Quadient SA

PAR:QDT

Earnings Call Transcript 2020-Q1

[Geoffrey Godet, CEO & Director]

Good evening, and welcome to our 2019 Q1 Sales Webcast and Conference Call. I am Geoffrey Godet, Neopost's CEO. I am together with Jean-François Labadie, Neopost CFO; and Gaële Le Men, Neopost's Investor Relations Officer. We will first comment on our sales figures, and then we will give you the floor for a Q&A session. If you have registered through our webcast module, you should have access to our slide presentation. Otherwise, the slides are also available from the finance section of our website.So let's move directly to Slide #3. So before going into the details of our good numbers, let me give you an overview of our key achievements during this first quarter. Q1's good performance is a further demonstration of our strong focus on execution. As our new organization is setting into place, it allows us to be all the more focused on the 4 major solutions and the 2 main geographies. And as you will see, we succeeded to deliver good performance in each one of our 4 major solutions as well as in each one of our key geographic regions. In the meantime, we are starting to reap the first benefits of our Back to Growth initiatives. So this is particularly the case of our revised go-to-market strategy, with an improvement in cross-selling as well as higher customer acquisitions. And it comes in particular from the combined offers we have set up to increase commercial synergies. So for instance, we have now Mail Solutions and Business Process solutions being jointly marketed.Finally, we are also delivering from our renewed focus on our Mail Related Solutions, and as is the case particularly in the U.S., confirming that it's possible to grasp opportunities even in a declining market.Last, but not least, we have reinforced our M&A team. This is key to be able to deliver on our promises in terms of acquisitions and divestments, but also in terms of integrating newly-acquired companies. As you will see, the integration of Parcel Pending is well underway. If you can now switch to Slide #4. So let's review quickly Q1. Our sales are growing by 6.9%, to achieve EUR 266 million. This represents EUR 17 million of additional revenues. We had a minor scope effect of minus EUR 1 million, which is the combination of the divestment from Satori, and Human Inference and Data Quality, and the acquisition of Parcel Pending.We also had a positive foreign exchange impact of in the amount of EUR 11 million. And we had positive revenue growth for the amount of EUR 7 million. This represents an organic sales growth rate at 2.9%. No need to say that we are very pleased with this performance.So indeed, you can now switch to Slide #5. This is the highest growth rate achieved in a quarter since the third quarter of 2013. And more importantly, this is the fourth quarter in a row showing positive organic growth. So obviously, Q1 last year, when you look at the chart, was a less challenging rate of comparison than the one we will face in the coming quarters. This chart shows the good organic performances that we recorded last year, and such especially, in the second quarter and the first quarter.So this is why, at this stage of the year, and despite the remarkable amount of 2.9% growth achieved in this first quarter, we remain cautious for the rest of the year. If you can now switch to Slide #6, I will now let Jean-François go into the details of the revenue.

[Jean-François Labadie]

