Quadient SA

PAR:QDT

Earnings Call Transcript 2019-Q1

[Operator]

Hello, and welcome to Q1 2018 sales. My name is Emilia, and I'll be your coordinator for today's conference. [Operator Instructions] I will now hand you over to your host, Geoffrey Godet, to begin today's conference. Thank you.

[Geoffrey Godet, Group Chief Executive Officer]

Good afternoon. Thank you for joining us today on our Q1 2018 Sales Conference Call. I am Geoffrey Godet, Neopost's CEO; Jean-François Labadie, Neopost's CFO; and Gaële Le Men, Investor Relations Officer, as most of you probably both know [indiscernible] for this call. I will not present any update on the strategy, and I will not address any questions at [indiscernible] as these will be [ bought ] for the new strategy to be presented before the end of our fiscal year, as I mentioned to you before. I will continue my [indiscernible] on our customers, my team, our partners, our investors until I have a full and complete assessment of the [ results ], obviously. In parallel, I have studied a strategic review of all of our finalization, I decided to mention to you earlier. [ Defining ] and decision will be part of what will be presented during our Capital Markets Day at the end of our fiscal year. During this call, we will first comment on our Q1 self-fulfillments, and we will hand over the call for a Q&A session. I'll remind you that, for the first time, we have produced a slide show to support our quarterly sales announcements in the same format as our full year results for 2017. We continue to share more information on our business than before. I hope that you have access to the slide. If not, you can download this presentation from our financial website. As a very brief introduction, I would say that our Q1 sales are in line with the expectation that we shared with you earlier. This represented an organic decline of minus 2.1%. This is a much improved performance compared to the 4.4% organic decline that we had in Q4 2017 with a different mix between our new activities and mail business. Don't get me wrong, we're only back in Q1 to a level that is broadly consistent with the level of annual decline that we have recorded over the last 3 years. And this is not -- this is still [not] satisfactory to me as our objective is to mitigate the decline of our mail business. So now I will let Jean-François give you a more detailed review of our Q1 numbers and invite you to move to Slide #3.

[Jean-François Labadie]

