solution. And now with Spain and the other Mediterranean countries slowly opening up, we are also expecting to see our cash management solutions, which offer a contact-free or contactless cash experience, to be very important going forward as well.And lastly, on the sort of growth pillars, we will continue to explore partnership opportunities with technology companies that have a solution that we can offer to our key partners or key customers in the Nordics and Baltics.So with that, I'd like to give the word to Hilde, our eminent CFO, for some more details on the financials. Hilde?

[Hilde Horn Gilen, Chief Financial Officer]

Thank you. The most challenging part of the financial crisis, when we saw that in the end of Q1, was the uncertainty, which -- a lot of questions pops up. Will the customers stop paying us? Can we adjust the production of goods fast enough? What can we do with the payables that we have to ensure that we do have financial capacity to pay our bills for the next weeks? So what we announced on Q1 also to secure our financial position, we increased our credit facilities. I'm happy to say that today, we do not use this extra credit facility or extra headroom.So what Jacob just presented on the EBITDA, but also on the net profit came in at NOK 7.5 million, and that led to an earnings per share of NOK 0.17. If we adjust for the amortization of intangibles, that figure came in to NOK 0.23 in the quarter. Looking at the first half, the same figures are NOK 0.45 or adjusted, NOK 0.69, and that is on the same level as in Q1, although slightly behind what we achieved last year. Looking at the continued cash flow effects for the first half. We started with a net cash of NOK 39 million. We add an EBITDA of NOK 42 million, which is our first half EBITDA level. And you see a quite large effect on working capital. I will come back to that in the next slide.If we look at the CapEx, it has increased by NOK 5 million, which again is related to the rental solutions in Spain and some fixed assets throughout the group, so not a huge figure there. And as you understand, the Q2 figures is not heavily influenced by rentals, as the Spain has been in a lockdown situation. In Q1, we paid earn-out for the companies Cub AB and PYD SLU, which we bought in 2017. We still have a rest earn-out liability potential for the Cub AB, while on the SLU, we are -- the PYD SLU, we are done with all the earn-out payments. To finance the earn-out payment, we increased our long-term debt, but the change of the first half is NOK 11 million, indicating that we have paid our financial obligation towards our bank as normal. The change in the overdraft is linked to the change in working capital, and we ended on a cash position of NOK 31 million.So what happened on the working capital? In Q1, with the COVID-19 heavily influencing the China operations, we placed a huge order of Pricer electronic shelf labels to secure delivery in these uncertain times. At the end of Q1, we still had a rest stock of those ESLs. With estimates and ambitions in Spain, our supplier of cash management systems had a full production and the speed was on a normal size. And then we had a complete shutdown in Spain. So we needed some time to adjust the production of cash management, which also led to an increased stock level of CashGuards in Spain.And again, we did do some negotiations with some suppliers, among them the landlord, rent. So we had delayed payments in -- from Q1, that was then due in Q2. So what you can see on the right side is the half year figures, where you see that inventory still has quite some negative but positive change from the end of last year. But if you look at the Q2 figures on inventory, we have reduced that with NOK 24 million. So we are reducing the stock week by week, and we will continue to do that in the next weeks to come.On the receivables part, we have increased the receivables by NOK 31 million first half, but it -- and it is also increased in Q2, it is what you see on the left side on the slide. But I can -- our evaluation is that the risk of our receivables is not increased. It's on the same level as it was before the COVID-19. Our customers stems mainly from large grocery retailers in Norway, Sweden and the Baltics, and we believe that they have a good financial capacity to pay their bills. We have increased our report with a Note 5, where you can find additional financial information, where you also can see that we have a good portfolio of receivables that is actually reduced on the long-term overdue. So it's a healthy receivable situation. On the payables, that's where you see the big negative change from Q1 to Q2 with NOK 58 million. And that is actually just the situation where we are reducing our stock and not then ordering new systems, indicating that our supply, our payables, has gone down dramatically, you could say, but still that's how it is. And we are proud to say that we are -- we have paid all our due debts, which is important in the situation we are, where we -- where our suppliers is in need of the same financial trust that we can assure them. So overall, we ended the main elements of the working capital, up from NOK 276 million last quarter to NOK 314 million.Going into the sum of all these cash and working capital changes, you can see that our net interest-bearing debt has increased to NOK 142 million. The blue line is the IFRS 16 liabilities, that is, the rent and the lease, of course, that we are obliged to put in as a liability in our balance sheet, that is approximately on the same level quarter-by-quarter, while our bank credit facilities and also long-term debt has increased to NOK 82 million. We -- which is then severely influenced, of course, by the change in working capital. We are still on a net leverage multiple of 1.57, which is an okay level. It's well below our covenants, and we do have a headroom of NOK 97 million on -- to secure any financial uncertainties if there will come a wave 2 or something related to the COVID-19.So all in all, we state that our financial situation is solid. After the summer vacation, we will present StrongPoint in different forums and areas, and we hope to see some of you investors there. So please follow our website for information and links, and we look forward to a very hectic fall. We also hope that we can see some of you in physical presence on -- when we report our Q3 figures, 22nd of October. So in the meantime, we wish you all a great summer, and thank you.