Thank you, Geoffrey. Ladies and gentlemen, good afternoon. Let's have a look at the breakdown of our organic growth. It comes from a significantly reduced decline in Mail Related Solutions, thanks to a strong performance in the U.S. System growth in all our [ 3,000 ] major solutions, particularly in Business Process Automation, but it also comes from a strong quarter in our additional operations, which is a combination of continuous growth in parcel lockers in Japan, one-off unrelated increase in some businesses, and further decline in other activities. If you can now switch to Slide #7. Let's now have a look solution by solution and start by Mail Related Solutions, which posted an organic decline of minus 1.4%. We recorded a positive low single-digit growth this quarter in North America. And I repeat, a positive low single-digit growth this quarter in Mail Related Solutions in North America. This remarkable performance in a declining market was achieved thanks to recurring revenues and hardware sales. We have stabilized our recurring revenues, and we registered a surge in hardware sales. We benefited from particular -- in particular, from the good performance in our high-end folders inserters, from a higher renewal rate of our franking machine leasing contracts and from the acquisition of new customers. And we also started to benefit from combined packages, including Mail and Business Process Solutions.In our Main European countries, our rate of decline was in line with the performance recorded in the previous quarters, i.e., a mid-single-digit decline. If you can now switch to Slide #8. Business Process Automation. In Business Process Automation, we posted a very strong organic growth this quarter, 37.1%. Compared to previous quarters, this increase marks an acceleration of the growth achieved both in France and in the U.S. This reflects new customer acquisitions, increased Software-as-a-Service business and higher cross-selling with Mail Related Solutions. In the meantime, we have been fine-tuning our commercial policy, which has been the definition of our priority segments and the extension of our market outreach through the development of indirect channels like in the software provider, [ PolyWare in force ].Finally, we also benefited from seasonal effects in hybrid mail contracts where our customers pay a fee according to the number of pages processed on our platform. The seasonal boost came in particular from property managers' contract in force.If you can now switch to Slide #9. Customer Experience Management. Organic growth in Customer Experience Management reached plus 9.2%. This is satisfactory performance knowing that we did not record any outages this quarter, we increased the level of our SaaS subscription, we benefited from a solid growth in maintenance and professional services as a direct consequence of the high level of license sales they recorded last year. We have started hiring a specialized sales team to support our ambitions in telcos, utility and government services. This should begin to have a positive impact in 2020. Indeed, let me remind you that the sales cycle in sales terms is approximately 12 months. We have also released a new version of our software, Inspire, with an increased proportion of cloud-based features. This allow us to better anticipate our customers' future requirements. If you can now switch to Slide #10, Parcel Locker Solutions. The main event in our Parcel Lockers segment was the integration of Parcel Pending. This is going as planned, and Parcel Pending recorded a growth above 20% in Q1 2019. This growth in Parcel Pending further contributed to the overall organic growth achieved in the segments, which stands at plus 13.3%. This probably looks a bit low given the contribution of Parcel Pending, but we have a high base of comparison in universities in the U.S. in Q1 2018. In addition, in the U.S., we have started some promising proof of concepts with renowned retailers. This bodes well for the long-term future as the sale cycle is longer in this segment than in the residential segment. If you can now switch to Slide #11, I'll now hand over to Geoffrey for a wrap-up of our performance.

[Geoffrey Godet, CEO & Director]

Thank you, Jean-François. So as we wrap up our total major operations. If you -- [ the core ] major operations represents 83% of our total sales, and they recorded an organic growth of 2%. We enjoyed a particularly strong performance in North America, where organic growth stood at 3.8%. We also did well in the main European countries, stable sales on an organic basis, despite a mid-single-digit decrease in the Mail Related Solutions. Overall, major operation continued to benefit from a high level of recurring revenues, which stood now at 70% of the sales.If you can now switch to Slide #12. Additional operation in the first quarter of 2019. So let's focus on this segment on additional operation, which represents 17% of our total sales. We had a pretty good quarter, with 7.4% organic growth. Obviously, we continued to have some declining activities within additional operation, but this high growth is coming from a mix of different things.First, we enjoyed further expansion in our parcel locker activity in Japan; and secondly, it also comes from Mail Related one-off organic performance, such as in the Mail Related Solutions on export markets and in the Nordics. And two, in the Customer Experience Management, where we signed significant contracts both in Spain and Asia Pacific. So this good performance does not change our commitment to either grow, improve or exit these operations.If you can now switch to Slide #13. So regarding our prospects, we are obviously very pleased with our Q1 performance. And we're leaving our indications unchanged for 2019. We are confident that all our efforts and initiatives will be paying off on the long run. As far as 2019 is concerned, this good Q1 needs to be confirmed, and it is too early to reassess our expectation. In the meantime, I'll remind you that we will face more challenging quarters going forward, in particular in the second quarter and the first quarter. So as a reminder, we expect for 2019 almost flat down on an organic basis, a decrease in EBIT at constant currency compared to 2018 EBIT pro forma, and that's restated from Icon earn-out reversal last year; and also taking into account the divestment of Satori and Human Inference as well as the acquisition of Parcel Pending. We expect the decrease stems in particular from additional operating expenses necessary to implement the Back to Growth story as announced in March. And we obviously confirm our Back to Growth financial trajectory.Let me now open the floor to questions.