Thank you, Geoffrey. Ladies and gentlemen, good afternoon. In Q1 2018, we posted sales of EUR 249 million, minus 9.7% versus Q1 last year. Our sales are strongly impacted by currency effect. Indeed, more than 50% of our sales is outside Europe and mainly in the U.S. And due to a weaker dollar against euro, we have a negative currency impact of EUR 20 million or 7.3%. We had a small scope effect of minus EUR 1 million, and you see a reflection of the disposal of DMTI Spatial last year. Excluding currency impacts and scope effects, our Q1 organic change in sales stands at minus 2.1%. As mentioned by Geoffrey, this is in line with expectations, and our indications for the full year remain unchanged. Now let us review performance by division, and please move to Slide 4. I will start with Enterprise Digital Solution or EDS. EDS represents around 11% of total sales. EDS is back to organic growth at plus 6.7% after a flat sales in Q3 and minus 12% in Q4. We had 2 business lines at EDS, the main one is Customer Communication Management software and the other one is our Data Quality software. In the Customer Communication Management, our organic growth is close to 10%. The full growth comes from recurring revenues. You remember that despite low growth last year, our customer base had increased, in fact, generating more revenues for maintenance and services. In the meantime, our new license sales are back to the same level as Q1 last year. This is much better but we remain cautious. Indeed, we are still in the process of fine-tuning our commercial approach, i.e., making changes to sale stores, to program address signs, vertical industries mainly financial services, insurance, healthcare and utility. And we are also introducing a more [ safe ] approach to license sales when appropriate. Our Data Quality business line continues to decline really low at lower pace than last year, with an organic decline of minus 3%. Please switch to Slide #5. Now look at our shipping division. Our shipping division represents around 5% of total debt. Shipping enjoyed strong growth -- strong quarter, with an organic growth of 21%. The growth is supported by sharp increase in Packcity revenues, an almost fourfold increase versus Q1 last year. This is essentially due to the full impact of the entry in our parcel locker install base in Japan last year. As a reminder, in Japan, same-store partnership with Yamato, we moved from 200 lockers at the end of 2016 to 2,600 lockers mid-March 2018, and we now stand at close to 3,000 lockers. You see mechanically generating higher rental revenues. In addition, we delivered also parcel lockers to Australia [ post ] to expand their current network. Revenues from CVP-500, our fit-to-size packing system, were marginal as we didn't sell any new machine in Q1 this year. This was already declared in Q1 last year, so no impact on those. Revenues from Shipping software are down 7% organically. Very much a mixed bag of various products, such as [ post ] shipping to U.S., track and trace software, RFID solutions. Some of the [ poor ] software are in the process of being gradually phased out and partly explain the decline. Temando is also part of shipping software. The Temando revenue progressively come from new Magento platform, which was launched last month. Now move to Slide 6 and let us look at our main division, i.e., SME Solutions. SME division represents around 84% of total sales. Organic change versus Q1 last year stands at minus 4.3%. The bulk of SME comes from our legacy Mail Solutions business. Mail Solutions declined by 5% organically. This is in line with the trend of the past 3 years, i.e., between minus 4% to minus 6%. And as for the past years, North America continues to show greater resilience, while the decline remains sharper in Europe, particularly in the U.K. and Scandinavia. Our graphics business is also declining, minus 12% this quarter, notably impacted by the loss of a large contract in Australia. Digital communication and Shipping Solutions [ shift to the view ] of SMEs continued to enjoy a total digit organic growth of plus 11%. Let's now switch to Slide 7. If we look at the breakdown of our Q1 sales performance from other angles, we see productivity, meaning Mail Solutions, on one hand[indiscernible] and all of our Communication and Shipping Solutions, including -- we have 6 across our 3 divisions on the other hand. Mail Solutions stands at minus 5%, as already stated. The total communication and Shipping Solutions, including graphics, grew by 6.2% organic, which is 28% of total sales versus 26% in Q1 last year. For kinds of revenue, equipment and license sales decreased by 8% to 28% of total sales. In the opposite, recurring revenue grew slightly to reach 72% of total sales, thanks to the contribution of rentals, maintenance and services revenue generated by new activity. In our geographic area, same stronger resilience in Mail Solutions. North America is not really stable, down 0.7% organically. Despite lower dollar against euro, North America is still at 44% of total sales. Europe is down 4.2% organically due to the decrease in Mail Solutions. In the rest of the world, small organic growth of 1.7% comes from the increase in revenues, particularly Japan, mitigated by the decline in graphics in Australia. I'll now hand the floor back to Geoffrey, who will walk you through our indications for the full year. Please turn to Slide 8.

[Geoffrey Godet, Group Chief Executive Officer]

Thank you, Jean-François. As indicated earlier, our Q1 numbers are in line with our expectations. We therefore maintain the indication that we gave earlier for the full year of 2018. As a reminder, we expect our top line to continue to decrease organically per division. We see EDS growing at low single-digits. We had a better Q1 than the 2 previous quarters. This is just 1 quarter and we have to stay cautious on that front as we're still adjusting our commercial approach. For our shipping division, we expect to continue to grow at double digits but at a much slower pace than in Q1. In particular, the 10 CVP-500s, which were placed in 2017, will present a challenging basis of comparison for the coming quarters. And within the SME division, we expect Mail Solutions to decline at a similar pace as in the past 3 years which means between minus 4% and minus 6%. In addition, graphic activity should also continue to decline. In contrast, revenues from digital communication and Shipping Solutions, dedicated to our SME division, should continue to grow at the double-digit. This is a broad picture for the fiscal year 2018. I would like, however, to stress that these trends will not be linear throughout the year. In particular, we will experience a negative base effect in Q2. This is particularly the case for EDS, which recorded last year a surge in Q2...[indiscernible] were 20% higher than the Q1 2017. This is also the case in shipping as we benefited from a high-level of parcel lockers out of our hardware sales in Australia in Q2 last year as well from the sales of 3 CVP-500. Whereas for Q2 2018, so far, we only have one potential CVP-500 in our backlog and I'll remind you that the CVP is also hardware sales[indiscernible]. And finally, in graphics, we will continue to suffer from the loss of the large maintenance contract that Jean-François mentioned in Australia until mid-Q3 2018. So moving to our projected EBIT margin. Before acquisition related expense, we maintain our indication of around 18% on the basis of similar level of investment than last year. We continue to adjust our company to the evolving needs of our SME division to better address our client performance and protect our margin in the same time. So I would also like to take this opportunity here to remind you that if we suffered in Q1 from a strong negative currency effect on our sales, this has no impact on our EBIT margin. As a consequence, the breakdown of our cost between our main currencies, the euro, the British pound and the U.S. dollar, matches the breakdown of our sales between these currencies. Our EBIT margin is therefore naturally hedged or protected against continuance[indiscernible]. Finally, despite the decline in our sales, we have demonstrated in the past our ability to generate high levels of recurring cash flow, and this will also be the case in this year, in this fiscal year 2018. So this ends our opening remarks. Thank you for your time and attention so far. We're now ready to answer your questions, so I will be waiting for those questions.

[Operator]

[Operator Instructions] The first question is coming from the line of David Cerdan from Kepler.

[David Cerdan, Equity Research Analyst]

David Cerdan from Kepler. First of all, I would like to thank you for the quality of the presentation. This is very clear for us and so it was important for me to tell you that we need some information and this is the case for this presentation. So thank you for that, and I have a few questions for you. My first question is just from EDS. Can you explain why you expect the trend to slower -- to be slower in the next quarters? And then [indiscernible] you had just a low single digital organic growth, meaning that we could expect maybe some quarters negative on a like-for-like basis? So this is for EDS. For Shipping, can you explain us the profitability of Packcity in Japan? Is it a profitable business or not? And for CVP-500, do you expect to sign some contracts in the view of the quarter for the year? And for the SME Solutions. The graphic business is now very, very small. Does it make sense for you to continue to be invested into this business?

[Geoffrey Godet, Group Chief Executive Officer]

So I will answer the first question on EDS. I will let Jean-François answer the question on shipping and I think I'll take the last question on the graphics as well. CVP and graphics. Okay. On EDS, I just want to repeat what I said about the second quarter for example[indiscernible] on a comparison base. We had a much big growth in '17 from Q1 to Q2 by 20%, which makes the achievements of the same performance in Q2 this year versus Q1 more difficult. So that's one part of the answer. The second thing is in EDS, we have our [ CCM ] activities and the net equity and net equity is declining. So in the mix of EDS, we have 2 different trends, which -- the makeup of both is what is providing the resulting indication that I gave. Last, which is not the [indiscernible]. We explained to you at the year-end presentation at the end of March, that we went through some change in ourselves, organization for the [ CCM ] activity, in particular within EDS and I have mentioned that those change will take [ time ] to take effect. We just hired a new head of our North American organization just a few weeks ago, I think, many months or so. And I expect to see some of this change. And until we see those change, we believe that we will have some differences in performance quarter-to-quarter and therefore, all those things considered, I think this indication that we gave is reasonable [ important ].

[Jean-François Labadie]

And we now jump to the profitably of Japan, and we saw that -- let me remind you, include the model that we have in Japan. In Japan, we have a partnership with Yamato. And basically, the agreement that we have with Yamato that when we installed a locker in Japan, we have roughly 75% of the capacity of that locker, which is rented to Yamato for a duration of 7 years. Okay. So the revenue that we get from Yamato is not depending on the occupancy of this locker, of the traffic of parcel that mostly is locker. It's a fixed revenue that we get from Yamato for [indiscernible]. So to answer your question, is it a profitable business. The answer is, yes. Packcity Japan will be profitable. When I say, will be, that it's not profitable yet because the profitability of this business depends on the number of our brokers that we have deployed [indiscernible]. And so far, as we speak, given that we -- the intensity of deployment that we have in Japan that we have had last year, I would say, the rental revenue, I'm not covering it. Our current amortization plus the OpEx of the organization that we have put in place to deploy this [indiscernible] which means that we are not expecting Japan to be profitable to 2018 but it will be closed to that and the profitability level will be reached in the course of 2019.

[David Cerdan, Equity Research Analyst]

And what is the volume required to reach breakeven because you were at 3,000 at the end of May. So are you far away from your breakeven?