[Operator]

[Operator Instructions] We do have a question coming through from the line of Martin Boeris.

[Martin Boeris, Analyst of French Mid Caps]

I have 4 questions. First, would you say that the positive organic growth that you reported in the U.S. in Mail this quarter is an exception or that could be repeated in the coming quarters?

[Geoffrey Godet, CEO & Director]

Okay. So let's answer them one by one. It's a good answer -- question, Martin. As you know, it's been quite some time that we've seen a difference in performance between North America and the European countries. So to that end, in the first quarter, it is the continuation of the difference of performance that we see in those 2 regions. That being said, we do have, in the first quarter, 2 things, in North America, for our Mail Related Solution. A stable level of our recurring revenue, which means we have operationally done a very good job of nurturing our installed base of customers from a service perspective, from a financing perspective, using, et cetera, which I think speaks to the quality of the operation that we had in North America and the quality of the execution of the team. In addition, we are going to go to also augment the whole placement of new hardware through both existing customers and also prospects. So it's a combination of those that has given us a higher performance in the first quarter than we have seen in the past. In addition to that point, just want to remind you also that in the Mail Related Solutions, or as we had in the past in the Mail Solution, quarter-to-quarter, we see also big variation of performance, and that is the case both in North America and in Europe. But just as a reminder, on the Mail Solution side in the past, we've seen quarterly performance moving from minus 2% decline to minus 7% decline. So it's quite an important range, almost minus 7%. So not every quarter is equal and that would be the important thing that we have to keep in mind. The third one is that obviously I think in the first quarter, after the announcement of our Back to Growth plan, I think that, that's confirmed. There are opportunities for us in the market even in a declining market for our Mail Related Solutions to have good performance and grasp good opportunities.

[Martin Boeris, Analyst of French Mid Caps]

Okay. But you don't target necessarily positive organic growth in the U.S. as part of your strategic plan. That's not the -- but it's organic growth...

[Geoffrey Godet, CEO & Director]

We don't give specific guidance between Europe and the U.S. because again we have many different things that are happening on a quarterly basis, and I think we should expect to see -- there's no reason today to see difference in -- difference between Europe and the U.S. and that's where I think I would comment.

[Martin Boeris, Analyst of French Mid Caps]

Okay. My second question is that, could you detail what are the new offers that combine Mail and BPA solutions? And how do you decide to recognize them either in your mail or BPA segments? Because I saw it, it appears in both.

[Geoffrey Godet, CEO & Director]

Yes. So they are not new offers per se. We have in the Mail Related Solution, our traditional franking machine offering both software and hardware. And then we have tested now for quite some time, in combination with our Business Process Automation Solution, specifically here, the hybrid mail portion or the accounts receivable one as another example. We use the term combined and not bundled because we have already bundled in the past those respective solutions. Here it's really from a go-to-market perspective, a capacity to cross-sell and have the same salesperson within Neopost to be able to [ win a ] customer to push either the solution and combine the offers. So either with a reporting segment, we report the revenue generated or related to one of each of the solutions in their respective segments and there's no choice to be made. They're well identified in each cases, even though they could be promoted as a [ single ].

[Jean-François Labadie]

But if we have -- to complement what Geoffrey said, we have dedicated the pricing for each of the components of the offer, and this is why we can allocate properly the revenue in each of the business sites.

[Martin Boeris, Analyst of French Mid Caps]

Okay. I thought this was a solution that mixed both solutions. So -- okay. My third question is regarding the Customer Expense Management division. It seems like there were no big license sales in Q1. Is it due to pure seasonal effects? Or is it due to a weaker pipeline at the start of the year?