[Jean-François Labadie]

No, we are not far from the breakeven. But then, given the speed at which we have deployed the lockers, we have significantly increased the size of the organization to maintain such an [indiscernible] at this stage. It's perfectly, I would say, normal, that we have not yet reached the pertinent one. Any other questions on...

[Geoffrey Godet, Group Chief Executive Officer]

Yes, I just want to confirm the question, whether we understood what you wanted on the CVP-500. Would you mind repeating it?

[David Cerdan, Equity Research Analyst]

Yes. Do you expect to sign some new contracts for CVP-500 for the rest of the year?

[Geoffrey Godet, Group Chief Executive Officer]

So we currently are assessing aggressively like any of our other solutions, pushing our product offering and that includes the CVP-500. So we'll see from now and at the end of the year if they are able to get us new orders.

[David Cerdan, Equity Research Analyst]

And can you remind us how many CVP-500 have been contracted last year?

[Geoffrey Godet, Group Chief Executive Officer]

10.

[David Cerdan, Equity Research Analyst]

10?

[Geoffrey Godet, Group Chief Executive Officer]

Yes.

[David Cerdan, Equity Research Analyst]

And do you think that 10 is a possible number for '18?

[Geoffrey Godet, Group Chief Executive Officer]

That's what we're -- it's the rough order of magnitude of what we're looking for. It's too early to confirm. Again, we have to think about machines with a value of 700k. So the sales cycle is pretty long. So at this stage, we can't guarantee any number in terms of unit thresholds for the year.

[Geoffrey Godet, Group Chief Executive Officer]

And as it relates to graphic, I will not answer the question and for any other offering that we have because I am doing the strategic reviews of [indiscernible] offering [indiscernible] the large one, and I would be happy to answer those questions by the end of the year presentation.

[Operator]

There are no further questions in the queue. [Operator Instructions] And we have the next question coming through the line of Jousseaume, Patrick from Société Générale.

[Patrick Jousseaume, Head of Mid and Small caps Europe Research]

Could you please elaborate a bit on the sentence quickly on Slide 5, gradual withdrawal of some application? Could you give more details about that, please?

[Gaële Le Men, Corporate & Financial Communication Director]

Sorry, Patrick, can your repeat? That was not very good, sorry.

[Patrick Jousseaume, Head of Mid and Small caps Europe Research]

Of course. So it's about the Slide #5. And the sentence on the Shipping software, sentence being gradual withdrawal of some applications. So could you please elaborate a bit on that, give some details, please?

[Geoffrey Godet, Group Chief Executive Officer]

Okay. So I will take this one. So under the Shipping software, we have definitely kind of applications. We have some application that we are strategically focusing on that we -- that I think it's in the information [ we passed on ] which is mostly demand for [indiscernible]. And that typically will give you more information on that. And then we have a bunch of other type of application that we have done in the past few years, and we have the same amount of [indiscernible] to focus on these, as projected already before even my arrival. And these are contracts that we have with, sometimes enough customers. We expect to continue to nurture the relationship with these customers because we may not see additional resales into those domains. So as a result, we are not increasing the new sales over all. So by default, mechanically, you will see a gradual decline related to those contracts in the period while we expect to see growth on the new one on the shipping module in particular[indiscernible].

[Patrick Jousseaume, Head of Mid and Small caps Europe Research]

Okay. Which means that you do not target to cover all application in the field of Shipping as presented some quarters ago? I guess, it was a slide, I remember where [indiscernible] was to cover any type of software or application, let's say, in the field. So it's the same, which is no more in the strategy of your company?

[Geoffrey Godet, Group Chief Executive Officer]

So I cannot speak to those -- for a slide. I don't have them...

[Patrick Jousseaume, Head of Mid and Small caps Europe Research]

But there was slide, let's say, showing that there was a sort of...

[Jean-François Labadie]

In fact, it was-- is a solid...

[Geoffrey Godet, Group Chief Executive Officer]

Yes, go ahead.

[Jean-François Labadie]

In fact, we the -- the position we have in shipping has not changed. We are still[indiscernible] at covering. They need some care to customers when it's related to customer partnershipment. But we are referring back, and you would say, out of some application. It's old software that we phase out, and that are -- that will be replaced by the new software that we have reengineered, particularly, at profit, and the one that we have launched through the Magento platform, i.e., Temando. So the saving and phase-out effect, that creates the -- I would say, the negative performance in software. It changed the coverage of the supply chain of the[indiscernible].

[Patrick Jousseaume, Head of Mid and Small caps Europe Research]

Okay. And could you remind us the target that you have in Japan in terms of number of parcel lockers to be deployed, please?

[Geoffrey Godet, Group Chief Executive Officer]

So main thing is[indiscernible] the initial was -- the [indiscernible] deployment was 5,000. We're currently at 3,000.

[Operator]

And we have the next question coming through the line of Nicolas Tabor from MainFirst.

[Nicolas Tabor, Analyst]

I have just a question. You said that you had hired a new Head of Sales for the CCM activity in the EDS segment, if I understand well? Was it for the full CCM, was it for the Pacific region? and did you have any order change in heads of sales for other subsidiaries or any changes of that sort? And do they interact across companies?

[Geoffrey Godet, Group Chief Executive Officer]

So I will specify the -- thank you for your question. I will specify the answer on the change. It is the head of Americas for the CCM activity, and do equity[indiscernible] actually because the Head of America is growing -- actually, sorry, both CCM and equity for the region and include actually also South America and North America and it causes sell and delivery and to support our [ relationship ], okay? So it's another role which includes the different head of sales in the region under it. And we don't have any additional information on any further change at this point.

[Operator]

The next question in the queue comes from the line of Granjon, Jean-Francois from ODDO BHF.

[Jean-Francois Granjon]

Yes, could you -- just one question, please. Could you comment to that quality? Explain what to expect for the future and why there is a slowdown or a decrease of the business and what to expect for the next quarter?

[Geoffrey Godet, Group Chief Executive Officer]

So on the equity theme, we have 2 main business: one is Human Inference and the other one is Satori. Satori is the main one in that equity. And Satori is purely -- and address data quality [indiscernible] related to address a situation that is related to our [ postal ] activity [indiscernible]. So there is a natural link which is not necessarily a 1 for 1 but is related to the trend of decline because we see decline in [ mail ] business, when we see [ basic need ] for mail addresses optimization in particular in the region that are covered by Satori, which is mainly in the U.S. even though [indiscernible] other countries but that's the main driver. The same thing that we're -- and this is what we will expect that it will probably continue. Now the base of it, we cannot predict, and we have other offering within Satori that at times can also compensate [indiscernible] but that's the main reason of the current decline. On Human Inference, it's a different situation. We are in the process of reengineering our offer and this takes time [indiscernible]. So we will reuse new application to existing customers et cetera [indiscernible]. And once we're going to see a normal life cycle in go-to-market, as you have new[indiscernible] offers and you take it to the market, then you get it to yourself, team, and then your customers. So it will take some time before we could see whether the reengineering and [indiscernible] there [ catch fruits ].

[Operator]

There are no further questions in the queue. And we have one more question coming through the line of David Cerdan from Kepler.

[David Cerdan, Equity Research Analyst]

Quick question on the OMS recent activity. What is the training the U.K. and Scandinavia? And is it only related to the mail volume or are you losing some market share? And what is the trend in force for your business in Mail Solutions?

[Geoffrey Godet, Group Chief Executive Officer]

So this is a good question. We're not specifically giving numbers on each of the countries but what I could consider speaking is that the trend in regulation in Scandinavia[indiscernible] has pushed those countries to lessen their use of mail[indiscernible] more rapidly and earlier than most of the countries so we see the maturation of the decline in these countries before there's another base that is continued. In U.K., we have seen a more -- I mean, we see additional solution as well but there's been an acceleration for us, in particular, second part of last year, where we continue to see that acceleration this year. And yes, it will[indiscernible] and some minor display of erosion of our market share, so it's not a main concern to the market share but obviously, it will have a strong position in the country. That's something we will continue to locate. As it relates to [ franks ] for the business quarter, Q1, we were actually flat for the first time, so no decline, which includes some of our new offerings on the communication side and the mail decline combined together into low or flat. It's too early to consider a real change of trend for [ franks ] so we'll look at in the next coming quarters to see if that same position, something that is sustainable.