[Geoffrey Godet, CEO & Director]

So on Customer Experience Management, this is really in the continuation of the work I have started to do since I arrived at Neopost. As you know, I really focused since the beginning on working on a go-to-market approach. Our strategy or the go-to-market approach we have in place is where we echo that land and expand, which is really to look not at big deals as a onetime event, but trying to look at the opportunities to deal with the large accounts and we seek now to increase the amount of revenue we could get from a customer, but -- by phasing the approach with the customer. So we are not asking a sales organization to look at big deals. We're trying to derisk those big deals by phasing them into smaller chunks. Smaller deals, a different set of implementation, different departments, one by one. And we are trying not to take into account into our forecast and pipeline any of those big deals, basically, it becomes, which that could still be the case, like we've seen last year in the last part of the year, it is in addition to the ongoing forecast in pipeline management that we have.

[Martin Boeris, Analyst of French Mid Caps]

Okay. And finally, my last question is, does your organic gross targets for the full year include the contribution from Parcel Pending?

[Geoffrey Godet, CEO & Director]

Yes. It does include the contribution of Parcel Pending. In fact, after we retake the divestments from Satori and HI, and we include the growth produced by Parcel Pending, which is the way we calculate the organic growth.

[Jean-François Labadie]

As a pro forma.

[Geoffrey Godet, CEO & Director]

As a pro forma.

[Gaële Le Men, Corporate & Financial Communication Director]

Yes. We include the -- in 2018, we add the sales done by Parcel Pending, and we compare it to the performance of 2019.

[Martin Boeris, Analyst of French Mid Caps]

Okay. So it's organic -- pro forma organic growth? Okay.

[Gaële Le Men, Corporate & Financial Communication Director]

Yes.

[Geoffrey Godet, CEO & Director]

Okay. And again, as a reminder, Q1, Parcel Pending grew by 25%.

[Gaële Le Men, Corporate & Financial Communication Director]

Above 25%.

[Geoffrey Godet, CEO & Director]

Above 25%.

[Operator]

The next question comes from the line of Nicolas Tabor.

[Nicolas Tabor, Analyst]

The first one would be, will you have an update on the change of IT platform and ERP that you mentioned during your annual results? Have you started to identify potential suitable IT targets in terms of different software? Where is it going? Do you already see the cost being incurred?

[Geoffrey Godet, CEO & Director]

Just to make sure I understood well what was the question, it is about our internal systems, right?

[Nicolas Tabor, Analyst]

Yes. Yes.

[Geoffrey Godet, CEO & Director]

So we are, definitely, at the beginning of an IT transformation process. We have a new digital -- Chief Digital Officer, that is coming from our operation in North America. And even studied, actually, even in the first quarter, to implement and test different part of our new infrastructure that will be rolled out in the next 2 or 3 years. This is going to be a long-term project. And I believe that the achievement in the first quarter mostly related to our CRM. And we have started to implement a new version of our CRM in only a few European countries, and for the first one was U.K. But as you know, we have many countries deliver with Neopost. So this will be a quarter after quarter, an ongoing rollout of the CRM, and then we will go obviously also within the ERP, along with it.

[Nicolas Tabor, Analyst]

Okay. On Parcel Pending, so I understand that it's a pro forma organic growth. Nevertheless, I felt like the organic growth was quite lower than what we could have anticipated from the communications you had during the CMD. Is it that the Q1 had a tougher comparison basis at Parcel Pending? Is it that usually Q1 is a lower quarter? Or is this roughly 25% indicative of what we should see over the full year? Should we see an acceleration? Or is the sequence there because we don't have the restated organic growth for the past quarters of 2018?

[Geoffrey Godet, CEO & Director]

That's a good question. Okay. Yes. So a few things. We're not giving specific guidance or indication by solution for the year. That being said, to your point, yes, it is a lower quarter. It was a very -- smaller quarter as we think for Parcel Pending last year, and the above 25% is definitely a good performance for a first quarter during the integration since the acquisition. So we're pretty happy with the way the integration is going. We had an ongoing series of meetings with the new team, both on their existing segments, which is obviously the residential markets, in which we continue to see in this first quarter a strong growth, and we're happy to see where they are today. In addition, there's been a lot of new initiatives being prepared, in particular to penetrate new segments so we have hired some new VPs for the retail segments, with each a different background to make sure we could look at the different segments within the retail industry. We were happy to see that they have already engaged some important, well-renowned retail brands in this first quarter then of POCs. But those POCs in those deals will be [ tackling ] and will -- that what Parcel Pending has been experiencing in the residential side, where the sales cycles is shorter on the retail side. We're going to look at some more enterprise sales cycle. So maybe sales cycles that are going to be closer to 12 months, that is -- we have in the Customer Experience Management. So we believe these are good investments for the future growth of Parcel Pending.

[Nicolas Tabor, Analyst]

In relation to this, I wanted to know, if ever you would communicate to us later on during the year, some indications of the organic growth of the new segments, not just for full year, but by semester or by quarter? First you have an ID, and would you also provide us with some H1 margins by the new segments or by semesters, in order to have some idea what we can expect for H1 and over the full year?

[Geoffrey Godet, CEO & Director]

[ Nicholas ] so in terms of profitability, what you will get is exactly what we shared with you when we position our full year or our 2018 results. So you will have the profitability at the major operation level. We will have the profitability at the additional operation level, and you of course will have the profitability at group level.

[Nicolas Tabor, Analyst]

And in terms of organic growth?

[Geoffrey Godet, CEO & Director]

In terms of organic growth that you will have at the end of H1, is the organic growth produced by the 4 major solutions within the major operations. And we will have the organic growth from North America and major European countries as well as the organic growth of the additional operations, and at group level. Likely, in Q1.

[Nicolas Tabor, Analyst]

Okay. And my last question because I don't want to take up all the time. In terms of the Business Process Automation segment, where you had a very strong growth this quarter and acceleration versus the full year, should we see this very strong level of growth as sustainable? Or were there too much of one-off sales that had a relative impact? And we should see something more in line with the previous trend from last year?

[Geoffrey Godet, CEO & Director]

So for Business Process Automation, we're obviously very happy with that very high growth that we had in the first quarter. It is the result of a combination of an ongoing growth that we've seen from a dynamic, but has been accelerated by some seasonal activities. So in particular, in France, we've seen some Business Process Automation software, like in the case of the hybrid mail. We have been -- penetrated some of the segments at the French industry, particularly [ an associate venture ] of the French property managers. There's a lot of activity at the beginning of the year, from January sometimes up to April. Sometimes up to May. It depends a little bit from one year to another. And because we have also a volume-based pricing related to some of their activities in terms of physical dedications. We do get that season boost every year. It may change in terms of the number of months we've been impacted based on their own activity. So this is what has augmented the level of the growth in the first quarter. That doesn't change that we still have a stronger growth outside of the season boost that we should expect to continue to see for the rest of the year.

[Operator]

[Operator Instructions] A question has just come through from the line of Martin Boeris.

[Martin Boeris, Analyst of French Mid Caps]

Yes. I have 3 additional questions. First, you guided for between 10 million and 15 million of additional operating expenses this year. I wanted to know if it's net of potential loss reduction in noncore operations?

[Geoffrey Godet, CEO & Director]

Excuse me, Martin, I could not hear the last part of your comment. Is it related to...

[Martin Boeris, Analyst of French Mid Caps]

Yes. I wanted to know if it is net of potential loss reduction in noncore operations, which we are loss-making last year?

[Geoffrey Godet, CEO & Director]

I want to be careful here. What are you referring, Martin, of loss in major operations? Because...

[Martin Boeris, Analyst of French Mid Caps]

In other operations.

[Geoffrey Godet, CEO & Director]

In other operations. Okay. Okay. Now I understand your question, excuse me. So no. It is 2 different topics. We have the additional investment related to the initiatives related to Back to Growth, the $10 million to $15 million level that I have mentioned to you that we have started to initiate at the beginning of the year, and since they are moving according to plan. And then we have the additional operations, for which our vision had been clearly stated that we need to either grow, improve or exit some of the activities in that operation. And that remains a priority for me at the beginning of the year, in particular, to focus on this [ priority ] for additional operations. And obviously, when you have a loss-making activity, that becomes the one that is most important for us to focus on the remaining of 2019.