[David Cerdan, Equity Research Analyst]

And if I may, I have another question regarding your mixed trends between your equipment and sales and license sales and the recurring revenue. So the equipment licensing and license sales are down 8.4%, recurring revenue are flat. My question is -- question also at the end, if the equipment sales continue to decline at 8% a year, at which extends this recurring revenue. When it will [indiscernible] based on your recurring revenue.

[Geoffrey Godet, Group Chief Executive Officer]

So basically, the portion that is declining on equipment and license sales is the equipment, mainly the equipments related to our mail [indiscernible] because again, as we continue to sell license, and that's what we said for the CCM in particular, where we have generated a level of license sales in Q1 '17 equivalent to the one that we posted in Q1 2016, okay? So what you see is, in fact, we are increasing the profit of the recurring revenue coming from the new activities thanks to the growth of our [ assortment ] of software, thanks to the increase of our parcel locker network and that's replaced the decline of the recurring revenue that we are experiencing in new solutions.

[David Cerdan, Equity Research Analyst]

And is it possible to have a trend of your recurring revenues related to your franking machine sales?

[Geoffrey Godet, Group Chief Executive Officer]

No. That's not something that's we discuss. It's negative. Declined [ most of the time ].

[David Cerdan, Equity Research Analyst]

Okay. And we're getting your -- your gain as for the free cash flows, do you expect some stronger cash flow for 2018? A high level of operating cash flow. Does it mean that you expect might then your operating cash flow for '18 to compare to '17?

[Geoffrey Godet, Group Chief Executive Officer]

No, we expect to maintain a high level of free cash flow for 2018. It's too early to commit on any precise level of free cash flow but again, due to the strength of our balance sheet and the strength of our business model, we know that the free cash flow level will remain strong.

[Operator]

There are no more questions in the queue.

[Gaële Le Men, Corporate & Financial Communication Director]

I have one question coming from the web. It's coming from [indiscernible]. So it's about the organic growth in SME, and especially in the Communication and Shipping Solution within the SME division in Q1 '18, which are at 11% growth which is lower than the growth which was recorded for the full year 2017. So the question is, do you expect the organic growth to accelerate throughout the year?

[Geoffrey Godet, Group Chief Executive Officer]

So as we said an indication that we'll continue to grow double digits. We are not being more specific on that. I would just remind like for the other activities in the software side or the shipping side that those activities are seasonal so they move in different quarters so it will be up its and downs. And the base comparisons are different from one quarter to the other one. We're talking about a small base of revenue, EUR 7 million and therefore this is why quarterly since you have some license deals, some hardware sales on the lockers. It could explain some of those gaps that may happen or not during the year. So we maintain an indication of double-digit growth in 2017. If you look at the track record of [indiscernible] for '16 and '17, you'll see that we have a volatility in -- from 1 quarter to another. So if that time -- if we had 1 quarter up 10%, the quarter below 10%, it's a very, very good quarter. So that basically explains. Hopefully that addresses [indiscernible] questions.

[Gaële Le Men, Corporate & Financial Communication Director]

Yes, we don't have any more questions. So please, Geoffrey, do the conclusion.

[Operator]

[Operator Instructions]

[Geoffrey Godet, Group Chief Executive Officer]

Okay. So as we have no -- any other follow-up questions, I will conclude this call. First, I'd like to thank all the folks and for the questions they've asked and for the kindness back at the beginning. I'd like to add a few words. Our Q1 2018 performance is better than the one of Q4 2017, and with a different mix between our new activities and our business during those 2 quarters. Again, though, this is not a dissatisfactory to me as our main objective is to mitigate the decline of our Mail business. So [indiscernible] we wanted to provide you. This ends our conference call. Gaële, can you please remind us what are the next dates on the agenda?

[Gaële Le Men, Corporate & Financial Communication Director]

Of course. Next event will be our Annual General Meeting, which is scheduled on June 29 in Paris. Then we have on our agenda of Q2 sales and interim results that will be published on the 25th of September after market closes. Thank you for your participation and at your [indiscernible] set of questions. Thanks. Bye-bye.

[Geoffrey Godet, Group Chief Executive Officer]

Thank you.

[Operator]

Thank you for joining today's call. You may now disconnect your handsets. [indiscernible] please stay connected.