[Martin Boeris, Analyst of French Mid Caps]

Okay. Yes. Because I wanted to know if it was 15, that's 25, that's minus the reduction of 10 in other operations. So it's -- at gross level, it's plus 15, and then you will see throughout the year or in the coming quarters, if you exit -- still loss-making on core operations?

[Geoffrey Godet, CEO & Director]

Yes. That is on the operational decision that we could make to improve each of these businesses. The benefits of the improvement, we will get at the additional operational level will -- starts of the year, guidance we have given for the year at the overall profitability of the company.

[Martin Boeris, Analyst of French Mid Caps]

Okay. My second question was rather regarding Parcel Pending. Just to have an idea, how many additional parcel lockers have you installed in the U.S. year-to-date? I don't know if an information you communicate on? Because you stated at the end of last year, it was 2,500?

[Geoffrey Godet, CEO & Director]

Yes. We are not -- obviously, we're at the beginning of the relationship, and it's going to be same thing for us moving towards to fully understand the dynamic, as we have high expectation for gross, things are moving from one quarter to another. But if we look at the first quarter, just to give you another indication, but it will be difficult for you to fully compare it, because the average selling price of those lockers by information is different than what you've seen in the past in France or in Japan. And the adoption of [ these ] in Japanese is different than the one in France, right? But roughly we are talking about 100 installations or around 100 installations per month. And just as a matter of understanding, it is by revenue recognition, not sales orders.

[Martin Boeris, Analyst of French Mid Caps]

Okay. And my last question was regarding BPS solutions. Could you we just get a sense of how many customers you have now? And what's the penetration rate of your existing mail customer base you aim for?

[Geoffrey Godet, CEO & Director]

No. We're not sharing yet those information. This is good feedback to know which one of our interest are for you because remember each of our solutions, we are obviously going to be very interested in all the indicators moving forward. But at this time, we're not sharing the number of customers of BPA, neither the level of customers we have with our existing customer base that we have.

[Operator]

As that was the last question in the queue, I will turn the call back to your hosts.

[Gaële Le Men, Corporate & Financial Communication Director]

Yes. I have 2 questions from the webcast from [ Dimitri Lenovo ]. So the first one is, what is the performance of the legacy mail solution business in Q1 2019?

[Geoffrey Godet, CEO & Director]

Q1 2019? Yes. We are not disclosing any of the performance of the Mail Related Solutions business in our other operations. And also we're not providing any detail. And as we said overall, the additional operations grew by 7.4% organic in Q1 2019. And I remind you that the additional operations are made of business on before Major Solutions and other businesses like Termando, CVP-500 and graphics activities.

[Gaële Le Men, Corporate & Financial Communication Director]

Okay. I have another question about -- from the same person, [ Dimitri Lenovo ] again, about the cost of the Schuldschein. As we have established in the press release recently, we said in that press release that the average interest on the Schuldschein was 2.55. I guess the question is about the carrying cost of the Schuldschein for the year 2019?

[Geoffrey Godet, CEO & Director]

Yes. Indeed, we will have some carrying cost because the Schuldschein really is used to repay the 2019 maturity that we had, EUR 470 million, and the carrying cost or the carryover cost will be EUR 4 million, approximately, for this year.

[Gaële Le Men, Corporate & Financial Communication Director]

I don't have any additional questions from the webcast. Operator, do you have anybody waiting online?

[Operator]

There are no questions waiting on the phone line.

[Gaële Le Men, Corporate & Financial Communication Director]

So thank you all to be with us tonight. And if you have further questions, let me know. And our next presentation will be on the 24th of September, after the closing of the stock exchange. And in the meantime, we will have the AGM on the 28th of June in Paris. Thank you for being with us tonight and bye-bye.

[Geoffrey Godet, CEO & Director]

Thank you. Bye-bye.

[Operator]

Thank you for joining today's conference. You may now disconnect your handsets.